DTEK faces new risks related to coal supply limits from Russia

DTEK Energy (DTEKUA), Ukraine’s largest coal and
electricity producer, is among the key companies to be most affected by the Apr. 18 decision by the
Russian government to restrict steam coal exports to
Ukraine as of June 1. In particular, its two power plants had a planned
shipment of 2.26 mmt coal from Russia this year, covering 100% of their needs.
Another power company to be affected is Donbasenergo (DOEN UK), whose single
power plant had an expected shipment of 0.62 mmt in 2019 (38% of its needs).
Ukraine planned to import a total of 3.8 mmt of anthracite (steam) coal from
Russia this year, according to the forecasted power balance of Ukraine for
2019, published in October 2018.

Recall, DTEK holding operates an anthracite mine in
the Rostov region of Russia, which is a core supplier of anthracite for DTEK
Energy’s Ukrainian power plants. Currently, two out of DTEK’s eight operational
thermal power plants consume almost exclusively anthracite coal, which is not produced
in Ukraine any more.

Alexander Paraschiy: The latest
Russian restrictions will hurt DTEK holding’s coal and power business. At
minimum, DTEK’s Russian mine will have to apply for a special permit to supply
its coal to Ukraine (which will increase its costs).

In the worst case, DTEK Energy’s power plants won’t be
able to receive anthracite coal from its related Russian mine. While such a
scenario does not look dangerous for the holding’s Kryvorizka Power Plant – as
it can substitute Russian supplies with overseas supplies via Ukrainian ports –
its other power plant, Luhanska, has no such option. The Luhanska plant is
located near the Russian border and Russian-occupied territory. Its only
reliable railway connection is with Russia, with coal deliveries impossible
from Ukrainian ports bypassing Russia or the occupied territory.

So, if DTEK won’t be able to supply coal to Luhanska
from Russian territory (either from DTEK-related mines, or from other Russian
suppliers), the plant will have to either switch to burning natural gas (which
is too expensive) or halt its operations altogether.

All in all, we continue to consider DTEKUA
Eurobonds as the most exposed to political risks of 2019.