Copperbelt Energy Corporation Plc RMB Morgan Stanley Conference 27 September 2016
Copperbelt Energy Corporation Plc
RMB Morgan Stanley Conference
27 September 2016
Today’s presenters
1
Owen Silavwe
Managing Director
Qualifications: Bachelor of Electrical Engineering degreefrom the University of Zambia and a Master of Science inPower Engineering from Chalmers University in Sweden.MBA from IMD, Switzerland
Years spent in the company: 18 years
Years industry experience: 19 years
Mutale Mukuka
Chief Financial Officer
Qualifications: Qualified UK Chartered ManagementAccountant and a Fellow of the Zambia Institute ofChartered Accountants. MBA from IE Business School inSpain
Years spent in the company: 13 years
Years industry experience: 16 years
2
The Zambian business
The Nigerian business
Consolidated Group performance
Overview of the CEC Group
Strategy and concluding thoughts
Q&A
3
About CEC Plc
1953 • Founded in 1953 as the Rhodesia-Congo Border Power Corporation
1966 • Company was renamed the Copperbelt Power Company
1982 • Became the Power Division of ZCCM, following the formation of ZCCM in 1982
1997 • ZCCM Power Division was privatised in 1997 and CEC formed
2006 • 77% of the CEC acquired by Zambian Energy Corporation
2008 • Listed on the Lusaka Securities Exchange
2009• Acquires 50% interest in Zambian ISP, Realtime Technology Alliance
Africa Ltd (Realtime) with the aim of commercialising its OPGW network
2010 • Receives infrastructure investment award – 2010 “Developer of the Year" presented by Africa Investor
2011• Enters into JV with Liquid Telecommunications to form CEC Liquid
Telecommunications Limited in Zambia to develop wholesale telecommunications platform
2013 • CEC Africa acquires an effective 45% stake in the Abuja DISCO and 20% in the Shiroro Hydro Power Station concession, both in Nigeria
2014• USD65 million successfully raised in CEC Plc Rights Offer • CEC’s international power trading segment makes a significant
contribution to the company’s earnings for the first time
2015 • CEC Liquid Telecom acquires 100% of Realtime (renamed HaiTelecommunications)
2016• 2nd Zambia-DRC Interconnector line commissioned• CEC receives Iconic Investor of the year award from the Zambia
Development Agency (ZDA)
• CEC Plc is a Zambian incorporated power transmission, generation and electricity distribution company listed on the Lusaka Securities Exchange
− CEC is a major developer of energy infrastructure in Africa and is respected for its skills in designing and operating transmission systems
• CEC Plc operates power transmission, generation and distribution assets in Zambia and Nigeria
− In Zambia, CEC is a market leading power transmission and distribution business and is the main supplier of power to the mines in the Copperbelt region
• Owns and operates an extensive electricity transmission and distribution network covering over 1,000km of 220kV and 66kV primary transmission lines
− In the DRC, CEC is a supplier of power to mining operations via the Zambia-DRC interconnection
− In Nigeria, CEC through its interest in CEC Africa, holds a 45% interest in the Abuja DISCO and a 20% interest in the ShiroroHydro Power Company
• CEC is a member of the Southern African Power Pool (SAPP) and is one of the largest international power traders in Zambia and the DRC
About CEC Plc Corporate development timeline
Source: Company information
CEC Plc Group structure
4
Zambian Energy Corp Ireland (ZECI) ZCCM – IH Institutional & Retail
Investors
CEC Liquid Telecom(Dark Fiber)
Kabompo Hydro(SPV)
CEC Africa
Hai Telecoms(ISP)
100%
50%
100%
100%
52% 20% 28%
KANN UtilitySPV
Abuja Disco
Shiroro Hydro (NG)
North South Power
CEC Africa Hydro CECA SL GenerationSPV
Generation Project
Key:
Investment assets Operating assets Projects in development
75% 50.1%100%
60%
Concession
100%20%
Zambian & DRC OperationsNigerian Operations
CEC Africa operates independently with no recourse to the CEC Plc balance
sheet
100%
Operating assets(Electricity transmission
and distribution)
Source: Company information
CEC PlcListed on Lusaka Securities
Exchange
5
The Zambian business
The Nigerian business
Consolidated Group performance
Overview of the CEC Group
Strategy and concluding thoughts
Q&A
Principal business activities in Zambia
6
Business units
Principal activities
Revenue
Contribution to CEC Plc
EBITDA
EBITDA margin
• Power transmission, distribution and generation in Zambia & DRC
• Main supplier of power to copper mines in Zambia• Supplier of power copper mines to the DRC• Long term contracts with payments in USD• Demand has a high level of resilience due to nature of
operations• Wheeling of power on behalf of the national state-
owned utility ZESCO• Owns and operates Zambian portion of the Zambia –
DRC interconnection
Energy
• USD363.1m
• 51%
• USD79.951m
• 22%
FY20
15
• 50% JV with Liquid Telecommunications• Largest and preferred wholesale bandwidth provider in
Zambia. CEC Liquid Telecom builds fibre and provides a national backhaul
• Hai Telecommunications is Zambia’s second largest ISP by market share
• Fibre network over 770kms with presence in Lusaka, Livingstone, Solwezi and Chirundu
• CEC Liquid Telecom has successfully leveraged CEC’s power infrastructure and allowed CEC to diversify revenue sources & build a new business
Telecoms
• USD21.144m
• 3%
• USD2.185m
• 10%
Source: Company information
7
Power generation is dominated by state-owned ZESCO, with the mining sector being the major consumer
Zambia’s mining sector is a major consumer of energy
CEC Plc is responsible for distribution of 50% of energy consumption in Zambia
94%
4%
2%
ZESCOCEC PlcLunsemfwa Hydro
69%
29% 2%
ZESCOCEC PlcLunsemfwa Hydro
ZESCO owns 94% of power generation in Zambia
CEC is engaged in 29% of transmission in Zambia
Domestic power shortfall expected to persist in Zambia
99.7% 99.7% 98.5%81.0% 81.2% 81.3% 85.6%
17.2% 17.0% 16.9% 13.1%
0%10%20%30%40%50%60%70%80%90%
100%
2014A 2015E 2016F 2017F 2018F 2019F 2020F
Hydropower Coal Oil Renewables
Hydro powered electricity remains dominant source of power
Structure of the Zambian power market
Source: EIU; BMI – Zambian Mining Report Q4 2015
8
CEC Plc - Zambia Asset Base & Infrastructure
Copperbelt Energy owns, maintains and operates the electricity distribution network in the Copperbelt region of Zambia
Leasehold title and wayleave rights of 99-year terms on properties and assets
High voltage transmission network (mostly 220kV and 66kV) designed for high reliability of supply
80MW Gas Turbine Generation capacity (including 8.8m litres fuel storage facilities)
Operates inter-connection with the DRC (handles bulk power flows into and out of DRC)
Comprehensive SCADA control system for 24hrs monitoring and operational control
Facilities for voltage control (sync condenser, cap banks) in various locations on network
China Copper Mine Ltd
Source: Company information
• Multiple sources of power, including access to SAPP sources which is important to satisfy customer demand not satisfied by ZESCO bulk supply agreement
• CEC takes reasonable risk on power purchase and makes margin on sale to customer
9
How the contractual power supply and demand arrangements work in Zambia
Back-to-back power supply and demand contracts mitigate trading risk
• Long term bulk power supply contract in place with ZESCO (up to 2020)
• Committed capacity reflects estimated demand from copper mines subject to 85% / 105% floor / cap
• Tariffs adjusted annually based on US PPI• Force majeure clause if unable to supply
power requirements to CEC• CEC has ability to access SAPP to satisfy
excess demand and mitigate risk of power shortages.
ZESCO
SAPP
• Long term ‘take-or-pay’ customer contracts
• Committed usage set on an annual basis with 90% of committed usage paid for (110% cap)
• Tariffs on ZESCO power adjusted annually based on US PPI with ability to pass-through 100% of BSA cost escalation
• Back-to-back force majeure clause with customers if unable to supply power due to ZESCO power shortages
• CEC enters into short term supply agreements to satisfy excess demand with SAPP sourced power
• ZESCO:
– Charge to wheel power to ZESCO customers in Zambia
– Secure payment mechanisms in place
• SAPP Utilities:
– Utilities using CEC infrastructure for a fee to move power within SAPP
Other customers
Mines
Source: Company information
• Aims to have a mix of third party and own generation sources to create a robust power sourcing pool in the region
Robust Power Solutions
10
How CEC Plc generates income
Sources of income for Copperbelt Energy Key customers
Pricing model
Electricity transmissionUSD277.6m
76%
Procurement of power at high voltage and transmission through CEC network to supply mine customers on the Copperbelt
Wheeling - distributionUSD11.7m
3%
Includes the provision of wheeling (wheeling) transportation services to mostly ZESCO to move power from point A to B in the CEC network
Other USD1.8m
1%
Peak generation & Other services: This service is priced as part of the supply contracts
Activity FY15 Description
Total income (Zambia) USD363.1m Total Revenue for the business
Power tradingUSD64.1m
18%
Operates a power trading business with power from regional sources sold the mines in the DRC market
Sundry incomeUSD7.9m
2%
This is mainly an amount representing customer contributions to dedicated assets used to supply their power requirements
Zambia DRC
China Copper Mine Ltd
COMILU
COMMUS
Source: Company information
Principles
• Tariffs are generally set back-to-back between the BSA and PSAs
• Tariffs are indexed annually to US PPI
• Applicable tariff is two-part consisting of capacity and energy components
• Industry-wide adjustments are taking root
Successful adjustments• Adjustments successfully effected
through industry-wide negotiations in 2008 & 2011
Challenges• Country working to adopt more
robust tariff setting mechanism• Considerable improvements
expected starting from next year
Regulation• Regulator adopting more proactive
approach to economic/technical regulation
• Process being perfected
13
21 21 24
34
40
FY10 FY11 FY12 FY13 FY14 FY15
30
49 44
47
61
80
FY10 FY11 FY12 FY13 FY14 FY15
172
218
267 279
326 363
FY10 FY11 FY12 FY13 FY14 FY15
11
Track record of consistently strong financial performance
Adjusted Revenue (USD’m)1 EBITDA (USD’m)2 & EBITDA margin (%)
Cash flow from operations (USD’m)3,4 & cash conversion (%)Profit after tax (USD’m)
36
26 29
37
28
48
FY10 FY11 FY12 FY13 FY14 FY15
Note 1: Revenue adjusted for the inclusion of power trading that has been included in core business activitiesNote 2: 2011 EBITDA positively impacted by arbitration award of USD 11.3mNote 3: 2010 cash from operations impacted on account of receipt of accrued amounts arising from tariff increase over and above USPPINote 4: 2014 cash from operations impacted by payment dispute with one customer – dispute later resolvedSource: Company info (extracted from IFRS account)Notes 5: Cash conversion equals cash flow from operations divided by EBITDA
120% 53% 66% 46%79% 60%
17.4% 22.5% 16.5% 18.7%16.8% 22.0%
7.6% 9.6% 7.9% 10.4%8.6% 11.0%
4.7%
6.8% 6.8%
5.8%6.3%
5.5%
FY10 FY11 FY12 FY13 FY14 FY15
8.1%
12.4% 12.2%13.1%
12.2%10.5%
FY10 FY11 FY12 FY13 FY14 FY15
Average: 6.0%
12
Strong balance sheet and attractive returns
Return on assets Return on equity
Debt to equityNet debt to EBITDA
Source: Company information(extracted from IFRS account)
0.7x
0.8x 0.8x
1.3x
0.9x 0.9x
FY10 FY11 FY12 FY13 FY14 FY15
Average: 11.4%
Average: 0.9x
1.1x
0.7x 0.7x
2.2x
1.6x
1.3x
FY10 FY11 FY12 FY13 FY14 FY15
Average: 1.3x
13
The Zambian business
The Nigerian business
Consolidated Group performance
Overview of the CEC Group
Strategy and concluding thoughts
Q&A
Principal business activities in Nigeria
14
Business units
Principal activities
• Acquired in 2013 and owned 45% by the CEC Group
• 40% interest retained by FGN
• AEDC Plc is a power distribution company in Nigeria with a franchise to distribute electricity in four states comprising the Federal Capital Territory of Abuja, Niger, Kogi and Nassarawa
• The AEDC Plc distribution zone covers 133,014km2 which has a population of at least 10.5 million people in 2.3 million households, dominated by the Federal Capital
• AEDC Plc has around 700,000 customers and an average electrification rate of 27%
Energy
• NSP has the concession to operate the ShiroroHydroelectric Power Plant
• Shiroro, commissioned in 1990, is presently Nigeria’s newest hydroelectric power plant
• The 600MW plant contributes around 11-15%? of Nigeria’s national generation
• It is located in the Niger State, 500 metresdownstream from the confluence of the Kaduna and Dinya Rivers, and is located within the AEDC Plc franchise distribution zone
• The Group holds an effective 20% minority equity stake
Power
Source: Company information
15
Understanding the performance of the Nigerian business – CEC Africa
Revenue (USD’m)
EBITDA
Source: Company information
Challenges facing the business
• AEDC distributor of power to 4 states (Abuja, Kogi, Niger and Nassarawa):
Sector has a huge growth potential given the population and the value to be derived from business turnaround activities linked to operational efficiency improvements
However, sector dogged by a number of issues:
• Liquidity challenges and culture of non-payment for consumed electricity
• Regulatory environment far from mature
• Macroeconomic issues mainly spooned by low commodity prices and Fx challenges
• NSP – concessionaire of the 600MW Shiroro hydro generation plant:
Turnaround strategy includes maintenance and operational efficiency improvements / renegotiating currency of the concession
Performance impacted by sector issues including liquidity and non-payment issues, and FX issues
• Nigerian businesses continue to be loss making and are driving overall losses in the Group
• Management is focused on:
Operational improvements and improvement in ATC&C losses
Aggressive debt collection strategies
Efforts to convert the USD loan to Naira to mitigate currency mismatch
Participate in regulatory reforms discussions
289
324
146
202
FY14 FY15 1H15 1H16
(117)
(177)
(33)
(55)
FY14 FY15 1H15 1H16
16
The Zambian business
The Nigerian business
Consolidated Group performance
Overview of the CEC Group
Strategy and concluding thoughts
Q&A
Consolidated Group financial performance: strong performance of Zambian business offset by losses in Nigeria
17
Adjusted revenue1 (USD’m) EBITDA (USD’m)
Profit after tax (USD’m) Dividends (USD’m)
Note 1: Revenue adjusted for the inclusion of power trading that has been included in core business activitiesSource: Company info (extracted from IFRS account)
311
612
710
315357
FY2013 FY2014 FY2015 1H15 1H16
127
(61)
(112)
(5)
13
FY2013 FY2014 FY2015 1H15 1H16
103
(149)
(197)
(78)
(157)
FY2013 FY2014 FY2015 1H15 1H16
4
0
14
16
FY2013 FY2014 FY2015 1H16
18
The Zambian business
The Nigerian business
Consolidated Group performance
Overview of the CEC Group
Strategy and concluding thoughts
Q&A
19
Strategy
• Focus on the core transmission business in Zambia and DRC
Increase capacity and efficiency through continued investment in the core power transmission assets
Focus on demand growth, maintaining and improving margins, cash conversion and returns on capital employed
• Increase wheeling of power on behalf of ZESCO
Leverage infrastructure to provide more extensive wheeling services
Segment to grow as Zambia brings on-stream new sources of power
• Build on highly profitable power trading business in Zambia and the DRC
Power trading, with power sourced from regional sources, holds huge growth potential
CEC has positioned itself for growth and aims to make a significant contribution to the DRC market going forward
• Co-investment with Zambian and regional partners on generation and transmission projects to create a robust power sourcing strategy
• Work with other sector players to achieve a more robust tariff framework in Zambia
• Transmission lines have provided opportunity to enter the telecoms space:
CEC Liquid Telecom with its retail arm Hai have made considerable progress to grow the market share in the last 4 years
• New services being rolled out, including LTE solution
• Business focused on growth and running a lean operation
• Offers good diversity to the power business
• Focus on business turnaround including maintenance and operational efficiency improvements, improved debt collection strategies, renegotiating agreements including currency of concessions and regulatory reform
• Aim to decrease losses in the business through focused implementation of turnaround strategies
Source: Company information
20
Concluding thoughts
The core Zambian business remains highly profitable, generating attractive USD linked revenue and EBITDA growth and stable margins
CEC’s core electricity transmission and distribution business is a market leader in electricity transmission and distribution in the attractive Zambian and the DRC markets
Group financial performance in FY14 & FY15 has been impacted by poor performance of CEC Africa, specifically relating to the acquisition of AEDC Plc in Nigeria in 2013
CEC’s current Group structure, consolidated financial results & limited liquidity at LuSEhave impacted the market value of CEC Plc
The Board of CEC Plc and management are evaluating options to unlock value for shareholders, which may include a restructuring of the business and a separate listing of the Zambian business on the JSE
2
3
4
5
1
3
Source: Company information
21
The Zambian business
The Nigerian business
Consolidated Group performance
Overview of the CEC Group
Strategy and concluding thoughts
Q&A
Q&A