Maxim Timchenko, DTEK CEO, in a rare interview.
Downtown Kyiv is filled with luxurious headquarters of major local and international companies stepping over each in a race for prestige and the heavens. But even amidst this flamboyant crowd the endless glass and steel of Parus business center looms above the competition, and not least because of its illustrious tenants.
Indeed, companies owned by some of Ukraine’s most powerful businessmen – billionaires Rinat Akhmetov, Dmytro Firtash and Victor Pinchuk – occupy the top floors of the 33-story building.
No exception is the office of Maxim Timchenko, chief executive officer of DTEK, the energy arm of Akhmetov’s System Capital Management holding and a major player in Ukraine’s electricity generation and distribution, coal mining and other energy projects.
His spacious office on the 23rd floor has a breathtaking, nearly panoramic view of downtown Kyiv, giving fortunate tenants a feeling of having the world at one’s feet. The surface of a huge desk where this rare interview took place has leather padding, interesting and comfortable, but not ideal for taking notes on.
Looking to buy up more state property, DTEK future looks bright.
Timchenko has every reason to feel elevated, just by looking at DTEK’s books.
The company’s 2010 results show that revenues increased by more than 60 percent, exceeding $3 billion. Its net profits fared even better, more than tripling – to roughly $360 million. These results have turned Akhmetov’s DTEK into Ukraine’s fifth largest company and 50th in the region, according to the latest ranking of Central and Eastern Europe’s biggest companies, published by Deloitte, an international consulting and auditing firm.
Life for DTEK is poised to get even better. In coming months, the company is well positioned to win a series of privatization tenders for key regional power generators. It stands to amass controlling stakes in much of the nation’s thermal electricity generation business, possibly at firesale prices.
On Sept. 22, days after this interview took place, DTEK’s owner Akhmetov celebrated his 45th birthday. A gift came from Ukraine’s State Property Fund, which announced the starting price for two of the generators to be auctioned off. Minority stakes in the billion-dollar companies Kyivenergo and Zakhidenergo, in which Akhmetov owns blocking stakes, will have starting prices set at just $50 million and $400 million, respectively.
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So it’s no surprise then that DTEK’s plans for the future are all about more double-digit growth.
Despite the bright future, Timchenko seems concerned about his company’s public image. Speaking to the Kyiv Post in a rare media interview, DTEK’s CEO repeatedly asserted the company should be a matter of national pride, similar to what Nokia is for Finland.
This may prove more challenging than sustaining DTEK’s growth. While Nokia owes its success to technological innovation, Akhmetov’s industrial empire was largely created through privatizations of state assets in deals that many experts say lacked transparency and free market competition.
In U.S. diplomatic cables published by the whistleblower website WikiLeaks, then-US Ambassador William Taylor called Akhmetov’s 2007 acquisition of a 40 percent stake in Dniproenergo, the largest energy distributor in central Ukraine, “an example of intransparency,” suggesting the stake was obtained at a fraction of its true value.
Timchenko dismissed such criticism as groundless.
Kyiv Post: What drove DTEK’s growth last year, when the company, according to the Deloitte ranking, jumped 38 spots to become Central and Eastern Europe’s 50th largest company in terms of revenue?
Maxim Timchenko: This is not so much the result of last year’s favorable [market] conditions, but rather the outcome of the way the company has been developing.
First of all, this result was achieved by our team – the top managers at the corporate center, the local managers and, most of all, the people who work at our production facilities. Second, we have a very clear and comprehensive development strategy, and invest a lot in construction, new equipment, the modernization of existing facilities and new business processes. So today we are beginning to reap the fruits of our labor from 2005-2007.
We should also mention that 2010 was a year of coming out of the [2008-2009 financial] crisis, so to a certain extent we have a favorable situation on external markets. But I am very pleased that even during the crisis, our financial results kept improving in hryvnia terms.
KP: Yet you did not mention DTEK’s owner, the richest Ukrainian Rinat Akhmetov, as one of the reasons for the company’s success. Didn’t he play a big role in bringing the company to where it is now?
MT: Of course, the company cannot succeed without its owner. Our owner is System Capital Management. To say that we are directly run [by Akhmetov] is not exactly correct.
My personal impression is that he has created the company’s basis of values. He manages the company not by his direct interference, orders and control, as some people like to do. He told us from the very beginning that this company should be built according to European principles of corporate management – board of directors, corporate center and production facilities.
People at the company should have the same values as successful Europeans have – professionalism, trust, honesty, commitment and readiness to succeed and do business transparently and with integrity, especially when dealing with the government, competitors and so on.
A thermoelectric generator provides Kyivans with heat at Kyivenergo, a local monopoly supplier of electricity and heating. DTEK, owned by billionaire Rinat Akhmetov, could soon boost its minority stake in state-owned Kyivenergo to a controlling share. (Ukrinform)
KP: What is DTEK’s current market capitalization?
MT: It’s an ungrateful task to talk about [market] capitalization. Take Zakhidenergo, one of the companies we are interested in and in which we already have a large share [25 percent]. It’s [market] capitalization on the Ukrainian stock market is $296 million. It used to be around $1 billion.
So, what is the true [value], today’s or yesterday’s? Until we start trading DTEK’s stocks in New York, London or elsewhere, it’s difficult to say: it would be wrong to answer this question. One always wants to exaggerate.
KP: If you talk about all of DTEK’s assets, the majority of which used to belong to the state, how much have you paid for them?
MT: If you count what we paid, how much we invested and how much we got out of this, it runs into billions of dollars.
A good example is [the mining enterprise in Donetsk oblast] Dobropolyeugol. You probably know that we recently signed a long-term rent agreement.
You will see the difference between what this mine is now, and what it will become in two years, as the miner’s didn’t even have proper uniforms [when we bought it].
People think that our coal assets are a gift from above. Huge investments and a lot of work are required to show results like, say, in Pavlogradugol [the largest coal mining enterprise of Ukraine, privatized and bought by DTEK in 2004].
KP: Prior to this interview we talked to coal market experts who said that last year DTEK was buying coal from its mines at below-market rates. According to our information DTEK paid on average Hr 363 ($45) for a ton of coal from the Komsomolets Donbassa mine and Hr 435 ($54) from Pavlogradugol. The average market price for this type of coal was Hr 575 ($72). Why is this the case?
MT: What is the market price? What is the market? Does [state-owned] Coal of Ukraine assign [market] prices? Or [are they based] on the price of coal imported from Russia? Or stock exchange indices?
KP: Hr 575 was the average price for which Coal of Ukraine and DTEK sold their coal to power generators.
MT: Let’s use these numbers correctly. You cannot really put all coal in one stack. If we used pricing based on caloric value, like everywhere, such comparisons would be correct.
And you cannot really run a business when one business segment is subsidized at the cost of another segment, because you won’t know when you lose money and when you earn it, as using transfer pricing [will make] both segments look good.
So, when it comes to the business relations between coal mining and power generation we try to operate on market principles, and use market prices. And we use export prices of standard European quality coal and simply lower it according to the quality we get.
KP: Regarding the upcoming privatizations of thermoelectric generators. You said you were interested in boosting your minority stakes to majority ones in Zakhidenergo, Dniproenergo and Kyivenergo? Are you ready to buy these companies at once?
MT: We are ready to buy these companies, but it all depends on the investment requirements. If we are told to pay a lot and then invest three times more, it’s better of us to stay as we are.
KP: Isn’t there a danger of you becoming a monopolist dictating prices on coal and electricity and a major player on the export market? This is not to mention all the steel assets that Akhmetov has.
MT: What is a monopoly? According to our legislation, when it comes to electric energy, one company needs to generate more than 33 percent. As you know, half of Ukraine’s electricity comes from nuclear energy and around 10 percent from hydro energy and these assets are not for sale. So, you cannot really have a monopoly without owning those.
Second, the electricity price is formulated as the mix of all three types of energy and when it comes to the final price that a consumer pays, it is regulated by the state. So, there is no way to influence prices after buying these companies.
KP: But is there anything positive for the country if you buy them?
MT: We spent last year developing a long-term development strategy of the company.
We started working on this internally and then invited McKinsey [a global management consulting firm] and came up with our company’s portrait in 20 years. The bottom line is that we want DTEK to become the national pride.
The Czechs are proud to have CEZ [as the largest electricity producer in the Czech Republic], a large company with considerable state share that has professional management and attitude. Nobody worries about a monopoly there, though it controls 70 percent of the market. It is a civilized, beautiful company.
I used say, the world got to know Finland through Nokia. Why can’t it get to know Ukraine and its electricity generation industry through DTEK?
KP: But Nokia built its mobile phone business basically from scratch, while many experts think that DTEK often got its assets cheaper than their market value. In one of the WikiLeaks cables, for example, US Ambassador William Taylor calls the 2007 debt-for-equity transaction as the result of which Akhmetov increased his share in Dniproenergo to 40 percent, “an example of intransparency privatization.” Are you ready to pay market prices in the upcoming privatisations?
MT: DTEK has always paid market prices, and I am ready to stand by my words; even the Dniproenergo story which, unfortunately, was turned from business to politics.
It had been a bankrupt company since 2002. Around Hr 1 billion have been pumped into it that ended up in the state budget. And I had to answer many questions regarding Dniproenergo.
KP: But there was no competitive tender.
MT: We entered the company as the largest private shareholder, and we were interested in its normal development, as Pavlogradugol [that DTEK owned] was built to supply Dniproenergo with coal. Then, we were officially invited to take part in its restructuring. We were not the only ones who offered the restructuring plan.
We offered real money to go with it. Compare Dniproenergo’s capitalization now and then. I can prove anywhere that we paid a maket price for Dniproenergo. The same goes for any other asset. In 2004 we paid Hr 1.4 billion [$280 million] for Pavlogradugol coal mine. It was a crazy price for Ukraine back then.
This is the firm stance of our company and the shareholder. We pay market prices, and make money on building these companies up, creating value. We learned to do this with these depressed assets.
KP: But there are lots of depressed and abused assets in Ukraine. Unfortunately, we don’t really have time now during this interview to figure out who contributed to Dniproenergo’s bankruptcy. Lets look, instead, at the upcoming privatizations, starting with electricity generators. Will there be fair and transparent tenders? Or will we again see deals done through the emission of extra shares, where DTEK will have a preference?
MT: As far as I know, it was already announced by the head of the State Property Fund, [Oleksandr Ryabchenko,] that this will be a tender, with bidding.
And I am not afraid of open tenders. You cannot build a sustainable business in today’s world without being able to win in market competition.
KP: But we hear that there is a condition being set that to take part in the tender a prospective buyer needs to be able to supply the generators with Ukrainian coal. Don’t you think that it will give your company, as an owner of coal mines in Ukraine, preferential treatment? This rings similar to the conditions set back in 2004 during the first privatization of Kryvorizhstal steel mill, when Akhmetov and President Leonid Kuchma’s son in law, Viktor Pinchuk, won the tender despite bidding much lower than others. One year later in an open auction this steel mill was resold to ArcelorMittal for $4.8 billion, six times more.
MT: Look, it’s one thing to require the company to own coal production in Ukraine, which might look like discrimination, and another thing is to require them to buy local coal. What is discriminatory about this?
Yes, we can [sell the companies to] the Russians who would re-equip the generation companies to consume gas. Do we want this? This would be the end of our coal industry, as we cannot export our coal due to its low quality.
KP: Such words make you sound like a Ukrainian nationalist that is eager to keep the Russians out. But what about the Vanco Prykerchenska project, a vast hydrocarbon exploration venture on Ukraine’s Black Sea coast? DTEK has at least a quarter share in it. It is not entirely clearly who owns the rest of it. But many think Russian companies are invovled.
MT: What’s more important: to make this project work, especially given the current situation [with the price of Russian natural gas exports to Ukraine surging]; or who owns it?
KP: Can we have both at the same time? Did you buy out an additional stake in the Vanco project from Shadowlight Ltd., plans that Akhmetov allegedly discussed in a conversation with U.S. Ambassador Taylor, according to the WikiLeaks cables?
MT: Only Vanco Prykerchenska’s press service can talk about [the shareholders and their shares], due to a confidentiality agreement.
Overall, this project has given me nothing but headaches. I think that the country should have been proud that a Ukrainian investor has been invited to take part in this project and that we are ready to invest billions to diversify gas supplies. Instead, people want to see something wrong with the project.
KP: What about the government plans to lower annual imports of Russian gas down to 12.5 billion cubic meters within years from a current 33 billion? Is it possible?
MT: We plan to take part in it. As a vertically integrated company, we have made a strategic decision to start working on our own gas extraction. As you realize, the Vanco project has very distant promise, so we are looking into shale gas or getting a license for conventional gas extraction.
We have a very good team of professionals [as part of DTEK Oil and Gas, incorporated into DTEK holding], and are ready for potential partnerships, including those with major international energy players.
Kyiv Post staff writer Vlad Lavrov can be reached at [email protected]
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