DTEK increases coal mining 2%, power generation 9% m/m in January

Ukraine’s leading coal and power holding DTEK (DTEKUA) mined 2.08 mmt of coal in Ukraine in January 2016, we estimated based on preliminary sector-wide data provided by Energobiznes. This is a 4% yoy decline and a 2% m/m increase. Importantly, the holding’s mines producing scarce anthracite coal boosted mining 80% yoy and 9% m/m to 0.46 mmt. Total mining of steam coal in Ukraine fell 11% yoy and 3% m/m to 2.41 mmt, which resulted in increase of DTEK’s share in the sector to 86% in January (from 80% a year before).

DTEK’s electricity generation outside the occupied territory of Ukraine amounted to 3.54 TWh, which is -3% yoy and +9% m/m, we estimate. DTEK’s thermal power plants burning anthracite coal hiked their power generation 99% yoy and 38% m/m to 0.91 TWh. Ukraine’s aggregate power generation (outside the occupied territory) was 14.58 TWh, a 6% yoy drop and 4% m/m rise.  

Alexander Paraschiy: DTEK was able to outperform Ukraine’s coal and electricity generation sector in January, which is mainly a result of its ability to improve its mining of anthracite coal, which is produced in the occupied territory of Donbas. The increased mining efforts and delivery capability of this scarce type of coal is an important achievement that should positively affect DTEK’s liquidity. However, DTEK’s financials remain vulnerable to regulations on the wholesale electricity market: the average electricity rates of its thermal power plants (which determine the profit at its flagship coal & power segment) were just 8% higher yoy and 4% lower m/m in January, we estimate. The key risk for the holding remains the low payment discipline of Ukraine’s wholesale power market operator, the only buyer of all generated electricity in Ukraine.

We remain neutral on DTEK’s Eurobonds. Despite the above-listed risks, there is also some room for positives in the future. Firstly, Ukraine’s parliament is going to adopt a new law that will liberalize the wholesale electricity market to allow the holding to sell a part of its electricity bypassing the regulated wholesale market, possibly already in late 2016. On top of that, some concessions from the government (in terms of electricity rates) are possible even earlier, particularly if the role of Rinat Akhmetov (DTEK’s owner) will increase in resolving the Donbas crisis. Recall, local media reportedlast week that Ukrainian president is considering the possibility of appointing Akhmetov as the governor of the occupied part of the Donetsk region of Ukraine, as one of the scenarios of returning Ukrainian political control there.