Bonds: DTEK 1H14 EBITDA down 7% YoY

Обзор облигаций 15.09.2014 Although DTEK reported that revenues from sales grew 20% YoY to US$4.3bn in its 1H14 financial results announcement last Thursday, EBITDA declined 4% YoY to US$829m and the company lost US$738m versus having positive net income of US$147m in 1H13. The company's total debt was largely flat YoY at US$3.4bn, while net debt declined 7% YoY to US$3bn, with a resulting net debt to EBITDA ratio of 2.3x versus 1.3x as of end-1H13. During the company's conference call, management stated that although the company's production process has been unaffected by the military conflict in Eastern Ukraine, supplies of coal from DTEK's mines located in the combat zone were severely paralyzed by military shelling that destroyed parts of the transportation infrastructure. According to DTEK, 42-50% of its coal mining assets and 30-35% of its power generation assets are located in the conflict area. One of DTEK's key coal mining assets, Komsomolets Donbassa, has been out of operation since 1 August, while two of the four blocks at DTEK's Lugansk TPP are being repaired from shelling damage. Investment implications: DTEK's 2H14 performance remains highly uncertain even after the announced ceasefire in Eastern Ukraine, as the truce is fragile and occasional skirmishes continue. The recovery of logistics is critical as 8% of DTEK's TPPs' coal consumption depend on anthracite supplied by mines located in the conflict area. The looming deficit of anthracite in Ukraine could threaten DTEK's export of both coal and electricity which will decrease USD-denominated earnings amidst the hryvnia's ongoing devaluation. We believe that both the company's earnings, even if affected by the crisis, and its cash balance are sufficient to pay the US$218m loans coming due in 2H14 and the US$200m Eurobond repayment scheduled in 1H15. However, the company's ability to meet or refinance US$742m of other debt maturing in 2015 critically depends on peace in the Donetsk and Lugansk regions, infrastructure repairs, and the industry's return to business as usual.