KPLC seeks profits

Published: 19-MAY-04

The restructuring plans are expected to enable KPLC to save up to $37.5 million for the year ending June 2004, according to its chairman, engineer Alfred Sambu. Key to the restructuring plan, which has been approved by the Ministry of Finance - the corporation's majority shareholder with 40.42 per cent ownership - is to convert $200 million of the debt KPLC owes to the electricity-generating company, Kenya Electricity Generating Company (KenGen) into non-cumulative redeemable preference shares.

The other significant owner of KPLC is the National Social Security Fund, with 10.81 per cent of shares.The plan will see KPLC save at least $13.75 million in interest on this loan, and aims to separate the corporation's power distribution and power-generating operations. KenGen is wholly owned by the government.

Part of the revival strategy of KPLC is to float additional shares on the Nairobi Stock Exchange (NSE) where it is quoted. Kenya's Energy Minister, Achilo Ayako, said that KenGen would be privatised through floating shares on the NSE "in the next 18 months".The other restructuring strategy involves reducing bulk supply tariffs by KenGen to KPLC. According to the plan, KenGen's reduction of tariffs will enable KPLC to save $28.75 million per year.

Engineer Sambu is optimistic that these changes will result in a better bottom line for this once blue-chip company, whose shares on the NSE were popular with foreign investors. "These measures will partly strengthen the company's capital base, in addition to providing financial relief during this recovery period," said Sambu.

Further measures will involve reducing its technical and commercial losses within its network by three per cent. These measures will enable the company to save a further $2.5 million per year. Network losses are the bane of KPLC; according to the company's records, there are at least 13,000 power outages per year, which adds up to it lost revenue of $900 million.

Apart from stemming losses, the company is aggressively marketing electricity connections, which will produce additional revenue.

This is an area where it has traditionally performed poorly. It has been accused of being slow to address the huge potential demand for electricity among Kenyans. As a result, most Kenyans are now resorting to other means of generating and distributing electricity.

For instance, in areas surrounding Mount Kenya, farmers are taking advantage of numerous water streams in the area to build community dams and electricity- generating turbines to produce enough power to serve more than 1,000 households.Sugar millers have also been agitating to be allowed to generate electricity from by-products of sugar milling and sell it to nearby areas.

The Ministry of Energy has set KPLC a target of 150,000 new connections every year - a tall order. To hit this target, KPLC has started reducing its connection fees by a significant 50 per cent to enable as many people as possible to apply and pay for connections.

Nevertheless, significant challenges lie ahead of KPLC's ambitious plans to return to profitability. The main hurdle remains the power supply agreements that the company signed with Independent Power Producers (IPPs). According to a recent report based on investigations into the company's former management, it was revealed that KPLC bought power from IPPs at 14 US cents per kilowatt hour and sold it at 8 US cents, a direct loss of 6 US cents. As a business imperative, the accounting behind these agreements has continued to baffle Kenyans.

The agreements were signed as early as 1996. Most of the contracts are expected to expire this year.There are presently six IPPs generating at least 23 per cent of electricity demands in the country. Tsavo Power Company generates 10 per cent, Iberafrica 5.3 per cent, Westmont 0.6 per cent, OrPower4, 2.3 per cent, VEB 4.7 per cent, and REF 0.2 per cent. KenGen produces the rest.

Michael Fox, the CEO of Iberafrica justified high tariffs on electricity sales to KPLC to "numerous taxes that IPPs pay to the government". Fox also said that because of the slow growth of the Kenyan economy, KPLC has been unable to buy all the power generated by the IPPs, despite the high cost of its production.

The investigations report also unearthed other management malpractices by the former management board. The losses resulting from the malpractices are likely to continue affecting the company's bottom line. To assist KPLC in its recovery, the Government will grant it $150 million. This is, however, $100 million short of the $250 million which Minister Ayako said is needed to address the company's short term problems.

The other challenge facing KPLC is how it will recover $10 million of its pension fund, which the former management used to set up Iberafrica. Already, the revelations by the investigating committee have resulted in low morale among the workers, with some of them threatening to go to court over the matter.

Since the new administration sacked procurement officers, KPLC's procurement division has been significantly affected, resulting in a shortage of key equipment for repairs and replacement. As a result, a section of its clients have been experiencing constant and long power blackouts, a fact which will eventually eat into the company's bottom line.

Investors, however, seem to be giving a thumbs-up to the restructuring exercise, and the company's share price has experienced significant appreciation over the last year. On 13 February 2004, 2004, KPLC shares at the Nairobi Stock Exchange (NSE) were trading at $1.5, a 300 per cent rise over one year.

Dealers at the NSE said the share price is expected rise further based on the restructuring measures being undertaken. However, only a return to the black will ensure that the rally is sustained, and that KPLC becomes the highly profitable company it once was.

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