DTEK updates on its 9M15 operations, complains about regulations

Ukraine’s largest coal and power holding DTEK Energy (DTEKUA) reported a 26% yoy decrease in coal mining to 21.4 mmt in 9M15, according to its Nov. 17 regulatory filing. As we earlier reported, its mining in Ukraine in 9M15 decreased 27% yoy to 20.0 mmt, including a 70% yoy plunge in Ukraine’s anthracite coal mining to 3.2 mmt. This means DTEK’s coal mining in Russia declined 6% yoy to 1.4 mmt.

Electricity production at DTEK’s power generation units decreased 21% yoy to 27.7 TWh. At the same time, output at power units operating outside the occupied territory of Donbas dropped 24% yoy, we estimate, based on Energy Ministry data. Recall, one out of DTEK’s nine thermal power plants is currently operating on occupied Donbas and has not sold its electricity to the Ukrainian wholesale market since May 2015. The share of electricity that DTEK produced in 9M15 beyond Ukraine’s power market is 3.7%, we estimate.

DTEK’s power distribution (excluding the lost Krymenergo) decreased 9% yoy to 33.6 TWh in 9M15. Its coal exports plummeted 71% yoy to 1.0 mmt, coal imports decreased 65% yoy to 0.4 mmt and power exports dropped 62% yoy to 2.7 TWh in 9M15.

Commenting on the results, DTEK CEO Maxim Timchenko highlighted that “artificial underpayments through tariffs and billions in debts” from the wholesale market operator made a pressure on DTEK’s thermal generation and coal mining. He also stressed that the holding’s mines reduced their tunneling work, which will affect negatively their coal production in the future. As a positive trend, he said that DTEK’s capacity to supply anthracite coal (the main fuel of its two power plants located in central Ukraine) from the occupied territories improved in 3Q15. Stockpiles of anthracite coal at DTEK’s power plants remained at the levels of last year as of end-3Q15.

Alexander Paraschiy: Most of the core data on DTEK’s 9M15 operations in Ukraine was available beforehand, so we see few surprises in this report. The key factor that spoils DTEK’s financials and limits its ability to invest in development is the low rates for electricity that DTEK generates, due to imits imposed by the government.

As a positive pricing development, the power sector regulator (the NERC) raised the cap on the marginal price for all thermal power plants by 13% to UAH 680/MWh since the start of 4Q15. The marginal price is the price of baseload electricity at which all power GenCos in Ukraine are selling it, this price should be a result of open tenders, and it should cover all producers’ variable costs. The bad news is that the cap on marginal price still exists, and it does not allow GenCos to fully cover their variable costs. Another worrying fact is that despite an increase in the marginal price, the total price at which DTEK’s power plants are selling their electricity to the wholesale market did not increase since October. This is because all the other components of total price (set at NERC’s discretion) were reduced.

For instance, in October 2015, the average electricity price of DTEK’s thermal power plants was the same as in 3Q15 and 2% lower compared to September. Even more, the average price of all Ukrainian thermal power plants in the first ten days of November was 7% smaller as compared to October and flat yoy. This means that DTEK has still not been able to solve its electricity pricing issue with the government and the sector regulator. However, we continue to believe this issue will be resolved once demand for heat and electricity increases in the upcoming winter.

As another positive development, DTEK did not import any coal in 3Q15, compared to 1.1 mmt imported in 3Q14, and was able to secure own coal deliveries for its use from the occupied territories. The own coal is much cheaper than imported coal, which should improve DTEK’s profitability. On top of that, being able to destock its coal mines, DTEK won’t freeze its working capital, unlike last year.