Kyivenergo EGM: New Subsidiary; Augmented Supervisory Board

At yesterday’s EGM, Kyivenergo (KIEN: U/R) shareholders voted to create a 100% subsidiary of the company, Teploenergozbut Kyivenergo LTD. According to management, the new subsidiary will provide housing services (last mile supply of heat and hot water) and accumulate payments from heat and hot water consumers. According to Kyivenergo’s CEO, the spin off will allow the company to avoid cross subsidization of its heating segment and increase chances for the company to get full compensation of heat losses from the Kyiv City budget. The EGM also increased the number of supervisory board members from seven to eight and elected Kyivenergoholding company to fill the new seat. Alexander Paraschiy: We expect Kyivenergo will not consolidate the new subsidiary in its financials according to UAS. If the new subsidiary will account for Kyivenergo’s heat production and supply business, Kyivenergo’s reported sales might decrease by up to 50%. In the short-term, this also will lead to an increase in Kyivenergo’s reported profits, as the subsidiary will accumulate all the losses from Kyivenergo’s unprofitable heating segment. In the mid-term, the subsidiary cannot be loss-making, as according to legislation, losses from heating services provision have to be compensated from the Kyiv city budget. We will adjust Kyivenergo’s accounts in the future to account for Teploenergozbut’s financials.