DTEK managers, state regulators named suspects in Rotterdam Plus pricing conspiracy

The National Anti-Corruption Bureau of Ukraine announced
on Aug. 8 six suspects in a criminal case of abuse of authority in designing
and implementing the Rotterdam Plus electricity pricing formula, the bureau’s
press service reported. The suspects are two former commissioners of the
electricity regulation commission, two middle managers of the commission, and
two middle managers of a “private group” that was later confirmed to be DTEK
Group (DTEKUA), Ukraine’s biggest electricity producer controlled by Rinat
Akhmetov. These company employees are suspected of “pressuring” the regulator.
Later that day, DTEK’s press service confirmed the two suspects are its
employees.

The anti-corruption bureau estimated the Rotterdam
Plus formula inflicted UAH 18.9 bln in losses to Ukrainian consumers of
electricity in 2016-2017, of which DTEK gained UAH 14.3 bln. DTEK said in
response that this claim is groundless, stressing that Rotterdam Plus brought
more transparency to Ukraine’s electricity market. The formula was also
endorsed by “multiple international experts,” the press service said, adding
that DTEK promised it will use all legal means at its disposal to protect its
employees.

DTEKUA bond price dropped 3.4% to 100.8 of par during
trading on Aug. 8, but rebounded and finished at 102.3 of par, down 2% on the day.

Recall, the Rotterdam Plus formula, introduced in
March 2016, based the wholesale price of electricity produced by Ukrainian
thermal power plants on coal prices set in the Rotterdam port plus delivery costs
to Ukraine. Beforehand, the prices of power produced by TPPs were set by the
state regulator and based on domestic coal prices. The Rotterdam Plus approach
has not been applied since July 1 when Ukraine’s free electricity market was
launched.

Alexander Paraschiy: It’s obvious
that DTEK was lobbying the introduction of the Rotterdam Plus approach, so it’s
possible the anti-corruption bureau could find some proof of contact between
DTEK and the state regulator. However, in our view, it will be extremely hard
for law enforcement bodies to prove “losses” to consumers from Rotterdam Plus.
It’s worth noting that the second-leading beneficiary from Rotterdam Plus was
state-controlled Centrenergo.

Therefore, we see no implications from this case
for DTEK Energy fundamentals. Nor do we see grounds for DTEK’s bond price to
fall on this news (unless bondholders naively believed before yesterday that
DTEK managers were not involved in lobbying Rotterdam Plus). All in all, we see
this event has created a solid entry point for DTEKUA bonds, which remain among
our top picks in Ukraine’s fixed income universe.