DTEK Energy decreases coal mining 45% in 2Q20, reopens mine on Centrenergo deal

The coal mines of DTEK Energy (DTEKUA) produced 8.72
mmt of ROM coal in 1H20, or 23% less yoy, Concorde Capital calculated based on
sector-wide mining data reported by the Energy Ministry. Total mining of coal
in Ukraine (including coking coal) decreased 14% yoy to 13.15 mmt. 

In 2Q20, DTEK Energy produced 3.03 mmt of ROM coal,
which is 45% less yoy and 47% less qoq. Out of DTEK’s three mining companies,
two haven’t been operational since March 2020 (Dobropillia Coal and Bilozerska
Mine), while 2Q20 output at the third company, Pavlohrad Coal, fell 35% yoy and
32% qoq (to 3.03 mmt).

In related news, DTEK will restart operations at its
second-biggest mining company Dobropillia Coal as of today, Interfax-Ukraine
reported on July 13, citing DTEK’s press service. This became possible after
DTEK signed a contract for coal supply to state-controlled power generation
company Centrenergo (CEEN UK) “as a result of long and tough negotiations with
the mediation of the President’s Office and Energy Ministry,” the press service
said.

In particular, Centrenergo reported on July 10 that it
reached an agreement with DTEK on the conditions of coal deliveries, following
negotiations that were initiated by acting energy minister Olha Buslavets.
Before the negotiations, a DTEK subsidiary insisted on 100% prepayment for coal
and higher volumes of supply. “During the negotiations, a contract was signed
that is based on market conditions and is acceptable for both sides,”
Centrenergo wrote in its press release, adding that “the Energy Ministry was
informed on the results of the negotiations.”

Reporting on the reached deal, the ministry stated
that it “made maximum efforts, within its power, to renew the operations of
Ukrainian miners.” State banks will open credit lines for Centrenergo to help
the company timely pay for the purchased coal, the ministry said.
“Consequently, mines will resume production and miners will be able to come
back to work,” the ministry reported.

Alexander Paraschiy: Notably,
there is no information that any state coal mines closed their operations in
the last months, meaning that the only mines that can resume their production
following the actions of the Energy Ministry are the mines of DTEK. This means
all the efforts of the President’s Office and the Energy Ministry in the coal
sector were directed towards pressuring Centrenergo to sign a coal deal with
DTEK.  Definitely, such unilateral support from the state is positive news
for DTEK as it indicates the holding has been able to find an approach to the
new power brokers in just one year of Zelensky’s presidency (having taken
longer under Poroshenko’s presidency).

Next, we can expect further government actions to
support DTEK, possibly at the expense of the other players on the energy
market. In this way, DTEK Energy could significantly improve its fundamentals,
which in turn could allow it to offer better debt restructuring conditions to
international creditors (recall, the company initiated such negotiations in late
March). All this adds little
to Ukraine’s investment case.