Matjtila: Word of caution from Eskom Acting CEO

Collin Matjtila

In February 2013, the National Electricity Regulator of South Africa (NERSA) awarded us an annual tariff increase of 8% over the period from 2013/14 to 2017/18, substantially lower than our request for 16% per annum. While we will be able to complete the current capacity expansion programme using existing resources, the tariff level awarded means that we will not achieve cost-reflective tariffs by 2017/18.

We will not be able to expand the investment asset base beyond current commitments, and it will be a challenge for us to meet all regulatory requirements.

The environment that Eskom currently operates in poses a number of challenges:

The revenue shortfall of R225 billion created by the MYPD 3 determination requires significant adjustments in the business
Lower than projected local electricity sales are exacerbating the projected revenue shortfall
We used the open-cycle gas turbine stations more since the tools we used to reduce demand in the past – particularly, power buybacks and the short-term power-purchase programme – are no longer available. We will not be able to continue this practice over the longer term as we cannot afford this nor maintain our liquidity buffer
Payments to IPPs, which are regulated in terms of their power purchase agreements, have increased, and the costs are currently higher than anticipated by NERSA. The regulatory methodology allows the recovery of prudently incurred IPP costs as a pass through with a timing delay in the reimbursement
There is increased pressure on the credit rating associated with the country’s credit profile and Eskom’s financial profile
Our credit ratings underpin our ability to borrow sufficient volumes at affordable levels. Eskom’s foreign-currency ratings are on the low end of investment grade (Baa3 from Moody’s) and second-lowest (BBB from Standard & Poor’s) investment grades. Both ratings have a “negative” outlook. In December 2013, Fitch affirmed Eskom’s long-term local currency issuer default rating of BBB+. Eskom is at risk of a further downgrade if South Africa’s sovereign rating, presently on “negative” outlook, deteriorates, or if our standalone financial profile weakens materially

In combination, these factors are putting a great deal of pressure on our financial sustainability. Accordingly, we are discussing possible funding options with the shareholder. In addition, we have applied to NERSA for the regulatory clearing account (RCA) adjustment. The RCA is necessitated by the fact that the revenue and expenditure approved for Eskom is largely based on forecasts. The MYPD rules require that from time to time a reconciliation of these variances be done in order to quantify over/under collection of revenue and over/under-expenditure on Eskom’s part. NERSA allows only expenditure that has passed the efficiency test. Should the results of the assessment indicate that Eskom has to re-imburse the customers, then the price of electricity would have to decrease proportionally to the RCA balance. Similarly, if the customers have to re-imburse Eskom, the price would have to increase. Depending on the quantum of the RCA balance, it is either carried over to the following financial year, or a tariff adjustment is effected in the following financial year or the MYPD is re-opened and the full stakeholder consultation process is undertaken before any tariff adjustment is allowed.

While we pursue these discussions, we will continue to strengthen internal efficiencies, defer spend where possible and reduce costs through our business productivity programme. However, cost-reflective tariffs remain a necessity for operational and financial sustainability.

We have identified and largely secured funding for the current capacity expansion programme and have sufficient liquidity to meet our immediate liability requirements. We are confident that we will be able to secure the remaining funding for the current capacity expansion programme. However, this will have to be balanced against the negative outlook from the rating agencies and the possibility of a downgrade due to the deterioration in the credit metrics.

Eskom achieved a group net profit of R7.1 billion for 2013/14 (2012/13: R5.2 billion) which was significantly affected by the profit on the embedded derivatives of R2.1 billion (2012/13: loss of R5.9 billion). The profit should be viewed in context of Eskom’s holistic financial position. The group is highly leveraged with a debt-to-equity ratio of 2.06 at 31 March 2014 (2013: 1.84). Eskom’s gross debt as at
31 March 2014 is R255 billion (2013: R203 billion) and will continue to increase as we execute our funding plan. Both the free funds from operations as a percentage of gross debt and gross debt as a percentage of earnings before interest, taxation, depreciation and amortisation ratios are significantly below investment-grade targets.

Collin Matjila is Acting CEO at Eskom. This is an extract from the 2013/14 Eskom Annual Report


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