Russia's Unified Energy System OGK-1 Power Privatization Stalls on Price as $1.5 Billion Project Moves Ahead

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Researched by Industrial Info Resources (Sugar Land, Texas)--Russia's state-owned electrical power monopoly Unified Energy System (OTC:USERY) (Moscow) will be finally broken up and privatized on July 1. Chief Executive Anatoly Chubais, who has strong political connections, is postponing the sale of OGK-1 OAO (RTD:OGKA) (Moscow, Russia), which generates and sells electric and heat energy, past the privatization deadline in order to obtain a premium price of about $7 billion.

OGK-1 is made up of six power plants: Permskaya, Nizhnevartovskaya, Iriklinskaya, Kashirskaya, Verkhne-Tagilskaya and Urengoyskaya. The privatization is a part of Russia's power-reform program aimed to boost the country's generating capacity.

Speaking at the launch of new power plants in Western Siberia, Chubais said to Russia Today, "OGK-1 is a gigantic project with a price tag of over $5 billion, which is the reason why it's not easy to find an investor under current market conditions. But we are not prepared to sell it cheap. Not even now." He added that Unified Energy System had worked out a means to hold the sale until 2009 or 2010. Currently, OGK-1 controls 9,531 megawatts (MW) of thermal power generation and aims to add a further 3,000 MW by 2012.

The only known bidder for OGK-1 is a consortium of Russian investors led by billionaire Viktor Vekselberg's Integrated Energy System, which has already acquired parts of Unified Energy System's holdings. The Integrated Energy System's position is that the $4 billion OGK-1 development program, which will last through 2010, would become an obligation for the new owner, warranting a discount on the full market price. In mid-July a new suitor for OGK-1, Roskommunenergo emerged. The company has been acquiring assets in Russia's regional power markets and consists of a Dubai-based fund and former Russian bureaucrats.

After July 1, all remaining assets of Unified Energy System will be transferred to its two largest subsidiaries: 66% to the Federal Grid Company and 33% to the hydropower major Hydro-OGK. In the lucrative grey margins of the privatization process, Chubais said that Unified Energy System still had the option to buy a new share issue of OGK-1 to fund the company's investment program in the near-term until it can be sold at an "appropriate" price.

At the power launch, the TGC-10 Nyaganskaya power plant project being developed by Finland's Fortum Oyj (HEL:FUM1V) (Espoo, Finland) was inaugurated. The 1,200-MW combined-cycle plant is being constructed near Nyagan in the heart of Russia's gas-and-oil-producing region in the Khanty-Mansisk Autonomous Region. According to Unified Energy System, power consumption in the region is forecast to increase by more than 50% by 2010 based on development over the last five years.

The $1.5 billion is currently the largest single investment project in the Russian power sector and will be financed with bonded debts and bank loans raised during TGC-10's additional share issue in March 2008. Fortum acquired 76.5% of TGC-10 in an auction in February 2008 and has made a mandatory offer for the entire share capital to minorities. The offer period ends on July 18.

TGC-10's plan is to add 2,300 MW of generating capacity by 2013 to its current 3,000 MW of power and 15,800 MW of heat production. Fortum had revenues of $6.9 billion in 2007 and has 10,900 MW of power capacity, 10,700 MW of which is located in the Nordic countries. In 2006, 84% of Fortum's power generation was free of carbon dioxide.

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