An examination of the financial statements of some of Nigeria’s electricity distribution companies (DisCos) indicate that they are veering dangerously close to full blown bankruptcy with reported losses of over N196.23 billion to end the 2016 financial year.
This compares with a loss of N104.69 billion they recorded the previous year.
DisCos in Africa’s most populous nation and largest economy are being squeezed by surging operating expenses and finance costs.
The National Electricity Regulatory Commission (NERC) had compelled the firms to post financial results on their websites.
The firms are Eko Electricity Distribution Plc (Eko Disco), Kaduna Electricity Distribution Plc (Kaduna Disco), Ikeja Electricity Plc (Ikeja Disco), Abuja Electricity Distribution Plc (Abuja Disco), Ibadan Electricity Distribution Plc (IKeja Disco) Plc and Benin Electricity Plc (Benin Disco) Plc.
A breakdown of the figures in the financial statement shows Eko Disco, Kaduna Disco, Ikeja Disco, Abuja Disco, Ibadan Disco, and Benin Disco recorded losses of N28.66 billion, N17.90 billion, N65.63 billion, N47.44 billion, N24.98 billion and N11.62 billion as at December 2016.
“The current liquidity crisis in the power sector is likely to be heightened in 2018, not least because the front runner IPP (Azura) will become operational in the course of the year, and the Nigeria Bulk Electricity Trader’s limited receipts from the distribution companies would have to be shared with even more generation companies,” said Woleme Esan, energy and infrastructure lawyer and partner at Olaniwun Ajaiye.
DisCos have ascribed much of the challenges in the sector to the absence of a cost reflective tariff, which essentially force them to price power below the cost of production and shoot up their debts.
Data from the financial statements show that the firms are highly indebted to suppliers or creditors as total and other payables spiked by 97.47 percent to N472.88 billion in December 2016 from N239.57 billion as at December 2015.
This comes as combined sales the six firms spiked by 31 percent to N336.69 billion in the period under review, but a cumulative operating loss of N344.89 billion prevented sales growth from trickling down to the bottom line profit.
“The prevailing Disco tariff today was modelled against variables that have been overtaken by time and events and therefore does not reflect the true pricing of electricity. MYTO 2015 for Discos were built on 196/$1, 8.3% inflation rate, certain available capacity and therefore the final tariff was a product of this variables,” Chuks Nwani, energy lawyer and vice president of PowerHouse International, an energy consultancy said.
“You recall that from late 2015 there were changes in these variables which would require reciprocal adjustment of the tariff but the government did not allow NERC to increase the tariff to meet up with the current realities. The shortfall that the Discos could not account for becomes a debt for the market which the government is under obligation to pay since it is at their instance that the tariff was not increased.”
“This is why the government has to fully implement the revised customer tariff plan even if at the end of the day, the government is not going to fully pass it on to the customer, but it has to act fast to bring in liquidity to the market as this will save the sector from total collapse and attract new investments,” said Nwani.
Drilling down the financial statement of these firms shows that they have recorded more losses than profit throughout their existence given the accumulated losses in their balance sheet.
Kaduna Disco, Ikeja Disco, and Abuja Disco, have negative retained earnings of N28.60 billion, N175.43 billion, and N29.60 billion, respectively.
Benin Disco may be technically insolvent as its total liabilities of N89.23 billion as at December 2016, exceeded total assets of N88.93 billion. This resulted in a negative shareholders fund of N584.18 million in the period under review. Negative shareholder equity on a company’s balance sheet is a red flag.
Babatunde Fashola, minister of Power, Works and Housing has always countered the argument to revise tariffs by insisting that DisCos are not even providing cost reflective service and if they improve collections by metering more people, this could assuage for the loses with more customers pay.
The chances of this happening, a year to the general election, especially with a government already burdened by a reputational and performance problem, does not look promising.
Worse still, the DisCos have been sorely incapable of ramping up collections to settle other market players. Contrary to their performance agreements signed before November 1, 2013 when power assets were handed over to the core investors, the DisCos have failed to reduce to their Aggregate Technical and Commercial Collection (ATC&C) losses to 20 percent within the first five years.
Rather, BusinessDay analysis revealed that in 2016, they reported average ATC&C losses of 40 percent, one of the highest in the world. Throughout 2017, DisCos could only settle on average 30 percent of their market invoice, forcing the government to create an N701bn payment assurance guarantee for gas suppliers.
The Federal Government plans to inject N871bn into the power sector this year according to its 2018 – 2020 medium term expenditure framework and fiscal strategy paper in line with its Power Sector Recovery Programme, (PSRP) to assuage these market losses.
A breakdown of the figure indicates that Central Bank of Nigeria Financing facility will account for N310 billion. The sum of N61 billion would be contributed through the World Bank’s Program-for-Results, a financing scheme that links disbursement of funds to programme results.
The Federal Government will also make available budgetary provision in the sum of N194 billion while governments power assets ownership restructuring and settlement of DisCos debts will account for N315 billion. The Federal Government owns 30 percent shares in 10 of DisCos and fully owns Yola DisCo.
But analysts fear this may not fully solve the problem. “In my view, the solution to the liquidity crisis is binary – it is either tariffs are made to be cost-reflective, or the Federal Government steps in to make good the losses. Either of these options would have to be actively considered this year for the sector to attract the much needed investments,” said Esan.
BALA AUGIE & ISAAC ANYAOGU
