THE NORTHERN RUSSIA ELECTRIC COMPANY

For the past 25 years the Northern Russia Electric Company has been one of the most
important wholesale generators of power in northwestern Russia (Figure 6.1). It is fuelled by natural
gas and regularly produces about 3000.3 million kilowatts of electric power, which is fed into a
federal wholesale electric power grid for distribution via local power companies to consumers.The
company employs 1200 people and operates through four divisions: production, distribution,
maintenance and repair, and administration. In 2003 NREC had an income from the sale of power of
2.3 billion rubles and profi ts of slightly more than 135 million rubles before administrative and other
costs. Total assets of the company were valued at 1.5 billion rubles, short-term liabilities at 350
million rubles, retained earnings 250 million rubles and shareholders’ equity at 900 million rubles and
the company has no long-term debt. At the time of Perestroika, when the government announced that
its goal was to have competition in the supply of energy to the wholesale markets, the company was
privatized. Very quickly control of NREC was acquired by a major holding company, the United
Electrical Power Transmission System of Russia, which in a relatively short period of time, through
acquisition of companies such as NREC, gained control over most of the transmission of
electricity in northwestern Russia. Although the United Electrical Power Transmission System of
Russia is a private company, it operates within the framework of the national energy policy, the goal
of which is to have competition among wholesalers of electricity. Consequently the mandate
of the parent company and of its subsidiaries is, as a result of general market reforms in Russia, to
become competitive participants in supplying the wholesale market with electrical energy. By 1996
the United Electrical Power Transmission System of Russia had, including its original investment,
slightly over 600 million rubles invested in NREC and was to all intents
and purposes the only shareholder. Over the years the strategy of the parent was to increase the
capitalization of Northern Russia Electric Company by bringing in new equity from abroad. It was
successful in doing so to the extent that in 2003 the total capitalization of the company had grown to
900 million rubles, with the great bulk of the new capital coming from three private investment funds
– one domiciled in Great Britain and two in the United States (Figure 6.2). While it remained the
controlling shareholder, after the new capital infusions, the total ownership of the holding company
was reduced to acomfortable 66 per cent. In 1997 trading of NREC shares began on the Russian
Trading System Stock Exchange, but little or no capital was raised from the offering. The number of
transactions was few and the listing simply created a market value for the shares. It did not lead to a
great infl ow of investment by individual Russian citizens.

Uri knew that the rate of return on assets on capital investment met the hurdle rate of the
major shareholder and that all the shareholders were reasonably content with the progress of the
company. However, from various conversations with representatives of the holding company he also
knew that the majority shareholder, was not only unwilling to invest more in NREC but also had no
plans to dilute its percentage of the ownership by selling more of its shares. While he was not privy to
the strategies of the parent, he believed it had reduced the percentage of its ownership in the past to
acquire foreign exchange to invest in, and gain control of, several manufacturing plants in the United
States and Great Britain, from which it could import high-tech equipment for use in its more
sophisticated operations.