Dec 222015
 
By Oleg Savitsky (NECU) and Greig Aitken (BankTrack), 22 December 2015

Almost two months ago, NECU and BankTrack issued an Investor Alert describing the circumstances which had forced Ukraine’s biggest coal company, DTEK, to seek a debt restructuring agreement with a host of European banks, including Dutch ING, Italy’s UniCredit and Austria’s Erste Bank. The troubled coal giant has been seeking a delay in the payment of most of its $3 billion debt.

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DTEK’s Ladyzhyn coal-fired power plant is the biggest source of air pollution in south-east Ukraine, accounting for more than 90 percent of the toxic emissions in Vinnytsia, an agricultural region. This huge 45-year old, 1800 megawatt plant pumps hundreds of tons of sulphur dioxide and toxic dust into the atmosphere every day. Photo: Oleg Savitsky, July 2015.

While the conflict in eastern Ukraine may have brought these financial troubles to a head in 2015, DTEK’s plight mirrors that of the coal industry more widely – efforts in recent years to intensify coal production and increase its coal power plant fleet have been rubbing up the wrong way against growing European Union requirements, and leading to further environmental abuses.

The debt restructuring deal remains cloaked in mystery – no further information has emerged from the banks concerned since we wrote to them:

“Should your institution agree to extend DTEK’s debt liabilities without addressing the way the company is currently operating, it would be seen by many observers in the Ukraine and elsewhere to be condoning and allowing the continuation of the company’s irresponsible approach to managing its carbon emissions and other environmental impacts.”

However, in early December, DTEK announced on the London Stock Exchange that it will present a restructuring package to creditors in the first quarter of 2016. In a further sign that DTEK’s finances are worsening, this is to involve two tranches of Eurobonds which expired in April 2015 and were set for repayment in 2018. In its announcement, DTEK Finance plc “urges” bondholders to form a committee “to appoint financial advisors, if necessary, to act as a point of contact for the DTEK group’s financial adviser – Rothschild.”

2016 shaping up very badly

Before the first quarter of 2016 has begun, a number of further factors are already colliding to form a highly gloomy outlook for DTEK. Even if the company is scrambling to buttress its finances, how long can this go on for in these kind of circumstances?

1. As it reported in June this year, DTEK’s debt in loans amounted to 53.47 billion UAH (approximately 2 billion euros). The share of loans in foreign currency is 95% of the loan portfolio. In 2015 DTEK’s ratio of debt to earnings before interest, taxes, depreciation and amortization exceeded 5.00 – this indicates a high probability of problems with the repayment of the company’s debts. Increasing deterioration of this indicator since the beginning of the year has been caused by a number of factors, including national currency devaluation, which in January-June 2015 reached 33%.

2. The bulk of DTEK revenue comprises the wholesale sale of electricity to the state-owned enterprise Energorynok, complemented by a portion of direct electricity and heat distribution to end consumers and coal sales. In 2015 Ukraine’s National Energy and Utilities Regulatory Commission refused to increase Energorynok’s tariff for electricity derived from coal-fired power generation. Currently DTEK is undergoing an anti-monopoly investigation, initiated on 18 September 2015 by the country’s Anti-Monopoly Committee.

3. The prevailing macroeconomic conditions and political environment (with the announced de-oligarchisation of the economy by president Poroshenko) continue to be highly unfavorable for DTEK’s business, and are affecting the liquidity of the company, which is owned by Ukraine’s richest oligarch Rinat Akhmetov. Since July this year the company has not been able to repay its loan principal.

4. The economic performance of DTEK’s thermal power plants is deteriorating further as a result of plunging domestic electricity demand (it decreased by 13.3% in November 2015), decreased electricity exports and increasing operational and maintenance costs (the average age of DTEK’s thermal power plants is 45 years).

5. Another development which looks like weighing heavily on DTEK’s operations is the Ministry of Infrastructure’s recently announced tariff increase for railroad freight in 2016. The tariff for the transportation of coal products is set to increase by 32% compared to 2015. As there are no transport alternatives for coal other than the national railway system, this big jump in freight tariff will impact the entire chain of domestic thermal generation.

6. Coal supplies from the temporarily occupied territories in eastern Ukraine remain unstable and are exploited by Russia as political leverage. Overseas shipments of coal from South Africa are considered to be not affordable by DTEK – according to CEO Maksym Tymchenko, the company is not ready to import coal which would involve taking on the risks of pre-payment and delivery.

Taken together, these factors clearly add to DTEK’s precarious position and add to the risks for investor returns. Along with the downward trend for coal finance globally and the latest evidence from Carbon Tracker about the long-term financial risks associated with carbon lock-in, this situation should be considered as a wake-up call for investors.

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