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Inside Umeme’s 74.4% drop in after tax profit

As the questions around Umeme continue to be the subject of continued news coverage, the utility company on Wednesday released its financial results to 2017. The results reveal a 74.4% drop in after-tax profit to Shs35bn at the end of 2017, compared to Shs138.4bn in 2016. The reduction in profitability does not reflect the 8.7% rise in revenue to Shs1.5trillion at the end of 2017. The increased revenue is due to more power sold, pre-paid metering and rising customer connections.

“Customers increased by 18.3% during the year to 1,125,291, with an additional 174,477 grid connections compared to 157,270 in 2016,” according to the Umeme results.

However, the signs that profitability would be affected were already known.

The reduction in after tax profit was largely expected, considering that in the first half of 2017, Umeme had made a loss of Shs47.5bn.

“As disclosed in the 2017 interim financial results, the Company reported an impairment provision in the amount of UShs 115.2 billion as a result of the issuance of Amendment 5 to Umeme’s Electricity Supply License,” the notes of the 2017 results.

In 2017, off Umeme’s Shs515bn gross profit, it had to deduct Shs115.2bn to be paid to the Electricity Regulatory Authority (ERA). ERA had made modifications to the Umeme Electricity Supply License. If interested, there is a link to the modification. For ERA, the purpose of the modification and reconciliation process was “…to reconcile the projected and actual energy purchases from UETCL; and the projected and actual corporate income tax payments by Umeme to URA. The purpose of these reconciliation mechanisms was to ensure that both Umeme and the electricity consumers are protected in the event that the actual/outturn are different from the projections used in the determination of the retail tariff.”

For investors, the reduced profitability – if a one-off – won’t be much of a concern, however, the challenge remains the talk around the concession not being renewed at the end of 2025 – according to a leaked letter by President Museveni.

Energy losses that were a subject of President Museveni’s letter reached 17.2% at the end of 2017, down from 19% in 2016. According to the report “technical and non-technical losses currently account for 9.9% and 7.3% respectively of the total loss factor.” If Umeme can “hack” the technical losses, it will continue to shrink the energy loss component that could also play a role in reducing the power tariffs. This will inform the next phase of the tariff regime (2019 – 2025).

“The Company will submit proposals for the next set of tariff parameters for the 2019-2025 period and discuss the required investments with ERA. The tariff parameters should be agreed upon ahead of the 2019 tariff determination,” the summary of the results reads.

For the power generation companies & the government, Umeme collected 102% from customers, 2% above the target. This means that it was able to ensure that the entire electricity value chain receives the money required, an incentive for further investment.

In the financial results, what is also visible is increased expenses overall. For instance, Administration costs rose from Shs151bn to Shs161bn in 2017. Repair and maintenance costs also rose from Shs22.6bn to Shs37.6bn at the end of 2017. The more significant rise is in the finance costs – the cost of borrowing – expanded to Shs97.6bn in 2016 to Shs69bn in 2017. Umeme has an outstanding long-term debt portfolio of Shs653bn ($181m).

Umeme uses its pool of retained earnings – money not paid out to investors – to pay some of the debts and also re-invest in the network. In 2017, Umeme reveals it invested $65m (Shs235bn) in upgrading the network. This was partly funded by Shs369.6bn in retained earnings – some of this went to repay debts – and also the short-term debt of Shs71.9bn.

Due to the reduced profitability shareholders will take home a dividend of Shs7.6 per share down from Shs18.8 per share.

 

 

 

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