Transcript of the Management Presentation on Operations & Finance Presentation at the 23rd AGM of CEC
Disclaimer:
The following transcript of the Operational & Financial Presentation made at the 23rd Annual General Meeting, held on 30 April 2021 may contain forward-looking statements and should not be used as a substitute for professional advice. These forward-looking statements are based on information available at the time the statements are made and/or management’s belief as of that time with respect to future events and may involve risks and uncertainties that could cause actual results and outcomes to be materially different, for which CEC cannot be held liable.
London Mwafulilwa: We’ll proceed with the next item on the agenda, which is resolution number two. The second resolution on the agenda is to receive the Directors’ Report and the financial statements for the year ended 31 December 2020 together with the report of the auditors of the Company. I will ask Mr. Owen Silavwe, the Chief Executive Officer, to make a presentation on the overview of the business during 2020. This will be followed by a report from the Chief Financial Officer, Mr Mutale Mukuka, who will present a summary of the financials for the year ended 31 December 2020. The auditor’s report will follow after the first two presentations.
Owen Silavwe: Thank you, Chairman. We’ll now present the 2020 full-year results for CEC. The presentation we’ll be making this morning is split into three parts. I’ll take the first part, which is giving highlights on the business, focusing on the operations and some of the progress we’ve made on implementing our strategy. The CFO, Mr Mutale Mukuka, will then come in and speak to the financial performance highlights. And then I’ll come in at the end to make some concluding remarks.
I’ll start with a commentary on the COVID-19 response. I think, as we all are aware, this pandemic has impacted everybody – businesses, individuals, economies – across the globe, and CEC was obviously not spared in this respect. As a Company, we needed to make sure that we implement all the necessary measures to keep both our employees and the contractors safe and ensure that we continue to deliver service to our customers. Indeed, we needed to adopt the guidelines as provided by the health experts.
As a Company, we did modify the way we work. We adopted remote working and, because of the nature of our business, we still needed some of the people to work at the office. If you look at the control staff and a number of our field staff, we still needed to make sure that people do go out. What that entailed basically was that we needed to think through how do we continue to deliver service, and that required that we streamline and, in a lot of cases, reconfigure our teams into much smaller teams so that they can be in different places at different times, and to ensure that these teams never get any opportunities to interact. That way, if any of the teams was affected, we would still have other teams continuing to work, so we equipped the teams with all the necessary tools to ensure that they continue to be safe and healthy. That way, at the end of the day, we are quite happy that the objective of us continuing to make our network available and ensuring that service quality continues was met.
We are also part of the larger community. We needed to make sure that we’re aware of what’s happening in the environment and came in to provide support where required, so we did support the government in a number of respects.
We did support the local community, some of the charities around us, the public health institutions, the schools, in as far as the challenges of managing COVID-19 are concerned. Overall, we believe that we delivered a strong operational performance and continue to meet the needs of our customers. From a perspective of safety and system reliability, and again, this is something that we pride ourselves on, year on year, and we need as a Company to make sure that we continue to ensure that the employees, the contractors, the customers can feel safe working on our system. More importantly, we need to make sure that we keep our system reliable, our services reliable and, indeed, secure on a continuous basis. Some of the achievements for the year: we managed to extend the number of man-hours without a system-based lost time accident to over 8 million man-hours.
That’s no mean achievement. Overall, we extended the number of years without a system fatality to 12 years. We’re quite proud of that record, and it’s obviously important that we continue to maintain this record going forward. Overall, our response times to system faults was pretty good, within world-class standards, and we continue to satisfy our customers’ expectations.
Just a few highlights on the business environment that we faced. On the power situation, the supply gap obviously peaked during the course of 2020 at about 850 megawatts.
Fortunately, there was a sort of categorization and segregation in the way we treated customers. So in as far as mine customers are concerned, we had, or the country had, to adopt load shedding as a way of managing the supply gap. The mining customers, fortunately, were given their full power requirements. This was important to try and mitigate the wide impact this would have on the economy if we didn’t ensure that the mines got all their power requirements.
The good news, though, is that the situation has significantly improved, particularly coming into 2021. We had very good precipitation for 2020-2021, but also the national utility, ZESCO, has done well in commissioning some of the new power plants. That has significantly improved the situation, and we’ve seen that load shedding has almost reduced to zero.
The other important issue to touch on is the contractual matters. As you recall, the Bulk Supply Agreement, that was the basis upon which a number of services were exchanged between CEC and ZESCO, came to an end at the end of March 2020. This agreement underpins power supply between CEC and ZESCO. It underpinned what we call domestic wheeling, which is the provision of transmission services by CEC to ZESCO locally, and then international wheeling, which is the service provided for moving power through each other’s network between CEC and ZESCO.
All these services, at the moment, are not backed by a commercial agreement. The parties have been trying to come to an agreement since the BSA ended. I have to report that up to this stage, no agreement has been reached yet particularly on the commercial issues. This matter is still outstanding.
There are obviously a number of issues that need to be resolved by the parties. One of the issues is that a number of the terms that are being discussed may require to be guided by the cost of service study, and that cost of service study has not been completed yet. We remain hopeful that it will be completed before year-end and then, obviously, that will come in handy in helping to resolve some of the issues that the parties are discussing.
The other issue is with respect to KCM. KCM used to have a Power Supply Agreement with CEC. The company used to be supplied power by CEC. The Power Supply Agreement between CEC and KCM came to an end at the end of May 2020. At that point, following a number of issues, the big one of course being that KCM owes CEC a lot of money, KCM chose not to renew that agreement with CEC but opted to sign a term sheet, as we understand it, with ZESCO.
Following that change, the contractual arrangements needed to be restructured given that KCM continues to be connected to the CEC network. A structure involving two agreements was foreseen – an agreement with respect to transmission services with ZESCO, and then another agreement called the Network Access Agreement between CEC and KCM. Those agreements are not yet concluded because of the same issues that I alluded to with respect to the Bulk Supply Agreement. These matters are obviously a priority to the business, and CEC will continue to focus on this and remain hopeful that we can resolve all these matters before the end of 2021.
I want to touch briefly on the commodity prices. We are all aware that the commodity prices are quite bullish at the moment, mostly being driven by the Chinese. Ore demand continues to be high for this red metal. On the supply side, we know that there’s a bit of a gap, so that is supporting the strengthening of the commodity prices, particularly with respect to the red metal. The drive for a much greener economy across the globe is one of those drivers for the favourable commodity prices that we’re seeing at the moment.
The other issue particularly important to our business environment is obviously the default by the Zambian government that’s continuing so far. We are aware that the government has missed three repayments on the Eurobonds. However, what’s more important is to note that the discussions between the IMF and Government have been reported to be going on very well, so we remain hopeful that something progressive will be coming out of those discussions.
Some announcements are anticipated in the course of May, so we are all hopeful that there will be good news coming out of there, and that will be quite key in supporting Zambia in restructuring its debt and addressing some of the macro issues that continued to impact the economy.
I will touch briefly on two key business segments, the other two business segments I won’t touch on. I’ll speak to the supply segments. The supply segment continues to look good. In 2020, we saw the recovery of demand with respect, particularly, to the mines but also in terms of our domestic wheeling. Demand has started to pick up, driven by a number of factors.
One, I talked to the favourable prices of copper and the global markets. Two, we have more power being available in the country so we anticipate that coming into 2021, demand recovery by our mining customers should continue. There are obviously a few downside risks, particularly with respect to the mines, the big one being the non-deductibility of mineral royalty tax.
The mines continue to talk about this. Yesterday, a mining indaba opened in Lusaka, and we are aware this is one of the key issues that’s being discussed there, so we hope between the mines and the government this is an issue that could be resolved quickly. If that is done, then we anticipate that most of the mines will continue to pour investments in the sector.
On the power trading side in 2020, we saw an improvement in trading margins driven by optimization of our sourcing contracts. On a year-on-year basis, our sales were somewhat flat, increasing by just over 1% during the year. We remain hopeful with some of the new agreements that are being signed that the demand will continue to grow in 2021. The key downside risk to this segment is obviously some of the transmission issues that we continue to work on within the Zambian network.
Briefly, on our 10-year capital programme – we continue to make good progress. This programme was obviously impacted by the COVID-19 pandemic that we continue to experience. However, we did implement a reasonable proportion of this programme – just over 50% of this was implemented last year. This programme is important with respect to modernization and digitalization of our network equipment and indeed the processes in the Company. This is important in driving efficiencies, reducing costs and improving the quality of service that we provide to our customers.
Touching briefly on some of the projects that we’re doing, the GET FiT Solar program is an important project. It obviously fits within our wider plan to invest in distributed renewable generation. This is important, in as far as enhancing our supply portfolio is concerned. At the moment, this programme is on hold. However, we’ve got a number of other projects that we are implementing within CEC. The key challenge with respect to GET FiT is the offtake issues that relate to the nominated off-taker with respect to this project, and those issues have to do with the bankability of the project. Obviously the off-taker needs to be credit-worthy to be able to support the bankability of the project.
One of the medium-sized projects with respect to a new customer that we’re implementing in the Ndola area is the Mwekera Copper Project. This project was somewhat impacted by COVID-19 and a number of tasks there could not be progressed. However, we remain committed to making good progress on this project. The teams, both from CEC and the customer side are working on measures to speed up the project. We are hopeful that we could complete this project before the end of this year.
Let me now comment on the common carrier declaration that was issued in 2020. As we remember, in May 2020, the Minister of Energy through issuance of SI 57 declared all of CEC’s transmission lines as common carrier and this followed the signing of that term sheet between ZESCO and KCM.
What was even worse was that this declaration of common carrier was followed by an interim tariff by the regulator, and in CEC’s view, this interim tariff was assessed to be 30% of our standard tariff. That was a big issue and, from a company perspective, we saw that as infringing on our property and commercial rights. We did engage the government in trying to resolve this matter. Unfortunately, that did not yield much progress. In the end, following advice from our legal experts, we sought judicial review. I have to report that as a Company, we are very pleased that on 26 February, the High Court delivered the ruling in favour of CEC, quashing both the decision of the Minister and the regulator. We are aware that the government did not like this. They did appeal the decision of the High Court, and at the same time, they sought to stay this decision of the High Court.
I have to report here that the stay that the government was seeking failed, fortunately for the business. In as far as their appeal is concerned, these are matters that we expect will be coming up in the next few months. As a Company, we remain committed to resolving this issue. We think the best position for the parties is to use this opportunity to try and finalize the contracts and focus on stabilizing the power sector so continue to seek those opportunities to engage. Thank you.
At this stage. Let me pass on the presentation to our Chief Financial Officer, Mr. Mutale Mukuka, who will speak to the financial performance of the business.
Mutale Mukuka: Good morning shareholders, and thank you, Chairman. I’ll speak to the financial highlights for the financial year 2020. If you recall, in September, when we had our last AGM, we did highlight three things as our key focus areas for the year 2020.
The 2020 financial statements have high levels of impairment, triggered by the payment default by KCM. The payment default position continued, suffice to say that the situation was partially mitigated by the load shift or the change in contractual arrangements between the parties, which Mr. Silavwe has already alluded to.
He has also already alluded to the fact that we are yet to conclude on putting in place the two agreements that are listed there. If you look at the 2020 financial results, those are the key issues that impacted the results in general. The lack of agreement in themselves meant that there was a lot more uncertainty in the environment. It also triggered quite a number of legal disputes. Management’s and the Board’s time was spent trying to mitigate that risk.
The second aspect is the fact that in the first half of the year, we had high levels of impairment arising from the KCM payment default. With the restructured position in load shifts, you’ll see that the level of impairment significantly reduces, so that in itself helped to reduce impairment and improved cash position for the business.
Because of that, this then leads us to talk about the more detailed drivers for the financial results. The first aspect, of course, was the default, which has been explained in some level of detail, which increased the level of impairment from USD55m the previous year to USD94m in 2020. The lack of agreement meant that we’re going to spend a lot more time, attention and increase in legal costs to try and mitigate the risk.
The last aspect is the fact that the business has not yet been receiving refunds. These are VAT refunds from ZRA. The risk there is in two forms. The first aspect is the fact that there’s no liquidity coming through. The second aspect is the fact that because these amounts are kwacha-based, the rapid depreciation of the kwacha implies that this amount significantly reduces, and in the 2020 financial results, you’ll see high levels of exchange losses relative to prior years. I think that could be one other aspect worth noting.
For the positive aspects, I think we’ve already spoken to the KCM load shift, which has a direct impact on reducing the impairments as well as improving the cash generation. The one thing that we are sure of as a business is our ability to manage our costs. And in this year, we essentially continued to pursue our automation and cost management initiatives. And what you see is a drastic reduction in cash costs by about 21%.
Overall, in managing the balance sheet to ensure that we move the balance sheet from a lazy balance sheet into an active balance sheet and also try and mitigate some of the risks that have been already alluded to, we managed to prepay USD20m to our lenders, thereby reducing our overall debt portfolio.
But lastly, one of the big things that we always try for is to ensure that we continue to keep our key stakeholder happy and, as a result, we managed at the end of the year to reward our shareholders with a distribution to the tune of USD34.1m.
Now the financial highlights at a glance: Reduced revenue from USD408m to USD371m. That in itself does not tell us much, it is important, but it doesn’t tell us much. It’s important now to look at the profitability matrices because what you see is that whereas we’re supplying KCM, for example, with power, we are now providing a service, which means that both revenue and cost of sales will be impacted and, therefore, in that instance your margins become more important.
The next aspect you see is that there was an improvement in our cash conversion for the reasons already alluded to. Typically, we target between 62% to 64% as our cash conversion ratio. This year, there was a slight improvement to 66% on the back of the drastic reduction in cash costs.
I already spoke to the impairments, the level of bad debt impairments, which significantly increased from USD55m to USD94m. Now, despite that drastic increase in impairments, we managed to post an EBITDA of USD32m, which is marginally lower than the prior year at USD36m. But it also feeds into the profit after tax of USD5.6m compared to USD12.2m the prior year.
I’ve already spoken to the cash and the gearing as well as the reward to our shareholders in the form of dividends which increased from USc1.9 to USc2.1. To put the numbers into context, it’s always good to have a trend analysis because then this allows you, our shareholders, to essentially assess the performance of 2020 relative to where we are coming from. So, if you look at the various financial matrices, you see that we’ve got revenue there, the trend was going up, and a significant drop in the year 2020 for the reasons that we briefly mentioned, which is the load shift for KCM. But you’ll see that that directly does not translate into a reduction in gross profit, and I think this is where looking at different matrices helps to inform the financial position of the business.
We see that there was some increase in gross profit and what pushes the EBITDA down really is directly linked to the level of impairments that we had, which pushed the EBITDA down from USD36m to USD32m when the normal sort of EBITDA level for the business is over USD100m as you’ll note in the years 2017 and 2018.
Again, looking at more trends for the business to assess whether some of these trends are permanent or temporary, you’ll see that from a cash perspective, we continue to strive to reduce cash costs because that’s the only thing that we believe we have control over.
On levels of impairment, as you see, we are coming from a period where we had close to zero impairments to the point when IFRS 9 was introduced. We expect some level of impairment, but definitely not to the tune that we are seeing in the years 2019 and 2020.
I’ve already explained the reasons for the exchange losses, but you’ll see that in prior years, again, we have not had this challenge. But in this year, two aspects – the non-payment of the VAT refund as well as the depreciation of the kwacha essentially increase the costs for the business in that we are now recognizing exchange losses to the tune of USD9.6m. Again, we are a capital-rich business, and as a capital-intensive business, we pride ourselves on using our assets as a means of generating our cash flows. You see that the trend of depreciation there is in a similar range.
When we look at our shareholders, we want to continue to reward our shareholders. We want to continue to post some form of return to our shareholders. Now you see that over the last five years, we have significantly grown the dividends from levels of USD16 million in 2016, and in the past year, we were at USD34m which was a 10% increase from the prior year dividend of USD31m. We hope that we can continue, despite all the risks that have been alluded to, to continue to provide our shareholders with a reward.
To put this into perspective, we generate wealth and we share this wealth amongst all the stakeholders. What you see there is that the local suppliers essentially take up about 55% of the wealth that is generated by the business, which goes to state the contribution that the business makes in the local economy, because once this money goes to the local suppliers, there’s a multiplier effect.
We also have, because of the specialized nature of the business, to procure certain services from offshore foreign suppliers, and we essentially procure about 17% of the services out of the money that we’ve generated.
What is interesting again to note is that despite the increase in shareholder rewards that we’ve seen on the previous page, the next largest receiver of our wealth is the government in the form of taxes. You see that they’ve gotten close to 10% of the wealth that we’ve generated if we look at it over the last five years, then we get to the shareholders who essentially got 7%, coming down to employees and then contractors and lenders. We always try to plough back some of this money through various initiatives with the communities and the areas in which we operate.
In summary, as a business, we are quite happy that having operated, if you look at it on a five-year basis, we have provided the necessary rewards to the various stakeholders. We continue to contribute to the economy.
We continue to contribute to the Treasury and continue to provide decent rewards to our shareholders as well as ploughing back into our communities.
I’ll now hand back the presentation for the MD to conclude. Thank you.
Owen Silavwe: I’ll now speak briefly to the priorities for 2021 and the outlook of the business. What are our priorities as a business for 2021? Key to our strategy in 2021, we need to focus on optimizing performance. What are some of the issues that we need to deal with in this area?
Key to the performance of the business going forward is the need to resolve these contractual issues. This is a top priority for the business, as I had indicated, so we’ll continue to focus on this, and hopefully, by the end of the year we would have resolved most of these issues.
The second critical issue under that pillar is the embedment of cost-saving initiatives. The CFO spoke to the reduction in cash costs that we saw in 2020 so we continue with implementation and the embedment of those initiatives in the business.
And again, important to our strategy is the successful delivery of the capital programme to support both asset modernization and the digitalization that should then help in driving efficiencies in our operations.
The second critical pillar of our strategy is the strengthening of our supply portfolio and the demand side arrangements. Some of the key issues that we need to deal with there are our investments in distributed renewable sources.
We see that as a critical ingredient in our supply portfolio that should help to mitigate price increases, but also help in supporting and strengthening the supply portfolio. This is important as we contribute to the wider energy transition agenda that the world has embarked on. We also continue to explore opportunities to offtake power from IPPs. In 2020 we signed two relatively small IPPs. That is something that we’re focused on as a business as we ensure that we strengthen our supply portfolio.
Additionally, we’ll focus on actively supporting and participating in shaping the country’s future electricity market. There are a number of national tasks that are going on at the moment, one of them being the open access regime.
There is a task which is supported by KFW where the country is trying to restructure its electricity market. We need to move as a country to the next stage of the electricity market, so work in that area is critical as the country seeks basically three things:
- One is to enhance the competitiveness in the market;
- second is to open up the whole of the transmission infrastructure in the country; and
- thirdly, it is to move to a more open economic pricing regime. So, as a company, it’s important that we support that process and actively play our role in shaping that process.
Thirdly, the critical pillar of whatever we do is obviously relationships. Both the Board and Management are quite focused on this important pillar. We do need to enhance relationships whether we are talking about government, local community, our investors, this is important. There is no way the Company can be successful without having good relationships. That’s something that, as a company, we continue to focus on.
In terms of the business outlook, I’ve spoken already to the performance of the red metal, which hit USD10,000 per tonne just yesterday. That performance, we believe, is going to spur productivity by the mining community around the globe and we hope to see increased demand in that area.
In terms of the impairments that have impacted the financial performance of the business in the last two years, as a Company, we believe we’ve come off the worst years and from this year going forward, we shouldn’t see those significant levels of impairment.
We’ll see some levels of impairment, but we think those will be quite minimal.
I’ve spoken to the customer demand and indeed the COVID-19. More importantly on COVID19, we’ve seen the rollout of vaccines, and I think this is obviously giving everybody confidence that things should begin to return to normal. If that happens, then we should expect a much better business environment going forward.
In terms of providing some guidance to you as our shareholders, I’ve just spoken to the COVID-19 situation, and as I said the rollout of vaccines should improve the environment and we do think as the environment improves this will facilitate speedy and efficient implementation of our capital expenditure programme, allowing continued realization of operational improvements and, indeed, service quality to our customers.
The second one is the impairments that I spoke to.
We do believe with a reduced level of impairment we should expect much improved profitability of the business from this year going forward. Overall, we think as a Company, we are achieving a very strong balance sheet, and this is important in supporting our augmentation of the supply portfolio that we intend to achieve. More importantly, this is important in supporting long-term growth and, indeed, dividend distributions.
In summary, what do we want you to take away from today’s discussion?
We think as a business we’ve managed very well the impacts of the COVID-19 situation. We focused on the safety and health of employees and contractors. We continue to maintain high security and reliability of the power network. We align to the need to support both the government and our local communities. That’s something that we continue to do as a business.
However, we want you to note that despite all these challenges, the Company delivered a very strong underlying financial performance, and we do think this can only get better going forward. And more importantly, the Company has achieved a very strong balance sheet to support growth and dividends going forward. Thank you.
Related downloadable transcripts
Transcription of the AGM Proceedings.pdf
Transcription of the Operational and Financial Presentation.pdf
Transcription of the Auditor’s Presentation.pdf
Transcription of the Q&A Session.pdf
