SUMMARY: TPE wants to be sole contractor for projects of state power cos
MOSCOW. July 19 (Interfax) - Technopromexport (TPE), a Russian engineering company that builds energy facilities, posted a loss of 8 billion rubles in 2012 and its shareholder, state company Rostec is drafting a financial recovery program for the firm. Near-term plans include raising over 5 billion rubles in loans and selling assets for about the same amount. The government is being asked to cover the interest on the loans and to position TPE as the only contractor not just for projects under intergovernmental agreements, but also the projects of state power companies.
Unprofitable projects
TPE's poor financial condition stems from three projects - a contract to build the boiler island of the Barh Thermal Power Plant in India, a general contract for the construction of two units at the Cherepetskaya GRES plant for OJSC Inter RAO UES and a TPP to supply power to the Moscow City center built under a build-own-operate contract, the minutes from a meeting of Rostec's management board, reviewed by Interfax, state.
TPE has been building the two coal-fired 225-MW units at Cherepetskaya GRES since 2008. The project was initially scheduled for completion in September 2012, but now it is expected to be finished in July 2014. The contract is worth 23.217 billion rubles (not including VAT). TPE did not include a 5% allowance for unforeseen expenses in the price of the contract and also gave an "unjustified discount to the customer in the amount of 3%," the Rostec materials show. Furthermore, in the course of implementation prices went up for equipment, materials and services and the scope of the construction and installation work increased. TPE, citing an independent appraisal, believes the contract should cost 5.4 billion rubles more.
When TPE won the contract to build these two units, it was said that the key factor in TPE's favour was the price the company offered - $1,800 per kW (in prices when the tender was held). It was the result of a downward trend at the time in the price of construction materials and metals.
TPE has already reached an agreement with Inter RAO to raise the price of the contract by 5.4 billion rubles, the Rostec materials state.
However, Inter RAO told Interfax that negotiations are continuing and it is difficult to change the price of the contract, since it is spelled out in the capacity supply agreement.
A source familiar with the negotiations told Interfax that the talks between Inter RAO and TPE on raising the price of this contract have been ongoing for about 18 months already.
Asset sales
The second loss-making contract is Mezhdunarodnaya TPP, which has capacity of 236 MW and 420 Gcal/h and supplies power and heat to the Moscow City business center. The power plant, which TPE owns, is generating a loss because the investment cannot be recovered through the system of regulated rates and the sale of electricity and capacity only on the wholesale market, the Rostec materials show.
TPE is now lobbying to get the plant designated as a must-run power plant, which would enable it to sell all of its electricity and capacity at rates set by the government, rather than on the market. This would increase the liquidity of this asset, which TPE plans to sell.
TPE hopes to sell the plant in the fourth quarter of 2013 or the first quarter of 2014 for at least 5.6 billion rubles, well below the construction cost of 12 billion rubles. The company wants to raise another 60 million rubles from the sale of other noncore assets.
Novikombank currently holds 99.9% of shares in OJSC TEP-City, which owns Mezhdunarodnaya, under a repo deal with TPE. Rostec owns a 17.6% stake in the bank.
A spokesman for TPE said that despite Mezhdunarodnaya being formally owned by TPE-City, the plant continues to be operated by TPE management and Novikombank is not considering acquiring ownership of the plant in future.
Borrowing
TPE signed the $450.2 million contract for the boiler island at Barh TPP (three generating units of 660 MW each) with India's National Thermal Power Corporation (NTPC) in March 2005. However, at the end of 2006 NTPC froze financing because it did not want to recognize the new legal status of TPE, which was reorganized from a state unitary enterprise into a wholly state owned open joint-stock company. The project was resumed in 2008, but NTPC refused to compensate TPE for losses suffered due to the down time.
The project, which was initially scheduled for completion in January 2010, is now expected to be finished in October 2015.
TPE estimates that the price of equipment and work on the contract has gone up by $236.553 million due to the higher cost of equipment, materials and work because of the project delays, discrepancies between the price escalation formula and the actual rate of inflation, and changes in the technical characteristics of the equipment and materials.
TPE is asking the Russian government to secure at least an $80 million increase in the price of the contract, as it was unable to reach an agreement at the company level. NTPC has not ruled out the possibility of considering price escalation, but at the intergovernmental level. TPE expects this issue to be resolved some time between the fourth quarter of 2013 and the second quarter of 2014.
TPE also wants to raise a long-term loan upwards of 4.2 billion rubles by the end of the first quarter of 2014 in order to complete the project. The company wants the Russian government to cover the cost of interest on this loan.
Rostec head Sergei Chemezov initially asked President Vladimir Putin to provide financial support for TPE by extending a loan of up to $450 million for a period of ten years or more. The Energy Ministry and Industry and Trade Ministry were ordered to work out proposals.
In March, the Energy Ministry proposed two options: a soft loan for foreign buyers (considered an unlikely option) and a long-term loan for the completion of the Barh project with the possibility of compensation for interest costs. The ministry saw the second option as "more realistic" but the necessary regulations are lacking for this instrument of support.
Vnesheconombank (VEB) has already rejected a proposal to lend to TPE, the Rostec materials state. State bank VTB is prepared to consider the issue on the condition that VTB's proposals are discussed "by all parties involved."
VTB officials declined to comment.
TPE also plans to borrow 1 billion rubles from Gazprombank with guarantees from Rostec in order to carry out the Cherepetskaya GRES project.
TPE received a loan of 1.5 billion rubles in January from Novikombank under a repo deal secured by the assets of the Moscow City power plant, and expects to carry out a second phase of this deal to raise at least another 1.5 billion rubles.
TPE did not specify how much money it plans to raise in total from Novikombank and for what period. Novikombank also declined to comment.
Bright future
TPE's financial recovery requires that the company secure new contracts worth 70 billion-100 billion rubles in 2013-2015. TPE's contract portfolio now totals 93.4 billion rubles, the company told Interfax.
It largest projects in Russia at the moment are the construction of new generating units at Cherepetskaya GRES and Nizhnevartovskaya GRES, while the largest projects abroad are Sisak TPP in Croatia, Harta TPP in Iraq and Barh TPP. The company also recently won a tender to build a power plant for the Yamal LNG plant.
TPE is hoping to secure contracts to build new plants in Russia's Far East for RusHydro subsidiary RAO Energy System of East (ES of East). The company also wanted to build new units for Inter RAO, but it did not win the projects at Verkhnetagilskaya GRES and Permskaya GRES, possibly due to the delays on the current contracts with the power company. Nonetheless, TPE still has hopes for the intergovernmental project to build the Kambarata Hydropower Plant-1 in Kyrgyzstan, where Inter RAO represents the Russian side. There are also promising projects in Africa and the Middle East.
The government is being asked to help TPE build up its order book. The proposals for government support listed in an extract from the Rostec meeting minutes include a point on "implementing measures that would make it possible to position TPE as the strategic company (only contractor) for the organization of the design, engineering services and construction" of a number of power facilities. This goes beyond the scope of projects implemented under intergovernmental agreements. TPE was initially established to build power facilities abroad under international cooperation programs, and has carried out projects in 50 countries.
Now TPE is proposing to be positioned as the only contractor for projects being carried out under regional development programs approved by the Russian government, and the investment programs of power companies controlled by the government. As examples, the company cites the already mentioned Inter RAO with Kambarata HPP-1 in Kyrgyzstan, and RusHydro with Far East projects such as Vostochnaya CHPP, a combined heat-and-power plant in Sovetskaya Gavan, Blagoveschensk CHPP, Yakutskaya GRES-2 and Sakhalinskay GRES-2.