OREANDA-NEWS. September 25, 2012.   DTEK, Ukraines largest energy company, released its unaudited consolidated financial statements for the six months that ended on June 30, 2012. Implementation of major investment projects increased DTEK's operational efficiency and enabled the company to retain leading positions in the Ukrainian market.

 Maxim Timchenko, DTEK CEO:
 
DTEK has entered into a new stage in its development a period of high quality integration and modernization of its new assets. The acquisitions in late 2011 and early 2012 allowed us today significantly to increase our operating results. At the same time, we face a challenge in increasing their operational efficiency, reforming of business-processes, considerably changing in both system and attitude towards occupational safety. We understand that the future of our business depends on a quality and well thought out modernization and reconstruction of our entire production chain. For that, despite difficult market conditions, we have increased investment in our businesses: capital investments amounted to USD  500 million in 1H 2012, nearly three times the level in 1H 2011. We understand that sustaining leadership in the industry may be achieved by becoming the nations largest investor.
 
DTEKs key financial results
 
In UAH million  1H 2011 1H 2012 Change, %
Revenue 18,453 38,315 +107.6%
Cost of goods sold (13,664) (32,003) + 134.2%
Gross profit 4,789 6,312 + 31.8%
Gross profit margin 26.0% 16.5% -
EBITDA 5,068 7,898 + 55.8%
EBITDA margin 27.4% 20.6% -
Net profit 2,201 2,447 + 11.2%
Net profit margin  11.9% 6.4% -
Net operating cash flow  2,993 2,602 - 13.1%

 
Revenue by segments
 
In UAH million  1H 2011 1H 2012 Change, %
Coal production and preparation 8,304 4,493 - 45.9%
Electricity generation 4,901 14,262 + 191%
Electricity sales 5,232 15,302 + 192.5%
Heat sales - 4,125 -
Other 16 133 + 732%

 
DTEK's revenue is generated from electricity sales to Energorynok, coal sales, and electricity transmission and sales to end users.
 
In 1H 2012, coal sales accounted for 11.7% (vs. 45.0% in 1H 2011) of consolidated income, electricity wholesale 37.2% (vs. 26.6% in 1H 2011), electricity retail sales 39.9% (vs. 28.3% in 1H 2011), and heating sales 10.8% (vs. 0% in 1H 2011).
 
Financial overview
 
With the macroeconomic situation stable in the first half of 2012, the Company continued the implementation of a large-scale program of investments into operating infrastructure and cost structure optimization.
 
In 1H 2012, the consolidated revenue of the Company grew by 107.6% to UAH 38,315 million vs. UAH 18,453million in 1H 2011. The cost of goods sold increased by 134.2% to UAH 32,003 million. Gross profit totalled UAH 6,312 million, 31.8% more than in 1H 2011 (UAH 4,789 million). The Companys gross profit margin fell by 9.5 pp to 16.5% in 1H 2012.
 
The significant rise in revenue was caused to a large extent by the acquisition of new electricity companies and mines, increased electricity sales and export operations.
 
The increase in the production cost of goods sold is explained by its higher share in volumes and the cost of electricity purchased by network companies from Energorynok, growth in coal consumption and prices, and an increase in the cost of raw materials due to inflation.
 
Operating profit over this period grew by UAH 1,363 million to UAH 5,552 million, compared to UAH 4,189 million in 2011, with the operating profit margin 14.5%, compared to 22.7% in the 1H 2011. These indicators reflect the acquisition of new companies, including low-margin distribution companies, as well as the need for investments to increase the efficiency of operations carried out by DTEK. One of the factors behind the profit growth in 1H 2012 was settlements in line with Resolution No. 517 by the Cabinet of Ministers of Ukraine, which resulted in an increase in operating profit by UAH 994 mln.
 
Net profit grew from UAH 2,201 million in 1H 2011 to UAH 2,447 million.
 
Net operating cash flow declined by 13.1% to UAH 2,602 million compared to UAH 2,993 million in 1H 2011. Capital costs grew by 210% to UAH 4,186 million. In the previous half-year, this figure was UAH 1,344 million.
 
DTEK paid an aggregate UAH 5,404 million in taxes to the budgets of the national and local governments of all levels across Ukraine, 85% more than the UAH 2,923 million it paid last year.
 
Liabilities
 
As of June 30, 2012, the Company's cumulative debt totalled UAH 17,283 million, including current debt of UAH 3,996 million (23.1% of the total amount) and long-term liabilities in the amount of UAH 13,287 million (76.9% of the total amount). Most of DTEK's debt (75%) is denominated in US dollars. Net debt to EBITDA ratio increased from 0.63x to 1.05x as of the end of 1H 2012. Cumulative debt/EBITDA ratio decreased from 1.65x to 1.36x.
 
Credit ratings  Credit agency Rating  Forecast  Last Review Date
Fitch     
 LT FC IDR B  Stable  June 2012
 LT LC IDR B+ Stable  June 2012
 National LT R AA+UKR Stable  June 2012
Moody's      
 LT CFR B2 Stable  March 2012

 
Vsevolod Starukhin, DTEK CFO:
 
We are satisfied with the finance performance in 1H 2012. Further improvement in the financial and operating indicators is the result of consistent implementation of our investment program and a focus on operational efficiency. Successful debt attraction and the consolidation of acquired companies combined with quality corporate governance and the continued confidence of financial institutions allows us to say with confidence that DTEK has the necessary financial stability to implement its strategic business development goals.
 
DTEKs operating results
 
Key production indicators Indicators Unit 1H 2011  1H  2012 Change
Coal production: ths t 11,435.2 20,048.3 8,613.1 75.3%
Coal preparation:         
ROM coal enrichment ths t 6,156.3 13,666.7 7,510.4 122.0%
Concentrate production ths t 3,937.3 9,090.8 5,153.5 130.9%
Power generation kWh mln 16,658.5 25,620.7 8,962.2 53.8%
Electricity purchase from WEM kWh mln 7,048.6 23,606.2 16,557.6 234.9%
Electricity export kWh mln 2,138.3 4,290.8 2,152.5 100.7%
Coal export ths t 1,858 1,466 -392 -21.1%
Coal import ths t 214.1 1 -213.1 -99.5%


Coal production and preparation
 
Coal production by DTEK companies totalled 20 million tonnes in 1H 2012, 75.3% more than in the same period of 2011.

 The increase in coal production was mainly provided by the acquisition of new coal assets: DTEK Rovenkyanthracite (3.7 million tonnes), DTEK Sverdlovanthracite (3.4 million tonnes), Mine Belozerskaya (0.3 million tonnes). At the same time, DTEK Pavlogradugol and DTEK Komsomolets Donbasa Mine produced record amounts of coal over the reporting period: 8.5 million tonnes and over 2 million tonnes, respectively.

 Increased coal production was achieved through renewing purification and tunnelling equipment, competent organization of labour, the use of innovative engineering solutions, training and the improvement of employees' professional skills.At DTEK Komsomolets Donbasa Mine, labour productivity totalled 95 t/person, which was one of the highest rates in the sector.

 In 1H 2012, DTEK invested more than UAH 300 million into longwall equipment, and for purchasing and capital repairs to tunnelling equipment. This helped to reduce the ash content in mined coal, ensured stable production indicators and improved coal mining safety.

 One of the largest projects was the commissioning of longwall #341 at the Pavlogradskaya mine in February 2012. This project was a part of the mines strategic development plan to 2030 with the goal of implementing international best practices on thin-layer coal mining. Total project investments totalled UAH 180.6 million.

 The Company continues to equip its mines with safe mining and transportation equipment. In 2Q 2012, a German Scharf monorail suspension system was purchased to modernize the freight and personnel transportation service at the Dolzhanskaya-Kapitalnaya Mine. Implementation of the project allows for the high-speed transportation of people and equipment, thus providing for accelerated longwall equipment relocation and improved miner safety. Total project investments amounted to UAH 21.6 million.

 ROM coal processing by DTEK enrichment companies came to 13.7 million tonnes in 1H  2012, 122% more than in 1H 2011.Concentrate production rose by 130.9% to 9.1 million tonnes. The main factor behind increased coal processing was the acquisition of DTEK Sverdlovanthracite and DTEK Rovenkyanthracite, which together control six coal processing plants. Coal processing at 'old' DTEK assets increased by 4.6%, and concentrate by 3.8%.

 DTEK invested UAH 79.4 million into comprehensive modernization and technical retrofitting of equipment at its enterprises in 1H 2012. Reconstruction of Pavlogradskaya CPP (with a total budget of UAH 143.2 million) will increase the production capacity of the plant up to 7 million tonnes/year, raise concentrate output by upgrading the technical process and reduce the costs of ROM coal processing. Improvement the enrichment process at Dobropolskaya CPP (with a total budget of UAH 106.7 million) will allow for increasing concentrate output,  enhancing the plants capacity to 4.5million tonnes/year, stopping the use of external settling ponds and resolving issues with storage of liquid waste.

 Projects to reconstruct the machinery and equipment at the Komendantskaya CPP were completed in 1H 2012, which allowed the plant to achieve its designed capacity for ROM coal processing of more than 6 million tonnes/year. Reconstruction and installation of new equipment continued at Sverdlovskaya and Oktyabrskaya CPPs. Completion of this work will facilitate a rise in production capacity and improved quality of the plants' products.

 Power generation

 Electricity supplies by DTEK's generation companies in 1H 2012 totalled 25.6 bln kWh, 53.8% more than in 1H 2011. The significant growth in electricity output was, above all, due to the acquisition of new enterprises the Company acquired three TPPs: DTEK Zakhidenergo, Mironovskaya TPP (within DTEK Donetskoblenergo) and Kyiv CHPP-5 and CHPP-6 (Kyivenergo).

 In 2Q 2012, DTEK continued large-scale modernization of its electricity generation equipment. Unit #8 was commissioned at Kurakhovskaya TPP; the unit was reconstructed in 1Q 2012. The projects cost totalled UAH 527 million. After an upgrade, unit #10 was commissioned at DTEK Luganskaya TPP. The reconstruction enabled an increase in the power units capacity from 175 MW to 210 MW, a reduction in dust emissions by a factor of 3x, and an increase in its flexibile operating range of 35 MW, and an extension in its service life by 15 years. The total cost of the modernization of the unit was more than UAH 370 million.  The unit is now operating in startup mode.

 The reconstruction of units #6 at DTEK Kurakhovskaya TPP, #4 at DTEK Zuevskaya TPP, #5 at DTEK Burshtynskaya TPP, #3 at DTEK Krivorozhskaya TPP, #9 and #11 at DTEK Pridneprovskaya TPP, and #1 at DTEK Zaporozhskaya TPP is underway. These overhauls are expected to be completed in in 2H 2012 - early 2013. The reconstruction of units #13 at DTEK Luganskaya TPP, #3 at DTEK Zaporozhskaya TPP, #1 at DTEK Krivorozhskaya TPP, #8 at DTEK Dobrotvorskaya TPP and #4 at Ladyzhynskaya TPP are being developed; equipment is already being manufactured as per DTEKs order. The projects will start in late 2012 - early 2013.

 As of July 1, 2012, seven of the Company's 62 power units were retrofitted at the nine TPPs of DTEK Skhidenergo, DTEK Dniproenergo, and DTEK Zakhidenergo. Since 2007, DTEK has invested UAH 2.96 billion (net of VAT) into the renovation of electricity generation equipment; the Company plans to allocate a total of UAH 23.33 billion (net of VAT) to overhaul power units until 2018. Starting in 2012, electrostatic precipitators are being reconstructed at all power units to comply with EU dust emission standards (50 g/m3).

 In addition, in 1H 2012, the modernization of power unit #5 at Mironovskaya TPP (within DTEK Donetskoblenergo) continued. One of the reconstruction stages is to retool  the boiler. This will make it possible to raise the reliability of the equipment, to reduce specific fuel consumption for electricity supply from 572.3 g/kWh to 435.8 g/kWh and to reduce auxiliary consumption of electricity from 16.94% to 9.87%. Unit reconstruction is planned to be completed in 2013.

 Plans for the reconstruction of power plants are expanding, first of all, due to wear and tear on the TPPs equipment as well as due to new technical solutions from the manufacturers of the plants. The large-scale modernization of DTEKs equipment is a serious motivational factor for activity in all sectors related to electricity generation in Ukraine.

 Electricity distribution and sales

 Electricity purchase by DTEK electricity distribution companies from Ukraines wholesale electricity market grew more than three times to 23.6 bln kWh in 1H 2012. The growth can be attributed to the acquisition of new electricity distribution enterprises, as well as to increased electricity demand from its key consumers: coal companies and households.

 DTEK's electricity distribution companies in 1H 2012 continued to implement investment projects aimed at technical modernization and the construction of new substations, and upgrading and construction of electricity transmission lines.DTEK Donetskoblenergo completed reconstruction projects at substations 110 kV Kalinovka and Scherbakovskaya (Donetsk). Reconstruction work at the 110 kV Telmanovo-Voykovo transmission line was started in 2Q 2012 (Donetsk region); the work is expected to be completed in 2H 2012. Kyivenergo completed a major overhaul of CHPP-5 unit #2.

 In general, in 1H 2012, DTEKs electricity distribution companies spent UAH 431.28 million (including VAT) on the reconstruction and construction of their distribution networks and substations. Kyivenergo also allocated UAH 49.1 million to upgrade its generation facilities. The implementation of these projects will improve the reliability of electricity supplies to industrial and household consumers and associated licensees and to minimize potential economic losses.

 In total, the following investments into electricity distribution networks are planned for 2012: Service-Invest UAH 202.1 million, DTEK Energougol UAH 43.6 million, DTEK Donetskoblenergo UAH 329.4 million, DTEK Krymenergo UAH 235.8 million, and DTEK Dniprooblenergo UAH 386.1 million. Kyivenergo plans to invest over UAH 1 billion into its generation facilities, and electricity and heating distirbution networks in 2012.

 Export and import operations

 Electricity exports increased in 1H 2012 by more than twofold to 4.3 bln kWh (+100.7%).

 Total coal exports in 1H 2012 amounted to 1.5 mln tonnes, down 21% YoY. The reduction in export volumes was the result of reduced demand in foreign markets and a decrease in the price for thermal coal since 1H 2011.
 
Yuriy Ryzhenkov, DTEK Chief Operating Officer:
 
Today, the most important issue for DTEK and the entire energy sector of Ukraine as a whole is to attract investment. Power plants, electricity grids and coal mine equipment have been subject to significant wear and tear and require urgent modernization. DTEK invests billions of hryvnias into modernization programs every year. Only in Power generation segment we finished the largest in the Ukrainian history reconstruction of seven installed energy blocks. Total investments amounted to almost UAH 3 bln and it is planned to invest till 2012 more than UAH 23 bln in this segment.
 
Key events
 
January 2012. DTEK signed a contract to acquire 45.103% of shares in Zakhidenergo from the State Property Fund of Ukraine. The price of shares was UAH 1.932 billion. Via the transaction, DTEK concentrated 70.91% of the generation companys shares.
January 2012. DTEK won an auction held by the State Property Fund of Ukraine for 40.061% of shares in Donetskoblenergo for UAH 467.6 million. Via the transaction, DTEK concentrated 71.34% of the electricity distribution companys shares.
March 2012. DTEK acquired the corporate rights to Mine Belozerskaya. DTEK Holdings B.V.s share in Mine Belozerskaya currently totals 95.4%.
March 2012. DTEK signed a contract to acquire a 25% stake in Dniproenergo with the State Property Fund of Ukraine. The price for the shares was UAH 1,179.7 million. Via the transaction, DTEK concentrated 72.9% of the generation companys shares.
March 2012. DTEK Kurakhovskoy TPP commissioned unit #8 in 1Q 2012. The projects total cost was UAH 527 mln. DTEK continued large-scale electricity equipment modernization projects in 2Q 2012.
April 2012. DTEK won an auction held by the State Property Fund of Ukraine for 50% of shares in Dniprooblenergo for UAH 660.1 million. Via the transaction, DTEK concentrated 51.505% of the electricity distribution companys shares.
June 2012. DTEK started received the first equipment to construct the Botievo wind farm.
June 2012. DTEK acquired its first coal assets abroad, purchasing three mines and a coal preparation plant from Rostovsky Anthracite.
Key events after the reporting period
 
July 2012. DTEK entered into a framework agreement with the Russian company Inter RAO UES for electricity supplies to the Russian Federation.
July 2012. DTEK finished reconstruction of seven power units. Since 2007 DTEK invested in Power generation equipment modernization more UAH 2.9 bln (VAT is not included).
August 2012. DTEK restarted coal supplies to Bulgaria.
September 2012. DTEK concluded contracts for anthracite supplies to Brazil and Ethiopia.

 Social responsibility

 Sustainable development is an integral part of DTEKs business strategy. The Company continued its social partnership activities in the regions where it operates. The key areas of social investments in 2012 - 2013 are: energy efficiency in utilities, health care, the development of socially important infrastructure, development of the business environment, education, culture and sports. Total amount of social investments in 2012 is planned to be more than UAH 60 mln that is 2x more than in 2011. Social infrastructure maintenance is forecasted to reach UAH 300 mln level in DTEK.

 In early 2012, DTEK's management decided to draw up three-year Social Partnership Strategies to be signed between DTEK and each city or town where it operates to improve the efficiency of the Company's social investments and establish the conditions for the long-term sustainable development of the local communities. The strategies are developed by task forces involving representatives of local and regional authorities, communities and experts, as well as DTEKs specialists. As a result, the projects focused on the most promising opportunities for development in each city or town and resolutions to the most acute social issues were short-listed.
In February 2012, DTEK launched the project Improvement of Miners Health and Safety in Eastern Ukraine. The UN Development Program in Ukraine and Metinvest Holding are DTEKs partners in this project. In pilot cities (Rovenky, Sverdlovsk and Krasnodon), an evaluation of miners' health and safety is currently in progress, including the following:
 
Secondary data from the mines, health care authorities and state institutions is being collected
Interviews, focus groups and questionnaires are being conducted to obtain first-hand data
Data is being processing and interpreted in the context of the target cities/towns

 Independent medical examinations of a statistically relevant number of mine employees is also being conducted. Based on the research, action plans will be developed to improve the situation in each city/town in order to prioritize the communities' needs with regard to health care and to maximize resources available to satisfy those needs. The action plans will present a combination of preventive and urgent measures with regard to health care issues that are based on the priorities set forward by the communities and will be implemented within the second stage of the project. DTEKs investments in the first stage of the project totalled UAH 320,000. Within the second stage in 2012, the Company plans to invest about UAH 5 million.

 Moreover the Telemedicine project is continuing at hospitals in Lviv and Burshtyn, and the was expanded to cover Pavlograd (Dnipropetrovsk region), Sverdlovsk (Luhansk region), Dobropolye, Kirovskoye (Donetsk region), and Ladyzhyn (Vinnitsa region).
DTEK maintains close cooperation with the USAID project Municipal Heating Reform in Ukraine. Pilot sites have been determined in the cities of Kyiv and Dnipropetrovsk where a set of energy efficient measures will be implemented. DTEK allocated UAH 3 million and UAH 2.8 million, respectively, to finance these facilities. The towns cooperate with the USAID project on the following issues:
 
Training of specialists and assistance in the development of municipal energy plans;
Energy auditing of standardized buildings and heating supply systems;
Research and implementation of standard projects on the installation of heating records and regulation systems, assistance in the establishment of apartment owner associations;
Implementation of demo energy efficiency projects on the basis of mutual financing.

 In May 2012, a City of Sport was opened in Kyivs Hydro Park a sports area with modern stadiums, sports grounds and a reconstructed beach established with DTEK's assistance. The project was designed to promote a healthy life style among Kyiv residents, creating a free zone for outdoor activities, and the development of children's and youth and amateur sports. DTEKs investments into the project totalled UAH 3 million. In spring and summer 2012, the first professional and amateur classic and beach football competitions took place at the newly-constructed sports facility.

 In September 2012, DTEK became a co-founder and participant of the energy companies' social initiative Energy for Society. The Company also extended its membership in CSR Europe the largest European business association uniting over 70 transnational corporations. DTEK also continued its membership in the Global Compact Alliance in Ukraine.