Kyivenergo reports record 2012 profit on generous heating subsidies

Kyiv’s power utility holding Kyivenergo (KIEN UK) reported UAH 2.34 bln income for 2012, according to its Feb. 20 filing. The annual profit exceeded the capitalization at which DTEK bought the company in December 2011 (UAH 1.8 bln, or UAH 450 mln for a  25% stake) and is 2.8x higher than KIEN’s current MCap.

Kyivenergo’s 2012 revenue grew 43% yoy to UAH 16.41 bln and EBITDA improved to UAH 3.07 bln (vs. UAH -0.57 bln a year before). In 2011, the company posted a UAH 1.2 bln loss.

Alexander Paraschiy: The company’s spectacular result is explained by an estimated UAH 3.38 bln in payments from the Kyiv city budget (which was granted by the state budget). The payments compensated the accumulated difference between Kyivenergo’s heating production costs and heating tariffs. Without these subsidies, Kyivenergo’s 2012 financials would have looked not better than a year before. Out of the paid compensation, only UAH 1.14 bln covered the 2012 tariff differences, with the rest compensating losses generated before 2012.

Given DTEK’s success in lobbying compensation for tariff differences from the state budget, there is a high chance that Kyivenergo will remain marginally profitable in 2013 as well. Despite such enormous profit, we do not believe the company will pay dividends any time soon, since it has to invest much of it into rehabilitating Kyiv’s outdated heating and electricity infrastructure.

Interestingly, the initial compensation for Kyivenergo was approved by the government at UAH 2.23 bln in June 2012 and was raised a couple of times since. Another interesting fact is that compensation from the state budget to Kyivenergo amounted to 6.7% of Ukraine’s 2012 fiscal gap.