DTEK boosts coal mining 10% in 1Q16, gets better March power rates

Ukraine’s leading coal and power holding DTEK (DTEKUA) mined 6.92 mmt of coal in Ukraine in 1Q16, which is 9.9% more yoy, we estimate based on data provided by the Energy Ministry via Interfax-Ukraine on April 6. The increase occurred mainly owing to more than doubled mining to 1.66 mmt at DTEK’s anthracite mines, located in the occupied territory of Donbas. Output at the holding’s assets mining hard steam coal decreased 5.2% yoy to 5.26 mmt.

Total mining of steam coal in Ukraine increased 5.6% yoy to 7.88 mmt in 1Q16. DTEK’s share in Ukraine’s production of steam coal surged to 88% in 1Q16, from 84% a year ago.

The quarterly results imply DTEK mined 2.45 mmt of coal in March, which is 16% more yoy and 10% more compared to February (in average daily terms). Mining of anthracitic coal amounted to 0.54 mmt in March, which is 141% more yoy but 22% less m/m (in average daily terms).

Alexander Paraschiy: DTEK’s result is encouraging as it indicates a significant de-escalation in occupied Donbas, as compared to what we had a year ago. Increased anthracite mining will benefit DTEK’s power generation segment, which is heavily dependent on supplies of this type of coal as three of DTEK’s nine power plants are designed to burn it.

Yet even more positives for DTEK come from the wholesale energy market, which its coal and power cycle depends on. In March, the average electricity price sold by all Ukrainian thermal power plants was UAH 1,062/MWh, which is 34% more yoy and 14% more compared to February. DTEK’s power plants got a comparable increase in prices, we estimate, which significantly improved their profitability in March.

All in all, business conditions are going to improve for DTEK, which will enable it to resolve its solvency issues in the mid-term. Meanwhile, improved operations do not allow the holding to immediately solve its liquidity issue. We still expect DTEK will approach bondholders with some coupon capitalization offer, probably next week.