Territorial Generating Company 14 (TGK-14)

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In June 2008, former monopoly RAO Unified Energy System of Russia (RAO UES) sold the government stake of 33.6% in regional generator Territorial Generating Company 14 (TGK-14) to the consortium made of state-owned Russian Railways (RZhD) and its partner ESN-Group. The consortium bought the stake through their joint venture Energopromsbyt for US$ 77 million. Energopromsbyt was 51%-owned by state owned railway company RZhD and 49%-owned by ESN-Group, a private Russian investor. TGK-14 had 663 MW of installed capacity and served the Chita region and Buryati Republic where it operated local thermal heat and power plants – Chitinskaya 1 and 2, Ulan-Udenskaya 1 and 2, Sherlovogorskaya, Priargunskaya and Timlyuiskaya. Before the sale of the Government share, TGK-14 largest shareholders were RAO UES (49.66%) and metals giant Norilsk Nickel (27.69%). Energopromsbyt agreed to pay 0.0074 ruble per share for 250 billion of government shares in TGK-14. The sale of the government share raised US$ 77 million and was the first of two steps in the auction process. The winning investor was also obligated to purchase additional shares TGK-14 expected to float to raise funds for investments. In July 2008, TGK-14 completed floating of additional shares of 580 billion new shares of common stock at 0.0074 ruble per share or $464 per KW of installed capacity, raising US$180 million. Energopromsbyt purchased about two thirds of the new share issue. The rest of shares were bought by the existing shareholders of TGK-14 exercising their preemptive right. After the additional share issue and RAO UES sale of the government stake in the TGK-14, Energopromsbyt consolidated a 50% stake in the company. After reaching the 30% stake in TGK-14, Energopromsbyt had to buy the share of minority shareholders at the same price paid for the government share according to the Russian regulations. By end of 2008 Energopromsbyt did not bough the share of minority shareholders because it indicated that the price required to be paid (similar to the one offered for the government shares) was too high considering the decline of TGK-14 share in the second half of 2008. Over 2003-2008 period, the Russian power sector underwent significant restructuring. Until 2003 the main assets of RAO UES, the state-owned holding for energy companies, were united into regional vertically integrated energy companies: 73 regional power utilities or Energos which produced and transmitted electricity and heat. RAO UES also centrally managed 32 Federal Power Plants, the Central Dispatch, High Voltage Grid plus Grid Service. 2003 energy sector reform envisioned a new organizational structure that included companies involved in potentially competitive activities (power generation and sales, repair and services) and natural monopolies (transmission, dispatching). As a result of the reform RAO UES was planned to be dissolved on July 1, 2008. The companies replacing RAO UES were: a System Operator was to receive functions and assets of regional dispatch administrations; a Federal Grid Company (FSK) was to manage the trunk grids; 11 interregional distribution grid companies were to manage regional distribution grids; RAO Eastern Energy Systems Holding was to manage energy companies of the East and isolated power systems of the Far East region; six wholesale generation companies (OGKs) were formed on the basis of large federal plants; one Hydro OGK was to manage large hydro plants; 14 territorial generation companies (TGKs) were formed on the basis of combined heat and power plants and Inter RAO UES was to remain the major investor and a leading exporter and importer of electric power in Russia. Rosenergoatom was to include all nuclear power plants. Wholesale generation companies (OGKs) were formed in 2004-05 on the basis of large federal power plants with a typical installed capacity of 1000-2000 MW. These large power producers were to become the largest participants and the main competitors on the wholesale power market. Seven of such companies were created in the process of reform: six of them incorporated large thermal power plants (OGKs) and one incorporated large hydro power plants (Hydro-OGK). In an effort to restrict the monopoly influence on the competitive wholesale power market, each of the OGKs was established on the basis of power plants geographically dispersed across the country. The reform also created Territorial generation companies (TGKs) by uniting combined heat and power plants with a typical installed capacity of 100-500 MW which were located in a few neighboring regions or one macro region. The territorial generation companies would sell electricity as well as supply regional consumers with heat energy. Interregional Distribution Companies were formed as operating companies to manage electricity distribution networks located in a number of neighboring regions. ESN group owns 49% stake in Energopromsbyt which owned 49% of TGK-14. Thus 49% times 49% = 24% private