Ukrainian Railways secures cheap electricity by end-2022

Ukrainian Railways (RAILUA) purchased at a special
auction  on Sept. 30 electricity from the state operator of nuclear power
plants Energoatom at a discounted price, the company reported the same day.
Namely, it purchased about 4.94 TWh of baseload electricity to be supplied by
end-2022 at UAH 1,105 per MWh (USD 41.5/MWh). This is a significant discount to
the price at which the company was purchasing electricity on the market in
September (UAH 2,104/MWh), the company stated, claiming that the deal will
allow it to save at least UAH 4 bln (USD 150 mln) in expenditures.

“This is unprecedented and the most profitable
procurement for our company,” acting CEO Oleksandr Kamyshin commented.
“The deal became possible thanks to resolution of the Cabinet that allowed
state generation companies to sell electricity directly to Ukrainian
Railways,” infrastructure minister Oleksandr Kubrakov commented, adding
that the saved money would be spent for infrastructure projects.

Recall, in early September, the Cabinet created a crisis management team
for Ukrainian Railways, headed by Kubrakov. The purchase of electricity
directly from Energoatom was among the key “anti-crisis measures,” as Kubrakov highlighted in early August.

Alexander Paraschiy: The deal is
nothing but a rude re-distribution of profit from Energoatom to Ukrainian
Railways which “is being in crisis” and “needs this money more” than a power
generation company. In our view, this became possible because Kubrakov (as the
top executor of a “big contruction” project, one of the most efficient
campaigns of president Zelensky) has much more leverage in the government than
Energy Minister Herman Haluschenko (who is responsible for Energoatom).

For Ukrainian Railways, this is a good chance to partially
renovate its infrastructure. He deal will allow it to significantly improve its
profitability in 4Q21 and 2022. However, in our view, such development bears
mid-term risk for the company. Showing better profitability due to preferential
treatment by the government (enjoying an increase of freight rates, decline of
electricity costs) the company is likely to borrow more to finance its “big
contruction” projects – and when this preferential story ends the company could
face a liquidity or solvency issue. There is no doubt that this story will end:
Energoatom won’t be the eternal sponsor of the company, and the big business
lobby won’t allow freight rates to increase as easily as it happened this year.

Meanwhile, in 2021-2022, Ukrainian Railway, which
has been chosen by the government as one of the profit centers, will look much
better than Naftogaz (NAFTO), which has been chosen as one of the donors for
government social programs. Therefore, it is likely that on the quasi-sovereign
bonds yield map, the RAILUA curve will go below the NAFTO curve.