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Concorde Capital Research: DTEK & Metinvest: Effect of economic blockade and assets loss

April 27, 2017 | Cbonds

The nationalization of some of its largest assets by the occupying forces in Donbas caused some harm for Metinvest and DTEK, but it did not prevent them from being able to operate smoothly and generate enough free cash flow for debt holders.

We have estimated that the effect of the blockade and asset loss for Metinvest will be minimal in the short-term (loss of about 5% of potential EBITDA, and nearly zero of free cash flow in 2017-2018). The most important short-term negative effect will be decreased steel output (due to the loss of Yenakiyeve Steel) and a need to seek new sources of coking coal (a lot was delivered from the occupied zone). However, we believe that the holding will be able to raise steel production at the remaining steel mills, which were loaded by 71% of their capacity in 2016. Also, Metinvest will be able to sell more iron ore in 2017, which it used to supply to Yenakiyeve.

The effect of the blockade and asset seizure could be more painful for DTEK as it lost completely its sources of anthracite deliveries for its three power plants. The need to import that coal at a higher cost (USD 50-60 per ton higher than own coal) is the key negative development for DTEK. To minimize increasing costs, DTEK will reduce its anthracite-based power generation. The decline in output will be partially compensated by a higher load from its five power plants burning hard steam coal (mined by DTEK). It will also boost its mining of hard steam coal for that reason.

But the holding is likely to be compensated for the extra costs by enjoying a higher rate for its electricity (which is, in fact, regulated). Moreover, recent data suggests the regulator is ready to apply a higher rate for all the electricity produced by DTEK’s power plants (including that which is produced from DTEK’s own coal). That said, the profitability of DTEK’s coal & power cycle will increase significantly in 2017.

Also, the loss of opportunity to supply electricity to the occupied regions will be beneficial for DTEK, as it generated heavy losses from such activity in the past due to low payment discipline there.

All in all, we expect some decline in power generation by DTEK in 2017, some increase of production costs, but ultimately a higher profit margin due to beneficial power rates. The total short-term effect of the blockade/seizure on DTEK’s EBITDA will be close to zero.

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Issue: DTEK, 10.75% 31dec2024, USD

StatusCountry of riskMaturity (option)AmountIssue ratings (M/S&P/F)
outstandingUkraine12/31/20241,343,717,150 USD-/-/C

Company: DTEK

Full company nameDonbass Fuel-Energy Company(DTEK)
Country of riskUkraine
Country of registrationUkraine
IndustryPower

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