DTEK PEM Enerhovuhillia PAT : Audited consolidated financial results of DTEK Energy for 2015

18.03.2016

Kyiv, 18 March 2016

DTEK Energy has announced the results of the audited consolidated financial statements for 12 months of 2015 that ended on 31 December 2015.

'The energy sector is the best marker of economy,' says DTEK Energy CEO Vsevolod Starukhin, commenting on the 2015 company's performance. 'We realised that the economic situation in Ukraine in 2015 would remain extremely difficult, and the main challenge for the fossil fuel-fired generation would be to provide the Ukrainian citizens with electricity when facing the shortage of anthracite. DTEK Energy's electricity generators and miners met all their obligations, which was a big contribution to the country's successful going through the heating season. Yet, our financial results of the year are negative as the company continues to operate at economically unsound tariffs and with a large debt owed by the state-owned company Energorynok. Though electricity tariffs for households and industrial consumers grew considerably, this had no impact on the financial performance of the fossil-fuel generation because the funds were mainly allocated to other types of generation. On top of that, there is also a 20% drop in electricity output by the company and state-owned company Energorynok's growing debt to our company amounting to UAH 5.2 billion. Consequently, DTEK Energy ended the year with a net loss of UAH 37.4 mln. Nevertheless, against the deep backdrop of economic decline and the almost 50% inflation, our team made everything possible to mitigate the impact of the external factors on the financial position of the company and on dozens of thousands of DTEK's employees.'

Brief overview of DTEKEnergy's financial results

UAH mln	2015	2014	Change, +/-	Change, %
Revenue	93,622	91,946	1,676	+1.8
EBITDA	4,087	12,019	-7,932	-66
EBITDA margin	4.4%	13.1%	-8.7 p.p.	-
Net loss*	-37,399	-19,648	-17,751	-90.3
Capital investment	4,061	5,367	-1,306	-24.3

The 2014 financial result does not include the results of DTEK OIL&GAS and DTEK Renewables' companies, and the impact of operating exchange rate differences is reflected in the costs not included in EBITDA.

Revenue by segment

UAHmln	2015	2014	Change, +/-	Change, %
Electricity sales to end consumers	46,830	43,660	3,170	7.3
including electricity exports	3,230	5,077	-1,847	-36.4
Electricity sales to SE Energorynok	32,648	34,252	-1,604	-4.7
Steam coal sales	4,149	5,300	-1,151	-21.7
Including coal exports	2,770	3,827	-1,057	-28
Heat sales	5,611	3,536	2,075	58.7
Other	4,384	5,198	-814	-15.7
Total	93,622	91,946	1,676	1.8

1. Overview of the financial results

The company's consolidated revenue for 2015 grew by 1.8%, or UAH 1.7 bln, YoY.

The net loss for the reporting period amounted to UAH 37,399 mln. Despite the declined output, the cost of production increased in absolute terms by 9%, or UAH 7 bln, compared with 2014.

High inflation growth rates, the increased cost of process fuel, equipment and consumables and growth of railway tariffs resulted in the higher cost of electricity production, which were not compensated by the tariff set for the thermal power plants (TPPs) of DTEK Energy. Thus, the company's thermal generation operated with a negative profitability. During the entire 2015, the cost of sold electricity and heat exceeded the tariffs set for their production. At that, the overdue debt of the state enterprise Energorynok for the electricity produced by the company in 2015 increased by UAH 3 bln, aggravating our liquidity position even further. As of 1 January 2016, the total debt of Energorynok was above UAH 5 bln.

The other negative factors that had a material impact on the company's performance were: losses related to foreign exchange differences, costs related to a decrease in the value of the property, plant and equipment and losses of the companies located in the anti-terrorist operation (ATO) zone, and exclusion of DTEK Krymenergo company from our operations.

Due to the economic situation in Ukraine, the company revised its plans for the retrofits and upgrading of its operating companies to cut down capital expenses to the level required for maintaining its production targets. In 2015, the company reduced capital expenditure by 24.3%, or UAH 1,306 mln, to UAH 4,061 mln.

As of the end of the year, the closing cash balance dropped by 87% to UAH 0.7 bln, compared to the start of the year, due to the negative financial results.

Debt liabilities

As of 31 December 2015, the company's loan debt was UAH 57,948 mln.

The shortage of funds for the energy sector, an armed conflict in Donbas region, devaluation of the national currency, no access to refinancing resulted in the company's low liquidity and inability to service its debt in accordance with its obligations. During the first six months of 2015, the company was making 10% of payments related to the loan principal and restructured its Eurobonds by the exchange of the USD 200 mln securities for the new USD 160 mln bonds with the maturity in March 2018. In December 2015, the company announced its intention to find long-term restructuring plan for it credit portfolio, including the Eurobonds. The process is expected to be finalised within 2016.

2. Overview of the operating results

Key production indicators

Indicators	Meas. unit	2015	2014	Change, (+/-)	Change, (%)
Coal production	ths tonnes	28,692.0	37,122.0	-8,430.0	-22.7
Coal processing:
ROM coal processing	ths tonnes	19,965.8	26,400.8	-6,435.0	-24.4
Coal concentrate production	ths tonnes	12,279.4	17,091.8	-4,812.5	-28.2
Electricity generation (net output)	mln kWh	37,650.1	47,138.1	-9,488	-20.1
Electricity transmission by networks	mln kWh	45,086.4*	53,809.7	-8,723.3	-16.2
Electricity export	mln kWh	3,555.0	7,988.0	-4,433	-55.5
Coal exports**	ths tonnes	1,387.1	4,057.1	-2,670	-65.8
Coal imports	ths tonnes	404.1	1,687.0	-1,282.9	-76.0
Gas imports	mln cub m	23.7	0.0	23.7	100.0

*net of DTEK Krymenergo.

**Including trading operations outside Ukraine.

DTEK ENERGY

Coal production and processing

In 2015, DTEK Energy's miners produced 28.7 mln tonnes of coal, which is by 22.7% less YoY. Consequently, the processing plants reduced their production volumes: they processed about 20 mln tonnes of run-of-mine (ROM) coal and produced 12.3 mln tonnes of clean coal concentrate.

Main factors influencing the production performance:

• The output of high volatile coal almost remained at the 2014 level: 22.1 mln tonnes. The company's miners satisfied the entire TPPs' demand for high volatile coal, which allowed the plants to meet increased load to stabilise electricity generation in Ukraine despite the understated fuel component in the tariff paid to TPPs and significant debt of state-run buyer Energorynok.

  Miners of DTEK Pavlogradugol contributed a lot to the stabilization of electricity generation in Ukraine by increasing its labour productivity by 2.2%, to 99.5 tonnes per person per month, in 2015. At the same time, under-financing of the coal-fired generating capacities considerably hinders the development of the coal industry. This makes miners to reduce the scope of tunnelling of mine workings and stop purchasing and repairing mining equipment.

• The production of anthracite and lean coals at DTEK Rovenkyanthracite, DTEK Sverdlovanthracite and DTEK Mine Komsomolets Donbassa dropped by 63.4%, or 8.0 mln tonnes. Yet, in HY2, the coal-mining companies increased their coal production by 59.5%, or 1 mln tonnes, vs. HY1 of 2015. It became possible due to restoration of the railway section Mykytivka-Maiorsk, which had been destroyed during the military hostilities in 2014. In Q4, average daily coal supplies from the ATO zone grew by 80% YoY to reach 10.2 thousand tonnes.

Key projects in 2015:

• In 2015, DTEK Energy invested over UAH 1.2 bln in renewal of the roadheading equipment fleet and upgrading of the transportation chain.

• DTEK Pavlogradugol:

• Commercial testing of the new generation KNF Road Cutter System was successfully completed. Pershotravenske mine group was the first to use the KNF system, which will ensure a high level of occupational safety and reduce the time for face entry tunnelling by 30%.

• The Yuvileina mine continued the construction of a ventilation shaft. The first project stage was completed: the shaft was drilled; the head frame was erected; and fan was launched. The second stage includes the installation of a winder and construction of a head frame and pithead building. The ventilation shaft provides the mine with the sufficient air amount for its sustainable operation.

• The Geroiv Kosmosu mine continues the project to increase of the conveying capacity of the coal winder set up to 3 mln tonnes per year.

• DTEK Pavlogradska coal processing plant: upgrading of the first section started. The project is aimed at increasing the plant's capacity for processing of run-of-mine coal from 3.8 to 7 mln tonnes per year, which will reduce costs for processing by external processing plants and streamline the logistic chain 'mine-coal processing plant-thermal power plant'. After the upgrading completion the plant will be able to stop using its sludge pond, which is vital for the region's environmental situation.

• DTEK Oktyabrska CPP: a heavy medium cyclone, which replaced a jig unit, was commissioned in the first section and is operating successfully. This improvement enhances the production capacity of the plant, increases the ash content in coal waste, reduces operating costs and helps the processing plant to run smoothly and failure-free.

Electricity generation

In 2015, DTEK's thermal power plants supplied 37.7 billion kWh of electricity, which is down 20.1% by YoY.

Main factors influencing the production performance:

• Electricity generation by TPPs was limited as the electricity consumption in Ukraine dropped by 11.3% or 19.3 bln kWh, on the back of imports from the Russian Federation and export restrictions.

• DTEK Zakhidenergo maintained its net electricity output at the 2014 level. As their availability factor was rather high, the high-volatile coal fired units had an increased workload to reduce capacity shortage and maintain stable operation of the UES of Ukraine. Yet, as there was a significant drop in industrial production, and electricity export restrictions were still effective, the coal combustion in 4Q declined, negating the growth of DTEK Zakhidenergo's output from January to September 2015.

• Electricity supply by DTEK Zuivska TPP and DTEK Luganska TPP of DTEK Skhidenergo, as well as by Myronivska TPP of DTEK Donetskoblenergo dropped by 36.1% or 3.1 bln kWh in total due to the military hostilities that resulted in a destroyed railway infrastructure and power transmission lines;

• Electricity supplied by DTEK Dniproenergo reduced by 40.2% or 6 bln kWh as in HY1 supplies of anthracite coal from DTEK mines in the ATO area were severely limited. However, in HY2 as fuel supplies increased, DTEK Dniproenergo increased its supplies by 5.2% or 228.4 mln kWh vs HY1.

As of 1 January 2016, coal stocks at DTEK Energy TPPs amounted to 1.6 mln tonnes of coal, which is by 67% or 956.7 ths tonnes more than YoY.

Key projects in 2015:

• The overhauls campaign of 2015 was completed: the main power equipment of 55 generating units and 10 sets (3 turbines and 7 boilers) repaired. The cost of the overhauls for DTEK Energy TPPs amounted to UAH 1.5 bln;

• We completed the retrofit of unit No 9 of Kurakhivska TPP. The installed capacity of the technically re-equipped unit was increased by 15 MW to reach 225 MW, and the specific fuel consumption for electricity generation dropped by 6%. The project budget totalled UAH 635 mln. Since 2012, as part of the upgrading procedure, the electrostatic precipitators at all DTEK's generating units are revamped to comply with the dust emission level stipulated by Directive 2001/80/ЕС;

• Kyivenergo completed the retrofit of the 330 kV outdoor switchgear at CHPP 5, aimed at covering the capacity deficiency in the central districts of Kyiv and creating a reserve for connecting new consumers. It also completed the retrofit of a demineralization plant in the chemical workshop of CHPP-6; the project implementation will reduce the corrosion of main heating and mechanical equipment and improve steam qualitative parameters.

Electricity transmission by networks

In 2015, DTEK's distribution companies transmitted 45.1 billion kWh of electricity via networks, which is by 16.2% less than YoY.

Main factors influencing the production performance:

• consumption of electricity by industrial enterprises of Ukraine decreased by 17.8% or 10.8 billion kWh, and by 7.2% or 2.8 billion kWh by households;

• decreased electricity transmission by DTEK Power Grid, DTEK Donetskoblenergo and DTEK Energougol ENE by 15.9% or 2.8 billion kWh in total due to the military hostilities and unstable social and economic situation in the region;

• DTEK Krymenergo was excluded from the production results due to the lack of the operational control over the company (electricity transmission by DTEK Krymenergo in 2014 was 4.3 bln kWh).

Key projects in 2015:

• DTEK Dniprooblenergo:

• in March, the company opened a Customer Service Centre (CSC) in the town of Pidhorodne of Dnipropetrovsk region operating as 'one-stop shop'. The Centre provides services to over 40 thousand households and one thousand of legal entities;

• in April the Company's contact centre completely covered Dnipropetrovsk region (about 1.5 mln of clients);

• the organisational structure and sales functions at the level of CSCs were transformed in September to increase the customer services' quality: district electricity supply units of DTEK Dniprooblenergo and DTEK Donetskoblenergo were transformed into CSCs;

• the company continues the implementation of an automated electricity metering system in the cities of Dnipropetrovsk, Kryvyi Rih, Dniprodzerzhynsk. The system already covers over 108 thousand residential metering points, and over 25 thousand points were connected in 2015.

• Kyivenergo:

• at CHPP-5 we completed the construction of the gas-insulated 330 kV switchgear, commissioning of which enhanced the reliability and quality of power supply to Kyiv due to improved connection between the capital city's power supply system and the Ukrainian UES;

• we completed the retrofit of Stankozavodska substation, aimed at improving reliability of power supply to consumers;

• over 3 thousand residential heat metering points were created, and over 4 thousand metering points began to be used for heat metering purposes. Thus, 90% of the company consumers pay for actually consumed heat and Kyiv is ranked first in Ukraine in terms of installing heat meters in residential houses;

• as part of the project aimed at implementing smart electricity metering systems to reduce excessive losses, the company installed about 90,000 meters that can transfer data remotely;

• We started retrofitting and replacing 10 kV cable lines from the Moskovska substation, 110 kV cable lines from Mototsikletna and Tatarska substations to ensure more reliable and uninterrupted supply of electricity to consumers in Kyiv and to create opportunities for energy consumption growth.

• DTEK Power Grid: The Company completed retrofit of the Dniprovska substation supplying the electricity to some mines, enterprises and households of Petropavlovsk district in Dnipropetrovsk Region. The activities were conducted without interruptions in the electricity supplies to consumers.

Commercial activities

Coal supplies

In 2015, we supplied 1.4 mln tonnes of coal to external markets, which is by 65.8% lower than in 2014.

Main factors influencing the indicators:

• shortage of flexible capacities in the UES of Ukraine at the beginning of the year, caused by insufficient coal supplies. In Q1 DTEK imported coal from the RSA and Australia to compensate the capacity deficit during the 2014-2015 heating season;

• destruction of the railway infrastructure in the ATO area, which considerably restricted shipment of anthracite and lean coals from DTEK Rovenkyanthracite, DTEK Sverdlovanthracite, and DTEK Mine Komsomolets Donbassa in HY1;

• coal supplies to industrial consumers in Ukraine dropped by 36% or 449 ths tonnes as the industrial production dropped by 13.5% in 2015, and coal was re-channelled to DTEK Energy TPPs for the heating season;

• exports licensing has become a constraint for supply to external markets. Electricity consumption in Ukraine decreased by 11.3% or 19.3 bln kWh, and coal supplies from the Eastern regions stabilized in HY2. In 2015, we supplied 3.2 mln tonnes of coal from the ATO zone, out of which 2 mln tonnes were supplied in HY2, and it is by 160% more YoY.

Electricity supplies

In 2015, the company decreased electricity exports by 55% to 3.6 bln kWh. The main factors influencing those indicators are the decision of the Ministry of Energy and Coal Industry limiting electricity exports effective since August 2014. Yet while the electricity consumption in Ukraine drops, export helps maintain production efficiency both in thermal generation and in coal production.

3. Key events in the reporting period

April

• DTEK successfully negotiated the restructuring of USD 200 mln Eurobonds originally due in April 2015. The Exchange was approved by 91.14% of the Eurobonds holders who have the right to participate in the tender for securities restructuring. All Eurobond holders were offered equal terms: the payment of 20% of the nominal value of the securities and exchange of the old Eurobonds for new ones to be fully redeemed in 2018.

• Power supply was restored to air shaft No. 3 (VS-3) of DTEK Mine Komsomolets Donbassa, which had been shelled repeatedly. This allowed us to launch ventilation installation No.2 and drain gas in the network of mine workings. Then, in order to restore the production of lean coal, we examined the mine workings and started pumping out water and repairing equipment. Delivery of the required materials was conducted in compliance with the Temporary Procedure for Control over Movement of Individuals, Vehicles and Goods along the Line of Contact within Donetsk and Luhansk regions.

May

• Retrofitted unit No.9 of DTEK Kurakhivska TPP was reconnected to the grid. The retrofit increased the installed capacity of the unit by 15 MW to 225 MW, expanded the flexibility range by 40 MW, while reducing specific fuel consumption for electricity generation by 6%.

• We implemented the first stage of the project on the construction of a ventilation shaft at the Yuvileina mine: the shaft was drilled; the head frame (facility intended for delivery of staff, materials and equipment) was erected, and a fan was commissioned. The construction of the shaft provides access to 19 mln tonnes of commercial coal reserves.

• Kyivenergo completed the construction of a 330 kV gas insulated switchgear at combined heat and power plant No. 5. This has enhanced the reliability and quality of power supply to Kyiv due to improved connection between the capital city's power supply system and the Ukrainian united energy system.

• We restored ventilation plant No.1 (VS-3) of DTEK Mine Komsomolets Donbassa. Three underground gas drainage plants started their operation. Resumed production of lean coal allowed us to accumulate the sufficient amount of this coal grade, which was in short supply, at the Ukrainian TPPs to ensure their uninterrupted operation during the heating season.

June

• We completed testing of the world's first frontal road-cutter system KNF. It was tested under different mining and geological conditions from September 2013 at the Stepova mine and later, at the Yuvileina mine. At DTEK's initiative, this brand new equipment for driving face entries in thin coal seams was manufactured by Kharkiv-based Corum Svet Shakhtyora Plant, Corum Group.

July

• At the Stepova mine, we tested the transportation of mined rock by overhead diesel-hydraulic locomotives, which is a new method for the coal industry. Experimental models of bottom discharge containers were designed and manufactured by Ferrit, the largest monorail equipment manufacturer.

August

• DTEK arranged for anthracite deliveries through the railway section Mykytivka-Maiorska. Due to the joint efforts of the Railway and DTEK, traffic through this section, which had been destroyed by the military combat in 2014, was restored, which allowed us to increase coal transportation from the ATO zone and accumulate sufficient coals stocks at the TPPs for passing the 2015-2016 heating season.

September

• We reshaped the organisational structure and sales functions at the level of customer service centres (CSCs): district electricity supply units of DTEK Dniprooblenergo and DTEK Donetskoblenergo were transformed into CSCs. We completed setting up the sales and client service processes in accordance with the Customer Service Standards.

November

• Kyivenergo completed a project on the arrangement of over 3,000 household heat metering points,
  and over 4,000 metering points began to be used for commercial metering purposes. As a result, 90% of the company's consumers pay for actually consumed heat amount, and Kyiv is a leader in Ukraine in terms of the equipment of households with heat meters.

December

• DTEK Power Grid completed the retrofit of a 150 kV outdoor switchgear at the Dniprovska substation, which is the key substation for the Pavlograd energy centre. It connects several substations and enables power supply to a number of mines, enterprises and households of Dnipropetrovsk region. The retrofit was aimed at improving the reliability of power supply to consumers.

Note

1. The annual audited consolidated financial statements of DTEK Energy B.V. (statements) was sent to the National Storage Mechanism and will shortly be available on the website www.Hemscott.com/nsm.do and the website of DTEK http://www.dtek.com/ru/investor-relations/financial-data/fy-2015.

2. Statements have also been sent to the FCA.

Profile

DTEK is a strategic holding company that manages three operational sub-holding companies with the assets in the coal production, thermal energy generation and distribution as well as alternative energy and gas production. It is part of the financial and industrial group System Capital Management (SCM). The shareholder of the group is Rinat Akhmetov. Maxim Timchenko is the Chief Executive Officer of DTEK. Currently, DTEK employs 118 thousand people.

The assets portfolio of DTEK in coal production, thermal generation and distribution sectors is represented by 31 mines and 13 coal processing plants; ten thermal power plants and two combined heat and power plants with 18 GW of total installed capacity; and six electricity distribution companies, which provide services to over 4.4 million customers. The alternative energy sector is represented by one wind farm with the designed installed capacity of 200 MW. The proven reserves of natural gas (С1, С2) at three fields amount to 26 billion cubic meters.

In 2015, DTEK's companies generated 38.3 bln kWh, including 634 mln kWh generated by the wind farm, transmitted 45.1 bln kWh of electricity, and produced 28.7 mln tonnes of coal and 1.3 bln cubic meters of natural gas.

For more information, visit: www.dtek.com

To learn about the social partnership projects in progress in the towns and cities of DTEK companies' operations and get a detailed status report on their implementation, visit www.spp-dtek.com.ua