Investor jitters over Museveni Umeme letter

Uncertainty has gripped investors of listed Ugandan utility Umeme, after President Yoweri Museveni’s letter on the renewal of the power distributor’s 20-year concession.

Although Umeme still has seven years on its current concession, industry regulator Electricity Regulatory Authority (ERA) has set June for a start of renewal negotiations, raising questions about the timing of President Museveni’s letter, and its impact on investor confidence in the firm.

In a memo to the Minister of Energy and Mineral Development, Irene Muloni, the president queried the persistently high electricity tariffs since the Umeme concession agreement was signed in 2005, and fairly high energy losses recorded by the power distributor. He advised the minister not to renew the concession deal.

The letter prompted a meeting of a section of Umeme top executives and directors with the president at State House a few days later. Details on the outcome of the meeting are still unknown.

The uncertainty has left many investors in suspense, with stockbrokers reporting scarcity of sell and buy orders on Umeme’s counter, as the market awaits clarity from government officials on the future of the firm’s distribution contract.

“That development is worrying because it raises questions about the concession but the president might have received inaccurate information about the state of electricity distribution in Uganda,” said managing director at Uganda’s National Social Security Fund Richard Byarugaba.

If government were to choose another concession operator, the firm would equally need a contract renewal for the purpose of mobilising enough money to expand the network.”

Mr Byarugaba added: “Renewal of the Umeme concession agreement is crucial for strengthening the company’s ability to borrow more money required for expansion of the distribution network before it can absorb expected new supply from the Karuma and Isimba power dams which are planned for commissioning by end of 2020.”

NSSF is the biggest shareholder in Umeme Ltd, with 23 per cent shares.

“Most investors are sitting back waiting for the President’s final decision. The full-year results for 2017 have also depressed investor appetite on the counter,” said a stockbroker at SBG Securities Uganda Ltd, Enid Busingye.

The company’s profits after tax dropped to Ush35.5 billion ($9.6 million) by close of December 2017, from Ush138.8 billion ($37.4 million) a year previously. However, Umeme earnings over the last six months of 2017 showed some improvement compared with the first half of the year.

The power distributor posted a loss of Ush41 billion ($11 million) at the end of June 2016 on account of a huge write off of Ush115 billion ($30.97 million) that was made against accumulated investment claims billed against government.

“Until questions on political risks have been resolved conclusively, no one is willing to buy Umeme shares, despite the firm’s good financial performance in the second half of 2017,” said the general manager of asset management firm GenAfrica Investments Uganda Ltd, George Mulindwa.

And while Umeme executives say they are cooperating with ERA on verification of investments in distribution lines, transformers and sub-stations, the regulator prefers a longer audit that minimises loopholes during physical scrutiny.

The scheduled licence review exercise could add to Umeme’s pain in the light of higher performance targets anticipated from government for the remaining seven years of the distribution contract.

“We have hired an Indian consultancy firm to evaluate Umeme’s performance so far with emphasis on collection targets, loss reduction and investment levels, and their findings will be ready by June this year” said ERA’s public relations officer, Julius Wandera.

“On the issue of frequent outages, we believe most are caused by power lines in rural areas belonging to the Rural Electrification Agency which does not fall under our mandate. Umeme’s turnaround times for delivering new connections have improved over time and that is why the company scores more than 80 per cent on this key performance indicator.”

Umeme’s total revenue rose to Ush1.4 trillion ($397.7 million) at the end of December 2017, from Ush1.3 trillion ($365.8 million) in December 2016. Cost of sales rose from Ush881.8 billion ($237 .5 million) to Ush960.5 billion ($258.7 million).

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