Proposed Energy Sector Privatisations in Ukraine


Between now and the end of October 2008, the Cabinet of Ministers of Ukraine intends to sell minority stakes in six local distribution companies and majority stakes in four thermal power generation companies. However, privatisation of energy companies is a politically controversial topic in Ukraine and already the President, Victor Yushchenko, is trying to block the sale of the generation companies.

Distribution Companies

The State Property Fund of Ukraine has announced the sale, in each case by auction, of a 25% shareholding in Poltavaoblenergo, a 26.98% shareholding in Lvivoblenergo, a 25.02% shareholding in Prykarpattiaoblenergo, a 25% shareholding in Chernihivoblenergo, a 25.01% shareholding in Odesaoblenergo and a 25% shareholding in Sumyoblenergo. The shareholdings in Prykarpattiaoblenergo and Sumyoblenergo are to be sold together with land plots of 2.65 hectares and 237 hectares, respectively.

The auctions are due to be held in the premises of the State Property Fund in Kyiv between 14 and 29 May 2008. Applications for participation in the auctions and participation fees are to be submitted to the stock exchanges through which the shares will be sold. In particular, the Poltavaoblenergo shareholding will be sold through the Ukrainian Interbank Currency Exchange (the “UICE”) on 14 May, the Lvivoblenergo shareholding will be sold through the Innex Stock Exchange on 15 May, the Prykarpattiaoblenergo shareholding will be sold through the PFTS Stock Exchange on 21 May, the Chernihivoblenergo shareholding will be sold through the Kyiv International Stock Exchange on 22 May and, finally, the Sumyoblenergo and Odesaoblenergo shareholding will be sold on 29 May through the UICE and Ukrainian Stock Exchange, respectively.

The starting price for all the shares has been set at the weighted average share price over the six months preceding the date falling three days before the auction date. Renaissance Capital has estimated that the Government could expect to receive at least USD 600 million in total from the six auctions.

Generation Companies

On 26 March 2008 the Cabinet of Ministers passed four resolutions ordering the State Property Fund to sell majority shareholdings in four thermal generation companies (Dniproenergo, Tsentrenergo, Zakhidenergo and Donbasenergo) before 31 October 2008. In each case the Government intends to sell 60% plus one share and the total amount raised could reach USD 5 billion. The state-owned National Joint Stock Company “Energy Company of Ukraine” (“ECU”), which currently holds the shares to be sold, will retain 16.04% in Dniproenergo, 10.1% in Zakhidenergo, 25.773% in Donbasenergo and 18.29% in Tsentrenergo. The shares which ECU retains are expected to be sold on the stock market after October 2008, although no schedule has been announced in this respect. Various press sources have cited DTEK, Energy Standard, Privat, UES, E.ON, RWE and Atel as potential bidders.

The Government also announced that the ten-year privatisation obligations would include (1) repayment of certain debts of the generation companies, (2) upgrading of their equipment to meet European Union standards and (3) a restriction of return on equity to no more than 15-17%.

However, on 11 April, the President, Victor Yushchenko suspended the resolutions of the Cabinet of Ministers, claiming that they did not comply with the Constitution of Ukraine. He referred the matter to the Constitutional Court who will now decide whether the sales should proceed.

There are also further problems with the proposed sale of the majority shareholding in Dniproenergo. Currently two of the shareholders, DTEK (part of the powerful SCM Group) and Business Invest (part of the Privat Group), are battling for control over the company. A recent decision of the Supreme Court of Ukraine set aside a share issue in 2007 which had diluted Business Invest’s and ECU’s stake whilst giving DTEK a 40% blocking shareholding in the company. The consequences of the Supreme Court’s decision are not definite yet, with DTEK threatening to take action in a foreign court and questions being asked about whether the finance which DTEK had invested since the share issue will be withdrawn putting the company back into financial crisis. Any attempt to proceed with the sale of the stake in Dniproenergo is likely to get bogged down in litigation.