Analytical Report "CHPP PRIVATIZATION IN UKRAINE IN 2015" by Ukrainian Energy

Analytical report

CHPP PRIVATIZATION IN UKRAINE IN 2015

This research has been conducted by DiXi Group think tank within the framework of the Think Tank Support Initiative implemented by International Renaissance Foundation (IRF) in cooperation with Think Tank Fund (TTF) and co-financed by Swedish International Development Cooperation Agency (SIDA). The views and interpretations expressed in this report are the authorsâ&#x20AC;&#x2122; and do not necessarily reflect those of the Government of Sweden. You may request additional copies of this Report and further information from: DiXi Group think tank 24 Sribnokilska Str., Kyiv, 02095, POB 68 author@dixigroup.org This Research is available for downloading on the website: Ukrainian Energy UA-Energy.org (Publications section)

ÂŠ SIDA, DiXi Group NGO, 2015 DTP designer: Taras Mosiienko

TABLE OF CONTENTS

INTRODUCTION .............................................................................................................................................................................. 4 MAIN FINDINGS .............................................................................................................................................................................. 5 COMPARISON OF CHPPs PUT UP FOR PRIVATIZATION IN 2015 .............................................................................. 6 ANALYSIS OF PARTICULAR COMPANIES ......................................................................................................................... 13 ODESA CHPP PJSC .................................................................................................................................................................. 13 KHERSON CHPP PJSC ............................................................................................................................................................ 19 MYKOLAIV CHPP PJSC .......................................................................................................................................................... 25 DNIPRODZERZHYNSK CHPP PJSC ................................................................................................................................... 30 ABBREVIATIONS AND DEFINITIONS ................................................................................................................................. 36

INTRODUCTION The Cabinet of Ministers of Ukraine adopted the Resolution of 12 May 2015 No. 271 “On Conducting Transparent and Competitive Privatization in 2015” to approve the list of state-owned facilities subject to privatization. Pursuant to the Resolution, the State Property Fund of Ukraine (SPFU) issued relevant orders on privatization and drafted the yearly privatization schedule. The list of state-owned facilities subject to privatization in 2015 was prepared pursuant to the SPFU’s Order of 19.05.2015 No. 740. Annex 1 to the Order contains the list of facilities included in “В” and “Г” groups to be prepared for sale in 2015 by the Property Reform Department of the State Property Fund of Ukraine. The list included the following four CHPPs: 1. 2. 3. 4.

Mykolaiv CHPP PJSC Odesa CHPP PJSC Kherson CHPP PJSC Dniprodzerzhynsk CHPP PJSC

According to the SPFU’s privatization schedule, 99.928% of shares in Dniprodzerzhynsk Combined Heat and Power Plant PJSC will be privatized already in September, 94.99% of shares in Odesa CHPP PJSC— in November, while 94,833% and 95% of shares in Kherson CHPP PJSC and Mykolaiv CHPP PJSC, respectively, — in December. Prior to privatization of majority stakesin the above-mentioned companies, 5% of minority stakes in Odesa CHPP PJSC and Kherson CHPP PJSC should have been sold in July, and of Mykolaiv CHPP PJSC — in September, in order to identify the investment demand and market value of the companies. Moreover, according to Annex 1 to the Order of the State Property Fund of Ukraine of 19.05.2015 No. 738, the list of facilities to be prepared for sale by the Property Reform Department of the State Property Fund of Ukraine included: 1. Kryvyi RihThermal Power Plant State Enterprise 2. Severodonetsk Combined Heat and Power Plant State Enterprise

MAIN FINDINGS It is already clear that the terms of privatization will be partially postponed. Thus, according to the SPFU’s schedule, 5% of shares in Odesa CHPP PJSC and Kherson CHPP PJSC were to be sold in July in order to identify the investment demand and market value of the companies. However, they were not; the minor stakes will be probably privatized in September and, therefore, the rest of shares will be put up for sale in December 2015 – January 2016 instead of November. As for other CHPPs, first sales are expected in September. Investors will be cautious since revenues of a CHPP directly depend on current tariffs and regulatory policy. Prices for the companies’ products, i.e. electrical and thermal energy, as well as hot water supply are regulated and set by the State represented by the National Commission for State Energy and Public Utilities Regulation (NCSEPUR). Therefore, if the Government is going to have serious negotiations with the investors, it has to outline a plan of the electricity and heat supply market reform and, what is more, guaranteea sustainable environment for CHPPs. Investors may be discouraged by intermediary schemes that substantially affect business and, in particular, can create debts to CHPPs. For instance, Odesa and Dniprodzerzhynsk CHPPsuse intermediary utility companies that possesslocal heat distribution networks and are at the same timeend suppliers of thermal energy to consumers and major debtors of CHPPs. Intermediaries’ debt to Dniprodzerzhynsk CHPP is particularly critical since it reached UAH 220 million. Financial and economic statements of some CHPPs are signals to investors meaning that purchase of such facilities is economically unfeasible. Dniprodzerzhynsk, Odesa and Kherson CHPPsshow negative net worth. Moreover, all CHPPsstill have outstanding debts to Naftogaz NJSC, therefore their property may be confiscated given a claim of the latter. Odesa CHPP’s debt equals to UAH 472 million, while Dniprodzerzhynsk CHPP’s — UAH 454 million. Mykolaiv CHPPshows the best financial standing; however, operation of all the above-mentioned companies still depends on the State’s financial support. Investors will have to search new solutions to enhance performance of the companies. Their business is seasonal by nature, as all of them produce thermal and electrical energy during a heating season, i.e. October through April as usually, pursuant to local government’sinstructions. The companies may enhance their performance by expanding their activities to supply hot water and produce electricity all year long. Investors may take interest in privatizing the companies only if a certain set of conditions is met, particularly if the companies keep their monopolistic position; facilities are put up for sale together with the territories where they are situated;the national policy targets increase in the energy tariffs at the national level; particular market relations are established in the sector. In order to avoid privatization-related manipulations,the State, in its turn, mustinsist oncertain conditions for investors. Clear and opentechnical re-equipment and modernization investment program for the next 5-10 years, as well as disclosure of the ultimate beneficial owner of the investor’s company will be among such requirements.

COMPARISON OF CHPPs PUT UP FOR PRIVATIZATION IN 2015 Net proceeds. This indicator shows all revenues from sale of products (thermal and electrical energy) before expenses are taken out. Since CHPPs are monopolistic thermal power suppliers within a certain municipal territory, this indicator helps evaluate the market size on the basis of 2014 tariffs. The main factor that influences net earnings is change oftariffs for CHPPs’ products. These tariffs are established by the NCSEPUR. Other factors include: number of days in a heating season, weather conditions, failures, heat distribution networks condition etc. Net proceeds of Mykolaiv, Kherson and Dniprodzerzhynsk CHPPs is relatively the same and vary within UAH 176-190 million, while Odesa CHPPshows a muchbetter result of UAH 266 million. Therewith, although the above indicator makes Odesa CHPP more attractive, it does not directly characterize the company’s performance. 300

266

250 200

178

190

176

150 100 50 0 Odesa CHPP

Mykolaiv CHPP

Kherson CHPP

Dniprodzerzhynsk CHPP

Fig. 1. CHPPs’ net proceeds in 2014, UAH million

Gross profit. This isdifference between net earnings and cost of products and reflects results (profit/loss) of a company’s main activities. For a CHPP, assessing performance based on gross profit is relevant, since companies in the sector may receive State subsidies, subventions or targeted financing affecting the accuracy of operating and net profit indicators. The figure below shows that only Mykolaiv and Dniprodzerzhynsk CHPPs achieved positive results in terms of main activity. 50

32 30 20 10 0 Odesa CHPP -10

-6

Mykolaiv CHPP

Kherson CHPP Dniprodzerzhynsk CHPP

-20

-30

-27

-40

Fig. 2. CHPPs’ gross profit during 2011–2014

Net assets are calculated as difference between company’s assets and liabilities. In fact, this indicator shows balance value of assets upon discharge of all liabilities. Only Mykolaiv CHPPdemonstrated positive net assets value. Net assets of other CHPPs fall below zero value. Pursuant to Article 155 of the Civil Code of Ukraine, if the value of net assets becomes lower than the minimum amount of the authorized capital established by law, thecompany is subject to liquidation. Therefore, Odesa CHPP’s result of UAH (-273) million is the most critical.

Dniprodzerzhynsk CHPP-23

Kherson CHPP

-6

Mykolaiv CHPP

Odesa CHPP

-273

-300

-250

-200

-150

-100

-50

Fig. 3. CHPPs’ net assets in 2014, UAH million

100

A CHPPâ&#x20AC;&#x2122;s main activity is combined production of thermal power and electrical energy. Odesa CHPPis a leader in heat generation, but at the same time producesleast electricity. Kherson and Mykolaiv CHPPs show similar structure and volumes of heat and power generation. Production falls on heating season only.

Production of thermal power, thousand Gcal 450 400 350 300 250 200 150 100 50 0

397.9 283.7

279.8

323

Production of electrical energy, thousand kWh 120.0 100.0 80.0 60.0 40.0 20.0 0.0

81.36 58.9

95.3 61.5

Fig.4. Production of thermal power and electrical energy by CHPPs in 2014

Fixed assets are tangible assetsheld by a company to be used in manufacture or supply of goods, or provision of services, with the expected useful life exceeding one year. Value, physical and moral depreciation of fixed assets is a very important component of price of a facility subject to privatization. Mykolaiv CHPP has fixed assets of the lowest balance value, however shows the best economic performance. Odesa CHPP, on the other hand, owns largest fixed assets and at the same time demonstrates the worst loss. 100 90

87 79

80 70 60

50 35

40 30 20 10 0 Odesa CHPP

Mykolaiv CHPP

Kherson CHPP

Fig. 5. CHPPsâ&#x20AC;&#x2122; fixed assets as of 31.12.2014, UAH million

Dniprodzerzhynsk CHPP

Accounts receivable reflectdebts payable to a company for goods supplied to end users or intermediaries. Dniprodzerzhynsk CHPP, which supplies thermal power through an intermediary, has the biggest amount of accounts payable. Accounts payable shows debts of a company to suppliers of goods, works and services. Volumes of accounts payable of Odesa and Dniprodzerzhynsk CHPPs in 2014 exceeded their double yearly net income. Except for Mykolaiv CHPP, volumes of accounts payable by CHPPs exceed accounts receivable by more than 80%. Odesa CHPPshowed almost 8-fold excess. These circumstances create additional burden for investors and reduce CHPPsâ&#x20AC;&#x2122; privatization value. 500 450 400 350 300 250 200 150 100 50 0

476 395

220 154

52 58

Accounts receivable, for products Accounts payable, for goods, works, services

Fig.6. Comparison of CHPPsâ&#x20AC;&#x2122; accounts receivable and payable as of 31.12.2014, UAH million

The main component of a CHPP’s accounts payable is gas debt. Naftogazof Ukraine NJSC supplies natural gas to CHPPs. In terms of debts, Odesa and Dniprodzerzhynsk CHPPs are most risky for investors, since their property may be confiscated if Naftogaz files a claim. As of July 2015, debts of Odesa CHPPreached UAH 472 million, Dniprodzerzhynsk CHPP — UAH 454 million.

500 450 400 350 300 250 200 150 100 50 0

472

454

226 71

Fig. 7. Total gas debt as of July 2015, UAH million (according to Naftogaz of Ukraine NJSC)

ANALYSIS OF PARTICULAR COMPANIES ODESA CHPP PJSC Location

29 Tserkovna Str., Odesa Odesa CHPP is located in the northern part of the city, nearthe commercial seaport and has access to railway communication. The area of the CHPPâ&#x20AC;&#x2122;s territory is 117 hectares.

Ownership structure The Ministry of Energy and Coal Industry of Ukraine owns 99.989 percent of the share capital, or 174,083,240 shares with the nominal value of UAH 0.25 each, and the total value of UAH 43,520,810. In 2012, 18,360 shares with the total nominal value of UAH 4,590, i.e. 0.011% of the company’s share capital, were sold to its employees.

Production structure The main activity of the company is combined production of electrical and thermalenergy for the purposes of district municipal heating and hot water supply (citizens, State-financed organizations and other consumers). The company generates over 65% of itsrevenuesfrom sale of thermalpower, and only 35% from sale of electrical energy. Table 1. Output volumes in 2014 Products

In kind

Thermal power Electrical energy

Cost, thousand UAH

397,866 Gcal 58,892 thousand kWh

165,722 88,280

% of the overall sold products 65.2 34.8

During 2011–2014, production of thermal powershowed negative trends, its volume reduced by almost 20%. Production of electrical energy showed no clear trends, however, in 2014 it substantially reduced to 58,892 kWh.

Heat, thousand Gcal

Electricity,million kWh 75.0 70.0 65.0 60.0 55.0 50.0 45.0 40.0

68.5

71.4

65.8 58.9

2011

2012

2013

2014

480.0 460.0 440.0 420.0 400.0 380.0 360.0 340.0

473.8 464

447

397.9

2011

2012

2013

2014

Fig. 8. Dynamics of heat and electricity generation by Odesa CHPP The company’s operation is seasonal by definition. It produces thermal power and electrical energy during the heating season, i.e. October through April as a rule, pursuant to instructions of Odesa’sMayor on commencement and end of the heating season. Hot water is also supplied during the heating season only.

Production capacities According to expert assessments, technical condition of the companies is extremely poor. The State Service for Mining Supervision and Industrial Safety of Ukraine named Odesa CHPP the most dangerous industrial company in terms of serious accident probability. High accident risk was the reason why a number of the company’s buildings were repeatedly shut down during the last 10 years. Today, the CHPP’s installed electricity generating capacity is 68 MW. All the energy it produces is sold in the wholesale electricity market of Ukraine. The overall installed thermal capacity of Odesa CHPP is 779 Gcal/h. The thermal power it produces is sold to consumers of hot water. Thermal power transformed into hot water to be consumed by

households for heating and hot water supply purposes on a wholesale basis against meter readings is transmitted through four pipelines (500 to 700 mm) within the network of Teplopostachannia Mista Odesy (Odesa Heat Supply) utility company. Therefore, the CHPP generates thermal power, but delegates its supply to end users to Teplopostachannia Mista Odesy utility company that possesses main and distribution heat networks and heat supply stations. Moreover, this utility company owns 5 large district and 62 small boiler rooms. Odesa CHPP is a monopoly in the city centre. However, as a result of the heating system decentralization, heat supplies reduced by 20% during 2004–2012.

Fig. 9. Thermal power sale pattern in the city of Odesa Prices for the products sold by Odesa CHPP PJSC, i.e. electricity and thermal energy and hot water, are regulated and established by the State represented by the NCSEPUR.

Fuel Since 1989, Odesa CHPP burns natural gas, and mazut remained a reserve fuel. Natural gas is burned in steam boilers (models ТП-170, ТП-47) put into operation in 1950-60s. The cost of gas in the cost structure of the CHPP’s products reaches 75%. It should be noted that Naftogaz of Ukraine NJSC sells gas to the company at prices lower than in the market. 11.3 5 Gas 8.4

Labour costs Depreciation 75.3

Other

Fig. 10. Cost structure of output in 2014, % In order to reduce the share of fuel in the product cost structure, the future investor will have to seek alternative fuels, first of all coal-water mixture.

Financial indicators 273

300 250

275

266

222

200 150 100

Net revenues

Net profit/loss

-1

-50

-16

-100

-77

-91

2013

2014

-150 2011

2012

Fig. 11. Comparative dynamics of net revenues and net profit, mln UAH During recent years, despite high inflation, net revenues are gradually increasing, while net loss obviously tends to increase. The companies’ gross profit now almost equals the cost of output, which makes them unviable and causes many risks related to their functioning. No increase of the company’s net income through increasing the overall production is possible, so the only possibility to increase net income seems to be increase in the tariffs for the CHPP’s products. Technical re-equipment and modernization could also make the company viable and, apparently, reduce the cost of the output. But this requires large investments. Financial results (UAH m) Net revenues Cost of production Gross profit/loss ЕВІТDА Operating profit/loss Net profit

2011 222 227 -5 -9 -14 -1

2012 273 272 1 0 -9 -16

2013 275 272 3 -81 -90 -77

2014 266 271 -5 -107 -121 -91

Increase in the non-current assets is caused by the increase in deferred tax assets. Current assets show negative trends. Current liabilities during the last two years almost doubled because of the increased accounts payable for goods, works and services (mainly gas). In 2014, Odesa Economic Court bound the company to pay UAH 53 million to its gas supplier — Naftogaz of Ukraine NJSC. The overall gas debt exceeds UAH 400 million. The company’s equity is negative which contradicts the laws of Ukraine in force, and therefore, the company is subject to liquidation. Balance Sheet (UAH m) Assets/Liabilities (Balance) Non-current assets Fixed assets Current assets Long-term liabilities Current liabilities Equity

2011 216 88 55 128 0 306 -92

2012 179 93 56 86 27 257 -108

2013 265 153 92 113 27 421 -183

2014 287 185 87 102 27 534 -273

476

500 450 400

363

350 300

272

250

Accounts receivable, for products

221

200 150

Accounts payable, for goods, works, services

107

100

50 0 2011

2012

2013

2014

Fig. 12. Dynamics of receivables and payables, million UAH During the last decade, the company has been unviable. Even its gross profit margin has been minimal and negative, i.e. the CHPP has been working mostly to cover the cost of production. The company’s general cost-efficiency tends to decrease, with the worse result in 2014. The analysed period also showed negative financing ratio, which means that the company’s activities are financed from the borrowed funds only. The equity/assets ratio is also negative (0.4–0.95) which proves lack of net assets and the company’s complete insolvency. The coverage ratio shows that the amount of the working capital made 0.4–0.2 of the amount of the current liabilities which signals critical lack of resources to repay them. Ratios Gross profit margin ЕВІТDА margin ROS RОЕ RОА Equity/assets ratio Financing ratio Coverage ratio

2011 -2.3 % -4.1 % -0.5 % -0.5 % -0.43 -3.33 0.42

2012 0.4 % 0.0 % -5.9 % -8.9 % -0.60 -2.63 0.33

2013 1.1 % -29.5 % -28.0 % -29.1 % -0.69 -2.45 0.27

2014 -1.9 % -40.2 % -34.2 % -31.7 % -0.95 -2.05 0.19

Therefore, the company is not viable, and its financial standing unstable. Odesa CHPP PJSC cannot exist without the State’s support.

Risks        

Production tariffs do not reflect fuel prices (natural gas). Dependence on a certain type of fuel. Lowered paying capacity and increased debts of consumers for the products supplied due to increase in tariffs. Sale of products to a certain intermediary that possesses heat networks. Technological backwardness of power generation and high level of equipment deterioration. Low efficiency of the company’s generating capacities and high production cost. Climate change (warming). Foreign exchange fluctuations.

Benefits for investor   

Monopoly position of the company. The company’s territory and location. General focus on the increase in energy tariffs in the country.

CHPP privatization priorities   

It is necessary to switch the CHPP from natural gas to coal-water mixture. Investment obligations and investment programme for the next 5 to 10 years must be in place, related to the company’s technical re-equipment and modernization. A compulsory condition for the company sale must be disclosure of information about the investor’s ultimate beneficial owner.

Potential investors 

Local.

KHERSON CHPP PJSC Location

Kherson CHPP is situated in Dniprovskyi district in the north-eastern part of the city. The CHPP is linked to Beryslav Highway and to the railway. The company is geographically located near several residential areas and large companies of the city.

Ownership structure The Government of Ukraine â&#x20AC;&#x201D; 99.83 %.

Production structure Total electricity sales in 2014 amounted to 72.910 mln kWh by volume and UAH 104,364 thsd by value, net of VAT, at the average selling price of 143.14 kopecks per kWh. Total electricity sales in 2014 amounted to 203.442 thsd Gcal by volume and UAH 85,184 thsd by value at the average selling price of UAH 418.71 per Gcal. Table 2. Generation output and sales volume in 2014 No. 1 2

Generation output

Main type of products* electricity heat

Sales volume

by volume

95.3 mln kWh 279.8 thsd Gcal

72.9 mln kWh 203.4 thsd Gcal

by value, thsd UAH 104,364 85,184

as percentage of total sales 55.1 44.9

The dynamics of performance indicators demonstrates negative trends. During 2011â&#x20AC;&#x201C;2014, electricity and heat generation declined by 20 %.

Electricity, mln kWh 130.0 120.0 110.0 100.0 90.0 80.0 70.0 60.0

Heat, thsd Gcal 400.0

118.8

350.0 102.7

103.5

348.1

319.4

311.6

300.0 95.3

279.8

250.0 200.0 150.0 100.0

2011

2012

2013

2014

2011

2012

2013

2014

Fig. 13. Dynamics of heat and electricity generation by Kherson CHPP Generation activity of Kherson CHPP PJSC has a seasonal character; the company operates only during the heating season.

Generation capacities Kherson CHPP, established in 1956 for the purpose of operation within the Unified Energy System of Ukraine with installed electricity and heat generating capacities of 80 MW and 734.7 Gcal per hour respectively, is located in the suburbs of Kherson. Kherson CHPP is the main source of heat supply for 50 % of heat consumers in Kherson. Kherson CHPP is a combined heat and power generation company, i.e. when generating heat, Kherson CHPP also generates electricity, with heat being the primary product of the generation cycle.

All boilers, turbine generator units and generator sets were put into operation in 1950s and 1960s. Kherson CHPP comprises two blocks. The first block of Kherson CHPP was built in 1955–1958 and comprised four ЦКТІ-75-39Ф boilers and two ПТ-12-35/10 turbine generator units (marking changed to 10 MW in 1991). The second block was built in 1965–1969 and comprised three БКЗ-160-100Ф power-generating boilers, two ПР-25-90 /10-0.9 turbine generator units and two ПТВМ-50-1 water boilers. Until 1978–1981, Kherson CHPP used solid fuel. As Kherson CHPP is located in the urban area, in 1978–1981 its boilers were redesigned for the use of black oil and natural gas set as the main type of fuel for Kherson CHPP. Existing CHPP power-generating boilers were redesigned with increased steam generating capacities: Power Unit No. 1 to 4 boilers — from 75 tons per hour to 105 tons per hour, Power Unit No. 5 to 7 boilers — from 106 tons per hour to 200 tons per hour. ПР-25-90/10/0.9 turbine generator units were redesigned with increased estimated steam flow rate and unit capacity increased up to 35 MW (marking changed to 30 MW in 1991). Power-generating boilers were installed in the main building, while water boilers were installed in a separate building. Steam boilers were connected to the common stack 120 metres high with the orifice diameter of 6 metres.

Fuel Natural gas is the main source of electricity and heat generation. The average price of natural gas used for electricity generation was UAH 3,858.07 per thsd m3, net of VAT, in 2013, and UAH 4,403.49 per thsd m3, net of VAT, in 2014. The average price of natural gas used for heat generation was UAH 1,517.48 per thsd m3, net of VAT, in 2013, and UAH 1,612.77 per thsd m3, net of VAT, in 2014. The main supplier of natural gas for heat and power generation is Naftogaz of Ukraine NJSC. Gas accounts for 76.1 % in the cost structure. 5.2

Fuel for process requirements

Wages with taxes

13.7

Depreciation 76.1 Other

Fig. 14. Cost structure of output, % In order to decrease the share of fuel in the cost structure, the future investor will have to seek opportunities for operation using alternative fuels, primarily coal-water mixture.

Financial indicators Financial results (UAH m) Net operating income Cost of production Gross profit/loss ЕВІТDА Depreciation Operating profit/loss Profit/loss before taxes Net profit Subsidies, subventions received

2011 177 183 -6 77 6 71 72 59 18

2012 193 193 0.3 22 6 16 16 8 44

2013 192 198 -6 -18 11 -28 -2 -28 7

2014 190 204 -15 33 11 21 21 16 66

The company’s net profit has remained at the same level during several years, while the cost of production annually increases by 5 to 10 %. As a result, in 2014 the company made a gross loss in the amount of UAH 15 mln. However, the company regularly receives subsidies and subventions from the government, which, obviously, has an impact on its operating profit and net profit. Thus, UAH 65.9 mln recognized as “other operating income” item of the statement of financial results of the company for 2014 correlates to UAH 66 mln recognized as “subsidies and subventions” item of the cash flow statement, being the basis for formation of the company’s net profit.

180 157

160

154

140 120 98

100 80

2012

2013

Accounts receivable, for products Accounts payable, for goods, works and services

60 40 20

0 2011

2014

Fig. 15. Dynamics of receivables and payables, mln UAH

Balance Sheet (UAH m) Assets/Liabilities (Balance) Non-current assets Fixed assets Current assets Long-term liabilities Current liabilities Equity

2011 148 64 59 84 0 126 20

2012 189 90 85 99 0,4 170 12

2013 199 93 86 107 0 220 -21

2014 223 91 79 132 0 229 -6

60 % in the structure of assets belong to current assets increasing due to increased receivables which amounted to UAH 85 mln as of 31 December 2014. Current liabilities increase due to increased payables for goods, works and services (primarily, natural gas). During last two years, the company’s equity has been negative. Therefore, we have a situation where the company is not paid for its products which leads to the increase in the amount of debt for the natural gas supplied. Ratios Gross profit margin ЕВІТDА ROS RОЕ RОА Equity/assets ratio Financing ratio Coverage ratio

2011 -3.6 % 43.8 % 33.5 % 40.1 % 0.14 6.14 0.67

2012 0.2 % 11.6 % 4.4 % 4.5 % 0.06 14.45 0.58

2013 2014 -3.0 % -7.7 % -9.2 % 17.3 % -14.4 8.2 % % -13.9 7.0 % % -0.11 -0.03 -10.38 -38.83 0.48 0.58

The company’s gross profit margin is negative, so the company operates at a loss. ЕВІТDА, ROA and ROS do not characterize actual effectiveness of the company’s economic activity, because, as it was mentioned above, the company’s actual net profit is formed at the expense of the State subsidies and subventions. Equity/assets ratio and financing ratio are the evidence of unstable financial position. Coverage ratio demonstrates that the company’s current resources are not sufficient for the settlement of its current liabilities. Therefore, the company’s operating activity is unprofitable; its financial position is unstable. The company continues to operate due to support from the government.

Risks       

Production tariffs do not reflect fuel prices (natural gas). Lowered paying capacity and increased debts of consumers for the products supplied due to increase in tariffs. Transfer of heating networks (main and distribution networks) into use of local authorities. Technological backwardness of power generation and high level of equipment deterioration. Low efficiency of the company’s generating capacities and high cost of production. Climate change (warming). Foreign exchange fluctuations.

Benefits for investor   

Monopoly position of the company. The company’s territory and location. General focus on the increase in energy tariffs in the country.

CHPP privatization priorities

 

Potential investors 

Local.

MYKOLAIV CHPP PJSC Location

18 Kabotazhnyi Uzviz, Mykolaiv Mykolaiv CHPP has a strategic geographical location. The downtown and residential areas are situated to the north of the CHPP. The company is located next to Mykolaiv Commercial Sea Port and is linked to it by railway.

Ownership structure The Government of Ukraine â&#x20AC;&#x201D; 100 %.

Production structure Core activities: electricity and heat generation, transmission and supply. In 2014, the company generated heat in the amount of 284 thsd Gcal and electricity in the amount of 81 mln kWh. Electricity and heat are almost equally represented in the revenue mix.

Table 3. Generation output and sales volume in 2014

Heat, Gcal Electricity, mln kWh

Generation output by volume 283,683 81.36

Sales volume by volume 253,006 67.89

thsd UAH 89,235 88,496

Share, % 49.8 50.2

Similar to other CHPPs, the dynamics of performance indicators is negative. During 2012–2014, heat generation declined by 15 % and electricity generation declined by 9 %. The decline in generation in 2014 can be attributed to the consumption rate cuts by Naftogaz of Ukraine NJSC.

Heat, thsd Gcal

Electricity, mln kWh

400.0

350.0

100.0 334.0

95.0

343.5

90.0

300.0

283.7

250.0

94.3 89.6

85.0

81.4

80.0

200.0

75.0

150.0

70.0 2012

2013

2014

2012

2013

2014

Fig. 16. Dynamics of heat and electricity generation by Mykolaiv CHPP It supplies heat to 40 % of households and industrial companies in Mykolaiv and remains the most powerful heat generating company in the city.

Generating capacities The CHPP’s installed electricity generating capacity is 40 MW and installed heat generating capacity is 410 Gcal per hour. Basic equipment of Mykolaiv CHPP PJSC includes four power-generating boilers (including two ТП230-2 high-pressure boilers and two ТКП-2 medium-pressure boilers), three water boilers (including two ПТВМ-100 boilers and one КВГМ-100 boiler) and three turbine generator units (including Р-1590/30 high-pressure turbine, П-15-29/10 turbine and ТР-10-29/0.8-1.2 turbine). Heat contained in delivery water is supplied via two main heating networks. Physical deterioration of the CHPP’s basic equipment is at the level of 70 %. Service water is supplied to the CHPP from the onshore pumping station via three delivery pipelines (including 1 standby pipeline). The CHPP leases 5 central and 3 individual transformer substations. 53.854 km of two-pipe hot water networks and two booster and pumping stations are on the balance sheet and under lease. Physical deterioration of the CHPP’s heating networks is at the level of 87 %. Target operating capacity is 8.3 MW. Actual operating capacity is 9.3 MW. In 2014, the company generated electricity in the amount of 81,362 thsd KWh. 283,683 Gcal of heat was supplied from collectors. Main products generated by the company include heat and electricity. The company is also engaged in heat and electricity transmission and supply. Heat is generated only during the heating season. Most boilers and turbine generator units were put in operation in 1950s and have worked 200 to 300 hours.

Fuel Natural gas is the main type of fuel used. Fuel accounts for 65 % in the cost structure, being the lowest figure among CHPPs put up for privatization in 2015.

13.68% Fuel for process requirements Wages with taxes

21.25% 65.07%

Other

Fig. 17. Cost structure of output in 2014, % The company’s investment programme for 2015 provides for preparation of two versions of feasibility analysis to switch the plant to burning low-rank coal using circulating fluidized bed technology and to burning water-coal fuel.

Financial indicators Financial results (UAH m) Net operating income Cost of production Gross profit/loss ЕВІТDА Operating profit/loss Profit/loss before taxes Net profit Dividends

2011 164 158 6 -2 -4 – 24 –

2012 188 183 6 23 20 – 15 7

2013 199 184 15 0.1 -3 -3 -3 4.6

2014 178 173 5 26 22 23 17 0

Though, at first glance, inflation processes in the country must have affected the company’s operating income, it did not happen due to the tariff policy strictly regulated by the government. The company’s operating activity is primarily characterized by presence and amount of its gross profit. However, the company’s net profit depends on its income recognized as “other operating income” item. Other operating income amounted to UAH 3.4 mln in 2013 and UAH 35 mln in 2014. Consequently, in 2013 the company made a loss in the amount of UAH 3 mln, while in 2014 the company received net profit in the amount of UAH 17 mln. However, the company’s cash flow statement shows that in 2014 the CHPP received special purpose funding from the government in the amount of UAH 33 mln, while in 2013 it did not receive such contribution. On the basis of operating results, the company pays dividends to the state in the amount of about 30 % per annum.

63 58

50 40

45 38

37 32

Accounts receivable, for products

Accounts payable, for goods, works and services

20 10 0

2011

2012

2013

2014

Fig. 18. Dynamics of receivables and payables, mln UAH Balance Sheet (UAH m) Assets/liabilities (Balance) Non-current assets Fixed assets Current assets Long-term liabilities Current liabilities Equity

2011 72 26 24 46 0 47 25

2012 76 26 25 49 0 43 33

2013 104 34 33 69 0 78 26

2014 118 38 35 80 0.3 75 43

The assets grew due to the increase in current and non-current assets. Current assets were growing more rapidly due to the increase in receivables and in cash and cash equivalents. Non-current assets increased due to the increase in the fixed assets, the share of which amounted to 91 % at the end of 2014. In 2013, there was observed a gradual increase in payables for goods, works and services. At the end of 2014, the amount of payables was UAH 75 mln. However, Naftogaz of Ukraine NJSC reported the gas debt of Mykolaiv CHPP PJSC in the amount of UAH 71 mln as of July 2015. Ratios Gross profit margin ЕВІТDА ROS RОЕ RОА Equity/assets ratio Financing ratio Coverage ratio

2011 3.8 % -1.3 % 14.3 % 94.2 % 32.6 % 0.35 1.89 0.98

2012 3.0 % 12.0 % 8.1 % 46.0 % 20.0 % 0.44 1.29 1.15

2013 2014 7.7 % 2.6 % 0.1 % 14.7 % -1.4 % 9.7 % -10.5 % 40.2 % -2.6 % 14.6 % -0.25 0.36 3.03 1.75 0.89 1.07

Equity/assets ratio is 0.36, which is lower than the standard value of 0.5. Financing ratio shows that the company’s liabilities amount to 1.75 per invested equity unit. Coverage ratio of 1.07 shows that the company has sufficient resources which may be used to settle its current liabilities. Therefore, one may conclude that the company is solvent; it has stable financial position and possesses sufficient own current assets. Overall, the company’s financial position may be considered satisfactory.

Risks 

Production tariffs do not reflect fuel prices (natural gas).

     

Lowered paying capacity and increased debts of consumers for the products supplied due to increase in tariffs. Transfer of heating networks (main and distribution networks) into use of local authorities. Technological backwardness of power generation and high level of equipment deterioration. Low efficiency of the company’s generating capacities and high cost of production. Climate change (warming). Foreign exchange fluctuations.

Benefits for investor    

Monopoly position of the company. The best financial and economic position among CHPPs put up for sale. The company’s territory and location. General focus on the increase in energy tariffs in the country.

CHPP privatization priorities   

Potential investors 

Local.

DNIPRODZERZHYNSK CHPP PJSC Location 2 Radianska Str., Dniprodzerzhynsk, Dnipropetrovsk Oblast

Ownership structure The Government of Ukraine — 99.9277 %.

Production structure The company’s core activity is electricity and heat generation. In 2014, the electricity generation target was met 106 % (actual output was 78.513 mln kWh, as compared to the output target of 74.140 mln kWh). Actual volume of electricity supplied to the Electricity Wholesale Market was 61.468 mln kWh as compared to the target of 57.90 mln kWh, which is 106.162 % of the target volume. The heat generation target was met 88.0 % (323.437 thsd Gcal of actual output, as compared to 367.724 thsd Gcal of the output target). Heat was supplied to consumers pursuant to the temperature chart. Table 4. Generation output and sales volume in 2014 Products

By volume

By value, thsd UAH

Heat Electricity

323,438 Gcal 61,467 thsd kWh

96,931 76,434.6

As percentage of total sales 55.9 44.1

In 2011–2014, heat and electricity generation dynamics was negative. Heat generation declined by 12 % and electricity generation declined by 13 %. The decline in generation in 2014 can be attributed to the consumption rate cuts by Naftogaz of Ukraine NJSC.

Electricity, mln kWh 80.0 70.7

Heat, thsd Gcal 400.0

75.9

380.0

70.0

381.4 374.9

360.0 61.5

60.0

368.9

340.0 323.4

320.0

50.0

300.0

40.0

280.0 2011

2012

2013

2014

2011

2012

2013

2014

Fig. 19. Dynamics of heat and electricity generation by Dniprodzerzhynsk CHPP

Generating capacities The CHPP is equipped with 4 medium-pressure turbines with total installed electricity generating capacity of 61.6 MW. There are 10 medium-pressure boiler units with total maximum steam generating capacity of 1,280 tons per hour. Installed electricity and heat generating capacities of the plant’s turbines at the beginning and at end of the year were 61.6 MW and 313.0 Gcal per hour respectively. Actual electricity generating capacity at the end of the year was 21.6 MW. The gap between the installed and actual electricity generating capacities can be attributed to technical limitations, i.e. insufficient heat load on P type turbine in winter due to the lack of consumers. Capital investments for 12 months in 2014 amounted to UAH 4,164.3 thsd, including those made in the fixed assets in the amount of UAH 3,186.1 thsd.

Fig. 20. Heat supply scheme in Dniprodzerzhynsk The strategy for the company’s further activity largely depends on the heat volume ordered by the town. CHPP’s receivables are the debt of heat purchasing and reselling entity — Dniprodzerzhynskteplomerezha Public Utility Company of Dniprodzerzhynsk Town Council.

Fuel Natural gas is the main type of fuel used by the company. The company’s only raw material (natural gas) supplier is Naftogaz of Ukraine NJSC. Fuel accounts for 81.4 % in the cost structure.

7.3

11.3 Material cost (fuel) Labour costs Other 81.4

Fig. 21. Cost structure of output in 2014, % In order to decrease the share of fuel in the cost structure, the future investor will have to seek opportunities for operation using alternative fuels, primarily coal-water mixture.

Financial indicators Financial results (UAH m) Net operating income Cost of production Gross profit/loss ЕВІТDА Operating profit/loss Profit/loss before taxes Net profit

2011 122 104 18 5 4 – 0.3

2012 188 178 9 -32 -33 – -2

2013 183 177 6 2 0.4 0.6 0.1

2014 176 170 6 14 13 13 0.5

During the last four years, the company’s net profit has exceeded the cost of production. However, regardless of minimum gross profit, the operating profit depends on income recognized as “other operating income” item. In 2014, the company received over UAH 88 mln on this account, which influenced the value of operating profit and net profit.

450 395

400 350 282

300 250

220 194

200

100 50

Accounts payable, for goods, works and services

145

150

Accounts receivable, for products

120 81 17

0 2011

2012

2013

2014

Fig. 22. Dynamics of receivables and payables, mln UAH

Balance Sheet (UAH m) Assets/Liabilities (Balance) Non-current assets Fixed assets Current assets Long-term liabilities Current liabilities Total liabilities Equity

2011 191 31 31 160 6 170 176 15

2012 263 67 32 197 0 251 251 12

2013 351 57 42 293 0.2 374 374 -24

2014 499 77 45 421 2 520 522 -23

Non-current assets grow due to the increase in deferred tax assets and fixed assets. The increase in current assets can be attributed to the increase in receivables for products (UAH 220 mln) as well as other receivables, the amount of which increased twice in 2014 up to UAH 180 mln. Therefore, receivables amounted to UAH 400 mln and accounted for over 80 % in the structure of assets. However, the increase in current liabilities can be attributed to the increase in payables for goods, works and services which amounted to UAH 395 mln at the end of 2014. Payables to the state budget (UAH 33 mln) and other current liabilities (UAH 68 mln) were also going up. Ratios Gross profit margin ЕВІТDА ROS RОЕ RОА Equity/assets ratio Financing ratio Coverage ratio

2011 14.8 % 4.3 % 0.2 % – 0.1 % 0.08 12.02 0.94

2012 5.0 % -17.1 % -1.2 % – -0.9 % 0.05 20.28 0.78

2013 3.0 % 0.8 % 0.1 % – 0.0 % -0.07 -15.81 0.78

2014 3.1 % 8.1 % 0.3 % – 0.1 % -0.05 -22.43 0.81

The company is characterized by low economic efficiency. ROS is between 1.2 and 1.3 %, and ROA is between 0.9 and 0.1 %. Equity/assets ratio and coverage ratio are the evidence of low solvency and negative value of equity. Coverage ratio shows insufficient amount of current assets. Therefore, the company’s financial position is unsatisfactory; its economic efficiency is low; the amount of its current assets is insufficient. According to Dniprodzerzhynsk CHPP PJSC, taking account of electricity and heat tariffs for companies approved by the National Commission for State Energy and Public Utilities Regulation, heat generation is a loss-making activity and electricity generation is a profit-making activity for the company.

Risks       

Production tariffs do not reflect fuel prices (natural gas). Lowered paying capacity and increased debts of consumers for the products supplied due to increase in tariffs. Products are sold to a single intermediary that owns heating networks. Technological backwardness of power generation and high level of equipment deterioration. Low efficiency of the company’s generating capacities and high production cost. Climate change (warming). Foreign exchange fluctuations.

Benefits for investor   

Monopoly position of the company. The company’s territory and location. General focus on the increase in energy tariffs in the country.

CHPP privatization priorities   

Potential investors 

Local.

ABBREVIATIONS AND DEFINITIONS UAH Gcal kWh MW mln t thsd h NCSEPUR PJSC CHPP mln EBIDTA Gross profit margin EBIDTA margin ROS (return on sales) ROA (return on assets) ROE (return on equity) Equity/assets ratio Financing ratio (Asset) coverage ratio

hryvnias (Ukrainian currency) gigacalories kilowatt-hour megawatt million ton thousand hour National Commission for State Energy and Public Utilities Regulation public joint stock company combined heat and power plant million Earnings before interest, taxes, depreciation and amortization. The indicator is derived byadding depreciation and amortization costs to the operating profit or loss is the ratio of gross profit to net revenue is the ratio of EBIDTA to net revenue is the ratio of net profit to net revenue financial indicator that shows efficiency of the use of assets; it is the ratio of net profit to the value of the company’s assets financial indicator that shows efficiency of the use of the invested equity; it is the ratio of net profit to the amount of equity financial indicator that shows the share of company’s equity in the overall capital structure financial indicator that shows the ratio of the funds borrowed by the company to UAH 1 invested in assets from equity financial indicator that describes the company’s ability to cover its shortterm liabilities; it is the ratio of current assets to current liabilities