12 December 2013

Zimbabwe: Zesa Technically Insolvent

POWER utility, ZESA Holdings, the custodian of government equity in the power sector, is technically insolvent and has a negative working capital, creating uncertainty in its ability to continue as a going concern.The situation could have worsened this year after government ordered the parastatal to write-off millions of dollars in electricity bills owed by consumers.

In its latest financial statement published last week for the year to December 2012, the company attributes its woes to outstanding legacy debts estimated to be in excess of US$600 million, which were not being serviced and are now treated as current liabilities.

Analysts fear that unless ZESA receives funding from government, the debt, which is part of the unresolved national debt, would weigh down the company.

ZESA's current liabilities, which totalled US$944,9 million, far outstripped its current assets by US$479 million, implying that the company may not be able to meet its current liabilities as they fall due.

In the prior comparative period in 2011, the company recorded a negative working capital of US$505 million.

The financial statement showed that the company recorded a net operating loss of US$132,2 million in contrast to a profit of US$24 million in the previous year.

The electricity debtors book ballooned to US$785,1 million from US$650,9 million in the prior year.

However, there was a significant improvement in electricity sales, which increased to US$799,4 million from US$698,6 during the prior comparative period in 2011.

Board chairman, Simbarashe Mangwengwende, described the financial position as precarious.

"The financial position of the group continues to be weak largely due to the legacy debt," said Mangwengwende in a commentary on the financial position.

"The group is technically insolvent because all outstanding legacy debt, which is not being serviced, is now treated as current liabilities."

"Although we have an unqualified audit opinion on our accounts because of the letters of comfort from the shareholder, there is an emphasis of matter by the external auditors regarding the going concern status of the group due to the fact that the current assets for ZESA Holdings, ZPC, ZETDC and ZESA Enterprises are less than the companies' current liabilities," Mangwengwende said.

"Although this is the same situation for Powertel Communications, the auditors did not issue a similar emphasis of matter because of the very positive trend towards financial viability exhibited by that company."

Powertel is another subsidiary of ZESA involved in telecommunications.

He, however, remained hopeful that the technical insolvency challenge could be addressed.

"This technical insolvency challenge will primarily be addressed by transferring the legacy debt to government and refinancing short positions on the balance sheet," he said.

ZESA had hoped the restructuring of the group would provide an opportunity to start the debt transfer, a move that would have strengthened the balance sheets of the group's subsidiary companies.

However, Energy and Power Development Minister, Dzikamai Mavhaire, abandoned the restructuring plan initiated by former minister, Elton Mangoma.

The restructuring was meant to create an efficient structure leading to a vibrant electricity market, capable of attracting investment and provisions of incentives for the efficient utilisation of electricity.

What has worsened the plight of ZESA is that when government issued the controversial directive to slash electricity bills, it was denied it the much needed revenue.

A government's decree in September to cancel electricity debts wiped about US$80 million off its debtors' book.

Government is now faced with a huge challenge to take action that can help heal the company which faced a negative impact on financial operations.

This situation presents a major challenge in attracting funds for new developments as it portrays a low credit rating for the electricity market in Zimbabwe.

To ensure that the entities continue as going concerns,installation of prepaid and smart meters is in progress and is expected to be completed by January 2014, a development which will significantly resolve the problem of debtors.

On completion, cash flows are expected to improve as cash would no longer be locked up in receivables.

The group is also working on the expansion of Hwange Power Station and Kariba South Power station to add 600 megawatts(MW) and 300MW respectively to the national grid.

The Zimbabwe and Zambia governments are also working on the Batoka Project which has an estimated combined output of 1 600 MW and is being driven by Zambezi River Authority.

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