KAZAKHSTAN: AES UPDATES AMBASSADOR ON IPO,

C O N F I D E N T I A L SECTION 01 OF 02 ASTANA 000580

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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.

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"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