Evgeny Fedorov: “We aim to be involved in the process as equal partners”
EVGENY FEDOROV, CEO of EuroSibEnergo and Irkutskenergo, has told Kommersant why Irkutskenergo invests in non-core assets, including the metals industry.
— Recently, Irkutskenergo has been actively investing in non-core projects. Why does the Company do this?
— We have been financing facilities that are not directly related to the electricity industry for quite a long time. Moreover, SibMetCom is not the largest or the most important of them. Irkutskenergo has faced the situation when we have no power supply agreements (which ensure that the generating company will receive higher income for ten years after commissioning the power generating units — Kommersant) and no opportunity to monitor the return on large-scale investments in power generation. This is why we have begun considering how to use our income more efficiently. We have tried to identify the areas in which we have certain competence in order to monetize them and thus generate income for the Company. We have identified several such areas, for instance, residential construction: in 2014 we will become one of the three largest developers in the Irkutsk Region.
— What competences does Irkutskenergo have in this area?
— Efficiency or inefficiency in this sector is related to infrastructure, the way power supply, sewerage disposal, heat supply are organized; this is especially true of large-scale construction. We are interested in comprehensive land development projects, mainly the construction along the Baikal Highway, in order to ensure a normal engineering and social structure and build a total of 500 thousand square meters within five to seven years. Investments in this program will total RUB 17 bln.
— In fact, this amounts to Irkutskenergo’s income for two years, doesn’t it?
— For one and a half years. Or investments in the main equipment for three years, which we are making now. Certainly, in this case, the cash conversion cycle is much shorter, and the payback period normally totals between twelve and eighteen months (except for the structural part, which undoubtedly takes more time). Surprisingly enough, the second area is the metals industry. However, this is not a major line of business; we are simply seeking specific solutions which will be effective in Siberia. The first project to be launched as early as this year is the construction of a steel mill in the Irkutsk Region.
— Will this already be Irkutskenergo’s own project?
— Yes. Actually, we have not invented anything new. There were plans to construct a steel mill with the capacity of 1 mln tons back in the Soviet time. The business logic is simple: the closest plants are located in Kuzbass and Khabarovsk. About 1 mln tons of scrap metal is produced in the region annually; it is transported either to Kuzbass or to Amurmetal and recycled into the simplest products (while the Irkutsk Region mainly needs reinforcing bars for construction). After that, the reinforcing bars are transported back to the Region, and transportation costs account for up to 20% of their production cost. The second reason is that heating induction furnaces requires large amounts of electricity. Currently, we transport scrap metal 2 thousand kilometers away and melt it down to produce reinforcing steel, while electricity prices are 2.5 times higher than in the Irkutsk Region. This adds another 20% to the production cost. In our opinion, there is only one correct solution: we should determine an optimal production volume for the mill. We have considered the existing technologies applicable to relatively small production volumes: we would not like to transport scrap metal very far so as to avoid losses on logistics, as we expect that it will help to ensure the project's profitability. The task is to produce exactly the amount which will be consumed in the Irkutsk Region and the Transbaikal Region.
— Is there a demand for reinforcing steel in these regions?
— We plan to satisfy about 60% of the demand for reinforcing steel in the Irkutsk Region and 70% in the Republic of Buryatia and the Transbaikal Region. The amount including other products will total 260 thousand tons. Finally, we have a considerable number of unused sites with access to infrastructure, where we can locate an enterprise. However, we do not plan to remain its owners in the long term. We see that we can carry out the project most efficiently, quickly and at a minimum cost; we plan to commission the plant and subsequently leave this business.
— Does this mean that in these schemes Irkutskenergo acts as a bank granting loans?
— It could be viewed as a bank if we simply granted a loan; but we aim to be involved in the process as equal partners. In the case of the steel mill we may achieve an IRR of 35-40%. We have a vision of how we will operate this plant. But we are also ready to consider the possibility of leaving this business.
— What are your estimates of costs and how long will the payback period be?
— Capital investments will total RUB 5 to 6 bln. If the IRR amounts to 35-40%, the payback period will total about six years.
March 21, 2013