UEGCL PROFITS UP, FINANCIAL SUSTAINABILITY IN QUESTION

Uganda Electricity Generation Company Ltd (UEGCL) saw profits jump 60 percent to sh54b in the year to June 2024 from sh34b the previous year, on the back of increased income from their power stations.

However, the Auditor General questioned the company’s long term viability due to its huge debt obligations and a tariff that does not cover its costs.

UEGCL has a huge debt overhang, about sh5.6trillion, whose servicing is straining their working capital.

According to UEGCL’s financials the debt to asset ratio is above 50 percent.

“The undesirable ratio is attributed to significant on lent loans for Karuma and Isimba HPPs (Hydroelectric Power Plants) and inadequate loan repayment on both loans,” the auditor general said in his report on UEGCL. The report showed that interest of about sh529b towards the two dams’ debt is in arrears, as of June 30^th 2024.

“This signifies a high financial risk given that the company majorly relies on debt to fund assets. Furthermore, it might hinder the company’s access to future loans, limiting its financial flexibility.”

The Auditor General went on to warn that, “the company’s current assets are insufficient to cover its short term obligations… the company’s liquidity position is unhealthy.”

The Auditor General advised that the on lent loans, amounting to more than sh4trillion for Karuma and Isimba, be converted to equity. Essentially that government shoulders the burden of paying the loans Improving UEGCL’s financials and improving its leeway to not only maintain current infrastructure but also develop new plants when needed.

While the Auditor General noted that UEGCL was more than able to meet its interest obligations on its outstanding debt – interest cover ratio of 4:1 versus a desirable rate of 2, he noted that interest payable or interest payments still due, rose in the year to sh530b “which may cause potential challenges in meeting future interest payments.”

"This looming cash squeeze is as a result of the inadequacy of the tariff, which is not reflective of cost, UEGCL is charging for the power it generates...

The Auditor General recognized this and advised UEGCL “To renegotiate the power purchase agreement (Karuma, Isimba), so that invoicing is based on capacity rather than energy sold. In addition, the license for Nalubale-Kiira power plant should be reviewed to provide a more cost reflective tariff.”

 A cost reflective tariff would factor in operational expenditure, taxes, capital recovery and an allowed return. As it is now none of the UEGCL operated plants recovers the investments made by government nor earns a return.

 UEGCL is at a decided disadvantage because of the difference in Power Purchase Agreements (PPA) it is operating under its major plants at Karuma and Isimba, compared to its contemporaries in the private sector.

A recent report of the contribution to the end user tariff of the various power plants showed that the 250 MW private player Bujagali accounted for $2.1 cent or 16.9 percent of the tariff or about the same as the combined tariff of Karuma and Isimba with a combined total capacity of 730 MW.

UEGCL is paid for only the power it generates at Karuma and Isimba, whereas the private sector players are paid for capacity they have available whether or not they sell power to the grid.

This is part of the reason the Auditor General has complained that UEGCL is not making optimal use of its assets, going by its low return on assets of 1.25 percent, considerably lower than the acceptable five percent.

He also counselled that the finance ministry should fund the Namanve capacity charge, which he thought would provide more stable revenue streams that would enhance the company’s cash position. This would not be necessary if these costs were included in the tariff instead of as a subsidy from government.

"This recommendation flies in the face of recent announcement by the Electricity Regulatory Authority (ERA) where they reduced the tariff by five percent, ostensibly saving the end user sh155b. Were the tariff to be kept stable, those savings could have been used to rehabilitate plant or pay down Umeme’s concession for instance.

Policy makers will do well to listen to the Auditor General who advised in his report that the tariff at Nalubale-Kiira should be increased to be reflective of cost, the Karuma and Isimba PPAs, which only allow them to charge for power produced and not installed capacity, are hobbling the company’s operations a situation that is not sustainable.

The Auditor General echoed the findings of a 2023 report that used Kenyan counterpart KenGen as a benchmark.

That exercise’s main recommendations were for the institution of a cost recovery-based tariff, conversion of Karuma and Isimba debt to equity, a sale of shares on the Uganda Securities Exchange (USE) to improve its balance sheet and stabilization fund to meet UEGCL’s current and most pressing obligations.  

While Uganda with its fairly stable power supply and huge surplus, is currently the envy of our neighbours, this situation maybe a temporary one if the industry is not managed with a view to long term sustainability.