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Russia's IES Holding starts asset consolidation to raise efficiency

May 27, 2014, 11:18 UTC+3 MOSCOW

The holding plans to consolidate its generating assets and acquire companies involved in gas and water distribution as well

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Integrated Energy Systems, or IES Holding, is controlled by businessman Viktor Vekselberg (photo)

Integrated Energy Systems, or IES Holding, is controlled by businessman Viktor Vekselberg (photo)


MOSCOW, May 27. /ITAR-TASS/. Privately-held Russian power utility IES Holding is finally starting reorganization aimed at increasing its efficiency. The holding plans to consolidate its generating assets and acquire companies involved in gas and water distribution as well. Analysts see a synergy effect from uniting all these businesses at one company, but say its performance will much depend on the heat reform and do not expect IPO of the enlarged company before 2016.


Long-planned consolidation

Controlled by businessman Viktor Vekselberg, Integrated Energy Systems, or IES Holding, has been planning to consolidate its assets for several years already. The holding's assets include power producers Territorial Generating Company-5 (TGC-5), TGC-6, TGC-7, and TGC-9, as well as a number of regional power sales and repair companies. The holding initially intended to base the consolidation on TGC-9, and the company's additional share offering was prepared for this goal in 2011, but did not take place, as power holding Inter RAO, which held stakes in TGC-6 and TGC-7 at that time, opposed the suggested scheme.

On May 19, the holding released its new business strategy, saying it would focus its efforts on optimization of its structure and asset portfolio, as well as on expanding the range of provided resources and services.

The holding said it had now chosen TGC-7, also known as Volga TGC, as a consolidation center due to the company's high financial and economic performance. In 2013, the company's net profit under International Financial Reporting Standards more than doubled to 2.3 billion rubles ($67.3 million) and revenue grew 11.1% to 70.3 billion rubles ($2 billion), while among other units, only TGC-6 also showed a net profit.

Otkritie Financial Corporation senior utilities analyst Sergei Beiden said that TGC-7 and TGC-9 have similar shareholder structures, but agreed that TGC-7 has stronger financial performance.

During the consolidation, TGC-5, TGC-6, TGC-9, and Orenburg TGK will be integrated into Volga TGC, which will offer 16,843,940,187 additional shares for the move. As estimated by independent appraiser Deloitte, one additional share of Volga TGC will be swapped for 971 shares of TGC-5, 1,037 shares of TGC-6, and 584 shares of TGC-9. Minority shareholders, who object to the consolidation, could be bought out, but the holding's CEO Boris Vainzikher believes that the minorities will likely keep their shares amid current down market.

The consolidated assets will operate under the new T Plus Group brand.

Consolidation of generating and sales assets should become one of the key actions to optimize the company's structure and business processes.

"Increasing the united company's capitalization, reducing management expenses, increasing operating efficiency and entering adjacent markets are the main goals of the holding's reorganization," the holding said.

The consolidation is expected to be completed by the end of 2014, Vainzikher said at a news conference on Monday.


Enlarged company

As a result of the consolidation, a large private power company with an installed power capacity of over 14.3 gigawatts, which account for 6% of Russia's total power capacities, will be created, analysts have calculated.

Currently, the largest power companies in terms of capacity are Gazprom Energoholding, RusHydro, and Inter RAO, with their shares amounting to 16.8%, 16.6%, and 15.0%, respectively.

Multi-industry holding Renova Group will receive slightly more than 50% in the consolidated company.

Based on estimates of four TGCs, the combined capitalization of the united company could amount to 83.2 billion rubles ($2.4 billion), Veles Capital analyst Alexander Kostyukov has calculated. But the united company will also include non-public companies, and the final figure could differ, he said.

The united company will certainly intend to make an initial public offering (IPO), but its terms will depend on the heat reform, Beiden from Otkritie said. The IPO will unlikely take place before 2016, he said.


Expanding activities

The holding's reorganization implies development of several work directions, including power generation, heat generation, thermal grids, water supplies, gas supplies, and power sales, Vainzikher said. At first, the holding will consolidate generating units and then power sales units, he said.

IES will buy 100% in Russian Utilities Systems (RKS) and around 50% in gas distributor Gazeks from Renova for 20 billion rubles ($584.6 million) and 5 billion rubles ($146.4 million), correspondingly.

The holding plans to reduce losses at thermal grids and close inefficient power plants and boiler units, namely the TETs-1 plant in Saratov and a boiler unit in Saransk. The purchase of RKS assets will allow the holding to deal not only with power and heat supplies, but with water supplies in nine regions as well, while the acquisition of Gazeks will involve the holding into gas distribution system in the Sverdlovsk Region.

"Uniting all these businesses, including power and gas distribution, in one structure can bring a quite serious synergy effect, but it is yet difficult to estimate it," Beiden from Otkritie said. Financial indices of TGCs are much dependent on heat tariffs, and if the growth of tariffs exceeds inflation, the companies will improve their performance, the analyst said.

Sergei Pigarev, an analyst at Rye, Man & Gor Securities, said that it was now difficult to estimate prospects of the united company due to a high debt burden and uncertainties over the industry's regulation.

UralSib Capital analyst Matvei Taits was quite pessimistic about prospects of the united company. Volga TGC focuses mainly on heat production and transportation, and the country's heat market is now fully regulated based on the cost of production and does not bring good profit to shareholders. Russia is now preparing for a reform of the heat market, which is slated to liberalize heat prices, but high social importance of heat supplies in Russia may not allow creating investment possibilities in the heat business, Taits said.

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