DTEK Zakhidenerho : Unaudited consolidated financial statements of DTEK Energy for 1H 2016

29.09.2016

Unaudited consolidated financial statements of DTEK Energy for 1H 2016

Kyiv, September 29, 2016

DTEK Energy reported its unaudited consolidated financial results for the six months of 2016 ending on June 30, 2016

'Any industry development depends on the financial condition of companies and their ability to introduce innovations, which would lead to the increase of efficiency of management and operations. We continue working on the loan portfolio long-term restructuring. This is to improve our financial performance and balance our capability of servicing loans and modernizing our enterprises. We are actively introducing measures that will help cut the costs and ensure reliability of equipment. For example, the Novator project that encourages our employees to offer process improvement ideas, yielded over UAH 400 mln year-to-date. We invested these funds in the operations and social projects' said Vsevolod Starukhin, CEO of DTEK Energy. 'We do understand that the main task of the energy sector now is to maintain the emerging economic growth. The company makes every effort to ensure uninterrupted electricity generation in necessary volumes during the heating season. However, we do hope that the emerging progress in the industry reforming will create conditions when preparation for the heating season will never be underfinanced again'.

Brief overview of DTEK Energy financial results

*Data on the Revenue, EBITDA (adj.) and Net loss (from continuing operations) does not include results of DTEK Oil&Gas and DTEK Renewables.

Revenue structure by segment

1. Overview of the financial results

The net loss for the reporting period amounted to UAH 8, 135 mln which is down by UAH 12.7 bln compared with January-June 2015. The main contributors to net loss reduction were lower hryvnia devaluation, which resulted in exchange rate difference losses being 4 times lower.

The company's consolidated revenue for January-June 2016 grew by 24.6%, or UAH 11.3 bln, YoY with the main contributors to growth being higher sales of gas, 3 party coal sales in Ukraine and electricity sales to European markets.

The production cost increased in absolute terms by 22.7%, or UAH 10 bln, compared with January-June 2015. The increase was caused by both higher sales and price of process fuel, equipment and consumables, railway costs and environment contamination charges.

The first six months of 2016 saw the continuation of the 2015 trend where the tariffs set for electricity supply did not fully cover its production cost.

In addition, the overdue debt of the state enterprise Energorynok for the electricity produced by the company in January-June 2016 increased by UAH 2 bln, aggravating our liquidity position even further. As of 1 July 2016, the total debt of Energorynok exceeded UAH 6.9 bln.

The other negative factors that had a material impact on the company's performance were losses of the companies located in the non-controlled territory (NCT).

The shortage of liquidity forced the company to revise its plans for the retrofits and upgrades of its operations in order to bring the capital expenditures to the level required to maintain its current production targets. In January-June 2016, the company's capital expenditure amounted to UAH 2,176 mln with a significant amount of capex deferred until later periods.

As of 30 June 2016, the closing cash balance reached UAH 1.3 bln.

Debt liabilities

As of 30 June 2016, the company's loan debt was UAH 61,737 mln.

Due to severely deteriorated liquidity, the company has started discussions on the long-term debt restructuring with its creditors earlier this year. After entering into a standstill agreement with the bondholders, the company formalised a standstill agreement with the banks on September 21, 2016 in order to create a stable platform to progress the long-term restructuring negotiations with all its creditors. In addition, on September 22, 2016 DTEK Energy completed the deleveraging transaction involving transfer of the company's Russian assets along with USD 436 mln of related debts outside the perimeter of DTEK Energy. The transaction has reduced DTEK Energy's debt amount by 17%, thus contributing towards improvement of the Company's financial position. The company expects to complete the long term restructuring with its creditors within the coming months.

1. Overview of the operating results

Key production indicators

*Excluding Krymenergo due to lack of operational control.

**Including trading operations outside Ukraine.

Coal production and processing

In the first half of 2016, DTEK miners produced 13.9 million tonnes of coal, which was 0.8% less YoY. Processing plants increased their ROM coal processing and, respectively, concentrate production volume up to 10.6 and 6.6 mln tonnes.

Main factors influencing the production performance:

• The production increase of anthracite and lean coal by 75.5%, or 1.3 mln tonnes.

The companies have been increasing the production for the second consecutive quarter. DTEK Mine Komsomolets Donbassa contributed most to the production growth. It was made possible by the restoration works in 2015, which helped resume coal production.

The limited energy supply of mines and Ukrainian TPPs in June served as a deterrent to higher rate of coal production.

In January to June 2016 DTEK Rovenkyanthracite, DTEK Sverdlovanthracite and DTEK Mine Komsomolets Donbassa supplied to DTEK Energy TPPs 1.9 mln tonnes of coal, which is a 26%, or 0.4 tonnes, YoY growth.

• The production decrease of high volatile (steam) coal by 13.7%, or 1.5 mln tonnes.

In January to May 2016, due to the decrease in electricity consumption in Ukraine by 6.4%, or 4.3 bln kWh YoY, as well as termination of supply in the Crimea, demand for coal by the TPPs decreased.

The set tariffs for thermal power plants remain below the cost of production, which significantly limits the company`s ability to finance the purchase of spare parts and repair of mining equipment. This leads to coal production decrease.

Key projects in progress in the reporting period:

• Completed upgrading of Pavlogradska CCM: the plant's capacity for processing of run-of-mine coal was increased from 4.2 mln tonnes to 7 mln tonnes per year. As a result of technical re-equipment the plant took the second place in Ukraine in processed coal volumes and became the most powerful coal processing company of DTEK Energy. The plant stopped using its sludge pond, which is vital for the region's environmental situation.
• Construction of an air shaft at the Yuvileina mine continues. The air shaft provides the mine with a sufficient amount of air for its stable operation. The first stage of construction completed in August makes it possible to transport people to their workplaces. Now, the mine is assembling the electrical part of the hoisting machine, while also constructing the mine yard and headframe.
• Tunnellers of the Samarska Mine successfully drove through the largest West Donbas geological fault - Bohdanivskyi fault. This fracture discontinues the horizontal coal seams: the depth difference between the parts is about 300 meters vertically. It was the first successful experience of driving through such a large tectonic fault in the world. Later three more workings will be driven through the Bohdanivskyi fault, which will develop a mine field with reserves of 10 million tonnes of coal.

Electricity generation

DTEK's thermal power plants supplied 17.6 billion kWh of electricity, which is 7.1%, or 1.3 bln kWh YoY decrease.

Main factors influencing the production performance are:

• a shrinkage of the domestic electricity market due to terminated supplies to the Autonomous Republic of Crimea (by 2.8 bln kWh in the first half of the year);
• a decline in the electricity consumption in Ukraine: in January to June 2016 the demand in the industrial sector dropped by 5.1%, or 1,3 bln kWh, and from households and public utilities by 6%, or 1.5 bln kWh
• an increase in electricity output by hydro power plants and pump storage power plants in January to June 2016 by 30%, or 1.2 bln kWh, due to the higher water level in the rivers of Dnipro and Dniester.

Since October 2015 to May 2016, the Unified Energy System of Ukraine has seen a surplus of capacities. However, in June Nuclear Plant electricity generation decreased, and coal supplies from Ukrainian mines in the NCT zone were suspended for 19 days. At the same time electricity consumption by households increased by 5.9%, or 146.2 mln kWh. These factors have led to power shortages in the UES of Ukraine.

In order to cover the power shortage DTEK Energy TPPs in June increased electricity production by 13.2%, or 335.2 mln kWh YoY. Due to growth of coal combustion, DTEK Energy TPPs stocks as of July 1, decreased by 24%, or 278 ths tonnes to 859 ths tonnes.

Key projects in progress in the reporting period:

• DTEK Energy continues the repair campaign of its units to get ready for the 2016-17 heating season.66 repairs are planned to be done. As of today the repair campaign is finilised at 33 units (29 power units, 1 turbine and 3 boiler), 10 more units are in active phase of execution. Due to power deficit in UES of Ukraine dispatcher's applications for taking out 5 power units for planned repair were rejected. Following which DTEK Energy was obliged to reschedule part of repairs for autumn.
• Final stage of the retrofit at unit 1 of DTEK Kryvorizka TPP is prepared to be carried out. We plan to increase the unit's capacity from 282 MW to 315 MW and reduce fly ash emissions in the air to 50 mg/m3.
• We have completed a retrofit at unit 5 of Burshtynska TPP. Majority of unit upgrade works were done in 2012-13. This year, the plant has conducted a medium repair with some retrofitting activities. The following results are expected: an increase in capacity from 208 MW to 215 MW, efficiency improvement and better equipment reliability.
• We completed two-year project to replace the generator at Unit No. 1 at Kyivenergo TPP-6 SBU Kyiv TPP.

Since 2012, we have started revamping electrostatic precipitators at all DTEK's generating units being upgraded to comply with the dust emission level stipulated by Directive 2001/80/ЕС.

Electricity transmission by networks

Our distribution companies transmitted 22.8 bln kWh through networks from January to June 2016, which matches the level of the same period of the last year.

Main factors influencing the production performance are:

• electricity transmission by Kyivenergo and DTEK Dniprooblenergo increase by 1%, or 121.3 mln kWh;
• decreased electricity transmission by DTEK Donetskoblenergo, DTEK Power Grid, DTEK Energougol ENE by 4.4%, or 336.8 mln kWh, due to the military hostilities and unstable social and economic situation in the region.

Key projects in progress in the reporting period:

• DTEK Dniprooblenergo: we opened a modern Customer Service Center in Solyonoe village, serving up to 300 customers a day. Customers will be able to receive advice on energy supply and perform all operations - from payment for the service to the technical conditions for accession;
• New dispatching office started operating in Kryvyi Rih. Video wall produced by Mitsubishi displays information about the energy supply of the city: from the general plan to the individual objects. This allows to reduce the time from problems discovery to resolving and anticipate emergencies. Modern dispatching office - a part of the SMART Grids implementation in power networks of the company;
• The company continues the implementation of an automated electricity metering system in the cities of Dnipro, Kryvyi Rih, Kamenskyi, Novomoskovsk and Nikopol. The system has already covered over 108 households' metering points;
• A design is being developed to construct a 150/10/6 kV Naddniprianska substation, which will create an additional capacity for connecting new consumers and improve reliability of power supply to the current and planned substations powering an underground railway system. By 2020, the second underground stage is planned to be commissioned from the Vokzalna station to the Zhovtneva station.
• The company continues a retrofit of the 110 kV kV Zhovtneva-Mototsykletna cable line. This year, we plan to complete the replacement of the oil-filled cable with a cross-linked polyethylene (XLPE) cable. The project will enhance the line's reliability and transmitting capacity;
• We continue the project on a retrofit of engineering infrastructure for the new airport terminal in Kyiv (Zhuliany). In the course of the project, we plan to conduct a technical renovation of the Nikolska and Harnizonna substations, to build the 35 kV Nikolska-Harnizonna cable line and the 10 kV Harnizonna-RP-267 cable line.

Due to seizure of accounts of Kyivenergo by the enforcement service of Ukraine under the penalties on the paid debt for gas before 'Naftogaz Ukraine' NJSC, the implementation term of the planned investment projects can be postponed.

Commercial activities

Coal and electricity supplies

We supplied 796 ths tonnes of coal to external markets, which is 5.1%, or 38.5 ths tonnes up YoY. Coal sales under export contracts were mainly from the Mine Office Obukhovskaya.

Coal supplies to industrial consumers in Ukraine increased 7 times - up to 1.3 mln tonnes.

We supplied 2.2 bln kWh to external markets, which is 24.5%, or 428.7 mln kWh up YoY.

Since the beginning of the year there was power surplus in the UES, while the supply of coal by Ukrainian mines of the company in the NCT stabilized at the level of 11-13 ths tonnes per day. This allowed in early June to completely eliminate coal deficit in DTEK Energy TPPs warehouses. This in turn made available coal volumes for third party/ export sales, as well as created conditions to resume electricity exports to Poland.

In January to June average daily shipment of anthracite coal from the NCT for Ukrainian TPPS made 27.5 ths tones.

1. Key events in and after the reporting period

January

Tunnellers of the Samarska Mine successfully drove through the largest West Donbas geological fault - Bohdanivskyi fault. This fracture discontinues the horizontal coal seams: the depth difference between the parts is about 300 meters vertically. It was the unique experience of successfully driving through such a large tectonic fault. Later three more workings will be driven through the Bohdanivskyi fault, which will allow developing a new mine field with the coal reserves of 10 mln tonnes.

March

DTEK was named among the best employers in Ukraine: according to the 2015 Best Employer Survey conducted by EY, the Company was ranked first among the industrial companies and named among the five most attractive employers by students of field-pertinent universities.

April

DTEK Energy proposed a credit portfolio long-term restructuring plan and initiated a stand-still for 6 months to conduct negotiations. The Eurobond holders supported the proposal. By 28 October, the Company plans, together with the Eurobond holders, to agree an acceptable solution about the terms and conditions and time for obligations performance. As long as the negotiations last, the initial payment terms and conditions do not apply, and no financial penalties are imposed.

June

DTEK Energy's proposal about the split-off of the Mine Office Obukhovskaya (the Russian Federation) as part of the credit portfolio restructuring was accepted by the Eurobond holders. Yet, the coal mining company remains the property of DTEK, the key holding company.

August

The Pavlogradska coal concentrating mill completed the upgrading: the plant's capacity for processing of run-of-mine coal increased from 4.2 mln tonnes to 7 mln tonnes per year. As a result of technical re-equipment the plant became the highest capacity coal processing company of DTEK Energy. The project allowed the plant to stop using its sludge pond, which is vital for the region's environmental situation.

The Yuvileina mine commissioned a new air shaft, which provides access to 19 mln tonnes of commercial coal reserves. Furthermore, apart from its key ventilation function, the shaft will be used for man-riding and cargo transportation. Thus, the time spent by miners underground will decrease by 2 hours for each shift.

September

We obtained the certificate of the State Architectural and Construction Supervision Authority on commissioning of unit No. 5 at the Burshtynska TPP following its retrofit. The following results are expected: an increase in capacity from 208 MW to 215 MW, efficiency improvement and better equipment reliability.

On September 21, 2016 the company formalised a standstill agreement with the banks with a view to progressing the long-term restructuring negotiations with all its creditors.

In addition, on September 22, 2016 DTEK Energy completed the deleveraging transaction. The deal reduced DTEK Energy's debt amount by 17%, thus contributing towards improvement of the Company's financial position.

Note

2) The Financial report was also sent to 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). 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

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For more information, please contact:

Oksana Nersesova

IR Manager, DTEK

Tel.: +38 (044) 581 45 22

E-mail: ir@dtek.com

This press release may contain forward-looking statements related to the planned measures or future financial indicators of DTEK. Words such as 'anticipate', 'believe', 'estimate', 'expect', 'forecast', 'intend', 'may', 'plan', 'project', 'predict', 'should' and 'will' or the negatives of these terms or variations of them and similar expressions are intended to identify such forward-looking statements. Accordingly, actual results may differ materially from those expressed or implied by the forward-looking statements. We undertake no obligation and do not intend to update these forward-looking statements to reflect events or circumstances occurring after this press release. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this press release. By their nature, forward-looking statements are subject to numerous assumptions, risks and uncertainties. Such risks include concerns over the general economic status, environment and risks associated with doing business in Ukraine, significant technological and environmental changes in our sector, as well as many other risks specifically applicable to DTEK and its business.