THE KENYA POWER AND LIGHTING COMPANY LIMITED ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 i ! 安 〕 ! ! 擊 攤 ! } 夢 The Kenya Power and Lighting Company Limited Annual report and financial statements For the year ended 30 June 2018 Table of contents Page No Corporate information 1 Directors' report 2-3 Directors' remuneration report 4-6 Statement of directors' responsibilities 7 Independent auditors' report 8-14 Financial statements: Statement of profit or loss and other comprehensive income 15-16 Statement of financial position 17 Statement of changes in equity 18 Statement of cash flows 19 Notes to the financial statements 20-97 The Kenya Power and Lighting Company Limited Corporate information For the year ended 30 June 2018 DIRECTORS Amb (Eng) Mahboub Maalim Mohamed - Chairman Eng. Jared Othieno - Acting Managing Director & CEO Mr. Adil Khawaja Mr. Henry Rotich - Cabinet Secretary, National Treasury Dr. Eng. Joseph Njoroge - Principal Secretary, Ministry of Energy & Petroleum Mr. Wilson Kimutai Mugung'ei Mr. Kairo Thuo Mrs. Brenda Engomo Kokoi Hon. Zipporah Jesang Kering Mrs. Beatrice Gathirwa - Alternate Director to Cabinet Secretary, National Treasury Eng. Isaac Kiva - Alternate to Principal Secretary, Ministry of Energy & Petroleum SECRETARY Imelda Bore Certified Public Secretary (Kenya) P.O. Box 30099 - 00100, Nairobi REGISTERED Stima Plaza OFFICE Kolobot Road, Parklands P.O. Box 30099 - 00100, Nairobi BANKERS Standard Chartered Bank Kenya Limited Citi NA Harambee Avenue Upper Hill Road P.O. Box 20063- 00200, Nairobi P.O. Box 30711- 00100, Nairobi Kenya Commercial Bank Limited Equity Bank Kenya Limited Moi Avenue Hospital Road P.O. Box 30081 - 00100, Nairobi P.O. Box 75104 - 00100, Nairobi The Co-operative Bank of Kenya Limited Commercial Bank of Africa Stima Plaza Ragati Road P.O. Box 48231 - 00100, Nairobi P.O. Box 30437 - 00100, Nairobi Stanbic Bank Limited Barclays Bank of Kenya Plc Kenyatta Avenue Barclays West End P.O. Box 30550 - 00100, Nairobi P.O. Box 30120 - 00100, Nairobi PRINCIPAL The Auditor General AUDITOR Anniversary Towers P.O. Box 30084 - 00100, Nairobi DELEGATED PricewaterhouseCoopers AUDITOR Certified Public Accountants (Kenya) PwC Tower Waiyaki Way/ Chiromo Road, Westlands P.O. Box 43963 - 00100, Nairobi PRINCIPAL LEGAL ADVISOR Hamilton Harrison & Mathews ICEA Building P.O. Box 30333 - 00100, Nairobi The Kenya Power and Lighting Company Limited Directors' report For the year ended 30 June 2018 The directors submit their report together with the audited financial statements of the Kenya Power and Lighting Company Limited (the "Company") for the year ended 30 June 2018, which disclose the state of affairs of the Company. BUSINESS REVIEW The core business of the Company continues to be the transmission, distribution and retail of electricity purchased in bulk from Kenya Electricity Generating Company Plc (KenGen), Independent Power Producers (IPPs), Uganda Electricity Transmission Company Limited (UETCL), Ethiopia Electricity Power Company and Tanzania Electric Supply Company Limited (TANESCO). RESTATEMENT OF PRIOR YEAR RESULTS The Company's financial statements include a restatement of the opening balances at 1 July 2016 and the statement of profit or loss and other comprehensive income figures for the year ended 30 June 2017 to correct prior period errors. These are covered in note 39 of the financial statements. RESULTS FOR THE YEAR 2018 2017 Restated Shs'000 Shs'000 Profit before income tax 3,089,209 7,656,639 Income tax expense (1,171,217) (2,376,214) Profit for the year 1,917,992 5,280,425 DIVIDEND A dividend of Shs 1.93 million (2017: Shs 1.93 million) is payable on the cumulative preference shares and has been recognised in the statement of profit or loss and other comprehensive income under finance costs (Note 10(b)). No interim dividend was paid in 2018 (2017: nil). Subject to the approval of the shareholders, the directors do not recommend payment of final dividend (2017: Shs 976 million) for the year (2017: Shs 0.50). COURT CASES AGAINST SENIOR MANAGEMENT OF THE COMPANY A number of senior management and retired staff of the Company are currently facing charges at the High Court of Kenya relating to alleged procurement malpractices. The Board of Directors has suspended current officials who have been charged in line with the Anti-Corruption and Economic Crimes Act and appointed an interim management team comprised of managers who are well experienced in their respective fields. Alongside various initiatives aimed at enhancing accountability, senior management of the Company have been re-trained on the requirements of the Public Procurement and Assets Disposal Act (PPAD Act 2015) and measures put in place to streamline the Company's business process including procurement, quality assurance and customer service. Investigations and court cases were ongoing at the date when these financial statements were approved. 2 The Kenya Power and Lighting Company Limited Directors' report For the year ended 30 June 2018 DIRECTORS The current Board of Directors is as shown on page 1. Amb (Eng) Mahboub Maalim Mohamed and Hon. Zipporah Jesang Kering were elected as directors of the Company on 1st December 2017 while Hon. Kenneth Marende ceased to be a director on the same day. Eng. Jared Othieno was appointed as the Acting Managing Director & CEO and Executive Director of the Company on 17th July 2018 replacing Dr. Kenneth Tarus who is suspended. AUDITORS The Auditor General is responsible for the statutory audit of the Company's financial statements in accordance with Section 35 of the Public Audit Act, 2015 (the "Act"). Section 23(1) of the Act empowers the Auditor General to appoint other auditors to carry out the audit on his behalf. Accordingly, PricewaterhouseCoopers were appointed to carry out the audit for the year ended 30 June 2018 and report to the Auditor-General. BY ORDER OF THE BOARD Imeda Bore Company Secretary 22 November 2018 3 The Kenya Power and Lighting Company Limited Directors' remuneration report For the year ended 30 June 2018 INFORMATION NOT SUBJECT TO AUDIT Remuneration of the Company's Board is set within the Government limits for state corporations. Statement of Company's policy on directors' remuneration During the year, there was no change to Board remuneration. The current policy as guided by the Government through the State Corporations Advisory Committee (SCAC) will apply in subsequent years until the same is revised. The Company does not have any share options or long term incentives plans. There was no compensation for past directors or any sum paid to third parties in respect of a director's services. The only executive director is the Managing Director and Chief Executive Officer. He has performance targets for the year which apply to the Board. Non-executive directors' remuneration is fixed by SCAC. Contract of service The non-executive directors are not under contract but are subject to retirement by rotation at the Annual General Meeting (AGM). The Managing Director and Chief Executive Officer is on a three years renewable contract from 1st August 2017 to 1st August 2020. Dr Kenneth Tarus was suspended in July 2018. Statement of voting at general meeting During the last AGM held on 1 December 2017, the shareholders unanimously approved the directors' remuneration of Shs 600,000 per year per director on a pro-rata basis. Summary of the remuneration policy The following are highlights of the Board remuneration policy for the Company: 1. During every Board or Committee meeting, Directors are entitled to a sitting allowance, lunch allowance (in lieu of lunch being provided), accommodation allowance and mileage reimbursement at Automobile Association of Kenya rates. 2. The Chairman receives a monthly honorarium. 3. Directors' fees are paid annually upon approval by shareholders during the AGM in accordance with Government's guidelines for all state corporations. 4. Non-executive directors are paid a total of Shs 600,000 or on pro rata basis for period served. 5. The remuneration for executive directors is as per the negotiated employment contracts. 6. The Company will not propose to make any changes in the remuneration level during the current financial year. 7. There are no directors' loans in the Company's loans. 8. There are no directors' shares schemes. 9. A sitting allowance is paid to each non-executive Director for attending a duly convened and constituted meeting of the Board or of any of the committees. 10. An allowance is paid to non-executive directors for any day of travel away from his regular station in order to attend to duties of the Company. 11. Medical insurance cover is provided to all non-executive directors for their individual medical requirements covering both out-patient and in-patient services. 4 The Kenya Power and Lighting Company Limited Directors' remuneration report For the year ended 30 June 2018 Directors' remuneration Below is a summary of entitlement per Board Member: Type of payment Chairman Member Honoraria (per month) Shs 80,000 N/A Sitting allowance (per sitting) Shs 20,000 Shs 20,000 Telephone - airtime for mobile phone (per month) Shs 20,000 N/A Transport allowance/mileage N/A* AA rates Lunch allowance Shs 2,000 Shs 2,000 Director's fees per annum on prorata basis Shs 600,000 Shs 600,000 Director's bonus N/A N/A Accommodation allowance outside Nairobi Shs 18,200 Shs 18,200 * Chairman was provided with a Company car during the year. INFORMATION SUBJECT TO AUDIT For the financial years ended 30 June 2018 and 30 June 2017, the directors' fees and remuneration are as below: Salary/ Fees Expense Total honoraria allowances Shs'000 Shs'000 Shs'000 Shs'000 Year ended 30 June 2018 Executive Director Kenneth Tarus 7,469 - 3,651 11,120 Non-executive directors Kenneth Marende - Former Chairman 400 543 475 1,418 Mahboob Maalim Mohamed - Chairman 560 - 560 1,120 Adil Khawaja - 543 712 1,255 CS, National Treasury - Henry Rotich - 600 - 600 PS, Energy & Petroleum - Joseph Njoroge - 600 186 786 Wilson Kimutai Mungung'ei - 543 1,784 2,327 Kairo Thuo - 312 1,496 1,808 Brenda Engomo Kokoi - 312 2,535 2,847 Zipporah Jesang Kering - - 3,475 3,475 Beatrice Gathirwa - 1,074 1,074 Isaac Kiva - 928 928 8,429 3,453 16,876 28,758 5 The Kenya Power and Lighting Company Limited Directors' remuneration report For the year ended 30 June 2018 Directors' remuneration (continued) Salary/ Fees Expense Total honoraria allowances Shs'000 Shs'000 Shs'000 Shs'000 Year ended 30 June 2017 Executive Director Ben Chumo 4,857 - 2,020 6,877 Kenneth Tarus 4,536 - 1,485 6,021 Non-executive directors Kenneth Marende - Chairman 960 600 1,514 3,074 Adil Khawaja - 600 355 955 Beatrice Gathirwa - - 98 98 Brenda Kokoi - - 934 934 CS, National Treasury - Henry Rotich - 600 - 600 Isaac Kiva - - 1,448 1,448 Joseph Kariuki - - 1,716 1,716 Jane Nashida - 889 1,767 2,656 Kairo Thuo - - 931 931 Macharia Kariuki - 889 1,437 2,326 PS, Energy & Petroleum Joseph Njoroge - 600 130 730 Susan Chesiyna - 316 4,542 4,858 Wilson Kimutai - 600 1,390 1,990 10,353 5,094 19,767 35,214 BY ORDER OF THE BOARD Imelda Bore Company Secretary 22 November 2018 6 The Kenya Power and Lighting Company Limited Statement of Directors' Responsibilities For the year ended 30 June 2018 The Kenyan Companies Act, 2015 requires the directors to prepare financial statements for each financial year that give a true and fair view of the financial position of the Company as at the end of the financial year and of its profit or loss for that year. The directors are responsible for ensuring that the Company keeps proper accounting records that are sufficient to show and explain the transactions of the Company; disclose with reasonable accuracy at any time the financial position of the Company; and that enables them to prepare financial statements of the Company that comply with prescribed financial reporting standards and the requirements of the Kenyan Companies Act, 2015. They are also responsible for safeguarding the assets of the Company and for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors accept responsibility for the preparation and presentation of these financial statements in accordance with International Financial Reporting Standards and in the manner required by the Kenyan Companies Act, 2015. They also accept responsibility for: i. Designing, implementing and maintaining internal control as they determine necessary to enable the preparation of financial statements that are free from material misstatements, whether due to fraud or error; ii. Selecting suitable accounting policies and then applying them consistently; and iii. Making judgements and accounting estimates that are reasonable in the circumstances. In preparing the financial statements, the directors have assessed the Company's ability to continue as a going concern and disclosed, as applicable, matters relating to the use of going concern basis of preparation in note 2 (a (i)) of the financial statements. The directors acknowledge that the independent audit of the financial statements does not relieve them of their responsibility. Approved by the board of directors on 22 N v mber 2018 a signed on its behalf by: Amb (Eng) Mahboob Maalim Mr. Kairo Thuo Eng. Jared Othieno Chaiman, Board Chairman, Audit and Risk Committee Ag. Managing Director and CEO 7 REPUBLIC OF KENYA Telephone: +254-20-342330 P.O. Box 30084-00100 Fax: +254-20-311482 E-mail: oag@oagkenya.go.ke NAIROBI Website: www.kenao.go.ke OFFICE OF THE AUDITOR-GENERAL REPORT OF THE AUDITOR-GENERAL ON THE KENYA POWER AND LIGHTING COMPANY LIMITED FOR THE YEAR ENDED 30 JUNE 2018 REPORT ON THE FINANCIAL STATEMENTS Qualified Opinion The accompanying financial statements of Kenya Power and Lighting Company Limited set out on pages 15 to 96, which comprise the statement of financial position as at 30 June 2018, and the statement of profit or loss and other comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information, have been audited on my behalf by PricewaterhouseCoopers auditors appointed under Section 23 of the Public Audit Act, 2015. The auditors have duly reported to me the results of their audit and on the basis of their report, I am satisfied that all the information and explanations which, to the best of my knowledge and belief, were necessary for the purpose of the audit were obtained. In my opinion, except for the effects of the matters described in the Basis for Qualified Opinion paragraphs, the financial statements present fairly, in all material respects, the financial position of Kenya Power and Lighting Company Limited as at 30 June, 2018, and of its financial performance and cash flows for the year then ended, in accordance with International Financial Reporting Standards and comply with the Companies Act, 2015. Basis for Qualified Opinion The audit was conducted in accordance with International Standards of Supreme Audit institutions (ISSAls). I am independent of Kenya Power and Lighting Company Limited in accordance with ISSAI 30 on Code of Ethics. I have fulfilled other ethical responsibilities in accordance with the ISSAI and in accordance with other ethical requirements applicable to performing audit of financial statements in Kenya. I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my qualified opinion. 1. Breach of Borrowing Covenants The Company's total borrowings are carried in the statement of financial position at Kshs.113,029,384,000. As disclosed in note 28 (d), the Company was in breach of financial covenant ratios for commercial borrowings by an amount of Kshs.59,963,128,000 as at 30 June 2018. This amount comprises of Report of the Auditor-General on the Financial Statements of Kenya Power and Lighting Company Limited for the year ended 30 June 2018 Promoting Accountability in the Public Sector Kshs.49,985,745,000 which is classified as non-current and Kshs.9,977,383,000 classified as current. Subsequent to the financial year end, the Company received letters from the lenders, waiving their rights to demand payment due to the breach of the debt covenants even though the Company did not have unconditional rights to defer payrnent as at 30 June 2018. International Accounting Standards (IAS) 1 on presentation of financial statements requires the presentation of the borrowings with covenant breaches as current liabilities. However, the total borrowings with covenant breaches have not been classified as current. Had management complied with IAS 1, an amount of Kshs.49,985,745,000 would have been reclassified from non-current to current. Accordingly, current liabilities and the net current liabilities would have increased by Kshs.49,985,745,000. 2. Incorrect Recognition of Unbilled Fuel Costs as Revenue As explained in note 2 (c) (ii) to the financial statements, the Company recognizes revenue relating to fuel costs charge in the month of billing by the power generators and invoiced to the customers in the subsequent month, following approval by the Energy Regulatory Commission (ERC), based on the individual customers' consumption in the month in which the revenue was recognized. The accounting policy ensures effective matching of costs and revenues for the supply of electricity to customers. This policy has been consistently applied in prior years. However, in the years ended 30 June 2017 and 2018, the company recognized revenue totaling Kshs.7,290,699,000 and Kshs.1,737,420,000 respectively relating to fuel costs charges, even though the amounts were not billed to customers in the immediate subsequent month. The balances are included within trade and other receivables as "unbilled fuel costs revenue" as shown in note 20 (b) to the financial statements. Consequently, these amounts had not met the criteria for revenue recognition under IAS 18 as at 30 June 2017 on the basis that the services (electricity) to support the revenue would be supplied in the future. The balance of "unbilled fuel costs revenue" as at 30 June 2017 was fully billed to customers in the year ended 30 June 2018 upon approval by ERC and based on the individual customers' consumption in the respective months of billing. As a result, revenue and unbilled fuel costs (current asset) for the year ended 30 June 2017 were overstated by Kshs.7,290,699,000, while revenue for the year ended 30 June 2018 is understated by Kshs.5,553,000,000. Accordingly, had the Company complied with the principles of IAS 18, the profit before income tax for the year ended 30 June 2017 and the trade and other receivables (current assets) as at 30 June 2017 would have been decreased by Kshs.7,290,699,000; and the profit before income tax for the year ended 30 June 2018 would have increased by Kshs.5,553,000,000, The correction of the misstatements requires a restatement of the comparative balances for the year ended 30 June 2017. Report of the Auditor-General on the Financial Statements of'Kenya Power and Lighting Company Limited for the year ended 30 June 2018 2 3. Material Misstatement of Provisions for Impairment Loss on Electricity and other Receivables As explained in note 2 (k) to the financial statements, the Company determines the provision for impairment loss on receivables based on objective evidence of impairment considering individual customers' credit terms and the age profile of the outstanding balances as at the year end. Application of the Company's policy as at 30 June 201 8, results in an additional impairment loss provision of Kshs.2,604,000,000 relating to electricity and prepaid fixed charge on no-vending meters. Had the Company consistently applied its policy for determining the provision for impairment loss on receivables, the profit before income tax for the year ended and trade and other receivables would have decreased by Kshs.2,604,000,000. The combined impact of correcting the above matters in the financial statements would have been as follows: * A reduction of the profit before income tax for the year ended 30 June 2017 from Kshs.7,656,639,000 to Kshs.366,639,000. Trade and other receivables as at 30 June 2017 would have decreased from Kshs.49,686,321,000 to Kshs.42,396,321,000, increasing the net current liabilities from Kshs.17,535,199,000 to Kshs.24,825,199,000 as at the same date; and * An increase in the profit before income tax for the year ended 30 June 2018 from Kshs.3,089,209,000 to Kshs.6,038,209,000. Trade and other receivables as at 30 June 2018 would have decreased from Kshs.40,992,525,000 to Kshs.36,651,525,000 and the net current liabilities would increase from Kshs.51,637,61 5,000 to Kshs.105,964,360,000 as at 30 June 2018. Key Audit Matters Key Audit Matters are those matters which, in my professional judgment, were of most significance in the audit of the Company's financial statements for the current year. These matters were addressed in the context of the audit of the Company's financial statements as a whole, and in forming my opinion thereon, and I do not provide a separate opinion on these matters. For each matter below, a description of how the audit addressed the matter is provided in that context. I have fulfilled the responsibilities described in the Auditor's Responsibilities for the Audit of the Financial Statements section of the report, including in relation to these matters. Accordingly, the audit included the performance of procedures designed to respond to the assessment of the risks of material misstatement of the financial statements. The results of the audit procedures, including the procedures performed to address the matters below, provide the basis for my audit opinion on the accompanying financial statements. Report of the Auditor-General on the Financial Statements of'Kenya Power and Lighting Company Limited/for the year ended 30 June 2018 3 Key audit matter How my audit addressed the key audit matter Heightened risk of fraud and errors in financial information A majority of the Company's Discussions were held with the Board Audit Committee senior management were to confirm their understanding of the charges, the actions arrested and charged with they are taking and their assessment of the impact, if any, alleged corruption at the on the financial statements. High Court of Kenya in July 2018. In consultation with forensic experts, it was determined the enhanced audit procedures be carried out as part of This event triggered a the audit. These included: heightened risk that the financial statements might * specific procedures focussing on compliance of a have been misstated. sample of procurements with the requirements of Public Procurement and Asset Disposal Act, 2015; In such circumstances, ISSAI 1240 requires that the * testing of billing adjustments made in the year Auditor conduct enhanced including re-computation of customer bills in the year procedures, including and testing of the interfaces between the meter, billing possible involvement of and financial accounting systems; forensic experts to address the heightened risk of fraud * review of the end-to-end handling of transformers and errors and assess from acquisition to disposal. I independently checked whether the risk is of such the condition of a sample of transformers; significance as to have a material impact on the * review of the process of pre-qualifying legal counsel, financial statements. assigning cases to lawyers and settlement of legal fees and litigation, and whether the settlements The Court case was ongoing appear reasonable from a Company viewpoint; at the date of this audit report. * evaluation of whether analytical procedures which are performed near the end of the audit, when forming an overall conclusion on whether the financial statements are consistent with my understanding of the Company, indicate a previously unrecognised risk of material misstatement due to fraud; and * obtaining of Board representation confirming that the facts disclosed to me and the impact on the financial statements is complete. Other Information The other information comprises the Chairman's Statement and the acting Managing Director & CEO's Statement, which I obtained prior to the date of this report, and the rest Report of'the Auditor-General on the Financial Statements of*Kenya Power and Lighting Company Limited for the year ended 30 June 2018 4 of the other information in the Annual Report which is expected to be made available to me after that date, but does not include the financial statements and my auditor's report thereon. The directors are responsible for the other information. My opinion on the financial statements does not cover the other information and I do not express any form of assurance conclusion thereon. In connection with my audit of the financial statements, my responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or my knowledge obtained in the audit, or otherwise appears to be misstated. If, based on the work I have performed on the other information obtained prior to the date of this auditor's report, I conclude that there is a material misstatement of this other information, I am required to report that fact. I have nothing to report in this regard. When I read the rest of the other information in the Annual Report and I conclude that there is a material misstatement therein, I am required to communicate the matter to those charged with governance. REPORT ON COMPLIANCE WITH LAWFULNESS AND EFFECTIVENESS IN USE OF PUBLIC MONEY Conclusion As required by Article 229(6) of the Constitution, based on the procedures performed, except for the matter described in the Basis for Conclusion on Compliance and Effectiveness section of my report, I confirm that, nothing has come to my attention to cause me to believe that public money has not been applied lawfully and in an effective way. Basis for Conclusion 1. Unclaimed Financial Assets The Company as at 30 June 2018 held in their books financial assets amounting to Kshs.1,728,504,000 (2017: Kshs.1,163,739,000) disclosed in note 27 to the financial statements under other payables of Kshs.10,356,112,000 (2017: Kshs.5,259,237,000). These assets which include; customer refunds, unidentified receipts, wayleaves compensation, uncollected dividends and stale cheques, ought to have been reported and submitted to the Unclaimed Financial Assets Authority (UFAA), as required by the Unclaimed Financial Assets Act, 2011. According to the Act, failure to comply attracts a penalty of 25% of the assets, in addition to a daily interest of Kshs.7,000 for each day a report is late in submission. This aspect of non-compliance may cost the Company up to Kshs.1,891,639,000, in interest and penalties as at 30 June 2018. 2. Non-compliance with the Capital Markets Authority Listing Rules The First Schedule of the Capital Markets (Securities) (Public Offers, Listing and Disclosures) Regulations, 2002 (Amended 2016) sets out the minimum requirements for Report of the Auditor-General on the Financial Statements of'Kenya Power and Lighting Company Limited,fbr the year ended 30 June 2018 5 a company at the time of listing, as well as continuing obligations of the listed entity. Kenya Power and Lighting Company Limited, which is listed on the main investment market segment, complied with most of these requirements. However, the regulations require that the issuer must not be in breach of any of its loan covenants, particularly in regard to the maximum debt capacity. The company was however in breach of borrowing covenants as at 30 June 2018. In addition, the regulations require that the issuer is not insolvent and should have adequate working capital. As at 30 June 2018, the company's current assets of Kshs.54,620,181,000 were less than current liabilities of Kshs.106,257,796,000, resulting in a negative working capital of Kshs.51,637,615,000. REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS As required by the Companies Act, 2015, 1 report based on the audit that: (i) In my opinion, the information given in the report of the directors on pages 2 to 3 is consistent with the financial statements. (ii) In my opinion the auditable part of the directors' remuneration report on pages 4 to 6 has been properly prepared in accordance with the Kenyan Companies Act, 2015. Responsibilities of the Directors for the Financial Statements The Directors are responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards and the requirements of the Kenyan Companies Act, 2015, and for maintaining effective internal control as directors determine is necessary to enable the preparation of financial statements which are free from material misstatement, whether due to fraud or error, and for assessment of the effectiveness of internal control. In preparing the financial statements, the directors are responsible for assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting, unless the directors are aware of any intension to liquidate the Company or to cease operations, or have no realistic alternative but to do so. The directors are also responsible for the submission of the financial statements to the Auditor-General in accordance with the provisions of Section 47 of the Public Audit Act, 2015. In addition to the responsibility for the preparation and presentation of the financial statements described above, directors are also responsible for ensuring that the activities, financial transactions and information reflected in the financial statements are in compliance with the authorities which govern them, and that public money is applied in an effective manner. Directors are responsible for overseeing the Company's financial reporting process, reviewing the effectiveness of management's systems for monitoring compliance with Report of'the Auditor-General on the Financial Statements of'Kenya Power and Lighting Company Limited fbr the year ended 30 .Jne 2018 6 relevant legislative and regulatory requirements, ensuring that effective processes and systems to address key roles and responsibilities in relation to governance and risk management, are in place, and ensuring the adequacy and effectiveness of the control environment. Auditor-General's Responsibilities for the Audit of the Financial Statements The audit objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report which includes my opinion in accordance with the provisions of Section 48 of the Public Audit Act, 2015 and submit the audit report in compliance with Article 229(7) of the Constitution of Kenya. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISSAls will always detect a material misstatement and weakness when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. In addition to the audit of the financial statements, a compliance review is planned and performed to express a conclusion with limited assurance on whether, in all material respects, the activities, financial transactions and information reflected in the financial statements are in compliance with the authorities which govern them, in accordance with the provisions of Article 229(6) of the Constitution and submit the audit report in compliance with Article 229(7) of the Constitution. Further, in planning and performing the audit of the financial statements and review of compliance, I consider internal control in order to give an assurance on the effectiveness of internal controls, risk management and governance processes and systems in accordance with the provisions of Section 7 (1) (a) of the Public Audit Act, 2015 and submit the audit report in accordance with Article 229 (7) of the Constitution. My consideration of the internal control would not necessarily disclose all matters in the internal control which might be material weaknesses under the ISSAls. A material weakness is a condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level, the risk that misstatements caused by error or fraud in amounts which would be material in relation to the financial statements being audited, may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. Because of its inherent limitations, internal control may not prevent misstatements and instances of non-compliance. Also, projections of any evaluation off effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the Company's policies and procedures may deteriorate. As part of an audit in accordance with ISSAls, I exercise professional judgement and maintain professional skepticism throughout the audit. I also: Report ofthe Auditor-General on the Financial Statements of Kenya Power and Lighting Company Limited.for the year ended 30 June 2018 7 * Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence which is sufficient and appropriate to provide a basis for my opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. * Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the management. * Conclude on the appropriateness of the management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions which may cast significant doubt on the Company's ability to continue as a going concern. If I conclude that a material uncertainty exists, I am required to draw attention in the auditor's report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify my opinion. My conclusions are based on the audit evidence obtained up to the date of my audit report. However, future events or conditions may cause the Company to cease to continue as a going concern. * Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner which achieves fair presentation. * Obtain sufficient appropriate audit evidence regarding the financial information and business activities of the Company to express an opinion on the financial statements. * Perform such other procedures as I consider necessary in the circumstances. I communicate with the management regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control which are identified during the audit. I also provide management with a statement that I have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters which may reasonably be thought to bear on my independence, and where applicable, related safeguards. RTb FCPA Edward R. 0. Ouko, CBS AUDITOR-GENERAL Nairobi 22 November 2018 Report ofthe Auditor-General on the Financial Statements of Kenya Power and Lighting Company Limited.for the year ended 30 June 2018 8 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME Note 2018 2017 Restated Shs'000 Shs'000 Revenue Electricity sales 6(a) 95,463,404 91,951,629 Foreign exchange adjustment 9,322,195 6,682,693 Fuel cost charge 7(b) 21,068,631 22,107,948 125,854,230 120,742,270 Power purchase costs Non-fuel costs 7(a) (52,795,031) (50,202,488) Foreign exchange costs (7,714,264) (6,199,227) Fuel costs 7(b) (23,591,184) (24,075,529) (84,100,479) (80,477,244) Gross profit 41,753,751 40,265,026 Net operating expenses Network management 8(a) (11,312,806) (11,146,208) Commercial services 8(b) (12,405,555) (4,920,081) Administration 8(c) (15,909,862) (18,678,529) (39,628,223) (34,744,818) Operating income 2,125,528 5,520,208 Other operating income 6(b) 8,670,357 8,130,398 Operating profit 10,795,885 13,650,606 Interest income 10(a) 100,000 46,004 Finance costs 10(b) (7,806,676) (6,039,971) Profit before income tax 3,089,209 7,656,639 Income tax expense 12(a) (1,171,217) (2,376,214) Profit for the year 1,917,992 5,280,425 Basic and diluted earnings per share (Shs) 13 0.98 2.71 15 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME (CONTINUED) 2018 2017 Restated Note Shs'000 Shs'000 Profit for the year 1,917,992 5,280,425 Other comprehensive income: Items that will not be subsequently reclassified to profit or loss Remeasurement of the retirement benefit asset 30 (97,837) (1,058,356) Deferred income tax relating to remeasurement of the retirement benefit asset 26 29,351 317,507 Other comprehensive loss (68,486) (740,849) Total comprehensive income for the year 1,849,506 4,539,576 16 The Kenya Power and Lighting Company Limited Financial statements At 30 June 2018 STATEMENT OF FINANCIAL POSITION 2018 2017 2016 Restated Restated ASSETS Note Shs'000 Shs'000 Shs'000 Non-current assets Property and equipment 15 273,376,882 262,347,609 233,714,593 Operating lease prepayments 16 813,423 868,463 868,519 Intangible assets 17 3,842,816 2,593,483 2,602,033 Retirement benefit asset 30 2,615,129 2,531,782 3,263,150 Trade and other receivables 20(a) 1,386,758 1,601,509 1,816,261 282,035,008 269,942,846 242,264,556 Current assets Inventories 19 9,745,385 9,626,293 11,895,271 Trade and other receivables 20(b) 39,605,767 48,084,812 29,893,927 Current income tax 12(c) - 44,358 25,990 Short term deposits 21(a) 491,991 596,169 3,842,355 Bank and cash balances 21(b) 4,777,038 2,941,754 1,660,698 54,620,181 61,293,386 47,318,241 TOTAL ASSETS 336,655,189 331,236,232 289,582,797 EQUITY AND LIABILITIES Equity attributable to owners Ordinary share capital 22 4,878,667 4,878,667 4,878,667 Share premium 23 22,021,219 22,021,219 22,021,219 Retained earnings 24 37,307,503 36,433,731 32,479,595 TOTAL EQUITY 64,207,389 63,333,617 59,379,481 Non-current liabilities Deferred income tax 26 29,694,493 28,683,216 26,702,741 Deferred income 25 16,999,103 19,562,051 18,154,796 Trade and other payables 27(a) 22,524,358 29,710,547 30,172,855 Borrowings 28 96,929,050 111,075,216 105,017,783 Preference shares 29 43,000 43,000 43,000 166,190,004 189,074,030 180,091,175 Current liabilities Trade and other payables 27(b) 71,249,076 57,545,032 34,495,409 Current income tax 12(c) 23,777 - - Deferred income 25 4,702,427 4,944,572 5,953,273 Leave pay provision 31 448,000 346,903 544,369 Borrowings 28 16,100,334 10,940,906 8,850,929 Dividends payable 32 862,007 362,839 268,161 Overdraft 21(b) 12,872,175 4,688,333 - 106,257,796 78,828,585 50,112,141 TOTAL EQUITY AND LIABILITIES 336,655,189 331,236,232 289,582797 The financial statements on pages 15 t were ppr ved' and authorised for issue by the 9rd of Directors on 22 November 2018 and wer igned on ts chalfby: Amb (Eng) Mahboob Maalim Mr. Kairo Thuo En red Othie o Chairman, Board Chairman, Audit and Risk Committee Acting MD and CEO 17 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 STATEMENT OF CHANGES IN EQUITY Note Ordinary Share Retained Total share premium earnings capital Shs'000 Shs'000 Shs'000 Shs'000 At 30 June 2016 - as previously reported 4,878,667 22,021,219 37,121,927 64,021,813 Restatement 39 (f) - - (4,642,332) (4,642,332) 30 June 2016 - restated 4,878,667 22,021,219 32,479,595 59,379,481 Year ended 30 June 2017 1 July 2016 - restated 4,878,667 22,021,219 32,479,595 59,379,481 Total comprehensive income for the year (restated) 39 (g) - - 5,280,425 5,280,42 Other comprehensive loss - - (740,849) (740,849 Total comprehensive income for the year - - 4,539,576 4,539,576 Final dividend - 2016 - - (585,440) (585,440) 30 June 2017 - restated 4,878,667 22,021,219 36,433,731 63,333,617 Year ended 30 June 2018 At 30 June 2017 - as previously reported 4,878,667 22,021,219 43,061,769 69,961,655 Restatement 39 - - (6,628,038) (6,628,038) At 1 July 2017 - restated 4,878,667 22,021,219 36,433,731 63,333,617 Profit for the year - - 1,917,992 1,917,992 Other comprehensive loss . . (68,486) (68,486 Total comprehensive income for the year - - 1,849,506 1,849,506 Final dividend - 2017 - - (975,734) (975,734) At 30 June 2018 4,878,667 22,021,219 37,307,503 64,207,389 18 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 STATEMENT OF CASH FLOWS 2018 2017 Restated Cash flows from operating activities Note Shs '000 Shs '000 Cash generated from operations 33(a) 37,168,444 35,131,974 Income tax paid 12(c) (62,454) (96,600) Interest received 33(g) 108,563 33,811 Interest paid 33(d) (9,128,427) (6,910,645) Net cash generated from operating activities 28,086,126 28,158,540 Cash flows from investing activities Purchase of property and equipment 33(h) (25,434,423) (38,838,985) Purchase of intangible assets 17 (2,457,161) (729,705) Prepayment of operating lease 16 (8,574) - Proceeds from disposal of property and equipment 33(e) 166,934 48,727 Net cash used in investing activities (27,733,224) (39,519,963) Cash flows from financing activities Repayment of borrowings 33(b) (12,736,581) (5,478,735) Proceeds from borrowings 33(b) 6,409,439 10,672,294 Dividends paid to owners of the company 33(f) (478,496) (492,692) Net cash (used in)/generated from financing activities (6,805,638) 4,700,867 Net decrease in cash and cash equivalents (6,452,736) (6,660,556) Cash and cash equivalents at the beginning of the year (1,150,410) 5,503,054 Effects of foreign exchange rate fluctuations on deposits - 7,092 Cash and cash equivalents at the end of the year 33(c) (7,603,146) (1,150,410) 19 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes 1 General information The Kenya Power and Lighting Company Limited, a public company domiciled in the Republic of Kenya, was incorporated on 6 January 1922, as East Africa Power & Lighting Limited. The Company changed its name on 11 October 1983. The core business of the Company continues to be the transmission, distribution and retail of electricity purchased in bulk from Kenya Electricity Generating Company Plc (KenGen), Independent Power Producers (IPPs), Uganda Electricity Transmission Company Limited (UETCL) and Tanzania Electric Supply Company Limited (TANESCO). The shares of the Company are listed on the Nairobi Securities Exchange. The Government of Kenya is the principal shareholder in the Company holding a 50.1% equity interest. The address of the Company's registered office is as follows: Stima Plaza Kolobot Road, Parklands P.O. Box 30099 - 00100, Nairobi 2 Significant accounting policies (a) Basis of preparation The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS). The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires the directors to exercise judgement in the process of applying the Company's accounting policies. The areas involving a higher degree of judgement or complexity, or where assumptions and estimates are significant to the financial statements, are disclosed in Note 3. The financial statements have been prepared on a going concern basis. The Director's assessment is included below; i. Going concern assessment The Company recorded a profit before tax of Shs 3,089,209,000 for the year ended 30 June 2018 (2017 Restated: Shs 7,656,639,000) and had net current liabilities of Shs 51,637,615,000 at 30 June 2018 (2017 Restated: Shs 17,535,199,000). In addition, the Company had a net cash outflow of Shs 6,452,736,000 for the year ended 30 June 2018 (2017 Restated: Shs 6,660,556,000). The Company's performance was affected by the following factors: i) Revenue growth in the year was constrained by the depressed economic environment in the first half of the financial year, and the delay in review and implementation of the retail electricity tariffs. The '2013 Schedule of tariffs' was for a 3-year period with a new tariff expected from June 2016. The average revenue requirement, which drives the tariff computation, takes into account the total transmission and distribution assets. Revenue for the last two financial years was based on the electricity grid in 2013 and did not take into account the significant expansion in the intervening period; ii) The recent aggressive connectivity and grid reinforcement programs aimed at achieving the Government's target of universal access by 2020 and increasing installed capacity, were funded using a mix of internal funds and medium term commercial debt resulting in net cash outflows and significant net current liability position as the assets acquired are long term in nature. The expected return on the Company's investment was dependent on review of the tariff; iii) Delayed fuel cost recoveries because of poor hydrological conditions in 2017 and the slow business environment, also affected the Company's cash flows. Financing costs and doubtful electricity receivables increased significantly in the year because of the deteriorated cash flows; and 20 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 2 Significant accounting policies (continued) (a) Basis of preparation (continued) i. Going concern assessment (continued) iv) Increased system losses due to rapid expansion at low voltage under the Last Mile and other connectivity programs. The business fundamentals remain strong despite the above factors. The Company has consistently recorded profit and generated positive cash-flows from operating activities, which is the strongest indicator that it is able to meet obligations as and when they fall due. The Board and management are undertaking a number of key strategic initiatives to improve the financial results of the Company going forward. These include: i) The new tariff (effective 1 July 2018), which includes incentives such as the time of use tariff and removal of the fixed charge, is expected to drive an increase in electricity demand and therefore, revenue; ii) Improvement in the Company's working capital position and profitability by reducing capital expenditure and undertaking cost containment measures without impacting service delivery; iii) Ring-fencing and channelling additional revenue to prioritized areas including defraying of overdraft facilities and payment of critical trade payable accounts including energy purchase; iv) Measures to enhance timely recovery and collection of electricity receivables; v) Measures to reduce transmission and distribution losses; and vi) The waiver letters obtained after year-end mean that the lenders will not call their loans on the basis of the current financial covenant breaches and management expect that the measures undertaken in the year will cure the breaches. Based on the above, the directors consider it appropriate to prepare the financial statements on the going concern basis. ii. Changes in accounting policy and disclosures New and amended standards adopted by the Company Standard Effective date Executive summary Amendment to IAS 12 - Annual periods The amendment was issued to clarify the Income taxes beginning on or requirements for recognising deferred tax assets on after unrealised losses. The amendment clarifies the Recognition of deferred 1 January 2017 accounting for deferred tax where an asset is tax assets for unrealised measured at fair value and that fair value is below losses, the asset's tax base. It also clarifies certain other aspects of accounting for deferred tax assets. The amendment clarifies the existing guidance under IAS 12. It does not change the underlying principles for the recognition of deferred tax assets. 21 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 2 Significant accounting policies (continued) (a) Basis of preparation (continued) ii. Changes in accounting policy and disclosures (continued) New and amended standards adopted by the Company (continued) Standard Effective date Executive summary Amendment to IAS 7 - Annual The amendments introduce an additional disclosure Cash flow statements periods that will enable users of financial statements to beginning on evaluate changes in liabilities arising from financing Statement of cash flows or after activities. The amendment responds to requests from on disclosure initiative 1 January investors for information that helps them better 2017 understand changes in an entity's debt. The Company has adopted this amendment in the presentation of cash flows relating to borrowings. New and amended standards not yet adopted by the Company Standard Effective date Executive summary IFRS 9 - Financial Annual 'Financial instruments', addresses the classification, Instruments (2009 periods measurement and recognition of financial assets and &2010) beginning on financial liabilities and introduces new rules for hedge * Financial liabilities or after accounting. * Derecognition of 1 January financial 2018 The complete version of IFRS 9 was issued in July instruments 2015. It replaces the guidance in IAS 39 that relates * Financial assets to the classification and measurement of financial * General hedge instruments. IFRS 9 retains but simplifies the mixed accounting measurements model and establishes three primary measurement categories for financial assets: amortised cost, fair value through other comprehensive income (OCI) and fair value through profit or loss. The basis of classification depends on the entity's model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are required to be measured at fair value through profit or loss with the irrevocable option at inception to changes in fair value in OCI without recycling. There is now a new expected credit losses model that replaces the incurred loss impairment model used in IAS 39. For financial liabilities there are no changes to the classification and measurement except for the recognition of changes in own credit risk in other comprehensive income, for liabilities designated at fair value through profit or loss. 22 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 2 Significant accounting policies (continued) (a) Basis of preparation (continued) ii. Changes in accounting policy and disclosures (continued) New and amended standards not yet adopted by the Company (continued) Standard Effective date Executive summary IFRS 9 relaxes the requirements for hedge effectiveness by replacing the bright line hedge effectiveness tests. It requires an economic relationship between the hedged item and hedging instrument and for the 'hedged ratio' to be the same as the one management actually use for risk management purposes. Contemporaneous documentation is still required but is different to that currently prepared under IAS 39. This standard will be applicable to the Company's financial statements for the year ending 30 June 2019. The standard requires that an assessment is performed to determine the impact of the standard on the financial statements. Management has not performed this assessment. IFRS 15 - Revenue Annual periods 'Revenue from contracts with customers' deals with from contracts with beginning on or revenue recognition and establishes principles for customers. after reporting useful information to users of financial 1 January 2018 statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity's contracts with customers. Revenue is recognised when a customer obtains control of a good or service and thus has the ability to direct the use and obtain the benefits from the good or service. The standard replaces IAS 18 'Revenue' and IAS 11 'Construction contracts' and related interpretations. This standard will be applicable to the Company's financial statements for the year ending 30 June 2019. The standard requires that an assessment is performed to determine the impact of the standard on the financial statements. Management has not performed this assessment. 23 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 2 Significant accounting policies (continued) (a) Basis of preparation (continued) ii Changes in accounting policy and disclosures (continued) New and amended standards not yet adopted by the Company (continued) Standard Effective date Executive summary IFRS 16 - Leases Annual periods This standard replaces the current guidance in IAS 17 and beginning on or is a far reaching change in accounting by lessees in after 1 January particular. Under IAS 17, lessees were required to make a 2019 - earlier distinction between a finance lease (on balance sheet) and application an operating lease (off balance sheet). IFRS 16 now permitted if requires lessees to recognise a lease liability reflecting IFRS 15 is also future lease payments and a 'right-of-use asset' for applied. virtually all lease contracts. The IASB has included an optional exemption for certain short-term leases and leases of low-value assets; however, this exemption can only be applied by lessees. For lessors, the accounting stays almost the same. However, as the IASB has updated the guidance on the definition of a lease (as well as the guidance on the combination and separation of contracts), lessors will also be affected by the new standard. At the very least, the new accounting model for lessees is expected to impact negotiations between lessors and lessees. Under IFRS 16, a contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. IFRS 16 supersedes IAS 17, 'Leases', IFRIC 4, 'Determining whether an Arrangement contains a Lease', SIC 15, 'Operating Leases - Incentives' and SIC 27, 'Evaluating the Substance of Transactions Involving the Legal Form of a Lease'. This standard will be applicable to the Company's financial statements for the year ending 30 June 2020 Management has not performed this assessment. 24 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 2 Significant accounting policies (continued) (b) Basis of preparation (continued) ii Changes in accounting policy and disclosures (continued) New and amended standards not yet adopted by the Company (continued) Standard Effective date Executive summary IFRIC 23, Annual periods IFRIC 23 provides a framework to consider, recognise and 'Uncertainty over beginning on or measure the accounting impact of tax uncertainties. The income tax after 1 January Interpretation provides specific guidance in several areas treatments' 2019 where previously lAS 12 was silent. The Interpretation also explains when to reconsider the accounting for a tax Published 7 uncertainty. Most entities will have developed a model to June 2017) account for tax uncertainties in the absence of specific guidance in IAS 12. These models might, in some circumstances, be inconsistent with IFRIC 23 and the impact on tax accounting could be material. Management should assess the existing models against the specific guidance in the Interpretation and consider the impact on income tax accounting Annual Annual periods These amendments include minor changes to: improvements beginning on or cycle 2015-2017 after 1 January * IFRS 3, 'Business combination' - a company 2019 remeasures its previously held interest in a joint operation when it obtains control of the business. (published * IFRS 11,'Joint arrangements', - a company does not December remeasure its previously held interest in a joint 2017) operation when it obtains joint control of the business. * IAS 12,' Income taxes' - The amendment clarified that the income tax consequences of dividends on financial instruments classified as equity should be recognised according to where the past transactions or events that generated distributable profits were recognised. * IAS 23,' Borrowing costs' - a company treats as part of general borrowings any borrowing originally made to develop an asset when the asset is ready for its intended use or sale. 25 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 2 Significant accounting policies (continued) (b) Power purchase costs Power purchase costs are recognised at the actual amounts charged to the Company by the suppliers of power. These comprise: (i) Non-fuel costs These include capacity charges, energy cost and steam charges. (ii) Foreign exchange costs These relate to the net foreign currency losses incurred by Kenya Electricity Generating Company Plc (KenGen) which are charged to the Company in accordance with the Power Purchase Agreements (PPAs) and the net foreign currency losses incurred by the Company in the settlement of foreign currency denominated invoices from independent power producers (IPPs). (iii) Fuel costs These comprise the cost of fuel incurred in the generation of electricity and invoiced by suppliers. The recharge of power purchase costs relating to customers under the Rural Electrification Scheme is covered in note 2 (t). (c) Revenue Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured. Revenue is recognised at the fair value of consideration received or receivable taking into account contractually defined terms of payment and net of Value Added Tax and other Government levies. The following specific recognition criteria must be met before revenue is recognised: (i) Electricity sales Electricity sales revenue is recognised when customers on post-paid metering are billed for the power consumed. The billing is done for each monthly billing cycle based on the units consumed as read on the customers' electricity meters and the approved consumer tariffs. Electricity sales revenue for customers on prepaid metering is recognised when customers purchase electricity units and then adjusted for the estimated amount of unconsumed power based on the consumption rate over a period of time. (ii) Fuel cost charge The Company recognises revenue relating to fuel costs charge in the month of approval by the Energy Regulation Commission (ERC). The billing to customers is based on their individual consumption in the month and applied as a charge per KWh. Fuel costs recoveries comprise the actual amounts billed to the customers (consistent with description under note 2 (c) (i) above). (iii) Foreign exchange adjustment Foreign exchange payments, arising from exchange rate differences not factored in the retail tariffs, are recognised and charged to the consumers of power to recover the losses in the foreign exchange rates. The net foreign currency costs are passed on to the customers as a charge per KWh, which is approved each month by the ERC. The recovery of fuel costs and the foreign exchange costs is based on supplier invoices and factors in the ERC's target loss factor in transmission and distribution. For the year ended 30 June 2018, the target loss factor was 15.9%. 26 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 2 Significant accounting policies (continued) (c) Revenue (continued) Other income (i) Finance revenue Finance revenue comprises interest receivable from bank deposits and other deposits. Finance revenue is recognised as it accrues in profit or loss, using the effective interest method. (ii) Rental income Rental income is recognised on the straight line basis over the lease term. (iii) Capital contribution Contributions paid by electricity customers relating to the construction of regular distribution assets and funding for electrification are credited to profit or loss as part of other income on a straight-line basis over the expected useful lives of the related assets. (iv) Fibre optic income This represents income from the lease of Company fibre optic cable lines to third parties. The revenue from leasing the transmission lines is recognised on a straight line basis over the lease term. (d) Inventories Inventories are stated at the lower of cost and net realisable value after due regard for obsolete and slow moving stocks. The cost of inventories comprises purchase price, import duties, transport and handling charges and is determined on a weighted average price. Net realisable value is the price at which the inventory can be realised in the normal course of business after allowing for the costs of realisation. (e) Property and equipment All property and equipment is stated at cost less accumulated depreciation and accumulated impairment losses. Such cost includes the cost of replacing part of the property and equipment when that cost is incurred, if the recognition criteria are met. Likewise, when a major inspection is performed, its cost is recognised in the carrying amount of the property and equipment as a replacement if the recognition criteria are satisfied. All other repair and maintenance costs are recognised in profit or loss as incurred. No depreciation is charged on freehold land. Depreciation on other assets is calculated to write down their cost to their residual values, on a straight-line basis, over their expected useful lives. The depreciation rates used are as follows: Buildings The greater of 2% and 1/the unexpired period of the lease Transmission and distribution lines 2.5 - 20% Machinery 2.85 - 6.66% Motor vehicles 25% Furniture, equipment and fittings 6.66 - 20% Computers and photocopiers 30% 27 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 2 Significant accounting policies (continued) (f) Property and equipment (continued) The asset's residual values, estimated useful lives and methods of depreciation are reviewed at the end of each reporting period with the effect of any changes in estimate accounted for prospectively. An item of property and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising from the recognition of an item of property and equipment (calculated as the difference between the net disposal proceeds and the carrying amount of the asset at the disposal date) is included in profit or loss for the year. This does not apply to assets acquired by the Company on sale and leaseback transactions. Properties in the course of construction for production, supply or administrative purposes are carried at cost less any recognised impairment loss. Cost includes professional fees and for qualifying assets, borrowing costs capitalised in accordance with the Company's accounting policy. Such properties are classified to the appropriate categories of property and equipment when completed and ready for intended use. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use. At the end of each accounting period, the Company conducts impairment tests where there are indications of impairment of an asset. Capital work in progress Capital work-in-progress is included under property and equipment and comprises costs incurred on ongoing capital works relating to both customer and internal works. These costs include material, transport and labour cost incurred. (g) Intangible assets Intangible assets acquired separately are measured on initial recognition at cost. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. Intangible assets with finite lives are amortised over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for the Company's intangible assets are reviewed at least at each financial year end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortisation period or method, as appropriate, and are treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the profit or loss in the expense category consistent with the function of the intangible asset. An intangible asset is derecognised on disposal, or when no future economic benefits are expected from use or disposal. Gains or losses arising from unforeseeable changes of such intangible assets are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in profit or loss when the asset is derecognised. Currently, intangible assets comprise software and have an estimated useful life of five years. 28 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 2 Significant accounting policies (continued) (h) Income tax expense Income tax expense represents the sum of the tax currently payable and deferred income tax. The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the profit or loss because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The Company's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period. Deferred income tax Deferred income tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred income tax liabilities are generally recognised for all taxable temporary differences. Deferred income tax assets are generally recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Such deferred income tax assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. The carrying amounts of deferred income tax assets are reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realised, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred income tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Company expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Current and deferred income tax are recognised in profit or loss, except when they relate to items that are recognised in other comprehensive income or directly in equity, in which case, the current and deferred tax are also recognised in other comprehensive income or directly in equity respectively. Where current income tax or deferred income tax arises from the initial accounting for a business combination, the tax effect is included in the accounting for the business combination. (i) Leases The determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement at inception date on whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset. For arrangements entered into prior to 1 January 2005, the date of inception is deemed to be 1 January 2005 in accordance with the transitional requirements of IFRIC 4. 29 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 2 Significant accounting policies (continued) (i) Leases (continued) Company as a lessee Finance leases, which transfer to the Company substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are reflected in profit or loss. Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease term, if there is no reasonable certainty that the Company will obtain ownership by the end of the lease term. Operating lease payments are recognised as an expense in profit or loss on a straight line basis over the lease term. Company as a lessor Leases where the Company does not transfer substantially all the risks and benefits of ownership of the asset are classified as operating leases. Initial direct costs incurred in negotiating an operating lease are added to the carrying amount of the leased asset and recognised over the lease term on the same basis as rental income. Contingent rents are recognised as revenue in the period in which they are earned. () Functional currency The financial statements are presented in Kenya shillings, which is the Company's Functional and Presentation currency. Transactions in foreign currencies are initially recorded at the Functional Currency rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the Functional Currency rate of exchange ruling at the reporting date. Transactions during the year are translated at the rates ruling at the dates of the transactions. Gains and losses on exchange are dealt with in the profit or loss. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined. (k) Financial instruments Financial assets and financial liabilities are recognised when the Company becomes a party to the contractual provisions of the instrument. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognised immediately in profit or loss. 30 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 2 Significant accounting policies (continued) (k) Financial instruments (continued) Financial assets Financial assets are classified into the following specified categories: financial assets at fair value through profit or loss, 'held-to-maturity' investments, 'available-for-sale' (AFS) financial assets and 'loans and receivables'. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. The Company's financial assets all fall under the 'loans and receivables' category. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables (including trade and other receivables, bank balances and cash) are measured at amortised cost using the effective interest method, less any impairment. Impairment of financial assets Financial assets are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected. Objective evidence of impairment of electricity receivables includes: * significant financial difficulty of the customer; or * non-payment of electricity bills; or * it becoming probable that the customer will enter bankruptcy or financial re-organisation. Electricity receivables that are outstanding for greater than the Company's average credit period of 30 days are considered past due. In addition to considering specific indicators for impairment, the Company makes a full provision for impairment loss on electricity receivables aged greater than 90 days excluding those relating to the Government of Kenya and entities related to the Government of Kenya including ministries and parastatals. For financial assets carried at amortised cost, the amount of the impairment loss recognised is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the financial asset's original effective interest rate. The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account. When a trade receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognised in profit or loss. 31 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 2 Significant accounting policies (continued) (k) Financial instruments (continued) Financial assets (continued) Loans and receivables (continued) For financial assets measured at amortised cost, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised. Derecognition of financial assets The Company derecognises a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Company neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Company recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Company retains substantially all the risks and rewards of ownership of a transferred financial asset, the Company continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received. On derecognition of a financial asset other than in its entirety (e.g. when the Company retains an option to repurchase part of a transferred asset or retains a residual interest that does not result in the retention of substantially all the risks and rewards of ownership and the company retains control), the Company allocates the previous carrying amount of the financial asset between the part it continues to recognise under continuing involvement, and the part it no longer recognises on the basis of the relative fair values of those parts on the date of the transfer. income is recognised in profit or loss. A cumulative gain or loss that had been recognised in other comprehensive income is allocated between the part that continues to be recognised. Financial liabilities Other financial liabilities Other financial liabilities (including borrowings) are subsequently measured at amortised cost using the effective interest method. Derecognition of financial liabilities The Company derecognises financial liabilities when, and only when, the Company's obligations are discharged, cancelled or they expire. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in profit or loss. Offsetting of financial instruments Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liabilities simultaneously. 32 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 2 Significant accounting policies (continued) (1) Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation. Capitalised costs include interest charges and foreign currency exchange differences on borrowings for projects under construction to the extent that they are regarded as adjustments to interest rates. All other borrowing costs are recognised in profit or loss in the period in which they are incurred. (m) Leave provision Employees' entitlements to annual leave are recognised when they accrue to employees. A provision is made for the estimated liability for annual leave at the reporting date. (n) Impairment of non-financial assets The Company reviews the carrying amounts of its tangible and intangible assets, to determine whether there is any indication that those assets have suffered an impairment loss at reporting date, or when there are indications of impairment. If any such indication exists, the recoverable amount of the asset is estimated and an impairment loss is recognised in profit or loss whenever the carrying amount of the asset exceeds its recoverable amount. An asset's recoverable amount is the higher of the asset's or cash-generating unit's (CGU's) fair value less costs to sell and its value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs to sell, an appropriate valuation model is used. Where it is not possible to estimate the recoverable amount of an individual asset, the directors estimate the recoverable amount of the cash-generating unit to which the asset belongs. Impairment of transmission and distribution lines A decline in the value of the transmission and distribution lines could have a significant effect on the amounts recognised in the financial statements. Management assesses the impairment of the lines whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that are considered important which could make an impairment review necessary include the following: (i) Significant decline in the market value beyond that which would be expected from the passage of time and normal use. (ii) Evidence from internal reporting which indicates that the performance of the asset is, or will be, worse than expected. 33 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 2 Significant accounting policies (continued) (n) Impairment of assets (continued) (iii) Significant changes with adverse effect on the Company have taken place during the period, or will take place in the near future, in the technology or market environment in which the Company operates, or in the market to which an asset is dedicated. (iv) Evidence is available of the obsolescence or physical damage of an asset. (v) Significant changes with an adverse effect on the Company have taken place during the period, or are expected to take place in the near future, which impact the manner or the extent to which an asset is used. These changes include plans to discontinue or restructure the operation to which an asset belongs or to dispose of an asset before the previously expected date. In management's judgment, the impaired carrying values of the lines and substations are reinforced, replaced or upgraded under the Energy Sector Recovery Project, after considering the above key indicators of impairment. (o) Employees' benefits (i) Company's defined contribution scheme The Company employees are eligible for retirement benefits under a defined contribution scheme from 1 July 2006. Payments to the defined contribution scheme are charged to profit or loss as incurred. (ii) Company's defined benefit scheme Pensioners and deferred pensioners (those who have left the employment of the Company but have not attained retirement age to qualify as pensioners) existing at 30 June 2006 are eligible for retirement benefits under a defined benefit scheme. For defined benefit plans, the cost of providing benefits is determined using the projected unit credit method, with actuarial valuations being carried out at the end of each annual reporting period. Remeasurement, comprising actuarial gains and losses, the effect of the changes to the asset ceiling and the return on plan assets (excluding interest), is reflected immediately in the statement of financial position with a charge or credit recognised in other comprehensive income in the period in which they occur. Remeasurement recognised in other comprehensive income is reflected immediately in retained earnings and will not be reclassified to profit or loss. Past service cost is recognised in profit or loss in the period of a plan amendment. Net interest is calculated by applying the discount rate at the beginning of the period to the net defined benefit liability or asset. Defined benefit costs are categorised as service costs (including current service cost, past service cost, as well as gains and losses on curtailments and settlements), net interest expense or income and remeasurement. The Company presents the first two components of defined benefit costs in profit or loss in the line item of pension cost-defined benefit scheme (included in staff costs). Curtailment gains and losses are accounted for as past service costs. 34 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 2 Significant accounting policies (continued) (o) Employees' benefits (continued) (ii) Company's defined benefit scheme (continued) The retirement benefit asset recognised in the Company's statement of financial position represents the actual surplus in the Company's defined benefit plans. Any surplus resulting from this calculation is limited to the present value of any economic benefits available in the form of refunds from the plans or reductions in future contributions to the plans. A liability for a termination benefit is recognised at the earlier of when the entity can no longer withdraw the offer of the termination benefit and when the entity recognises any related restructuring costs. (iii) Statutory defined contribution pension scheme The employees and the Company also contribute to the National Social Security Fund, a national defined contribution scheme. Contributions are determined by the country's statutes and the Company's contributions are charged to profit or loss as incurred. (p) Operating segments The Company's business is organised by regions (reporting segments) comprising Nairobi, Mount Kenya, Coast and West Kenya. Business administration is by geographic region as the Company deals in only supply of electricity. There are no inter-region sales. The Chief Operating Decision Maker (CODM) is the Executive Management Committee. Regions derive their revenues from the distribution and retail of electricity purchased in bulk by the head office. Region assets and liabilities comprise those operating assets and liabilities that are directly attributable to the region or can be allocated to the region on a reasonable basis. Capital expenditure represents the total cost incurred during the year to acquire assets for the regions that are expected to be used during more than one period (property and equipment). (q) Earnings per share Basic and diluted earnings per share (EPS) data for ordinary shares are presented in the financial statements. Basic EPS is calculated by dividing the profit for the year attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all potentially dilutive ordinary shares, if any. (r) Dividends Dividends on ordinary shares are charged to reserves in the period in which they are declared. Proposed dividends are not accrued for until ratified in an Annual General Meeting. 35 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 2 Significant accounting policies (continued) (s) Government grants Government grants are not recognised until there is reasonable assurance that the Company will comply with the conditions attaching to them and that the grants will be received. Government grants are recognised in profit or loss on a systematic basis over the periods in which the Company recognises as expenses the related costs for which the grants are intended to compensate. Specifically, government grants whose primary condition is that the Company should purchase, construct or otherwise acquire non-current assets are recognised as deferred revenue in the statement of financial position and transferred to profit or loss on a systematic and rational basis over the useful lives of the related assets. Government grants that are receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the Company with no future related costs are recognised in profit or loss in the period in which they become receivable. (t) Recharge of costs to Rural Electrification Scheme The Rural Electrification Scheme was established in 1973 by the Government of Kenya following an agreement between the Government and East African Power & Lighting Company (now The Kenya Power and Lighting Company Limited (KPLC). The Scheme was established with the specific objective of extending electricity to the rural areas Recharge of costs to the Rural Electrification Scheme (RES) is based on a formula determined by the Government of Kenya following an agreement between it and East African Power & Lighting Company Limited, the predecessor to The Kenya Power & Lighting Company Limited The power purchase costs recharge is calculated as a proportion of RES electricity unit sales (excluding off-grid sales) to gross electricity unit sales. The distribution costs recharge is calculated based on 2% and 4% of the total high voltage and low voltage assets respectively in the books of RES at the close of the financial year. Customer service costs recharge is calculated as a proportion of RES metered customers to total number of metered customers. Administration costs recharge are calculated based on the proportion of RES electricity unit sales to gross electricity unit sales. (u) Cash and cash equivalents Cash and cash equivalents in the statement of financial position comprise cash at banks and on hand and short-term deposits with a maturity of three months or less, which are subject to an insignificant risk of changes in value. For the purpose of the statement of cash flows, cash and cash equivalents consist of cash and short-term deposits, as defined above, net of outstanding bank overdrafts as they are considered an integral part of the Company's cash management. (v) Comparatives Where necessary, comparative figures have been adjusted to conform to changes in presentation in the current year. 36 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 3 Critical accounting judgements and key sources of estimation uncertainty In the application of the Company's accounting policies, which are described in note 2 above, management is required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised if the revision affects only that period or in the periods of the revision and future periods if the revision affects both current and future periods. (a) Critical judgements in applying accounting policies In the process of applying the Company's accounting policies, management has made the following judgments, apart from those involving estimations, which have the most significant effect on the amounts recognised in the financial statements: Deferred income tax assets Deferred income tax assets are recognised for all unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Significant management judgment is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and level of future taxable profits together with future tax planning strategies. Details of the carrying value of recognised tax losses at 30 June 2018 are provided in Note 26. Pension and other post-employment benefits The cost of defined benefit pension plans and other post-employment medical benefits is determined using actuarial valuations. The actuarial valuation involves making assumptions about discount rates, expected rates of return on assets, future salary increases, mortality rates and future pension increases. Due to the long term nature of these plans, such estimates are subject to significant uncertainty. Details of the defined benefit asset at 30 June 2017 are provided in Note 30. Revenue recognition Prepaid electricity revenue includes an assessment of electricity supplied to customers between the date of the last meter reading and the year end. Electricity sales revenue attributable to units consumed but not billed to customers at the end of the reporting period is estimated using historical consumption patterns taking into account the total electricity usage by the customers. (b) Key sources of estimation uncertainty The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that have significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year: Pensions Actuarial assumptions are made in valuing future defined benefit obligation and are updated periodically. The principal assumption relates to the discount rate, the expected rates of return on assets, future salary increases, mortality rates and future pension increase. Due to the long term nature of these plans, such estimates are subject to significant uncertainty. See note 30 for further details. 37 стши о о оо и и и'с rn t�- � �`! м� N °O ° и�O CO- � � v rn 'и 1- и О и Г � � ° L `� Й и�оN °� �or' aNO � � � � •с (0 и �0 � Г СО � � и " ln t0 N Ш и Ф° и а0 о �(V Г с0 � 3 ло N vrn Г ....v м с� оо й и о=•� Г 0`ОМ М N N Г N 2� ` � и о о о °-тош �оо Nйми � м � и и •т ш v,o д� � ои�о� м � о � °м_ й�"д а =�и °сой� и � й м пi � � о т О NГС�° � й N о N .У�р � с с ш гл ш р L и � о а и ��� °- о �° а`~ой�� � й оГо � � с к о со и сч_ о и °jf° �°� V�= Na°о�� й ао и о с�л ��,ш � �% °rn�° � � � IN о 0- У•'=' о N Г v N �О г00г) CV � �, С "о С >и а� р > N .0 ; � О а� � Оо ��coN ш с� и и и >U �°j и и С> и ОМо� � N � Оо0 N � и.с У�'С д� 1� с0 N 1� �t CV м Г tU +' И м О N �'- О f� (D ,� � 3� и °D � Г со �r сч_ и оо о с'�-с Q 3 NN`Г° " о д�„ г� � .�Zи°л vv Г -�ши°� со ` ° � L ашш ао м ° о т гл р р°о � N� о, � сд о о и о°� ш _ в� о оо о и N о cr cv и ао 5 �.с Е '�v д и �л r с� с° � г� и v_ оо ш rn� й г�и ймNN oNO й й � rn ��° р �° �'"� с° � м й � с° L о7 - � `i Г Г � о � � о"-``ш л s n. к с F" и ш ш �о='о ��д� р са �р и и � • ш и `'а р й Е т��°� ш л �са°� � с о и 'о Е и= с т U.стсл т � L а с � �о ui о »��ш�°� и V •- и С р� р Ш 'С N � � '° :д N о С1 а и С Ш U о � и и о-ш т и � � с :� � с �,, � .-. р со � 'J � .-. а=t р" с �° т с и Ш и � '� � о �р Е сtdс�С .°� с � ° Е рим д � ша��с°�i с_т°� � ш а � � `шшш с и шо�L� "'с�- о Е'�� л с � а V и р, �° Ф а о и Ф ш с аш� � � �ш=�с иаа� т,ccoic��a ` и а о а. со � р '•-• пs ,'� т ° р о л:✓ :.✓ й� ш о � и '� лй � v � �t а� � о � � �т т ш с Е .�-� .� = � � с св л " Q 0 s о Ф сив о ш� � а а °? с со� L й � т ш У�.� � О и. 3U со.д с�, �ОшО О �i.i. � а Q � U р ., .� .� .с `о С i- tL � Z � _ ., ,-, � �о ооо�,� о о�'� сиv м � м й � р0 NM�'� СО Op�jN д: N (О �- М LL'С7 ~t �M��V СО �м� N N � и С�Л N (Л ��"�.� Ом - - - м й � г� � .- � о ° 00 о� � C° � м со �t .- С` � о0 М М N �' о � а ш а и t0 с аСа у+о°о vйrno � й гN. °г.° о ад с'�о ммо� ао � и и о �" У д= м й м г�. N °о °�° й ► о С ♦, � и СО (О � N м о � � Ср U с р � N� � �л иэ r. ,- о� � г. ч v и сч о �� � о и ш '- L о Е ы _р °о й�шс+� � й м о м ь о О ° и м N � о CU м О> � '� Г N д � � � й �°�°аио°м � аио о й � р р й ° � и N г, �л �t � о� О N � v м �r � v � о V ш `= � � ° С °о N�йй � N м й ti �° о о ш�с'ог cr � о и ао i д И (О � Г д' м р N � '� о М а0 � � W о0 � N �>, = и N N д� о0 о и �- м ; �... � � д v о � У � - й о � д � �° � М � С Ф Ш V о О('м��0� � о N д' и г= •� о м N U д И � и г, СО и N О а0 f� mQ � й�мсош � со rn и и и N�`: о й � й и.-. = � м �t и м v д� � �р с � v.-- � �- 3� г v и и с �, о о �j с й р и ш ь ш С t° гип "' сьц и со Е *' о ш � Е � .Q о р л � а �� С Ф д G> р Х � С С � С � N � zЛ U о0 С р`� '`"' Ф д С � N � й С й � j О � '+. Ш о Ф HJ V _ � tA �.и.. `-�-� С� 5 f0 и �. и � � i. д > О w N й ь Ш � ' � р и U с � и с со � О и м д О) ь°� р и� "" и а � - Е � �� � т °с с й шs р- о Е и к д с � °� �� � и о с й � �� °- со� о х У а о ор� '+�' � �4=р р�Qи и,CUt�O ь и х 'н G С с с р ш гв тйL '~ 3ш:,., ��>,:.. :... й�ш w и ;а? '� т v `ь° оЕи с'ьр',cLa сьо п�сЕ *� �- `�° т с т л ... т ш о� � >� `ш ш ш_� св о о й � а а У=L д О Н.� о со� �Ош0 О�ii � аь Q � U 0 го " +� � ш �i Z � о � с R о с� оо о ао г�. и и о р о о й й м� � `ш ~,� й� м �Г°м й г� и с�и оо ио и �' �_ Г rn О .- v и � F_.� � N N N г� (V •V � в•�+ о и о G1 И О ' СО СО ' М М �"'' 'Q й О OD 00 00 OD '�t cF � L •с R.ис dN' dN' � QMi '�ц � :° и оо ао и и � ш с м м с� с� � -а � с гсо t0 д++ � о cv и г� v� Г и и о й ,� д,_ °о с°�ч_ й rn й ом_ сиv �'с с£ о м и м ао cfl и с� .д о ��..о s и и о Г и оо �w �� сtЛ Гд� с0 Nf� rn и_ � �- Q ео ai rn ш и � "о 4i Qi Г Г Г Г с и О й � , _и •и G1 О О�э � (�О � , � � _о° Г Г и и � � = t N N и � cLo ш j И �? �г? �r v_ � в-� V L Г Г г- �--� � � � и О � т 3 S` о � о "�° �+ о r. Г со м ао Г и > .д °�� с д°о шм й мо � с•� 3 с й �о ►� аот- rn о� й � у N й й N v й и � и � с о � `v и т v � '> И v � о о � а > � N с У И О б) СО 1� и г- (р и И'- О 41 О Г О N 1� N д) � р� � д с_ О д� tn � ct' о0 N � •С N N J t N и � Г�t CD О со и Г ао О оо о т с гл ш ш с''а о ш г� о ао ао ш N о Г Г СО 1� и и и Г N �-- Г (0 = У � о � ш :о °' "� �° а �� с �в* о vГ и шti м ш -с `f0 ш с�о йо ~ йй � а а? � а Е `° с Е � о •� =а.= �о�`'о м йй N � д• со Г �t ш .- о �•-и -� ,-. � U � � � ш.� °� J� м со � � � � � .5 � с �v с_ а с й� °� � а w о � � о с с -� °' д U °Г° v 'й � й а� •с rn о V � с и °- с с N и � о и О �р � °� с � Е .Е а с � � £ � о и о т '� о .�. � и о 'д с � с им � й �.о � ° _ � � т го у со И � °' � � с с � и ° � °- с ° с а' ош� �� о�о � й,о йо и с ,. U w- ш и а�� � � °�`�и °� �� �� � И С� fl. L и о ,с и и >' ->, `-' О 1- =v w F- � с� � r с» �о � aci � ш и � с°ч Е`- � � с°r Н`о- � Н � У с � �б; � .с `о С 1- � � Z The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 5 Financial risk and capital management Information about the Company's exposure to risks, its objectives, policies and processes for measuring and managing such risks, as well as quantitative disclosure, is discussed in this note. The management of capital is also discussed. The Company has an integrated risk management framework. The Company's approach to risk management is based on risk governance structures, risk management policies, risk identification, measurement and reporting. Three types of risks are reported as part of the risk profile, namely operational, strategic and business continuity risks. For the Kenya Power and Lighting Company, a strategic risk is a significant unexpected or unpredictable change or outcome beyond what was factored into the organisation's strategy and business model which could have an impact on the Company's performance. Business continuity risks are those events, hazards, variances and opportunities which could influence the continuity of the Company. One of the key risks for the Kenya Power and Lighting Company, identified both under the operational and strategic risk categories, is financial sustainability of the Company. The financial risks, as defined by IFIRS 7, and the management thereof, form part of this key risk area. The Board of Directors has delegated the management of the Companywide risk to the Audit Committee. One of the committee's responsibilities is to review risk management strategies in order to ensure business continuity and survival. Most of the financial risks arising from financial instruments are managed in the centralised finance function of the Company. The Company's exposure to risk, its objectives, policies and processes for managing the risk and the methods used to measure it have been consistently applied in the years presented, unless otherwise stated. The Company has exposure to the following risks as a result of its financial instruments: (a) Credit risk The Company has exposure to credit risk, which is the risk that a counter party will be unable to pay amounts in full when due. Credit risk mainly arises from electricity receivables, short term deposits and bank balances. Counterparty risk is the risk that a counterparty is unable to meet its financial and/or contractual obligations during the period of a transaction. Delivery or settlement risk is the risk that counterparty does not deliver on its contractual commitment on maturity date (including the settlement of money and delivery of securities). Credit risk arising from short term deposits and bank balances are low because the counter parties are financial institutions with high credit ratings. The carrying amount of financial assets recorded in the financial statements representing the Company's maximum exposure to credit risk without taking account of the value of any collateral obtained is made up as follows: 41 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 5 Financial risk and capital management (continued) (a) Credit risk (continued) Neither past Past due but due not impaired Impaired nor impaired <90 days > 90 days Total Shs'000 Shs'000 Shs'000 Shs'000 At 30 June 2018 Electricity receivables 10,502,960 3,247,045 8,471,429 22,221,434 Stima loan 191,905 - 79,071 270,976 Other receivables 1,047,288 19,489,900 2,853,220 23,390,408 Less provisions - - (11,403,720) (11,403,720) Net trade and other receivables 11,742,153 22,736,945 - 34,479,098 Short term deposits 491,991 - - 491,991 Bank balances 4,760,401 - - 4,760,401 16,994,545 22,736,945 - 39,731,490 At 30 June 2017 Electricity receivables 12,013,601 665,736 4,036,472 16,715,809 Stima loan 263,102 - 79,071 342,173 Other receivables 13,745,697 16,108,565 1,259,623 31,113,885 Less provisions - - (5,375,166) (5,375,166) Net trade and other receivables 26,022,400 16,774,301 - 42,796,701 Short term deposits 596,169 - - 596,169 Bank balances 2,925,817 - - 2,925,817 29,544,386 16,774,301 - 46,318,687 The customers under the fully performing category are paying their debts as they fall due. Past due amounts are those beyond the maximum established credit period and represents slow but paying customers. The receivable balance continues to be serviced even though this is not done on the contractual dates. Treasury and finance departments are actively following up on these receivables. In addition, the Company holds deposits or a bank guarantee, depending on the electricity load supplied which acts as collateral. The fair value of the collateral held by the Company as security and other credit enhancements amounted to Shs 7,433 million (2017: Shs 7,418 million) Note 27(a). Management of credit risk Financial instruments are managed by the finance and commercial services functions. 42 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 5 Financial risk and capital management (continued) (a) Credit risk (continued) Management of electricity receivables The Company supplies electricity to customers in its licensed areas of supply. A large proportion comprises small commercial and domestic customers who settle their accounts within twenty one days after receipt of the bill. The Company's exposure to credit risk is influenced by the individual characteristics of each customer. In monitoring credit risk, customers are grouped according to their credit characteristics, including whether they are large, small or domestic electricity users, profile, security (deposits and guarantees) held and payment history. The main classes of electricity receivables are industrial, government ministries, local authorities, parastatals, commercial and domestic customers. Electricity supply agreements are entered into with all customers. All customers are required to deposit an amount equivalent to two times their monthly consumption being security in the form of a cash deposit depending on the load supplied, subject to a minimum of two thousand five hundred shillings. Industrial and large commercial customers have the option of providing a bank guarantee in lieu of a cash deposit. Payment is enforced by way of disconnection of the supply if bills are not paid within twenty one days after billing. No interest is charged on balances in arrears. The Company has well-established credit control procedures that monitor activity on customer accounts and allow for remedial action should the customer not comply with payment terms. These procedures include the issue of a notice for disconnection of supply, an internal collection process; follow up of the customer by telephone or in person, negotiations of mutually acceptable payment arrangements and letters of demand. Non-payment will result in disconnection of supply and the account's closure if the disconnection is done and there is no payment within three months. The legal collection process is pursued thereafter. The decision to impair overdue amounts is assessed on the probability of recovery based on the customer's credit risk profile. Progress on the collection process is reviewed on a regular basis and if it is evident that the amount will not be recovered, it is recommended for write-off in terms of the Company's policy. The process of recovery continues unless it is confirmed that there is no prospect of recovery or the costs of such action will exceed the benefits to be derived. Amounts written off are determined after taking into account the value of the security held. The Company evaluates the concentration of risk with respect to electricity receivables as low, as its customers are located in all regions in Kenya and electricity is supplied to different classes of customers including individual households, private industries, companies and Government institutions. The total cumulative provision for impairment of electricity receivables at 30 June 2018 was Shs 8,471 million (2017: Shs 4,036 million). Refer to Note 19(d). The Company continues to install prepaid and automatic meters as strategies to minimise the risk of non-collection. In addition, the following strategies are currently in operation and are largely successful in other high risk areas of non-paying customers. These include: * disconnections * increased internal debt management capacity * use of debt collectors * focus on early identification and letters of demand * higher security deposits 43 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 5 Financial risk and capital management (continued) (a) Credit risk (continued) Management of Stima Loan receivables Shs 270,976,000 (2017: Shs 342,173,000) The Kenya Power Stima Loan Revolving Fund was established in the year 2010. The objective of the Fund is to facilitate credit access to the low income segments of the market for the purpose of electricity connection. It is funded by Agence Francaise de Development (AFD) through credit and grant to the Government of Kenya (GOK) which is then on lent and on grant to the Company. Electricity supply agreements are entered into with all customers and Stima Loan contracts signed. All customers are required to deposit 20% of the loaned amount and administration fee of 5% and are advanced a loan valid for 24 months with no interest charges. Repayment of the loan commences one month after connection. Monthly follow ups are done to monitor these customers. These procedures include the issue of a notice for disconnection of supply, an internal collection process; follow up of the customer by telephone or in person, negotiations of mutually acceptable payment arrangements and letters of demand. A short text message is sent reminding them of their monthly bill with a loan balance on the same. Stima Loan customers are grouped into delinquency levels, according to their credit profiles to help in monitoring customer repayment performance. Delinquency level one have balances that are one month in arrears, delinquency level two are two months in arrears, delinquency level three being customers in three months arrears and subsequently delinquency level four and five are customers that are in arrears from four months on to twenty four months respectively. Non - performing loans are assessed on the probability of recovery based on the customers' delinquency level. A provision of Shs 79 million has been recognised for loans which have been outstanding for more than 24 months as at 30 June 2018. Refer to Note 19 (d). (b) Liquidity risk Liquidity risk is the risk that the Company will not have sufficient financial resources to meet its obligations when they fall due, or will have to do so at excessive cost. This risk can arise from mismatches in the timing of cash flows from revenue and capital and operational outflows. The objective of the Company's liquidity management is to ensure that all foreseeable operational, capital expansion and loan commitment expenditure can be met under both normal and stressed conditions. The Company has adopted an overall balance sheet approach, which consolidates all sources and uses of liquidity, while aiming to maintain a balance between liquidity, profitability and interest rate considerations. The Company's liquidity management process includes: * projecting cash flows and considering the cash required by the Company and optimising the short-term requirements as well as the long-term funding; * monitoring statement of financial position liquidity ratios; * maintaining a diverse range of funding sources with adequate back-up facilities; * managing the concentration and profile of debt maturities; and * maintaining liquidity contingency plans. The table below summarises the maturity profile of the Company's financial liabilities based on the remaining period using 30 June 2018 as a base period to the contractual maturity date: 44 о rn с� r. ао г� со и � -п л ' ,�о и мо rn �t �tм м с и �о и го ш о шоо и �� .ис о °� м v йш й и т и rn иао м г гсл и ш L �л г� v с� �л r: � и с� о м и и v� С С г г L�J г (у � '� .. т .о � � rn rn � � � с f0 /�! О 1� д' г f� О 1� ... � О � 00 СО М � г � С �и О N м г СО 00 т� ^'с ° м v°, N � ° т О и i° сCO�з ш й ом � У � и � •с :а а� .,.- .с о »✓ -о и� � � с_ � � о N й о°о_ смv_ � м �-о° � �L N О М N О N и.-С... � ,(/� о0 д� tV �t f� г � •- й N ш гм. су ш о.о � � -о � и > °� и о -о сиi а � ио rn rn' со с� г' м о an = о й а°о_ м � м аго � -о � со� р и с� �t � г �t �л о Е'С й � � М � с� � л ш у cF CU г т � п°Oi ~ м сМ•� °' м � С и � � аи М v Е � и b U Ш � и и � мио ' и' rn ' и' и и.Lи =�°о ш ш й й �'�ш 'а +=и � .иС ди' � dN' д�' С � �0 � йЕи а� ао о о у�т = го, ° й й й.й й у J С и и 'v О и Ф -о "' � � N О с 'v � G1 'С О ' О_ I� 1� ' о о СО `о �� J � {�р0 NO N �омр (м V �� С � �,� f� CU М О(С� Со о с о с� с � И оо оо г� м м со й т.� � � _ `- � "= t°а о � О с�,осу U � �° ш 'й �° с со� а. С= � с и v о Q и т � � С � � � i•► � рр ` �, L s'*_ и С и (� � � 0 � 0 � �., S] ,� .. о � и_ N +-� N +-, �� л а► и д и д и� � С v� � и о и а.-, 3� с '++ _� � с С�� � с_ �°�� � ш�° а°ro� С � � �3итС � �3�°тС о°>� �ц � � о о о л� о о и л°� V с со с т� � с ,;: о� а.>_ � о` � n. :� ,= а ссо У•� L � iL Q OD f- 0 Q [0 1- � 1- сз Е »-. �, т .� .� `о 0 �- и. � Z и The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 5 Financial risk and capital management (continued) (c) Market risk Market risk is the risk that the fair value or future cash flow of financial instruments will fluctuate because of changes in foreign exchange rates, commodity prices and interest rates. The objective of market risk management policy is to protect and enhance the statement of financial position and statement of comprehensive income by managing and controlling market risk exposures within acceptable parameters and to optimise the funding of business operations and facilitate capital expansion. The Company is exposed to the following risks: (i) Currency risk Currency risk arises primarily from purchasing imported goods and services directly from overseas or indirectly via local suppliers and foreign borrowings. The Company is exposed to foreign exchange risk arising from future commercial transactions and recognised assets and liabilities that are denominated in a currency other than the Functional Currency of the Company. The following table demonstrates the sensitivity to a reasonably possible change in the respective foreign currency/Shs exchange rate, with all other variables held constant, on the Company's profit before income tax (due to changes in the fair value of monetary assets and liabilities). Currency Appreciation/(depreciation) of Effect on profit before exchange rate tax and equity Shs million Year2018 US$ 5%(-5%) +/-4,205 Euro 5%(-5%) +/-456 JPY 5%(-5%) Chinese 5%(-5%) Year2017 US$ 5%(-5%) +/-4,480 Euro 5%(-5%) +/-437 JPY 5%(-5%) +/-54 ChineseY 5%(-5%) +/-118 Management of currency risk Exposure due to foreign currency risk is managed by recovering from customers the realised fluctuations in the exchange rates not factored in the retail tariffs. (ii) Commodity or price risk Commodity or price risk arises from the fuel that is used for the generation of electricity. 46 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 5 Financial risk and capital management (continued) (c) Market risk (continued) (ii) Commodity or price risk (continued) Exposure due to commodity risk is managed by passing the cost of fuel used in generation to customers. In addition the Company has well-established credit control procedures that monitor activity on customer accounts and allow for remedial action should the customer not comply with payment terms. These procedures include the issue of a notice of disconnection of supply, an internal collection process; follow up of the customer by telephone or in person, negotiations of mutually acceptable payment arrangements and letters of demand. Non-payment will result in disconnection of supply and the customer's account being closed. The legal collection process is pursued thereafter. The decision to impair overdue amounts is assessed on the probability of recovery based on the customer's credit risk profile. (iii) Interest rate risk Interest rate risk is the risk that the Company's financial condition may be adversely affected as a result of changes in interest rate levels. The Company's interest rate risk arises from short- term borrowings. Borrowings issued at variable rates expose the Company to cash flow interest rate risk. Long-term borrowings issued at fixed rates expose the Company to fair value interest rate risk. The interest rate risk exposure arises mainly from interest rate movements on the Company's borrowings. Management of interest rate risk To manage the interest rate risk, management has endeavoured to only sign and obtain borrowings from institutions that offer contracts with fixed interest rates. Based on the various scenarios, the Company also manages its fair value interest rate risk by using floating -to- fixed interest rate swaps, where applicable. Sensitivity analysis The Company analyses its interest rate exposure on a dynamic basis by conducting a sensitivity analysis. This involves determining the impact on profit or loss of defined rate shifts. The sensitivity analysis for interest rate risk assumes that all other variables, in particular foreign exchange rates, remain constant. The calculation excludes borrowing costs capitalised in terms of the Company's accounting policy. The analysis has been performed on the same basis as the prior year. At 30 June 2018, an increase/decrease of 5 basis points (2017: 5 basis points) would have resulted in a decrease/increase in a profit before tax of Shs 4,661 million (2017: Shs 5,090 million). 47 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 5 Financial risk and capital management (continued) (d) Market risk (continued) (iii) Interest rate risk (continued) Sensitivity analysis (continued) Change in Effect on profit currency before tax and rate equity 2018 Shs'000 1% 932,000 5% 4,661,000 2017 1% 1,018,000 5% 5,090,000 (e) Capital management Capital managed by the Company is the equity attributable to the equity holders. The primary objective of the Company's capital management is to ensure that it maintains healthy capital ratios in order to support its business and maximise shareholder value. The Company manages its capital structure and makes adjustments to it, in light of changes in economic conditions. To maintain or adjust the capital structure, the Company may adjust the dividend payment to shareholders or issue new shares. No changes were made in the objectives, policies or processes during the years ended 30 June 2018 and 30 June 2017. The Company monitors capital using a gearing ratio. This ratio is calculated as net debt divided by capital. Net debt is calculated as total of interest bearing loans and borrowings, less cash and cash equivalents. 2018 2017 Shs million Shs million Interest-bearing loans and borrowings (Note 27) 113,029 122,016 cash and cash equivalents (Note 33(c)) 7,603 1,151 Net debt 120,632 123,167 Equity 64,207 63,334 Gearing ratio 188% 194% 48 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 5 Financial risk and capital management (continued) (e) Capital management (continued) The major factors that impact on the equity of the Company include the following: * revenue received from electricity sales (which is a function of price and sales volume) * power purchase cost * cost of funding the business * cost of operating the electricity business * cost of expanding the business to ensure that capacity growth is in line with electricity sales demand (funding and additional depreciation) * taxation * dividends The Company uses Power System Development Planning process, which forecasts long-term growth in electricity demand; evaluates the alternative means to meet and manage that demand and comes up with a Least Cost Power Development Plan. The planning process determines a forward electricity cost curve (the Long Run Marginal Cost), which will give an indication of the size of the price increases that the Company requires in order to be sustainable over the medium and long term. Adjustment of the tariffs for the electricity business is regulated and is subject to the process laid down by the Energy Regulatory Commission (ERC). The electricity business is currently in a major expansion phase driven by a rise in demand and Government policy. The funding of additional transmission and other distribution capacity is to be obtained from cash generated by the business, Government support and funds borrowed from local and international lending institutions. The adequacy of electricity tariffs allowed by ERC and the level of Government support are key factors in the sustainability of the Company. The debt to equity ratio plays an important role in the credit ratings given to the Company which in turn influence the cost of funding. The Company's policy is to fund capital expansion programme jointly through its own resources and long-term borrowings. (f Fair values of financial assets and liabilities Comparison by class of the carrying amounts and fair values of the financial instruments is as set out below; Carrying amount Fair value 2018 2017 2018 2017 Shs'000 Shs'000 Shs'000 Shs'000 Financial assets Trade and other receivables 43,295,835 45,332,533 43,295,835 45,332,533 Short term deposits 491,991 596,169 491,991 596,169 Bank and cash balances 4,777,038 2,941,754 4,777,038 2,941,754 Financial liabilities Borrowings 113,029,384 122,016,122 113,029,384 122,016,122 Trade and other payables 93,773,434 87,255,579 93,773,434 87,255,579 Bank overdraft 12,872,175 4,688,333 12,872,175 4,688,333 49 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 5 Financial risk and capital management (continued) (f) Fair values of financial assets and liabilities (continued) Trade and other receivables are evaluated regularly to assess the likelihood of impairment. Based on this evaluation, allowances are taken to account for the expected losses on these receivables. As at 30 June 2018, the carrying amounts of such receivables, net of allowances, approximates their fair value. The fair values of term deposits, bank and cash balances and trade and other payables approximates their carrying amounts largely due to the short term maturities of these instruments. Fair value hierarchy The Company uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique: Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities; Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly; Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data. None of the financial assets is carried at fair value. 6 (a) Electricity sales 2018 2017 Shs'000 Shs'000 Electricity sales 95,463,404 91,951,629 (b) Other operating income Capital contribution amortised to profit or loss 6,837,104 6,773,396 Miscellaneous sales 903,649 683,936 Fibre optic leases 450,624 336,308 Transmission line maintenance revenue 206,427 119,291 Reconnection charges 143,936 154,430 Rent 128,617 63,037 8,670,357 8,130,398 50 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 7 Power purchase costs (a) Non-fuel costs The basic power purchase costs according to source/ power producer were as follows: 2018 2017 Shs'000 Shs'000 KenGen* 37,022,822 33,990,062 OrPower 4 Inc. 11,438,108 11,343,617 lberafrica Power (E.A.) Company Limited 3,154,052 3,342,529 Rabai Power Limited 2,960,346 2,306,222 Thika Power Limited 2,352,950 1,621,244 Tsavo Power Company Limited 2,306,675 2,035,340 Gulf Power Limited 2,133,329 2,046,992 Triumph Power Generating Company Limited 1,939,371 2,384,967 Uganda Electricity Transmission Company Limited 1,098,878 1,268,119 Regen-Terem 178,349 24,474 Gura 137,336 - Ethiopia Electricity Power Company 81,893 18,363 Power Technology Solutions Limited 14,696 9,743 Chania Power Limited 5,295 - Biojoule Kenya Limited 4,136 7,353 Imenti Tea Factory 3,826 1,706 Tanzania Electric Supply Company Limited 37 1,229 Aggreko - 12,977 Mumias Sugar Company Limited - 3,911 64,832,099 60,418,848 Less foreign exchange surcharge (separately presented in profit or loss) (7,714,264) (6,199,227) Less recharged to Rural Electrification Scheme (4,322,804) (4,017,133) 52,795,031 (50,202,488) KenGen*- included in Non-fuel costs for Kengen are Capacity charges totalling to Shs 21,189,809,000 (2017: Shs 21,145,825,000), Steam charges totalling Shs 6,166,125,000 (2017: Shs 5,093,354,000), Energy charges totalling Shs 8,112,081,000 (2017: Shs 6,491,665,000) and foreign exchange costs totalling Shs 1,554,807,000 (2017: Shs 1,259,218,000). 51 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 7 Power purchase costs (continued) (b) Fuel costs 2018 2017 Restated Shs'000 Shs'000 KenGen 9,622,740 10,003,406 Rabai Power Limited 5,153,442 5,345,244 Uganda Electricity Transmission Company Limited 2,454,654 2,639,322 Thika Power Limited 2,311,997 2,206,335 Iberafrica Power (E.A.) Company Limited 2,044,320 2,493,244 Tsavo Power Company Limited 1,928,108 1,446,738 Off grid power stations 1,673,030 1,472,798 Gulf Power Limited 1,433,953 760,015 Triumph Power Generating Company Limited 327,332 880,346 Aggreko - 15,033 26,949,576 27,262,481 Less recharged to Rural Electrification Scheme (3,358,392) (3,186,952) 23,591,184 24,075,529 Fuel cost for the year ended 30 June 2017 have been restated. The prior year adjustment is explained in note 39. A recovery of Shs 21,068,631,000 (2017: Shs 22,107,948,000) was made. 52 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 7 Power purchase costs (continued) Units purchased Analysis of interconnected power purchases by utility source in gigawatt-hours (GWh) is as follows: 2018 2017 GWh GWh KenGen 7,989 7,513 OrPower 4 Inc 1,185 1,172 Rabai Power Limited 562 607 Thika Power Limited 215 168 Tsavo Power Company Limited 196 121 Iberafrica Power (E.A.) Company Limited 186 252 Uganda Electricity Transmission Company Limited 168 180 Gulf Power Limited 81 61 Off grid power stations 47 41 Triumph Power Generating Company Limited 28 83 Regen-Terem 18 1 Gura 17 - Mumias Sugar Company Limited 4 - Ethiopia Electricity Power Company 3 3 Chania Power Limited 1 - Imenti Tea Factory 1 - Power Technology Solutions Limited 1 1 Biojoule Biogas Power Plant* - 1 Aggreko - 1 10,702 10,205 Less recharged to Rural Electrification Scheme (740) (683) 9,962 9,522 *Biojoule Biogas Power Plant supplied KWh 403,879 during the year (2017: KWh 711,165). Tanzania Electric Supply Company Limited supplied KWh 4,865 during the year (2017: KWh 3,353). 53 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 7 Power purchase costs (continued) Type of interconnected power sources Analysis of interconnected power purchases by utility source in gigawatt-hours (GWh) is as follows: 2018 2017 GWh GWh Geothermal 5,053 4,451 Hydro 3,224 3,341 Thermal 2,206 2,165 Net imports 171 184 Others 48 64 10,702 10,205 Less recharged to Rural Electrification Scheme (740) (683) 9,962 9,522 The Company transmits excess units generated by Aggreko Limited to Uganda Electricity Transmission Company Limited (UETCL) and Tanzania Electricity Supply Company Limited (TANESCO), whereas UETCL and TANESCO transmit back their excess power to the Company at the same charge rate as that billed to them. The two transactions have been effected in the accounts to give net quantity. 54 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 8 Net operating expenses (a) Network management 2018 2017 Shs'000 Shs'000 Salaries and wages 5,188,001 4,554,499 Depreciation 5,060,161 4,705,527 Wheeling charges - Ketraco* 2,011,000 2,011,000 Loss on disposal of fixed assets 539,035 625,570 Consumable goods 271,631 380,068 Staff welfare 191,403 105,919 Transport and travelling 104,386 545,026 Advertising and public relations - 50,444 Office expenses 3,114 3,017 Other costs 661,506 535,994 Net recharge of distribution and transmission costs to Rural Electrification Scheme (2,717,431) (2,370,856) 11,312,806 11,146,208 * These are fees levied by Ketraco for the use of their transmission lines to transport electricity from the generators. The amount is determined by Energy Regulatory Commission (ERC). (b) Commercial services 2018 2017 Shs'000 Shs'000 Depreciation 3,985,122 2,442,417 Salaries and wages 3,832,228 3,290,802 Advertising and public relations 131,340 63,472 Staff welfare 127,713 74,316 Transport and travelling 79,046 236,786 Consumable goods 16,318 29,722 Office expenses 11,010 85,175 Other costs 9,911 10,116 Net recharge of customer service costs to Rural Electrification Scheme (1,870,180) (2,060,241) 6,322,508 4,172,565 Allowance for doubtful receivables Provision for electricity debtors (Note 20(e)) 4,434,957 282,472 Provision for non-vending customers 1,342,103 289,940 Provision for other receivables 138,505 209,258 Provision for Uchumi debt 112,927 -- Provision for street lighting debtors 54,555 Imperial Bank deposits write-back** - (34,154) 6,083,047 747,516 12,405,555 4,920,081 55 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 8 Net operating expenses (continued) (c) Administration 2018 2017 Restated Shs'000 Shs'000 Salaries and wages 5,252,374 4,791,114 Depreciation 4,968,229 4,065,095 Staff welfare 1,293,650 1,234,597 Amortisation of intangible assets and operating lease prepayment 1,271,442 738,311 Repairs and maintenance 854,395 1,286,538 Security and surveillance 757,758 608,196 Transport and travelling 700,933 478,831 Office expenses 505,283 637,045 Bank charges 471,739 357,593 Rents 400,573 438,804 Licenses 379,095 429,836 Insurance 368,718 374,998 Public relations 233,417 329,127 Company electricity expenses 188,995 181,226 Training expenses and consumer services 135,881 446,645 Other consumable goods 128,129 189,688 Increase /(decrease) in leave pay provision (Note 31) 101,097 (197,466) Consultancy fees 73,095 136,758 Directors' emoluments 28,758 35,214 Auditor remuneration 15,750 15,270 Other directors' expenses 14,615 62,774 Inventories provision (Note 19) - 497,733 Insurance claims provision - 58,756 Other costs 598,247 724,258 Retirement benefit credits (Note 30) (181,184) (326,988) (Decrease)/increase in unrealised exchange differences - restated (1,650,243) 2,141,402 16,910,746 19,735,355 Recharge of administration costs to Rural Electrification Scheme* (1,000,884) (1,056,826) 15,909,862 18,678,529 Unrealised exchange differences for the year ended 30 June 2017 have been restated to include exchange differences on borrowings. The prior year adjustment is explained in note 39. * Recharges to Rural Electrification Scheme (RES) relate to operating costs apportioned to RES based on the predetermined formula developed by the Government of Kenya. **A full provision of Shs 322,438,000 was made in the year ended 30 June 2016 for amount deposited with Imperial Bank Limited. No recovery was made in the year (2017: Shs 34,154,000). Imperial Bank was placed under receivership in 2015. 56 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 9 Employee benefits 2018 2017 Shs'000 Shs'000 Salaries and wages 15,708,491 14,941,112 Recharge of recurrent expenditure to capital jobs* (2,330,802) (3,157,191) NSSF employer contributions 27,105 27,137 Pension costs - defined contribution 867,808 825,364 Salaries and wages 14,272,602 12,636,422 Pension credit - defined benefit scheme (Note 30) (181,184) (326,988) 14,091,418 12,309,434 Increase/ (decrease) in leave pay provision (Note 31) 101,097 (197,466) 14,192,515 12,111,968 * Recharge of recurrent expenditure to capital jobs relates to the labour and transport costs incurred by staff on capital jobs. 10 Net finance costs 2018 2017 Shs'000 Shs'000 (a) Interest income Interest income on bank and other deposits 100,000 46,004 (b) Finance costs Interest incurred on: Loans (5,424,962) (5,529,522) Bank overdrafts (1,418,489) (508,519) Late payment of invoices (961,295) Dividends on cumulative preference shares (1,930) (1,930) (7,806,676) (6,039,971) 57 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 11 Expenses by nature The profit before income tax is arrived at after charging/(crediting): 2018 2017 Shs'000 Shs'000 Employee benefits (Note 9) 14,192,515 12,111,968 Depreciation (Note 15) 14,013,511 11,213,039 Interest expense (Note 10(b)) 7,806,676 6,039,971 Provision for trade and other receivables (Note 8 (b)) 6,083,047 781,670 Amortisation of intangible assets (Notel 7) 1,207,828 738,255 Loss on disposal of property and equipment (Note 32 (e)) 539,035 625,370 Rent expense 400,573 438,804 Increase/(decrease) in leave provision 101,097 (197,466) Amortisation of operating lease prepayments (Note 16) 63,614 56 Directors' emoluments: - Fees 3,453 5,094 - Other 25,305 30,120 Other directors' expenses 14,174 62,774 Auditor remuneration 15,750 15,270 Provision for inventories (Note 19) - 497,733 Write back for cash deposits held in Imperial Bank (Note 8 (b)) - (34,154) Retirement benefit credit (Note 30) (181,184) (326,988) 12 (a) Income tax expense 2018 2017 Restated Shs'000 Shs'000 Current income tax 130,589 78,232 Deferred income tax (Note 26) 1,040,628 2,297,982 1,171,217 2,376,214 The net income tax charge for the year ended 30 June 2017 has been restated as a result of the prior year adjustments explained in Note 39. 58 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 12 (b) Income tax expense reconciliation The tax on the Company's profit before income tax differs from the theoretical amount that would arise using the statutory income tax rate as follows: 2018 2017 Restated Shs'000 Shs'000 Profit before income tax 3,089,209 7,656,639 Tax calculated at the statutory income tax rate of 30% (2017: 30%) 926,762 2,296,993 Tax effect of: Expenses not deductible for tax purposes 113,866 187,905 Under/(over) provision of deferred tax in prior years - (186,916) Tax effect on excess allowance over depreciation Current income tax on separate sources of income 130,589 78,232 Income tax expense 1,171,217 2,376,214 (c) Current income tax (payable)/ recoverable reconciliation 2018 2017 2016 Restated Restated Shs'000 Shs'000 Shs'000 At start of year 44,358 25,990 (180,432) Paid during the year 62,454 96,600 498,155 Income tax paid - - (33,020) Corporation tax on separate sources of income - current year (130,589) (78,232) (258,713) At end of year (23,777) 44,358 25,990 The current income tax recoverable balance at 30 June 2016 and 30 June 2017 has been restated as a result of the adjustments explained in Note 39. 59 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 13 Earnings per share The calculation of basic and diluted earnings per share is based on continuing operations attributable to the ordinary equity holders of the Company. There were no discontinued operations during the year. There were no potentially dilutive ordinary shares as at 30 June 2018 and 2017. Diluted earnings per share is therefore the same as basic earnings per share. The earnings and weighted average number of ordinary shares used in the calculation of basic and diluted earnings per share are as follows: 2018 2017 Restated Shs'000 Shs'000 Profit for the year attributable to owners of the Company 1,917,992 5,280,425 The total number of shares and the weighted average number of shares for the purpose of calculating the basic and diluted earnings are as follows: 2018 2017 Weighted average number of ordinary shares for the purpose of basic and diluted earnings per share 1,951,467,045 1,951,467,045 Earnings per share is calculated by dividing the profit attributable to owners of the Company by the number of ordinary shares. 2018 2017 Restated Basic earnings per share (Shs) 0.98 2.71 Diluted earnings per share (Shs) 0.98 2.71 14 Dividends per share Proposed dividends are accrued after they have been ratified at an Annual General Meeting. At the Annual General Meeting to be held before 31 December 2018, the directors will not recommend payment of dividend in respect of the year ended 30 June 2018 (2017: Shs 0.50). There was no interim dividend paid in the year (2017: Shs Nil). 60 � о мс� � о и ��N м с� О о ti � N i � й м м � F- и cv со rn и ch с� ш t � v N с� сд .- �D и г� и ооr� о и �tом � м NN v й ш�v °г�° � м м с� С и О О N ^ i � � � i� � � � L` о v� � й й и и оо � г� г•` � Q й N� � и и й сиv й N п�i °.' с о cv � т� и r- �� оо г� ! ,� � о � о`-о с°И N� м й � и � v� ai cv ао о оо ` а '� а�'о � й оио ° й °ш �� и t� � м � � �� N � ,о аиi °о й� г� гм.. о°'о о�о � � rn О � О и �r и rn г� г� � �•� = й �OV о �о а�о N � и и � о о �r д� и ш � й й � � 1 1 1 д °о � й г ом v й с - � � cD �D 1� � м � и и � с и о м � и ^ сд с� оо ^ ао оо � с о й о д' � омо_ п°�i_ _о й й � � .ис о м�'` а'�о йои м й � и м г�� о с�шм и и и rn мv м с°'v~v м й ' � Г N � с и О ш � N � оо � оо � и rn р д о � N м д� г� .- � •и с о и r: с� о г� т � и г й пi � м° v N ао и с? о r. г� и й и й о о й oi о _ � � М N � � � Ш _ _ � � с а�°о о� о� °i•° ййо ш � J � �о со и г�о с� и�v rn м и N м � ао .- rn .- с � е�о �� м N� и О.- с� м а �-.в �л м v оо �- � г� Е о о U Г Q� N = с /" о '-' т � ш :� с ш t с ,�, .с • ,.-, � а т т J � ^ •� й � о й � �° им � д �й 3 w �л �о д�о с � св �• � ш Г ti И �- � � � N Ф � С � СЛО N �0,-С N lDN ош� '''" �, Na`йи с �Nои � хс .-� tц и� � д -�i С й`р� р м Go1 -�i р� рИ м �� >, - и С� а w ,«. �с о а о � � а о •� о и � У•с= � � о о.. о� о.и .М а°'i. � и .`,�' т.°✓ о n. с� VQ ''�1- � Q G, о й со cr �.n � ш; ' � .д° i � о -� � � � � °о � v rn й� i с`-� � й � о о � v_ с� г� о v �'� � .� N � � си�з N й о � а � г� и и � .- и о со с� � � �,.5 з и � � С М О � � СО м N м N е- �� N � с °о � rn � й °�° N � омо_ aNO_ � °� � �= гл о и� м r�oN м rn и�° л .с v и° о им�' и �r и•° � и и с�� м �мN с� о 5 ш и й мv й Nш" N � с°' G �- � .- � О � � � о- с и о �t � с� � ш ао м � •- и й ш о_с о й � й й� о v =в L с� и .с о�''о ш й °� °� м г с о � со а0 д• с0 О ср с0 �D � и оо � rn оо а� о с� � � о О Ш ~ и � � � С i7f О � � Ор0 1 О �� , t,�f) й С�1 о� Со rn со и �со и ш с�о° � и �- о с� � r: со м •� м �� с = ���й й м м rn° о N а = �-д м � и .- v mr о и U °O � о о `- ++ и � +, с со� = с ш и о п� ;�, � °' � � с о с°� = Е т ° а �о -о �с � са � 'О о „' 'а. и с0 о сц о.,.�_, с ис'� д д ` й 3 � �, � д :� 3 � ш ш � _ � rno N о�� с°v � ш с Е'° � ° о ч- д ° L т > и`-° о о с :ь+ с� а и и и с'С +• cv о и с У ш� ai n' с� `т 0 � с •5,� � й -� � ° � т й � о т.� ш т й о v Q � +,-� ` � ро о и L-� ио о ,а > ш о с го л � � �� о N� й_ �"� � С. � т й м +. ш� с И v Ф и О. N С) Q S� F- � 0 Q`", C Q U � Q Z Н- N С У с ,s д у+ .ис .Е `о � � �- tL t,i Z The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 16 Operating lease prepayments 2018 2017 2016 Restated Restated Shs'000 Shs'000 S hs'000 Cost At start of year 870,718 870,718 870,718 Additions 8,574 - - 879,292 870,718 870,718 Amortisation At start of year (2,255) (2,199) (2,150) Charge for the year (63,614) (56) (49) At end of year (65,869) (2,255) (2,199) Net book value 813,423 868,463 868,519 The cost at I July 2016 and 1 July 2017 has been restated to include leasehold land totaling to Shs 737,025,000 which was previously disclosed as part of' freehold land and buildings' under property and equipment. The cumulative amortization charge of Shs 57,135,000 relating to the reclassified leases has been recognized in the year ended 30 June 2018. 17 Intangible assets 2018 2017 Shs'000 Shs'000 Cost At start of year 4,330,577 3,600,872 Additions 2,457,161 729,705 At end of year 6,787,738 4,330,577 Amortisation At start of year (1,737,094) (998,839) Charge for the year (1,207,828) (738,255) At end of year (2,944,922) (1,737,094) Net book value 3,842,816 2,593,483 63 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 18 Recoverable foreign exchange adjustment The electricity tariff allows the Company to bill and recover realised foreign exchange losses based on the base rates approved by the Energy Regulatory Commission The Company has previously recognised a recoverable foreign currency exchange adjustment asset relating to unrealised currency exchange differences on foreign currency denominated borrowings at the reporting date which are recoverable from electricity customers. 2018 2017 2016 Restated Restated Shs'000 Shs'000 Shs'000 Recoverable foreign exchange adjustment asset - - . The adjustments made for the years ended 30 June 2016 and 30 June 2017 are explained in note 39. 19 Inventories 2018 2017 Shs'000 Shs'000 General stores 4,177,464 5,321,960 Transformers 2,920,775 2,049,688 Conductors and cables 1,526,142 1,696,835 Meters and accessories 636,698 302,240 Poles 375,945 867,961 Fuel and oil 185,054 229,750 Motor vehicle spares 108,989 100,651 Engineering spares 13,560 17,437 9,944,627 10,586,522 Provision for impairment (199,242) (960,229) 9,745,385 9,626,293 Movements in the provisions for inventories were as follows: 2018 2017 Shs'000 Shs'000 At start of year (960,229) (602,893) Write off 760,987 140,397 Additional provision (Note 8(c)) - (497,733) At end of year (199,242) (960,229) General stores, engineering spares, fuel and oil, transformers and motor vehicle spares are carried at weighted average cost. 64 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 20 Trade and other receivables (a) Non-current - Trade and other 2018 2017 2016 receivables Restated Restated Shs'000 Shs'000 Shs'000 Prepayments 1,386,758 1,601,509 1,816,261 1,386,758 1,601,509 1,816,261 (b) Current - Trade and other receivables Electricity receivables (Note 20(c)) 22,221,434 16,715,809 16,159,084 Rural Electrification Scheme - intercompany 9,101,806 4,855,584 238,115 Prepayments 2,685,067 488,171 337,448 Receivable from Government of Kenya***** 2,598,787 3,362,487 3,362,587 VAT recoverable 2,429,798 4,276,787 1,901,651 Unbilled fuel costs revenue* 1,737,420 7,290,699 - Due from Ketraco*** 1,425,441 8,593,104 5,204,858 Staff receivables (Note 20 (d) (i)) 726,828 705,197 672,496 Stima loan deferred payment customers (Note 20(d)(ii)) ** 270,976 342,173 552,707 Rural Electrification Authority current account 248,564 167,110 60,294 GPOBA prepaid debtors**** 208,479 610,495 1,114,756 Energy Regulatory Levy 56,351 - 759,429 Capital contribution receivable - 1,939,813 - Other receivables (Note 20(d) (iii))****** 7,298,536 4,112,549 3,830,958 Gross trade and other receivables 51,009,487 53,459,978 34,194,383 Provision for credit losses (Note 20(e)) (11,403,720) (5,375,166) (5,049,870) Net trade and other receivables 39,605,767 48,084,812 29,144,513 Trade and other receivables are non - interest bearing. * Unbilled fuel costs revenue of Shs 1,737,420,000 (2017: Shs 7,290,699,000) relate to unrecovered fuel cost arrears to be recovered from customers in the subsequent month. ** Deferred payment customers balances represent debts outstanding under the Stima Loan Revolving Fund Programme which was established in 2010 to facilitate credit access to the low- income segments of the market for the purpose of electricity connection. It is funded by Agence Francaise de Development (AFD). *** This represents amounts due from Ketraco for local costs incurred in the construction of Sondu Miriu transmission and distribution line and repayments in relation to 0.75% Japan Bank for International Corporation loan before the same was transferred to Ketraco in the year upon signing of the Novation agreement. 65 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 20 Trade and other receivables (continued) (b) Current - Trade and other receivables (continued) ****GPOBA prepaid debtors relate to the Global Partnership on Output Based Assistance (GPOBA) project for customers with prepaid meters. This project aims to provide safe, legal and affordable electricity to informal settlements. In 2015, the Company entered into an arrangement with the World Bank's International Development Association (IDA), which acts as an administrator of GPOBA. Under the agreement, the Company pre-invests its own resources to provide electricity to informal settlements after which IDA reimburses the Company for every connection done under this project. The facility comprised a USD 10 million IDA loan and USD 5.15 million grant to be used as a subsidy for eligible electricity connections, allowing low income households to pay Shs 1,160 per connection. The receivable amount of Shs 208,479,000 (2017: Shs 610,495,000) is due from customers who received electricity connection under this project. The Company automatically recovers Shs 100 from these customers every month towards the Shs 1,160 awarded to each customer. *****Receivable from Government of Kenya (GoK) relates to subsidies due to the Company to enhance universal access to electricity through connectivity to the national grid. The Shs 2,598,789,000 (2017: Shs 3,362,487,000) receivable from the GoK is part of a larger commitment by the GoK, to be financed partly through support from the World Bank and the African Development Bank to enhance universal access to electricity. During the year, the Company received Shs 1,196,750,000 as disbursements of which Shs 763,702,000 was used to offset the debt and Shs 433,048,000 was fully utilized to grant accounting versus capital connect new customers. ******Included in other receivables is an amount of Shs 288,284,000 (2017: Shs 288,284,000) deposited in Imperial Bank Limited which was placed under receivership in 2015. No recovery was made during the year (2017: Shs 34,154,000) (Note 8(c)). The rest of the balance is fully provided for. Prior year adjustments relating to unbilled fuel costs revenue and Rural Electrification Scheme - intercompany are explained in noted 39. (c) Electricity receivables At 30 June, the aged analysis of electricity receivables was as follows: Total <30 days 30-60 days 60-90 days >90 days Shs'000 Shs'000 Shs'000 Shs'000 Shs'000 2018 Gross 22,221,434 8,945,986 1,351,668 1,095,377 10,828,403 Impairment (8,471,429) - - - (8,471,429) Net 13,750,005 8,945,986 1,351,668 1,095,377 2,356,974 2017 Gross 16,715,809 7,912,550 1,432,842 698,471 6,671,946 Impairment (4,036,472) - - - (4,036,472) Net 12,679,337 7,912,550 1,432,842 698,471 2,635,474 66 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 20 Trade and other receivables (continued) (d) Other receivables analysis Other receivables comprise debtors' balances that have been impaired as follows; 2018 2017 Shs'000 Shs'000 (i) Staff receivables (Note 20(a)) 726,828 705,197 Allowance for doubtful staff receivables* (188,161) (127,165) Net staff receivables 538,667 578,032 (ii) Stima loans deferred payment customers (Note 20(a)) 270,976 342,173 Allowance for doubtful Stima loans (79,071) (79,071) Net Stima loans 191,905 263,102 (iii) Other receivables (Note 20(a)) 7,332,689 4,166,549 Allowance for doubtful receivables (2,665,059) (1,132,458) Net other receivables 4,667,630 3,034,091 * Allowance for doubtful staff receivables relates to provision held for ex-staff. (e) Provisions for credit losses Movements on the provision for impairment of trade and other receivables are as follows: Electricity Stima Staff Other receivables loans receivables receivables Total Shs'000 Shs'000 Shs'000 Shs'000 Shs'000 2018 At start of year (4,036,472) (79,071) (127,165) (1,132,458) (5,375,166) Additional provision (4,434,957) - (60,996) (1,587,093) (6,083,046) Write back - - - 54,492 54,492 At end of year (Note 20(a)) (8,471,429) (79,071) (188,161) (2,665,059) (11,403,720) 2017 At start of year (3,754,000) (79,071) (127,165) (608,657) (4,568,893) Additional provision (282,472) - - (523,801) (806,273) At end of year (Note 20(a)) (4,036,472) (79,071) (127,165) (1,132,458) (5,375,166) The Imperial Bank provision of Sh 322,438,000 was made in the year ended 30 June 2016. Shs 34,154,000 was recovered in the year ended 30 June 2017. 67 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 21 Short term deposits, bank and cash balances 2018 2017 Shs'000 Shs'000 (a) Short term deposits Housing Finance Company of Kenya Limited 393,183 371,089 The Co-operative Bank of Kenya Limited 98,808 225,080 491,991 598,169 The average effective interest rate on the short-term deposits for the year ended 30 June 2018 was 6.90% (2017: 6.68%). (b) Bank and cash balances 2018 2017 Shs'000 Shs'000 Cash at bank 4,760,401 2,925,817 Cash on hand 16,637 15,937 4,777,038 2,941,754 Overdraft (12,872,175) (4,688,333) (8,095,137) (1,746,579) 22 Share capital Ordinary share capital Authorised: 2018 2017 2,592,812,000 ordinary shares of Shs 2.50 each 6,482,030 6,482,030 2018 2017 Shs'000 Shs'000 Issued and fully paid: 1,951,467,045 ordinary shares of Shs 2.50 each 4,878,667 4,878,667 23 Share premium The share premium arose from the redemption of the 7.85% redeemable non-cumulative preference shares and a rights issue in the year 2011 at a price of Shs 207.50 giving rise to a share premium of Shs 14,367 million. A further premium was received from the rights issue of 488,630,245 ordinary shares of Shs 2.50 each at a price of Shs 19.50, hence resulting to a share premium of Shs 17.00 per share or a total share premium of Shs 8,307 million. The transaction costs amounting to Shs 653 million were netted off against the share premium. 68 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 24 Retained earnings The retained earnings balance represents the amount available for distribution to the shareholders of the Company. 25 Deferred income Deferred income relates to capital contributions received from electricity customers for the construction of electricity assets. The amounts are amortised through profit or loss on a straight line basis over the useful life of the related asset used to provide the ongoing service. 2018 2017 Shs'000 Shs'000 At start of year 24,506,623 24,108,069 Additions: Contributions from customers 4,032,011 5,267,029 Grant from Government of Kenya - 1,904,921 Recognised as income (Note 6(b)) (6,837,104) (6,773,396) At end of the year 21,701,530 24,506,623 Maturity analysis: Non-current 16,999,103 19,562,051 Current 4,702,427 4,944,572 At end of the year 21,701,530 24,506,623 26 Deferred income tax Deferred income tax is calculated using the enacted income tax rate of 30% (2017: 30%). The movement on the deferred income tax account is as follows: 2018 2017 2016 Restated Restated Shs'000 Shs'000 Shs'000 At start of year 28,683,216 26,702,741 24,699,789 Credit to other comprehensive income (29,351) (317,507) (72,289) Charge to profit or loss (Note 12 (a)) 1,040,628 2,297,982 2,075,241 At end of year 29,694,493 28,683,216 26,702,741 69 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 26 Deferred income tax (continued) Year ended 30 June 2018 01.07.2017 (Credited)/ Credited to 30.06.2018 Restated charged OCI to profit or loss Shs'000 Shs'000 Shs'000 Slhs'000 Deferred income tax liabilities Property and equipment 51,351,629 (954,341) - 50,397,288 Unrealised foreign exchange loss (2,791,229) 831,959 - (1,959,270) Retirement benefit asset 759,534 54,355 (29,351) 784,538 49,319,934 (68,027) (29,351) 49,222,556 Deferred income tax assets Provisions (2,004,689) (1,694,381) - (3,699,070) Tax losses (18,632,029) 2,746,884 - (15,885,145) (20,636,718) 1,052,503 - (19,584,215) Tax charge on excess accelerated capital allowances(current year) - 56,152 - 56,152 Net deferred income tax liabilities 28,683,216 1,040,628 (29,351) 29,694,493 Year ended 30 June 2017 01.07.2016 Chargedl Credited to 30.06.2017 Restated (credited) OCI Restated to profit or loss Shs'000 Shs'000 Shs'000 Shs'000 Deferred income tax liabilities Property and equipment 43,183,443 8,168,186 - 51,351,629 Unrealised foreign exchange loss (2,315,206) (476,023) (2,791,229) Retirement benefit asset 978,945 98,096 (317,507) 759,534 41,847,182 7,790,259 (317,507) 49,319,934 Deferred income tax assets Provisions (1,714,847) (289,842) - (2,004,689) Tax losses (13,429,594) (5,202,435) - (18,632,029) (15,144,441) (5,492,277) - (20,636,718) Net deferred income tax liabilities 26,702,741 2,297,982 (317,507) 28,683,216 70 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 26 Deferred income tax (continued) As at 30 June 2018, the Company had accumulated tax losses amounting to Shs 52,950,483,000 (2017: Shs 62,106,763,000). The deferred income tax has been restated to account for errors in prior periods which are explained in Note 39. 27 Trade and other payables 2018 2017 (a) Non-current liabilities Shs'000 Shs'000 Capital contribution - on-going projects** 8,242,300 13,426,192 Customer deposits* 7,432,623 7,417,883 Capital contributions 4,610,528 1,542,274 Deferred creditor (Fibre optic) 480,251 524,460 Rural Electrification Scheme current account - capital 182,697 172,498 Donor funded revolving fund 177,910 4,509,763 Nuclear electricity project 12,545 - Ministry of Finance - 328,141 Other payables 1,385,504 1,789,336 22,524,358 29,710,547 *Customer deposits are held as a non-current liability because the Company will continue to offer services to the customers for the foreseeable future and the customers are not expected to discontinue their use of electricity in the short run. In addition, the customer deposits are a security for the electric meters supplied to the customer for long term electricity supply. **Capital contributions for on-going projects relate to customer contributions for capital works not completed. (b) Current liabilities 2018 2017 Shs'000 Shs'000 KenGen 21,888,545 15,429,222 Other suppliers' accounts 14,531,425 13,773,775 Other electricity suppliers 11,010,113 12,695,623 Other payables 10,356,112 5,259,237 Rural Electrification Scheme current account - Last Mile Project 5,839,520 3,570,618 Rural Electrification Authority Levy** 3,292,916 1,634,371 Ketraco wheeling charge 2,047,868 1,119,457 Ministry of Finance 875,041 546,900 Prepaid revenue*** 871,210 302,499 Street lighting project 285,741 2,875,319 Aggreko 190,400 193,934 Deferred creditor (Fibre optic) 60,185 60,185 Energy Regulatory Commission Levy - 83,892 71,249,076 57,545,032 **The Rural Electrification Authority Levy relates to levy charge for May and June 2018 to be remitted to the Rural Electrification Authority on collection. *** Prepaid revenue represents unearned income on prepaid meters. Based on historical trends, management derives an estimate of the value of prepaid power units not consumed as at the end of the financial year. Non-current trade and other payables payables are non-interest bearing. 71 ~о иоооиос� ' о миоог�i.мооиооrnмг��tи с� сч .-о иос�мог� м миаогос�i.оисvд•r�r.rno и с� о о о о r. и о и м r- и с� i.. ш rn �r оо со и м г о v с� r. г- N и о0о00г �--� N'ctCUt!')и�N00COCO000Г.NN �F (р й rnоососоои о aor�aoor�oovис�оомшг�и г .-- Nг00М00 OD NO00�1'Mf�(�д•l1')гг�мои N О COиof�CVCV м NO>о(V мг NгN рр �у м г г � г г 'с1' CV �-- 000 OOO�tO(i�N N (L�Od•(Оt�О�ооОб)00 '' О N �f- а�0 ОООООи� М chиNNCOиONOO�г о0 и ор NO lпОLпгОии (V OMOOOf�N00�od'MN а0 г ('г� . и (�• О м t[) О М о0 рр tЛ (О N г 1� о О 1� о OD 0� � � г д3 .с сдаог�vог�и о мис�о�rис�зсflсчсооош и сч cv и мгомог� м мос�оог��rшvмс.iг г i.. а и и 1� (U N г г 0р N г О N N г (�j � �rj ,. м г (� г г г � �� ',, t� �; шМгиrnио иvа•шиис�vоNrnишм И N N N N г г м м м N N N N N М г и г м N� � О О О О О О О О О О О О о О О о О О О О О NNNNNNn1 NNNNNNNNn1NNNNN .а ���....��� �..����,-��,.���,���..� ММгО00гг г00гU:00игиlС)ОСUги = NNММNМм �jN�\Nм\МN�М�М` ш СО (U N о СО N п1 01D о f� м о� г г СО м г 00 ., г г г �' г О О д сди�vr.�м г�•и а,�� >�т о U °г° о ot� °� v Шслсл ��� U �_ш � N и.х�с с� о� �Уш д� с с � -� с с с�ц т �•3 J И '� Z У с�р И И Ii с�р Q с � J � .-. 3�� �� �•<ив и штй ш т о �'�� о � о � -о о �р ° ш� т� � с �wgd' У с ш•> �шш �J °�' � глм � � и и�D� сLц ико2S ��� р�УУ�У с.-. С1 ` ш ш � ,а �� с? �ti О �waoQc�wp �Yr.cp�Z а� � з�� � и �.cs,�,c �� � � шQ�Ом �•о�0й�ит"- � о о� и = _ •� UU � с р� с оУZм�су с�р I iлс�и� � с L а г�п � О у-а-а шт �� � �б) M�tf)СОО t� г �- и д О ООм00�000 �о�-- иСОи N CU�-CO t�иС0�0 � N� t' О d:�t��� tn NNf� М�Р• N C�N1� �-O�NO � � С fIi оiГМОГГ c�r�ap��p� �i ррГГ CV(VГим �f а= а�мrnс�мо cvr�rn�и�' и �сvи г�шаог�v г.. �� `и и�ииии ишr. ии и аооо �ис�о rn � д' NCON � �pj N �- �NM N�M� м Q Cfl д' д' N д' М � м � и и N м � Q � �а, о v v `� г м м м °i м � � У i�+ C � �^' V � W С J �.., � � � с � � � � д р. С = (�ц N О С _ �j ао v и � с и и°с� �„ с � т _ш ш со �' N и _= .. Е � У�° -� cLi и ш ш � � = ео шс�'о �й> >� � .fl д �� � с а� ст� v� ис_�v � х ,��ч >, � ° � и= ������ ш.� �о.д и � шш°' ш асУ�о �р �� д � � Ш и й� Ш.с t� Е ш й ш � з О О w � w� `�� 7 г'�v � -� ш и��`, w. � сс • v с� и ��-о = � +.. � �д'-' � и�а c�i� � Й -� Е Ш с с� и ш � c�i 3 и � +r � с � а:ш св �� шТ� со с Еа а �аи�•-•- � � U � с � ш с с � L � а о � р �, � Н �':��>Е`° `оf°> ��� '� cv г-lшшf°3ш �°с с сц �, с� L � ш о `L° � о � � � � о д'С�с 'Q � т йтч�ч�� °`� � � л- ... о +. и а ш с> :�. �° Ф'а � � о с I- �... и� а.� ш ш � > � ш�z со О �.с ша ш ш� о� � � У'� � � а и а�о =��г- ��� Uит �- Ои��ооЕ-та �U У � s .� `о � w �-�� Z м � � �л �' У к�М �'S�'1,�LD��� ` C.h .НΡ � �г �?� г���У�уΡ.��/.� � г��у{ Р �i.I1yдF г q мJ � ,,,. ` �.^д .А«���(}У�� '���� . � ;�'.. � �м ^ ^� � . • у� �. 1 �i* � 7 ; � � �:i i � ��k: 1 � q l��{�i ч���Я�1�.S'1� д Зri, ц fi'И� F�; F, ч.:1{ i ° 'Z.'�.. ь� « �� t .. ..., . _...,, ., .... .. . fs�. ,. 41 д О i� i i� О и О � L и .с сд и _ � � са_лао мrnи�- � о о и д°о п~i_ м й� °.-° с� �'�° � as йvйй � �� `у иитс� и а `л °° й и N а г• iц м ш rn tv- {- � . � : .�., р о .� с�л м, о �s . ц� сз� а�-о� rд. лч;. N�`n �'������ � �мw nr. �' сС : � :� с� т � о а у N N = � О cg с`1 а � 3� с ;�, � с •� 5^ v; и o,j °� р �т„ � 1и- ш°.3сг�о .� о. сл � т и� V ь. у Ш �� р�� 4 л_ л ... ° +✓ и ,4?�t._ш f- Y��s д а` v� Q ��то0 � � �, ��`о ° о> ^ 1- ii � Z м � The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 40 World Bank Financing (continued) (a) World Bank Credits No. 3968 and 4762-KE The Company received financial support from the World Bank through Credit No. 3958 and 4572 KE dated 4 August 2004 to support implementation of the Energy Sector Recovery Project. Summary information on transactions during the year are as follows: 2018 2017 Shs'000 Shs'000 Balance at the beginning of the year 456 Expenditure during the year (456) Balance at the end of the year The closing balances shown above are included in cash and cash equivalents and represent balances on the World Bank funded Special Account No. 024/00/800521/01 held at Stanbic Bank of Kenya Limited. Included in the long term borrowings is also an amount of Shs 10,222,823,931 (US$ 101,165,996) in respect of the amounts disbursed under the loan to date. The proceeds of the World Bank loan have been expended in accordance with the intended purpose as specified in the loan agreement. (b) KEEP Loan (IDA Credit No. 4743-KE) The Company received funding from the World Bank through Credit No.4743-KE to support electricity expansion projects. Summary information on transactions under KEEP Loan during the two years ended 30 June 2018 and 2017 were as follows: 2018 2017 Shs'000 Shs'000 Balance at the beginning of the year 34,189 17,312 Amounts received during the year 339,344 170,285 Net interest income 1,068 786 Expenditure during the year (370,494) (154,194) Balance at the end of the year 4,107 34,189 96 The Kenya Power and Lighting Company Limited Financial statements For the year ended 30 June 2018 Notes (continued) 40 World Bank Financing (continued) (c) KEMP (IDA Credit No. 5587-KE) The Company received funding from the World Bank through Credit No.5587-KE to support electricity modernization projects. Summary information on transactions under KEMP Loan during the two years ended 30 June 2018 and 2017 were as follows: 2018 2017 Shs'000 Shs'000 At start of year 123,461 - Amounts received during the year - 123,461 Net interest income 6,074 - At end of year (71,603) - Balance at the end of the year 57,932 123,461 The closing balances shown above are included in cash and cash equivalents and represent balances in the World Bank funded Special Account No. 1400266765947 held at Equity Bank Limited. Included in the long term borrowings is an amount of Shs 268,400,346 (US$ 2,655,214) in respect of the amounts disbursed under the loan to date. The proceeds of the World Bank through Credit No.5587-KE have been expended in accordance with the intended purpose as specified in the loan agreement. 41 European Investment Bank (EIB) Financing The Company received financial support from EIB for Grid development. Summary information on special account transactions during the year are as follows: 2018 2017 Shs'000 Shs'000 Balance at the beginning of the year 235,568 227,567 Net interest income 1,995 8,001 Expenditure during the year (237,563) - Balance at the end of the year - 235,568 The closing balances shown above are included in cash and cash equivalents and represent balances on the European Investment Bank funded Special Account No.0100000443683 held at Stanbic Bank of Kenya Limited. Included in the long term borrowings is an amount of Shs 2,747,766,546 (Euro 23,513,882) in respect of the amounts disbursed under the loan to date. The proceeds of the European Investment Bank loan have been expended in accordance with the intended purpose as specified in the loan agreement. 42 Subsequent event Except for the matter disclosed under note 37 (ii), there are no other material subsequent events. ---000--- 97