Utilities

The Company

THE COMPANY: Kenya Power is a monopoly player in Kenya’s energy sector. Its core business activities include the transmission, distribution and retail of electricity purchased in bulk from Kenya Electricity Generating Company (KenGen, 70%) and independent power producers (IPPs, 30%). The company is largely owned by the government of Kenya with a controlling stake of 50.1% while private investors hold 49.9%.

The firm’s business is structured under six administrative regions which form a network covering 41,486 km. The company also engages in the leasing out of fibre-optic cables. It has 1200 km of fibre optic on the transmission network and 600 km on the distribution network. An additional 25,000 km needs to be laid out to reach most of its 2.9m customers. Management anticipates vast growth from this revenue line.

The company’s key earnings drivers remain pricing and power purchase costs, energy demand, system loss reduction and the level of capital expenditure. Kenya Power is entitled to a triennial review of tariffs which has supported significant capital expenditure (capex) investments. The last review was carried out in November 2013 to the company’s favour. Increases of 3-12% were put in place on high-income consumers and heavy industries which make up 31% of Kenya Power’s customers. The tariff increase boosted Kenya Power’s credit rating and helped it secure $370m in funding for upgrading and expansion of its transmission grid.

The growth opportunities in Kenya’s energy sector are enormous. The country has an 18% electrification rate, well below the sub-Saharan African average of 31.8%. The country’s installed generation capacity is 1652 MW, with peak load projected to grow to 15,000 MW by 2030. Demand will be driven by growth in regional economies, increased purchasing power and urbanisation. Projects are under way to bridge this gap. Kenya is among the countries picked in the first phase of US President Barack Obama’s $7bn Power Africa project aimed at doubling the electrification rates in the continent by adding 10,000 MW capacity. The government plans to add 5000 MW over the next 40 months which is expected to drive up power usage and revenue.

Kenya Power requires significant capital to finance its projects, with capex estimated at KSh156bn ($1.8bn) between 2013 and 2018. Projects planned such as investments in the distribution network will minimise system loses and enhance margins. The financing requirement is expected to be met through improved revenue collection, the lease of fibre-optic capacity and from long-term funding such as corporate bonds.

In first-half 2014 results, the company recorded 53% year-on-year (y-o-y) growth in operating profit to KSh6.8bn ($77.5m), lifting the company’s operating profit margin by 455 bps to 14.5%. This was a result of a 5.5% y-o-y decline in operating expenses to KSh9.7bn ($110.6m), as energy transmission costs declined 11.6% y-o-y to KSh1bn ($11.4m).

Total electricity sales grew by 9.1% y-o-y to 4093 GWh, driven by increased power demand from its existing 2.9m customers as well as the introduction of a large industrial customer in the mining sector. Gross profit margins improved by 113 bps y-o-y to 31%.

Finance costs increased by 79.4% y-o-y to KSh1.9bn ($21.7m) arising from bank overdrafts and loans to finance working capital needs and network expansion and system developments. Borrowings grew 82.2% yo-y to KSh40.4bn ($460.6m) in order to finance its capex ventures. The loans were issued by the International Development Agency, First Rand Bank Medium Term Loan ($60m), the International Finance Corporation ($27m) and Standard Chartered Bank ($60m). Overall, PAT declined 2.7% y-o-y to KSh3bn ($34.2m).

Development Strategy

Kenya Power is positioning itself to take advantage of the additional 5000 MW generation capacity. The company plans on transmitting to neighbouring EAC countries once the regional interconnector projects are completed, which is expected somewhere between 2015 and 2016. Investments are being made to the company’s grid, targeted at reducing system losses as well as minimising outages.