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CEC Chairman: Hanson Sindowe


Conference Call Audio


Conference Call transcript


8 September, 2016

INTERIM RESULTS FOR THE PERIOD ENDED 30 JUNE 2016



Operator
Good day ladies and gentlemen, and welcome to the Copperbelt Energy Corporation Plc half year 2016 results conference. All participants are currently in listen-only mode and there will be an opportunity for you to ask questions later during the conference. If you should need assistance during the call, please signal an operator by pressing star and then zero. Please also note that the call is being recorded. I would like to turn the conference over to the Managing Director, Mr Owen Silavwe. Please go ahead, sir.

Owen Silavwe
Good afternoon ladies and gentlemen and welcome to this year’s half-year review of the CEC performance for the last six months. I believe you have all got the presentation that we’re using for discussion this afternoon. I start from slide 4, and on slide 4 you see the Group structure. And by and large you see that the Group structure remains unchanged. I move on to slide 6, and slide 6 basically gives the macroeconomic environment where the business is operating and ’ll try and combine slide 6 with slide 9 because, overall, you will see that our operating environments in Nigeria and Zambia, from a macro perspective, are quite similar though there are differences. What you see is that the major factors driving the macro environment are the low commodity prices, in Zambia copper and in Nigeria it will obviously be oil. The two countries have also faced inflationary pressures and these have obviously reflected in the exchange rates where currencies in both countries have depreciated quite a bit over the period. And you will see that from a GDP growth perspective, the growth in Zambia is expected to be much less compared to what you’ve seen in the last few years; whereas in Nigeria, we are actually expecting a contraction in the GDP.

Moving on to slide 7, I begin to discuss the operational environment and in this case, we start with that of Zambia. In Zambia, where are we as a business? You will see that the issues that we started dealing with last year are obviously still with us. A key issue has been the power shortages and the partial force majeure that was declared by our main suppliers of power. This basically is continuing where we, at the moment, just receiving about 70% from the sources that we are contracted with. This has meant that we have to find alternative sources to meet the remaining 30% requirements of our customers, and this is coming from regional sources. However, I should also in this instance just mention that the demand by our customers has been impacted by the low commodity prices and what we are actually seeing is that the demand overall has actually gone down by 16%. However, what we’ve lost through this demand reduction, we’ve more than made up through the international power trading which has been doing pretty well this year. This has grown quite substantially in the order of 254%, which is a great performance over this period. The telecoms business is doing quite well but we obviously continue looking for growth areas for the telecoms business. And we look forward to making this a significant part of the Group.

I move on to the Nigeria operational performance. Our key target in Nigeria has been to try and turn around the performance of the business in that market and our focus there has been to try and reduce the ATC&C losses. As you can see looking at the graph on slide 10, the results at this stage have obviously been quite mixed. The tariff increase of February 2016, which in itself is obviously good news, however, resulted in the increase in the collection losses. Again this is something that one would expect whenever there is a tariff increase. And it, therefore, requires that we continue to focus in this area, because as you increase the tariff you find that a number of customers that were paying before begin to struggle to meet the payments and they need to adjust to the new tariffs. That remains a big focus area for us. And you will see that beginning the month of June there has been great improvement in that area. So the ATC&C loss reduction is still a big area for us to focus on and try and use that to improve the performance of the business.

The other concern has obviously been the depreciating Naira which continues to impact the business negatively especially as it relates to some of the obligations as well as the purchase of equipment which is imported out of other markets that require that we pay in hard currency, in this case the US Dollar. In terms of the power situation, again we have faced increasing shortage of power availability in Nigeria and some of this has been driven by some of the militant activities that we are quite aware of in this market where gas has not been available to supply the generators. So again that’s an area of concern for us. We are hoping that this situation will be addressed as we’ve probably heard already that the government continues to work on improving the situation. The other big issue is obviously the liquidity issues, and part of this comes as a result of the collection challenges that I discussed earlier. So by and large, those are the challenges that we continue to face in Nigeria.

At this stage I would want to just point out a couple of things on the HSE performance of the business. In Zambia, our HSE performance is obviously very good given that we’ve already implemented most of the systems that need to be in place. Looking at Nigeria, we are still facing a number of challenges in this area. First of all, the infrastructure itself is not up to standard in certain areas. So we need to work pretty hard to try and resolve infrastructure issues as well as the number of fatalities that we continue to face. That is a key focus area for us in the area of HSE. From a lender perspective, we have agreed with our lenders under what is called the ESAP programme as to some of the actions that need to be implemented, and we continue to work in this area and are quite hopeful that we will begin to see results coming through in the next few months. At this stage, I will hand over to Mutale Mukuka, who is our CFO who is going to take us through the financial performance up to this point.

Mutale Mukuka
Good afternoon ladies and gentlemen. Thank you so much, Owen, for that introduction. I will start the presentation with slide 13 to 16 which provide a summary of the half-year consolidated financial results of the business. I think focussing on slide 14, it provides a trend analysis of the various aspects of the business covering a three-year period, 2014 to 2016. Of importance to note there is the fact that with respect to revenue the business has been growing. With respect to earnings per share we can see that whereas the business has been recording losses, the losses have essentially been on a downward trend. If we look at the slide 15 which provides a summary of statement of income you will note that overall revenue has gone up 13% as at half-year results. And the gross margin or gross profit has gone up 51% to US$132 million from US$87 million in the same period last year.

Now, the key contributing factors to the increase in gross margin and revenue is essentially attributed to the increase in power trading revenue in Zambia as well as the tariff increases at AEDC in February 2016. The last point to note, which was earlier alluded to by Owen, was the fact that the billing efficiency over the same period has shown a downward trend. However, I think it is important to note that the business was in a loss-making position as at half year and this was mostly as a result of the exchange losses which were booked, which was solely on account of the depreciating Naira which reduced from levels from below ?200 and as at end of June we are looking at exchange rate north of ?250. Today, I think for those who are following the FX market you are probably looking at an exchange rate of over ?400 on the parallel market and in excess of ?320 if you are looking at the CBN rate. But what is important to note as well is the fact that if we adjust for the exchange loss and we isolate the provision for bad debt, the business has resulted in a profit EBIT. So from that perspective we think that operationally the business is doing well. However, there are challenges when it comes to sector as well as fiscal issues.

Moving on to the few slides after that, I think what is important from our perspective, which is the business perspective is to try and show you or break down the businesses from a regional segmentation perspective. Now the way we normally look at our businesses is to look at the Zambian businesses separate from the Nigerian businesses because the issues are essentially involved in driving growth in the two areas are fundamentally different. Whereas from a technical perspective the skills set required may be similar but the environments are very different. With that background, I will probably focus more now on slide 17 going up to slide 20. Now, what we note is the Zambian businesses, which have shown that there is definitely an increasing trend, if we look at slide 18, we see that the quality of the cash flows coming from CEC Plc has fundamentally improved over the period. We are essentially looking at an increase in almost all parameters, a gross margin increase from 35% to 43%, EBITDA margin increase as well as net margin increase.

Now, most of the upside is coming from the fact that the international power trading revenues have essentially increased and this has positively impacted on the business. The other point to note is that the business has to a larger extent contained the costs below expectation. If you look at the key parameters covering the periods 2013 to 2016 for this business in Zambia you will see that most of the parameters are on an upward trend. I think what is important to note there is that whereas parameters such as revenue are slightly lower than what we had last year but the quality of those earnings in terms of what portion of those earnings are being converted into revenue for the business after costs has drastically improved as explained by the improvements in margins. From a shareholder perspective, this year we did post a dividend of US$16.4 million which is an improvement from the previous year’s dividend.

Moving on from CEC Plc to the other asset that we operate in Zambia is the telecoms company called CEC Liquid, which similar to CEC also increased its margins in all respects. We see that the gross margin improved from 64% to 83% and the net margin as well going up from just about 5% to close to 41%. So for the half year, we actually see a business that is now profitable and we anticipate that with the growth coming in the telecoms sector and the sales the business is focussing on this business will continue to grow at this trend.

Now if we focus on Nigeria alone, I guess we start with the distribution asset which is the Abuja Electricity Distribution Company. You see that revenues went up as well as gross margin. However, as earlier mentioned, the business has posted a loss of US $57 million compared to US$53 million last year. From an operational perspective, most of this has been impacted by the fact that we had an almost close to US$50 million bad debt provision which is a provision of the unpaid bills. So operationally we think that the business is not too bad. However, there are other fundamental issues that have negatively impacted on this asset which include the fiscal issues as well as the depreciating Naira.

NSP which is the 600 megawatt Shiroro Hydro also improved the quality of earnings in most respects. So if we look at our revenue gross margin and EBITDA that fundamentally improved relative to the previous year. However, one of the structural or sector issues with respect to this asset is the fact that it has obligations in Dollars payable under the concession. And from an accounting perspective this essentially is accounted for as obligations, which allows you to compute the PVs of the payments which you then discount back to today’s value. Now, because of the depreciating Naira we’ve ended up with a loss for the period of over US$66 million. The focus from a Group perspective is to try and find a solution, together with the other sector issues that are there, aimed at aligning the receivables to the payments.

Now, a more detailed focus of comparison of the businesses in the two markets essentially is provided in slides 25 and 26. So what we see there is an improvement in the Zambian businesses in profitability terms whereas from a Nigerian perspective the aspects that we have already mentioned, which is the bad debt as well as the FX, have negatively impacted on the business. And, therefore, we see that the businesses are essentially not doing that well.

Now, what is the strategy from a Group perspective? The strategy is essentially around growing the Zambian business, not necessarily limited to Zambia but more focussed to explore for opportunities that can be integrated with the core businesses. And the initial plan is to focus on Southern Africa at the moment. Now, we have also realised if you look at the half-year results the power trading income has come in quite handy. And the focus would be to try and nurture this and sustain these cash flows. Therefore, opportunities in embedded generation as well as some form of transmission reinforcements to try and grow this category of the revenue will be explored going forward.

Lastly, I think from both the Zambian and the Nigeria perspective the key focus is to ensure that we contribute to having cost-reflective tariffs over the period as a key player. And we think that it’s only this that will make the businesses viable. Now on the development side we had indicated that we are developing an HFO plant in Sierra Leone and the plan is to push this project to financial close, all being equal, within the last half of 2016. On the Nigerian side we’ve got a lot more issues to deal with which are either fiscal or sector type issues. To start with, we’ll need to continue to make improvements, operational improvements at AEDC, more importantly to work with the government on the regulation side to ensure that the current liquidity challenges that are there in the sector, a solution is found and addressed. But more on the financing side we need to restructure the current facility we’ve got at KANN level which is a Dollar facility to try and address the currency mismatch that currently exists. Lastly, we’ll try to look for ways to reduce the gearing at KANN level through one form or the other.

Now, coming back to CEC, I guess we’ve looked at a number of opportunities that the business may be looking at to try and grow the business in Southern Africa. Now, in order to do that one of the key challenges that was identified is the fact that the management and board believe that the current market cap of the business is not representative of the true value of the Group. Now, with that it ideally implies that it limits the options for the business to raise capital. We think that part of the reason why this is so is because of the sector issues in Nigeria as well as the limited liquidity in the stock, which to a larger extent, is also contributing to the valuation of the business.

Now, in order to address that, assuming that the assumptions we’ve made are correct, we are currently evaluating a number of options aimed at unlocking the true value to the shareholders. Now if, with the sector issues and the liquidity issues as mentioned, this may imply some form of restructuring of the Group in one form or the other as well as a listing on a more liquid exchange which could be one such as the JSE. And at the back of this we have of course appointed financial advisors who are assisting us to help to come up with a solution which we can then operationalize. With that I now hand over to the moderators for questions and answers. Thank you.

Operator
Thank you very much. Ladies and gentlemen, at this time if you wish to ask a question please press star and then one on your touchtone phone. If you decide to withdraw your question, please press star and then two to remove yourself from the question queue. Again, if you wish to ask a question, please press star and then one now. Our first question is from Sibusiso Hlatshwayo of Anibok Investment Research. Please go ahead.

Sibusiso Hlatshwayo
Hi. Thank you so much for the call. Just a couple of questions from my side. The first one is on your bad debt provision. Can you give us an indication of what the total bad debt provision is as a percentage of your gross receivables at AEDC?

Mutale Mukuka
Hi, thanks. This is Mutale. I guess my understanding is that there are two questions to that question you’ve asked. The first aspect is what percentage of your income is uncollectable, in which case which is the basis for the provision. If you look at the graphs that are shown on the earlier slides, I think you’ve got something on slide 10, if I’m not mistaken, it does provide a summary of the various components of the loss profile. So you’ve got the collection losses which I think is shown in the graph which is coloured red. And that effectively provides you with the trend on a month by month of the bills that are not collectible in that period. This is from a cash perspective. However, when you are looking at it from an accounting perspective you only provide for the debt once it meets your set characteristics. Now, one of our key characteristics is that the debt should be overdue by over 120 days. Now, to the extent that this graph is pretty much flat then your expectation is that from the time that the debt is due you are essentially three months in arrears of the provisions. I hope you understand what I mean. So if you are looking at the invoices for let’s say March, assuming that it was due in March, then that portion of the bill if it remains unpaid as at June will be provided for in full at that time.

Sibusiso Hlatshwayo
Okay. That was very clear, thanks. And my second question is on the tariffs in Nigeria. My understanding is there was an article going around that there was a court judgement on the tariff increase for the 11 discos in Nigeria. And the judgement was against the increase. Can you provide some light on that, if AEDC is affected? Because I see on the revenues we are attributing the increase to the 20% increase in tariff since February 2016.

Owen Silavwe
Thank you for the question on the tariff in Nigeria. Unfortunately, because the matter is still in court we are unable to give a full response on that. However, as things stand, in terms of the billing we are obviously billing on the new tariffs that were passed in February. Thank you very much.

Operator
Thank you. Our next question is from Jonathan Imakando of Aflife. Please go ahead.

Jonathan Imakando
Hello. Thank you very much for the presentation. A couple of questions from me, the first being are you able to provide an update on the Kabompo project that you are looking at doing in Zambia? And then secondly, could you also advise or provide any assurance that CEC will be able to access the CBN facility which will be used to recover the outstanding market operator’s debt? And then, also, maybe just trying to understand part of your strategy. You had mentioned that you are looking at expanding into Southern Africa. Are you able to provide what countries that you would be looking at expanding to? And then also with this expansion the immediate concern is that with the operations you currently have in Nigeria it would seem like a handful. Would this not be over-extending or overstretching your capacity as you expand further into Southern Africa?

Mutale Mukuka
Okay, I will tackle the second question which is the question on whether AEDC will actually access this facility. I think from an industry perspective this funding is available for all industry players. And I think as earlier alluded to at the last call we had in March or is it April, we did indicate that the proceeds from this facility will essentially be used to pay down the market operator’s bill. Now, that will also help to a larger extent to restructure the balance sheet because a certain component of the balance sheet will essentially move into long-term liability. Now, there are a number of conditions which the parties are working on; they are essentially CPs to accessing this facility which, at the moment, are under discussion. And in that respect I will not go through the details of it. But we do anticipate that sooner than later AEDC should be in a position to draw down on this facility. There are discussions, for those who are following the news in the Nigerian power sector, around a second fund which will also be available to the players in the sector.

Owen Silavwe
Thank you very much. Just to comment on the two other questions. The second one was an update on Kabompo. I just want to state the fact that Kabompo, I think as you may know, is a project that was taken to the market by the government and we participated in the process, and we emerged the preferred developers of Kabompo. We have been following a process to try and bring Kabompo to financial close. We are at a stage where we have been looking at putting in place a viable PPA for Kabompo as well as securing land for the project. So those two processes are still in progress. We haven’t closed those processes yet. But they are quite critical to achieving a viable structure for the project. So basically in terms of progress that is where we are, and we will run with those processes. At this stage we are hoping that we will get clarity on that by the end of the year.

In terms of potential expansion into Southern Africa, what we believe is at the moment in as far as Southern Africa is concerned, we are more focussed on two markets which is Zambia and the DRC. And, therefore, what we do going forward would need to align very well with the two activities or the two markets that we are involved in so obviously we will need to be quite careful to ensure that if, for example, it is a strategy where we are trying to enhance our power sourcing then obviously that needs to support our current strategy to meet the requirements of the two markets where we are involved. So definitely we need to be quite careful in terms of selecting any opportunities that we get involved in; and again, we also need to evaluate our capacity to ensure that whatever investment that we get involved in, we are able to not just to invest in that but to manage it so well such that it delivers the value to the shareholders. Thank you.

Jonathan Imakando
Thank you. Just a follow-up on the questions. On the CBN fund, are you able to provide a timeline? I know you had said sooner rather than later. Are you able to give an estimate of what the sooner rather than later would actually refer to? And then the expansion, would it be correct to say it is going to be limited to Zambia and DRC and just expanding the current work that you’re doing there?

Owen Silavwe
Maybe just to start with the expansion, what I was basically saying is that in terms of the markets where we are selling power today it is mostly Zambia and the DRC. However, from a power sourcing perspective we are always looking around for new sources of power to ensure that we align that with our strategy to have multiple sources. So if we do find power sources which we can use to source power that we take to the market within the region we are obviously quite interested to be able to access those sources. If as part of that process we need to take a stake, be it in the power source itself or in ensuring that transmission capacity to enable the movement of power within the region is created, then obviously we need to take a strategic view on that. So we will obviously review those opportunities as they arise and then try and determine how aligned they are to the strategy that we are pursuing at the moment.

Mutale Mukuka
Okay, the second question on the CBN drawn down and the timeline to that, I think at this stage it is safer to say that we anticipate that this should be closed before year end. I guess we can give further updates as we go through the annual results review.

Jonathan Imakando
Alright, thank you.

Operator
Thank you. Our next question is from Prem Jain of University of Zambia. Please go ahead.

Prem Jain
Okay, good afternoon. Thank you very much for this presentation. I have a few questions. Number one, what net profit for Zambia operations in Dollars, not in Kwacha, for the six months of 2016 compared to six months of 2015? What net profit did CEC make for Zambia operations in Dollars for the six months of 2016 compared to six months of 2015?

Owen Silavwe
Would you want to ask all your questions so that we come back with answers?

Prem Jain
Okay. The second question is, I am not an accountant by profession to I should admit I have not been able to assimilate everything, whatever you presented. But on the face of it, the Nigerian operations look quite worrisome. And as far as I could understand the losses have increases. Rather of course you explained it’s because of the exchange losses, etcetera. And the last time I remember you said you were making an effort to isolate the two businesses, Nigeria and Zambian. So how far are you in that? And it still worries me sometimes whether operations in Nigeria are going to impact negatively on the Zambian operations. That is the second question. My third question is with all these things, good and bad, on the whole what do you think on the overall performance of CEC? How would you rate it - good, satisfactory or poor? Then number four, what is the correct valuation in your opinion of the CEC stock at present? The market valuation is about K0.70 but what do you think is the right value? Thank you very much.

Mutale Mukuka
Thank you, Professor Jain. I’ll start with the first question which is the profitability for the Zambian business. If we go through the slides there is a specific slide which addresses that question, that’s slide 18. If you see there, there are this year’s half year numbers as well as the comparative. So from a profitability perspective, we are looking at US$23 million compared to US$20 million the previous period. The second question is around CEC operations. I guess was just a comment that Nigeria is worrisome from a performance perspective, which is a correct statement. I think the macro environment in Nigeria, as well as some of the sector-specific issues in that market, have negatively impacted on the operations of the sector as a whole. And more specifically there are issues that have to do with the asset itself such as the exposure to foreign currency debt which has negatively impacted on the operations.

Now, I think we did discuss last time on the strategy around the Group from an operations perspective. One point I would like to mention is that at the moment we still continue and the intention is to continue to operate each asset on a ring-fenced basis. So from a cash flow perspective what you see as the Zambian cash flows they are ring-fenced in Zambia. What you see as the cash flows at AEDC they are ring-fenced at AEDC. So there is very limited exposure that the different businesses have with respect to each other. However, considering that they are all entities which form part of the CEC Group, there is some embedded risk which is there. And if you look at the strategy, which was partly also summarised earlier today, the expectation is that there may be some form of restructuring. Now, the detail of that is what we are currently working on and at this stage we can’t say what it is exactly. But I think we should be in a position to come back to market with more details once the various experts have opined on it.

The other question is around the market valuation, sorry the valuation of the CEC Group. I guess there are various ways of valuing a business and at this stage from a management perspective the only comment we can make is that we would want you to probably limit or we’d want you to limit what we give you to the numbers that we see. So if we look at CEC Plc’s net asset valuation it gives us some number there which to a larger extent gives us an indication of what the CEC Group or CEC Plc is worth. The other parameter which gives an indication of the valuation is, as you rightly noted, is the market cap which also gives some valuation. Now, at the moment if you just look at those two numbers, because those are factual numbers, one being provided by the market and the other being provided by and audited in the books of CEC there is currently a disparity. And I think from a strategy perspective what we are trying to do is try and see if we can unlock that value. Now, there are other more complex valuation methodologies which I guess we would look at which probably are not for this meeting but those will require more detailed analysis such as the multiples and the DCF valuation. But I think for this purpose what is important is if you look at those two you will see that disparity and that is what we are focussing on from a strategy perspective to address.

Now, the last question on the overall performance, is it good, satisfactory or poor, I think from our perspective we would want you to look at CEC as a Group as provided on slide 25 and 26, which essentially splits the different businesses in the different regions. If you look at it from a Zambian perspective business, yes business was tough in the half year - low generation, some mines closing up some of their operations, but even with that what we see is improved performance from a financial perspective. On the Nigerian side, the fundamentals are different and what we see there are increased losses on account of exchange losses as well as bad debt provision. So on the Zambian side I would say the performance was good. On the Nigerian side I would say the performance was poor. I hope that provides the answers.

Operator
Thank you. Our next question is from Francis Daniels of Anibok Investment Research. Please go ahead.

Francis Daniels
Thank you. My first question relates to the power trading. Who tend to be the customers for your power trading activities in other countries like Democratic Republic of Congo? And what is the potential for continuing to increase the power trading revenues and profits? My second question relates to Nigeria. Is Abuja and NSP, but more so Abuja, in compliance with the covenants or undertakings associated with the concession given by the Nigerian authorities in terms of the loss targets which are [inaudible] met? And then the last question is on [inaudible] bad debtors and where do these bad debtors seem to be coming from? Are they coming from the federal government sector, state government sector, corporate sector or individuals? That will do for now.

Mutale Mukuka
Sorry, Francis, can you just repeat the last question?

Francis Daniels
I was asking whether you have the ability to terminate supply of electricity to bad debtors. And where are those debtors? Are they in the federal government sector, the state government sector, the corporate or the individual sector? I’m trying to get a sense of the big source of your bad debt problems.

Owen Silavwe
Okay. Thank you for that. In terms of the power trading particularly with respect to the DRC market our focus at this stage has obviously been the mining sector in that market. And I think as we are all aware, the DRC as a country has been facing a shortage of power just like most of the countries in Southern Africa, and that obviously has opened up the market and created some opportunities there. It’s obviously a growing market. I think those who understand the DRC potential from a mining perspective, the market itself is still growing. There are other players in the market. And, therefore, obviously we need to have a strategy as to how we address the potential growth in that market. And that is something that we will continue to work on.

Mutale Mukuka
Sorry, was there a follow-up question or should go address all the rest?

Francis Daniels
No, I was going to wait for the answers to all the questions then I can come back on one or two of them.

Mutale Mukuka
Okay, sure. I guess the next question is around the obligations that the respective companies have to the government. Now, I’ll start with NSP which has a concession with the government. Now, at the moment the NSP is meeting all the concession obligations to the government. With respect to AEDC, there is a separate type arrangement which is underpinned by an agreement called the performance agreement. Now, under the performance agreement there are various parameters that are monitored. Probably f importance is the ATC&C loss target. And then the other material one is probably the connection rate.

Now, that is the obligation of the company to the government. But from a government perspective the obligation that the government has to the company includes such things as facilitating for the regulatory environment that should provide for cost-reflective tariffs at a certain time. Now, when we took over the assets there were certain parameters that were not immediately met as enshrined in the agreement. So there’s been certain discussions and negotiations to try and accommodate that because if you look at cost-reflective tariffs that couldn’t come in almost immediately because there were a lot of parameters such as affordability as well as the regulator felt that it was not fair to increase the tariffs to cost-reflective when the losses are still high. So what was agreed in that instance was a tariff migration path, which is currently being followed.

Now, if you look at what was agreed by the parties following that, AEDC has relatively done well and I think there are various reports that I want to believe were also circulated to the media as to the performance of the various discos relative to each other. Now, AEDC under the different quarters did quite well. I think in all situations it was in the 3 three or top 4 of the 11 distribution assets. So from that perspective, operationally the asset is doing quite well.

The last question is around bad debt and the ability to disconnect customers who have not made the payments as contracted. Now, at the moment I think there are aggressive plans to ensure that we increase the collection rate because it’s only after increasing the collection rate that we will have sufficient money to meet most of the obligations that we have. So other than the fact that there are certain sensitive institutions that you don’t want to just disconnect, such as hospitals, from a moral perspective, all the other institutions, to a larger extent, have been touched in one form or the other; with others entering into some form of time-to-pay agreements with AEDC. Now, in terms of proportion at the moment our supply to institutions that are called government ministries, departments and agencies is around 27% to 30% of the total bills that we have. Now, there are two aspects to the government institutions, which is the fact that we need to deal with the current bill as well as the accrued bills which are coming in from prior periods. Now at the moment, I think for those who followed the media, there was a big debate because apparently in this year’s budget which was approved it didn’t provide for prior year accrued liabilities. And at the moment the sector as a whole, not just AEDC, has been in discussions with the government to try and address those amounts, because those amounts are quite significant if you look at it from a sector perspective. However, if we move to the residential, commercial and industrial customers we’ve got all the leverage to negotiate and disconnect as the case might be.

Francis Daniels
Okay. Thank you very much for those answers. You mentioned 27% to 30% for the ministries, departments and agencies. I assume that is a percentage of revenue or electricity consumed. What is their percentage in the bad debt? Is it 27% to 30%, higher or lower?

Mutale Mukuka
It is slightly more than that as a proportion. Now, the reasoning there is that because bad debt provision is being made on an accruals basis so to say because we are doing it post the event, what we see is that the government ministries, in this year especially, the payment pattern has not been as good as we would anticipate. So it’s slightly more than the 30% that I earlier mentioned.

Francis Daniels
Okay. Have you actually disconnected longstanding bad debtors in Nigeria?

Mutale Mukuka
That is correct. That happens pretty much every day. We are always disconnecting whether it is government ministries or agencies in one form or the other. That is something that we are doing from an operations perspective. You always enter into some form of discussions and negotiations once you receive some payment in one form or the other.

Francis Daniels
I see. If I may revert to the power trading. Presumably, the mining companies in the Democratic Republic of Congo are suffering from the low commodity prices facing the Zambian mining sector. How are you able to satisfy yourselves that their demand for power is going to grow significantly since it seems that power trading has been very lucrative to you? What is it that gives them the ability to get power from you and you’re struggling in Zambia?

Owen Silavwe
I think maybe to just put it in perspective, remember even in Zambia we are able to meet the full requirements of our customers. I think it’s probably more important for me to state that we always give priority to our customers in Zambia in the sense that the infrastructure in Zambia is in a much better state from the perspective that this is infrastructure that we maintain ourselves, it is infrastructure that we are able to control. So from a quality of service perspective, we definitely deliver better quality in Zambia; and whereas we are getting 70% from ZESCO at the moment, for those who have opted to get their full 100% requirement we’ve put in arrangements to bring power from the region and ensure that they get their 100%. However, what has impacted us broadly in Zambia, broadly speaking, is the fact that the Zambian mines, particularly if we are looking at the big guys like Glencore, have decided to put part of their operations on care and maintenance while they try to improve their cost profiles. I think you are probably quite aware that Mopani had been investing in three new big shafts in Zambia and we have been working with them quite closely to ensure that those projects from a power supply perspective are successfully completed. Again, from a power infrastructure perspective, we just completed one project. We are beginning on another one; we’ve just signed an EPC contract with the contractor. So in terms of the demand that we’ve lost in Zambia we are also quite confident that a lot of that should begin coming back towards the end of next year and of course that is also dependent on what happens to the commodity prices on the global market.

Going to the DRC market, what you see is that the mines in DRC have obviously been impacted as well by the low commodity prices. However, part of the demand there is quite resilient. As I said, because of the power shortages in that country some of the mines are being forced to run more expensive diesel and, therefore, have been looking for cheaper solutions; and we are obviously just one of the players that have been trying to provide solutions in that market and ensure that the solutions that we provide obviously meet with their requirements. There is a lot of room for improvement in that area so if we want to sustain that business we obviously need to work with these customers closely as well as the national utility in DRC to ensure that we do provide much cheaper solutions that also meet the requirements of the mines over there.

Francis Daniels
I see. Can you explain for ignorant people like me the difference between power trading and international wheeling?

Owen Silavwe
Well, international wheeling in essence is basically just paying for transport. So if you are using somebody’s transmissions infrastructure then they will charge you for use of their transmission infrastructure. Whereas power trading involves buying power from a source and selling this power to an end user somewhere.

Francis Daniels
Okay. So you buy the power and then you transmit it yourself over your lines, I take it.

Owen Silavwe
In this case we transmit it both through third-party infrastructure but also through our infrastructure. So in a sense we have to pay wheeling and then we also take the risk of supplying this power to the customer.

Francis Daniels
Okay. How do you protect yourself against bad debt in the power trading area, especially as it is growing rapidly?

Owen Silavwe
There are obviously detailed mechanisms that are probably are not appropriate to detail on this call, but certainly we are quite aware of that and we need to work through some mechanisms to ensure that in a way we have some protection.

Francis Daniels
Okay. Thank you. That’s all my questions.

Owen Silavwe
Thanks, Francis.

Operator
Mr Silavwe, there are no further questions. Would you like to make some closing comments?

Owen Silavwe
Okay, thanks a lot for that. I see we’ve had quite some detailed questions today and it’s always a pleasure for us to be able to hear from you in terms of some of the concerns and some of the issues that you would want us to explain in detail. So thanks a lot for that, and thanks for the opportunity to be able to explain some of these in detail. But as always, we are quite open to speak to some of you. Those who get opportunities to be in Zambia, if you want to drop in by the CEC offices, we are quite happy to have that opportunity to talk. Thank you very much.

Operator
Thank you. That concludes today’s call. Thank you for joining us. You may now disconnect your lines.

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