KAZAKHSTAN: AES UPDATES AMBASSADOR ON IPO,

C O N F I D E N T I A L SECTION 01 OF 02 ASTANA 000580 SIPDIS NOFORN SIPDIS DEPT FOR EB/ESC; SCA/CEN (O'MARA) E.O. 12958: DECL: 11/14/2016 TAGS: ENRG EPET KZ PGOV PREL RS SUBJECT: KAZAKHSTAN: AES UPDATES AMBASSADOR ON IPO, REGIONAL INVESTMENTS REF: A. ASTANA 379 ¶B. ALMATY 2052 Classified By: Amb. John Ordway, reasons 1.5 (b) and (d). ¶1. (C) Summary: AES's Dale Perry briefed the Ambassador on November 7 on AES's preparations for an IPO of its regulated Kazakhstani assets; the company's efforts to buy three CHP (combined heat/power) plants in Omsk, Russia; and several avenues of possible cooperation with Samruk, Kazakhstan's holding company for state-owned assets. On the subject of regional electricity integration, Perry reported that he had signed an MOU with Kyrgyz Prime Minister Kulov on November 6 governing the construction of a 220kV transmission line across Kyrgystan. AES's Ekibastuz Gres I plant had produced a record volume of electricity in October, Perry reported, and with prices trending upward, new long-term supply contracts on the horizon, and signs of further GOK regulatory reform, business in Kazakhstan has never been better for AES. End summary. Planned IPO of Regulated Assets -------------- ¶2. (C) Perry, AES's Regional Director for Eastern Europe and the CIS, informed the Ambassador that AES's planned IPO of 40-45% of its regulated Kazakhstani assets (including two CHP plants and a trading company) had "stalled," due to complications in harmonizing international accounting systems. Perry estimated that the IPO -- expected to raise $500-$600 million -- would take place in May or June 2007. Samruk, Perry explained, was likely to buy a 15-20% stake in the regulated companies as a "strategic partner." Further Cooperation with Samruk? -------------- ¶3. (C) Perry explained that AES and Samruk were discussing other areas of potential partnership, including possible AES investment in a series of joint stock companies which had been transferred to Samruk, effective October 24. (Note: Nine of the seventeen new companies incorporated into Samruk are energy companies, including three hydropower stations which AES operates on a concession from the GOK. Other notable companies incorporated into Samruk include Air Astana, Kazmortransflot, and the Astana, Pavlodar, and Aktobe airports.) The state-owned electricity assets needed new investment, Perry explained, and AES would be a logical partner. ¶4. (C) Perry also described AES's discussions with Samruk about possible cooperation in regional electricity projects. Samruk subsidiary KEGOC (the national grid company) would be a natural partner in AES's regional transmission line investments, Perry told Energy officer after the meeting, while KazMunaiGaz subsidiary "KMGEnergy" appeared interested in co-investing in a new Tajikistan hydropower project. However, Perry cautioned, Samruk was insisting that there be "Kazakhstani clients" for the hydropower project -- a demand which theoretically fit AES's desire to have a "backup sales plan" for the investment should selling power to Pakistan prove impossible. Further on the subject of regional electricity, Perry informed the Ambassador that he had just signed an MOU with Kyrgyz Prime Minister Kulov granting AES 24-month exclusivity to build the trans-Kyrgyz portion of the planned 220kV line stretching from the Kazakhstan/Kyrgystan border to the Tajikistan/Afghanistan border. AES Looks to Enter Russian Market -------------- ¶5. (C) Perry told the Ambassador (in confidence) that AES was "close" to acquiring a majority share in three CHP plants (2000 combined MW) and "two old boilers" in the Omsk region of Russia. AES had already reached agreement with SUEK (Siberian Coal Energy Company) to purchase a "blocking share" of the assets, Perry indicated; now the company was negotiating with UES to acquire sufficient additional shares to constitute a majority. UES had been "nervous" about transferring a stake in a "strategic asset" to AES, Perry admitted, but AES had received a verbal "okay" on the deal from the Russian Anti-Monopoly Committee, and prospects looked good. If the deal went through, Perry added, AES would be the first U.S. power generation company to enter the Russian market. ASTANA 00000580 002 OF 002 "How Things Have Changed in Two Years..." -------------- ¶6. (C) In addition to the IPO, prospective investment in Russia and growing cooperation with Samruk, Perry outlined other reasons to be upbeat about AES's regional business. The company's Ekibastuz Gres I coal-fired plant had set a plant record in October, he said, generating one billion kW of electricity. The plant had run its four operating 500 MW blocks around the clock, he said, without suffering any break-downs -- proof that AES's investment in plant maintenance had been effective. Plans were moving forward to rehabilitate the first of AES's idle 500 MW blocks, based on AES's recent success in securing long-term generation contracts. The company had recently signed two ten-year contracts for 90 MW, Perry explained. More importantly, negotiations were underway on contracts for another 1600 MW, including a 1000 MW contract with "Russian Aluminum," the new entity created from the merger of SUAL, Rusal, and Glencore (Ref A). Asked about AES's possible involvement in a Chinese investment to build what would be the world's largest power plant (7200 MW) in NE Kazakhstan (Ref B),Perry replied that he had no update, but was expecting news to emerge from Nazarbayev's December trip to Beijing. ¶7. (C) Perry reported two other positive news items: in a November 6 ministerial meeting, he said, KEGOC President Kanat Bozumbayev had acknowledged that Kazakhstan would face electricity shortages by 2008, and had admitted that regulatory reform -- and a rise in prices to 4 cents / kwH -- would be necessary to attract necessary investment. Furthermore, said, AES appeared close to securing a three-year distribution tariff from the government -- a breakthrough deal which would allow AES's distribution companies, at long last, to make planned investments and upgrades. Reacting to Perry's long list of good news, the Ambassador remarked how dramatically things had changed for AES in the two years he had been in Kazakhstan. Perry agreed that the change had been dramatic, adding that AES corporate management would never have approved AES's entry into the Russian market (para. 4) if things had not smoothed out for AES in Kazakhstan. ...And How They've Stayed the Same -------------- ¶8. (C) Laughing, Perry noted that despite his optimism and AES's growing regional business, in many ways things had stayed the same for AES. The local financial police in Ust-Kamenogorsk, he said, had recently opened a tax case against AES, claiming that the company owed the tax liabilities of the bankrupt CHPs it had acquired in 1997. Further, AES had recently lost an environmental case concerning its Maikuben coal mine, and now faced a $4 million fine. AES could have avoided the fine, Perry explained, by buying $150,000 worth of overpriced spare parts from the environmental inspector who carried out the investigation -- but had chosen not to pay the bribe and fight the case in court instead. ORDWAY