Olga Bodrova

Russian state-controlled electric power holding Inter RAO UES posted poor financial results for the first half of 2012, with its EBITDA deterioration exceeding analysts' expectations and a multi-billion ruble net loss caused by non-cash items. Analysts expected the holding's results to worsen, but did not anticipate that the company would lower its EBITDA forecast for the whole of 2012. Analysts say the holding is currently trying to improve the operations of a number of assets that it purchased in 2011 and could start showing solid stable results in 2014.

In early October, Inter RAO UES posted a net loss of 10.219 billion rubles for January–June against a net profit of 49.8 billion rubles in the same period of 2011, as calculated under International Financial Reporting Standards (IFRS). The revenue of Inter RAO UES, which controls a number of generating and distribution assets with a combined installed capacity of around 28 gigawatts, fell 3.2% on the year to 264.6 billion rubles in this period, while earnings before interest, taxes, depreciation and amortization (EBITDA) decreased 32.7% to 16.9 billion rubles.

It also posted a pretax loss of 8.872 billion rubles in January–June against a pretax profit of 59.564 billion rubles in January–June 2011.

The holding also said its net profit, adjusted for non-cash items, fell 41.3% on the year to 8.8 billion rubles in January–June.

Inter RAO UES said its half-year financials were affected by a number of factors, including a reduction of tariffs by its sales units as a result of changes in pricing on the retail market; a switch of the annual indexation of power tariffs from January 1 to the second half of the year; a "non-cash effect" from depreciation of fixed assets due to a decrease in the market value of power companies; intensive implementation of the investment program; and a reduction in the volume of export-import operations due to unfavorable conditions on Finland's Nord Pool market.

The financial results released look mediocre, analysts said, admitting that they expected the holding to post weak results.

Otkritie Financial Corporation senior utilities analyst Sergei Beiden said the results came in slightly below his forecast in terms of profitability, as he projected the holding to post a net profit of 9.9 billion rubles, while the consensus estimate was at 7.8 billion rubles. Revenue was in line with his expectations, Beiden said.

Konstantin Reyli, a senior utilities analyst at investment company Metropol, said he did not expect a net loss, but noted it was in fact probably not correct to speak about a net loss, as it was connected with a large amount of non-cash items, which he attributed to the peculiarities of accounting of some financial instruments and the company's operations. "Thus if to speak about the half-year results, the company exceeded analysts' expectations, as its EBITDA turned out to be 6% higher than the consensus," he said.

Reyli believes that Inter RAO UES' poor financial operations in the first half of 2012 were connected with a whole number of factors. "First of all, we must note the changes in the rules of operations of power sales companies, which were deprived of a number of additional incomes from April 1, 2012. Secondly, we can note the unfavorable dynamics of prices on the free power market in the first half of 2012, which is connected first of all with the launch of additional, more efficient capacities, which put pressure on prices. At the same time, prices of gas in the first half of 2012 remained at the same level as in the second half of 2011," the analyst said. The third factor is connected with changes of certain regulatory rules on the power market, concerning the non-indexation of prices for capacity. And the last significant factor than can be noted is the unfavorable dynamics on the Russian electric power market in relation to foreign markets, which led to a reduction in the volume of the company's trading operations, Reyli said.

Besides posting weak results for January–June, Inter RAO UES also provided quite a pessimistic guidance for the entire of 2012. During a post-result conference call the holding's management lowered the 2012 EBITDA guidance to 26 billion–29 billion rubles from the previous forecast of 36 billion–42 billion rubles. Analysts previously expected a higher EBITDA in 2012 and were disappointed by the guidance announced.

"On the whole, a deterioration of Inter RAO UES' financial results was expected, and results adjusted for one-off non-cash effects even slightly exceeded expectations. However, expectations of a weak second half of the year, announced by the company, look disappointing," Gazprombank utilities analyst Dmitry Kotlyarov said.

"The forecast is significantly below our previous estimates for the 2012 EBITDA of 41 billion rubles and consensus estimates of 37 billion rubles. The main reasons for the downgrade are continued pressure in the retail segment and weaker profits in the generation segment, despite the growth in market electricity prices since July 1, 2012," Beiden from Otkritie said. According to its report, Otkritie expects Inter RAO UES' EBITDA at 31.088 billion rubles in 2012, down from 41.7 billion rubles in 2011.

Beiden reminded that Inter RAO UES plans to launch a 450-megawatt (MW) combined cycle gas turbine at the Urengoi GRES plant and 225 MW of coal-fired capacity at the Kharanorskaya GRES in late October and will start receiving capacity payments in November. However, this will add just 800 million rubles to the EBITDA in July–December, which will not significantly influence the 2012 results.

The cut in the 2012 EBITDA guidance is 13% below our estimates of 31.7 billion rubles, utilities analysts at VTB Capital said.

Reyli from Metropol believes that the company's results for the entire of 2012 will be weaker than analysts and investors had expected before the January–June report was released. "The results are quite weak, but this is not connected with the work of the company's management, but with an objective situation, which formed on the market, in the outside environment, and with the fact that the company is currently in the process of improving the work of the assets that it purchased in 2011," the analyst said. The holding received a large number of assets and needs to restructure them, improve the management of them, and increase their efficiency, Reyli said, adding that under his estimates the company will be able to do this by 2014. "Besides this, by 2014, the company will launch a significant number of new capacities, which are included into its mandatory investment program, and then, I think, the company will have a completely different level of efficiency. I think we should now refer to Inter RAO UES as a company, which does not show very strong results currently, but is ready to show quite solid and stable results in two years," Reyli said.

Inter RAO UES' management did not provide the net profit it was expecting in 2012. Otkritie projects the holding's net profit for the entire of 2012 at 13.628 billion rubles, down from 41.457 billion rubles in 2011. Before Inter RAO UES released its January–June figures, Metropol was expecting the holding's net profit at 19.341 billion rubles in 2012, without adjustments for non-cash items, but this forecast may now be irrelevant, Reyli said.

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