DTEK Aims to Boost Decarbonization Efforts, Replace Russia as Europe’s Eastern Energy Supplier After War; ‘Too Early to Pursue Debt Restructuring’ CEO Timchenko Tells Reorg

DTEK Group, Ukraine’s single largest energy company, is staying the course to transition into a major European producer of clean energy despite the setbacks caused by Russia’s invasion, the company’s chief executive Maxim Timchenko told Reorg.

The group sees Moscow’s behavior in the past year as final confirmation that Europe must enhance its energy independence and eyes an opportunity for Ukraine to provide some of the volumes that European consumers have been getting from Russia.

“We want to build new energy for Ukraine. After Ukraine’s victory, our economy should revolve around new, clean, renewable energy,” Timchenko told Reorg. He underlines that DTEK will work to restore all of its damaged assets but also boost investment in new technologies, in line with the strategy that has already made DTEK, owned by Ukraine’s wealthiest person Rinat Akhmetov, the largest private investor in Ukrainian renewable energy.

The company is constantly evaluating the scale of damage to its assets, he said. “Some objects might be repaired in weeks or months, to repair others it might require years. At this point the most important task is to gain back control over the seized territories and the assets located there. This concerns the renewables business of DTEK. At this moment, half of the renewables capacities, around 500 MW, are not operating because they are located in the currently non-controlled territory. We believe that it will take from six to 12 months to restore financial performance,” Timchenko said.

DTEK spans many types of energy, representing around 95% of Ukraine’s coal-fired thermal production to oil and gas through solar and wind farms at its DTEK Renewables subsidiary. In the final days of 2020, the group unveiled its 2030 Strategy to reach carbon neutrality by 2040, through more gas and renewable energy production, but 14 months later, the operating environment was turned upside down when Russian missiles started raining down.

DTEK has lost control over two of its eight thermal power plants, Luhanska and Zaporizka, which are in Russian-occupied territory in addition to most of its wind turbines, which management decided to stop early on in the battle to avoid being bombed.

“That aim of the 2030 Strategy has not been changed regardless of the war. At DTEK we believe that Ukraine has a great potential of turning into the ‘Green Hub’ for Europe, helping Europe get rid of its overdependence on Russian energy resources,” Timchenko said.

“In 2022, at a conference in Lugano, a ‘30 by 2030’ initiative was instigated. It presupposes the construction of 30 GW renewable capacities in Ukraine by 2030. The “30 by ‘30” initiative relies purely on private funding. Government support is mainly envisaged to come in the form of equity guarantees from donor countries, callable in case of geopolitical and domestic political risks. Such a structure would not put an additional strain on budgetary resources of donor countries as the guarantees are contingent liabilities,” Timchenko noted, adding that funding for the initiative is envisaged to come “both from international private partners and leading global financial institutions.”

Despite suffering the brunt of Russian attacks in recent months, DTEK is sticking to its long-term decarbonization plan, Timchenko said, adding that “furthermore, we believe that Russia’s war against Ukraine will only accelerate the process not only in Ukraine but in Europe as well.”

Russia’s bombing campaign has, however, forced the company and its peers to tackle an unprecedented challenge; repairing the energy infrastructure of Ukraine, a country larger than the U.K. and Germany combined, amid ongoing missile and drone strikes. Management has thrown everything at the task to keep the lights on while also ensuring the safety of its 60,000 staff.

“Currently 4,500 of our employees have joined the armed forces of Ukraine and are now fighting for our land on the frontline. For the critically needed employees or those who remain in Kyiv, bomb shelters have been equipped where they can hide when the air raid comes on,” Timchenko said.

DTEK’s technicians working around the clock to maintain electricity and heating supply to homes across the country have also been caught in the crossfire, the CEO said, noting that damaged power lines supplying 6 million citizens have been repaired so far. DTEK’s engineers also helped restore electricity to the liberated Kherson and Mykolayiv regions although the company does not operate grids there.

“They work in extremely difficult and often dangerous conditions. There have been cases where DTEK’s emergency crews became the targets of the Russian occupiers,” he said. Russian missiles have killed three DTEK employees and injured another 25 since Oct. 25 when Moscow began what Timchenko calls the systemic attacks on Ukraine’s critical infrastructure.

Since Feb. 24, a total of 310 DTEK employees have been injured, 22 have gone missing, four were captured, and 121 colleagues have been killed. The company has stepped up its humanitarian efforts, donating 800 million hryvnia ($21.7 million) worth of medical supplies, food kits and protective gear so far and providing UAH 350 million of free electricity to critical infrastructure. In December, DTEK Energy also sought and received permission from its creditors to raise the cap on donations to $10 million per year during a specified waiver period.

Equipment Needed

The Russian destruction of Ukrainian infrastructure has resulted in Ukraine halting its electricity exports to the EU in October and introducing blackouts across a frozen Ukraine in December. DTEK said in a Jan. 4 release that its power plants have been hit 148 times with rockets and shells since Feb. 24, 2022, causing over 1,000 damages to the equipment of thermal power plants and 9,200 grid damages.

As of Dec. 19, more than a third of Ukraine’s consumers had no electricity supply and the figure was 49% in Kyiv where drones took out key distribution and supply networks to prevent power from reaching the capital’s consumers.

DTEK is now calling on the international community to send more mobile substations, complete transformer substations, circuit breakers, power and current transformers, cable products and insulators.

Patient Creditors Get Paid

DTEK Energy completed a $2 billion restructuring of its bank debt and eurobond in the middle of 2021, which resulted in the issuance of its $1.65 billion 7% 2027 senior secured PIK toggle bonds. The new 2027 notes were printed into a bearish market for Ukrainian debt, dragged down by thousands of Russian troops taking their positions on the country's eastern border and Putin publishing his article “On the Historical Unity of Russians and Ukrainians”. By late November, the debt traded at 51 and when Russian tanks rolled in, the notes plunged in the secondary market to the 30s and then the low 20s where they stayed until November.

Despite the severe operational hurdles and extraordinary repair spending, DTEK Energy decided to keep servicing its new debt, but split the March and June coupons in 3.5% cash and 4% PIK. DTEK Oil & Gas and DTEK Renewables also continued paying their coupons. Investors have also granted the group a number of waivers and covenant releases where necessary, which Timchenko says is buying the company critical time to adapt to the evolving situation and react promptly to the new challenges.

“The support and relations with our investors is of ultimate importance for the company and its management since the first day we approached capital markets more than 10 years ago. Our investors secured the possibility for the company to grow and develop, we invested into DTEK and Ukraine together. The company took its obligation and responsibility in front of investors to secure debt servicing and is going to stick to its commitment where it is possible in the current situation. The creditworthiness, transparency and prudent financial policy especially in such difficult times is the path for the future as rebuilding Ukraine would be possible only with support of external investments,” he said.

During November and December, DTEK Energy approached its creditors holding the distressed 2027 paper with two tender offers, which resulted in bondholders selling around $230 million of notes through auctions at prices no higher than 27 cents. Ornex Ltd, an entity controlled by Rinat Akhmetov, conducted a similar exercise to buy €8.6 million of DTEK Renewables’ 8.5% 2024 notes at prices below 30 cents. DTEK Energy’s 2027 notes are now quoted at 32/35, according to Solve.

Most observers expect DTEK Energy to launch its third debt restructuring since 2016 when peace has been restored in Ukraine allowing management to draw up a reasonably reliable business plan. Timchenko told Reorg it is too early to pursue debt restructuring options, and points out that there is still some time left on the bonds issued by the three DTEK issuers, DTEK Energy, DTEK Oil & Gas and DTEK Renewables.

“The maturity of the bonds is in 2027, 2026 and 2024. We are not now in position to talk about any restructuring. As you know on Nov. 22, we have announced a tender offer for Renewables and DTEK Energy bond in order to optimize our capital structure and decrease debt burden for the Group and are looking to find appropriate solutions for all our creditors to secure business stability and ongoing operations.”
DTEK Energy’s capital structure is below:
 
-- Magnus Scherman