DTEK wants higher power rate to cover 2.5 mmt of 2017 coal imports

Energy holding DTEK will have to import over 2 mmt of anthracite coal and about 0.5 mmt of hard steam coal by the end of 2017, said CEO Maxim Timchenko in an interview published by Interfax-Ukraine on March 24. He complained that the current price of electricity covers the production costs of thermal power plants of UAH 1,730/t (USD 64/t), while the cost of imported coal is about USD 100/t-110/t.

Timchenko also said the current pricing methodology for electricity produced from coal (which takes into account the international benchmark API2 Index, plus shipment costs from Amsterdam/Rotterdam, plus transshipment costs) is optimal. At the same time, he said the time lag used to calculate prices (the current formula uses the historical index for the previous year to calculate coal costs for the next year) is not efficient, as current coal prices are higher than the 2017 average level, which does not allow the company to cover its coal costs with power rates. In March, DTEK’s power plants will receive a UAH 1,700/MWh price for electricity, while the holding will need UAH 1,900/MWh to fully cover costs of imported coal and have a 5% profit margin, according to Timchenko.

Alexander Paraschiy: DTEK’s estimates of coal import needs are in line with our calculations (import needs of 2.0 mmt of anthracite and 0.4 mmt of hard steam coal, refer to our Feb. 22 note). But DTEK’s estimates of its desired electricity rate is manipulative. Even if it will have to import 2.5 mmt of coal (or about 13% of its total coal needs) at the price of UAH 3,000/t, the average cost of coal used by its power plants will be just UAH 1,900/t (assuming the rest of coal is priced at UAH 1,730/t). The current price of electricity (UAH 1,700/MWh, according to Timchenko) covers coal costs of UAH 2,600/t, we estimate, which is 37% more than actual coal costs.

What we can conclude from the statements of Timchenko is that there is a good chance for electricity prices for thermal power plants to continue growing under pressure from DTEK. Recall, at the end of 2016, the power sector regulator planned that the average price of thermal power plants will be UAH 1,300/MWh in 2017, which was too low. But now, DTEK’s top manager is seriously criticizing the price of UAH 1700/MWh, which is 30% higher. All in all, we are increasingly confident of DTEK’s ability to smoothly service its debts in 2017 and we remain firm on our neutral position on DTEK Energy Eurobonds.