OREANDA-NEWS. Key financial indicators of the Company for the reporting period:
 
Revenue: UAH 43,776[1] million
EBITDA: UAH 7,023 million
Net profit: UAH 1,197 million
Capital investment (in tangible assets): UAH 4,540 million

DTEK, Ukraine's largest energy company, announced its unaudited consolidated financial statements for the six months ended 30 June 2013.

 ‘‘We were able to increase production at DTEK’s coal enterprises and electricity sales by our electricity distribution companies,” said Maxim Timchenko, DTEK CEO. “This was the result of on-going reforms of internal processes in DTEK and the consolidation of new companies. Unfortunately, at the same time market experienced considerable increase in the debts of state-owned mines and water utilities for electricity, general electricity consumption decrease as well as the surplus of local coal in the market. We understand the financial deficit in the energy system and the surplus of coal on the local market will continue to grow and it is quite doubtful to get the long-term effectiveness of Ukrainian energy industries without conduction of systematic reforms. At the same time, DTEK still has a good safety margin and is continuing a large-scale investment program to modernize its enterprises. We have also done everything possible to maintain planned social investments in regions where we operate. We believe all these investments provide a good basis for overcoming the challenges ahead’’.
DTEK’s revenues were generated by the sale of electricity to state enterprise Energorynok, sale of coal, distribution of electricity to end customers, and sale of heating.
 
In the first half of 2013, the share of sales in the coal mining and electricity generation segment amounted to 49.1% (compared to 55.9% in the first half of 2012) of consolidated revenue; sales of wholesale electricity amounted to 43.5% (compared to 34.3% in the first half of 2012); and sales of heating (taking into account compensation for the difference in heating tariffs) was 6.9% (compared to 10.8% in the first half of 2012).
 
Financial performance
 
The Company continues to implement a large-scale investment program in infrastructure and optimization of its cost structure in 2013.
 
The consolidated revenue of the Company for the first half of 2013 increased by 14.9% to UAH 43,776 million compared to UAH 38,103 million in 2012. The cost of goods manufactured rose by 22.8% to UAH 39,056 million. Gross profit amounted to UAH 4,720 million, which is 25.0% lower than in the first half of 2012 (UAH 6,291 million). The decrease was mainly due to declining profits from the sale of coal due to DTEK Dniproenergo and DTEK Zakhidenergo consolidation, changes in market conditions and sales’ structure as well as reduction in the amount of compensation for the difference in heating tariffs. The reduction in the compensation for the difference in heating tariffs of Kyivenergo by UAH 1,147 million was mainly due to the transition to an accounting method based on the accrual of current liabilities, while the results from the first half of 2012 reflected compensation for the difference in heating tariffs for 2009-2012.
 
These factors, as well as an increase in the share of the low-margin electricity distribution segment and drop in profitability from trading operations and exports led to a decline in the gross profit margin by 5.7% to 10.8% in the first half of 2013.
 
The significant growth in revenue was largely related to an increase in electricity distribution due to the consolidation of new electricity distribution companies acquired in 2012 for the full period.
 
The increase in the cost of goods manufactured was the result of changes in the cost structure - a significant rise in the share of the volumes and cost of electricity purchased by distribution companies from Energorynok, growing payroll costs, growth in royalties and taxes, and an increase in depreciation due to the implementation of the investment program and the effect of the consolidation of new electricity distribution companies acquired in 2012 for the full period.
 
Net profit for the period decreased from UAH 2,962 million in 1H 2012 to UAH 1,197 million, mainly due to the drop in gross profit and increased financial expenditures associated with credit portfolio growth.
 
Net operating cash flow decreased by UAH 2,418 million to UAH 1,987 million. The main reasons were a decline in profit before tax, an increase in prepayments of income tax due to changes in the Tax Code, and an increase in interest payments due to credit portfolio growth. Working capital showed a positive dynamics reflecting the repayment of receivables under the Resolution of the Cabinet of Ministers of Ukraine #517 in 2012 to UAH 2,273 million (including the difference in heating tariffs), which was partially offset by an increase in coal reserves by UAH 237 million.
 
Capital expenditures rose by 8.5% to UAH 4,540 million. This change was primarily due to the amount for the reconstruction of TPPs that increased to UAH 616 million and growth in investments in electricity distribution companies acquired in 2012 to UAH 125 million, against a background of curtailed investment in coal companies and the completion of the first phase of construction of the Botievo Wind Farm.
Debt obligations
 
As of 30 June 2013, the Company’s debt amounted to UAH 23,299 million, including current debt of UAH 3,676 million (15.8% of the total amount) and long-term liabilities of UAH 19,623 million (84.2% of the total amount). The net debt to EBITDA ratio equalled 1.3x as of 30 June 2013. The total debt to EBITDA ratio amounted to 1.5x.
Vsevolod Starukhin, DTEK’s Chief Financial Officer, said:
 
“The financial results of the first half of 2013 were largely influenced by the conditions of the market in which DTEK operates in, as well as by the need to implement the investment program at production companies acquired in 2012. We plan to continue the implementation of the investment program, which is focused on improving operational efficiency. Successful debt financing, including the issuance of USD 750 million in Eurobonds, in conjunction with our high-quality corporate governance system have enabled us to say that DTEK has the necessary financial strength for the continued successful implementation of its strategic goals for business development."
“Coal consumption decreased because of a reduction in electricity consumption by industrial enterprises and the decrease in the number of operating power units of thermal power plants following the accident at Uglegorskaya TPP,”said Yuriy Ryzhenkov, DTEK’s Chief Operating Officer. “In this regard, we did not increase coal production and processing. In fact, production at our enterprises remained at the same level as last year. A partial solution would be to significantly increase exports since electricity export transactions make it possible to load our capacity to the maximum and consume coal”.
 
The overall performance of DTEK in terms of increased electricity purchases from the wholesale market was due to the acquisition of new electricity distribution companies (DTEK Dniprooblenergo and DTEK Krymenergo), whose results have been consolidated since April and May 2012, respective. At the same time, a major problem with electricity distribution remains non-payment for consumed electricity by water utilities and state-owned mines, which negatively influences the financial condition of electricity distribution enterprises.
 
Coal production and processing

 DTEK’s enterprises increased coal production by 0.2% year-on-year in the first half of 2013. The company continued increase occurred despite a decline in coal production in the second quarter by 1.2%.

 DTEK’s coal processing plants also raised production in the first half of the year: ROM coal processing increased by 4.6% year-on-year and production of concentrate grew by 4%. The growth was due to the acquisition of Russian coal
 companies (three coal mines and one processing plant).

 Factors affecting the production performance:

surplus of coal remaining in the coal market, particularly G grade, caused by the reduction in the number of operating power units of thermal power plants;
inclusion of coal production and processing by Russian enterprises acquired in July 2013 into the data for the first half of 2013.
Electricity generation

 DTEK’s electricity generation enterprises’ supplies grew 2.9% year-on-year in the second quarter of 2013. Yet, overall for the first half-year, the company reduced electricity supply by 5.2% due to the effect of the first quarter.

 Factors affecting the production performance:

increase in electricity supply by HPPs by 42.9%, which resulted in a reduction in electricity generation by other types of producers;
electricity generation by Kyivenergo fell by 32% to cut its consumption of natural gas;
electricity consumption by industrial consumers decreased by 7.6% and by household consumers by 0.9%
electricity sales by the Botievo Wind Farm to the energy market started on 1 January 2013.

 Electricity distribution

 DTEK’s electricity distribution companies increased electricity purchased from the Wholesale Electricity Market (WEM) by 29% year-on-year in the first half of 2013. This growth was the result of the acquisition of DTEK Dniprooblenergo and DTEK Krymenergo, which joined the Group in spring 2012. That said, in the second quarter of 2013, DTEK’s distribution companies reduced their electricity purchases by 1.3% due to lower demand from industrial enterprises.

 Factors affecting the production performance:

consolidation of DTEK Dniprooblenergo and DTEK Krymenergo electricity distribution companies indicators
lower electricity sales by Service-Invest due to reduced demand from iron and steel companies (which account for 80% of Service-Invest’s total electricity supplied);
lower electricity consumption DTEK Donetskoblenergo’s household customers (which accounts for about 40% of DTEK Donetskoblenergo’s total electricity supplied).

 Commercial operations

 Coal export

 The Company increased coal exports by 633.5 thousand tons in the first half of June 2013 compared to the first half of 2012. The 43.2% increase in coal exports in1H 2013 was the result of increased supplies to the Russian Federation, Moldova, China, Belgium, Turkey and other countries.

 Factors affecting the production performance:

consolidation of DTEK's position in traditional sales markets and access to the Asian coal market.
extended cooperation with iron and steel companies in China and South Korea, which confirms the effectiveness of the use of anthracite for coking coal replacement technologies in blast furnaces.
conclusion of contracts with several international energy companies for the supply of coal to meet the needs of thermal power plants in Europe.
resumed supplies of thermal coal (G and DG grades) to Mediterranean countries.
rise in the efficiency of export operations and increased share of direct sales to end consumers in Europe.
The absence of coal imports was due to the sufficiency of internal coal resources for the Company’s electricity generation facilities.
 
Electricity exports

 The Company increased electricity exports by 655.6 million kWh in the first half of 2013 compared to the analogous period of 2012. Export volumes grew for all countries: Moldova, Slovakia, Hungary, Romania, Poland, and Belarus.

 Factor affecting the production performance:

increase in throughput capacity of the cross section of Ukrenergo National Energy Company from 500 MW to 650 MW. This growth was due to equipment modernization and relay protection of the Burshtyn TPP’s power grid, as well as due to the conclusion of agreements on emergency backups of approved exports with system operators in the Continental Europe regional group in adjacent power systems.    

 Oil&gas
 
DTEK’s entry into the oil & gas industry was caused by the need to provide resources to its own electricity generation facilities and the other SCM Group enterprises, which is estimated at about 6 billion cubic meters per annum. The company reached an agreement to acquire a stake in Naftohazvydobuvannya, the largest private gas company in Ukraine with the potential to produce 1.5 billion cubic meters, in early 2013. DTEK began importing natural gas from Europe in July 2013: the volume of imports until the end of the year will be adjusted based on economic feasibility and market conditions in the Ukrainian and European gas markets.

 “DTEK’s commercial business results in the first half of 2013 were significantly affected by the market conditions, both in Ukraine and beyond its borders,” said Andrey Favorov, DTEK’s Commercial Director. “Despite 13% coal prices decline, DTEK coal products change and average 20% electricity prices decrease, export revenues amounted to USD 476 million. Till the end of 2013 DTEK plans to implement its export operations plans fully”.

 Investments in production

 Coal mining

 DTEK directed UAH 627 million into the technical re-equipment of longwalls in the first half of 2013, UAH 240 million of which was invested into the renewal of tunnelling equipment and modernization of the transport chain. In particular, the company spent UAH 128 million to purchase new coal mining equipment for the Obukhovskaya mine (Russian Federation).

 The replacement of outdated equipment makes it possible to improve working conditions for miners, while raising efficiency and productivity at the same time. DTEK's coal mining enterprises maintained high labour productivity rates: DTEK Mine Komsomolets Donbasa – 97.6 tons/human-month, DTEK Pavlogradugol – 86.1 tons/human-month, and DTEK Sverdlovanthracite - 68 tons/human-month.

 The company resumed construction of the air supply shaft at the Vakhrusheva mine of DTEK Rovenkyanthracite in the second quarter and started the project to increase the throughput capacity of the hoisting facility at the Geroiv Kosmosu mine of DTEK Pavlogradugol.

 In addition, construction of the following facilities continued:
 
air supply well at the Dobropilske mine of DTEK Dobropolyeugol (total budget of the project: UAH 75.6 million);
vertical air supply shaft at the Frunze mine of DTEK Rovenkyanthracite (total budget of the project: UAH 214.7 million);
ventilation shaft #3 at the Yuvileina mine of DTEK Pavlogradugol (total budget of the project: UAH 235 million).
The construction of the wells and shafts will make it possible to ensure the ventilation of coal extraction sections in the mines. This will raise the safety level, maintain coal production at the current level, and further increase the latter by providing mines with the necessary amount of air. The modernization of the coal hoisting facility at the Geroiv Kosmosu mine will increase its capacity to 3 million tons per year starting from 2015 (total project budget of the project: UAH 117 million).

 Electricity generation

 The company began to retrofit power unit #1 of the Kryvorizka TPP in the second quarter of 2013, which will ensure reliable performance and extend its service life by 15-20 years. In addition, the capacity of the power unit will be increased to 33 MW, its manoeuvrability range will grow from 100 MW to 215 MW, and specific fuel consumption will decline by 7.5%. Since 2012, as part of TPP power unit modernizations, DTEK has been retrofitting electrical precipitators to achieve dust emission levels in accordance with Directive 2001/80/EC.

 The company is also continuing the technical re-equipment of power units #13 at Luganska TPP, #5 at Burshtynska TPP and #8 at Dobrotvirska TPP, all of which are scheduled for completion before the end of the year.
DTEK will invest a total of UAH 1,998 million into these projects, of which UAH 360.3 million will be used to retrofit the electrical precipitators.

 Electricity distribution

 DTEK’s distribution companies completed projects to retrofit and construct new substations in the first half of 2013. All of the projects were designed to improve the reliability of electricity supply to industrial and household consumers and adjacent licensees. To improve the quality of its service, the company is developing online services for electricity payments and opening modern Customer Service Centres (CSCs) that will operate on a ‘single-window’ basis.

 Retrofits of the following substations were completed:
 
Zhavoronki substation (DTEK Krymenergo), which supplies electricity to the pump stations of Mezhgornyi Water Supply Centre and Saki Irrigation System Centre that supply water to household consumers in Simferopol, Yevpatoria, Saki and some districts of Sevastopol;
Mayak substation (DTEK Krymenergo), which supplies electricity to the resort area near Yevpatoria;
Moskovskaya substation (Kyivenergo), which supplies electricity to the capital’s five power centres, has reached its design capacity.
The following projects are underway:
construction of the Gorod 11 substation (DTEK Donetskoblenergo) to improve the reliability of power supply to the central districts of Mariupol and ensure the needs for infrastructure being developed in Oktyabrskiy, Primorskiy, Zelenyi, and Krasnoflotskiy districts (total product budget: UAH 46.5 million);
technical re-equipment of the Novotroitskaya substation (Service-Invest), which feeds the Water of Donbass utility, JSC Novotroitskoe Rudoupravlenie, and the Donetsk Western Electric Networks sub-division of DTEK Donetskoblenergo (total project budget: UAH 51 million);
retrofit of the Yelenovskaya substation (Kyivenergo) to ensure the connection of new consumers in the central part of the city of Kyiv and Podol district (total project budget: UAH 130.2 million);
upgrade of outdoor switchgears at CHPP-5 (Kyivenergo) to cover the electricity consumption deficit in the city of Kyiv’s central districts and improve operational reliability during hot weather (total project budget: UAH 385.4 million).

 Key events of the reporting period
 
January 2013. Power unit #4 of DTEK’s Zuivska TPP was connected to the power system of Ukraine after reconstruction. Modernization of the power unit improved the reliability of the equipment and significantly reduced the environmental impact. Investments in the modernization of the unit amounted to UAH 252 million.
February 2013. DTEK and the Trade Union of Coal Industry Workers set up a task force to enhance social benefits for miners. The decision was made due to the deterioration of the economic situation in the coal industry of the country.
February 2013. DTEK launched the Energy Efficient Schools pilot project at educational institutions in Kyiv. As part of the project, the elective course Fundamentals of Heating Supplies and Heat Savings was taught in the capital's schools from February to May. Students of the course created projects to improve the energy efficiency of their schools. DTEK allocated UAH 1 million for the implementation of these projects at all 11 schools that participated in this pilot initiative.
March 2013. DTEK, East European Foundation, Sokal Agency for Regional Development, and the British Council in Ukraine announced the launch of a new project to support social entrepreneurship. The project, in which DTEK invested UAH 1 million, is aimed at improving the competitive position of regions where DTEK operates by strengthening their economic potential. Agencies for Local Economic Development are being established as part of the project and funds have been allocated to support and promote social enterprises.
March 2013. The modernization of power unit #6 at DTEK Kurakhovska TPP was finished. The work was carried out in a record time of 11 months. The total investment in the project amounted to UAH 583 million. The main equipment of the power unit – turbine, boiler, generator, transformer and electrical equipment – was revamped with the use of new technical solutions.
April 2013. DTEK announced that it reached an agreement to acquire a stake in Naftohazvydobuvannya from its current shareholders, and SCM decided to assign 25% of shares in Naftohazvydobuvannya to DTEK. The transaction between DTEK and the shareholders of Naftohazvydobuvannya will be completed after the approval of the Antimonopoly Committee of Ukraine. This will result in DTEK becoming the enterprise’s majority shareholder.
April 2013. DTEK priced USD 750 mln Eurobonds with coupon 7.875% due in 2018. Proceeds were used for a partial buyback of bonds of the previous issue as well as DTEK general corporate purposes, including but not limited to financing working capital and CAPEX current programs as well as paying debts.
June 2013. Wind Power LLC, a subsidiary of DTEK, has signed a loan agreement in the amount of ˆ 138 million for the Second Phase of the Botievo Wind Farm. The construction is expected to be finished in 2014. The loan was granted by the LandesBank Berlin (LBB), one of the largest banks in Germany. The loan has a tenure of 10 years and will be used for financing the second stage of the Botievo wind farm, which includes thirty five Vestas wind turbines V112-3,0 MW with total capacity of 105 MW.
June 2013. DTEK set up a trading company in Switzerland to provide direct access to European energy markets. DTEK Trading SA was registered on 20 June 2013 in Geneva, Switzerland. DTEK Trading SA will carry out the bulk of commercial operations with coal and electricity on European markets.
Key events after the reporting period
 
July 2013. DTEK began importing natural gas from Europe. The volume of imports until the end of the year will be adjusted based on economic feasibility and market conditions in the Ukrainian and European gas markets. DTEK's entry into the oil & gas business was caused by the need to provide resources to its own electricity generating facilities and other SCM Group enterprises, which is estimated at about 6 billion cubic meters per annum.
August 2013. DTEK launched a program to create new jobs in regions where the Company’s enterprises operate. DTEK’s existing and potential contractors were invited to participate in the program. All other conditions with respect to price and quality being equal, the Company, in awarding contracts, is ready to give preference to suppliers who create new jobs in the regions where DTEK operates.
Sustainable development

 The total costs of DTEK for sustainable development projects, including social partnerships with cities where the Company operates, health and safety, environmental protection, and maintenance of social assets totalled more than UAH 1.5 billion in the first half of 2013. Most of the expenditures are planned for the second half of the year.

 Social investments into the development of regions where DTEK operates totalled UAH 43.5 million. Until the end of the year, it is planned to invest about UAH 144 million in social projects, including UAH 120 million as part of the three-year Social Partnership Strategies with regions where the Company operates and about UAH 24 million into the Development Fund of Luhansk region.

 DTEK started the implementation of three-year Social Partnership Strategies with 22 populated territories where the Company operates in 2013. Civil society organizations, representatives of municipal governments and city councils, and active citizens are being actively involved in the process. Social projects are being implemented in five main areas: energy efficiency in the utility sector, health care, support of socially relevant infrastructure, development of the business environment, and increasing community participation.

 DTEK spent UAH 290 million on the maintenance of social sector assets and non-commercial facilities in the first half of 2013. Most of the expenditures were spent on the maintenance of boilers, health and recreation resorts, housing facilities on the books of enterprises, public food facilities, and sports and recreation facilities.

 The costs of projects in the field of occupational health and safety at DTEK’s coal mining, electricity generation and electricity distribution enterprises amounted to UAH 280.2 million. The funds were used for the purchase and maintenance of small tools and equipment, ventilation and gas drainage in the coal mines, purchase of personal and collective protection equipment, fire protection equipment, repair and maintenance of facilities, and for bringing capital assets and work places in line with the requirements of rules and regulations.

 The environmental costs of DTEK in the first half of 2013 amounted to UAH 919.6 million. These investments were focused on measures to protect the air, reduce the emissions of thermal power plants, reclaim land areas, protect water resources, and organize proper handling of hazardous and toxic substances and materials.
 
Key events in social partnership sphere

April 2013. DTEK and the Ivano-Frankivsk Oblast Administration signed an agreement to cooperate on the social and economic development of Ivano-Frankivsk region within the framework of their social partnership. In the course of 2013, DTEK plans to allocate UAH 7.2 million for the implementation of priority projects for the development of the region and the city of Burshtyn.
April 2013. DTEK implemented its first corporate volunteering project. Over 8,600 DTEK employees participated in the Clean City campaign. Volunteers in 24 cities collected over 600 tons of inorganic waste that was sent to sorting lines and duly disposed of.
May 2013. DTEK, the Luhansk Oblast Administration, and Luhansk Oblast Council signed an addendum to their agreement to cooperate on the social and economic development of Luhansk region from 2 March 2012. Separately, a decision was made to establish a development fund for Luhansk region. The new fund should be an effective mechanism to attract financial resources from international and national grant programs to address social issues of the region. The key objective of the fund will be the organization of a new industrial park near the cities of Sverdlovsk and Rovenki.
May 2013. DTEK, the United States Agency for International Development, and the Kyiv City Administration opened the first energy-efficient school in Kyiv. DTEK invested UAH 3 million to improve the energy efficiency of a school and a kindergarten in the capital. These projects were the final stage of the joint work of DTEK, USAID and the Kyiv City Administration.
June 2013. DTEK, the Dnipropetrovsk Oblast Administration, and the Dnipropetrovsk Oblast Council signed a Memorandum of Cooperation on Social and Economic Development Issues of Dnipropetrovsk Region. The Company will double social investments in Dnipropetrovsk in 2013.
Key achievements in the health, safety and environmental protection sphere
 
The health and safety management systems of DTEK Pavlogradugol, DTEK Mine Komsomolets Donbasa, DTEK Dniproenergo, DTEK Donetskoblenergo, and DTEK Dniprooblenergo passed a compliance audit, validating conformity with the requirements of OHSAS 18001:2007.
Independent auditors from the international company Moody International confirmed the compliance of the environmental management systems (EMS) of DTEK Dniproenergo, DTEK Donetskoblenergo, and DTEK Dniprooblenergo with ISO 14001:2004.
Performance tests of the electrical precipitators installed at power unit #4 of DTEK’s Zuivska TPP and power unit #6 of DTEK Kurakhovska TPP were accomplished. Residual dust content of less than 50 mg/Nm3 was achieved, which meets the requirements of European Directive 2001/80/EC. The electrical precipitators are equipped with an automated system for monitoring exhaust gases (SMUG).

 "We began actively working on two new areas of social partnership in 2013 - the formation of the business environment and the increased participation of communities,” said Alexander Tolkach, DTEK’s External Affairs Director. “To this end, we created Local Development Agencies in 14 cities. These agencies will deal directly with the attraction of investments in these cities and search for new opportunities for their residents. We decided to develop projects for three industrial parks in regions where we operate (near Sverdlovsk/Rovenki, Pavlograd, and Burshtyn). As a result, we should come to the point when the cities will become as independent from big business as possible, and are able to develop successfully and sustainably on their own.”