Nobody will get anything for free ...........
(Posted to Mosenergo website July 29, 2004)
05.07.2004
The interview with Arkady Yevstafyev, AO MOSENERGO CEO
The reform in the power industry in the Moscow region has started. AO MOSENERGO shareholders almost unanimously supported the restructuring plan. Under the plan, 13 new companies should be created. The grid business will be owned by Moscow and Moscow regional governments. For Arkady Yevstafyev, AO MOSENERGO CEO, this means the end of old controversies when he, as a «Chubais man,» was the main irritating factor for Moscow authorities. According to Yevstafyev, he will make his best to implement Chubais-Luzhkov pact that provides for amicable split of AO MOSENERGO assets. However, he does not exclude that the reality may be somewhat different.
Q: Recently, the Prime-minister Mikhail Fradkov has announced that key decisions on the power sector restructuring should be taken only after the steps made after 2001 have been analyzed. He also said that the decision on the mechanism for OGK auctions (privatization of generating companies) will be made no earlier than in December. What is you opinion of this statement? Does it mean that the reforms will be stopped or delayed?
A: The reform imply changes. Naturally, in the course of the reform new factors emerge and the changes in the reform itself are introduced. Moreover, the power industry restructuring is a complex process and not all problems and weak points can be detected right away. We have to track developments and revise many things. There is no threat in what the Prime-minister said. I am convinced that the reform will eventually take place. The government decided to take a break to get a deeper understanding of some issues. I see absolutely no disaster as a result of this statement. Judging by the progress, I see that the government is aware of the need in the electric utilities reforms. The draft proposal for AO MOSENERGO restructuring was approved at all levels and commissions in the government. The reform was also supported by our shareholders. 99,77% of AO MOSENERGO shareholders voted for the reform at the general shareholder meeting. We even did not expect such a positive result. We are pleased that minority shareholders voted for the reform. It was a material event.
Q: How did you achieve that?
A: My first deputy Dmitry Vasiliev visited key European countries and the US. We drafted a special information announcement in accordance with SEC requirements (ADRs are SEC’s jurisdiction). It was crucial to show that all data are true and transparent. This information announcement was filed with SEC.
A: How many shareholders took place in the AGM?
Q: 82.43%. Around 10% of our shares are floated in the form of ADRs that did not take part in the voting. Previously, the Bank of New York sent us voting proxies for those ADR holders who did not give their orders. However, as a result of new voting rules established by the Russian Securities Commission nobody voted for those ADR holders.
Q: You said that in some way the reform will be reassessed. Will the restructuring plan for AO MOSENERGO be changed?
A: The question should not be put this way. There is a principal strategy that will be followed. We implement the plan that was approved by the Russian government. In strict accordance with this plan AO MOSENERGO will be split in 14 companies whose shareholder structure will mirror that of AO MOSENERGO. We have signed agreements on the restructuring of AO MOSENERGO with the governments of Moscow and Moscow region. These are important documents under which the governments have the right to receive controlling stakes in grid companies.
Q: Please, tell, how did you manage to agree on the restructuring with the Moscow Government—your most ardent critic. Is it true that RAO UES CEO Anatoly Chubais agreed to concessions in exchange to support from All Russia Duma faction for Power Industry Restructuring Law?
A: It was a complex process and undoubtedly there was a political rationale. I was not involved in the political process, I only took part in drafting agreements. My opinion is that neither government interest not minority shareholder interests were not damaged.
The procedure for agreeing on all positions was very complex. At first, we obtained approvals from governments of Moscow and Moscow region having passed all government commissions. It was a very big job. After these agreements were approved we got signatures from Moscow mayor Yuri Luzhkov and governor of Moscow region Boris Gromov. These documents laid a framework for further actions. Then we had to approve the restructuring plan adjusted to the agreements which meant passing the whole procedure once again.
Q: Why the governments of Moscow and Moscow region want exactly grid assets?
A: It is quite understandable that heads of any federal entity always want everything. The natural desire of the management is to limit this trend to preserve the balance of interests. Everybody thought that both electric and heating lines is exactly what should be given to municipal authorities. The rationale is as follows: previously, the city built grid facilities that overlap with ours. We operate them all but the costs are not reflected in tariffs. In order to streamline the segment, they wanted to join their and our grid assets by contributing their assets as payment for rights issue for new grid companies. Thus, grid assets will be concentrated in the same hands and the governments of Moscow and Moscow region would set tariffs on grid services.
Q: Is there a preliminary estimate of how much Moscow assets cost?
A: No, there is not. The only thing we have is talking. I view such talking quite negatively. It is irresponsible and non-professional.
Q: Who will carry out the appraisal?
A: Independent appraiser that has international recognition. Everything will be done along usual market lines. By the way, at the BoD meeting at RAO UES German Gref suggested that the stake of the Moscow Government should be increased on market terms, based on independent appraisal, I was pleased to hear this.
Q: Agreements say that after the split of AO MOSENERGO the governments of Moscow and Moscow region may increase their stakes in grid companies to controlling ones. Who or what may force shareholders to vote for the dilution of their own stakes?
A: Such risk always exists and it is usual. Naturally, there can be contradictions, as somebody wants to get assets cheap and the other party does not want to sell them cheap. It is a normal question, and a reasonable solution will be looked for. Nobody will get anything for free. Assets will be exchanged for cash or other assets upon agreement with shareholders which is important and pretty difficult, too.
Q: Is there a risk that agreements will not be observed?
A: This risk is always there, too. There is no complete confidence that everything would go as was planned. For example, in a year the Moscow Government may say: «We have revised our position as the energy market has changed and there are new laws. Yes, we needed it before, but now we’d be better off if we change our position.» Everything may happen.
Q: Moscow is rich. It has assets and money. But how the Moscow region will pay for the rights issue?
A: I would be cautious to state that availability of money means the sufficiency. AO MOSENERGO is not a cheap company. I would like to stress: it a matter of honor for me to complete the agreements that were concluded. On our part, we will execute our obligations in strict accordance with the law and interests of all sides.
Q: Gazprom has been a major shareholder of AO MOSENERGO for several months. At the AGM, two top managers of Gazprombank became BoD members. What is Gazprom strategy towards AO MOSENERGO?
A: So far, Gazprom is assessing the situation. It is true that it has a major stake in AO MOSENERGO. In total. shares of the four companies amount to 15.8%. That’s as of the April ex-date. We had many meetings with them. They are just asking questions about AO MOSENERGO. I understand them. AO MOSENERGO is a pretty complex company. Our chief engineer who has been with AO MOSENERGO for 30 years and has two government awards says that he still does not understand what electricity is. And he is a «family doctor» for the company. So, in order to understand everything, Gazprom would need 30 more years.
Q: Gazprom states that he is interested in gas-fired station, while Moscow needs grids. So, market participants believe that the two companies would just divide AO MOSENERGO. Is this possible?
A: How do you imagine this? So far, none of them has sufficient assets to achieve this.
Q: Is it true that they are coordinating their actions regarding AO MOSENERGO?
A: I know that they meet, have discussions, but nothing else.
Q: When new companies that will be established on the basis of AO MOSENERGO will start operations?
A: As soon as they get registered.
Q: Whose shares out of 14 companies will be used to issue ADRs?
A: It is a difficult question. I don’t want to get ahead of the train, as there is a long process of getting approvals from US SEC. It is up to that body—to permit ADR issuance for a given company. The only thing I can say is that AO MOSENERGO ADR program will remain. It is difficult to forecast other things.
Q: So, ADR holders will lose as a result of AO MOSENERGO restructuring because they won’t get ADRs for new companies. Moreover, their stakes in grid companies will be diluted. Can foreign investors expect any compensation?
A: Is is not correct to state that ADR holders will lose as a result of the reform. All ADR holders will receive shares of new companies that will be created on the basis of AO MOSENERGO. If they don’t want to be shareholders of new companies they will ask the Bank of New York to sell them (the bank is a custodian under the ADR program). In addition, if shareholders do not agree with the reform they can sell their shares in the market or submit to AO MOSENERGO for buy-out.
Q: How do you assess the prospects of new companies that will be created on the basis of new companies? AO MOSENERGO shares are blue chips. But will the shares of new companies be blue chips?
A: Not immediately. The first company that have good chances to become a blue chip is generating company Mosenergo. It will include 17 power stations excluding the four stations (Zagorsk GAES, GRES-24 in Ryazan, GRES-5 and GRES-4) that will be part of other OGKs.
Q: How much time will it take?
A: Hard to say. It is a pretty lengthy procedure. First, the companies have to be registered and only then the listing can be obtained. Each stage is pretty difficult and lengthy. It is not a matter of one month.
Q: Instead of one company there will be 14 new companies. Where are you going to find top-managers? During the transition period (around one year and a half) I will have to be general director in all 14 companies. My deputies in each business area will continue to carry out their work too. Those who will cope well with their duties may become top managers there afterwards.
Q: You will be blamed of holding 14 positions at once and «sucking the blood of people.» Aren’t you afraid of this?
A: No, I am not. I read in a Moscow newspaper that I spend most of the time at the Canaries and have little idea of what is happening in AO MOSENERGO. This is what for people are deprived of their money. Please, believe me, I have never been to the Canaries, it is easy to check. I hope, in the end people will get everything right. How can the electricity sector «suck last blood?» Look at this: every year the gas price goes up on average 14-16%. However, the price for 1Kwt-r may grow next year 8.5-9%. At the same time gas accounts for 92.5% of fuel used by AO MOSENERGO (due to technological and environmental reasons). This is the same gas that becomes more expensive every year 20-24%. Gas payments account in budget for 40-45% of costs. Therefore, one cannot be absolutely sure who drinks what.
Q: Some time ago you announced that AO MOSENERGO is going to independently produce gas. Have these ideas materialized?
A: If you look at the evolution of electric utilities you will see that they buy gas producers, not the opposite. For example, E.ON has purchased Ruhrgaz. We cannot do that but we did not abandon these ideas.
Q: Will they be implemented by Moscow regional generating company?
A: Yes
Q: At what stage is the project now?
A: We have signed the protocol of intentions. The problem is that there are a number of technical problems relating to this field. The owner of the field is Guta Group and they are our partner under this project.
Q: You are purchasing gas not only from Gazprom but from independent producers too. What are these producers and what are the volumes?
A: We purchase 21.8 bcm of gas at regulated prices. We also buy approximately 2 bcm at commercial prices that are considerably higher. But we have a clear criterion-that gas should not be more expensive than the coal because we can substitute gas with coal. If the price is acceptable we purchase gas. If not, we buy more coal. It is very convenient as there is some space for maneuvering.
Q: With what independent producers do you work?
A: Various suppliers offer gas to us. Not everybody can make it. We tell them: sign an agreement with Gazprom on gas transportation and then come to us. Some go and never come back but some succeed. We cannot cooperate with oil companies as they are barred from the pipe. They are ready to give us cheap gas but gas transportation restrictions obviously are not a market measure.
Q: All the time you work for AO MOSENERGO you are harshly criticized by Moscow authorities. Why Moscow mayor Yuri Luzhkov does not like you?
A: This question should be addressed to those who do not like us. But one can note that the heat has lately decreased. We have absolutely businesslike relationships with all Luzhkov deputies. We often meet with them and resolve operational issues. I see that the understanding of our tasks and needs has grown in last six months.
Q: Was it difficult to work for the last several years when complaints went almost to every agency and even to the president?
A: I got used to it. Few people remember that when ORT V channel was disintegrating I was deputy general director for information and everything had to be created anew. It was my time when Vremya program made it back to the air. My life has never been easy.
Q: You became the head of the company although you had nothing to with the electricity sector. Were you not afraid of such adventure?
A: I absolutely disagree that it was adventure. I have several graduate degrees including a technical one. Mathematics teach people to thing and streamline brains. So, if you have desire to study and learn something new, such decisions are natural. It was a well thought-out decision. For one year and a half I worked here as a deputy general director. And becoming head of the team was easy excluding an attempt to prevent me from entering the building and a small punch-up at the entrance.
Q: So, the only thing that darkened your life was the physical assumption of top manager duties?
A: I was not upset at all. Because we have entered in the end. And punch-ups happen very often.
Q: Do they often tell you about the Xerox box?
A: I think they will recall it until the end of my days and tell the story to my children and grandchildren.
Q: Are you sorry about that incident?
A: Not at all.
Biography
Arkady Yevstafyev was born on March 10, 1960 in Saratov. In 1982, he graduated from Saratov State University where he majored in Applied Mathematics. In 1986 he graduated from KGB High School and Diplomatic Academy of the Ministry of Foreign Affairs (1990). In 1990-1992, Arkady Yevstafyev was the second secretary of a department at the Ministry of Foreign Affairs. In 1992-1995, he was a counselor, press-secretary of the deputy prime-minister. In 1995-1997 – deputy general director of the ORT channel. In 1997-2000, Arkady Yevstafyev was deputy general director for government and mass media relations. In 2001-2002 – acting general director, and since 2002 – general director of AO MOSENERGO.
About the company
AO MOSENERGO is the biggest Russian AO-energo with installed capacity of 15,000 MWt (7% of total Russian capacity). The client base is more than 4 mn people. The company’s 2003 revenues were 69.6 bn rubles, the net profit-1,7 bn rubles. As of May 28, AO MOSENERGO shareholders included RAO UES (51%), entities associated with Gazprom (15.8%), ADR holders (11%), Guta Bank (4%), and the Moscow Government (3%).
As of July 2, AO MOSENERGO market capitalization based on RTS trading results was $2,1 bn.
Tatyana Yegorova,
Vedomosti
AI
