Ukraine calls for 25% hike in DTEK power plant rates in 2018

Ukraine’s power sector regulator, the NERC, plans to hike
the price of electricity to be produced by thermal power plants (TPPs) as of
January 2018 to cover 28% higher coal costs, the regulator announced on Dec.
22. The increase was included in a NERC draft regulation to set a forecasted
wholesale price of electricity for 2018, which will be considered at its Dec.
28 meeting, according to its website.

The coal costs that will be covered by TPP rates
consist of a 12-month trailing (Dec. 2016 – Nov. 2017) API2 coal index, the coal
shipment price from Rotterdam and coal transshipment price in Ukrainian ports.
These three components total USD 102.3/t, which is 23.1% higher than the price
set for 2Q17-4Q17. Factoring in a higher UAH/USD exchange rate, the local
currency price of coal to be covered by TPPs’ power price would increase 28% in
January to UAH 2,850/t.

According to Concorde Capital calculations, this will
allow TPPs to enjoy a 24-25% higher power price since January 2018. Out of 12
TPPs operational in Ukraine, eight are controlled by DTEK Energy (DTEKUA),
three are controlled by Centrenergo (CEEN UK) and one is controlled by
Donbasenergo (DOEN UK).

In related news, Ukrainian President ordered on Dec. 23
the appointment of two NERC commissioners, thereby raising the number of
commissioners to four, which would allow the NERC to have a quorum at its
meetings this week. The NERC has lacked quorum since Nov. 13, and in early
December lawmakers had to amend legislation to grant power
to the president to appoint temporary commissioners, thereby bypassing
selection procedures.

Recall, a methodology to calculate forecasted prices
for electricity (the price that is used to calculate the ultimate prices for
business consumers) that accounts for import parity coal prices (also known as
Rotterdam Plus) was approved by the NERC in March 2016. According to that
regulation, the forecasted wholesale price should have been set by the
regulator ten days before the start of the period (i.e. this time, by Dec. 21).

Alexander Paraschiy: Despite the
NERC having already missed the deadline to adjust electricity prices for TPPs,
we believe the regulator will find a way to approve and validate its decision
as of early 2018. That will be clearly beneficial for DTEK Energy and
Centrenergo. Moreover, as we earlier anticipated,
the late approval of the Rotterdam Plus regulation for 2018 (as an alternative
to its approval in November 2017, as was scheduled before) is more beneficial
for TPPs.

In particular, the latest draft foresees a higher
increase in coal costs to be covered by TPPs rate next year (0.9% more in USD terms,
and 6.1% more in UAH terms, as compared to the November draft). All this
allows us to reaffirm our positive view on DTEKUA bonds.