THE REPUBLIC OF UGANDA

REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF

THE UGANDA ELECTRICITY TRANSMISSION COMPANY LIMITED

FOR THE YEAR ENDED 31ST DECEMBER, 2014

OFFICE OF THE AUDITOR GENERAL

UGANDA

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TABLE OF CONTENTS

PAGE

LIST OF ACRONYMS i

REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF THE UGANDA

ELECTRICITY TRANSMISSION COMPANY LIMITED FOR THE YEAR ENDED 31ST DECEMBER

2014…………………………………………………………………………………………………………………………… 1

DETAILED REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF THE

UGANDA ELECTRICITY TRANSMISSION COMPANY LIMITED FOR THE YEAR ENDED 31ST

DECEMBER, 2014…………………………………………………………………………………………………………. 3

1.0 INTRODUCTION ......................................................................................................................... 3

2.0 BACKGROUND INFORMATION ................................................................................................. 3

3.0 ENTITY FINANCING ................................................................................................................... 4

4.0 AUDIT OBJECTIVES ................................................................................................................... 4

5.0 AUDIT PROCEDURES PERFORMED ......................................................................................... 4

6.0 FINDINGS .................................................................................................................................... 5

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LIST OF ACRONYMS

Acronym

ERA Electricity Regulatory Authority

IAS International Auditing Standards

MoFPED Ministry of Finance Planning and Economic Development

UCC Uganda Communications Commission

UEB Uganda Electricity Board

UETCL Uganda Electricity Transmission Company Limited

UGX Uganda Shillings

USD United States Dollars

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REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF THE

UGANDA ELECTRICITY TRANSMISSION COMPANY LIMITED FOR THE YEAR

ENDED 31ST DECEMBER 2014

THE RT. HON. SPEAKER OF PARLIAMENT

I have audited the accompanying financial statements of the Uganda Electricity

Transmission Company Limited which comprise of a Statement of Financial Position as at

31st December, 2014, Statement of Comprehensive Income, Statement of Cash Flows

and Statement of Changes in Equity for the year then ended, and a summary of

significant accounting policies and explanatory notes.

Directors’ Responsibility for the Financial Statements

The Directors are responsible for the preparation and fair presentation of financial

statements in accordance with the International Financial Reporting Standards and the

requirements of the Uganda Companies, Act 2012 and for such internal controls as the

Directors determine are necessary to enable the preparation of financial statements that

are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

My responsibility as required by Article 163 of the Constitution of the Republic of

Uganda, 1995 (as amended) and Sections 13 and 19 of the National Audit Act, 2008 is

to audit and express an opinion on these statements based on my audit. I conducted

the audit in accordance with the International Standards on Auditing. The standards

require that I comply with ethical requirements and plan and perform the audit to obtain

reasonable assurance on whether the financial statements are free from material

misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts

and disclosures in the financial statements. The procedures selected depend on the

Auditor’s judgment, including assessment of the risks of material misstatements of

financial statements whether due to fraud or error. In making those risk assessments,

the Auditor considers internal controls relevant to the entity’s preparation and fair

presentation of financial statements in order to design audit procedures that are

appropriate in the circumstances, but not for the purpose of expressing an opinion on

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the effectiveness of the entity’s internal controls. An audit also includes evaluating the

appropriateness of accounting policies used and the reasonableness of accounting

estimates made by management, as well as evaluating the overall presentation of the

financial statements.

I believe that the audit evidence obtained is sufficient and appropriate to provide a basis

for my unqualified audit opinion.

Part ‘‘A’’ of this report sets out my unqualified opinion on the financial statements. Part

‘‘B’’ which forms an integral part of this report presents in detail all the significant audit

findings made during the audit which have been brought to the attention of

management.

PART "A"

Unqualified Opinion

In my opinion, the financial statements present fairly, in all material respects, the

financial position of the Uganda Electricity Transmission Company Limited as at 31st

December, 2014 and its operating results and cash flows for the year then ended, in

accordance with the International Financial Reporting Standards and the Companies Act,

2012.

Report on Other Legal Requirements

As required by the Companies Act, I report to you, based on my audit, that:

i. I have obtained all the information and explanations, which to the best of my

knowledge and belief were necessary for the purpose of my audit.

ii. In my opinion, proper books of account have been kept by the company, so far

as appears from my examination of those books; and

iii. The statement of financial position and statement of comprehensive income are

in agreement with the books of account.

John F.S. Muwanga

AUDITOR GENERAL

14th December, 2015

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PART "B"

DETAILED REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL

STATEMENTS OF THE UGANDA ELECTRICITY TRANSMISSION COMPANY

LIMITED FOR THE YEAR ENDED 31ST DECEMBER, 2014

This Section outlines the detailed audit findings, management response, and my

recommendations in respect thereof.

1.0 INTRODUCTION

Article 163 (3) of the Constitution of the Republic of Uganda, 1995 (as amended)

requires me to audit and report on the public accounts of Uganda and all public

offices including the courts, the central and local government administrations,

universities, and public institutions of a like nature and any public corporation or

other bodies or organizations established by an Act of Parliament. Accordingly, I

appointed M/S ERNST & YOUNG, Certified Public Accountants, to audit the

accounts of the Company on my behalf and report to me, so as to enable me

report to Parliament.

2.0 BACKGROUND INFORMATION

The Uganda Electricity Transmission Company (UETCL) is a limited liability

company incorporated in March 2001 in Uganda under the Companies Act and

Section 28 of the Public Enterprise Reform and Divesture Act following

implementation of a power sector reform and privatization policy, which resulted

in the unbundling of Uganda Electricity Board (UEB) into Generation,

Transmission and Distribution successor companies. The UETCL one of the

successors of the UEB is wholly owned by the Government of Uganda and has

two shareholders; the Minister of Finance, Planning and Economic Development

and the Minister of state for Finance in charge of Privatisation.

The company is licensed by the Electricity Regulatory Authority to operate and

maintain the high grid voltage transmission lines, as a system operator and a

bulk power purchaser and seller in the local market and to import and export

power into and out of Uganda. The company is also licensed by Uganda

Communications Commission (UCC) as a public infrastructure provider.

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3.0 ENTITY FINANCING

During the year, the entity raised revenue amounting to UGX 750,328,000,000

entirely from the energy sales.

4.0 AUDIT OBJECTIVES

The audit was carried out in accordance with the International Standards on

Auditing and accordingly included a review of the accounting records and agreed

procedures as was considered necessary. In conducting my review, special

attention was paid to establish whether:

a. The financial statements have been prepared in accordance with

consistently applied Accounting Policies and fairly present the financial

position as at 31st December, 2014 and the revenues and expenditures

for the year then ended.

b. All funds were utilized with due attention to economy and efficiency and

only for the purposes for which the funds were provided.

c. Goods and services financed have been procured in accordance with the

Government of Uganda procurement regulations.

d. Sufficient internal controls have been applied consistently throughout the

year to safeguard the assets of the Company and mitigate the risk of

misstatement of the financial statements.

e. All necessary supporting documents, records and accounts have been

kept in respect of all activities, and are in agreement with the financial

statements presented.

5.0 AUDIT PROCEDURES PERFORMED

The following audit procedures were undertaken:

a. Revenue

Obtained schedules of all revenues collected and reconciled the amounts to

the cashbooks and bank statements.

b. Expenditure

The Company payment vouchers were examined for proper authorization,

eligibility and budgetary provision, accountability and support documentation.

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c. Internal Control System

Reviewed the internal control system and its operations to establish whether

sound controls were applied throughout the period audited.

d. Procurement

Reviewed the procurement of goods and services by the Company during the

period under review and reconciled with the approved procurement plan.

e. Fixed Assets Management

Reviewed the use and management of the Company’s assets during the

period audited.

f. Financial Statements

Examined on a test basis, evidence supporting the amounts and disclosures

in the financial statements assessed the accounting principles used and

significant estimates made by management as well as evaluated the overall

financial statement presentation.

6.0 FINDINGS

6.1 Categorization of audit findings.

The following system of profiling of the audit findings has been adopted to

better prioritize the implementation of audit recommendations.

No

Category Description

1 High significance Has a significant / material impact, has a high likelihood of reoccurrence, and in the opinion of the Auditor General, it requires urgent remedial action. It is a matter of high risk or high stakeholder interest.

2 Moderate significance Has a moderate impact, has a likelihood of reoccurrence, and in the opinion of the Auditor General, it requires remedial action. It is a matter of medium risk or moderate stakeholder interest.

3 Low significance Has a low impact, has a remote likelihood of reoccurrence, and in the opinion of the Auditor General, may not require much attention, though its remediation may add value to the entity. It is a matter of low risk or low stakeholder interest.

6.2 Summary of audit findings

No. Title of finding Significance

1 Deemed energy purchases High

2 Enforcing collection of overdue receivables Moderate

3 Over recoveries by UETCL-ERA funds Moderate

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7.0 DETAILED FINDINGS

7.1 Deemed energy purchases

UETCL has contracts with power producers where by it is obligated to purchase

all available units of electricity whether or not they are consumed. The power

paid for but not evacuated is referred to as deemed energy purchases. It was

noted that the company incurs high costs relating to deemed energy purchases,

as indicated below;

Table showing annual deemed energy purchases

Power

Producer

Cost incurred in 2014

(UGX)

Cost incurred in 2013 (UGX)

Hydromax 8,610,000,000 12,499,000,000

Tronder 113,000,000 394,000,000

Eco power 793,000,000 732,000,000

Total cost 9,516,000,000 13,625,000,000

This challenge is mainly attributed to low demand and limited distribution and

transmission networks.

Payments for deemed energy purchases is nugatory and puts a constraint on

funds available for working capital requirements and operations.

Management explained that deemed energy cost in IPP capacity contracts are a

standard norm in Energy Sector contracts worldwide.

I have advised management to address the infrastructural constraints in the

transmission networks to ensure more power is evacuated.

7.2 Enforcing collection of overdue receivables

The Company continued to supply power to customers with outstanding dues on

credit terms contrary to the sales agreements which require it to extend credit to

customers for a maximum of 45 days. This practice exposes the Company to

increased credit risk and ties up cash for financing Company activities in debtors.

Details of the amounts outstanding are provided in the table below;

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Customer name Outstanding as at

31 Dec 2014 (UGX)

Outstanding as at 30

April 2015 (UGX)

Ferdsult Engineering Services 5,212,853,040 6,154,706,846

Bundibugyo Cooperative Society

Limited

420,374,897 363,547,807

Pader Abim Comm Muti Pur ECS 635,624,787 736,465,449

Total 6,268,852,724

7,254,720,102

Management explained that this matter was brought to the attention of ERA for

its intervention, as the cause is due to losses and inadequate tariff charged in

the concession areas. ERA is handling this issue in order to come up with a

solution.

I await the results of management’s action.

7.3 Over recoveries by UETCL

Arising out of favourable changes in the macro economic factors like inflation,

exchange rates and fuel prices, UETCL realizes more revenues than had been

budgeted in the tariff structure. ERA requires that these over recovered funds be

ring fenced and put on a tariff stabilization fund account until ERA authorizes the

Company on how to use the funds. This amount is accounted for as a liability. As

at 31st December 2014 the liability amounted to UGX.54bn.

I however noted that the company doesn’t have the reserve account for these

surplus funds. As such there is a high risk that, at the time when use of these

funds is confirmed by ERA, the Company will not be in position to avail the cash.

This will have a significant impact on the future cash flows of the Company.

Management explained that the delay in putting funds aside was due to UMEME

withholding of UGX 44.53bn due to government delays in settling its bills so the

Company didn’t have sufficient funds to ring fence. Priority was to ensure that

Power generators are duly paid without causing load shedding rather than invest

in funds in Treasury bills. Besides, there were still some reconciliations ongoing

with the regulator, which had not yet been resolved by 31st December 2014.

I urged management to engage all stakeholders to have the issues of non-

payment by government resolved.

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8.0 STATUS OF PRIOR YEAR RECOMMENDATIONS

Review of the implementation of the previous year’s recommendations revealed

the following status;

Issue Status Amounts due to and from related parties

Implemented

Payment for Non-remitted power and Disparity in Power Purchase Agreements and sales Agreements

In progress

Inadequate security at substations

Implemented

Inadequate surveillance at the stations

Implemented

Non remittance of VAT on power purchases

Not implemented

Fleet Management System

In progress

Ownership of land

In progress

I advised management to prioritize implementation of the outstanding

recommendations as they are intended to enhance the stewardship of the

company.

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FINANCIAL STATEMENTS