The Ukrainian authorities will attempt to privatise the country's leading power generating company Centrenergo in late November-early December. However, the privatisation tender of what Kyiv has branded as a jewel in the crown of state assets seems to have been reduced to a farce, with the transfer of the company to a businessman who has close ties with Petro Poroshenko's team.
On October 3, the Ukrainian cabinet approved a starting price for the sale of the 78.3% stake in Centrenergo of UAH5.98bn ($210mn), according to State Property Fund's (SPF’s) head Vitaliy Trubarov. This will be the biggest privatisation of the year and has been widely anticipated as the company is considered one of the most attractive in the government’s portfolio of assets to be sold off.
The SPF and the nation's economy ministry are going to complete preparation of privatisation conditions in three days, Trubarov said, and will make an official announcement to launch the process in mid-October.
Alexander Paraschiy at Kyiv-based brokerage Concorde Capital believes that "at first glance, the starting price of Centrenergo looks feasible for potential investors". However, market experts agree that the company will likely be sold to the Ukrainian businessman Vitaliy Kropachev, who in recent months has monopolised coal supplies to Centrenergo.
According to information supplied by the company, coal companies controlled by the businessman — the Chervonolymanska coal mine based in the southeast of Ukraine, as well as three coal cleaning facilities — accounted for 83% of supplies (1.9mn tonnes) to Centrenergo in January-August.
Ukraine has a long tradition of local oligarchs manoeuvring to prevent the fair and open sale of state-owned assets. The government has tried to privatise Odessa Port Plant (OPP) three times already but it has proven impossible to sell partly because of a debt of UAH193mn owed to Ukrainian oligarch Dmytro Firtash's company Ostchem.
At the same time, another oligarch Ihor Kolomoisky has threatened to challenge any privatisation sale as his company Nortima says it would regard any sale as the purchase of stolen assets following a 2009 tender in which Nortima outbid two rivals with an offer of $600mn at the exchange rate at the time, but was rejected by the Ukrainian authorities.
Mysterious 'coal king'
Kropachev is close to Ihor Kononenko, who is a close associate and long-time business partner of Poroshenko. Kononenko, the first deputy head of the Poroshenko Bloc faction in parliament, is regarded as a 'grey cardinal' on the Ukrainian political scene for his leading role in unofficial negotiations with other parliamentary factions, and together with Poroshenko owns various businesses and funds as bne IntelliNews described in a detailed investigation “LONG READ: Poroshenko’s empire – the business of being Ukraine’s president” published in August 2016.
Kropachev’s three coal cleaning facilities were added to his portfolio in 2016, after he reached arrangements on their purchase with representatives of Mako Group run by Oleksandr Yanukovych, the eldest son of the former Ukrainian president, who fled the country in 2014.
Meanwhile, Chervonolymanska was acquired by Kropachev’s conglomerate in late 2017. Igor Humeniuk, a former member of the pro-Russian Party of Regions, acted as the seller of the asset: his companies were listed as the official owners of a majority shareholding in Donbasenerho, which went private serving Oleksandr Yanukovych’s interests, according to the Ekonomichna Pravda online outlet.
In February, Ukraine's leading energy conglomerate DTEK, controlled by fellow oligarch Akhmetov, complained that Centrenergo cancelled coal supply contracts and refuses to purchase its coal any more, buying from Kropachev's coal companies instead.
The Centrenergo-DTEK agreements were broken in late 2017, when Chervonolymanska launched its production of hard steam coal and started pursuing this niche on the market. In late January, a company related to Chervonolymanska won an open tender to supply 0.1mn tonnes of hard coal to Centrenergo at UAH2,400 per tonne, which is less than the prevailing market price.
Chervonolymanska mined 0.90mn tonnes of coal in 2017, all of which was coking coal, according to statistics from Ukraine’s energy ministry.
What is Centrenergo?
Centrenergo plays a leading part in power generation for the Kyiv, Kharkiv and Donetsk regions. The company supplies electricity to the wholesale energy market and thermal energy for heating and hot water supply of the towns of Svitlodarsk (the Donetsk region), Ukrainka (the Kyiv region) and the village of Komsomolske (the Kharkiv region).
The company consists of three thermal power plants — Vuglegirska, Zmiivska and Trypilska. The total designed capacity of the power plants amounts to 7,690 MW which is equal to about 14% of Ukraine’s total generating capacity. Within total electric power production in Ukraine the electricity share generated by Centrenergo accounts for about 8% of the total, according to the company's marketing material.
The company’s largest power plant, Vuglegirska, is located in the industrially advanced Donbas region of Ukraine, which is home to lots of power-intensive industrial enterprises. The Donetsk coal basin is situated in the area as well.
The Zmiivska plant is located in the Kharkiv region adjoining the Donbas area, which also has advanced industry and agriculture.
The third power plant, Trypilska, is located in the Kyiv region near to the capital of Ukraine. After the Chernobyl nuclear power plant was shut down Trypilska became the largest supplier of electric power in the Kyiv region.
Concorde's Paraschiy believes that the announced starting price implies total EV of about $260mn, EV/Capacity of $55 per kW and EV/Output’17 of $41/MWh.
In terms of EV/Output, most of the previous privatisation tenders in Ukraine were closed at a lower price ($10-$33 per MWh), except for the sale of Zakhidenergo’s 45% stake in 2012 (at $45/MWh). In terms of EV/Capacity, the previous tenders, on average, brought a higher multiple: $73/kW, the expert wrote in a note on October 4.
Recently, Centrenergo and the nation's State Reserves Agency (SRA) signed a number of amicable agreements on repayment by the company of about UAH85.5mn of debts, which were formed in the late 1990s when Centrenergo borrowed natural gas, boiler oil, and coal from the SRA, but failed to return them.
"All moves between Centrenergo and the SRA on repayment of this sum have been agreed in court," the agency's media office said in a statement, adding that Centrenergo will handle the repayment in stages: the entire sum of the debt is due to be repaid within four years.
As of late 2017, Centrenergo's total debts to state companies stood at UAH600mn, while its debts to commercial firms were at UAH130mn, according to the Minprom online outlet.