Business Daily (Nairobi)
James Makau
17 September 2007
Nairobi — Heavy tax deductions have eaten into KenGen profits despite the firm having registered an overall growth in its business.
In a performance review for the year ended June 30, 2007 that will be made to investors this morning KenGen will report a profit after tax of Sh2.4 billion for the year to June 2007, a drop of 35 per cent from Sh3.7 billion the previous year.
The decline in profit attributable to shareholders was all the more shocking because the company's overall operation had returned a 27 per cent growth from Sh3.7 billion to Sh4.7 billion during the period under review. For a company which had realised a tax gain of Sh48 million last year, it was a harsh poetic justice as direct tax and deferred tax claimed Sh2.2 billion, nearly half the amount earned from operations.
The company will, however, pay a final dividend of Sh0.80 up from Sh0.55 given out in the year 2006. An interim dividend of Sh0.40 per share has already been paid and the final payment will be made in February. KenGen's chief finance manager Wycliffe Temesi said the tax provision for the year was a direct charge at 25 per cent of profit before tax. KenGen is paying at that rate instead of 30 per cent under a Government incentive for listed companies.
Besides the direct tax charge, KenGen is carrying in its books a Sh5.6 billion deferred tax charge which Mr Temesi attributes to a revaluation done two years ago that increased the value of the firm's assets by Sh35 billion.
Under International Financial Reporting standards, a tax must be attached to revalued assets at the applicable rate. Such deferred tax, however, is not repayable in future. The company is also engaged in a Sh3.5 billion tax dispute with the Kenya Revenue Authority (KRA) whose outcome will have a bearing on its future profitability. The dispute relates to investment deductions dating back to 1999 and 2000.
Mr Temesi said the company did not earn any tax reprieves during the period under review because it did not commission new projects. "The commissioning of Sondu Miriu is expected to put us in a substantial tax loss position for the current year," he said. The $200 million (Sh14 billion) Sondu Miriu hydro project will add 60 megawatts to the national grid and is due for commissioning in November. The exact tax deductions applicable, however, will depend on the rate charged on various items.
According to Rina Karina an investment analyst at Faida Securities, the deferred tax credit occurred due to the reduction in tax rate - companies that list on the stock market get reduced tax rates- as well as accumulated group losses. In a statement highlighting the Kengen's performance, managing director Eddie Njoroge attributed the firm's improved performance on the increase in the bulk tariff rate from Sh1.76 per kilowatt hour to Sh2.36.
The revision of the bulk tariff translated into a non fuel revenue increase from Sh11 billion this year compared to Sh8.2 billion posted in 2006. One of the challenges that KenGen faces is a volatile revenue stream depending on the varying hydrological conditions, changing generation mix (geothermal, hydro, wind, among others).
The firm is however expected to add 500MW in additional generation capacity to the national grid over the next 5 years which Kengen estimates would cost Sh70 billion.
The preferential charge allowing KenGen to reduce its tariff for the power it sells to its sole consumer, The Kenya Power and Lighting Company was the cause of a dispute between the two firms last year. In 2003, KenGen reduced the tariff for KPLC from Sh2.36 per kilowatt hour to Sh1.86, allowing the latter to overcome cash flow woes that had dogged it for several years. The Ministry of Energy had attempted to push KenGen not to revert to the Sh2.36 per unit as per the agreement which was due to end in July of 2006.
An increase in the bulk tariff back to the Sh2.36 per unit, was meant to improve KenGen's profitability ratios and overall performance. This trend was consequently meant to reflect positively on the firm's share price.
A study by the then Electricity Regulatory Board - now Electricity Regulatory Commission - earlier in the year indicated that the financial performance for KenGen would be highly satisfactory with key performance indicators looking up for the next four years with after tax profit set to rise from 2006 level of Sh3.8 billion to Sh7.1 billion in 2011.
The report had indicated that KenGen would not be able to cover its revenue requirements for the next two years as it will generate Sh13.9 billion against a requirement of Sh14.6 billion in 2007, Sh30.5 billion will be generated in 2008 but Sh30.9 billion will be required. According to the report, the revenue requirements were based on the depreciation of the plant and machinery as well as the actual interest paid on borrowed funds.
But after two years, the report indicated that the firm would be able to recover the amount.
Although the study sets out some technical conditions under which the long-term bulk tariff would be determined, it had indicated that there remains to be done another study to show exactly how the long-term power purchase agreements (PPAs) bulk tariffs would be determined.
Be the first to Write a Comment!
Copyright © 2007 Business Daily. All rights reserved. Distributed by AllAfrica Global Media (allAfrica.com). To contact the copyright holder directly for corrections — or for permission to republish or make other authorized use of this material, click here.
AllAfrica aggregates and indexes content from over 125 African news organizations, plus more than 200 other sources, who are responsible for their own reporting and views. Articles and commentaries that identify allAfrica.com as the publisher are produced or commissioned by AllAfrica.
