The Energy Market
Investor Concerns
Restructuring Plan
Shortfalls
Unified Energy Systems (UES), Russia's largest energy producer, is planning a major restructuring with an eye toward accessing the world energy market and attracting large-scale investment.
The Russian power sector is one of the largest in the world, with nearly 200 gigawatts of nameplate capacity and three million kilometres of high-voltage transmission lines. The sector is incorporated and consolidated primarily under the joint stock company UES, in which the government holds an approximate 52% interest. UES wholly owns the high-voltage transmission grid and central dispatch system, and holds between 14% and 100% of the shares in the 73 regional energy companies (Energos) and 32 federal generating stations. As one of the largest holding companies in the country, UES accounts for over 72% of Russia's energy production.
Despite the enormous potential in the Russian energy sector, international lenders and developers have been reluctant to invest capital for a number of reasons, not the least of which has been the country's political and economic uncertainty. In addition, investors have cited over capacity, payment problems, low tariffs and a badly structured energy sector as reasons for avoiding Russia.
UES is attempting to address these concerns. Recently, the company reported the collection of nearly 100% of electricity bills. Additionally, UES plans to raise charges for electricity by 50% to 55% this year, and on May 1 2000 took the first step toward this goal by raising the price of electricity on the wholesale market by 35%.
Moreover, UES appears to have recognized the market inefficiencies inherent in the current monopolistic structure of the power sector. The UES's restructuring plan contemplates three stages. The first and most critical stage is aimed at restructuring the sector according to operations. Electricity production and sales would become part of an independent electricity market. UES would accomplish this either by (i) dividing up each Energo and incorporating the production and sales operations of each Energo into a separate joint stock company, with ownership mirroring that of the original Energo, or (ii) by incorporating each of the Energo's operations into a wholly owned subsidiary. Simultaneously, UES would establish its own grid subsidiary that would control nearly all power transmission and distribution, and service the new production and sales companies.
The second and third stages of the UES restructuring plan are aimed at increasing investment and developing the UES holding company. UES would reduce its interests in the new companies that would be formed in the first stage (as well as in other 'non-profile' companies). It would use these funds to service its debts and invest in the development of its subsidiary grid company and in other prospective businesses. The new UES would be a highly diversified holding company that would maintain its position in the power sector through its grid subsidiary, while production and sales would develop independently in a free market.
UES plans to finalize its restructuring plan by June 19 2000. Most of the restructuring is targeted for completion in 2005, although the government may push for its completion by 2003 in order to boost its image before the next election.
The UES draft falls short in providing a comprehensive plan for ensuring the payment of electricity bills. However, the federal government recently issued two decrees aimed at enforcing payment.
The UES proposal also does not provide concrete plans for regulating tariffs. Nor does it protect the rights of Energo shareholders whose holdings may be diluted under a divide-and-incorporate scheme. In this regard, at a recent London conference, UES chairman Anatoly Chubais insisted that shareholders would be treated fairly in the proposed restructuring.
Finally, the draft restructuring plan does not address the issue of the increasing shortage of gas, on which the Russian power industry is heavily dependent.
Regardless of the shortfalls, UES is confident that its proposed restructuring will convince lenders to invest in the Russian power sector. The sector needs an estimated $70 billion over the next decade in order to replace ageing generating assets and add new capacity to meet increasing demand. If UES can implement the restructuring plan as conceived, developers and lenders may be encouraged to take a second look at one of the world's largest power markets.
For further information on this topic please contact Laura Brank at Chadbourne & Parke by telephone (+7 095 974 2424) or by fax (+7 095 974 2425) or by e-mail ([email protected]).
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