Strategic expansion, conservative approach

In 2018, SUEK’s total assets increased to $14 billion and its revenue to $8.3 billion, reflecting the favourable coal market environment and the acquisition of the energy business.

The combined business model of the Coal and Energy Segments enabled SUEK to reduce the dependence of its EBITDA on volatile global coal prices.

In August 2018, SUEK Group acquired SGCBy purchasing 99.9% shares in LLC SGC.. Since this consolidation was treated as a transaction with respect to a company under common control, for the purposes of this MD&A report SUEK has provided like-for-like retrospective figures for FY 2017 which include a representative full year contribution from SGC to the Group’s financials.

Macroeconomic conditions were favourable for the company overall. Average annual coal indices in Asia and Europe rose by 21% and 9% respectively, compared to 2017.

In Russia, 2018 inflation reached 4.3% and led to an increase in labour costs, rail costs and material purchase expenses in Rouble terms; it also impacted electricity and heat prices. With that, a 7% decrease in the average annual RUB/US$ exchange rate allowed us to maintain coal division expenses at the level of 2017 in US Dollar terms, compensating for the growth in Rouble expenses. The lower exchange rate also limited the growth of the average selling price of coal and energy to domestic consumers in US Dollar terms.

Group financial highlights
$m 2018 2017 %
Revenue 8,296 6,939 20%
Coal 6,711 5,693 18%
Energy 2,137 1,702 26%
Intragroup operations (552) (456) 21%
Cost of sales (5,488) (4,630) 19%
Cost of sales (2,760) (2,235) 23%
Logistics (1,809) (1,786) 1%
Cost of sales (1,471) (1,065) 38%
Intragroup operations 552 456 21%
Administrative and other expenses (267) (240) 11%
EBITDA 2,541 2,069 23%
EBITDA margin, % 31% 30% 1 p.p.
Net profit 1,164 873 33%
Net margin, % 14% 13% 1 p.p.
Capital expenditureСash outflow. 903 763 18%
Net debt 4,187 4,351 (4%)
Net debt/bank EBITDA ratio Bank EBITDA is calculated in accordance with our existing credit agreements 1.6x 2.0x (0.4x)
Bank EBITDA/interest expense ratio 9.1x 6.7x 2.4x

Revenue increased by 20% to $8,296m, driven by growth in coal sales and a positive global market situation, along with higher sales of electricity and heat due to the acquisition of new assets and lower than average annual temperatures.

EBITDA rose by 23% to $2,541m reflecting the revenue growth and efficient cost control.

Net Profit grew by 33% to $1,164m as the increase in EBITDA was partially offset by higher depreciation owing to the expanded fixed asset base and by higher foreign exchange losses due to the weakening Rouble.

$m 2018 2017 %
EBITDA 2,541 2,069 23%
Depreciation (669) (575) 16%
Income tax (314) (270) 16%
Finance costs (311) (338) (8%)
Foreign exchange loss (83) (13) 538%
Net profit 1,164 873 33%

Administrative and other expenses increased by 11%, primarily through the increase in expenses relating to SUEK’s charity work in the company’s regions of operation.

Administrative and other expenses ($m)

Operating cash flow rose by 9% year-on-year to $1,901m. Warm weather in Europe led to higher leftover coal inventories at the year-end, increasing our working capital at the end of 2018. This restricted the growth rate of our operating cash flow compared to EBITDA.

$m 2018 2017 %
EBITDA 2,541 2,069 23%
Changes in working capital (373) (118) 216%
Income tax paid (288) (248) 16%
Other 21 35 (40%)
Operating cash flow 1,901 1,738 9%

Capital expenditure was $903m, which represents an 18% increase year-on-year. The investments largely targeted an increase in high-CV coal production, productivity upgrade, health and safety, and environmental measures.

Capital expenditureСash outflow. ($m)
Operating cash flow vs capital expenditure ($m)

Net debt decreased by 4% to $4,187m as at 31 December 2018. As at 31 December 2018, most of our bank loans were denominated in US Dollars (62%); 35% were denominated in Roubles and the remaining part in Euros.

The effective cost of borrowing, normalised to the rate in US Dollars, was 4.5%. The company’s main debt instrument is still pre-export financing secured by international sales revenue.

Debt structure as at 31 December 2018 (%)

Credit ratings

In 2018, Moody's international ratings agency raised SUEK Group’s credit rating to Ba2 with a stable outlook. In May 2018, Fitch Ratings assessed the company for the first time and assigned it a BB rating with a stable outlook. Both agencies confirmed the Group's credit rating following the integration of SGC.

According to Fitch Ratings, the acquisition of the energy business expands SUEK’s operations, improves the predictability of revenues and will help maintain or increase free cash flow. On the other hand, it may lead to a higher debt burden in the next two years compared to previous forecasts. Moody’s analysts noted the leading position of SUEK in the global coal industry, a high level of operational diversification, a good quality of coal products, competitive costs, significant control over the infrastructure and a balanced financial policy.

In addition, in 2018 SUEK received a credit rating from the Russian Expert RA agency at ruAA-.

Reporting by product group


$m 2018 2017 %
Revenue from international sales 5,051 4,190 21%
Asia-Pacific market 2,894 2,494 16%
Atlantic market 2,157 1,696 27%
Revenue from sales in Russia 1,200 1,103 9%
Sales to third parties 655 654 0%
Intragroup coal sales 545 449 21%
Petroleum coke sales 250 235 6%
Other 210 165 27%
Total 6,711 5,693 18%

Export revenue from coal sales grew by 21% year-on-year to $5,051m, which was primarily due to the higher average selling price (+17%) and an increase in sales volumes by 2% to 55.4 Mt. The average coal selling price differed from the average index price because of the contracting time lag and differences in the quality characteristics of the coal sold and the index quality benchmark.

Average price of coal sold on international markets, FOB basisThe price is reduced to the FOB basis Vanino, Maly Port and the eastern borders of China for shipments to Asia, and FOB Murmansk for sales to Europe. For shipments on other terms, we exclude the costs of freight, railway transit and cross-charged warehousing costs in foreign ports. ($ per tonne)
Coal sales revenue by market

Russian market revenue increased by 9% to $1,200m, mainly driven by growth in sales to the Group’s own power facilities (+5.5 Mt). The price increase in Russian Roubles was offset by the Rouble weakening against the US Dollar.

Average price of coal sold in Russia
($ per tonne)
(RUB per tonne)

Cash cost of coal sold
The unit cost of own coal sold in US Dollar terms did not change year-on-year due to the lower Rouble exchange rate. The cost in Roubles rose by 9% compared to 2017 following a sharp increase in the cost of fuel and lubricants and rising prices for imported spare parts.

Cash cost of coal sold
($ per tonne)
(RUB per tonne)

Transportation costs in US Dollar terms increased by $21m (+2%) compared to 2018, which resulted from higher transportation volumes.

The company continued transport export shipments using mainly railcars under management in order to maximise the margins of export sales. Operators, despite an increase in rates by 43%, began to provide higher capacity cars for loading. This improved the efficiency of using the operators’ fleet.

Specific coal transportation costs in Roubles rose amidst the continued growth in operator rates caused by a shortage of railcars due to the intense freight traffic during the period of high export prices, as well as a rise in railway tariffs in the domestic and international markets by 5.4% and 4%, respectively. The specific increase in expenses was partially offset by the weakening of the Russian currency.

SUEK is one of the few global coal companies that tranships coal via its own ports, such as Vanino Bulk Terminal and Murmansk Commercial Seaport. In addition, SUEK also uses the Maly Port for coal transshipment. The share of coal transhipped through the Group’s ports increased to 85% of the total transshipment volumes in 2018. Total transshipment costs at the above ports in 2018 increased by 15% mainly reflecting the growth in volumes and increase in transshipment rates according to market level.

Transportation costs
$m 2018 2017 %
Rail costs 1,383 1,362 2%
Freight costs 223 212 5%
Port costs: 184 174 6%
Group’s port facilities 92 80 15%
Third-party ports 92 94 (2%)
Other 19 38 (50%)
Total 1,809 1,786 1%
Rail costs (international market)
($ per tonne)
(RUB per tonne)

Rail costs (Russian market)
($ per tonne)
(RUB per tonne)

Ports costs (international market) ($ per tonne)
Freight costs (international market) ($ per tonne)


$m 2018 2017 %
Heat sales revenue 734 490 50%
Capacity sales revenue 720 659 9%
Electricity sales revenue 588 461 28%
Total 2,042 1,610 27%

Heat sales revenue amounted to $734m. The acquisition of new facilities and a longer heating season due to lower air temperatures, together with higher tariffs, made it possible to achieve a 50% increase in revenue year-on-year.

Capacity sales revenue totalled $720m, representing a 9% growth year-on-year. The main share of revenue comes from capacity supply contracts. The connection price for these is on average five times higher than the price of a standard connection. The generating facilities acquired in 2018 operate under standard supply contracts, and therefore do not have such a significant impact on revenues.

Energy sales revenue (%)

Electricity sales revenue rose by 28% to $588m. The growth in production due to the expansion of generating capacity and higher tariffs caused by a more intense electricity flow from the European part to Siberia compensated for the negative impact of the Rouble depreciation.

Cash cost of energy sold The cash cost of energy sold in 2018 was $1,471m. The impact of cost growth in Rouble terms, due to the indexation of labour costs and an increase in fuel costs, was partially offset by the lower Rouble exchange rate.

On top