OREANDA-NEWS. September 30, 2009. JSC Irkutskenergo started to purchase the company Vostsibugol. It plans to finish the transaction in October. Sergei Emdin, General Director of the energy coal company JSC Irkutskenergo, told the correspondent of Vostochno-Sibirskaya Pravda (East Siberian Truth) newspaper about the results of the joint activity expected by the two companies.

Adding new assets

- What is the current stage of the transaction for purchase of Vostsibugol?

- Now we are preparing coordination of commercial details – contracts and payment. We should understand that the transaction is quite a complicated one, because many counteragents and structures take part in it. It started in September and will be finished in October this year.

- How much did the coal assets cost to JSC Irkutskenergo and is it already clear what financial sources will be used for the transaction? Is it a difficult task for the company?

- We do not tell anyone the sum, because it is a commercial secret, but I can say that the financial stability of JSC Irkutskenergo will not be affected by the transaction. As for the sources, they are quite different. In this case we will apply both the own means of JSC Irkutskenergo and credit resources, promissory notes and bonds. This will be a whole set of payment instruments. We have a possibility to receive payment by installments. The company will be spending bit by bit money for payment of coal assets. We will have paid to the full for these assets in 2011, which is good for us, because we are already receiving benefits from management of the assets.

- Does it mean that the property will be also transferred in parts?

-No. In October the Company Vostsibugol will become the property of Irkutskenergo under the legal acts.

-How will the coal company be integrated with JSC Irkutskenergo?

- Our task is to achieve the maximal synergy at the merger, for example, by exclusion of doubling of management functions. The service that is uniform for the two companies will cope with the financial and legal issues, including property issues, where the coal company employees do not have a large experience. This concerns both management in Irkutsk and in the local areas. However, we should take into consideration that the coal company has the chief energy for coal extraction and the functions of coal sale that our company does not have. Naturally, these services will stay the same. This, again, does not mean that we do not plan to make improvements in these spheres. We actually will make improvements, but they will not be directly related to inclusion of Vostsibugol.

-How much will the personnel of Vostsibugol (KVSU) be reduced in number?

- Of course, there will be no large reduction in the number of employees. On the contrary, we expect the growth of employment connected with the expected growth of production. These are mostly managers that will be dismissed.

-Will Vostsibugol retain the status of a legal entity?

- Our task now is to gain maximal profit from a closer interaction of managers of the two companies. And this may be achieved despite the fact whether KVSU (Vostsibugol) is a separate legal entity or not. We regard the managerial and legal issues separately. From the managerial aspect, we will be trying to create a common body on the basis of the two companies. From the legal aspect, at the starting stages KVSU will retain the states of a legal entity. One of the reasons for this is the fact that KVSU has all necessary licences for coal extraction. The future will show what comes next. In our opinion, it is not necessary to change anything quickly in the legal status of KVSU.

-Will the transaction be followed by the rebranding procedure?

- Yes, this will be necessary, but not urgently necessary. For example, today our official name is the “joint-stock company of electric industry and electrification”, but now we actually the energy coal company. Besides, JSC Irkutskenergo has already ceased to be engaged in electrification; these are the functions of Irkutsk Electric Network Company that has ceased to be our dependent and affiliated company. Thus, our name in some sense has become outdated. Secondly, we would like to reflect not only our energy orientation, but our coal orientation as well. I admit that this will lead to firm changes of the brand. What about the main “rebranding”, it, no doubt, will take place in the sphere of corporate procedures and corporate culture. All our employees will have a lot of work there.

Coal accounting

- What processes of integration will be most visible?

- We have created groups of specialists that are now working for each functional activity, thinking and working out what these activities will be like. In the nearest future we will approve documents that regulate them. In September we will start to execute them. In particular, we can do quickly many things related to the management issues of the company headquarters in Irkutsk. It will take more time to make changes in the management of our production departments. I think that we will reach the threshold of the target structure approximately in half year. We are choosing the best management models, because we regard the merger not as absorption of one company by the other, but as the union of two peer companies.

- Is JSC Irkutskenergo reconsidering its investment projects due to its merger with KVSU?

-After the merger with KVSU JSC Irkutskenergo will not reconsider its investment programme. For example, we are not going to give up our gas projects. However, understanding or need in coal, now we can transmit investments very quickly through development programmes; this is connected with our consumers and with sale of our products. Now we just have the possibility to apply this ideology for our coal assets. Earlier that price for fuel was difficult to predict; now we know for sure when, for example, thermal electric station No.l0 increases its loading by 500 MW: we know where the coal for its functioning will come from, how much it will cost and which investment project of KVSU will provide it. We do not have to work out new deposits for this purpose: the company has a considerable degree of safety, and it is possible to use it quickly, even if it will concern input of new coal capacities. KVSU may for very few money to grow its deposits one and a half times. This synergy is especially efficient concerning the recent accident at Sayano-Shushensk hydro electric station. It is obvious that in the nearest future Irkutskenergo will have a bigger loading than we expected. We know what stations will receive additional loading and what investments should be made. The integration of management will allow to solve quickly such extra issues, for example, concerning supplies of additional coal at minimal prime cost till the end of the year.

Predictability of tariffs

-How do you qualify the financial state of KVSU?

- The company does not have any debts. This is a profitable and absolutely efficient company. It was also profitable last year, when it was governed by JSC Siberian Coal Energy Company. The financial position of KVSU will depend on the level of coal extraction. This year is not a good one - with the global crisis and abundance of water (which causes act6ive work in the hydro generation, and not thermal generation). However, we think that the growth of loadings on coal extraction is inevitable in the future.

- Can it come out the way that the coal sector will subsidise the energy one?

-Energy companies cannot purchase coal at subsidised prices, because then they will have problems with the tax authorities. If we do not want to pay more taxes, we should (under article 40 of the Tax Code) buy fuel at a market cost, give or take twenty percent. In Russia we do not have a law legalizing transfer prices. Thus, if the market price brings great income to KVSU, the coal employees will pay dividend to the managing company.

- How much has the purchase of KVSU increase the need of Irkutskenergo in reception of the state financial guarantees?

- We may state that the liquidity issue of the company has almost been resolved. We do not have now problems with attraction of credit resources, even regarding the transaction for purchase of KVSU. The situation has fundamentally changed within a half-year. We needed state guarantees for the bank to grant credits to us. Now we, probably, may need state guarantees to reduce interest rates.

- To what extent are development programmes synchronised in KVSU and JSC Irkutskenergo?

- Now we are aiming to synchronise them completely. If earlier there was a risk that the growth of loadings at JSC Irkutskenergo will not be supported with coal, or coal workers suffered from the fact that they make stores, and we do not buy them, now we have almost completely synchronised our work both for the approaching winter, in a short-term perspective, and for the next five years. The uniform service for strategy and development is engaged in these issues.

-Can we say that the purchase of KVSU may in any way affect the tariffs?

- It may affect on the predictability of tariffs, i.e., they will become more predictable. Earlier we did not understand what price we would have; now we have a clear understanding of the predictability of prices. We understand that KVSU may receive more profit, if the price at the market grows. However, we can find a compromise. Another positive fact is that we avoid a great number of dead expenses. This is the positive effect of the synergy. But at the current stage it will be, roughly speaking, compensating costs for purchase of the coal company (mainly, on cover of credits).

Efficient investments

- Under which principle is the company now making the decision on investment in development?

- If we see that the loadings grow, we will launch projects that were previously suspended due to the crisis. Today, in order to extract and consume millions of tons of coal, we have increased the volume of repair works and some projects for modernisation both in KVSU and in Irkutskenergo. We aim to repair the equipment that will be in work. The budget of Irkutskenergo has grown by 150m; KVSU has almost the same figure. Now JSC Irkutskenergo does not have any troubles with capacities due to the crisis. We had an unloaded thermal energy generation plant No.10. It loading due to the crisis fell down to 200-300 MW. Now it will grow by 500 MW. However, we will not achieve the last year level of electric energy production, but we will reduce the fall from 6 to 3%.

- In what figures is the financial effect from the merger expressed?

- I will not name here specific figures, but, anyway, these are tens of percent of the prime cost of the coal. We will be able to avoid extra expenses connected with a wrong quality of coal and unnecessary stores. Naturally, the efficiency will grow. We, of course, think not only about the nearest future, but about the far future as well. Being one of our large shareholders, the state also valued highly the perspectives of the merger; it is eager to see Irkutskenergo a more stable company that minimises its risks.

-Why did Irkutskenergo refused to integrate, for example, in its structure the thermal power generation station in Baikalsk?

- Here the situation differs from that of KVSU. We do not see any perspectives for this object. We do not need a station that we will have to close in a year and bear responsibility for it. Now we have started to construct an eco-friendly electric boiler in Baikalsk. We understand well how the city will keep warm in the long-term perspective. We are spend money on this. However, it is still not clear what will become of the combine, and, unfortunately, we did not receive 200m roubles for preparation of the thermal energy generation station for the autumn and winter that were registered in the minutes of the meeting headed by Russian Prime Minister V.V.Putin. I think that we – the uniform team of coal and energy workers - have done all possible for the city to avoid problems with warmth.