DTEK EBITDA falls 12% yoy, net debt rises 45% in 2013

Обзоры по компаниям и отраслям 17.04.2014 Ukraine’s leading coal producer and power holding company DTEK (DTEKUA) reported 12% growth in its revenue to USD 11.60 bln, according to its April 16 report. Sales growth was noticed in two DTEK’s main segments, coal & power production (+13% yoy) and power distribution (+22%). At the same time, revenue from its heat generation segment fell 33% yoy to USD 0.66 bln, mainly due to a 2.5x yoy drop in state compensation for heating losses. The holding’s EBITDA fell 12% yoy to USD 1.78 bln, with its traditional segments showing decline (heat -42% yoy, power distribution -29%, coal & power production -8%). At the same time, the holding’s new segments, natural gas and renewable energy, generated operating profit of USD 0.09 bln, contributing almost 5% to its total EBITDA. DTEK’s operating cash flow before working capital changes fell 17% yoy to USD 1.55 bln, while better management of working capital enabled a 21% yoy increase in resulting operating cash flow to USD 1.26 bln. While the holding’s reported CapEx was close to that number, USD 1.29 bln, its net debt increased by USD 0.88 bln yoy (45% yoy, to USD 2.82 bln) in 2013. Most of the increased net debt was spent to pay dividends to DTEK’s shareholder (USD 0.36 bln) and financial aid (USD 0.15 bln). The holding’s gross debt increased 33% yoy to USD 3.48 bln, and its year-end ratio of gross debt/EBITDA increased to 1.9x (from 1.2x as of end-2012), still remaining at a safe distance from the 3.0x Eurobond covenant. During the holding’s conference call on the reporting day, management disclosed it is going to further develop its new segments, natural gas production and renewable power, as well as concentrate on enhancing coal and power assets that it acquired earlier. In particular, DTEK plans to increase the production of natural gas by its newly acquired company 1.7x yoy to 0.86 bcm (in 1Q14, its growth was 56% yoy). Alexander Paraschiy: The holding’s results outperformed our estimates, with EBITDA appearing to be 5% better and end-2013 net debt being 1% smaller. For 2014, we expect the company’s profitability will worsen: according to management, its coal and electricity segments require about a 10% yoy increase in electricity rates to keep their profit stable yoy. At the same time, the current retail power rates are only 4% higher than the average rate for 2013, and there is low probability that they will increase later this year (they have been kept flat by the regulator since August 2013). DTEK’s core possible bottom line drivers for this year should be its gas production segment and coal trading, though they are unlikely to compensate declines in profit of the holding’s core segments. Devaluation of the local currency (and more than 90% of DTEK’s revenue comes from the local market) also will play to decrease the holding’s key P&L indicators in USD terms this year. At the same time, we expect DTEK’s gross debt /EBITDA ratio will remain far below the 3.0x threshold as of end-2014, yet much will depend on the demand for dividends from DTEK’s shareholder. The core risks that we see for DTEK in 2014 have a political nature as the holding’s single shareholder, Rinat Akhmetov, failed to find common ground with the interim government. He is widely suspected of sponsoring the pro-federalist wing of the Party of Regions, though he opposes the pro-Russian separatists. During the Yanukovych presidency, DTEK took control of a series of state assets that a new government may try to reclaim. The most risky asset that DTEK may lose are two coal mining companies, Rovenkyantratsyt and Sverdlovantratsyt, which are currently leased by DTEK from the state based on a concession agreement signed in late 2011. The two mines produced 13.7 mmt of coal for DTEK in 2013, or 1/3 of its total coal mining. About half of these mines’ coal has low sulfur content (unusual for Ukrainian coal), enabling DTEK to export it to EU countries. At the moment, it is hard to estimate any probability of such negative events for the holding. Its management believes the risk is low, alleging that DTEK is fulfilling all the obligations/ commitments that it took when acquiring control of the assets.