Kenya Power profit shrinks despite making suppliers richer

Kenya Power management is likely to face fireworks from shareholders who will have to wait longer for the firm to end its dividend drought.

The shareholders have not earned dividend since 2017, even as other entities that feed the power utility firm give good returns to shareholders.

While Kenya Power reported its worst profit in more than a decade, KenGen nearly doubled its profit for the half-year to December 2019.

Ormat Technologies, which owns OrPower 4 that produces power in Olkaria and is listed at the New York Stock Exchange, is also among the firms that have made their earnings from Kenya Power public - giving good returns to investors.

While KenGen had the benefit of a tax rebate following the commissioning of a 165 megawatt (MW) power plant at Olkaria, Naivasha, the firm also attributed its growth in profit to increased electricity revenue for the half-year.

Its net profit went up 98 per cent in the six months to December 2019 to Sh8.17 billion from Sh4.12 billion reported in the similar period of 2018.

Other than the tax rebate, the firm said the growth was helped by a 6.4 per cent increase in electricity revenue - from Sh15.04 billion in 2018 to Sh16 billion for the six months.

This follows the completion of the Olkaria V geothermal power plant.

Kenya Power saw its profit for the six months to December plunge 71 per cent from Sh2.458 billion to Sh693 million over a similar period in 2018.

The dip in numbers shows an improvement compared to the 92 per cent drop in net profit that the power retailer reported for the full year to June 2019.

The profit went down to Sh262 million from Sh3.268 billion reported in the year to June 2018.

Ormat, which has an installed capacity of 150MW at its Olkaria fields, just published its result for the year to December 2019, and reported a six per cent increase in revenues from electricity - partly aided by its business with Kenya Power.

KPLC buys the firm's power produced by its Olkaria geothermal plants and according to Ormat's earlier reports, Kenya accounts for 16.6 per cent of its revenues. This is a substantial chunk for a firm with operations in over eight countries, which include US and Turkey. Kenya Power acquired Ormat’s electricity worth Sh11 billion in its year to June 2018, the second-largest producer after KenGen, which earned Sh37 billion.

The American firm has always cautioned shareholders that its heavy reliance on revenues from Kenya Power is a risk, something that seems to be passing.

“In the electricity segment, we are exposed to the credit and financial condition of KPLC that buys the power generated from our Olkaria III in Kenya,” said the firm in its annual report last year.

“In 2018, KPLC accounted for 16.6 per cent of our total revenues. Any change in KPLC’s financial condition may adversely affect us,” it added.

Then why is it that Kenya Power can help other players along the power supply chain become profitable while staring in the red?

In a commentary accompanying the financial results, the firm noted that the drop in profits was due to increased power generating capacity.

This means the firm is now required to pay more to either power from producers or pay capacity charges from those that it is not buying power from.

Demand has, however, not been growing in tandem with the power production capacity. In October 2018, the 310MW Lake Turkana Wind Power Plant and last year the 50MW Garissa Solar Power Plant started generating and feeding power to the grid.

While they present cheap renewable power, the consumers of this power are not growing as fast. “There is a jump in non-fuel costs, which is attributed to the incoming of Lake Turkana Power and Garissa Solar Power,” said Kenya Power Chief Executive Bernand Ngugi at a recent briefing.

And if more power being added to the grid was a key concern for the power distributor last year, this year might also prove to be difficult, as more power producers increase their electricity production capacity. These include KenGen, which has commissioned its 165MW Olkaria V. Several other producers have lined up plants that are at different phases.

A recent BloombergNEF report said projects lined up by various energy firms can increase Kenya’s power production capacity by 4,000MW.

Many of these are, however, in their early stages and yet to get licences.

The State is pushing for lower power cost for commercial consumers and it recently gazetted a tariff for large firms connected at 220KV, who will pay Sh7.9 per unit of power consumed.

This compares to the current tariff that charges businesses between Sh10 and Sh15 per unit.

While lower tariffs are good for the industry, it might be a drag for Kenya Power, which relies on such heavy consumers who are however few and whose pace of growth has been slow.

Mr Ngugi said power purchase was almost being outside the firm's control, the firm is putting in place different mechanisms to reverse what has been a fast decline as it tames borrowing.

Short-term loans in the year to June 2019 resulted in the firm's finance costs jumping by 46 per cent to Sh10.3 billion, from Sh7 billion.

The costly loans had been used to bridge cash flow shortfalls.

“We have said we are not taking any more loans unless it is extremely necessary. We want to see what we can do with what we have and at the same time give up some of these non-essential things,” said Ngugi. The firms are also reducing losses occasioned by theft occasioned by illegal connections and collusion between customers and employees.

Commercial and technical losses stood at Sh12 billion in the year to June 2019. Some of these losses can be recovered from consumers. These include fighting illegal connections.

The firm is also trying to collect debts, mostly unpaid power bills. Mr Ngugi said he is undertaking a reorganisation that will see more Kenya Power employees walk around reading meters and where necessary, disconnect customers who have not been paying their bills.

Currently, the firm has Sh20 billion in unpaid bills. “There are several measures we are putting in place, including maximising utilisation of our resources to grow our sales. Growth of sales is the only option we have. We have no control over power purchase,” said Ngugi.

“We are moving in to ensure that all points of power consumption are metered. This is because we have discovered that we are being robbed off power at almost all points of consumption.”