DTEK sees little effect from new beneficial coal pricing in Ukraine

DTEK (DTEKUA) CEO Maxim Timchenko said that while he welcomes the Ukrainian government’s decision on a new pricing approach for steam coal, it has not led to a significant “economic effect” for DTEK, the Interfax-Ukraine news agency reported on June 2. The average rates at DTEK’s thermal power plants decreased to UAH 1.06/kWh in May from UAH 1.16/kWh in April, Timchenko said. The average rate for 5M16 was UAH 1.00/kWh, which is only a 10% increase yoy, he said. This is much less than the 50% inflation in Ukraine over the same period, he stressed. Recall, Ukraine’s power sector regulator approved in March a new methodology to calculate the prices of steam coal in Ukraine (which will be covered by the rates of thermal power plants). Based on it, the coal price in Ukraine will be equal to the API2 Index (CIF price in Rotterdam) adjusted by energy content, plus shipment costs from Rotterdam to Ukraine, plus transshipment costs.

In other news, Kyivenergo (KIEN UK), one of DTEK’s utility companies, reported on June 2 that all its banking accounts were arrested based on the request of the state natural gas supplier Naftogaz of Ukraine. The company said it has fully repaid its debt for natural gas supplies, while the account blocking was initiated due to Naftogaz’s demand to pay penalties in the amount of UAH 1.5 bln. Of this amount, the validity of UAH 1.2 bln is now being questioned by Kyivenergo in a court. On top of that, Kyivenergo claims that municipal authorities owe it UAH 2.8 bln, the state budget owes it UAH 0.8 bln and the state wholesale market operator owes it UAH 0.5 bln. Kyivenergo is not alone in its problem – it reported that the accounts of 104 utility enterprises in Ukraine were arrested at the demand of Naftogaz.

Alexander Paraschiy: As we suggested in our May 12 report, DTEK will keep singing the blues to get the maximum concessions from its creditors during the negotiation period on its debt restructuring. Therefore, we doubt that everything is so bad at DTEK. Based on the available information, we calculate that the average rate at DTEK’s TPPs was UAH 1.01/kWh in 5M16, which is higher by 26% yoy, not 10% (in 5M15, the average rate was UAH 0.81 /kWh, we calculate). Moreover, the revision in coal pricing methodology has indeed yet to be reflected in average electricity rates on the market – based on the regulator’s official estimates, the average price on the wholesale electricity market will increase by 6.6% in 2H16, and we have no doubt that a large portion of this growth will be distributed to thermal power plants. Also, there is nothing new in the disputes between Kyivenergo and the state as all these issues are usually resolved by the start of the heating season.

All in all, we are keeping our view on DTEK’s turnaround in financials this year. We are also changing our bullish view on DTEK Energy’s Eurobonds to neutral, taking into account that their prices have nearly reached our target of 60% of par.