DTEK Luhanska plant granted 44% discount to natural gas price

Ukraine’s Cabinet of Ministers decided to oblige
Naftogaz (NAFTO) to sell natural gas to DTEK Energy’s (DTEKUA) Luhanska Thermal
Power Plant at a fixed net price of UAH 2,895/tcm, Andriy Gerus, the
president’s representative to the Cabinet, announced on Aug. 14. The term of
the obligation begins July 29 until coal supplies to Luhanska TPP are resumed,
but no longer than April 30, 2020, according to the draft government
resolution.

The Cabinet’s website does not contain any information
on the resolution’s approval, while Interfax-Ukraine reported the same day that
the resolution had been approved “under a simplified procedure with a need to
be revised in accordance with legislation.”

So far this month, Naftogaz has been charging natural
gas at a net price of UAH 5,204/tcm for those customers that did not prepay,
implying DTEK may get a 44% discount on this price for this power plant for
this month.

Luhanska TPP ran out of coal and had to switch to
burning natural gas since July 29 after Russia – the plant’s only convenient
source of coal – implemented a blockade early that month. Burning natural gas
is much more expensive than coal, and DTEK can’t shut down Luhanska TPP (as it did with Kryvorizka TPP in May)
because the plant is the only source of electricity for a significant part of
the Ukrainian-controlled Luhansk region of Ukraine, with a population of about
1 mln.

Alexander Paraschiy: With such a
discount, and the expectation that Luhanska TPP will burn 60 mcm of gas in
August, we calculate that DTEK will save about UAH 140 mln this month (about
USD 5.5 mln). In turn, Naftogaz will under-receive that amount. This is
unexpected generosity from the Cabinet at the cost of the state-owned natural
gas monopoly, motivated by the fear that a million Ukrainians in the
politically sensitive Luhansk region – which the new president is targeting for
renewal – will lose their power supply otherwise.

Ironically, DTEK Group is Ukraine’s second-largest
producer of natural gas. With monthly output at 140 mcm, it can easily cover
the needs of Luhanska TPP.

So far, we expect that this initiative (if it has been
approved) will be revised by the new Cabinet, which should commence its work in
early September. In other words, we see no material implications from this move
of a lame duck Cabinet for the fundamentals of DTEK and Naftogaz. Meanwhile, we
are keeping our bullish view on DTEKUA bonds.