The board of CECA is having an interesting time in Nigeria. Although they pledged to investors that they would ensure a return on investment, the market Nigeria is proving to be perilous. In the board’s statement to shareholders published 7 September 2017, they cited the following as some of the challenges in that market:
- Volatility and unpredictability of tariffs, caused by the failure of the regulator to adjust tariffs to account for movements in pre-agreed economic and sector indicators; thus making tariffs non-cost reflective;
- Mismatch between cost of energy increases (based on the Power Purchase Agreement foreign exchange hedge) and allowable tariffs by distribution companies, reducing gross profit for distribution companies;
- Non-payment by Government agencies of electricity bills, which severely impacted Abuja Electricity Distribution Company Plc (AEDC) due to its customer demographics;
- Lower than anticipated generation due to non-availability of gas
The impact of volatility and unpredictability of tariffs is seen in the interim financials which shows the firm’s revenue falling in comparison to last year by 41%. However, that is not the only challenge the firm is facing. The macro environment as we had indicated in our end of year review of the company has also not been too friendly. The depreciation of the Naira against all major currencies also impacted the firm’s ability to grow revenue.
Power purchase agreements can also be a challenge. There is no perfect contract therefore, continuous negotiation over hedging against currency depreciation has been challenge for the firm. This is where customers can apply their power of negotiation as has been seen in Zambia with the standoff between CEC and Mopani.
CECA is certainly in the process of revolutionizing the electricity industry in Nigeria. Therefore, shareholders will be curious to know how the firm’s receivables from Government will be settled. The management team must be pondering the pre-paid alternative because this allows them to realize revenue before the service is consumed. This is evident in the statement of financial position (balance sheet) which shows that current liabilities are currently more that current assets. What this means is that meeting obligations as they fall due must be very difficult. Some companies are forced to have a pecking order in terms of whose obligations get met first. Therefore, improving liquidity is key for the management team.
On a positive note, the board states that the group’s associate, North South Power has been profitable and contributed a share of profit of K24m compared to a loss of K141m in the prior period. Furthermore, the group’s loss for the half year 2017 at K806m is significantly lower than the prior period loss of K1.2bn. Shareholders however, will have to continue waiting for a dividend which hopefully will come when the company starts having positive earnings. However, the shareholder must also ask themselves the question, am I in it for the short term or the long term. Capital intensive projects such as these and in a country like Nigeria require patience and a close watch of the macro environment. Furthermore, although the incentive for investment in the country is there when population is considered, keeping an eye on what is happening on the oil side of the story is important. Dangote has indicated intensions of opening up a refinery for oil. When this happens, the competitive force of substitutes will also play a part in CECA game in Nigeria.