December 11, 2018 | Cbonds
|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).
|Status||Default||Country of risk||Maturity (option)||Amount||Issue ratings (M/S&P/F)|
|Full company name||Donbass Fuel-Energy Company(DTEK)|
|Country of risk||Ukraine|
|Country of registration||Ukraine|