“THE DEBTS OF THE ENTERPRISE WERE HIGHER THAN WE EXPECTED”Samara Observer, 27.03.2008
At the end of 2007, Oboronprom Corporation took over management of Kuznetsov SNTK. What are Oboronprom’s plans for SNTK? What will be the source of its income in 2008? Vasily Lapotko, SNTK’s Executive Director, answered our questions on these and other issues.
- Oboronprom reviewed the finances and production of SNTK at the end of last year. What were their findings?
- In effect, Oboronprom came to SNTK as a crisis manager. Our first step was to conduct a financial audit. It showed that the estimations we had made of the company’s debt on the basis of the enterprise’s balance sheets at the end of 2007 were not accurate. According to the company’s books, SNTK owed 1.7 billion rubles, of which 129 million rubles consisted of wage arrears, and another 700 million rubles in tax arrears. However, this was only part of the story. A more detailed examination showed that SNTK really owed about 2 billion rubles. The extra debts include several promissory notes issued to suppliers and subcontractors that were not included on the books, as well as advances that SNTK received for goods under production. We are also conducting a valuation of the enterprises properties and a technological audit. When these procedures are complete we will take the appropriate measures. We have prepared financial sanation program for SNTK that we are submitting to the Ministry of Industry and Energy. It is already being implemented, and is being adjusted and refined as we go along.
- What does the financial sanation program for SNTK involve?
- The program is meant first of all to bring the enterprise back to a stable financial footing. Thanks to state support delivered through a targeted allocation of funds, we have paid off the wage and most of the tax arrears owed by the company. Moreover, we have covered its energy debts, using, in part, funds contributed by Oboronprom. The restructuring of the remaining debts is a separate issue. It is well known that 90% of the debts were overdue. The company was paying over 20% interest on some of its loans, sometimes up to 26%. We can now say with confidence that with the assistance of Oboronprom management, all debts owed by SNTK have been restructured. This applies first of all to two large commercial structures: Koversbank and VBRR. First of all, the term of these loans was extended, and the interest rates were reduced to 12% per annum. The loans were extended by one year, but we would like to extend them by five years. We are being assisted by the administration of the Samara region. It has already provided loan guarantees of 305 million rubles to the enterprise, which we hope will be increased to 500 million rubles. The guarantee is good for five years. Accordingly, we have the opportunity to negotiate loans for a five year period. We plan on further debt restructuring, making long-term loans out of short-term loans, so as to lower the tax burden on the enterprise so that it can develop in a stable manner. But in spite of all this restructuring, SNTK still owes about 1 billion rubles to the banks. So the financial sanation plan also includes provisions for the sale of non-core assets. For the moment, there is no other way to reduce debts. We also plan to establish a technological park in the southern wing of the enterprise, where the test facilities are located. This could be an investment project for the aviation industry. For the moment this is more of a concept than a concrete plan, but we will be discussing it with the governor. The costs involved will be minimal, since the infrastructure is already in place.
- What will the sources of the company’s revenue look like in 2008?
- Revenues for 2008 will derive mostly from contracts with Gazprom. The sale of each gas pumping unit brings in about 100 million rubles. We have already delivered two engines for the Novo-Gryazovetskaya station, and we are currently working on another engine for the Mikunskaya station, and have signed two contracts for the repair of our engines at the Bezymianskoy co-generation plant, and for engines for the Samaratransgaz and Volgotransgaz companies. So, we can say that we have a stable workload from Gazprom, and are writing the specifications for the Arskaya station. Today, Oboronprom and Gazprom have established the NK Trading House on a parity basis, which will distribute orders for gas pumping units among our enterprises. It will also take care of the financing and configuration of orders.
- How are the projects with Iran progressing?
- The Russia-Iran intergovernmental commission has included deliveries of gas pumping units to Iran as an item of business, and Oboronprom has been nominated as the Russian agent for this area of cooperation. Negotiations with the Iranian party are currently underway, including their largest state companies specializing in this business. In April 2008 an Iranian delegation will visit SNTK to familiarize themselves with our products and stations in operation. I can say that the Iranians are very interested in cooperating with us.
- Can we expect a large volume of orders from them?
- Very large. We’re talking about dozens of stations. Moreover, negotiations with Iran concern not just gas pumping units, but electricity generating units as well.
- And how about the implementation of contracts with Belarus?
- We have a turn-key contract for the delivery of an electricity generating station for the city of Lida, with Grodenergo corporation. This contract was signed by the previous management, but no work was undertaken through 2007, and the terms of the contract was broken, leading to some tense discussion at the intergovernmental level. However, we have since come to a common understanding with the leadership of Grodenergo, and the completion and installation of the station is now underway. I think that we will finish the station this summer, though it should have been complete in 2007.
- Did the Belarusian party impose any fines for the delays?
- Yes, and a substantial one at that: over $1 million.
- Does SNTK still carry any wage arrears?
- No. The company does not owe any wage arrears. They were paid in full and indexed to inflation. The same goes for all taxes on wages. Today wages are paid on time without any delay.
- What is the situation with the financing for the flight tests of the NK-93 engine?
- Financing for these tests has been replenished. We included a supplementary item to the federal targeted program for civil aviation worth 94 million rubles, meant specifically for the testing of this engine. More funds have been allocated in a separate contract between LII Gromov and SNTK. Oboronprom has already allocated the first tranche for the financing of ground testing of the engine.
- What, in your opinion, are the chances that the NK-93 will prove to be a success?
- I am hoping for the best, but we have to recognize that no firm customer for this engine has been identified as yet. Nevertheless, Ilyushin Finance Corporation has expressed an interest in equipping the Il-96 and possibly the modernized Il-76 with the NK-93. Some of our foreign partners have also expressed an interest in the development of this engine.
- What stage has the development of gas turbine locomotives for the railways reached?
- We have had several meetings with the leadership of Russian Railways. They are extremely interested in gas turbine locomotives, since this is a critical issue for the development of their company. Everything is fine in terms of the power plant, but the control system still has some problems due to the replacement of a subcontractor. But the responsibility for developing the control systems has now been assumed by a subdivision of Russian Railways. I think that within a month or two the system will be ready for regular testing. Russian Railways intends to place orders for up to 100 engines with SNTK.
- How do you foresee the development of relations with Motorostroitel?
- SNTK and Motorostroitel will work closely together because they are working on parallel projects (instruments, castings). Production at Motorostroitel is on a much larger scale, since it is a large, series-production facility, even if they are working at only 30% capacity. SNTK is also working under capacity. To continue work in this manner has no economic rationale. Reductions are planned, at SNTK in particular. But SNTK will retain assembly and testing lines and will offer services to outside companies as well. Everything relating to series production will take place at Motorostroitel. In this manner the Samara cluster will become an integral part of the engine-building holding being established by Oboronprom.
- How are your relations with the Director General of Motorostroitel (a representative of Roskosmos), where you are a deputy?
- Oboronprom and Roskosmos have enjoyed normal, constructive relations in their joint efforts to pull Motorostroitel out of its crisis situation. We are jointly developing a plan for the financial sanation of the company, and are working to secure new orders. We have no disagreements regarding the development of the plant as part of the engine-building holding.
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