Going through Kenya Power’s latest audited accounts, the first thing that struck me was the big drop in pre-tax profits.
According to the audited accounts, profits fell from Sh7.6 billion in the previous year to Sh3 billion in the financial year ending June 2018. I decided to comb through the accounts to find out what had caused such a massive reversal in the fortunes of the company within one financial year.
Two items caught my eye immediately. First, some massive amount of Sh7 billion the Auditor- General describes in mumbo jumbo as unbilled fuel cost charges. Intriguingly, the phrase unbilled fuel cost charge is put in quotes in the auditor’s comments, suggesting that even the Auditor-General- while looking at the books- found that these charges indeed represent monies that were unbilled as reported by the management of the company.
So, I decided to comb through the accounts in more detail to find out if these ‘unbilled fuel’ cost charges were included in what accountants called receivables- or monies owed to the company. I found that the Sh 7.2 billion figure is recorded as owing to the company.
To my surprise, an amount of Sh4.4 billion is immediately written off from this figure ‘as a credit provision’ essentially meaning that those unbilled fuel cost charges have been written off against income.
It means that Kenya Power does not expect any payments from them. I went to the notes on the accounts to find out what this provision was all about and why such a large amount owing was being written off. I wanted to see the actual counterparties who owe Kenya Power the amounts that have been provided for and written off the company’s income. However, the notes have no clear information on the strange animal called ‘unbilled fuel cost charges’. For the record, this item ‘unbilled fuel cost charges’ is the main reason why the Auditor- General has given a qualified opinion on the financial statements of the company.
The next item that caught my eye is how the Auditor-General went about throwing a tantrum on the company’s borrowings. That had caused a massive debt load - a whopping Sh113 billion.
Then Auditor-General proceeds to make the point that the company is in breach of financial conditions on commercial loans amounting to Sh60 billion. According to the Auditor-General, the company is in a precarious situation because- technically- these commercial lenders are entitled to demand immediate payment of their debts.
You can imagine the crisis that can happen to the company’s already strained working capital position were these commercial lenders to demand payment in line with time frames stipulated in existing loan agreements. The short-term financial position of the company would be very precarious indeed.
When you include overdrafts and other short-term borrowings, the debt in the company’s books comes close to Sh120 billion. This means that the debt load is nearly 40 times Kenya Powers annual income of Sh3 billion. Clearly, the company’s long- term solvency is now in doubt. In the medium, I see the government being forced to implement a radical balance sheet restructuring.
I don’t want to prescribe to the government what to do. But when a strategic parastatal is in this situation, the playbook is the same everywhere: Inject capital to recapitalise the company and consider forging an alliance with a strategic partner that can bring technical expertise and management.
It all begs the question: does it really make sense for Kenya Power and other strategic commercial state corporations to remain listed on the stock exchange? I ask the question because I foresee a situation-in future- where the government- as the main shareholder in these commercial state corporations-- will be forced to pump in capital and –in the process- end up diluting the minority shareholders.
Kenya Power is the monopoly electricity distributor in the country. It is the only buyer of electricity from independent power producer meaning that its financial health has implications to the flow of investment in the electricity sector.
The company’s financial health fortunes have implications to the performance of the economy. If the government does not come up with radical solutions to restore its profitability, it will not take long before it dips into even deeper financial problems.