Eko Electrical Distribution Company (Disco) and Ikeja Disco are the most profitable and viable power firms in Nigeria, in an industry where the majority of sector players are at the brink of bankruptcy.
Five out of the eight sector players that have released their 2020 financials are technically insolvent as their total liabilities exceeded total assets, however, Ikeja Disco and Eko Disco recorded positive shareholders’ funds of N31.56 billion and N63.89 billion respectively.
Interestingly, Ikeja and Eko Discos posted profit of N8.78 billion and N11.72 billion respectively as at December 2020.
However, Abuja, Jos, Yola, and Kaduna Discos recorded net losses of N16.50 billion, N42.48 billion, N28.04 billion, and N54.50 billion respectively.
It is noteworthy that while Enugu Disco posted a profit of N177.76 billion from a loss of N64.55 billion, it still has a negative shareholders’ fund of N27.06 billion.
Distribution companies (Discos) have become a burden on the government and private investors who have a stake in them, as many have one foot in the grave given huge debts that they are likely unable to pay back.
Of course, the myriad of challenges has cast doubt over their going concerns as Kano, Benin, and Kaduna have been taken over by Fidelity Bank and the lender initiated action to take over the boards of the three Discos.
Also, the government through its Bureau of Public Enterprises (BPE), announced that with the takeover of Ibadan Disco by the Asset Management Corporation of Nigeria, the BPE had obtained approval from the Nigerian Electricity Regulatory Commission (NERC) to appoint an interim managing director for the distressed power firm.
The government further stated in a notice that it was restructuring the management and board of Port Harcourt Disco to forestall the imminent insolvency of the utility.
Analysts say more firms will be up for grabs given their level of indebtedness and deteriorating revenue collection.
“It is not unlikely as many of them are defaulting on their obligations, despite a series of restructuring. One of the major reasons being the weakness in Naira,” said an analyst who doesn’t want his name mentioned because of the sensitivity of the matter.
“Recall the loans are FCY-denominated, even as they generate local revenues. Besides Eko and Ikeja which covers highly densely populated areas, with a sizable portion of customers being middle and high income earners who are willing and able to pay bills, collection rates of most Discos is really low,” said the analysts.
Discos insolvent as liabilities to assets ratio hit 168%
It is glaring that most companies are in financial distress as the combined industry total liability to assets ratio increased to 168.22 percent in December 202o from 164.93 percent as at December 2019, according to MoneyCentral calculations.
The liabilities to assets (L/A) ratio is a solvency ratio that examines how much of a company’s assets are made of liabilities.
Companies in signs of financial distress will often also have high L/A ratios. A company facing declining revenues and poor long-term prospects of growth will be impacted on retained equity.
However, Eko and Ikeja bucked the trend as they recorded a liability to assets ratio of 62.64 percent and 79.71 percent respectively.
And that compares with Abuja Disco, 111.38 percent; Enugu, 206.31 percent; Jos, 229.92 percent; Yola, 422.17 percent, and Kaduna, 135.69 percent.
The total liabilities of the nine Discos including bills owed to Nigerian Bulk Electricity Trader (NBET) rose by 15.37 percent to N1.55 trillion in December 202o from N1.34 trillion in 2019.
And perhaps more worrisome is that these entities do not have the cash flow to cover spiraling debt.
The government-owned NBET buys electricity in bulk from generation companies through power purchase agreements, and sells through vesting contracts to the DisCos, which then supply it to the consumers.
There was optimism that the privatisation of the power sector in 2013 would unlock the potentials in the economy, but lack of effective revenue collection and non-implementation of cost reflective tariffs combined with corruption have tipped the sector into crisis.
There are concerns that banks who have lent these firms’ money will bear the brunt, a double whammy for lenders who are recovering from exposure to the oil and gas and the coronavirus loans loss.
The debt owed to Nigerian banks by operators in the power sector rose by 11.85 per cent in one year to N819.97 billion in August 2021 amid the lingering problems plaguing the sector since it was privatised over eight years ago, according to the Central Bank of Nigeria data.
The average industry ratio of cash to short-term borrowings, a gauge of liquidity for the nine Discos – is abysmally low at 4.99 percent, as its cash and equivalents plunged to the lowest in six years, MoneyCentral calculations based on the results show.
The cash ratio is a liquidity measure that shows a company’s ability to cover its short-term obligations using only cash and cash equivalents.
If a company’s cash ratio is less than 100%, there are more current liabilities than cash and cash equivalents. It means insufficient cash on hand exists to pay off short-term debt.
Some Discos have vowed to lock horns with the government over the takeover and restructuring of their business.
The management of Benin Electricity Distribution Company Plc said that there was no legal basis for the takeover of the company following the purported activation of the call on its collateralised shares by Fidelity Bank.