Lending to companies engaged in heat business in Ukraine: New rules apply to loans from international lenders
Regulation of Heat Market in Ukraine
September 2019 – In Ukraine, the generation, transmission and distribution of heat are subject to licensing by either the National Energy and Utilities Regulation Commission (NEURC) or regional state administrations, including the Kyiv City State Administration, depending on the scale of the business and other criteria.
Prices for services relating to the generation, transmission and distribution of heat are also regulated – based on tariffs approved by the NEURC in relation to companies licensed by the NEURC, or by the municipal authorities in relation to companies licensed by regional state administrations. These tariffs are intended to cover all operational costs incidental to the generation, transmission and/or distribution of heat, including expenses relating to debt service. A company engaged in the generation, transmission and/or distribution of heat may apply for a review of a tariff if there is an increase in any cost component, including debt service in relation to a new loan.
In April–June 2019, the NEURC and the Cabinet of Ministers of Ukraine (in relation to smaller companies licensed and regulated by local authorities) adopted regulations aimed at limiting the ability of companies engaged in the generation, transmission and/or distribution of heat to increase their debt obligations and eventually pass on the debt-service expense to end-customers. At present, these businesses may seek a tariff review only in relation to loans that were approved earlier by the NEURC or the municipal authorities, as the case may be.
Approval of Loan Agreements by Heat Tariff Regulators
The NEURC has yet to pass a regulation setting out the exact process that a company should follow to have its loan approved by the NEURC. However, Ukraine’s Cabinet of Ministers has already adopted a similar regulation in relation to the approval of loan agreements by the municipal authorities – Resolution No. 561 dated 5 June 2019, effective 6 July 2019.
Resolution No. 561 applies to a company engaged in the generation, transmission and/or distribution of heat if the following conditions are met:
the borrower’s heat-related business is subject to licensing by a local state administration – a regional state administration or the Kyiv City State Administration as discussed above (a “Locally Regulated Entity”);
the loan agreement is proposed to be entered into with either of the following lenders: a foreign state, a foreign bank or an international financial organisation;
the repayment of such loan is planned to be made from the proceeds generated by the Locally Regulated Entity based on a tariff established by the municipal authorities; and
the loan proceeds will be used by the Locally Regulated Entity to finance an investment project.
To receive the approval from the municipal authorities, prior to entering into the proposed loan agreement, a Locally Regulated Entity must submit to the executive body of the municipal council in the location of its operational assets a set of documents that includes, in particular:
an investment plan;
information on the key parameters of the loan (principal amount of the loan, lender, disbursement schedule, repayment schedule, interest rate and currency of payments);
assessment of economic impact of the investment project; and
information on the impact of the debt-service costs on the tariff price over the lifetime of the loan.
Resolution No. 561 does not expressly require a Locally Regulated Entity to submit a draft loan agreement for review by the municipal authorities.
The executive body of the relevant municipal council must consider the submitted documents and prepare a conclusion for the respective municipal council within 20 business days from the date of submission. The municipal council is required to review the conclusion of its executive body and resolve on the approval of the loan at its next session following the submission of the conclusion. The approval process is therefore very lengthy and should be started by the borrowing Locally Regulated Entity at the earliest convenience.
Once the loan agreement has been executed, the Locally Regulated Entity must submit to the executive body a copy of the loan agreement and the action plan related to the investment project. In the course of the investment project, the Locally Regulated Entity is required to report on the project’s progress to the Ministry of Regional Development of Ukraine and to the municipal authorities on a regular basis.
Other Loan Registration Formalities
Resolution No. 561 will exist alongside other pieces of Ukrainian law that have a more general application. Under Resolution No. 6 dated 2 January 2019 of the Management Board of the National Bank of Ukraine, a loan agreement between a Ukrainian borrower (other than a bank) and a non-resident lender must be entered into the system of the National Bank of Ukraine prior to any payment under the loan agreement, unless an exception applies. Furthermore, under Resolution of the Cabinet of Ministers of Ukraine No. 809 dated 15 June 2011, a company (other than a bank) in which the State of Ukraine owns 50% or more of its shares must apply for the approval of the Ministry of Finance of Ukraine if it intends to borrow a loan from a non-resident lender or issue a bond on the international capital markets with maturity in excess of one year or issue a guarantee in relation to a similar long-term debt.
For further information please contact Andriy Nikiforov, Counsel, at , or Ganna Kalinichenko, Senior Associate, at .
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