We need to start a national conversation about the financial solvency of Kenya Power. When a monopoly utility like Kenya Power, which is part of the nation’s critical infrastructure is in bad financial health, the nation’s economy is at risk because electricity is a vital input in virtually every economic activity.
What is the true health of Kenya Power today? This burning question is the issue of fuel cost recovery. Newspapers have reported a massive hole running into billions of shillings in the books of the company.
A section of members of the energy committee of Parliament alleged the other day that the big hole in the books of Kenya Power is hidden under fuel cost recovery charges. I grabbed the latest audited accounts of the company to look for evidence to test some of these claims.
I was taught in business journalism school many years ago that the three principal elements that make up a financial statement of a company are the profit and loss account (P&L), the balance sheet, and the cash flow statement.
We were taught that other notes and disclosures in the annual audited accounts merely support the information contained in the three basic elements of a financial statement.
I went straight into the profit and loss account in Kenya Power’s audited accounts for the year ended June 30, 2017. The first thing I wanted to find from the profit and loss account is whether it shows any fuel costs that were not recovered in the financial year?
When you look at the profit and loss account and check the item ‘‘fuel cost charges’’, you will see clearly that they were recovered in full in 2007.
Indeed, the information in the profit and loss account shows that the reporting accountants who audited the books of the company did not flag any month where any significant fuel costs were not recovered.
I asked myself, what is the basis of the controversy around recovery of fuel costs? I was soon to discover that buried in the notes at an obscure part of the audited accounts - note 20(a) on page 117 to be precise - is an abnormally large amount of Sh10.1 billion under the name ‘‘unrecovered fuel costs for the month of June 2017’’.
According to the information in the audited accounts, this money was supposed to be recovered from customers in the month of July 2017.
In the scale of Kenya Power’s operations, Sh10.1 billion is a very large figure especially when you look at it against the backdrop of Kenya Power’s pre-tax profits of Sh10.9 billion.
If you treat it as revenues that have not been recognised in the profit and loss account, then the conclusion is that profits have been materially misstated and the accounts do not reflect the true state of the company’s financial health.
Will this amount be recovered from customers? Energy secretary Charles Keter has assured consumers that nothing of the sort will happen. Had the reporting accountants cleared the matter by the time they were signing off the accounts in October matters would been clearer.
I don’t understand why the reporting accountants chose not to comment on this abnormally large and materially significant amount sitting in the books of Kenya Power.
Indeed, the fact that this large figure does not appear anywhere in the company’s profit and loss statement - only popping out in an obscure corner in the notes to the accounts- is clearly the biggest riddle in the whole saga.
We are at a point where we must stop pretending that all is well with the finances of this critical and strategic national asset.
The accounts show clearly that revenues are stagnant and that pre-tax profits are on a downward trend.
Other indicators of financial ill health are a negative working capital and a massive Sh121 billion debt burden that is not only beginning to push debt- to- equity -ratios to unsustainable levels, but also taking debt coverage well beyond normal borrowing covenants.
Clearly, that six-hour long power blackout we suffered on Tuesday did not happen without context and may be a precursor to a financial blackout. The public uproar by customers about inflated bills is a symptom of a corporate whose fundamentals are worsening by the year.
Kenya Power’s state of health carries implications to the flow of foreign investments into the energy sector. A national debate about the financial solvency of this critical utility is urgent.