CEC walks tight rope of pending legal cases at full year 2020
Copperbelt Energy Corporation Plc, Energy

CEC Zambia Plc has advised shareholders that it has a number of legal cases pending in the Zambian judicial system that may have a material impact on the company financials.

According to the company’s recently published 2020 Annual Report, “The Company is party to various legal cases whose outcome is dependent on the conclusion of the Zambian judicial process”.

The accounting standard IAS 37 defines and specifies the accounting for and disclosure of provisions, contingent liabilities, and contingent assets, CEC Management made estimates for the outcomes of these cases based on professional advice. The company further states that “there are some cases where, based on professional advice received, the directors have not made any provision”.

These particular Contingent liabilities are possible obligations whose existence will be confirmed by uncertain future events that are not wholly within the control of the entity. According to IAS 37, an example is litigation against the entity when it is uncertain whether the entity has committed an act of wrongdoing and when it is not probable that settlement will be needed.

The contingent liabilities that CEC recognizes in its 2020 annual report relate to the Energy Regulation Board tariffs of 2014 and ZESCO unilateral supply terms of 2020.

On the ERB tariffs of 2014

According to the CEC 2020 Annual Report…

The ERB awarded an electricity tariff increase to ZESCO applicable to all mining companies with effect from 2nd April 2014. The ERB communicated a 28.8% increase of tariffs under the BSA between ZESCO and the Company. This tariff was applicable for the period between April 2014 to December 2015. Most of the mines have contested this tariff increase and since commenced an action in the High Court by way of Judicial Review.

Pursuant to the ERB directive, ZESCO had invoiced the Company on the basis of the new tariffs and the Company, in turn, invoiced its mining customers on the same basis. From a working capital perspective, the Company payments to ZESCO during the period have been based on the old tariff prevailing (exclusive of 2014 ERB tariff pending determination in the High Court). In this regard, in the event that the court’s ruling will be in favour of the ERB, and subject to (i) an amendment to the BSA (ii) receipt of the amounts owed from the mining houses, the Company will be expected to pay an amount equivalent to USD225.0 million (2019: USD225.0 million) to ZESCO.”

On ZESCO unilateral supply terms of 2020

According to the CEC 2020 Annual Report…

“On 31st March 2020, following failed negotiations between ZESCO and the Company, the BSA terminated by effluxion of time. Despite the BSA having terminated, the parties – The Government, through the Ministry of Energy, ZESCO and the Company, have agreed to continue facilitating an efficient and economic supply of power to the consumers in the Copperbelt. As the Successor Agreement is yet to be agreed, ZESCO charges or invoices the Company for the purchase of power based on its unilateral supply terms. Following legal advice provided by the Company’s legal counsel, the Company continues to follow the terms or provisions of the BSA for all services exchanged between ZESCO and the Company until the parties negotiate and agree a mutually acceptable contract. In this regard, an amount being the difference between the ZESCO invoices issued to the Company and the computations based on the BSA terms has been recognized as a contingent liability. This amount is equivalent to USD56.9 million as at year end”.

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