FSK Will Boost Number of Power Lines by 58%

Federal Grid said Thursday that it would boost its number of power lines by 58 percent over the next decade and eliminate a transmission deficit in Moscow by year's end.

Laying out ambitious plans to investors, Federal Grid managers also said the company would trade as a blue-chip stock when it floats on the MICEX and RTS in mid-July. The company intends to issue Global Depositary Receipts with 23 percent of its startup capital.

Federal Grid, or FSK, is the successor company of United Energy System, the former state electricity monopoly that is being wound up now during a privatization of the power industry.

FSK's capitalization is expected to reach $24 billion, making it the priciest Russian electricity company and sixth-largest by capitalization, said Evrofinansi, a brokerage advising the company on its shares. FSK will be the biggest electricity distributor in Europe.

FSK deputy CEO Alexander Chistyakov told investors Thursday that 70,000 kilometers of power lines would be added to the existing grid of 120,000 kilometers by 2020, boosting transmission capacity by 65 percent to 510,000 megavolt amps.

To this end, more than $60 billion will be spent from 2008 to 2015, he said.

Construction costs through 2010 will mostly be covered by the privatization of UES's generating companies and the state budget, he said.

The 16 European regions of Russia, including Moscow and St. Petersburg, which now suffer a transmission deficit, will boast a surplus by 2010, Chistyakov said. Moscow should also see its needs more than met by year's end, he said.

"We will open a renovated Ochakovo, which will become the biggest transformer station in Europe, as well as Zapadnaya, thus eliminating the deficit in Moscow," Chistyakov said.

He said FSK faced a shortfall of 120 billion rubles by the end of 2010 and that he hoped to get the funds through higher tariffs, not the state.

"Our main task is to introduce a new market-based tariff system to get our profit primarily from tariffs and also from the grid connection costs," Chystyakov said. "For that, a new system of tariffs has to be adopted by the government."

A new tariff system could triple FSK's forecast earnings to $3.5 billion next year, according to the company's investment plan.

FSK also plans to increase borrowings to $10 billion in 2015, from $640 million in 2007.

But there may be hurdles for building new capacity, Chistyakov said, complaining about soaring construction prices. "Demand on Russia's construction market surpasses supply," he said. "So to build new capacity we have to compete with Russian Railways, Gazprom and Transneft."

After July 1, the state's share in FSK will shrink to 77.6 percent from the current 83.87 percent still owned by UES, leaving minority stakes with Gazprom, Norilsk Nickel and SUEK.