DTEK confirms its intention to service debt despite Donbas threats

Ukraine’s leading coal and power holding DTEK Energy (DTEKUA) issued a statement on March 2 confirming that, as of mid-day, it still controls and manages all its assets located on the occupied territory of Donbas. The statement was made in response to alleged threats by the Russian-backed occupiers to expropriate DTEK’s assets on the occupied territory in response to a trade blockade, as reported by the Interfax-Ukraine news agency on March 1.

 

DTEK reported that its assets located on the occupied territory represents 8% and 25% of DTEK’s capacity in power generation and coal mining, respectively. These assets are also responsible for 10% of DTEK’s power transmission, a claim that we believe is based on 2016 results.

 

DTEK also made it clear that it “does not expect these recent developments will prevent it from continuing to comply with its obligations,” referring to its Eurobonds. It also emphasized that it works and will work “exclusively within the Ukrainian legal framework”.

 

Later on March 2, the website of the self-declared Donetsk People’s Republic published a list of 43 companies on its territory that will face a “temporary administration” imposed. It includes all DTEK assets (Zuyivska power plant, Komsomolets Donbasa mine, power DisCos and some other minor assets), as well as the assets of Metivest (the key ones being Yenakiyeve Steel and Khartsyzk Pipe). However, the statement avoided using strong words like “nationalization” or “expropriation”.

 

Alexander Paraschiy: It’s important and a relief to learn that DTEK is not going to change its commitments to its creditors, despite the risky situation in Donbas. So far, no evidence has surfaced that DTEK’s assets in the occupied territories have been seized. Moreover, as we concluded yesterday from the audio recordings released by the State Security Service, DTEK has a strong chance to retain control over its assets there.

 

Namely, Aleksandr Zakharchenko, the recognized leader of the occupied districts of the Donetsk region, mentioned in a phone conversation with his handlers that a decision was reached in Moscow that Metinvest’s assets would be seized by a Russia-based businessman. All other assets on the occupied territory of Donetsk region, including those of DTEK, will remain under local control, Zakharchenko alleged.

 

So we believe that DTEK’s controlling shareholder, Rinat Akhmetov, has a chance to reach an arragement with Zakharchenko on retaining control of its assets, though that will likely require concessions. As for Akhmetov’s Metinvest assets, they are under far greater threat.

 

While the expropriation risk will continue to loom for DTEK, in the short-term it will suffer much more from the blockade of railroads between the occupied territories and Ukraine. In particular, the holding is still unable to deliver anthracite coal form the occupied zone to at least two of its thermal power plants in central Ukraine, and is unable to deliver hard steam coal from the mainland to its power plant located in the zone. Aggregately, the three affected plants were responsible for 25% of DTEK’s power generation in 2016.

 

Our base-case scenario is that DTEK will be able to retain control of its assets in the occupied territory, the railroad blockade will be short-lived and it won’t interfere significantly with DTEK’s production cycle. That said, we remain cautiously neutral about DTEKUA Eurobonds, keeping in mind that the blockade and the risk of asset expropriation are just two among numerous unknowns about DTEK for 2017.

 

Ironically, we consider the possible seizure of DTEK’s assets on the occupied territory to be less painful for the holding’s cash flow than a scenario of a full and permanent trade blockade. Under asset seizure, DTEK will not have to supply electricity to the occupied regions, nor spend money on supporting idle mines in the zone.