LETTER FROM THE CHAIRMAN
Coming off another period of uncertainty and disruption occasioned by the COVID-19 pandemic and the consequent tumult in the local and global economies, you can be proud as shareholders that your Company has delivered a set of commendable results and performed above expectation.
For the second year running, COVID-19 affected every aspect of life as we had previously known it and while some opportunities arose, particularly in sectors driven by technology and dependent on the movement of information, for businesses like ours many shifts still required some getting used to. Albeit, from an environmental sustainability perspective, a bright spot resulting from some of the Company’s responses to COVID-19 was the reduction in the amount of waste produced from consumption, arising from our remote working arrangements, leading to a smaller carbon footprint. Planting nearly 60,000 trees in different parts of the Copperbelt in 2021 to serve as carbon sinks for absorbing carbon dioxide from the environment further reduced our carbon emissions impact.
Financial and Operational Performance
Despite the challenges from a public health, commercial and relationship perspective, your company significantly reduced the level of impairment losses compared to the prior year and delivered demand growth across all business segments, resulting in the restoration of profitability, which came in at USD51.2 million. Operating costs were higher than prior year, largely occasioned by the higher than planned legal costs incurred on the various legal matters the Company was engaged in.
The Board’s focus on shareholder value creation and reward motivated the declaration and payment of an interim dividend of USD37.4 million, equivalent to 2.3 US Cents per share compared to 2.1 US Cents per share the previous year. Overall, we remained focussed on delivering consistent shareholder value year-after-year.
On the back of improved energy availability and national grid stability, we pushed more energy through our network, resulting in a positive network import variance of 5.1% over 2020. Capacity sales to our customers were higher by 2%, supported by the strong global appetite for copper.
Consequent to the country’s hydropower generating reservoirs receiving more water due to good rains, less aggressive demand-side management actions were taken at national level. Hence, the amount of power moved through our network on behalf of ZESCO under domestic wheeling went up 10%.
We maintained the integrity and high performance of our network to meet internal and regulatory benchmarks throughout the year. Even then, our network was affected by three blackouts experienced nationwide, causing widespread loss of load. We responded to the blackouts by deploying our standby generating plants to supply our customers with critical power required to assure the safety of their people and plants.
Our program to invest and reinvest in the assets of the business focused not only on tackling obsolescence through renewal and modernisation of our infrastructure but also on addressing environmental sustainability considerations. In that respect, feasibility studies are underway to assess the possibility of deploying cleaner fuels in order to improve the carbon footprint of our embedded thermal power generating units.
Detailed financial, commercial and operations performance reviews can be found on pages 42 through to 53 and from page 84.
The Company continued to operate without a formally signed agreement for the services exchanged with ZESCO even as the utilities ensured undisrupted service provision to all customers, pending re-engagement on the outstanding contractual matters, as I have later highlighted.
On the other hand, the colossal KCM debt remained unsettled while the mining operation equally continued to access services from the Company without the necessary agreements in place. The operational risk from the absence of agreements with KCM remains high but the credit risk was significantly mitigated by limiting CEC’s service provision to the use of system and grid connection necessities. KCM’s accumulated debt of over USD168.0 million remains unpaid. CEC has instituted arbitral proceedings to recover the debt in line with the provisions of the contract under which the services were provided.
Added to this was the general stress in the economy especially through to the third quarter, exacerbated by COVID-19, where the weakened fundamentals, including high inflation and currency depreciation, negatively affected the equity capital market’s performance and demanded the Company continues to reign in its expenditure amongst other measures.
CEC performed commendably well on the LuSE, maintaining and then surpassing the momentum from the previous year when the share price recovered from a dip of K0.70 to set a new high of K2.65 in November 2021. It was one of the 11 stocks to register capital gains on the bourse during the year. The stock appreciated 139% over the previous year.
The macro-economic situation began to ease up from around August, supported by positive investor sentiment alongside freer movement of people and goods resulting from the relaxation of COVID-19 restrictions in many countries, partly buoyed by the roll out of vaccines in most countries and adherence to tested coping measures.
The initial jolt to our business and operations from COVID-19 in 2020 settled into pragmatism and solidifying of practices that work. Despite not being spared the tragedy of the loss of some of our people, the Company strove to safeguard its employees and the community around it through provision of information, access to testing and vaccines. At the close of the year, 260 employees had received the Company-arranged free testing. With vaccines becoming available in the country from May 2020, 33% of staff had been vaccinated by year end through the public health vaccination program and Company-arranged drives.
Top of mind in 2021 was supporting and partnering with communities, government and health institutions in providing wide protection against COVID-19. We supported testing, vaccination, provision of personal protective equipment and equipping selected local hospitals with requisites to increase their capacities to provide in-patient care.
Status and Outcome of Key Developments
A number of issues are carry-overs from the previous year, mostly stemming from the commercial and legal disputes affecting the Company:
- Quashing of SI No. 57 of 2020: Chiefly, CEC commenced judicial review of the decision of the then Minister of Energy to declare its transmission and distribution lines as common carrier, an action CEC argued was intended to enable continued power supply to a defaulting customer – KCM. In February 2021, the High Court found in favour of CEC and quashed the minister’s declaration.
- Promulgation of SI No. 24 of 2021: Following the court’s quashing of SI No. 57 of 2020, the government issued another statutory instrument in April, with the same effect as SI No. 57 of 2020. The Company, again, made an application for judicial review to contest this decision. On 29 December, the Minister of Energy issued SI No. 94 of 2021, which revoked SI No. 24 of 2021, resulting in an amicable resolution of this matter.
- Conclusion of legal proceedings: In 2019, ZESCO instituted arbitral proceedings against CEC, demanding, as the main claim, payment of USD54.2 million for purportedly unpaid historical power charges and seeking a declaration that certain sums consequential to the ERB decision to increase electricity tariffs to the mines in 2014 were payable to it should that decision be found lawful in the Zambian courts. The sole arbitrator ruled on the matter and awarded USD16.4 million in principal and interest to ZESCO. The money has already been fully paid and the matter closed.
- Continued KCM indebtedness: KCM indebtedness to the Company grew to USD168.2 million as at year end. This is on account of additional accrued charges for network access and interest on delayed payment. It must be noted that the Company continues to incur impairment charges on portions of the KCM debt in compliance with IFRS 9. To recover money owed to it by KCM, CEC has instituted arbitral proceedings in line with its contract with KCM.
The current strategic plan covering the period to 2023 is yearly reviewed and updated to account for any significant developments in the environment, which might affect its effective execution.
Enhancing the health of our power network through continued and targeted renewal and replacement of infrastructure components and adopting more effective technologies that are more compliant to the demands of environmentally cleaner operations remain a key priority for the business. Towards this objective, spend on capital items during the year totalled USD16.4 million, doubling the previous year’s outlay.
Injecting diversity into the mix of the power we supply our customers by source has been a top-tier objective for the business, for which I am happy that we have made considerable progress so far. Our purchases of energy from IPPs like Dangote and Lunsemfwa rose about four-fold from 89.6GWh to 411GWh. This is a trajectory we will build on going forward.
We continue to record progress on our strategy for organic growth for the DRC market. Amid market challenges, including COVID-19, our sales in that territory registered a 10% jump over 2020. We remain on course to translate the relationships we have cultivated in that market over the years into tangible commercial transactions.
Growing responsibly entails mindfulness about what our growth means not only for the sustainability of the business but, of equal importance, also the planet. We acknowledge that energy is a very critical driver of climate change, hence, the many actions around the globe to shift development and consumption towards its better forms. In that regard, CEC has taken tangible steps towards a low carbon energy future through its plan to invest in renewables; pursuant to which the Company signed an EPC contract for the expansion of its 1MW Riverside Solar PV plant to 34MW.
Leadership and Governance
The Board effectively discharged its oversight and leadership responsibilities, focused on delivering sustainable value to the Company’s shareholders, protecting the bona fide interests of all stakeholders and assuring business success and longevity.
The Board met six times during the year while the committees of the board convened quarterly as scheduled and whenever required. In furtherance of COVID-19 prevention, all the meetings of the board and its committees were held virtually. Details of the board and committee meetings can be found on pages 56 to 59 of the report.
ZECI effected changes to its Board representation, appointing Mr. Siyanga Malumo on 24th February 2021 to replace the long-standing member, Mr. Abel Mkandawire, who died on 4th February 2021. The special shareholder, GRZ, appointed Mr. Arnold Simwaba as the Government Director/Special Shareholder Representative on 28th May 2021, replacing Mr. Trevor Kaunda.
Though not entirely new to the Board and the Company, the Board welcomes Messrs Simwaba and Malumo and relishes the benefit of their knowledge, expertise and skills. Mr. Simwaba previously served as an alternate to past Special Shareholder representatives while Mr. Malumo had served as an ex-officio member of the then Investments Committee.
The continued improvements to our integrated management systems have culminated into aligning our management systems with ISO standards. This was affirmed by the Company’s achievement of certification to the ISO standards of occupational health and safety (45001:2018), environment (ISO 14001:2015) and quality (ISO 9001:2015). Earning this certification is a major boost to CEC’s systems for managing the health, safety, environment and quality assurance aspects of its business.
The Company was recognised by the national environment regulator, ZEMA, for sustaining regulatory compliance and demonstrating commitment to continuous environmental improvement, and promoting sound environmental management within its corporate social responsibility. CEC was the winner of the 2021 Environmental Award for Overall Contribution to Sound Management Practices in Industry.
Looking to the Future
We believe COVID-19 will continue to be a factor in our operations over the coming year, albeit with lesser impact as ever more populations get inoculated and even though vaccine inequality remains, access is improving. This, coupled with other containment measures that countries continue to implement to varying degrees, should help us maintain a defensive stance against contagion, especially in the workplace, and minimise workflow disruption. Hence, we expect that a good number of capital projects that were rolled over should get be fully implemented in the coming year. We are excited and looking forward to the implementation of the project to expand the Riverside solar plant. Apart from increasing our own generating capacity and enabling cleaner operations, the upskilling and knowledge to be gained from developing and executing these projects are a store of value for the business.
Copper is still riding a crest on the international market with prices continuing on an upward trajectory for the foreseeable future, fuelled by the global hunger for a greener, cleaner world. The new government has clearly signalled its intent to capture more value from the metal by increasing production and has already set the desired target. Expectation, therefore, is high that supportive policy and fiscal stance will give weight to this ambition to, in turn, enable better investment into mining assets to actualize higher output. The Company is expectant that its customers will participate in this upturn.
It is hoped that the studies on the potential future market structure and regulatory changes that are on-going, including the CoSS, shall be concluded in full consultation with all stakeholders. Overall, we expect substantial improvements in the operating environment with more harmonious relationships. This should facilitate timely and amicable resolution of any legacy issues from the past two years. This is more so given that early in 2022, our management team re-engaged with the new management team at ZESCO to begin discussions on the outstanding contractual matters between the two companies.
I wholeheartedly applaud the belief, commitment, dedication and resilience of our people who have supported the Board and management through a very difficult 24 months. Without their loyalty, we would not have made the strong showing now being reported. They have not been spared the pain of COVID-19 at very deep and personal levels – with some of them losing colleagues and family members – yet they remained unwavering in their commitment to the Company.
I must thank our customers, the reason we are in business. They, too, have ridden a very rough patch keeping afloat in the midst of the pandemic and other uncertainties, including disruptions of their operations. Working together in partnership to craft solutions to their energy challenges and riding out the storms encourages the Company to continue placing their satisfaction at the centre of what we do.
You, our shareholders, have trusted us to steer this Company through very difficult and uncertain times. With the share price having rallied in 2021 to its highest ever, after having hit its lowest, your support serves as your endorsement of our leadership.
Different stakeholders partnered with us in the delivery of our services and especially in our ESG agenda. These include government and non-government institutions and individuals whose insights, availability and willingness to support made possible the Company’s strong performance in different areas.