NERC cuts Oblenergo budgets

The National Electricity Regulatory Commission decreased the investment programs of Ukraine’s electricity distribution companies. NERC reduced to zero Oblenergos’ regulated profit, which is prescribed for reinvestment into CapEx, meaning the companies’ net income in the forthcoming quarters is set by the regulator at zero. Alexander Paraschiy: As we wrote in our April 30 note on Oblenergos, the sector showed its highest-ever profit in 1Q09. The regulator decided Oblenergos are too profitable in the current economic environment, so they should “share” their profits to support thermal generation companies and the Ukrainian steam coal sector. By our estimates, the new regulation will result in a 16% yoy decrease in the Oblenergo sector’s EBITDA in 2009 (vs. our previous expectations of -7% yoy). The NERC’s action definitely increases the risk of investment in regulated sectors in Ukraine, at least in the short-term. One of the possible negative mid-term outcomes of the regulation could be a turn back in the companies’ strategy of over-reporting costs/expenses (hiding value), which was common in the mid-2000s (see our Dec. 15, 2005 report).