DTEK boosts coal, gas and power production in 1H14

Ukraine’s leading energy holding DTEK (DTEKUA) boosted its operations in all its core segments in 1H14, according to its operating results in its Aug. 8 release. The holding was able to increase coal mining 4% yoy to 20.7 mmt, mainly driven by almost doubled production of coal at its Russian mines. The company also managed to increase coal exports 29% yoy to 2.7 mmt. DTEK stressed that some of its coal mines located in the war-afflicted Donetsk and Luhansk regions reduced their activity and one of its biggest mining subsidiaries, Sverdlovantratsyt, had to stop its operation in June.

Electricity output by DTEK’s generation units increased 1% yoy to 24.6 TWh in 1H14, mainly due to increased demand for coal-fired electricity in Ukraine prompted by a 41% yoy plunge in power supplied by hydro power plants. Purchases of electricity by DTEK’s power distribution companies decreased 1% yoy to 27.9 TWh, which was a much more moderate rate than overall decrease of power consumption in Ukraine, which fell 3% yoy in the period. DTEK’s electricity exports fell 6% yoy.

Its newly acquired natural gas mining company also reported good results, boosting gas production 43% yoy to 0.35 bcm in 1H14.

Alexander Paraschiy: The last month of the first year-half already showed a negative trend for DTEK’s output in its coal division, which is very likely to worsen in the second half of the year. In particular, power output for the holding’s mines located in the Donetsk and Luhansk regions decreased 21% yoy in June (and 5% yoy in 1H14). In July-August, the result should be much worse, given that its three biggest Donbas-located mines are reportedly idling now.

A possible decrease in coal production in Donbas is not likely to affect negatively its electricity generation business, given that six out of its nine power stations consume coal mined in the regions not affected by war. At the same time, there is a risk that at least two of DTEK’s power plants will be destroyed in the current war. Risky assets for DTEK remain power distribution/supply companies Krymenergo (located in Crimea) and Donetskoblenergo (part of whose grids are in the Donbas war zone).

Overall, we cannot expect that the second half of the year will be as good for DTEK as it was 1H14. At the same time, we do not expect visible deterioration in the holding’s operating results in 2H14 in any segments except coal mining, unless the situation in Donbas worsens.