Industry News

First Year of Parting with Sales Companies Brings RAO UES $550 mln

RAO UES of Russia has finished selling shares of power sales companies in 2007. Tenders enjoyed varying success, and the behaviour of participants sometimes irritated RAO, but in the end, thanks to a number of successful sales, the power holding company was able to earn an impressive amount of 13.24 billion roubles (about $550 million). This figure pales in comparison with the smash hit of the sale of Yukos assets, but it is still equivalent to nearly a half of RAO's last year IFRS profit and is comparable with the annual budget of some CIS states, for example Kyrgyzstan.

Wave after Wave

The sales took place in three "waves", each narked by its own specific features.

The first "wave" turned out to be very successful and brought RAO UES more than a half of its annual revenue: 7.47 billion roubles. One asset, 49% of Nizhnovenergosbyt, was sold at a price 2.7 times higher than the starting price, which is this year's record for RAO.

Having changed hands, Nizhnovenergosbyt found itself in the centre of a problem with the supplier of last resort status. The Nizhny Novgorod Regional Energy Commission, without waiting for the Government of Russia to approve regulatory documents, conducted the first tender for granting the supplier of last resort status. Nizhnovenergosbyt was not allowed to take part in the competition for some minor technical reasons. A similar situation occurred in the Leningrad Region where a local company won the tender and defeated RAO's sales company.

This led to a considerable decline in investors' interest in the "second wave" of the disposal of power sales companies: only four out of eleven companies were sold, and just 1.28 billion roubles was raised.

After the failure of the second "wave," the holding company became concerned about the supplier of last resort status problem, and in association with relevant agencies it developed amendments to the Government's directive on the operation of the retail power market. The first regular tenders will not be held before 2010, in accordance with the amendments. The amendments have not been passed as yet, but experts have no doubt that they will be.

In the course of the second "wave" of sales, the Project Centre for the disposal of RAO UES assets considered the actions of buyers to be part of a plot. Several participants registered for a tender for one of the companies, but none of them raised the sign to confirm the starting price.

"When there are five participants and none of them raises the sign, this is a plot," Ekaterina Novokreshchionykh, Deputy Director of the Project Centre for the disposal of RAO UES assets, said after the auction. "Perhaps they expected that the price of assets will be decreased in the future. But there will be no Dutch auction (when the price is gradually decreased - Interfax)," said she.

The Project Centre kept its promise and never decreased prices. Despite the opinion shared by the buyers and sector analysts that sales companies were overpriced.

The outputs of the second "wave" served as the reason for changing the rules for conducting auctions. They used to be conducted as follows: the starting price of the shareholding was announced and the auctioneer was raising it by a certain amount. Investors participating in the auction raised their signs to show their agreement with another rise. Now bids are submitted in closed envelopes. The investor who offers the highest price wins the auction.

"We Have Won"

These changes in the rules helped RAO UES to sell nine out of twelve companies during the third "wave", as well as dispose of shares of two power sales companies which had been put up for sale before. "Those who refused to purchase with a small extra charge then have purchased with a big extra charge now. We have won. Full stop," Project Centre Director Vladimir Avetisyan told Interfax. He is confident that the Project Centre has been able to neutralise the possible influence of buyers on auction results.

"The Board of Directors was so happy with the results of the repeat sales where we earned 747.5 million roubles that it recommended that we put up the unsold sales companies for auction again and accept bids in envelopes," said Mr Avetisian.

The auctions will be held on January 18. All companies whose shares were not purchased in 2007 will be put up there.

RAO UES has also decided on the further destiny of unsold sales companies. After the last tender "in envelopes", their shares will be put up for auction in the electronic system ISTRA. The first one to file an application for participation in the tender will be declared winner, and Mr Avetisyan says that the system allows keeping track of the order of application submissions to within one second.

"In early February, ISTRA will be tested, and by the middle of February we will be holding auctions for selling to the first applicant without decreasing the price," said Mr Avetisian.

If there remain companies which fail to find their buyers even via the ISTRA system, the Project Centre will consider each project individually, in terms of the possibility of reducing the price.

The Best Is Yet to Come

Integrated Energy Systems, Transneftservis S LLC and Roskommunenergo LLC were the most active buyers of shares of power sales companies in 2007. They all intend to develop the business, representatives of the companies told Interfax. Regional investors take an active part in tenders: for the first time during the third "wave", a foreign fund close to Halcyon Advisors purchased some shares. Halcyon Advisors can hardly be called a novice in the Russian power industry though: the company invests in power industry assets, and its Managing Director David Hern is the Chairman of the RAO UES of Russia (RTS: EESR) Strategy and Reform Committee; earlier, in 2002-03, he was a member of the holding company's Board of Directors. Halcyon Advisors is also a minority shareholder in OJSC Territorial Generating Company No. 4 (TGC-4) and the latter's area of operations covers that of Tula Power Sales Company purchased on behalf of Halcyon.

Upcoming are the fourth and the fifth stage of selling shares of power sales companies. The fourth one is scheduled for March, and the fifth one for May 2008. It is in May that the holding company wanted to sell shares of the three largest power sales companies: in Moscow, St Petersburg, and Tyumen. However, Mr Avetisyan told Interfax that the sale dates may be shifted to March. This requires a separate decision of the RAO UES Board of Directors.

The target for selling power sales companies as set by RAO UES is $1 billion. "However, since we are facing the sale of the sales companies in Moscow, St Petersburg, Tyumen, and Samara, I have no doubts that we will achieve the target," thinks Mr Avetisyan. Ms Novokreshchionykh announced that the starting price for Mosenergosbyt (RTS: MSNG) will amount to "several hundred million dollars".

The Project Centre itself is targeting the revenue of $1.5-2 billion for shares of 52 sales companies.

The table below shows the results of selling shares of RAO UES power sales companies in 2007.