Donbasenergo gets USD 1.1 bln modernization approved

The Ukrainian government issued directives on June 5 approving two modernization projects at Donbasenergo’s (DOEN UK) Slaviansk thermal power plant worth a combined UAH 9.32 bln (USD 1.15 bln).

The first proposed project is a full reconstruction of power unit #6, which would result in a new twin-power unit (2 x 330 MW) that will utilize modern CFB technology of coal burning. Its total cost is estimated at UAH 6.81 bln (USD 880/kW). The second project is a reconstruction of power unit #7 (800 MW) at a total cost of UAH 2.52 bln (USD 212/kW). The second project is planned for 34 months, while no term for the first project has been set.

Slaviansk TPP currently has one operational power unit, which is #7 that was commissioned in 1971 and has 800 MW of nominal capacity. The first time Donbaenergo hinted about a deep modernization of Slaviansk TPP was a year ago (refer to our news of May 28, 2012), and it estimated the project at UAH 9.4 bln then.

Alexander Paraschiy: If it’s launched, the modernization project at Slaviansk TPP would be the largest in independent Ukraine’s history. Usually, Cabinet approval of this kind of project opens the door for its initiator to secure up to 80% compensation for its cost from a hike in electricity tariffs (at the expense of consumers). In turn, that opens the door for a GenCo to raise financing for the project from one of the state banks.

While the news looks clearly encouraging for Donbasenergo, we wonder how the company can attract the project’s financing that significantly exceeds its market capitalization (UAH 0.5 bln) and book value of its total assets (UAH 2.3 bln). Recall also that the government has another headache in the power industry – it needs to raise financing for rebuilding the damaged Uglegorsk TPP belonging to Centrenergo.

The key drawback of the proposed reconstruction would be decreased output by Donbasenergo since Slaviansk TPP would have to completely halt its electricity production: last year it produced 2.74 TWh of power, 30% of Donbasenergo’s total and 1.4% of Ukraine’s total. Once the project starts, Donbasenergo would turn from a power generator to mostly a real estate developer, as most of its profit would come from a special fund collected from consumers to compensate part of reconstruction costs.

If the company is able to secure special tariff compensation and financing for the project, its attractiveness for potential investors will increase significantly. Recall, the Ukrainian government, which owns a 86% stake in the company, said it will announce the sale of a 61% stake in Donbasenergo in August 2013.