Kyivenergo to lose USD 160 mln from heat production in 2008

Kyivenergo (KIEN: HOLD) estimates its losses from generation and supply of heating at USD 160 mln in 2008, due to low tariffs, said company’s chairman Serhiy Titenko yesterday. The city of Kyiv, which by law, has to fully compensate these losses, allocated only USD 28 mln in compensation from the city budget in 2008. Moreover, the city underpaid USD 28 mln in compensation for Kyivenergo heating segment’s losses in 2007. Poor compensation raises liquidity issues for Kyivenergo – the company cannot fully pay for consumed gas and, according to Naftogaz of Ukraine, could be completely cut from gas supply in the near future. Alexander Paraschiy: We do not believe the local authorities will revise heating tariffs before the elections for the Kyiv mayor and city council members on May 25 (despite a more than 30% increase for the heating production costs at Kyivenergo in 2008). Due to the elections, the cutoff of gas deliveries to Kyivenergo is also unlikely: local authorities will not allow hot water supplies to stop in Kyiv. We expect that tariffs will be revised slightly upward after elections. In addition, we believe Kyiv city council will raise compensation amount for Kyivenergo sometime in 2H08, as it did in 2007 and 2006. Though, it is unlikely that heating losses will be fully compensated by new tariffs and budget subsidies. We stick to our 2008 net income forecast for Kyivenergo at USD 4.3 mln.