Geregu Power drops costs to defend profit from revenue losses

Geregu Power Plc, the newly listed power generating plant on the Nigerian Exchange Group, faces the challenge of falling revenue in the current financial year and management has resorted to a compensatory cost reduction to defend profit.

The company suffered a drop of 61 percent in revenue from N13.4 billion in the corresponding quarter last year to N5.2 billion in the third quarter that ended September 2022. The company’s third-quarter interim report attributed the loss of revenue to gas supply constraints during the quarter.

Gas supply constraints led to a drop in the capacity it delivered and energy sent out from 1,855,920 Mwh as at 30 September 2021 to 1,314,439 Mwh as at 30 September 2022.

This follows a nationwide force majeure declared by Shell Petroleum Development Company Limited on the Forcados oil terminal pipeline, which ceased the company’s primary gas supplies to its power generating plant from mid-July 2022.

The company’s management responded to the fall in earnings by slashing administrative expenses far ahead of the drop in revenue. It crashed administrative costs by 91.5 percent quarter-on-quarter to N682.5 million in the third quarter.

At over N3 billion for the quarter, the cost of sales dropped by 56.4 percent quarter-on-quarter compared to the 61 percent drop in revenue.  Cost of sales, therefore, encroached on earnings, leading to a more rapid drop in gross profit at 66.2 percent quarter-on-quarter to N2.1 billion for the third quarter.

The huge drop in administrative cost however compensated both for the revenue drop and the incursion of cost of sales on revenue. The result is a rebound in operating profit for the quarter from a loss of N1.8 billion in the same quarter in 2021 to N1.4 billion at the end of September 2022.

Finance income provided the strength to avert a loss position in the third quarter despite declining from N2.6 billion to N2 billion quarter-on-quarter. Finance expenses however swelled from N288 million to N2.7 billion over the same period, resulting in an adverse shift from net finance income of N2.3 billion in the same quarter last year to net finance cost of N644 million in the third quarter of 2022.

Despite the shift, the drop in administrative cost and the rebound in operating profit still permitted an increase in pre-tax profit from N507 million to N795 million over the review period.

This was further reinforced by a favourable shift from tax expense of N268 million in the same quarter last year to a tax credit of N350 million for the third quarter ended September 2022.

Geregu Power was therefore able to build an after tax profit of N1.1 billion for the third quarter, which is a huge increase from the N239 million profit in the same period in 2021. It is however a weak contribution to its half-year closing after tax profit of roughly N9.9 billion.

The company’s year-on-year earnings reading reflects the major setback of loss of revenue in the third quarter. Revenue for the nine months of trading dropped by 28 percent to N39 billion at the end of September 2022.

Cost of sales went down slightly ahead of revenue at 29 percent year-on-year to N20 billion. Gross profit declined by 27.4 percent to N18.9 billion over the period.

The big cost saving from administrative expenses in the third quarter reflected in the nine-month reading with a drop of 73.3 percent to N2.9 billion at the end of September. This changed the reading from the decline in gross profit to an increase of 6 percent in operating profit to N16 billion.

The challenge came from cost of finance that multiplied close to eight times year-on-year to N4.2 billion at the end of September. That overturned the company’s net finance income of N2.1 billion in the same period last year into net finance cost of roughly N2.1 billion.

Pre-tax profit dropped by 24 percent to less than N14 billion but a drop of 33.5 percent in tax expenses limited the decline in after tax profit to 11.4 percent to close at N10 billion.

The earnings outlook for the company for the final quarter is clouded by the gas supply constraint, which is expected to last up till the end of October.