Largest energy company today: Prospects of DTEK in Ukraine

Author : Yuriy Korolchuk

The future of energy business of the richest man in Ukraine can be described in words of The X-Files slogan: "The Truth Is Out There". And what will be waiting for them at the end – no one can say.
22:56, 24 January 2017

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The energy holding of Rinat Akhmetov got out of the default risk area. DTEK, the largest private energy structure of Ukraine has completed negotiations with creditors and received the opportunity to roll over its debts for another eight years - until 2024. And in January 2017 the Irish Stock Exchange (ISE) included in the listing the new DTEK eurobonds totaling $ 1.275 billion.

However, this solution to financial problems hasn’t removed from the agenda some relevant for the Akhmetov’s holding issues as the thermal power plants modernization, coal supply guarantee, correlation of growth of tariffs for thermal power plants, reducing emissions and continuing of Kyiv’s heat networks operation.

Losses put pressure on DTEK

Irish Stock Exchange delisted DTEK eurobonds for $ 750 million with a rate of 7.875% and maturity date on April 4, 2018, and for $ 160 million - with a rate of 10.375% and maturity date on April 28, 2018. To replace the old bonds, the company issued new - the total amount of the issue is $ 1.275 billion. During the 2015-2016 DTEK Energy Holding held fairly difficult negotiations and agreed the restructuring conditions with the holders of eurobonds. In 2015 company was unable to repay the bonds of 2010 and decided to exchange old bonds for $ 160 million amount. As a result ─ already DTEK securities for $ 750 million and $ 160 million were combined in a single issue with a day of the payment up to 31 December 2024. DTEK also reduced its debt burden by $ 436 million by transferring Russian assets (coal mines in Rostov region of Russia) together with the corresponding loan to another company’s subjection - DTEK B.V.

As of 2016 the total amount of debt of Akhmetov’s energy holding amounted to more than $ 2.5 billion. Of this amount, 35% of debt consists of eurobond obligations, 25% ─ of bilateral loans, 15% ─ of syndicated loans, 15% ─ of pre-export financing, while the remaining 10% ─ these are swap lines, the main credit lines, other tools.

In such a severe credit situation the company got because of its dependence on foreign currency loans. After all, 60% of the debt was denominated in US dollars, 20% in euros and 18% ─ in Russian rubles. At the same time, the share of dollar in the revenue was less than 10%, and the critical mass of revenue was Ukrainian hryvnia (UAH).

It is logical that in 2016 the energy holding continued to increase losses, which in the III quarter of last year rose to 2.61 billion UAH. Although formally DTEK debts for this period decreased by 11% (7.41 billion UAH) ─ to 60.22 billion UAH.

In the previous two years (2014-2015), DTEK also showed losses increase. In 2015, its losses amounted to 37.399 billion UAH ($ 1.4 billion), which is 90.3% higher than for the 2014. Also DTEK income increased by 1,8% ─ to 93.622 billion UAH.

In 2015 DTEK increased its distribution of electric power (to final consumers and for export) by 7.3% (3.17 billion UAH) ─ to 46.83 billion UAH. At the same time export sales fell by 36.4% (1.847 billion UAH) ─ to 3.23 billion UAH. Steam coal sales decreased by 21.7% (1.151 billion UAH) ─ to 4.149 billion UAH including export ─ 28% - to 2.77 billion UAH. At the same time the energy holding boosted sales of the heat energy by 58.7% (2.075 billion UAH) ─ to 5.611 billion UAH.

In 2014 DTEK losses were also large and amounted to 19.648 billion UAH ($ 1.3 billion). But earlier, in 2013, the Akhmetov’s company received the profit of 2.98 billion UAH ($ 375 million).

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Russian roulette for Akhmetov’s companies

Now regarding the story of Akhmetov's energy companies crediting, everyone’s attention is focused on the so called Russian trace. Even in 2011 ─ on the eve of large-scale privatization of Kyivenergo, Zakhidenergo, and Dniproenergo companies ─ DTEK received $ 500 million from the Russian Sberbank and $ 330 million from the Russian bank VTB. At the present time Russian money constitutes exactly one third of its loan portfolio.

In order to stabilize and improve the situation around the energy holding it is necessary to increase income of local currency. But in the current energy crisis conditions we shouldn’t expect further increase in tariffs for thermal power plants. Although exactly this condition DTEK management mentioned as a guarantee of loans payment. "There is an ongoing discussion with the authorities aiming to set the 2016 average electricity tariff for thermal power plants at the level not less than 1.25 UAH / kW. This will ensure an economically stable work of the group and stabilize its financial performance”, stated the company.

Theoretically, this tariff would allow DTEK to pay approximately $ 70-100 million annually, and by 2024 to reduce the total debt of $ 1.5 billion. And with such indicators the company could hope to attract new loans.

However, in the context of recent events in Ukraine for three years (2014-2016) we can’t make even approximate forecast  for two years ─ it’s a Russian roulette. A devaluation of hryvnia to 35-40 UAH for 1 USD, decrease in economic activity, intensification of hostilities in Donbas, another abrupt change of policy of the state may have irreparable impact on the energy holding.

All of these factors are unpredictable for creditors and the Akhmetov's holding itself. The future of energy business of the richest man in Ukraine can be described in words of The X-Files slogan: "The Truth Is Out There". And what will be the end of the bonds’ prolongation – no one can say.

The DTEK assets ─ it is not only ten power plants and two thermal power stations (of total capacity of 18 GW) and six companies for the sale and supply of electricity. Akhmetov’s energy business ─ it is primarily 31 coal mines and 13 coal preparation plants. And a significant part of them is located on the uncontrolled territories of Donbas. In case of failure of coal supplies from the uncontrolled territories - the chain "production ─ tariff" will also fail.

Also the negative role will play the lack of growth of not only DTEK but Ukraine’s export potential as a whole. In the 2015-2016 years the volume of electricity sold abroad has not changed: it stays at the level no more than $ 150 million. However, previously the export was amounted to nearly $ 600 million, and nearly all of its scope provided by Akhmetov’s group of companies.

"There's no money, but you hold on"

Finally, perhaps the most important and painful aspect of the work of Rinat Akhmetov’s energy holding is depreciation of thermal power plants infrastructure and the lack of necessary funds to carry out the works at appropriate scales ─ instead of solving the problems of individual units.

"I have to admit that most of the generating capacity on more than 80% has already crossed the borders of its project resource exploitation. Almost all power units depleted this limit of 200 000 hours. And, unfortunately, there are units on Prydniprovska and Dobrotvirska thermal power plants, which  operating time has already exceeded 300 000 hours ", said the power generation director of DTEK Energy Serhiy Kurylenko.

Even with the optimistic indicators the DTEK energy holding by 2024 will be able to find only 20% of the required amount ─ 50 billion UAH. Although in 2011, DTEK was counting on investments at the level of $ 20 billion until 2030 ─ one billion per year. It seems that the company is today very keenly feels the relevance of the Russian Prime Minister Dmitry Medvedev’s statement which became an internet meme: "There's no money, but you hold on"

Also on today’s agenda is the implementation by Ukraine and DTEK of the Directive 2001/80/EC "On the limitation of emissions of certain air pollutants from large combustion plants" (thermal power plants) with a term until 2018. Neither Ukraine nor the Akhmetov’s company can fulfill it due to lack of money. And the situation will get worse as Europe plans to replace the existing directive on the tougher 2010/75/EC "Directive on industrial emissions", but with an extended implementation period ─ until 2022. Several years ago, the CEO of DTEK Maxym Tymchenko said that bringing the Ukrainian coal thermal power plants in compliance with the requirements of Directive 2001/80/EC will cost $ 13-15 billion of investments.

The inability to obtain new loans and exceptional service of re-issued eurobonds ─ it is rather pessimistic way for the company. And long until 2024 it may lead to the introduction of new changes in the terms of loans’ service or other form of payments to creditors. DTEK creditors are consciously giving the company the chance for salvation.

But, on the other hand, the same lenders are realists and know all of the crisis conditions in the energy sector of Ukraine. Therefore, the only "plan B", which can be considered by banking structures, it is searching for a partner to DTEK or sale of business segments. In the meantime, a public interest in the Akhmetov’s energy business was shown only by ICU company (Investment Capital Ukraine).

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