Umeme Limited (UMME.ke) 2018 Annual Report

We have extracted below the Chairman’s Statement from the 2018 annual report of Umeme Limited (UMME.ke), listed on the Nairobi Securities Exchange:

To our Shareholders,

It is my pleasure to communicate to you our performance results for the year ended 31 December 2018 and provide guidance on our strategic imperatives for the future of Umeme. As we celebrate the 14 years of our existence, I am proud of what the Company has been able to achieve in transforming the electricity distribution sector in Uganda. Umeme and the Uganda electricity supply industry are models of reference for financial sustainability and operational efficiency, while attracting private capital.

Over the period, as guided by the Uganda Government Energy Policy and National Development Plans, Umeme has played a critical role in the transformation of the electricity supply industry. Some of the achievements recorded include:

  • Doubling the size of the distribution network to 33,146 Km of distribution lines and over 12, 523 distribution transformers at the end of 2018. In addition the the electricity distribution network is more safe, reliable and efficient.
  • Customers connected to the grid have increased fourfold from 290,000 as of 2005 to 1.3 million at the end 2018. Pre-paid metering has been rolled to 950,000 of these customers, contributing 24% of the Company’s revenues.
  • The distribution system is more efficient, having reduced energy losses to 16.6% in 2018 from 38% of 2005.
  • We improved revenue collections with a the 5 year collection rate averaging 99% as of 2018 compared to 80% at the start of the concession.
  • Umeme has been innovative, implementing technologies like pre-paid metering and network automation to improve our service experience.
  • The sector is less reliant on government subsidies,there by self-generating cash flows to meet the cash needs of the electricity value chain. Electricity sales have increased to Ushs 1,600 billion in 2018 compared to Ushs 160 billion of 2005.
  • Due to the conducive investment climate, the installed generation capacity has increased from 240 MW as of 2005 to 984 MW, mainly driven by private sector investments. The electricity sales have increased to 3,011 Gwh in 2018 compared to 1,000 GWh of 2005.

The period up to 2012, was focused on stabilization of the industry given that the country was experiencing electricity generation shortages and this was followed by improved operating efficiencies. Learning from this period, I am pleased to note the current period is one of growth, with an opportunity to double the electricity demand in order to uptake the new generation capacity. It is therefore important to prioritise investments across the entire electricity supply chain from generation to distribution.

The Economy and Sector growth

Uganda has registered strong economic growth with Gross Domestic Product (GDP) growth of 6.1% in 2017/18 compared to 3.9% in 2016/2017. The main economic growth drivers were increased private sector activity, significant growth in the services sector and recovery in agricultural growth from the previous drought seasons. The Government continues to prioritize investments in public infrastructure especially roads, electricity and airports. Among other infrastructural projects, we are pleased with the Government investments in the electricity generation capacity and transmission grid that are expected to be in commercial operation by 2019 / 2020. The investments will deliver supply security and capacity for further growth.

The 183 MW Isimba Hydro Power Project is due for commissioning in quarter 1 2019. As at the end of the year Uganda’s installed capacity was 984 MW. The national transmission grids are under construction, with the Kawanda – Masaka line, Nkenda – Fort Portal and Fort-Portal Hoima lines commissioned in 2018, together with the transmission substations at Fort – Portal and Hoima. The Queensway Substation was also commissioned in the year 2018, improving the quality of supply and reliability in the Kampala Central Business District (CBD).

Growth in Demand

Electricity sales increased by 9.1% to 3,011 GWh in 2018 compared to 2,760 GWh of 2017, on account increased industrial demand, system stability and new customer connections. The industrial demand grew at an average of 12%. Our customer base increased by 15% to 1,291,811 customers, having connected 166,520 new customers to the grid (net of disconnections).

Investments in the Distribution Network

During the year, we invested Ushs 231 billion (USD 62 million) in the network, leading to a cumulative investment of Ushs 2,330 billion (USD 627 million) over the last 14 years. We recognize the urgency of additional investments required in the network on the account of increased generation capacity and the implementation of the last mile connections programme.

To further mobilise additional capital, the extension of he existing concession beyond 2025 becomes critical. I am pleased to note the willingness of government to engage with the Company and agree on terms of an extended concession. Once the process is concluded, the Company will be able to unlock funding opportunities for long term capital to finance the Company’s projected capital investments programme of USD 450 million for the next 6 years.

I am pleased to note the willingness of government to engage with the Company and agree on terms of an extended concession.

Regulatory Updates

2018 marked the 7th year of the Company’s second regulatory parameters cycle running up to 28th February 2019. Effective 1st March 2019, new set of tariff parameters will be agreed upon between Umeme and ERA. These include; Energy losses, Target bad debt rate, Operating costs and workings capital. The set targets are expected to be fair and reasonable, and achievable within the available resource envelope.

During the year, ERA proposed 5 amendments to our Supply License on the following items;

  • Definition of RQ (reconciling amount) under Power Supply Price (PSP) reconciliation
  • Introduction of minimum connection targets
  • Supply reliability penalties/rewards mechanism
  • Provision of information during the transition period
  • Adjustment indexation of USD Component operating costs to international inflation

Whereas the regulatory framework balances the needs of the customers with thebreturns to investors, the impact of the proposed amendments shall be assessed and appropriate legal and commercial remedies implemented.

Financial Performance

The Company recovered from the 2017 regulatory write-downs, posting a strong performance for the year. Earnings Before Interest Tax Depreciation and Amortization (EBITDA) increasing by 8.9% to Ushs 354 billion in 2018 compared to Ushs 324 billion in 2017. The Profit after tax increased to Ushs 133 billion compared to Ushs 36 billion in 2017.

During the year, cash flows generated from operations were Ushs 395 billion compared to Ushs 302 billion in 2017. The cash generated was used to fund capital investments, dividends and financing obligations. In total our capital investments implemented in the year were Ushs 231 billion (2017: Ushs 236 billion). The cumulative investments since the commencement of the Concession to 2018 stand at Ushs 2,330 billion (USD 627 million).

This year, the Board recommends a final dividend of Ushs 28.2 per share compared to UShs 7.6 per share of 2017. Once approved by the shareholders at the Annual General Meeting, the final dividend shall be paid on or about 15th July 2019.

Conclusion

In conclusion, on behalf of the Board, I extend our sincere appreciation, to our customers, staff, the Government and stakeholders for your continued support to Umeme. Without your support, Umeme would not have transformed the electricity distribution system in Uganda and bring to fruit the objectives of the sector reforms effected in 2000. We look forward to your continued support.

Patrick Bitature
Board Chairman