DTEK Energy reports expectedly weak 1H15 financials

Ukraine’s biggest coal and power holding DTEK Energy (DTEKUA) reported a 50% yoy decline in 1H15 revenue to USD 2,137 mln and 80% yoy decline in EBITDA to USD 138 mln, according to its Sept. 30 filing. The holding’s operating cash flow before working capital changes dropped 75% yoy to USD 186 mln, and net loss doubled yoy to USD 972 mln in 1H15.

DTEK Energy attributed its weakened P&L to the devaluation of its local currency (most of its business is linked to the domestic market) and a decline in all its output volumes. In local currency terms, its revenue increased 4.6% yoy and EBITDA fell 58% yoy in the period.

This time, DTEK Energy reported its 1H15 financials net of its renewables and oil & gas businesses, which it spun off in 1H14 and 1H15, respectively. In 1H14, the two spun off businesses generated 18% of DTEK’s total EBITDA.

DTEK Energy’s net debt decreased by USD 234 mln YTD (and USD 338 mln yoy) to USD 2,706 mln as of end-1H15. The holding attributed the 1H14 debt decline solely to its renewable energy business spinoff, which released USD 264 mln in net debt.

With its debt-to-LTM-EBITDA ratio of 5.35x as of end-1H15, DTEK breached some leverage covenants and is in discussions with its lenders to waive them. The holding also reported it’s still in the process of negotiations to postpone repayment of all its loans due in 2015, in the amount of USD 372 mln. On top of that, DTEK Energy will have to repay USD 721 mln in loans in 2016, USD 333 mln in 2017 and USD 78 mln in 2018. Its two Eurobond issues mature in September 2017 (USD 72 mlln), March 2018 (USD 72 mln) and April 2018 (USD 750 mln).

Alexander Paraschiy: The holding’s weak P&L was an expected event, given the decline in its operations and sticky rates for its generated electricity. However, what also looks disturbing is DTEK’s corporate restructuring, which eliminated from the holding two businesses that are much less sensitive to hryvnia depreciation. Our rough estimates suggest that DTEK’s oil & gas and renewables businesses would have added 50-60% to its reported 1H15 EBITDA. Another sign of worry is that DTEK hasn’t yet completed the restructuring of its debt due this year. Earlier, the holding was expecting to finalize restructuring talks by the end of 3Q15, while now a positive result would be reaching a deal by the year’s end.

Nevertheless, we remain cautiously optimistic about DTEK Energy’s ability to improve its operational performance, its P&L and debt sustainability. DTEK’s key challenge right now is sticky rates for its coal-fired power generation. The core component of this rate, the so-called marginal price (the price that should cover fuel and other variable costs of power plants) is capped by the power sector regulator at the level of UAH 600/MWh, which covers coal costs of no more than UAH 1,100/t (USD 52/t). For more than half a year, DTEK was unsuccessfully demanding that coal costs for power plants should be lifted to UAH 1,500/t. Now with heating season approaching and DTEK’s importance in the nation’s power balance increasing heavily, it’s a good time for power regulators to consider rate revisions.