Uganda power distributor Umeme Ltd's net profit before tax for the first six months of this year has grown by 29.5 per cent to Ush113 billion($30.4 million), but shareholders will not receive half-year dividends as the company grapples with unresolved issues with the sector regulator over performance targets.

The firm will direct funds towards meeting these targets.

Total electricity sales rose to Ush815.7 billion ($219.5 million) in June this year from Ush740.8 billion ($199.3 million) in June 2018 while total assets rose to Ush2.56 trillion ($688 million), according to latest financial results published on August 29.

Total finance costs dropped to Ush45.1 billion ($12 million), from Ush45.7 billion ($12.3 million) over the same period, on account of lower loan repayment costs in the first six months of this year.

Overall customer numbers grew by 93,580 to 1.4 million as at the end of June 2019, driven largely by government’s Electricity Connections Policy launched in November 2018.

Under the policy, rural customers are offered subsidised electrical wiring and poles in an effort to increase access to power in the countryside and boost Uganda’s electricity penetration rates in line with middle income development goals.

However, Umeme’s energy losses rose slightly to 16.9 per cent as at the end of June 2019, from16.7 per cent in June last year.

Stalemate
But the stalemate with the Electricity Regulatory Authority over performance targets for the period 2019-2025 has weighed on the company’s operations since April this year.

The targets cover revenue collections, energy losses, operating cost allowances and conditions for approving new investments in Umeme’s distribution network.

Umeme has termed the targets as unrealistic but ERA remains guarded on the matter following a public hearing held on August 16.

A final decision on the review of the targets was yet to be communicated prior to the publication of Umeme’s half-year results.

This suspense is what compelled the power distributor to withhold half-year dividends in a tactical move aimed at preserving hard cash that may be needed to meet the performance targets.

“Due to current compliance issues related to ERA’s performance target review and their likely impact on fourth quarter activities, the board decided not to pay a half-year dividend for 2019.

The cash will cushion our operations against future compliance obligations that may be imposed by the regulator. Besides, half-year dividends are a discretionary matter and can be reviewed with ease,” said Umeme’s managing director Selestino Babungi.

The disputed performance targets include a $41.8 million ceiling on distribution, operation and maintenance costs incurred by Umeme Ltd in 2019 and a $40.8 million ceiling placed on the same cost category in 2020.

In addition, ERA set an energy loss target of 13.79 per cent for 2019 and 13.01 per cent for 2020, according to an Umeme investor notice.

The company’s share price fell to Ush296 ($0.08) on the Uganda Securities Exchange on Thursday following the release of half-year results.

Ongoing discussions between Umeme and a group of lenders over the acquisition of a new debt facility for new investments are likely to be overshadowed by continued uncertainty over the delayed renegotiations for the firm’s 20-year concession agreement.

No planned negotiations

While government has committed itself to fresh negotiations for this contract in a bid to cut electricity tariffs and raise economic competitiveness ratings, there is no timetable yet for the planned negotiations coupled with the absence of a multi-sector negotiation team appointed by government.

“The fact that there is a group of lenders willing to provide more debt to the company shows there is hope for a successful renegotiation process for Umeme’s power distribution contract,” argued Aeko Ongodia, the chief executive of asset management firm Xeno Ltd.

“The lenders must have calculated their risk premium based on both successful and unsuccessful renegotiation outcomes.”

Mr Ongodia said that it is not yet clear how stockbrokers and other industry players are weighing the Umeme share price valuations.

According to Andrew Muhimbise, a retail investor on the USE, the uncertainty surrounding Umeme’s contract renegotiations has kept large foreign investors away from the power distributor’s counter for months.

“This explains why some South African investors and Actis, the former majority shareholder in Umeme Ltd sold most of their shares to the National Social Security Fund sometime back. Their absence has lowered the demand and supply of shares on the Umeme counter which has left the share price fairly stagnant,” said Mr Muhimbise.

“The continued uncertainty surrounding renegotiation of the company’s distribution contract might push its share price closer its initial public offering price of Ush275 [$0.074].”