DTEK’s coal mining is -23%, power generation is -20% in 2015

Ukraine’s leading coal and power holding DTEK Energy (DTEKUA) mined 28.69 mmt of coal in 2015, down 23% yoy, according to its Feb. 25 trading update. As we reported earlier this month, DTEK’s coal mining in Ukraine decreased 22% yoy to 26.53 mmt, based on preliminary data from Energobiznes. The decline in mining was a result of the poor performance of DTEK’s mines located in the occupied territory of Donbas, which suffered from limited ability to deliver their coal to power plants in central Ukraine. DTEK’s result implies its Russia-based mines performed worse than its Ukrainian ones – their coal output fell 26% yoy (to 2.16 mmt), we estimate.

DTEK’s total supply of generated electricity to the power market decreased 20% yoy to 37.65 TWh in 2015. As we earlier reported, its generating assets located outside the occupied territory decreased power production 19% yoy last year. The decline in generation was a result of a deficit of anthracitic coal, which DTEK produces in Russia and the occupied territory of Ukraine, as well as a decrease in power demand in Ukraine.

Transmission of power by DTEK’s grid companies decreased 16% yoy to 45.09 TWh in 2015. This result is largely due to the overall decrease in electricity consumption in Ukraine by 12% yoy, and an 18% yoy decline in demand from industrial consumers in Ukraine, which DTEK’s grid companies are focused on. 

Commenting on the results, DTEK’s CEO highlighted that power generation assets suffered losses because “the tariff was set too low” and “the billions” of arears of the state-run operator in the wholesale market. In the year 2016, the company is hoping for “constructive dialogue between the state and the market members” to ride out the crisis.

Alexander Paraschiy: DTEK’s mining results are fully in line with our estimates, while power generation stats are slightly below what we expected (-19% yoy). What’s also important from the release is DTEK’s imporved ability to ship coal from the occupied territory, which averaged at 10.2 t/day in 4Q15. This still lags behind the output of DTEK’s mines in the occupied territory in 4Q15, which we estimate was about 15.1 t/day, and it lags behind the mines’ total production capacity of 50t/day.

DTEK’s financial performance is also very likely to be weak in 2015, given the problems that the holding highlighted – sticky regulated prices for coal and generated electricity. Recall, DTEK reported a 50% yoy EBITDA decline to UAH 2.95 bln in 1H15 – with half of the decline being due to insufficient coal and power prices adjustment, while another half was due to the spin off of DTEK’s renewable energy and gas production subsidiary, we estimate. The good news for 2H15 is that average electricity rates were adjusted upwards by 17% h/h and that DTEK’s coal mines located in the occupied territory increased mining by 1.6x h/h. That will allow DTEK to more than double its EBITDA h/h in 2H15, we estimate. Though, another big problem for DTEK is the poor discipline of the wholesale power market operator, stressed by the CEO. In particular, in 1H15, DTEK’s receivables increased by UAH 5.65 bln YTD, which was clearly painful for the holding. At this stage, there is no clarity on how the payables changed in the second half of the year. All in all, the risk remains that DTEK won’t have sufficient funds to service its debts in the year 2016.