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starts. The Ukraine's Cabinet has agreed to allow a higher rate at the expense of other power producers (i.e. without revising the average price of all power producers), according to Andriy Gerus, an industry expert. However, the power sector regulator, so far, has not approved the Cabinet’s decision. The primary fuel of Luhanska TPP is anthracite coal, which was supplied from DTEK-related Russian mines that are located about 70 km away. The plant is the only producer of electricity for most of the Ukrainian-controlled part of Luhansk region. However, anthracite coal production has been halted due to the fighting and the rest of Ukraine does not produce this type of coal, making the power station reliant on imports of anthracite coal from Russia and the USA. “By burning natural gas instead of coal, Luhanska TPP will generate about UAH1.3-1.4 of losses per KWh produced at the current electricity prices. At about 200 GWh of monthly output of the plant, it will generate monthly about $9-10mn in losses without price revisions. Moreover, its status as the only power producer in the region forbids radically reducing its power output. Such losses are significant at 11-12% of DTEK’s average monthly EBITDA for the last reported 12 months,” Alexander Paraschiy of Concorde Capital said in a note. The coal supply blockade affects the fundamentals of DTEK Group’s Russian mines, which are not consolidated by Eurobond issuer DTEK Energy since 2016, reports Concorde Capital. The poor performance of these mines is clearly detrimental for Russian authorities: DTEK is a large employer in the Russian mining sector, while its Russian mines owe a lot to Russian state-controlled banks ($436mn as of mid-2016). For that reason, Concorde Capital expects the blockade of DTEK’s coal supply to Ukrainian power plants will be short-lived. “If not, we expect the Ukrainian regulator will apply a higher price on Luhanska TPP’s electricity by 1Q19 certainly, if not in the coming days. Therefore, the coal supply crisis may affect negatively DTEK Energy’s the fourth quarter of 2018 results, but won’t affect its further P&L. All in all, we remain neutral about DTEKUA Eurobonds,” Paraschiy adds.
Leading Ukrainian energy company DTEK has resumed deliveries of anthracite coal to its power plant located in the disputed Luhansk (aka Lugansk) region of the Donbas that is currently under the control of Russian-backed speratists, the epravda.com.ua reported on November 12, referring to DTEK’s press service. The anthracite supplies from DTEK mines located in Russia have enabled the power plant to reduce its natural gas use by 30%, the press service said, after halted supplies required the plant to resort to the expensive fuel. However, the supplies are not enough to fully switch the plant's power units back to burning anthracite, its designed fuel, the holding said. While Ukraine is a major producer of coal, most of the specialized anthracite coal the power plants burn is based in the Donbas region where mining and supplies have been suspended due to the on going military action. During the last heating season, Luhanska Power Plant was burning 3.1-3.2 kt of coal each day, according to Concorde Capital calculations. The plant received 2.36 kt of coal on November 11, which was the first delivery since October 11, according to the Energy Ministry data. In a November 12 newsletter, DTEK reported it had called upon Ukrainian authorities to initiate construction of a railway connection between Ukraine's railway system and the Luhanska Power Plant (currently, such a connection exists only with Russia's railway system). The new railway connection will take 1.5 years to construct, according to DTEK estimates, while it says Ukrainian Railway’s estimate is for five years. “There is no economic justification behind Russia blocking coal supplies between DTEK’s Russian mines and the Luhanska Power Plant, as we highlighted before. However, we do not rule out that such a blockade could have some political motivation. Specifically, Russia
74 UKRAINE Country Report December 2018 www.intellinews.com