DTEK denies crime in its lobbying for Rotterdam+

Ukraine’s leading coal & power holding DTEK
believes that “there are no valid grounds for NABU’s investigations and that there
is no legitimate basis for the suspicions” that NABU holds regarding two DTEK
employees and four officials from the energy sector regulator, the NERC,
according to DTEK’s IR newsletter sent on Aug. 12. Recall, on Aug. 8,  the
National Anticorruption Bureau (NABU) reported that six individuals are
suspected in a Rotterdam+ conspiracy which led to UAH 18.9 bln
damages to Ukrainian electricity consumers in 2016-2017. Namely, NABU alleges
that coverage of coal delivery costs from Rotterdam to Ukraine (the “plus”
component of the formula) was included unlawfully in the price of electricity
sold by thermal power plants.

Commenting on the allegations, DTEK’s newsletter states
that coal delivery costs were justified as Ukraine had became a net importer of
coal. The approach introduced by the Rotterdam+ regulation “removed the
arbitrariness” in electricity price setting and “introduced rule-based
transparency and predictability” to the market, DTEK said. Moreover, the
resulting “improvement” as such, “met demands of international funding
institutions including the IMF,” DTEK alleged.

Separately, DTEK admitted its high involvement in
promoting and grounding the Rotterdam+ approach, but highlighted that its
employees did that with “rigorous adherence to legal and regulatory
requirements and in keeping with best practice for such processes.” It promised
once more that it would “use all legal means and processes at its disposal
vigorously to protect” its employees and the company.

Alexander Paraschiy: It’s good
that DTEK does not deny the obvious – that its role in the introduction of the
Rotterdam+ approach was tremendous – at least this is what all the market
players understand. At the same time, its reference to “transparency and
predictability” from the new approach looks funny (the good thing is that
consumers were able to see power price forecast from the NERC for the entire
year, which was never possible before, but the price was much higher than it
could have been without the “plus”). Also groundless is DTEK’s referring to IMF
“demands,” as IMF representatives consistently avoid commenting on the
legitimacy and adequacy of the Rotterdam+ approach.

Key question now is whether the law enforcement bodies
have enough proof of: 1) NERC officials’ illegitimate actions or abuse of power
while setting the Rotterdam+ approach; 2) the role of DTEK’s employees in
lobbying this approach that goes beyond usual communications with the
regulator. If both are proved, then 3) the law enforcement bodies could go
further and demand compensation from DTEK for the part of losses to electricity
consumers that DTEK has profited on (it’s UAH 14.3 bln for 2016-2017, as NABU alleges,
and about UAH 31-33 bln for 2016-2019, we estimate). Completing all the three
mentioned above steps looks highly unlikely, meaning the risk of any fine to
DTEK looks extremely small (as well as this process would be very
time-consuming).

That said, we have to admit that the probability of a
negative financial outcome for DTEK could increase: if under Poroshenko’s
presidency, NABU met a headwind in its attempts to investigate the Rotterdam+
approach, the direction of the political wind has been apparently changed
recently. Still, weighting the above-mentioned risks, we stick to our position
that DTEK Energy (DTEKUA) Eurobonds is the most promising investment in
Ukraine’s corporate fixed income universe.