Industry News

RAO UES Amends WGC-6, TGC-6/7/9 Sale Terms, Approves Mosenergo Sale to Moscow

At a meeting on November 30, the RAO UES of Russia board of directors tried to decide how the holding company being reorganised will be selling what is yet to be sold (in generation) and consolidating what is yet to be consolidated (in the grid). In spite that decisions were passed on most matters, uncertainty about details still remains.

One of the most expected decisions was approval by the board of directors of the sale of the state interest in Mosenergo to the government of Moscow. The sale price is equivalent to the price earlier offered by Gazprom as part of an offer which was turned down by both RAO UES and the capital: 6.5 roubles per share. RAO UES and the government of Moscow are to enter into a sale and purchase agreement before February 1, 2008. The city will be paying the purchase in several tranches until January 30, 2009. During the entire time as Moscow is in the process of paying for the state interest in Mosenergo, the shares of the generating company will be held as security by RAO UES until it is liquidated and by Federal Grid Company of the Unified Energy System (FGC UES) after that, RAO UES head Anatoly Chubais said earlier today during a press conference held over the telephone and dedicated to the results of the board of directors meeting. At the same time, Mr Chubais did not rule out that the government of Moscow may wish to pay the entire amount ahead of schedule. This decision will be welcome, noted he. RAO UES's share in Mosenergo's authorised capital amounts to 36.17%. The holding company's minority shareholders are entitled to 15.01% of the shares and the state is entitled to 21.16% or 8,411,231,716 ordinary shares.

Amendments were introduced to the procedure for selling shares of Wholesale Generating Company No 6 (WGC-6). RAO UES intended to sell the generating company as far back as early November, but postponed the placement of shares until a later time. Now the holding company expects to divide the additional share issue of WGC-6 into two parts: first, in the fourth quarter of 2007 through the first quarter of 2008, an amount will be placed which is required to finance the WGC-6 investment programme for the period to 2009 and then (in the fourth quarter of 2008 through the first quarter of 2009) shares will be placed whereof the placement will be required to implement the rest of the company's investment programme. RAO UES managers have lately announced that a strategic investor has been found for WGC-6 who will agree to buy out the company's shares with account for the prospect that control over the WGC with remain with Gazprom. In order to sell such an investor a strategic holding in the amount of a blocking interest, the board of directors approved removing restrictions on the amount of the additional share issue that used to depend on WGC-6's investment requirements. Mr Chubais refused to disclose the strategic investor during the intercom conference. At the same time, RAO UES gave assurances that the option of entering the London Stock Exchange with WGC-6 shares as discussed earlier is still being contemplated.

The RAO UES board of directors also approved the separation in time of the sale of the additional share issue and the state interest in Volga Territorial Generating Company (TGC-7). The placement of the TGC-7 additional share issue via a public offering to portfolio investors will be carried out in the first quarter of 2008, while the state interest shares will be sold through a competitive procedure in the second quarter of 2008. The share of RAO UES in TGC-7 as a result of the placement and the sale of shares will go down from 54.47% to lower than 15.28%. Another important decision was to lower the minimum price for selling TGC-9 shares. IES-Holding, the principal potential buyer of TGC-9, and RAO UES were earlier unofficially reported to be negotiating for lowering the price of the generating company's shares. Earlier today, the board of directors agreed to sell TGC-9 at a minimum price of 0.00801 roubles per share versus the earlier approved 0.00854 roubles per security. A decision was made with respect to TGC-6 to sell the government share therein simultaneously with the additional share issue, but perhaps, in several lots. The government interest in TGC-6 amounts to 34.06% of the generating company's authorised capital or 439,217,262,097 ordinary shares. The RAO UES board of directors decided to use the dual track technique (an offer to both portfolio and strategic investors) to sell the TGC-6 additional share issue which amounts to 585 billion ordinary shares with a face value of 0.01 rouble (45.37% of the authorised capital before the placement and 31.21% the TGC-6 authorised capital after the placement of the additional issue).

The meeting of the RAO UES board of directors highlighted some progress in the project for exporting electric power to China. A decision was made on the advisability of carrying out an additional share issue of OJSC Eastern Power Company (EPC, the project operator) in favour of RAO UES. The holding company will pay the additional shares using the funds earned on selling a blocking interest in WGC-5 to Italy's Enel. To implement the project in 2007-08, EPC needs a total of 2,140,290,000 roubles. EPC has also been entrusted with work on attracting new investors in the authorised capital of the company, including State Grid Corporation of China (SGCC), coal producers, and lending and financial institutions. Upon liquidation of RAO UES, the holding company's share in EPC will go to Inter RAO UES, so the government preserve control over the company, said Mr Chubais at the end of the board of directors meeting. The RAO UES head did not specify the share transfer mechanism.

As for the grid, RAO UES passed a decision to establish five interregional distribution grid companies (IDGCs): IDGCs of the Centre, the North Caucasus, the Urals, the Volga, and the South. For that purpose, the stated companies will carry out additional share issues. The ratios for converting the shares of the distribution grid companies being merged into additional shares of the IDGCs were also approved at the November 30 meeting. Some doubts remain as to the IDGC that was supposed to be based on power grid assets in Moscow. Mr Chubais confirmed that the RAO UES management passed a decision to modify the procedure for consolidating Moscow United Power Grid Company (MUPGC) and Moscow City Power Grid Company (MCPGC). Instead of the earlier contemplated additional share issue of MUPGC that was blocked by Gazprom as the company's shareholder, MCPGC will be integrated into MUPGC. This process will require a simple majority approval at the meeting of shareholders. In view of the modification of the procedure, the companies to be merged will have to order valuation of their assets once again, noted Mr Chubais in the course of the intercom conference.

At its meeting on November 30, the RAO UES board of directors was not able to pass a decision on extending the IDGC share management contract with OJSC Federal Grid Company of the UES. An argument arose at the board meeting regarding this matter and apparently the parties were not able to reach agreement: the issue was postponed until a later meeting.

At the past meeting RAO UES also failed to give the final answer to the question of selling the shares which shareholders of the holding company will present for a buyout based on the results of the reorganisation vote on October 26, 2007. The holding company has time to make up its mind before July 1, noted the RAO UES leader. In any case, RAO UES does not intend to sell the shares it buys out at a price lower than their purchase price: 32.15 roubles per one ordinary and 29.44 roubles per one preferred share. The RAO UES Management Board was instructed to include the item of selling the company's shares to potential investors in the agenda of the board of directors meeting in December 2007 once the process of shareholders presenting their shares for a buyout is over. In the meantime, the RAO UES board of directors passed a decision to enter into framework agreements with potential buyers of the shares. It is already definite that the shares will be sold, but it is too early to discuss to whom and in what quantities they will be sold, according to Mr Chubais. The holding company's Management Board chairman also gave assurances that RAO UES will try to minimise the number of treasury shares before its liquidation.

The results of the process of the presentation of shares for a buyout will be published between December 10 and 15, said Mr Chubais. The results of the presentation for a buyout of the depository receipts for which the application period ended on November 30 will also be announced then.

At the end of the intercom conference, RAO UES representatives answered the question about when the capacity market may be launched. RAO UES Management Board member Yuri Udaltsov said that he still believed that trade in the capacity market will begin on January 1, 2008. If the regulator delays the market launch, interim trade will start at the beginning of the year and in February the market will operate with account for the obligations accumulated in January. "The text of the market launch directive is at a deep revision stage. We hope very much that the process will be over before the end of the year," assured the RAO UES representative. So far, RAO UES has introduced more amendments to the agreements on the provision of new capacity for the market by generating companies. The amendments concern the rights and obligations of a generating company under the contract. In particular, the new version of this document suggests that the total amount of payments for a violation of the contract terms by the generating company must be limited to a specific amount stipulated therein. The amounts and periods of providing capacity for which the generating company has already been fined are excluded from the amount of a WGC's or a TGC's contract obligations. The new version of the contract incorporates a number of supplements. Even if a generating company provides capacity under some other market mechanisms (contracts), this also provides grounds to terminate obligations under the contract. The supplements are also associated with the transfer of the functions of Trading System Administrator to another infrastructural organisation, Commercial Operator of the Wholesale Market. In the light of this, the new version of the contract provides for a transfer of the rights and obligations of TSA as a party to the contract. The board of directors approved the new versions of the contracts with WGC-1, TGC-2, TGC-6, Volga TGC, TGC-10, TGC-11, Kuzbassenergo, and Yenisey TGC (TGC-13).