Russian power-generation company holds successful IPO

MOSCOW. (RIA Novosti economic commentator Vasily Zubkov) Russian utility giant RAO UES (Unified Energy Systems), which owns 72% of the country's power-generation facilities and almost 100% of its power transmission networks, plans to raise nearly $81.5 billion in order to build new thermal power plants and overhaul existing facilities.

The company has to build over 20 gigawatts in new power-generating capacity in 2006-2010 in order to stave off rising power shortages resulting from economic growth.

The Russian economy has never before implemented such an ambitious investment program. However, the Fifth Power Generation Company's (OGK-5) successful pilot IPO on October 30 shows the power industry can attract billions of dollars in investment.

The entire RAO UES reform was conceived several years ago as a means for attracting private investment, including substantial foreign capital. According to the plan, the state will gradually relinquish control of the national power industry.

Although the market value of RAO UES shares increased last year, the Russian power industry lags behind the West in terms of its capitalization and main efficiency parameters, making it less attractive to investors.

The correlation between investment and power-generation volumes (expressed in millions of dollars per one gigawatt/hour) is only five points in Russia, whereas the equivalent figures for France, the United Kingdom, Germany and the Czech Republic are 250, 50, 40 and nine points, respectively.

However, the reform's authors are quite optimistic about the unexpectedly good results of the energy sector's first IPO, which netted $459 million.

RAO UES CEO Anatoly Chubais said this sum exceeded the average annual investment in the industry over the last few years.

RAO UES, which had owned an 87.7% stake in OGK-5, will now control 75.03%. Russian Industry and Energy Minister Viktor Khristenko said the shareholders consisted of strategic foreign investors, including energy companies, as well as Russian financial and energy companies. Strategic investors, including the European Bank for Reconstruction and Development, received 5% of OGK-5's shares, while institutional and portfolio investors were given a 9.4% stake. Not a single IPO participant received more than 1.1% of the company's statutory capital.

Interestingly, top RAO UES executives turned down an offer by energy giant Gazprom, which wanted to buy OGK-5's entire 14.4% stake in the company. Vnesheconombank, Vneshtorgbank, Russia's largest independent gas producer NOVATEK and some other companies also wanted to acquire these shares.

Russia's oldest and largest private investment company, Troika Dialog, handled the OGK-5 IPO together with Western investment banks. According to Chubais, demand for shares exceeded supply several times over. Experts said demand was eight times greater than the number of available shares.

The IPO set the company's value at $3.2 billion. Moreover, one kilowatt generated by its power units exceeded the average market value of one kilowatt generated by RAO UES companies by 10-20%.

OGK-5 will use the proceeds from the IPO to help build 1.2 gigawatts in additional power-generation capacity under a $1 billion five-year investment program. Notably, 0.42 gigawatt steam-and-gas power units will begin operation at the Sredneuralsk state district power plant, and 0.412 gigawatt plants will be brought on line in the Moscow Region. Both areas are plagued by power shortages, and OGK-5 plans to borrow another $500 million to help solve this problem.

Domestic and foreign investors do not consider OGK-5, with only four thermal plants, as the best buy. Another six power companies plan to hold IPOs by late 2007, and the shares of ten wholesale and regional generating companies are now traded on Russian stock exchanges.

Viktor Khristenko, whose ministry oversees the Russian power industry, said the reform of the energy sector had reached the point where there was no going back.

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