06ASTANA580, KAZAKHSTAN: AES UPDATES AMBASSADOR ON IPO,

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Reference ID Created Released Classification Origin
06ASTANA580 2006-11-15 11:41 2011-08-30 01:44 CONFIDENTIAL//NOFORN Embassy Astana

VZCZCXRO9420
PP RUEHDBU
DE RUEHTA #0580/01 3191141
ZNY CCCCC ZZH
P 151141Z NOV 06
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC PRIORITY 7677
INFO RUCNCIS/CIS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEAIIA/CIA WASHDC
RUEBAAA/DEPT OF ENERGY WASHDC

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 
main
tenance 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

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