Energy sector privatization :first news in six years

In April, the State Property Fund of Ukraine finally announced its list of enterprises to be privatized in 2007. For the first time in years, the list contains, among others, several energy-distributing companies.

This May 30th, the Vedomosty Pryvatyzatsiyi [Privatization Bulletin] newspaper is expected to announce the sale of five blocks of shares in regional energy-distributing companies, namely: 15% of VinnytsiaOblEnergo, 10% of ChernivtsiOblEnergo, 15% of ZakarpatOblEnergo, 6% of CherkassyOblEnergo, and 15% of DniprOblEnergo.

Two weeks later, another five blocks of shares will be put up for bidding: 26.98% of LvivOblEnergo, 25% of OdessaOblEnergo, 10% of KrymOblEnergo, 15% of VolynOblEnergo, and up to 5% of DonetskOblEnergo.

The last sale of the state-owned energy assets took place in April 2001 when Viktor Yushchenko was Prime Minister. Six energy-distributing companies were sold then: two – KyivOblEnergo and ZhytomyrOblEnergo – to American companies and four – SevastopolEnergo, KhersonEnergo, KirovogradEnergo and ZhytomyrOblEnergo – to the Moscow-based Voyevodin-Babakov group (the late Kurochkin represented the group’s interests in Ukraine at the time) operating under the seal of Slovak VS Energy.

The sales were supposed to continue further, but a long pause followed during which there was only one sale of significance: in late 2002, the State Property Fund, struggling to squeeze Konstantin Grigorishin’s conglomerates out of the market of regional energy-distributing companies and responding to its Slovak friends’ insistent request, offered to sell 25% of the stocks of Open Joint Stock Companies SumyOblEnergo and PoltavaOblEnergo at the Kyiv International Stock Exchange. The tender terms were written so as to bar all but the “only right” bidder from participating.

However, Grigorishin managed to agree on sharing his assets with President Kuchma’s son-in-law Viktor Pinchuk, and the offer was cancelled at the last moment. That was the end of the state-initiated privatization in the energy sector, although the re-distribution of property in the sector never ceased. From time to time thereafter, Grigorishin and Pinchuk formed alliances. Anatoliy Chubais tried to enter the market. Konstantin Grigorishin ceded his stocks to Ihor Kolomoisky and later litigated with him. Hryhoriy Surkis assigned his stocks to Kolomisky and did not litigate with him.

The Slovaks competed with Grigorishin for buying out the regional energy-distributing companies owned by the Americans, who refused to sell anything. The Donetsk guys redistributed the energy assets formerly held by the Kliuyev brothers in favour of Rinat Akhmetov’s family business. KyivEnergo kept changing hands between the city authorities and Andriy Ivanov’s group, etc, etc, etc.

The state showed no interest whatsoever to the above activities and transactions. With the incorporation of the National JSC Energy Company of Ukraine, it did not seem to care about privatization any more.

Last year, the State Property Fund made an attempt to sell some state-owned energy assets: in mid September, SPF Chair Valentyna Semeniuk declared her intention to sell some of them before the year ended, including 5% of the stocks of those regional energy-distributing companies where the state owned over 75% of shares. However, before doing so, the SPF had to get the stocks from the NJSC Energy Company of Ukraine. The latter, predictably, did not delight to give its property away.

As a result, the process of compiling the privatization list took too long, and the list was significantly pared off: the stocks of energy-generating companies were dropped altogether… Only two large stocks were offered for sale – those in LvivOblEnergo and OdessaOblEnergo. All other stocks were much smaller, although not uninteresting.

It is over the two above major stocks that the potential bidders are most likely to clash. Analysts do not expect the nominal stock in DonetskOblEnergo to become a bone of contention. As for KrymEnergo, Rinat Akhmentov’s conglomerates are, reportedly, claiming to enhance their presence there, particularly upon buying out the Slovaks’ share in it. So it is most unlikely that any other competitive bidder would opt to go into that region.

The 6% stock in CherkassyOblEnergo is another story, though. Presently, the state owns 71% of shares in this company, 46% of which are controlled by the NJSC Energy Company of Ukraine, and the other 25% – by the Closed JSC UkrESCO. In theory, the latter company also belongs to the state – the State Property Fund holds 99.7% of its shares. In practice, however, the SPF has no control of it, and the NJSC Energy Company of Ukraine has been trying to repossess the stock in question, but in vain. A large stock in CherkassOblEnergo (more than the blocking package) is under the Grigorishin conglomerates’ control; he also strives to buy UkrESCO.

Furthermore, the recently publicized privatization list includes 15% of the stocks in one of the largest state-owned energy-distributing companies: DniprOblEnergo. Some time ago, it was in the hands of the Grigorishin conglomerates (allied with Pinchuk). When the NJSC Energy Company of Ukraine came into being, those conglomerates lost operational control of the company, having nonetheless retained about 20% of the shares. The upcoming privatization could enable them to form a blocking package of stocks.

Among other stocks to be put up for sale are those in the Vynnytsia and Volyn regional energy-distributing companies, where the largest private shareholder (with over 20% of shares) is the Energostandard Group owned by, yet again, Grigorishin. The blocking package of stocks in ChernivtsiOblEnergo belongs to Mikhail Voyevodin’s company VS Energy International Ukraine, although the court case regarding the sale of 36% of its shares, filed back in late 1990s, is still in progress.

A large stock in ZakarpatOblEnergo (over 10%) is held by the “Moscow-based Slovaks”, i.e. Voyevodin and Babakov.

According to expert forecasts, local (Ukrainian and Russian) market players have the best chances in the forthcoming privatization. In theory, foreign companies could enter the market, should they be eager to do so, but they are not. As matters stand, observers can only venture guesses about how actively the Rinat Akhmetov conglomerates will bid.

Stocks in Poltava, Prykarpattia, Sumy and Chernihiv energy-distributing companies are not to be found on the list. The state keeps hold of the blocking stocks but has a weak influence. It could sell these stocks for a very good price. Since 2006, Grigorishin and Kolomoisky’s Privat Group have been at court over control of these assets. Neither party seems to have confidence in Ukrainian courts (surprise, surprise!), so their dispute is pending in the London International Court of Arbitration. The hearing is to be over by mid May, i.e. before the offer. However, its disposition has been postponed several times. The state has not dared to take advantage of the shareholders’ controversies, and contented itself with offering only LvivEnergo shares for sale.

Thus, the process has been set in motion, no matter how slow and cautious. Its first results will become evident in early summer.

There is yet another piece of corporate news in the sector: in April, the energy-generating ZakhidEnergo Company unveiled its plans to issue corporate bonds worth UAH 265 million to fund investment projects, in particular the reconstruction of two units of the Burshtyn Heat Power Plant in the Lviv Oblast.

The size of the issue is twice as large as the company’s authorized capital and 12 times as large as its annual profit--hence a question as to its ability to redeem the bonds. According to the company’s estimates, complete modernization of one unit will cost USD 150 million, maybe a little more. There are 12 units at the power plant. USD 150 million is big money, of course, but it will hardly increase the Burshtyn HPP return on investment dramatically. What it can do, however, is to create a legally valid debt. Ukraine’s history has known of debt privatization cases (suffice it to mention DonbassEnergo, for instance).

In March 2007, Oshchadbank (Savings Bank) and Ukreximbank announced a joint issuance of corporate bonds from the Open JSC ZakhidEnergo to fund the reconstruction of the Burshtyn HPP. Both banks are state-owned, which reduced the risk of damaging state property. Later the Closed JSC Vnieshtorgbank (Ukraine) was reported to have joined the consortium. It can also be regarded as state-owned, its owner being the Russian Federation or, more accurately, the Russian bank VTB. What is to come of the entire arrangement, I wonder?

The long intermission in the energy sector privatization seems to have come to an end. Slowly but steadily, the sector is coming to the fore of the business community’s attention. The market players are all well-known. No new faces are anywhere in sight. Is that the intention?..