Ukraine minister pleads for energy saving; gas stocks drop

KIEV — Ukraine's new energy minister pleaded with industrial and domestic consumers to use less electricity as hard frosts led to a sharp drop in gas stocks and low coal stockpiles, making more blackouts likely.

Volodymyr Demchyshyn on Thursday asked for a reduction in evening electricity consumption by 15 per cent.

"Please, take it seriously. We expect reductions in  electricity consumption even today. If we see consumption fall... I promise to appeal [to the regulatory body] to stop the outages," the minister told the government press service.

He also asked industrial companies to switch to working at night, promising attractive tariffs if they do. Shortages on the electricity grid have caused some outages across parts of eastern Ukraine and in the capital Kiev.

Ukraine consumed a record high volume of gas from its limited storage on December 2 due to hard frosts, gas transport monopoly Ukrtransgaz said.

Weather forecasters expect relatively mild weather in mid-December and this could reduce gas consumption.

Ukraine uses gas to produce electricity but has been forced to switch to coal or fuel oil after Russia suspended gas flows.

However, the national electricity company, Ukrenergo, said on Tuesday coal reserves at thermal power plants stood at 1.3 million tonnes, around 65 per cent lower than in December 2013. It said five plants only had enough coal to last up to another four days.

Mired in a power crisis caused by a separatist conflict in industrial eastern regions that has shut down mines and rail links for transporting coal, Ukraine has said it may now depend on Russia for both coal and electricity to make it through the winter.

A spokesman for Ukrtransgaz said 132.7 million cubic metres of gas were drawn from underground storages on Tuesday versus an average of around 100 million per day last week.

Company data showed that the volume of stored gas has fallen more than 17 per cent to 13.8 billion cubic metres since Kiev started pumping gas on October 20 for heating in cold season.

Ukraine has been left without flows from Russia since mid-June due to a pricing dispute and unpaid debts.

After months of talks, the two sides reached an agreement in October, and Kiev said on Wednesday it planned to make a pre-payment for 1 billion cubic metres of Russian gas by Friday. 

Separately, more and more of Ukraine's companies are finding themselves unable to repay overseas debt with an economy in meltdown, a currency that has tanked 45 per cent and a possible sovereign default ahead.

While a relatively modest $12.4 billion in private sector debt falls due in 2015, according to International Monetary Fund (IMF) estimates, it still exceeds Ukraine's total hard currency reserves and is double what the government owes foreign creditors next year.

Many companies and banks have already fallen behind on debt payments. Metals firm Metinvest for instance last week swapped 2015 dollar debt for bonds maturing at the  end of 2017, and agricultural producer Agroton asked bondholders' consent to hold off next year's coupon payments until 2016.

Agro firm Mriya, pipe manufacturer Interpipe and banks First Ukrainian International Bank, VAB, Nadra, and Finance and Credit Bank are also in trouble.

Bonds of all these companies have fallen sharply, with the Agroton issue for instance now valued at 25 cents on the dollar  and Mriya's 2016 bond at 15 cents.

And as company after company reports steep falls in revenues, investors are bracing for more trouble ahead.

"I think that almost all the Ukraine corporate sector will restructure," said David Spegel, head of emerging debt at BNP Paribas.

He bases this on a conviction that the sovereign itself will default, pushed by Russia which could call due a $3 billion debt by spring. That may spark a default cascade across all sovereign debt, in turn flattening the private sector.

Ukraine's Eurobonds are trading around 66-70 cents in the dollar, an indication of how much investors expect to recoup on each dollar invested. Even that is too much, says Spegel, who calculates a recovery value of less than 50 cents in the dollar.

"Even seemingly strong corporates and banks usually default when the sovereign does, as we saw in Argentina," Spegel said. "The speed of sovereign restructuring will decide whether all do, or just most."

None of the companies could be reached for comment. 

Mriya's Chief Financial Officer Oleksander Cherniavskiy told Thomson Reuters financial news service IFR three weeks ago that he expected debt restructuring "to be substantially expanded in companies alongside us as a result of the aggregation of the sovereign's circumstances".

Avangardco, Ukraine's biggest agriculture firm, is a prime example of the hardships companies are facing. It posted a net loss of $5.7 million in the first nine months of the year compared to net profits of $162 million in the same period of 2013. It suspended work at poultry farms in rebel-held regions and said egg sales were down as people spend less.

Its $200 million 2015 bond has fallen to 69 cents in the dollar as the company, owned by the same group as the failed VAB bank, is seen likely to restructure.

For firms like Avangardco that have hryvnia earnings, the currency collapse makes debt servicing costlier, while economic recession causes a cash flow collapse at home.

Banks' bad loans meanwhile are approaching 40 per cent, while the hryvnia value of their total deposits is down 20 per cent this year, according to Andre Andrijanovs, a debt strategist at Exotix.

"Several companies have done liability management and other companies will be asking themselves if they should do the same," Andrijanovs said. "Most bonds are already pricing haircuts."

There is some sympathy for Ukrainian companies, given the country's plight and Russia's perceived aggression. Restructurings have also been mostly investor friendly, says Jefferies analyst Richard Segal, involving some cash payments, maturity extensions, higher coupon rates and fees for consenting to restructure.

"If this practice remains the rule rather than the exception, then market engagement with the sector should remain encouraging overall," Segal said.

Investors are watching state-run Ukreximbank's $750 million bond due April 2015. The bond price, at 80 cents in the dollar, suggests some expectation of restructuring.