DTEK coal and power production falls in 2018

Coal mining at Ukraine’s largest coal and electricity
holding DTEK Group fell 1.9% yoy to 27.19 mmt in 2018, according to the
holding’s Feb. 18 trading update. The decline was caused solely by loss of
control of three mines on the Russian-occupied territory of Ukraine as of March
2017. On a like-to-like basis, the group’s coal mining increased 5.3% yoy,
including 4.9% yoy growth in Russia (to 3.05 mmt). Eurobond issuer DTEK Energy
(DTEKUA), which operates the holding’s Ukrainian mines, boosted coal production
5.3% yoy on like-to-like basis to 24.13 mmt.

Total electricity supplied to grids by DTEK Group’s
generating units amounted to 34.75 TWh in 2018, which is 6.3% less yoy. The
group’s renewable energy producers (not consolidated by DTEK Energy) increased
power supply 6.1% yoy to 0.68 TWh. Coal- and gas-fueled units, consolidated by
DTEK Energy, reduced power supply 6.6% yoy to 34.75 TWh. The decline was caused
by the loss of control over one power plant as of March 2017 and ceased
operations at two Kyiv-based heat and power plants as of August 2018. Excluding
the lost power plant and Kyiv-based plants, DTEK Energy power generation dropped
1.8% yoy on like-to-like basis, based on our estimates.

DTEK Group’s grid companies (no longer consolidated by
DTEK Energy since late 2018) transmitted 43.69 TWh of electricity in 2018,
which is 1.2% more yoy. The group boosted electricity exports 16.5% yoy to 5.83
TWh. It cut coal exports from its Russian mines (not part of DTEK Energy) to
third-party countries 35% yoy to 0.49 mmt, raising the supply of such coal to
Ukraine 26% to 1.5 mmt. The group’s total coal imports to Ukraine increased
3.5% yoy to 2.66 mmt. The group’s natural gas production (not consolidated by
DTEK Energy) declined 0.4% yoy to 1.65 bcm.

Alexander Paraschiy: The key 2018
results of DTEK Energy, including Ukraine’s coal mining and power generation are not new
to us. In 2019, we expect DTEK Energy will continue to slightly increase its
coal mining in Ukraine (by 1%-2% yoy) and will likely reduce coal deliveries
from its related Russian mines. We expect DTEK Energy’s power generation will
increase 2%-3% on a like-to-like basis (excluding its Kyiv assets). We also
estimate DTEK Energy has generated about UAH 25-26 bln in EBITDA in 2018 and
expect it will generate about the same amount this year.

Among the key risks for DTEK in 2019 are possible
interim troubles in case President Poroshenko (with whom DTEK’s owner Rinat
Akhmetov has solid relations) won’t be able to be re-elected. All in all, we
retain our neutral view on DTEKUA bonds.