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Jun 02, 2016

Rollins keeps up battle to revive Ukrnafta, pay debts

Kyiv Post
 

When Ukrnafta CEO Mark Rollins took charge of Ukrnafta in late September 2015, he became the company’s only foreign manager and inherited a deeply troubled and only nominally state-controlled oil and natural gas producer.

The company is caught in a debt spiral: Ukrnafta owes nearly Hr 11 billion to Ukraine’s government in taxes. But Ukrnafta itself is owed Hr 8.7 billion.

Also hampering its ability to go from red to black is outdated infrastructure, which contributed to the company’s Hr 5.4 billion operating loss in 2015.

Much of the debt to Ukranafta was racked up by schemes allegedly perpetrated by the company’s minority shareholders, including billionaire oligarch Ihor Kolomoisky.
Privat representatives told the Kyiv Post they could not comment on the allegations. Kolomoisky has defended himself in the past by accusing the government of owing him money in the payment dispute.

Rollins told the Kyiv Post that getting this money back is key to reviving the energy company, which he said was now back under state control.
Rollins is developing a “readjustment” plan that could repay the company’s tax debt and set it on a path towards fiscal sustainability, he says. It received preliminary approval from the Supervisory Board on May 24. Full approval will be voted on at a July 7 general shareholder’s meeting.

State-owned oil and gas company Naftogaz controls 50 percent and one share of Ukrnafta, while Kolomoisky’ owns roughly 42 percent through a number of offshore companies. Eight percent of the company is controlled by pension funds for former employees.

Kolomoisky control

While Kolomoisky owns less than half of the company’s shares, that was enough to let him run the company.

“Privat Group had operating control over the company,” said Denis Sakva, an analyst at Dragon Capital, adding that that the company’s previous management rules – requiring a 60 percent quorum on shareholder meetings for decision-making – had allowed Privat “to block all unwanted shareholder meetings.” .

However, he said the state had reduced Kolomoisky’s influence over Ukrnafta when parliament in January 2015 passed a law reducing the quorum for holding shareholders’ meetings to 50 percent plus one share, meaning Privat Group could no longer block such meetings.

Kolomoisky, through his Privat Group network of companies, began accumulating shares of Ukrnafta in the early 2000s. In a London lawsuit brought by Dnipro oligarch Victor Pinchuk, Kolomoisky said in a defense memorandum that his initial stake in Ukrnafta came through a backdoor deal with Pinchuk.

In the memorandum, Kolomoisky stated that he colluded with Pinchuk to stack Ukrnafta’s supervisory board with individuals favorable to both men’s business interests.
The “proposal was that the claimant and the defendants should cooperate so as to enable the defendants to appoint representatives to the supervisory board of Ukrnafta and the chairman of the management board,” Kolomoisky wrote in the lawsuit.

Schemes

The lack of accountability in Ukrnafta’s ownership allowed the company to become a cash cow for the minority shareholders.
In one scheme, Ukrnafta would arrange non-competitive oil auctions and sell its products to Privat-related traders, at discounts that Sakva said reached up to 70 percent. The oil would then be resold at market prices.

The resulting lack of fiscal responsibility led to the company’s now nearly Hr 11 billion debt to the tax authorities.
Much of the company’s current debt appears to stem from a period of time between April and September 2015, after Ukrnafta’s previous management had left, but before Rollins took charge.

During that time, Samopomich Party member of parliament Viktoriya Voytsitska alleges, an additional nearly Hr 11 billion was funneled out of the company through oil and gas sales to anonymously owned companies.

“They prepaid for gasoline and for diesel to a company to supply their fuel installations,” said Sakva. “The company, which is believed to be related to Privat, did not supply the gas.”
Voytsitska alleges that the sales occurred at far below the market rate, mimicking the earlier scheme involving oil sales.

Sanitary restru­cturing

Rollins is proposing a restructuring plan – a “sanation” or “sanatsiya” in Ukrainian – that would, he says, allow the company to pay back its debt to the tax authority.
“The essential elements are the deferment of the debt,” Rollins said. “I’m going to be asking for a waiver on any fines, on any interest rate (increases), or on fines and penalties once the sanation has started.”

Rollins added that he would refuse to go through with the sanation plan if any of the Ukrnafta shareholders withheld support. 
“I was careful not to propose the sanation until I’d really checked that everybody was in support,” he said. “There’s no point for me to formally propose this if the government doesn’t support it, and the shareholders don’t either.”

Where’s the money?

A key question about the sanation is where the money to pay off the debt will come from. The company is operating at a steep loss with low oil prices, and had to cut production by 20 percent last year. 
Rollins told the Kyiv Post that money to pay back the debts would come from the company’s business activities, debts owed to it by the government through Naftogaz, and then through the “large amount of receivables and prepayments on our balance sheet.”

The receivables and prepayments are from deals made under the previous management – Rollins indicated that the sanation would mostly be funded by recouping these past losses.

“The priority actually will be receivables and Naftogaz payments, if I can negotiate those with the relevant parties,” Rollins said. 
“There are quite a lot of parties, and we’re in discussion with them to try to agree to a payment schedule,” he added.

But Sakva said that Ukrnafta would be unlikely to recoup the losses, as many of the companies are on the way to declaring bankruptcy themselves.
“Some of those companies have already lost their VAT registration, so its very likely that those companies have lost the money,” Sakva said.

‘Align the shareholders’

Rollins parried criticism that Ukrnafta only holds bank accounts in Privat Bank, leaving the accounts susceptible to the influence of the minority shareholder. 
“We’re still using Privat Bank as our main banking partner, we may review that in the future, but our services with Privat Bank have actually been very good,” he said. “I understand there’s an emotional reaction to the owner of Privat Bank.”
Rollins added that he does not see himself as an investigator of the company’s past misdeeds, but as a manager of its present operations.

“I’m not sure that if things were done wrong in the past you can necessarily fix them – you need to make sure that you do things properly going forward,” he said. “The only way we can move the company forward is with peaceful coexistence, and if we can align the shareholders.”

I don’t think its viable now to change the company structure of Ukrnafta in the short term,” Rollins added, “so you’ve got two shareholders, and you’ve got to work with them.”
Asked if he still saw it as part of his responsibility to go after those who caused Ukrnafta’s current situation, Rollins demurred.

“There’s a prosecutor, a police force, there’s a whatever,” he said. “If they think there’s something wrong, they should come over and raise their case.”

 
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