DTEK’s Luhanska Power Plant runs out of coal stockpiles

The Luhanska Thermal Power Plant of DTEK Energy
(DTEKUA) has run out of its coal stockpiles and has had to switch to burning
natural gas, the Interfax-Ukraine news agency reported on Nov. 6, citing Luhansk
regional deputy head Yuriy Klymenko. He clarified that the plant can burn both
coal and natural gas, while coal is much cheaper. Coal supplies to Luhanksa TPP
can be only made by railway from Russian territory, but the Russian side has
been blocking such supplies since October.

Due to higher costs related to burning natural gas,
Luhanska TPP has requested the ability to raise its electricity rate. In turn,
Ukraine’s Cabinet has agreed to allow a higher rate at the expense of other
power producers (i.e. without revising the average price of all power
producers), according to Andriy Gerus, an industry expert. However, the power
sector regulator, so far, has not approved the Cabinet’s initiative.

The primary fuel of Luhanska TPP is anthracite, which
was supplied from DTEK-related Russian mines that are located about 70 km away.
The plant is the only producer of electricity for most of the
Ukrainian-controlled part of Luhansk region.

Alexander Paraschiy: By burning
natural gas instead of coal, Luhanska TPP will generate about UAH 1.3-1.4 of
losses per KWh produced at the current electricity prices. At about 200 GWh of
monthly output of the plant, it will generate monthly about USD 9-10 mln in
losses without price revisions. (Moreover, its status as the only power
producer in the region forbids radically reducing its power output.) Such
losses are significant at 11-12% of DTEK’s average monthly EBITDA for the last
reported 12 months.

The coal supply blockade affects the fundamentals of
DTEK Group’s Russian mines (which are not consolidated by Eurobond issuer DTEK
Energy since 2016). The poor performance of these mines is clearly detrimental
for Russian authorities: DTEK is a large employer in the Russian mining sector,
while its Russian mines owe a lot to Russian state-controlled banks (USD 436
mln as of mid-2016). For that reason, we expect the blockade of DTEK’s coal
supply to Ukrainian power plants will be short-lived.

If not, we expect the Ukrainian regulator will apply a
higher price on Luhanska TPP’s electricity by 1Q19 certainly, if not in the
coming days. Therefore, the coal supply crisis may affect negatively DTEK
Energy’s 4Q18 results, but won’t affect its further P&L. All in all, we
remain neutral about DTEKUA Eurobonds.