Company management speeches

It is no longer efficient to remain 100% owner in this field of activity

The chairman of Board of Directors EMAlliance Mr. Evgueniy Tugolukov is ready to share his power for further progress.

Mr. Evgueniy Tugolukov started his career in big business with MDM Group whose promoters he had met in native Ekaterinburg. As Head of investcompany Rinako, Mr. Tugolukov was responsible for the projects out of the main line of the Group. When he decided to get down to independent business, he took up power engineering. In 2003 he bought out shares of Krasny Kotelschik from MDM Group and one year later he owned another key manufacturer of power equipment ZIO-Podolsk. Based on these assets, Mr. Tugolukov founded a new machine-building holding EMAlliance. The new holding has a strategic partner Alstom from France and before New-Year holidays the company Rosatom became a co-owner of ZIO-Podolsk. Mr. Tugolukov speaks about further plans of EMAlliance in his first interview to The Vedomosti.

- Holding EMAlliance was founded in 2005. What purpose did you have?

- In 2003 Krasny Kotelschik was far from good conditions. The company had very few contracts and the annual revenue was not more than USD 40 mln. It was quite obvious that we would survive only through enlargement and acquisition of new technologies.

The first goal was achieved in 2004 when we agreed to consolidate with our main competitor ZIO-Podolsk. The control stock belonged to several top managers of the company with Mr. Vladimir Ovchar, Chairman of Board of Directors, among them. Practically all these people continued to work in the consolidated company. Joint owners of Podolsk Plant were enthusiastic about the proposal to consolidate the assets and the negotiations took less than a month. At first it was a question of consolidation but very soon we realized how difficult it would be for different joint owners to agree with each other. At the end of 2004 we signed the contract, some payment under the contract was effected at that same year and the total bargain was finalized within the next year.

- What was the result of consolidation of the companies within the holding?

- It allowed us to take the same position at the market as, for example, Power Machines.

Power Machines is often called a leader of machine-building industry in this country. They underline that the company has produced 70% equipment for power capacities in the USSR and traditional importing countries. The matter concerns only turbine equipment which occupies about 10 % of machine hall. Boiler equipment makes up 10 % as well and our equipment is as significant as Power Machine’s for power engineering: coal boilers of Krasny Kotelschik have been installed at nearly 80 % power plants in this country and ZIO-Podolsk has supplied 100 % steam generators for all Russian NPPs.

- What is the current structure of ownership in EMAlliance?

- EMAlliance owns 75% shares of Krasny Kotelschik and 50% minus 1 shares of the company EMAlliance-Atom, the latter owns ZIO-Podolsk shares (78,6%) and ZIOMAR (96%). Up to now I have been a sole beneficiary of EMAlliance. The structure of ownership will be changed very soon starting the next year.

- What is wrong with the current structure?

- Mr. Guennadiy Levchenko, who had been Head of Krasny Kotelschik for 16 years, mentioned in his interview some years ago that shareholders might pass away but factories remain. At that time the turnover of owners came to its end in the company. I respect Mr. Levchenko very much and I felt rather hurt by his remark. Later on, we worked well together and I think he is pleased with the current status of the company. He was right, of course, in some way.

When a company in our industry is at a particular stage of development, it becomes inefficient to remain 100 % owner. If further progress requires the involvement of new partners, then I’m not very much concerned whether I’ll remain the major shareholder or not. Moreover, the company shall go public and get a market assessment.

- How will the composition of shareholders change?

- In my opinion, the best way is to keep the majority interest as belonging to several big Russian shareholders and to sell the blocking stock of shares to a strategic investor, one of key foreign players in the market. Up to 20% shares shall be offered in the stock exchange and the rest stock of 5-6% shares shall be distributed among the management. The appropriate option programme for the management has been adopted by the Board of Directors.

- When does EMAlliance schedule IPO?

- We schedule IPO in the Russian stock exchange at the end of 2007 or at the beginning of 2008. Now we make the required preliminary arrangements. Krasny Kotelschik has carried out an accounting according to international standards for five years. It is not the same with ZIO-Podolsk but IPO in Russia does not require to follow international standards of accounting.

- Since 2005 you have had a strategic foreign partner, the French company Alstom. Are you going to sell the blocking stock of shares to this company?

- Currently I can give you no comments.

The only thing I can tell you is that we have no other foreign partners.

- What is covered by your cooperation with Alstom?

- New technologies was the second task of EMAlliance and in 2005 we initiated negotiations with several companies including all the main foreign manufacturers of power equipment.

At first we discussed additional orders with Alstom and then we proposed deeper cooperation in the Russian market.

It took us about one month to achieve agreement on every point of our Strategic Partnership Agreement. Our conceptual approach was to exchange technologies and jointly participate in Russian projects. I’d like to mention that out partner, unlike Siemens who fought then for the majority interest of Power Machinery, did not claim any shares.

- Have you achieved any results due to your partnership with Alstom?

- Our consortium has won the tender announced by Mosenergo for design and supply of power unit for TPP 26 of total amount about Euro 300 million.

The biggest world’s companies took part in this tender such as Siemens (with Power Machinery), Mitsubishi (with Technopromexport) and General Electric (with Iberdrola). The contract is out of the common in many respects as foreign companies have been allowed to construct a power unit in Russia for the first time. What is more important, the consortium includes a Russian company as well. EMAlliance will supply not only a customary boiler equipment but carry out erection and civil work as required by the turnkey basis of the project.

This business is new for us and gives us an additional motivation for further evolution.

- What about exchange of technologies?

- At the beginning of this year we expect to complete the negotiations concerning the transfer of technology for circulating fluidized bed boiler, - a state-of-art technology of solid fuel (coal) firing.

We achieve the agreement in general and have only some details to discuss. This technology ensures high environmental standards and efficient firing of a wide range of solid fuels of different quality. Up to now each coal mine has generally required an original plant depending on the quality of particular coal. However, restructuring of RAO UES will bring out a great number of power generating companies and some of them would not like to depend on a single coal supplier. That is why I think that the owner of such license will have a great advantage over his competitors.

- Last year EMAlliance established strategic partnership with another partner Rosatom. How much unexpected was a proposal to sell the majority interest of ZIO-Podolsk?

- Before the last year we mainly based our strategy on thermal power engineering, Rosatom orders made up not more than 5% of total output.

Nuclear power programme on large-scale construction of new capacities was rather unexpected. Under this programme Rosatom decided to consolidate the key power engineering companies. The relevant proposal was submitted to us nearly at the beginning of the last year. Gazprombank was the first to ask us to sell ZIO-Podolsk on behalf of the bank clients. At that time our prospective participation in Rosatom programme was already clear for us and we independently started negotiations with nuclear power people. After Atomenergomash (100 % daughter company of TVEL company – «Ведомости» comments) had been established, in May we came to agreement to establish a joint company EMAlliance-Atom and to bring ZIO-Podolsk and ZIOMAR shares there The majority interest of the joint company was purchased by Atomenergomash at the end of the year.

- Why did you agree to have such breakdown of the deal?

- It was a matter of great importance for nuclear power people to get the majority interest. We operated in that way as we expected benefits from such cooperation for ZIO-Podolsk evolution because this plant was tailored for nuclear power projects in the soviet period. During our further meetings we came to agreement about further merger of EMAlliance-Atom and some assets of OMZ «Izhorskiey Zavodi» and Skoda JS and that the joint company would go public after some period of time. According to preliminary assessment, the company will cost $4 5 billion.

- What share do you expect to have in the consolidated company?

- The investors represented by Gazprombank and we will have to divide 49% shares. I can give you more details only after the assessment of assets by a third party. Before we scheduled the deal with Atomenergomash, we invited assessors from our side to assess the total business and assets of EMAlliance. According to their estimation, it was about $500 million then and they forecast that the cost would increase up to $ 1 billion to 2010. The deal with Atomenergomash required a separate assessment which was made by a pool of Russian and foreign banks. The assessment of OMZ «Izhorskiey Zavodi» is carried out as well.

- At the beginning of this year Rosatom was going to name a foreign company which launches the production of half-speed turbines in Russia. What do you think about prospects of EMAlliance and Alstom?

- I know that Atomenergomash has meetings with all the main manufacturers including Siemens, General Electric and other companies. If they fail to come to agreement on this project with Alstom, we will take it as a chance to discuss a possible mounting of other products, for example turbines, using our facilities. The main line of activities for EMAlliance is still conventional thermal power engineering. We shall provide comprehensive solutions to a customer and not only as a supplier of particular equipment but as a general contractor on EPC basis.

- According to calculations of experts in power generation, not less than 150 GW of new power generating capacities shall be installed to 2020. Are you ready in power engineering sector to realize such scope of orders?

- The new plan means, of course, a greater number of orders to be placed in power engineering companies and we are ready to mobilize our potential and successfully fulfill the orders. Unfortunately, power generating experts have not given us a clear plan for the middle-term period. We need at least some guiding lines for the nearest three years. I wonder that power generating strategies have changed but none of them has been realized. For example, the previous plan included the same goals, i.e. a lower share of gas, greater number of coal and nuclear power plants, the figures were only different. Manufacturers fail to understand reforms or strategies, they appreciate clear tasks whose realization is supported by money.

- What about financial and production data of the company?

- At the beginning of 2006 we expected to have revenues $375 million but it will be 10 % lower as we did not have some orders which we had taken into account.

This year we expect to get about $540 million revenues and 10 million net profit. We expect significant financial growth not earlier 2008 provided that power generating companies increase the number of orders next year. In 2007 we do not have any big projects except Mosenergo contract. Although in 2005 we did not have even a yearly programme. I hope for a break-through this year and that we will receive securities for our contracts at least for the next two years. If it happens, we will be able to solve definite problems: attract finances and come to agreement with foreign companies.

- Do we need consolidation in power engineering industry?

- I am for a reasonable consolidation. It is not required to concentrate all resources in a single state-owned company. An ideal market shall consist of several key players: one state-owned company operates as a market regulator, it can be Atomenergomash as well, and a number of private companies whose minor shareholders might be foreign strategic partners.

They shall meet all market demands rendering complete services for construction of power plants. This configuration allows to keep competence and break through in the field of advanced technologies.

- What place in this market shall be occupied by EMAlliance?

- We direct our efforts to have the leading position in Russia and create a competitive company in the global market. Our main goal is a full compliance with Russian power-generating strategy. In spite of various strategies, they always pursue a steady growth of power generation. Unfortunately it has not had any impact on the actual growth of orders. However, we shall be fit and ready for realization of power generating plans in full extent, so we have developed a long-term strategy of the company development in thermal power engineering. Also, there is a federal programme of development of nuclear power generation where we will take part. We expect with Atomenergomash to create a new company which will become one of the key players in the power machinery market.

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