DTEK 2015 coal mining falls 22%, power generation falls 19% in Ukraine

Ukraine’s integrated coal and power producer DTEK (DTEKUA) mined 26.53 mmt (-22% yoy) of steam coal in Ukraine in 2015, we estimate based on preliminary country-wide statistics provided by Energobiznes. Its anthracitic coal producing assets (all located in the occupied territory of Donbas) decreased their output 64% yoy to 4.54 mmt. Its hard steam coal mines increased their output 2% yoy to 21.99 mmt.

DTEK’s fossil-fuel power plants generated 38.7 TWh of electricity in Ukraine (outside the occupied territory) in 2015, which is -19% yoy. Its power plants burning anthracitic coal decreased their power output 58% yoy to 6.6 TWh, while the other power plants performed flat yoy.

Nation-wide production of steam coal in Ukraine decreased 36% yoy to 31.42 mmt, and DTEK’s share in Ukraine’s total output increased to 84% in 2015 (from 70% in 2014). Ukraine’s total power generation (outside the occupied territory) decreased 12% yoy to 143.6 TWh, and DTEK’s market share decreased to 27% in 2015 (from 29% in 2014).

DTEK’s businesses that the holding spun off last year performed as follows: its wind power generation asset produced 0.64 TWh (-2% yoy); its natural gas mining company, NGD, produced 1.3 bcm of natural gas (up 1.7x yoy).

Alexander Paraschiy: The preliminary production data is line with our estimates that DTEK’s coal mining fell 23% yoy (including its Russian mine) and that power generation fell 19% yoy in 2015. In the year 2016, we expect DTEK’s coal mining will stabilize or slightly improve yoy, while power generation will continue to decline (by about 2% yoy).

The relatively good statistics of DTEK’s spin off businesses, renewable power and natural gas, confirms our view that the spinoff was value-destructive for DTEK’s investors.  

Thus far, DTEK’s key challenges are related to its interaction with state entities  – the wholesale power market operator, which has weak payment discipline; and the sector regulator, which does not allow DTEK to increase its coal and power prices. These two factors prevent DTEK from generating enough cash flow to smoothly service its debt, at least in the short-term. For that reason, we see a high risk that the holding will address the creditors with its debt restructuring offer soon.