Lusaka Securities Exchange listed Copperbelt Energy Corporation – CEC Plc’s stock has year to date shaved 20.8% in share price on account of asset sell-off pressure following energy distribution quagmires. Trading as ISIN0000000136 on the Zambian bourse, CEC Plc last traded at K0.99 a share from levels of K1.38 per share at start of year. The stock has gyrated from April 2019 highs of K2.1 per share levels when the Commonwealth Development Corporation – CDC deal for a K380mln takeover excited markets but stalled on one key factor, the Bulk Supply Agreement – BSA which had been mispriced and would not be renewed to allow for contractual anomalies. CEC Plc stock has lost 52.85% of market capitalization between 16 May 2019 to date.
Common carrier paradox of transmission and distribution. The energy distributors business model has been threatened by the recent move by the Zambian authorities to declare CEC transmission and distribution line as common carrier, through enactment of Statutory Instrument No.57 of 2020 made pursuant to the Electricity Act No. 11 of 2019. CEC Plc has since the 80’s monopolized transmission and distribution of power to the mining entities on the Copperbelt of Africa. This takeover can arguably be dubbed as nationalization on account of the monopolistic skew since the state is now in charge of all transmission and distribution. Following expiry of a 20 year Bulk Supply Agreement in 2017, extended 3 years to March 30, 2020 the Zambian government took over transmission and distribution of power which reduces CEC Plc to ‘wheeling’ in a move that allows for correction of adverse contract repricing on the sweet side, yet bitter for Independent Power Producing – IPP Investment pulse. This has raised early warning signals for potential litigation in the sector should the Zambian authorities not compensate CEC for its existing infrastructure for which the mines were serviced with.
Zambia’s energy pricing environment has for decades been unattractive for lack of cost reflective tariffs, yet the electricity prices have merely reflected a bloated power utility ZESCO Ltd. London based Energy Markets and Regulatory Consultants – EMRC were commissioned to conduct a $600,000 Cost of Service Study – CSS that will determine cost reflectivity and optimality of tariffs to allow for improved investment in the sector. This move to ‘nationalize’ distribution is bittersweet in nature.
Rising impairments erode earnings. FY2019 after tax earnings slid steeply to $12mln from $50mln year on year following a widening impairment stock comprising exposure to Vedanta’s Konkola Copper Mines – KCM, a mine caught up in the labyrinth of litigation following attempts by the state to liquidate the entity for license breaches. KCM owes CEC Plc K140mln in power bills for which the national power utility ZESCO is pressuring CEC Plc to settle.
Energy and Mining Outlooks at brink of gloom. CEC stock has been on a roller coaster of fluctuations reflecting asset sell-off pressure exacerbated by a series of events ranging from failure of CDC deal to assume majority stake of the energy distributor, uncertainty about power supply to the mines and the recent step by the Zambian authorities to ‘nationalize’ (the common carrier paradox) power transmission and distribution which in turn contradicts the liberalization of the energy sector. The power impasse with Vedanta’s Konkola Copper Mines concerning a $140mln debt owing denting earnings for the LuSE listed entity has resulted in unattractiveness in CEC’s stock price.
The ZESCO – CEC Plc relationship has always been a ‘shaky’ one and any risk analyst could have forecast that one day business risks would actualize as they have in this era. The irregularities (contract mis-pricings and structures) date as far back as the 80’s when agreements were executed in an unbridled fashion, unacceptable in the modern day times.
Forward looking, CEC’s future could be in the balance as wheeling only, may not sustain the current workforce and could mean job trims for the Copperbelt Province. This coupled with feeble mining sentiment could impact Zambia’s growth outlook.
The Cynical Investor and Kwacha Arbitrageur