CECA | Managing Director’s report for the year ended 31 December 2016
Note: Please read this article in conjunction with the Auditor’s Report in the annual financial statements for the year ended 31 December 2017
During 2016, the activities of CEC Africa were focused on the operational turn-around initiatives introduced at the end of 2015. Notable amongst the actions were a project to realign business processes at Abuja Electricity Distribution Company Plc (AEDC); the rationalisation of management and financial reporting at North South Power Company Limited (NSP); and progress on achieving financial close of, and the disposal of equity interest in respect of the Sierra Leone power project. Significant efforts were made to refinance the loan facility at KANN Utility Company Limited (KANN) with a view to ensure a comfortable servicing ability and providing sufficient resources to fund AEDC activities through its deficit years.
As well as focusing on the operational turn-around initiative, CEC Africa was actively involved in a restructuring of the CEC group which culminated in an Extraordinary General Meeting of the shareholders of Copperbelt Energy Corporation Plc (CEC Plc) approving a demerger of CEC Africa from CEC Plc. The demerger: had the effect of reorganizing the CEC Group structure, the result of which has been the cessation of direct ownership of CEC Africa by CEC Plc. The Company is no longer a subsidiary of CEC Plc; moved ownership of CEC Africa from CEC Plc to CEC Plc Shareholders; entailed Qualifying Shareholders receiving 1 CEC Africa Share for every 1 CEC Plc share held on the Record Date; and resulted in CEC Africa being registered as a foreign company in Zambia, which is still in progress
As stated earlier, the major focus was on the management of the operating assets under CECA i.e. AEDC/KANN and NSP.
There was also a drive towards financial sustainability through the reduction of the cost base and activation of cash flows from operating agreements with AEDC/KANN and NSP. During 2016, AEDC paid fees of approximately NGN2billion under the operator agreement, to KANN. The shareholders of KANN, that is, CEC Africa and Xerxes Global Investments Limited, directed the funds towards servicing of the loan facility with United Bank of Africa (UBA) which was contracted for the acquisition of AEDC. During the same period, CEC Africa received fees of USD450,000 from the NSP operator agreement. These funds were used to supplement the working capital requirements of CEC Africa.
The finances of the Company remained tight. However, with the inflows of cash from the operator agreement and prudent management of expenses, the company ended the year with a small surplus. Further opportunities to constrain costs will continue to be pursued, including a review of labour requirements. All revision of labour will ensure that whilst costs are kept low, the capabilities for project development and asset management that have been built up over the years are retained and the Company is kept ready for re-commencing its development activities as soon as the Nigerian assets are stabilised and sufficient cash flows are established to support not only working capital requirements, but also project development activities.
CEC Africa expects to earn a one-off fee from its development work on CECA SL, the power plant in development in Freetown, Sierra Leone at financial close.
Management remains committed to firmly establishing the two core streams of value creation.
The next 18 to 24 months will see a focus on the Company’s role as a manager of assets and therefore the main source of revenue shall be through operator fees with a focus on improving these by increasing turnover at AEDC and NSP as the fees are calculated as a percentage of turnover.
KANN Utility Company Limited (KANN) and Abuja Electricity Distribution PLC (AEDC)
During 2016, the main aspect of KANN operations continued to be managing the loan facility used for the acquisition of AEDC. The loan was serviced successfully through the year and a healthy dialogue was maintained with the lenders. The debt service reserve account was topped up with cash inflows from the operator fee from AEDC. The slow turnaround of the Nigerian power sector coupled with the macro-economic challenges that have plagued Nigeria over the past 2 years are requiring very active engagement with all stakeholders to ensure viability of the sector.
There is a general acknowledgement of the strain that the sector is facing by the government and management is confident of some sector-level intervention by the agencies of government during 2017.
At an operational level, AEDC continues to show improvements, despite a significant drop in national generation capacity, mostly occasioned by security challenges in the main natural gas producing regions. AEDC received 10% less energy in 2016 compared to 2015.
Compared to the values assumed when setting tariffs in the Multi Year Tariff Order (MYTO), capacity was down by about 40% as illustrated. Combined with the drastic fall in the value of the Nigerian currency, the Naira, during the course of the year, the tariffs ended up well short of the expected levels. To compound this, the unit cost of energy (in ₦/kWh) increased by over 50% due to foreign exchange indexation in the power purchase agreement between the generators and the bulk buyer/seller. A retail tariff review was only carried out at the end of 2016 and it is expected that new tariffs that take into account the operational and financial conditions will be announced during 2017.
On a positive note, the year saw a significant improvement in operational efficiency, with an over 10% improvement in the aggregate technical, commercial and collection (ATC&C) losses.
A business process reengineering initiative was started during the year and it is aimed at reviewing the entire value chain of the business to ensure that fit-for- purpose, modern management processes are introduced and implemented in AEDC.
Relations with key stakeholders, including regulatory agencies remained cordial. AEDC was named best performing distribution company in the Nigerian power sector for three out of four quarters in 2016 on a compounded score that takes into account, among other things, payment levels to the market, customer service and improvements in operational efficiency.
A significant milestone was achieved by CEC Africa in October 2016 in relation to its ownership rights in KANN. A London Court of International Arbitration hearing in relation to CEC Africa’s rights as against its co-shareholder XerXes Global Investments Limited took place on 2nd and 3rd September 2016 and handed down its decision on 28th October 2016. In summary, CEC Africa was successful in the arbitration with declarations that CEC Africa validly owns its 75% share in KANN and additionally ordered that XerXes should fund its equity share.
North South Power Company Limited (NSP)
2016 was a good year for the Shiroro Hydro Power Plant, with 2.8GWh of generation representing a 50% increase over 2015 energy generation and 17% above 2016 budget. This occurred on the back of a 100% plant availability during the peak generation period between August and October, following the completion of major underwater civil works to repair damage on the intake to one of the four turbines at the plant. Rain patterns were also favourable.
On the financial side, the company recorded a profit although cash flow was still constrained due to the short payment from the bulk buyer. As of year-end, the short payments accumulated to over NGN20 billion (over USD60 million). Revenue in Naira was 95% above budget because of the increased generation and increased tariff due to the Power Purchase Agreement (PPA) foreign exchange indexing.
CECA Sierra Leone
The project development continued apace in 2016 with substantially all project and finance documentation completed. Finance documents were signed in September with project documents to be signed and ratified by the Sierra Leonean Parliament in early 2017. The project has continued to receive strong support from the World Bank and is included in the power sector development plans as a critical component of the planned Sierra Leonean network.
The lender group has been actively involved in all discussions and although there are a number of challenges which remain, it is expected that following ratification, the project will quickly proceed to financial close.
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CEC Africa Investments Limited (CECA.zm)Share price: 0.63 Kwacha (0.00 | 0.00% – 24/03/23)
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