DTEK Energy EBITDA surges 3.7x in 2016

Ukraine’s leading utility holding DTEK Energy (DTEKUA) reported a 17% yoy increase in net revenue to USD 5,012 mln in 2016, according to its April 28 earnings release. Its EBITDA surged 3.7x yoy to USD 697 mln and its net loss dropped 85% yoy to USD 262 mln.

 

Most of its EBITDA was generated in its coal & power segment, or USD 681 mln (up 2.1x yoy). Its power distribution segment also contributed to EBITDA growth, showing a positive result of USD 17 mln from USD -128 mln a year ago. Its assets located on the occupied territories of Ukraine generated USD 15 mln in EBITDA (2.1% of total), with its power generation and distribution businesses in the territory producing operating losses.

 

The holding’s total debt decreased 15% yoy (USD 406 mln) to USD 2,235 mln as of end-2016, so its ratio of total-debt-to-EBITDA decreased to just 3.2x from 14.1x a year before. DTEK is still working to complete the restructuring of its debt portion of USD 527 mln (as of end-2016), according to its report.

 

DTEK’s CapEx increased 29% yoy to USD 240 mln in 2016. In 2017, DTEK is going to adjust its initially planned  CapEx of about USD 470 mln for the loss of its assets on the occupied territories, thus reducing spending by about USD 100-110 mln, management said in an April 28 conference call.

 

Alexander Paraschiy: Although we expected the EBITDA surge given the generous achieved electricity rates in 4Q16 (see our update on Eurobonds on Apr. 26), the annual result was 19% higher than we estimated. The positive surprise was the result of positive EBITDA in its power distribution segment, which we expected to be nearly as loss-making as a year ago.

 

What disappointed in the report was a finding that a significant amount of banking debt outstanding has yet to be restructured. In late March, DTEK reported on a deal with the “vast majority” of its existing baking lenders, which we interpreted as the restructuring deal having been nearly completed. From the annual report, we see that “the remaining minority” of lenders accounts for a significant portion of DTEK’s debt outstanding. The exact amount of this debt is not clear from the holding’s data: its presentation points at a USD 290 mln principal amount (30% of banking debt outstanding), while its financial report says about USD 527 mln (which includes accrued interest), or about a half of banking debt outstanding. The good news is that over 85% of the restructured debt of DTEK matures after 2022 – the holding has enough time to prepare for debt repayments.

 

2017 looks to be harder for DTEK as it has lost a significant share of its coal mining assets on the occupied territory, which will affect its coal costs, availability of coal and amount of power generation. In general, we expect a decrease in power generation by about 8-10% yoy, with some increase in EBITDA margin due to higher power rates.

 

During the April 28 conference call, the holding’s management sounded conservative for 2017, anticipating that the average achieved price of electricity supplied by DTEK’s power plants would be just UAH 1,300/MWh (+5% yoy), a level prompted by the regulator’s official forecast of December 2016. But we believe this price outlook is too pessimistic (in January, the rate was UAH 1,330/MWh, while in March it was UAH 1,770/MWh). Moreover, in its financial report, DTEK wrote that it is expecting that the rate increase will “offset the impact of cost inflation,” which suggests the growth in rates will be much higher than 5% yoy. At least, the holding has put such the “cost inflation” assumption into its detailed cash flow projection for 2017-1H18, from which it sees “no liquidity gap in any months.” Our vision is that DTEK’s average achieved electricity price will be close to UAH 1,500/MWh in 2017.

 

All in all, we remain bullish on DTEK Energy Eurobonds.