The management of invested assets remained the focus of CEC Africa activities during the year ended 31 December 2019, with some continuing minor activity in project development. The Group’s theatre of operations remained predominantly Nigeria through its investments in Abuja Electricity Distribution Plc (“AEDC”) held through KANN Utility Company Limited and in North South Power Company Limited, which holds the concession for the operation of Shiroro Hydro Power Plant. It was a year of steadily improving operational fortunes for the Group, ending the year with increased working capital reserves and more importantly, a more clarified and favourable regulatory environment in Nigeria.
The Board and management maintained a positive cash flow with emphasis on cost control to ensure expenditure was kept in line with cash reserves and expected cash inflows. A conservative investment regime to preserve cash which was approved by the Board in 2018 was continued in 2019 to ensure that operations were funded in 2019 and there are sufficient reserves to fund 2020 operations.
Nigeria Business Environment
Nigeria – Macroeconomic Trends
The Nigerian economy continued to grow at above 2% throughout the year, supported by increased oil output and the services sector. This growth rate was relatively weak compared to peers and was below the forecast rate of 2.9%. The Central Bank of Nigeria ended the year with the monetary policy rate at 13.5%. Both Central Bank of Nigeria (CBN) and parallel market exchange rates between the Nigerian currency (Naira) and the United States Dollar (USD) remained relatively stable throughout 2019 and did not move much beyond the bounds established in 2018, with the CBN rate at around NGN306/USD and the more attainable parallel market rate at around NGN360/USD. The business environment was therefore stable, with neither significant threats nor opportunities arising from macroeconomic trends.
At the end of 2019, the world witnessed the emergence of the novel coronavirus, COVID-19. At the time of writing this report, it is expected that the health emergency posed by this virus may disrupt global trade sufficiently to have an impact on the availability of electricity retail meters in Nigeria. These are mainly imported from China and supply on the local market has already been strained even before the disruption of Chinese exports.
This disruption may have a negative effect on AEDC’s meter roll out program which eventually expects to install nearly a million meters over the course of three years.
Industry and Regulatory Environment
There were few major events in the Nigerian Electricity Supply Industry (NESI) in the first half of 2019, but regulatory activity picked up significantly in the second half of the year, starting with the publication of a long-awaited minor tariff review for the retail end of the value chain. Whilst the tariff review did not result in an immediate increase in tariffs to the consumers, the revised tariff order that was effective from 01 July 2019 was based on the concept of recognising the full cost-reflective tariff.
The order also provided for a Federal Government subsidy to cover any difference between the retail tariff and the economic/cost reflective tariff.
With this order, all electricity distribution companies in Nigeria have a mandated minimum remittance threshold which is a fixed percentage of their bill from the bulk supplier. AEDC was able to meet its payment obligations for the six months to the end of the year and has continued to do so in 2020. It must be noted that AEDC has contested some of the parameters used to calculate its minimum remittance levels and negotiations with the Nigerian Electricity Regulatory Commission (NERC) are underway.
During the year, the Federal Government of Nigeria increased the duty imposed on imported electricity meters from 5% to 45%. Importation of parts for the manufacture of meters locally still attracts only a 5% duty. Although the measure is meant to encourage the local manufacture of meters, the change in law has resulted in constraining the supply of meters on the market as there is insufficient local production capacity and the price of meters is controlled by regulation.
On the generation side, NERC issued a Merit Dispatch Order in September 2019. The effect of this order is that Shiroro Hydro Power Plant, being one of the lowest cost generators on the Nigerian power grid, now enjoys priority dispatch resulting in more predictable generation and increased overall energy production since the order was made.
Zambia – Macroeconomic Trends and Impact on Market Capitalisation
Whilst CEC Africa does not have significant operational exposure to the Zambian macroeconomic environment, the Company’s capitalisation is intricately tied to the ZMW/USD exchange rate. Whilst the stock price of CEC Africa suffered a ZMW0.02 (10%) decline during 2019, the market capitalisation fell by USD 6 million (20%) during the year due to the poor performance of the kwacha against the US dollar. Market capitalisation was at USD 21 million at the end of the year, having achieved a high for the year of USD 27 million in February 2019.
KANN Utility Company Limited (KANN)
The main activities at KANN continued to be management of the shareholder litigation process and discussions with the lender in respect of the loan facility contracted by KANN for partial funding of the acquisition of its equity in AEDC in 2013. Unfortunately, KANN and its lender were unable to achieve a restructuring of the loan facility and the lender has written to KANN to call the loan. There were no further developments on the loan during the year and no equity injection into KANN for the purpose of paying down the loan was achieved. Management notes that a semblance of regulatory stability was only achieved in the second half of 2019.
The Nigerian High Court in February 2018 registered the October 2016 London Court of International Arbitration ruling in favour of CEC Africa with respect to the shareholding dispute with Xerxes Global Investment (“Xerxes”) in KANN. Xerxes has since appealed the registration in the Nigerian Appeals Court and there was little progress in the appeal process in 2019. Following a demand for payment of amounts owed to it and failure by Xerxes to meet its obligation, CEC Africa has commenced winding up proceedings of Xerxes in the High Court of Nigeria. The expected outcome is the appointment of a liquidator by the courts.
Abuja Electricity Distribution Company PLC (AEDC) Collections continued to improve through 2019 and the clarity on commercial performance standards that has resulted from
the June 2019 multi-year tariff order revision has helped set targets for management and staff in AEDC. For the first time in its history, AEDC was able to breach the NGN 7 billion or USD19 million collection level in a month and the trend towards the year end was upward. Part of the improved performance has been attributed to the adoption of technological solutions in gaining control of the commercial process with the installation and launch of an end to end commercial management software.
AEDC was one of only two distribution companies that were able to fully meet its payment obligations to the market under the Minimum Remittance Order thresholds introduced in 2019. There are further regulatory changes expected in 2020 with respect to carrying out an extraordinary tariff review to reset performance obligations based on the Performance Improvement Plans that AEDC has submitted to the regulator.
North South Power Company Limited (NSP)
NSP operations continued to be mostly focused on the prudent management of the Shiroro Hydro Power Plant. Total energy generated in 2019, at 2,646,354.2MWh was 99.97% of the
forecast volume, and the second highest annual generation since NSP assumed operation of Shiroro Hydro Power Plant. On the hydrological front, copious water inflows during the rain season resulted in a prolonged spillage program from 18 September 2019 until 02 November 2019.
The Payment Assurance Guarantee (PAG) program which provided Government support for market payments to the generation companies was terminated at the end of 2018 as anticipated. A replacement program of NGN 600 billion or USD 2 billion support to the generators was announced and approved by the Federal Government but disbursement had not
begun by the end of the year. It is still expected to be paid out in 2020, back dated to the beginning of 2019.
NSP successfully raised a NGN 8 billion or USD 22 million Green Corporate Bond whose proceeds were used to pay down a loan and support strategic investment programs including the acquisition of a concession for a 30MW hydro in Kaduna State of Nigeria. Part of the proceeds of the bond have also been applied to the overhaul of one of the 150MW turbine and generator units. This type of overhaul is done once every ten years.
The NSP board and management have also been exploring opportunities for vertical integration through direct supply contracts with viable large commercial and industrial consumers, as provided for under the Eligible Customer rules promulgated by the regulator. Lack of regulatory clarity has meant that there was little progress in the vertical integration strategy, but interest remains strong in the market and several potential customers have signed up, awaiting regulatory approval of the transactions.
Emmanuel Katepa
Chief Executive Officer
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