DTEK public subsidiaries report mixed results in 2Q16

Dniproenergo and Zakhidenergo, open joint stock companies that are operating six of DTEK Energy’s (DTEKUA) nine thermal power plants, reported a significant improvement in their P&L in 2Q16, according to their July 25 filings. Their combined revenue increased 5% qoq to UAH 5.73 bln in 2Q16, despite a 4% qoq decline in the amount of power sold. Both their combined gross profit and EBITDA for the quarter improved by UAH 0.95 bln qoq (to UAH -0.02 bln and UAH 0.13 bln, respectively).

DTEK’s other public company, coal giant Pavlohradvyhillia, posted worse results for the second quarter. Its revenue fell 26% qoq to UAH 4.17 bln, and gross profit fell 77% qoq to UAH 0.29 bln. At the same time, its EBITDA improved 90% qoq (or by UAH 0.50 bln) to UAH 1.06 bln, solely due to less reported “other operating losses”.

DTEK’s public DisCos, Dniprooblenergo and Donetskoblenergo, reported a combined gross profit of UAH 0.11 bln in 2Q16, compared to gross losses of UAH 0.11 bln in 1Q16. However, their combined EBITDA fell to negative UAH 0.40 bln (from negative UAH 0.15 bln in 1Q16) due to increased “other operating losses.”

Another DTEK subsidiary, vertically integrated utility Kyivenergo, reported a gross loss of UAH 0.39 bln for the quarter (compared to positive UAH 0.23 bln in 1Q16), as well as worsened EBITDA to negative UAH 0.65 bln (from negative UAH 0.22 bln in 1Q16).

Alexander Paraschiy: The above-mentioned companies account for 60%-75% of DTEK’s total coal mining, electricity production and electricity distribution volumes, thus their results might be indicative for the entire holding. However, we cannot extrapolate these results to make an assessment of DTEK as a whole – as there are other, non-public, intermediaries in DTEK’s value chains. Nonetheless, the results are in line with our vision on how DTEK Energy’s EBITDA will change in 2Q16. Namely, there should be significant improvement in EBITDA in power generation and some decline in coal mining results. The net effect for 2Q16 for DTEK’s coal & power segment should be an EBITDA increase by about UAH 0.9 bln – UAH 1.1 bln, we estimate.

The poor results of DTEK’s key power distribution companies and of Kyivenergo in 2Q16 suggest that these segments will eat away some portion of the additional profit generated by the coal & power segment. The total qoq increase in DTEK’s EBITDA in 2Q16 should be close to UAH 0.5-0.7 bln, we estimate, or 1.2x-1.3x higher qoq.

In the third quarter of 2016, we expect a further increase in profit from DTEK’s coal & power segment, which will be driven by an increase in electricity rates for DTEK’s power plants. At the same time, uncertainty remains regarding the future performance of DTEK’s power distribution business. We confirm our neutral view on DTEK Energy’s Eurobonds.