DTEK Energy spins off distribution assets to comply with legislation

Ukraine’s leading coal and power holding DTEK Energy
(DTEKUA) reported on Dec. 10 that it has sold all its corporate rights in five
electricity distributors, as well as some shares in DTEK Donetsk Grids, except
for its 71.5% stake, which will be spun off later due to bureaucratic delays.
The spin off (unbundling) deal was completed on Dec. 7, the company said. 
The consideration for the unbundling “was paid in cash and did not exceed USD
100 mln,” the holding clarified. As a result of the deal, DTEK Energy will no
longer hold any interest in power distribution companies. DTEK’s power DisCos
were operating grids in the city of Kyiv, as well as the Dnipropetrovsk and
Donetsk regions.

The unbundling was performed to comply with the
requirements of a new law, On the Electricity Market, the holding said. This
law, adopted in April 2017, stipulates that power distribution businesses
should be explicitly separated from power generation and supply.

Following the transaction, DTEK Energy said its grid
companies were automatically excluded from the list of suretyship providers
under the holding’s Eurobonds. The same happened to Kyivenergo, a DTEK-controlled
company that used to operate Kyiv-based heat and power plants until August
2018, as well as three coal mining companies that DTEK had lost on the occupied
territory in March 2017. Instead, DTEK reported it intends to add sureties
under its Eurobond from its coal machinery assets acquired in late 2017.

Alexander Paraschiy: Ukraine’s
new law On the Electricity Market does not explicitly force any vertically
integrated holding to sell its power distribution assets, but stipulates that
power DisCos should be independently governed. That means their management
should be independent in operational decisions, grid development plans, human
resources and remuneration policy. A holding can only adopt the annual
financial plan of a DisCo and set limits on its financial indebtedness. It
seems that such independence does not match with the strongly hierarchical
corporate culture of DTEK Energy, so the decision to spin off the DisCo assets
looks logical and fair. On top of that, such a spin-off should reduce the
attention of Ukraine’s anti-monopoly bodies to DTEK Energy.

We are sure the spun off power DisCos will remain
under the control of DTEK Energy’s parent DTEK Group or SCM holding, but they
won’t be in the perimeter of consolidation of DTEK Energy. For the Eurobond
issuer’s operating profit, this is not a big loss in the short term (e.g. in
2017, all the power DisCos – excluding eternally loss-making Kyivenergo –
generated 5% of the DTEK Energy’s operating profit).

However, their spinoff will limit the growth of DTEK
Energy’s profit in the mid-term when DisCos are expected to become a very
profitable business following a long-expected introduction of RAB-based
regulation for electric grids. In other words, DTEK Energy is losing the
segment that is most prospective in terms of profit growth, as well as the most
stable in terms of profit in the mid-term. While there is little positive in
this news for bondholders, the spinoff won’t affect the issuer’s financial
stability. Therefore, we remain neutral on DTEKUA notes.

The key question left is whether DTEK breached its
obligations to Eurobond holders by completing the spinoff. According to its
Eurobond prospectus, the holding can avoid asking noteholders for consent if
the total deal value is below USD 100 mln – and DTEK claims the deal’s value is
within the limit. However, we doubt that the fair value of the spun-off assets
is that low. For instance, based on the privatization price of Dniprooblenergo,
Donetskoblenergo and Kyivenergo (their 25% stakes were sold to an SCM
subsidiary in August 2017), DTEK Energy’s stakes in just these three companies
is UAH 4.1 bln (USD 150 mln). It’s worth adding that the companies sold in 2017
were integrated power distributors and suppliers at that time (and Kyivenergo
was also an operator of heat and power plants and heat networks
in Kyiv). But nevertheless, the core assets of the privatized companies was
their power grids. Another example is: the state power sector regulator
estimated in 2017 the fair value of all the grid assets of Dniprooblenergo (now
these assets belong to DTEK Dnipro Grids) at UAH 13.4 bln (about USD 500
bln).