Donbasenergo outlines ambitious investment program

Donbasenergo (DOEN UK), a Ukrainian power generation company, is planning to start reconstruct its #7 power unit at the Slaviansk thermal power plant, the company’s investment director announced last week. According to him, the reconstruction should cost about UAH 1.5 bln (USD 190 mln, USD 235/kW) and might commence in 2013 or 2014. The aforementioned power unit, with a 800MW nominal capacity, is the main generating asset of Starobeshev TPP. It accounts for 29% of Donbasenergo’s total power capacity and 35%-40% of the company’s total power output. In addition, Donbasenergo is considering a brownfield project to build two 330MW power units at Slaviansk TPP at an estimated cost of USD 1500/kW. The company has reportedly prepared a business plan for the new power units, which would utilize CFB technology for burning low-quality coal.

Alexander Paraschiy: We believe that scale of the CapEx programs and smoothness of its financing will depend on the lobbying power of new Donbasenergo’s owner: the company is still on the list for privatization in 2012. It seems very likely that the new owner (if the company is privatized) will have a degree of political/lobbying power, so there is a high chance Donbasenergo’s extensive modernization program will get a green light. The most critical issue for the program is the ability to get compensation from a special surcharge to its power tariff, which should also be fairly straightforward if the company gets a new private owner. Donbasenergo will receive only 44% compensation to reconstruct another power unit, as approved by the regulator last week, vs. the up to 80% level that we are used to seeing – and this should reverse. Moreover, if all the announced projects are realized, Donbasenergo will be turned into a development company to earn the bulk of its profits from CapEx-related tariff mark-ups. The straightforward flipside of the reconstruction of the #7 power unit will be a huge decline in the company’s power output (up to 40%) and related revenue during the unit’s idle time. Though, reconstruction will be definitely value-accretive: a reduction in fuel cost and a decrease of idle time after reconstruction will allow the unit to get back the announced CapEx in four years, we estimate.