Kenya Power sees fall in profit ahead of tariffs increase
Energy PS Patrick Nyoike (left) with Kenya Power MD Joseph Njoroge at a past event. The firm is set to raise power tariffs. Photo/Diana Ngila
What you need to know:
Kenya Power disclosed the earnings forecasts in an application to the Energy Regulatory Commission (ERC) as it seeks to raise its tariffs.
The firm estimates that its profit before tax would drop 53.4 per cent to Sh3.9 billion in the year ended June.
The lower profit is expected to be driven by high operating costs that would wipe out most of increase in sales.
Kenya Power expects its profit to halve in the year ending June and more than double in the next financial period if it succeeds in raising electricity tariffs.
The earnings estimate means investors in the firm may receive lower dividend payout for this financial year though the company says it will rebound to a sustainable profit growth in the medium term.
The power distributor disclosed the earnings forecasts in an application to the Energy Regulatory Commission (ERC) as it seeks to raise its tariffs by 21 and 9 per cent in March and July respectively.
It has also applied to raise its tariffs in July 2014 and July 2015 in what would raise overall electricity prices by four and 11 per cent respectively. The firm says the increase in power charges will cover for rising expenses.
Kenya Power estimates that its profit before tax would drop 53.4 per cent to Sh3.9 billion in the year ended June compared to Sh8.5 billion in the same period last year.
The lower profit is expected to be driven by high operating costs that would wipe out most of increase in sales. The firm’s sales are expected to rise 38.9 per cent to Sh62.5 billion compared to Sh45 billion in the same period as transmission and distribution costs, for instance, rise 28.6 per cent to Sh19.4 billion.
The profit drop is due to the tariff increase coming late in the financial year, with the company expecting its earnings to grow steadily in subsequent years.
The company projects profit before tax to grow 182 per cent from the Sh3.9 billion in the year ending June to Sh11 billion in the same period next year as sales rise 30 per cent to Sh81.7 billion.
Mr Francis Mwangi, an analyst at Standard Investment Bank, said the tariff review would be positive for Kenya Power but cautioned the gains would depend on its ability to curb system losses.
System losses are revenue leaks brought by inefficiency in the power flow system and meter tampering or outright electricity theft.
“If they don’t bring down the system losses significantly then the tariff increments will not contribute much to their profitability,” said Mr Mwangi. Kenya Power currently experiences a system loss of 17.3 per cent and targets to lower it to 16.9 per cent by 2016.
The firm’s profit before tax is expected to stagnate at the Sh11 billion mark in 2014 and 2015.
“Assuming the proposed retail adjustment is granted as requested, then the Kenya Power’s financial performance in the medium term is expected to be satisfactory,” the company said in its application to ERC.
Kenya Power says the tariff adjustments are critical to cover the rising operating expenses, noting that its revenue in the past four years had dropped below earlier targets due to low tariffs.
The firm last reviewed its tariffs in July 2008 and had applied to raise the rates by 25 per cent from June 2011. The government, however, suspended the tariff increase to protect consumers grappling with double-digit inflation.
The regulator has signalled its support for an increase in electricity tariffs, noting that the utility firm has absorbed rising operational costs besides its need to make big-ticket investment in electricity distribution network.
The tariffs are subject to a public review on January 25 and it remains to be seen whether they will revised or adopted as originally proposed by the power distributor.
Kenya Power, however, said it expects the proposed tariffs to be approved in whole, arguing that failure to do so would hurt its capacity to maintain and invest in electricity distribution network.
“Kenya Power assumes that the application to adjust retail tariffs shall be approved in its entirety as the company may face operational challenges if review is not granted,” the firm said in the statement.
The company plans to spend about Sh80 billion in the medium term to upgrade and expand its current distribution system.
Higher revenue is also aimed at winning the confidence of financiers like European Investment Bank and the World Bank on whom the company relies to fund its capital projects.
While higher tariffs will hit consumers hard, it is expected to lift the fortunes of the monopoly, which says rising operating costs is hurting its margins.
The company’s costs of connecting customers to the electricity grid, for instance, has risen more than five times from Sh2.3 billion in 2007 to Sh11.8 billion last year.
