Shocks ahead for Uganda electricity users as rule change jolts Umeme 2017 profit

Uganda’s largest electricity distributor Umeme saw a 32% drop in earnings before interest, taxes, depreciation and amortization in 2017 after a change in its license clawed away revenues previously earned from excess power sold, its full-year results show.

Umeme previously recorded revenues from higher-than-projected sales of electricity as part of its operating profit with earnings before interest, tax and amortization of Shs309 billion in 2016. But after a protracted legal battle and out-of-court settlement, the Electricity Regulatory Authority amended Umeme’s license in May 2017 and directed such revenue to be passed through, without a return, and reinvested in the grid under supervision by ERA.

In the first full-year impact of the rule change, Umeme’s EBITDA dropped sharply to Shs210bn, weighing down profit before tax from Shs198bn in 2016 to Shs44.6bn, a decline of 74.4%. Adjusted for the non-recurring charge of Shs115.2bn arising from the change in the license, EBITDA would have been Shs325bn, up from Shs309bn, the company said in disclosures.

Revenue rose 8.7 per cent in the year to Shs1.4 trillion on the back of a 7.5 per cent increase in power sales. Gross profit also increased by a similar margin to Shs515.9bn on improved distribution margins and continued reduction in energy losses, according to the results statement.

The company, which is listed on the Uganda Securities Exchange and cross-listed on the Nairobi Securities Exchange, proposed a final dividend of Shs7.6 for the year, down sharply from the Shs18.8 paid out last year.

While the long-term impact of the rule change on Umeme’s financials remains to be seen, the latest results reveal wider concerns about the state of Uganda’s electricity sector.

After several years of patchy power supply, the country now faces an unforeseen problem: an oversupply of electricity.

Maximum demand for electricity in 2017 was 597.4 megawatts, which was a 7.2 per cent growth from previous year. But this is significantly less than the total installed generation capacity, which the Uganda Electricity Generation Company puts at 851MW. The country has more power than it can consume.

The 183MW hydropower dam at Isimba scheduled for commissioning later this year, and the 600MW Karuma Dam expected to come on line by the end of 2019, will only increase the excess capacity in the country.

End-user tariffs in Uganda are as high as 11 U.S$ cents for domestic users, and while they are lower for manufacturers, they are still higher than in Ethiopia and Tanzania, for example. The Ugandan government has been trying to reduce the end-user tariffs; the International Finance Corporation recently announced it is to refinance about $500 million in loans to the 250MW Bujagali hydropower dam, currently the largest in the country, to this end.

In theory, an increase in the supply of power when Isimba and Karuma dams come on line should lead to a fall in prices and relief for power users. Both dams, however, like Bujagali, have take-or-pay power purchase agreements. This means that an increase in the supply of electricity might not lead to a reduction in tariffs; instead, it could lead to an increase as existing electricity users are forced to pay more for the unused installed capacity.

The government is extending the grid to rural areas and subsidising the cost of new connections in an effort to evacuate more power from the grid. Umeme’s customer base grew 18.3% in 2017 to 1,125,291 with 174,477 new connections. Of these, 16,607 were free connections subsidised by the government and other partners, including Germany’s Kfw.

New connections mean more strain on an ageing distribution infrastructure. Umeme said it invested $65.4m in the grid in 2017, pushing financing costs to $16.5m in the year and long-term debt to $181m.

Still, more will have to be pumped into the grid. Umeme said it had retained an unnamed financial advisor to evaluate long-term financing options for the “significant” capital investment required.

“Our focus remains on reducing distribution losses, increasing electricity access and preparing the distribution infrastructure to evacuate the increasing generation in the pipeline,” the results announcement said.

With seven years left on Umeme’s 20-year concession and amidst public pressure for it not to be renewed or to be cancelled altogether, further capital investments and long-term debt considerations will have to be matched by demands for regulatory predictability and lower risk.

It looks like a high-voltage drama for the power company and there might be price shocks at the switch for consumers.