Kyivenergo asks for compensation for inefficient tariffs

Обзоры по компаниям и отраслям 17.09.2013 Kyivenergo (KIEN UK), Kyiv’s monopoly producer of heat controlled by DTEK (DTEKUA), owes Naftogaz UAH 2.13 bln for gas supplies, according to Kyivenergo CEO Oleksandr Fomenko, as reported by the Interfax-Ukraine news wire on September 16. At the same time, the city of Kyiv owes UAH 2.8 bln to Kyivenergo as the difference for inefficient (below-cost) heating tariffs, the CEO stated. Kyiv Mayor Oleksandr Popov reported that the city government is working with Ukraine’s Cabinet of Ministers to secure state funding to cover Kyivenergo’s deficit, according to Interfax. Alexander Paraschiy: As heating season is approaching, Kyivenergo is getting more justification to ask for compensation for inefficient heating tariffs from the city. Kyivenergo has found a good way to secure such compensation in trying to match its debt to Naftogaz with the debt owed to it by the Kyiv city government. Facing the risk that Kyiv city will be deprived of heat in the winter season, Kyiv’s city administration has no option but to ask the central government to pay for the tariff difference to Kyivenergo so that in turn, it’s is able to repay its debt to Naftogaz. Last year, this tactic was rewarded by an enormous payment to Kyivenergo from the state budget (UAH 3.4 bln, by our estimates). This year, the state budget has reportedly secured UAH 1.5 bln in compensation to Kyivenergo, but given the latest development, it looks like the company has not received anything. So, the company has a choice: 1) either to continue blackmailing the Kyiv city administration (and in the process endanger the smoothness of the heating season in Kyiv to get a chance at full compensation) or 2) demonstrate a “political consciousness” (since Popov belongs to the same ruling party as Kyivenergo’s ultimate owner, Rinat Akhmetov) and let DTEK finance the working capital of Kyivenergo. Since state budget revenue is far below plan this year, we see a high chance that Kyivenergo will be unable to receive its compensation in full, meaning DTEK will have to finance the company’s operations and Kyivenergo will report losses this year. In turn, that can become a negative driver for DTEK’s profit in 2013. Total compensation to DTEK (paid from the state budget) for the inefficient heating tariffs of its subsidiaries was UAH 4.3 bln in 2012, or 25% of its 2012 EBITDA.