By NJIRAINI MUCHIRA

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Electricity distributor Kenya Power is on the verge of a meltdown as it battles allegations of corruption and mismanagement, and plummeting profitability.

The utility firm, which last year launched an “align, grow and transform” strategy based on impressive profitability, last week issued a profit warning, signalling a tough period ahead.

Its current and former managers have also been arraigned in court on charges of corruption and abuse of office. They have denied the charges.

With a 6.5 million customer-base, Kenya Power has taken out expensive short-term financing amid rising operating costs; has huge financial obligations under several power purchase agreements; is running on crumbling distribution facilities and is operating with an inefficient and bloated workforce.

Worse still, a plan to recover $100.2 million in fuel cost charges from consumers by inflating and backdating power bills has left the company with a huge hole in its books. In its annual report for the year ended June 2017, the amount listed under trade and other receivables continues to be problematic on its books.

“Unrecovered fuel cost from customers is currently in a mitigation fund set up by the Energy Regulatory Commission (ERC) to be passed on a later date upon approval,” said the report.

Although the ERC gave the green light for Kenya Power to recover the amount, it was halted by the High Court in January. However, in July the company got a reprieve after a marginal increase in electricity tariffs, but a nagging challenge of electricity losses on the system coupled with a subsidised tariff for large businesses and manufacturers operating at night has resulted in near zero benefits.

Monopoly

Analysts say the company’s recovery will only be possible with the appointment of a turnaround specialist who has credibility, given that previous top managers have been entangled in scandals with some currently facing prosecution for corruption.

“A utility, especially a monopoly, should not be struggling. Kenya Power is a good business under bad stewardship,” said Gerald Muriuki, research analyst at Genghis Capital.

The magnitude of the trouble into which Kenya Power has sunk came to the fore last week after the company issued a profit warning, preparing shareholders to brace themselves for a fall in profitability for the full year ending June 30.

In the statement, the company said net profits would be at least 25 per cent lower than the $70.8 million posted the previous year. Half-year net profits declined by 30.3 per cent to $28.4 million.

“Revenue growth in the year was constrained by a depressed economic environment, poor hydrological conditions in 2017 and a protracted electioneering period. This slow business environment led to a significant decline in the company's financial performance,” said Jared Otieno, acting managing director.

Corporate governance

However, analysts say the poor performance — which has also seen the company’s share price at the Nairobi Securities Exchange decline from a high of $0.11 (Ksh11.80) a year ago to $0.03 (Ksh4.05) last week — was based on external factors.

During the second half of the company’s financial year, electricity consumption steadily grew with peak demand hitting an all-time high of 1,802MW as at June, up from 1,770MW in January 2018, according to data from the Energy Regulatory Commission.

Although the growth in consumption should have translated into an increase in total revenues, numerous internal factors related to mismanagement have wiped out any benefits that would have come with an increase in electricity sales.

The firm’s corporate governance is in doubt given a change in board leadership while top managers faced charges of swindling the company through procurement of substandard transformers worth $44.2 million.

Top long-term financiers have given the company a wide berth, forcing it to rely on expensive short-term funding from commercial banks.

Although in the first half Kenya Power’s drop in net earnings was mainly due to a 42.8 per cent increase in finance costs, the company has maintained a reliance on short-term funding, which has increased by 76.6 per cent year-on-year to $15.2 million.

The firm is posting reduced profitability even as it faces pressure to upgrade distribution facilities to reduce power losses. Currently, system losses stand at about 18 per cent, which is significant considering the ideal average is nine per cent.

There are around 25,000 outages and 300 transformer failures a month — a situation that gets worse during rainy seasons.

The company also faces fixed capacity charge payments for new power plants that are coming on-stream despite a depressed demand for electricity.

Kenya Power is 50.1 per cent owned by the government and 49.9 per cent by private investors.