Tuesday, 28 October 2008

No crisis detox for DTEK

Business New Europe

Jason Corcoran in Moscow

October 28, 2008

The richest man in Ukraine and reputedly the whole of the former Soviet Union, Rinat Akhmetov, is embarking on a bold acquisition programme to pick up cheap energy assets across Central and Eastern Europe at a time when other oligarchs in the region are sweating over making margin calls.

Akhmetov, estimated by the Russian daily Kommersant to be worth $31.5bn, has largely been insulated from the international financial crisis due to the consistent demand for coal and electricity and his minimal exposure to the equity markets.

DTEK, Akhmetov's main Ukraine-based energy holding, is now talking to banks about assembling a cash pile to target coal assets worth up to $500m in Russia and the rest of Central and Eastern Europe. "We are pretty much immune to the fluctuations of the world economy and we are cash positive so we can fund our modernisation programme and our working capital through our own cash so we don't need to use the external market. We do need external markets only to fund M&A and refinance our debt," Yuriy Ryzhenkov, DTEK's chief financial officer, told bne in an interview.

Ryzhenkov said DTEK is looking to buy assets cheaply in the resource base in Russia close to Ukraine and westward in Poland, Romania and Hungary. "We are trying to balance our whole chain of production from coal mining to the end customer. We are also looking outside of Ukraine westwards for new customers and new generations in countries like Romania, Hungary and Poland. The assets there can have a synergy with existing assets in Ukraine," he said.

A bigger whole

Kyiv-headquartered DTEK is part of Ukraine's largest conglomerate Systems Capital Management (SCM) and is the leader in Ukraine's fuel energy industry. It runs the energy assets of Donetsk-based SCM and unites 16 enterprises, including Skhidenerho energy generating company, Service Invest and Enerhovuhillia energy distribution companies. DTEK is Ukraine's largest coal producer, owning the Pavlogradugol unit and the Donbass Komsomolets mine SHKD.PFT. It also owns electricity generator Vostokenergo and the electricity network Servis-Invest and PES-Energougol. According to 2007 figures, its market share in Ukrainian coal mining industry was 20.9%; its share in thermal power generation was 27.0%; and its market share in electricity distribution was 5.4%.

Last year, DTEK earned revenues equivalent to $1.86bn compared with $1.04bn in 2006, and operating profit more than doubled to almost $496m from $243m. Net profit rose to $196m from $102m.

Metinvest, Akhmetov's metals and mining holding is vertically integrated, with its energy needs met from DTEK. When markets improve, analysts expect both DTEK and Metinvest to move forward with their IPO plans and to provide an interesting cash-out to investors with a two- to three-year horizon.

Ryzhenkov said the ambitious $2bn capex programme of DTEK, which is wholly owned by Akhmetov and his wife, was also unaffected by the financial crisis. "The majority of it is addressed towards the coal mining assets. We are planning bringing the productivity of those assets up to the best western standards and that would put us in a stronger position against competitors outside of Ukraine. This programme is to be funded through our own cash flows. At the moment, DTEK is not paying dividends and all money generated is reinvested into existing assets."

With western banks offering unattractive terms for loans, Ryzhenkov said DTEK was looking at other avenues to fund its expansion programme such as bond issuance, syndicated loans with relationship banks and leasing transactions. Russian bank Troika Dialog has already underwritten two tranches worth UAH500m ($100m) on behalf of DTEK, but the company remains on hold, as they don't have a dire need to sell at current rates of 15-25% per annum. DTEK postponed the issuance of its debut Eurobond last year and is waiting for a window in the current market before opting for that financing route.

In recognition of DTEK's rude financial health, ratings agency Fitch in September placed the company on a positive outlook, although it did cite poor liquidity and a relatively short debt maturity profile as negatives. "We were quite pleased by the upgrade," commented Akhmetov. "We improved our financing metrics since last year when we first obtained the rating. At the same time as notching down the Ukraine rating outlook to negative, they changed our outlook to positive which was a good sign that we are doing something right and the agency considers us becoming more stable and self-sufficient."

Akhmetov has been a very divisive figure in Ukrainian politics thanks to his own political ambitions and close ties to Viktor Yanukovych, the twice-elected prime minister and leader of the opposition Party of the Regions. But Ryzhenkov insists that the negative press hasn't impeded the progress of the company. "Obviously, the company gets associated with the beneficial shareholder whenever we do something." However, he insists that while DTEK did indeed grow during the time the Party of Regions was in government, the company also prospered when President Viktor Yushchenko's party and Prime Minister Yulia Tymoshenko's eponymous bloc were in power too. "I can say the company is pretty much immune towards the political landscape," he said.

Even so, the latest round of political wrangling, which forced snap elections to be called for December, has had some effect, by slowing the progress of privatisation in the electricity generation sector. However, DTEK is optimistic the New Year will bring developments.


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