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CEC Chairman: Hanson Sindowe



Conference Call Audio


Conference Call Transcript 

4 September 2015

INTERIM RESULTS

Chama Nsabika Kalima
Good day, ladies and gentlemen, my name is Chama, Head of Investor Relations and Communication at CEC Plc. I wish to welcome all of you to the call today which will discuss the first half year 2015 earnings for CEC Plc. Thank you so much for joining in. Please do note that the presentation has been sent by email, but it is also available for viewing on the website. You can submit your questions using the link provided when you registered for the call. We will also take oral questions at the end of the presentation during the question and answer session. Our interim results were published recently and are available on our website for reference.

Please feel free to contact me regarding any issue after the call. My contact details are available on the website. I wish to bring to your attention the usual disclaimer related to forward-looking information, which is published in our presentation.

I now wish to introduce you to Owen Silavwe, Managing Director at CEC Plc, and Mutale Mukuka, the Chief Financial Officer, who will take the presentation today. The podcast of this presentation will be published on our website, which is www.cecinvestor.com, as soon as possible after the call, as will be the transcript. If you have not registered on our website to receive notifications please do so. The audio of the previous call is also available on our website. A reminder that you are welcome to submit questions during the call – a link does appear on our website landing page – and we will do our best to address them. But if we do not get the chance today then we hope to provide summary responses through our website subsequently. I now hand you over to Owen.

Owen Silavwe
Good day, ladies and gentlemen. I will start my presentation with slide seven, and what you see there is something you are obviously familiar with. There has been one change during the first half of this year, and I will talk about that in a moment. Obviously under CEC Plc we’ve got CEC Africa, which is 100% owned by CEC Plc. And as you know, CEC Africa is our investment platform cross Sub-Saharan Africa where we have invested at the moment in Nigeria, where through KANN we own 60% in AEDC. AEDC is the distribution company in Nigeria where we have invested. And then through CEC Hydro we own 20% in North South Power, which has a concession to operate a 600 megawatt hydro power plant in Nigeria.

Coming back to Zambia, we own 50% in CEC Liquid. CEC Liquid focusses on the telecoms industry here in Zambia where it provides wholesale bandwidth. The restructuring that I referred to earlier is where we’ve got what used to be called Realtime. That company has been restructured in terms of ownership. It is now owned 100% by CEC Liquid. And it has since changed its name from Realtime to Hai, and Hai will be focussing on mostly the retail customers, but it will continue to provide internet services to some corporate customers as well. With that said I will move on to slide number nine.

On slide number nine, I begin to look at the African power sector. As you know, some of you might be aware, if you look across Sub-Saharan Africa the problems in the power sector seem to be quite common. The region is basically facing a chronic energy supply shortage. If you look at the region, this is a region with an installed capacity of around 68 gigawatts. It is interesting that two-thirds of this is actually based in South Africa which amounts to about 43 gigawatts. Which means the rest of the region despite the huge discrepancies – if you look at South Africa there are only 50 million people whereas the rest of Sub-Saharan Africa has got 800 million people – that obviously is a bit of a paradox and it actually tells you a story in terms of the need for capacity improvements in the rest of the region.

If you look at the growth, there is considerable growth averaging around 6.7%. And that growth at the moment is unmatched with the growth in generation capacity. And it is estimated today that to try and match this growth the generation capacity itself needs to be growing at about 10%. So there is a lot of opportunity in terms of the requirements in new generation capacity. And it is important that the governments create an enabling environment to enable the private sector to participate in this huge infrastructure requirement, together of course with the public sector.

I move on to slide number ten. In slide number ten we obviously just try and expand on the issues and the opportunities that we see in the sector. And as I said, we have seen over the last few years that the power situation has obviously been getting worse. The power deficit has swept across most of the countries in Sub-Saharan Africa. And this has not spared even South Africa, where I think ordinarily people would have expected that things would be different. Most of the markets in this region are currently affected by massive power cuts. What is causing this of course is the under-investment in new capacity that is required, we’ve got fuel shortages in some of the regions, and more importantly in terms of trying to stimulate investment, I think there is a belief in the region or most of the markets in the region actually require governments to undertake reforms but those reforms have not been forthcoming.

If you look at markets like Nigeria where gas plays quite a big role – this is the same with East Africa as well – there is obviously a fear that the declining oil prices are going to have an impact in terms of stimulating investment in those regions. In terms of forecast, again I’ve alluded to this issue, what we see is that over the next ten years the picture is blighted by all of these challenges that I’ve mentioned, including the electricity shortages, under investments in new capacity, which will obviously lead to poor electricity supply overall. And this obviously has got a huge impact on the countries’ realisation of their economic dreams.

However, we see that governments are beginning to do quite a bit in trying to encourage investment and to ensure that the power shortages that we’ve seen today that are impacting economic growth begin to be addressed. We hope the governments do a lot more in this area to try and encourage private sector investments.

What are the likely concerns in the market? If you look at Sub-Saharan Africa again the issues remain - we’ve got limited capacity in terms of generation. If you look at the generation per capita that is low as well, and this as I said, leads to poor quality of supply, and generally the electrification rates are quite low. The tariffs are obviously a big concern and I think with the sort of power deficits that we are seeing we hope this is an issue that all the governments will begin to address. We are aware that at some of the ministerial meetings in the last couple of months resolutions have been made to ensure, for example, that the tariffs achieve cost-reflective tariffs. Each of the countries in the SADC region is expected to achieve cost-effective tariffs by the year 2019. So it is everybody’s hope that the governments will push through with those objectives.

With that I move again to slide number 11. On slide number 11 I try to focus a little bit on the Zambian market. I start by looking at the mining sector, which is the sector that we focus on in Zambia. Today if you look at the mining sector in Zambia the future obviously continues to look quite good from the point of view of the resources and also the investment that has gone in this sector. Most of our big customers have been investing. They have actually invested a lot of money in extending mine life and improving the economics of these mines. I, therefore, expect that performance should be generally good.

However, there are obviously concerns in terms of the copper price, which has been falling for a good part of this year and is probably at its lowest in the last two years. This is a cyclic phenomenon and if we look at the forecast we obviously expect that in the medium term the copper price will continue to be weak, with expectations that we should begin to see improvements in the next one and a half to two years or so.

On the demand side, the demand by our mining customers has remained strong. As the picture you are looking at on slide 11 shows you, the Zambian mines are taking well over 50% of the demand, followed by the domestic customers, and then you’ve got others, which includes other industries and the commercial customers. In terms of our forecast we have expectations in terms of demand growth which is in the order of 150 megawatts in the next two to three years. And what we are obviously showing here is the demand that we believe in terms of the level of certainty that this demand will materialise is quite high.

Looking at the current issues and opportunities in the market, the big issue for Zambia includes the low water levels that the country is experiencing at its power station reservoirs. And this obviously has resulted in the power deficit in Zambia which is having a huge impact on customers in this country. As you may have heard, in the first half of this year our mining customers were not affected in terms of the power cutbacks. However, moving forward, there is need for all customers to contribute to the load management initiatives that are being implemented to allow the country to ride through this low water challenge.

So what it is that we can expect? We expect within the next one to two weeks that we will be asking our customers to begin cutting back. However, what we intend to do is we’ve gone round the region and tried to mop up any available power imports. So we are hoping to replace that demand which our customers would be cutting back with these imports, as well as some of the generation that will come from the emergency plants. One thing to note is that this power will come at higher tariffs than the tariffs that our customers are paying at the moment. This is a discussion that we’ve had with our customers, and most of them are willing to pay for this power so that they don’t get impacted by cutting back their demand, and therefore, affecting their productivity.

In the medium to long term, there are solutions that are anticipated, and these include the coal plant, in particular we’ve got Maamba who are working on around 600 megawatts of coal. We anticipate that by the end of quarter one next year, 300 megawatts should be brought on stream and that should help, to a large extent, to alleviate the current challenges. The other options that are being looked at include the grid scale solar PV. As some of you may be aware, the government has recently been making a number of pronouncements in trying to entice investors in grid connected solar PV. That’s an area that as CEC we are looking at as well. We are currently busy looking at a 20 megawatts solar PV on the Copperbelt and once the feasibility studies that are going on are concluded and we get to an understanding of what are the requirements to develop this project we hope that we will be moving forward with that project. The are other options that include HFO plants. Again that includes some of the things we are looking at as CEC.

Let me move on to talk about the Nigerian market, to slide number 12. If you look at the Nigerian market there have been some positive developments. On 1st February, 2015 the Transitional Electricity Market was declared. And what you also note is the Nigerian Bulk Electricity Trader has delayed activation of some of the power purchase agreements, of course, citing the failure of some of the distribution entities to activate vesting contracts. What is the negative impact of this? What this actually implies is that the indexation of tariffs that was anticipated to be happening has not taken effect.

Some of the other good things that have happened in the industry is that if you look at the first half of this year, AEDC was exposed to a penalty of $9.6 million. This arises due to AEDC over-drawing in terms of its allocation from the national generation pot. The rules then were such that if you over-drew on your allocation then you had to pay a penalty. This has since been changed, and what is happening now is that the Discos are being encouraged to actually draw more power. That has a positive impact on both the top line as well as the bottom line for AEDC, and we think this is quite positive for the business.

In terms of the tariff, there has been a general tariff increase in Nigeria. However, there is still a lot of work to be done in that area. Specifically, we saw a 27% increase on the commercial and industrial tariff, whereas for the rest of the customers, the Discos have been asked to submit ten-year tariff migration paths that will be considered by the regulator. In terms of outlook, again there is some positive news there because what we see is that an increase in generation is expected on account of improved management of the gas supply. And also investment in transmission infrastructure is beginning to materialise, which then means we should see more power being evacuated to where it is required.

Furthermore, we have seen the liquidity position begin to improve in the sector, which we think again is a good thing. And also judging by some of the things that are happening we see that there is some political will from the new government in Nigeria to try and do things right and we believe that is good for business. So we think the outlook is generally good for the business in Nigeria. And at this point I will hand over to Mutale, our CFO, who is going to take us through the financial performance.

Mutale Mukuka 
Good afternoon, as introduced, my name is Mutale Mukuka, CFO for CEC Plc. I will take you through the financial highlights of the half-year results for the Group. We start with slide 14. On slide 14 we provide you with a consolidated statement of income, which essentially highlights the fact that the business is growing. The half-year results do provide a growth in gross profit from 15% last year based on the full-year audited financial statements to 29% based on the half-year results.

From an earnings perspective, we have a loss of $66 million for the half year compared to $149 million based on the audited financial statements for 2014. Now, what are the drivers for the revenue? The increase in revenue is essentially coming from AEDC. AEDC has seen operational improvements stemming from the billing efficiency improvements, which increased the value of our invoices.

One of the things that happened at Group level was that effective 1st January 2015, the Group changed its policy on bad debt provisions. Essentially we are now more aggressive in providing for debt, and as a result, this has increased the absolute amount of provision that we made, mostly stemming from AEDC. And for the half-year results we have recognised almost $40 million in bad debt provision.

I will take you through the respective financial segmentation of the operating subsidiaries in the Group. To start with, we can focus on slide 15, we look at the Plc results. This is the entity operating in Zambia. What we see in the Zambian operations is an increase in revenue driven by the increase in power trading or power trading flows. Essentially CEC has got three business models. The mainstay of the Group is power sales to the mines, buying power from the generators, mostly ZESCO, and selling the power to the mines on the Copperbelt. The second revenue stream or business model is wheeling of power. We wheel power on behalf of the state utility, ZESCO, to supply the domestic and commercial users or consumers on the Copperbelt. And the last business model is the power trading model where we buy power in the region and sell this power mostly to the mines in the Katanga region through SNEL, the state utility in the DRC.

Now, what we see in the half-year results is essentially a shift in the business model for CEC with a bit more focus on the regional power trading. And we see, of course, an increase of 267% year-on-year flow on power trading revenue. However, I must state here that even on the power sales, which is the mainstay of the business, we saw an increase in the uptake - what the mines are taking. From an energy perspective, we have a 2.1% increase.  In gross margin, the Group is definitely growing and what we see is an increase in gross margin to 34% from 30%. From that perspective we actually see that this business remains one of the few profitable businesses in the Group.

Let’s turn to slide 16, which provides the financial summary of the subsidiary called CEC Liquid. CEC Liquid is an infrastructure telecoms provider in Zambia. During the period to June 2015, there was a group reorganisation in the CEC Group which essentially resulted in Realtime, now called Hai Telecommunications, being owned 100% by CEC Liquid. The results of CEC Liquid, therefore, have consolidated the Realtime results. Turnover for the consolidated telecoms group grew to $10 million for the half-year results compared to $13.3 million for the full year 2014 audited financial statements.

In terms of the key ratios, we see an increase in gross margin from 54.7% to over 64%. EBITDA has also increased from 12.8% to over 21%. The reason for the increase is stemming from the fact that the business is now covering its fixed costs. Prior to 2015, the business made a lot of investments in infrastructure. The focus for 2015 and beyond is to grow the business at the back of the investments that were made in 2013 and 2014. This business provides a required diversity in that it is the only business that exposes the Group to the telecoms cash flows.

Slide 17, this provides the income statement for the two operating subsidiaries in Nigeria. AEDC is the biggest subsidiary to the CEC Group. AEDC’s revenue for the half-year results stood at $155 million. The increase in revenue is backed by the improvements in billing efficiency that we saw at AEDC. Despite the billing efficiencies having improved during the period, what we see is that the resultant financial revenue in AEDC does not correspond to the increase in billing efficiency due to the fact that the Naira depreciated during the same period.

As earlier mentioned when we talked about the Group results, the change in the bad debt provision policy at Group level resulted in an increased bad debt provision at AEDC. As a result, we have incorporated a provision of $40 million in the EBITDA loss of $53 million. If we see the results for AEDC, you actually see that there is an increase in gross margin, whereas the 2014 audited financial numbers provided for a break-even in gross margin, you actually see an increase in gross margin resulting in $37 million for the half-year results.

At NSP level, which is the company that operates the 600 megawatts Shiroro Hydro, this was negatively impacted by the lower water levels. As a result, the revenue dropped from $63 million based on the audited financial statements to $18.6 million. In terms of margin, we see a reduction in gross margin from 71% to 64%. EBITDA margin reduced as well from 65% to 33%.

Slide 18 provides us with a summary of the key parameters that provide a long-term value proposition of the Group. The key measures being provided there is revenue which shows a growing revenue from 2001 from under $150 million to half-year results for 2015 in excess of $250 million. The dividend pay-out, in 2009 we had a dividend pay-out ratio of over 80% which reduced in 2011 to 2014 at the back of investments that the Group was making to secure future cash flows. We anticipate that going forward, as a mature utility, we should provide the right balance between dividend pay-outs and investments in subsidiaries.

Having looked at the financial numbers we now want to focus on some of the operational statistics, specifically on AEDC, the entity that contributes the losses to the CEC Group. The key main parameters that we use to measure the operational performance of AEDC hinge on the losses split between collection, billing and commercial losses. What we see is an improvement in billing efficiency month-on-month from under 60% in January 2014 to over 80% in June 2015.

From a collection perspective we see a slight increase in collection efficiency. What you actually see is that as the billing efficiency improves the ability for the business to collect the additional energy that is being billed is also slowly improving. In as much as this is not improving at the same rate, on average we actually see a steady collection efficiency of around 70%. In absolute terms, we actually see an absolute increase in the cash collected by this business. Overall if we summarise the billing, collection and technical losses we actually aggregate that into what we call the aggregate technical, commercial and collection losses, which is shown on slide 20 in the top graph. You can see the top right graph provides an average improvement in losses starting with 56% in January 2014, ending up with 43% in June 2015.

Having looked at the operating statistics for AEDC, the distribution company, we can now turn to slide 21 which provides the key statistics for North South Power, the company that has the concession to operate the 600 megawatts Shiroro Hydro. From a generation perspective, comparing January to June 2015 with January to June 2014, we actually see a drop in energy generated month-on-month, with the worst month coming in May when the generation dropped close to zero on account of the low water levels.

From a collection perspective, we actually see an improvement in cash collections between January to June 2015 and January 2014 to June 2014. In percentage terms, we are comparing 87%, which is the collection efficiency in 2015, compared to 57% in the same period.

Having discussed the financial results with some colour on operational performance for the Group, we now turn to slide 23 which looks to identify the business focus for the operating subsidiaries in the Group, also looking at the key drivers that will drive the business, and finally ending up with the focus activities for the last half of 2015.

From a Zambian perspective, we expect increased flow from a power trading perspective, and therefore, we think that this revenue could essentially become permanent and sustained revenue. However, we are mindful of the fact that there are short-term power generation shortages in the country, and therefore, we’ll continue to explore and seek to source power in the region to meet our customers’ requirements.

From an economic perspective, the depreciating Kwacha will definitely impact on the business. It must be noted that all our key contracts at CEC Plc level are in dollars, and therefore, we do not expect the depreciating Kwacha to negatively impact on the business. The main drivers for the last half of the year for the Group will essentially be underpinned by the expansion projects coming from mining. Specifically, we look at the NFC mine new expansion projects, the Synclinorium project, being done by Glencore mining as well as the KCM KDMP expansion project, all of which are expected to increase energy inflows to be supplied by CEC.

In the medium term, we expect to target the Katanga Province mines, which should be supplied with power sourced from the region. We expect flows to increase in and out of the DRC upon completion or commissioning of the second interconnector, which is under construction. We anticipate that this should be commissioned within quarter three or early quarter four. We continue to improve the performance of AEDC; we just highlighted the billing, technical and collection efficiency improvements that we’ve shown to date and we think that at the rate we are going, we’ll see more and more improvements in that area aimed at achieving the AEDC plan as previously envisaged.

From a telecoms perspective, the focus now is to acquire more revenues at the back of the new infrastructure that has been laid in Lusaka, the new products that are now being sold which are new in town. We also expect that from a Nigerian perspective, the investments that the government or the gas supply companies have made in the pipelines as well as in the transmission lines, supported by the World Bank, should allow for more flows of energy to be evacuated to distribution companies which can then sell this power. The commissioning of the turbine 3 at Shiroro Hydro will also increase availability of the plant and allow the generating plant to generate more energy as we go through the rainy season. Based on today’s forecast, the meteorologists in Nigeria have indicated that Nigeria is likely to have normal rainfall this year.

Therefore, finally, the focus for the last half of 2015 will essentially be to continue to implement the turnaround strategies at AEDC, to focus our energies in Zambia to completing the projects that will support our customer expansions, particularly at Mopani, a Glencore-owned mine, as well as the NFCA mine. We anticipate and expect to commission the second interconnector with the DRC. And finally we expect to focus our energies on sourcing power in the region to meet our customer needs. This ends the formal presentation. I now hand back to the moderator for the Q&A session.

Operator 
Thank you very much. Ladies and gentlemen, we are going to take questions first from the web. In the meantime, if you would like to ask a question from the telephone conference please press star then one to be in the queue for questions from the telephone audience. I will now hand over to Chama to take questions from the web. Please go ahead.

Chama Nsabika Kalima
Thank you, Ari. The first question I will read out and somebody wants to know why is the investment in Namibia and Sierra Leone has not been included in the Group structure.

Mutale Mukuka
Thank you. This is Mutale, I will take that question. The Group structure that has been provided in the slides is limited to operating subsidiaries currently under the CEC Group. We have not included projects contemplated under the CEC Group. What we have, for example, in Namibia is a right to invest equity at financial close at the time the project will move into construction. So for that perspective, the companies in Namibia as well as Sierra Leone are not yet operating, but we anticipate that once we reach financial close – which should be sometime at the back end of this year or sometime early next year – then these companies will form part of the CEC Group. Thank you.

Chama Nsabika Kalima
The next question is essentially in four parts. How do you see the power shortages in Zambia? How much effect will it have on your margins? Are you considering importing electricity? And when do you expect to start doing that, and what are the cost implications for this decision? Owen.

Owen Silavwe
Alright. This is Owen. Let me talk about the power challenges we are having at the moment in Zambia. The Zambian power shortages are a concern for everybody - utilities, customers and the government as well. And we have been working with all the parties to try and find solutions to this. As we have said in the presentation, up to this stage our customers have not been asked to cut back their demand. However, it has gotten to a point where we need everybody in the country to begin contributing to the efforts that have been made to try and ensure that the country rides through this challenging period until the next rainy season. So in the course of next week we are likely to ask the mining customers to begin contributing to the load management initiatives.

However, what we have done before effecting those cutbacks is that we’ve held discussions with all the customers. We’ve gone out in the region and tried to mop around the power that we can find. And we will begin making that power available, whatever power we can get from regional sources. We have discussed obviously the cost implications with our customers. And the customers are willing to pay for this imported power which is going to come at a slightly higher tariff than the prevailing tariff. That obviously makes sense given that cutbacks are going to have impact on their productivity. In the event that the imports that are available from the region are inadequate we have been quite active looking at what are the other solutions but those solutions are actually even more costly compared to the imports. However, we will continue having those discussions with our customers so that we can gauge the impact in terms of their production, but also we need to gauge the impact this could have on CEC’s cash flow as well. Thank you.

Chama Nsabika Kalima
The next question reads, it appears that your Nigerian investments are still making losses. When do you expect to start breaking even?

Mutale Mukuka 
Thank you. This is Mutale again, I’ll take the question. For those who’ve been following the CEC story and the acquisition of AEDC and NSP, you do recall that the assets, particularly AEDC, had a five-year turnaround strategy plan. Now, before year four we did not anticipate that the business is going to be profit-making. However, the expectations are that once the losses reduce from the high levels at the time we took over, the overall losses were in excess of 60% which means for every 100 megawatts we were buying we were only collecting cash for 40 megawatts. As of today, we have transformed the asset a little bit. For every 100 megawatts we are buying we are essentially only losing 43% of that, which is 43 megawatts, which is a great improvement considering that we only bought this asset slightly over a year ago. The expectation is that this improvement should continue. And we anticipate that within the next 24 months to 36 months we should ideally have a profitable business that will contribute profit to the overall Group numbers. Thank you.

Chama Nsabika Kalima
Thank you, Mutale. The next question is also around Nigeria and it reads how are the losses in AEDC being funded? Any recourse to the profitable Zambian operations if there is debt in AEDC?

Mutale Mukuka
Thank you. I will take that question again. This is Mutale. At the moment, the CEC entities are essentially structured on a project finance framework. So essentially you have business units or entities within the Group that are ring-fenced from most parameters, basically from a cash perspective. So what you don’t see are leakages between entities. So the Zambian entity’s cash flows are limited to Zambian operations and if at any one time there is need for CEC Plc to inject additional capital or subsidise any operating subsidiary within the CEC Group at that point the expectation is that board decisions would be taken and requirements for capitalisation will essentially be made. From an operational perspective, there are no cash leakages between entities in the CEC Group; and therefore, AEDC is not subsidised by CEC.

From an operational perspective, how AEDC is surviving? We did mention at the last brief – which  the situation has continued to prevail even up to now – is that AEDC is using the payments to the market operator or NBET as the case might be, which is essentially the cost of power which comes from the generation units, to absorb the working capital shock that the business is experiencing. Under the interim rules, which were the rules that AEDC was operating on up until February, the requirement was for AEDC to only partially cover the market operator’s bill. At that point, the obligation was to cover 65% of the bill. Now, what that means is that the additional requirements, the 35% of the market operators bill, is used as working capital bridge for AEDC, which allows AEDC to then cover its operating cost and ensure that from a cash perspective it is EBITDA positive.

Chama Nsabika Kalima
What proportion of your power supply will be through wheeling and what is the revenue per megawatt from imported power versus ZESCO / CEC supply? What is the expected incremental, if so, in aggregate from imports from the SAPP?

Owen Silavwe
Thank you, Jimmy, for that question. I take it when you talk about wheeling you are referring to international wheeling. The level of international wheeling has obviously increased in the first half of this year. We have seen considerable growth. And this is mostly driven by the power that CEC itself is trading in the DRC. In terms of the imports, as I mentioned, the imports are a lot more expensive in comparison to the power that we buy from the Zambian sources and what we have done to ensure that our customers are prepared is that we’ve been discussing this issue, for the last two months or so, with our customers to take them through this process. And I think what’s important to note is that the power in the SAPP, in terms of price, can actually change. This is different from the long-term contracts that we’ve got in-country. But we are used to having both ourselves and our customers. So we would expect that these tariffs will be changing from time to time. I can’t at this point give you the actual revenue we expect from imports, but I can probably give you some information in terms of what level of imports we expect. In terms of cutbacks, the expectation is that next week we will be asking customers to cutback by a maximum of 30%. Now customers have two options. They could cover part of that through efficiency improvements and then the rest of it through imports. Some of them have their own diesel generation, they could decide to use their own diesel generators. That is basically the process that we have been following. More importantly for CEC, what we’ll try and do is to try and cover the internal CEC tariff when we bring in this power. Whether we can cover the internal CEC tariff or the margin, if you want to call it that, then we’ll try and make sure we cover that. Thank you.

Chama Nsabika Kalima
Thank you, Owen. The next question. Are you going to raise debt or equity for CEC Africa? Are you considering a rights issue?

Mutale Mukuka
Thank you, Chama. I will take that question. Yes, from a Group perspective there are plans to raise equity at CEC Africa. The equity to be raised at CEC Africa will initially be funds that will be used to support the projects that are currently being developed, which projects we expect should reach financial close sometime early next year. At the moment, there are no plans for a rights issue at CEC Plc level but should that position change or should the board deem it necessary, we would definitely come back to the market with a firm response.

Chama Nsabika Kalima
Thank you, Mutale. The next question. How much of the $40 million bad debt provision is abnormal due to the change in policy?

Mutale Mukuka
Thank you, Chama. That’s an interesting question. I’m not too sure abnormal is the right word. Maybe I can just talk about the two policies that we had, the policy we had before and the policy we adopted in January. The policy we had last year was a policy that essentially assessed respective customers based on their ability to actually pay the debt. So you look at what is provided from a contractual perspective that this debt will not be recovered so if you look at AEDC it does supply different types of customers. Some of these customers are essentially government and quasi-government institutions, others are commercial utilities then we are also talking about residential utilities. Now, under the transaction document with AEDC the regulator essentially assists in collecting debt from government and quasi-government institutions, which means from an accounting perspective it is highly probable that we are not going to write off any quasi-government or government debt at the back of the...

Operator
Ladies and gentlemen, please stay on the line, thank you. We have lost the main line. Please stay on the line, ladies and gentlemen, thank you. We will reconnect them shortly. Ladies and gentlemen, please stay on the line. Thank you.

Mutale Mukuka 
Okay, thank you so much; sorry, we lost you there. I’ll probably just cover the question again on bad debt. I was just saying that the change that amends the policy as opposed to looking at the credit position of the debtor to looking at a time period on how long that debt has been overdue. You are essentially writing off any debt that is overdue by a certain number of days irrespective of who the debtor is. I hope that this covers the question. I’m not too sure where we lost you but I hope I’ve provided an answer to that.

Chama Nsabika Kalima
Thank you, Mutale. The next question reads when can we expect a decision on whether a final dividend will be paid?

Owen Silavwe
Thanks for that question, Chama. I think as we know payment of a dividend are to be decided by the board on the basis of the performance of the Company. Given what is happening in the market with the power shortages in Zambia, the board will obviously want to ensure that the Company performs well during this period for them to be able to make that decision. I’m sure they will be quite happy to approve a final dividend if the Company performs well during this period. But suffice to say that this really is dependent on the performance of the Company and if the board is satisfied that the Company has performed well enough to be able to make the final dividend payment, then obviously that will be communicated to all investors. Thank you.

Chama Nsabika Kalima
Thank you, Owen. We move on to our last email question. When do you expect the Namibia and Sierra Leone projects to become operational? Are they on track?

Mutale Mukuka
Thank you so much, Chama. I will take those two questions starting with the Kudu project. Kudu project is a priority project in Namibia, the Namibian government has allocated substantial sums of money to facilitate the development of this project. Now, all being equal, the expectation is that within the course of next year, 2016, this project should reach financial close and construction at that point should commence. If financial close is reached in 2016, the expectation is that this project should be commissioned in 2019. So far, indications are that the project is on track, but we’ll continue to monitor the process and we’ll will continue to communicate to our stakeholders.

Moving on to Sierra Leone, the Sierra Leone project was negatively impacted by the situation which I think we all understand that there was a medical or an Ebola situation in Sierra Leone. Current forecasts are that this project should close within the course of next year, and from a planning perspective, the project has got a construction period of around 18 to 20 months. So we expect that after 20 months from financial close this project should become operational. Thank you.

Chama Nsabika Kalima
Thank you, Mutale. I will now hand over to Ari for the live questions.

Operator 
Thank you. Ladies and gentlemen, a reminder, if you would like to ask a question please press star then one. To ask a question please press star then one. We have a question from Paul Robinson of Laurium Capital. Please go ahead.

Paul Robinson
Hi. Afternoon everybody, thank you for the call. Just two questions, just on your bad debt provision. Is it likely that you will eventually recover and reverse these bad debts from the government and quasi-government entities? And if so what type of time fame are you expecting? Or do you think that these may go on forever? And then secondly, what do you expect your power sales in Zambia to be for the second half?

Mutale Mukuka
Thank you so much. This is Mutale. I’ll cover the first question and my colleague Owen will take the second question. On bad debts provision, just to clarify the position, I hope I haven’t insinuated that the $40 million relates to sales to government and quasi-government institutions. That was just an example. However, having said that I must also state that yes, there are also some outstanding overdue amounts from some government and quasi-government institutions, and at the moment, our estimate is that we will continue to collect these amounts on an ongoing basis. We do not anticipate that there will be a time period when we will collect everything at once. But this being a business we think that the collections will be aligned to business operations, and this will be ongoing. So our expectation is that we should see an increase in collection efficiency once these funds are collected, and we will also see some form of bad debt write-back when this happens. Now because this is an ongoing situation, what we will actually be seeing is that embedded in the bad debt write-off there will also be write-backs. Therefore the net position at that point will depend on whether the write-offs are higher than the write-backs at that time. Owen will cover the second part of the question.

Paul Robinson
Maybe just a follow-up on the first half of the question there. Are you still providing power to any customers who do have these bad debts, who are in this $40 million bad debt number, or do you cut anybody off?

Mutale Mukuka
Thank you so much. The current policy that we employ, we try by all means to…maybe I can just explain from an operational perspective. Operationally, we have prepaid and post-paid customers. Now, what this means is that for prepaid customers we do not accrue any liabilities with them. We actually end up owing them some money at the end of each month.  For metered customers, these are customers who we invoice at the end of the month, and the expectation is that within the stipulated period they should facilitate payment. Now if a debt remains unpaid and that date is not disputed then at that point our expectation is that any unpaid debt beyond a certain timeframe we should restrict the customer. So we officially cut off the customer as a first call.

Now, restriction of a customer depends on the type of customer you are restricting. If, for example, it’s a hospital or some other strategic institution the expectation is that because we are operating in an environment we expect to engage the stakeholders, being reasonable and recognising the strategic nature of the institution that we are supplying, we push for them to facilitate and make payment. Sometimes it is just a cash flow issue from a timing perspective in that they do not cover the full bill at the time we want it covered based on our books; but we see them lagging behind in terms of payment. In other instances, yes, there are overdue amounts which remain unpaid, and under such scenarios we have taken extreme measures where we actually end up restricting, including strategic institutions in the case of the Nigerian operations.

Paul Robinson
Thank you.

Owen Silavwe
It’s Owen. Just to talk briefly about our expectations in terms of reductions in the power sales. As I said, obviously if we don’t do anything by providing either imports or power from emergency sources then we take a hit by about 30%. Now, that obviously is significant and we can’t allow that to happen. That’s why in my presentation I said we have made efforts on our part to ensure that we bring in imports to cover that demand that cannot be made by sources from Zambia. We are working very hard to ensure that we cover the full 30%. And we try and ensure that there is no reduction in terms of our sales. However, for periods where we can’t find imports from the regions it is likely we can have a small reduction in our sales. So we are basically working on the basis that we will keep the overall reduction in our sales as small as possible, probably around 5%. But everything else above that we’ll try and cover that through imports and other sources. Just to add to that, if you look at the cost side of the business, given the situation that we are facing what we’ve tried  to do as well is to try and manage our costs during this period. Therefore, for things where we think we can postpone expenditure we will do that until the situation is improved. Thank you.

Operator
Mr Robinson, are your questions finished, sir?

Paul Robinson
Yes, I have. Thank you.

Operator 
Ladies and gentlemen, a final reminder, if you would like to ask a question please press star then one. Our next question is from Chama Kamukwamba. Please go ahead.

Chama Kamukwamba
Hello everybody. My name is Chama. My question is will CEC Plc manage to maintain its margins should ZESCO go ahead and increase its tariffs as recently permitted by the Zambian government?

Owen Silavwe
Thank you, Chama, for that question. As a matter of principle, as you know, in any business the customer basically pays the bill. So if there’s any increment in tariffs the expectation is that that full increment has to be passed to the customers. We’ve used that principle in the increments that we’ve had in the past and it’s the principle that we believe the energy regulator is basically following; and, therefore, we expect any increment going forward will basically have a system where those increments should be passed to the end users. And what the government has announced the last few weeks was basically policy pronouncements which would then require the regulator to follow some process to effect any increments that they’ll come up with. So that process will include the consultation of CEC, ZESCO and the customers, and it is obviously going to ensure that those increments are passed to the customers. Thank you.

Chama Kamukwamba
Thank you.

Operator
Ladies and gentlemen, there are no further questions at this time. Mr Silavwe, Mr Mukuka and Chama, would you like to make… Apologies, Mr Robinson has come in for a follow-up question.

Paul Robinson
Gentlemen, sorry, while I’ve got you on the line can you give us some information on where your power imports would come from, which countries, and how available this spare power is in the region?

Owen Silavwe 
I will answer that question. As I said, what we’ve basically done is that we haven’t really focussed…as you know in the region what we have at the moment is almost all the countries, with the exception of Mozambique, have got shortages at the moment. And these shortages are occurring at different times so what we’ve tried to do is try to look who’s got power during what time. Therefore, the power that we will be getting is coming from different markets within the region. Thank you.

Paul Robinson
Okay. Given these constraints, the whole region having a serious power shortage, do you really think you will only be able to maybe have a reduction of only 5% in your power sales, given what is happening in Zambia?

Owen Silavwe
Well, if you look at the power situation the key challenge in Zambia is not so much capacity. The challenge is energy and what that problem does, it doesn’t restrict you in terms of when you can bring in your power. So we are taking advantage of some of the aspects of the challenge that we’ve got, leveraging on that to structure import contracts that allow us to bring in energy at times when our potential suppliers can make that energy available. So using that principle we think we should be able to cover as much as possible with respect to the shortage that we’ve got. Thank you.

Paul Robinson
Thank you.

Operator 
Gentlemen, we have a question from Cornelius Makari of Anibok. Please go ahead.

Cornelius Makari
Thanks for the call. Just one question from me. Could you please maybe if you can clarify the definition of your billing and your collecting losses? And as a second question to that, can you also explain AEDC - what are the tariffs at the moment in dollars per kilowatt hour? What are you paying and what at you selling at in Nigeria?

Mutale Mukuka
Thank you so much, Cornelius. We will try and provide you with any information which is not market sensitive or confidential in this call. I think the first question, it covers the billing and collection efficiencies, how are these measured? I will go back to the example, which I gave earlier. If you buy 100 megawatts at a busbar and this 100 megawatts ends up in our network in Nigeria, ultimately, the expectation is that the 100 megawatts will have to be transported through our infrastructure which is our network. Some of the 100 megawatts will essentially be lost in the wire as technical losses and whatever remains as a residue will essentially be supplied to the customers. Now, out of the supplies to the customers, we are going to bill a portion of it or a certain portion will be billed. Now, there are reasons why only a portion will be billed. In certain instances you’ve got customers who are not metered. They are on fixed rates per month. And the expectation is that as part of these reforms, the target for AEDC is to ensure that within a four / five year period metering of all the customers is a key KPI. So to the extent that some customers are not metered and they are on fixed rates, it essentially means that whereas from an invoicing perspective you are invoicing them at a fixed rate of say 1 megawatt, you might actually find that in practical reality they might consume more or slightly less than what you are actually billing them.

Now, the second part of the differential between what they consume and what you are invoicing essentially falls into what is called the commercial losses for the business. Now, at that point when you measure what is billed against what you expected to bill, essentially it gives you a ratio which we call the billing efficiency. Now, out of what you bill not everyone pays on time and not everyone actually pays because you have a certain portion in bad debt provision. The collection efficiency essentially compares what you billed against what you actually collected. So from that perspective, those parameters help to measure business efficiency at various levels starting from the infrastructure, which is the technical losses, the systems that you are using to bill, which is the metering, as well as the billing platform, which measures the billing and commercial losses. And then if you are aggressive in actually collecting the money, that measures the collection efficiency. I hope that clarifies the three parameters.

From a tariff perspective, at the moment, what we see from a Nigerian perspective is that the overall tariff is very different for different customer categories. Now, this is not unique to Nigeria. This is applied in most countries across the world. The expectation is that for individuals or consumers who just have a very small consumption rate, they are on what is called a lifeline tariff, which is a very low tariff which allows them to probably just connect one appliance, which might be a fridge. Maybe it does not allow them to cook on a stove. The moment they go beyond a certain number of kilowatts per month, the expectation is that then that moves into a slightly higher tariff band. Now, because we have this blend you actually realise that there are very different tariffs for different customer categories. However, having said that, the expectation is that the average tariff at which we invoice most customers will range between ₦20 per kilowatt to about ₦25 per kilowatt. Thank you.

Cornelius Makari
Thanks a lot. And what do you buy the power at on average? I want to understand the size of the gap.

Mutale Mukuka
Thank you so much, Cornelius. Unfortunately I will not give you the full information because of the sensitivity around it. But I will probably just give you the structure. At the moment in Nigeria we have different generation sources. And different generation sources have different tariffs. For example, if you are buying from a gas plant each gas plant, depending on how far it is from the grid and where it’s buying its gas supply, they will have very different tariffs. The same applies to hydros. Hydros will also come in with extremely different tariffs at which they supply the grid. If you look at coal as well for coal-generated plants they’ll also have a very different tariff because the cost profiles of all these generation sources is very different. However, for respective Discos the expectation is that you’re going to get a blended tariff.

Now, in the rainy season when the water levels are high the expectation is that the contribution of hydros to the total package of energy supplies to a respective Disco will essentially be higher. And therefore the weighting of the hydro tariff is a see-through which you essentially see as a Disco in your cost profile. However, if you go into the dry season you actually see that from a Nigerian perspective, there is a lot more reliance on gas supply generators, and therefore, the weighting from a tariff perspective will essentially be leaning more on the prices at which the gas generators supply to the grid. I think that provides you the framework. I will not go into the details of the respective tariffs as supplied by the respective generators but that should give you a framework on the pricing structure.

Cornelius Makari
Alright. Thank you very much.

Operator
Back to the management at CEC for closing comments, please.

Owen Silavwe
I think at this point, I just want to thank everyone for coming through, joining us on this call and for all the participation. I think when I look at the last two calls that we’ve had this has been the most lively, and I think this is quite encouraging. I hope that we’ve given you all the information that you need. However, if we haven’t managed to answer any of the questions today we are quite happy to answer those questions through email and also through most of the platforms through which we get to interact with you and if you are in Zambia, also our offices are open, feel free to come through, we can come and discuss some of those issues. Otherwise, thank you very much and it’s goodbye from us as CEC management. Thank you.

Operator 
Ladies and gentlemen, that concludes today’s call. Thank you for joining us. You may now disconnect your lines.


END OF TRANSCRIPT


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