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. Last Updated: 07/27/2016

UES, Norilsk Spar Over OGK-3

Itar-TassChubais said investment plans for OGK-3 should only alter in the event of big changes in costs, demand or inflation.
A battle is brewing over the fate of $1.5 billion between state utility Unified Energy Systems and one of its main strategic partners, Norilsk Nickel.

The utility's CEO, Anatoly Chubais, said Friday that Norilsk would have to invest more money than planned into OGK-3, the UES subsidiary that Norilsk effectively came to control this month.

But Norilsk has other plans. Its general director, Denis Morozov, said that after carrying out the agreed-upon investment project for OGK-3, Norilsk would spend the remaining money elsewhere, as it sees fit.

The two executives spoke in separate conference calls last week.

On Tuesday, Norilsk finalized the purchase of 38 percent of OGK-3 for $3.1 billion, paying well above the market price to get within a few percent of majority control, which it will secure in a matter of days, analysts said.

OGK-3, which owns six power stations across the country, had only expected to raise $1.6 billion from the sale, just enough to carry out the development program approved by its board of directors. Although Norilsk has every intention of realizing this program, the remaining $1.5 billion will be spent on other acquisitions in the power sector, Morozov said Wednesday.

Chubais said Friday that this was unacceptable.

"We will propose to our new partners, Norilsk Nickel, additional investment projects for OGK-3," Chubais said. These projects are to be funded with the extra cash from the share sale, and by mid-June, Norilsk will be asked to sign a "final, detailed, and legally binding" contract, committing it to spend the entire $3.1 billion on OGK-3, Chubais said.

Morozov said he expected that Norilsk, as majority shareholder, would have the last word on how its money would be spent. "All the money we invested in OGK-3 will stay on OGK-3's balance sheet and basically under Norilsk's control," he said. This, he added, was one of the main reasons Norilsk decided to invest in OGK-3 on such a scale.

Even the basic investment program that Norilsk agreed to in a signed memorandum could be revised, the company's head of investor relations, Dmitry Usanov, said in Wednesday's conference call. "We will review and look with more attention at the existing program, and in case of need, we will optimize it," he said.

But Chubais said that only under "radical" circumstances -- such as a drastic change in fuel costs for power plants, a sudden spike in inflation, or an unexpected change in the pace of the sector's liberalization -- could the investment program be amended in any way. All strategic investors in the power sector would be bound in the same way to UES's investment goals, he said.

OGK-3 chairman Alexander Chikunov said after the share sale took place last month that UES could take Norilsk to court if it failed to carry out the investment program.

The legal odds would appear to be on Norilsk's side, however, as Russian courts tend not to interfere with a majority shareholder's right to spend a company's money.

But UES still has some influence on the OGK-3 board. With a 38 percent stake, it can block any major decisions, at least until July 2008, when the national utility is to be dismantled as part of the energy sector reforms. After that, its shares in OGK-3 will go pro rata to its existing shareholders. None of these will have a big enough stake to challenge Norilsk's control, however.

Getting a court to step in on UES's behalf would be an uphill legal battle, Chikunov told a March 10 news conference at UES headquarters. "This practice is indeed not very widespread in our country, but lawyers insisted while drawing up the documents that this practice will take shape as we go along."

After UES is gone, a noncommercial body called the Market Council will police the power industry in cooperation with the electricity trading exchange. What regulatory bite these organizations will wield is not yet clear.

OGK-5, one of the first generating companies to go public in 2006, said last month that the investment program laid out by UES was excessive and would not be realized in full, Bloomberg reported.

UES's forecast of 5 percent annual growth in electricity demand is grossly inflated, analysts have said. Over the next four years, rising electricity prices will keep growth down to 3 percent per year, reducing the need for new capacity, said Tigran Hovhannisyan, utilities analyst at MDM Bank. UES's five-year plan for some 70,000 megawatts of new installed capacity -- the equivalent of about 15 power stations -- has astonished many experts with its gargantuan scale. At about $700 for every new kilowatt, it would cost $50 billion to install this much capacity, with the new investors in UES spin-off companies bearing most of the burden.

By the end of this year, Norilsk Nickel plans to spin off a $7 billion electricity company called Norilsk Power, which will inherit control of OGK-3. Mikhail Prokhorov, who stepped down as CEO of Norilsk Nickel this month, is widely expected to head up the new company, although Morozov and Usanov declined to comment on his future management role.

Who emerges victorious in this battle over investment in the electricity sector may well depend on political influence, rather than the legal interpretation of Norilsk's investment commitments, however.

If political power and wealth go head-to-head in modern Russia, power always wins, said Vladimir Lebedev, general director of TGK-5, another generating company to be spun off from UES this year.

"Strategic investors make promises to carry out these investment projects," Lebedev said in a recent interview. "Going back on your promise to the government is a dangerous thing in Russia."