eskom
feature
Eskom reports ‘solid’ financial performance, outlines future plans
2
www.southafricamag.com
Eskom focus ENERGY
Love them or hate them, we all have a lot to thank Eskom for. By Ian Armitage
E
skom has to overcome numerous hurdles. Chief amongst those is getting the public to save energy and getting municipalities to lower profit margins. It has also had to convince ratings agencies to maintain its ratings to keep borrowing costs down, while meeting increasing demand for energy. Eskom has worked tirelessly with the aim of becoming Œfinancially selfsustainable¹ and less reliant on government support. As part of that, unfortunately, tariffs will rise. Eskom has applied to Nersa for a 16 percent increase in electricity prices each year for the next five years. The new tariffs would come into effect in April. Public Enterprises Minister Malusi Gigaba described the increases as unavoidable. “It is not fair, it is necessary,” he said, following a recent business breakfast in Fourways. According to Eskom spokeswoman Hilary Joffe, 13 percent of the 16 percent increase is for Eskom’s “own needs”, while three percent is factored in to support the introduction of independent power producers. We caught up with Hilary recently and asked her a few questions…
www.southafricamag.com
3
Hilary, Eskom recently released an interesting set of interim results. Are you pleased with performance? I think it is another fine set of results. It is building on the three-and-a-half-year track record, following worst ever losses of R9.7 billion in our 2008/9 financial year. So yes it is continuing on the path towards financial stability, combined with our usual transparency that people expect from us. The results were at best flat and we have indicated that we in fact expect to be lower for the full-year because we make most of our profit in the first part of the year, so at best we will break-even in the second half. The one issue that is of concern, really for the country as much as for Eskom, is the decline in sales and that reflects the weaker than expected economic growth; particularly weak commodity sectors. Also the impact of the industrial unrest that we had in the latter part of the period and, to some extent, the buy-backs that we did earlier in this year. I think that is of concern and the trend is likely to continue in the second half of the year. We would really like to see the economy thriving. Is there anything you can do to lessen the impact? I think when we get our new capacity online from late next year - especially within the commodity sector - it will lift some of the constraint gradually over time. It won’t happen straight away as those units come online one by one so it will take a little time before we have really big increments of new capacity. That will help to make the power system much easier to manage and certainly lessen the need for measures such as power buybacks. On the upside, I think we may also be seeing some impact of the energy efficiency programmes, which we’ve had in place for some years now. So there may be an element of that in the demand growth to the extent that we still have economic growth in SA, with perhaps more efficient energy research. I think that is something that is certainly a positive. 4
www.southafricamag.com
Eskom focus ENERGY
You mentioned the new capacity that will be happening. Give me an update about it. Are you pleased with how the projects are coming along? I think this is really the area of focus over the next year - getting those new projects up and running. They really are mega projects. Medupi is really a huge project. It will be the first brand-new coal fired power station capacity that has been commissioned for almost two decades. It is a challenge and is one that we are giving a great deal of focus to. We are on track at this stage. The first unit of Medupi is due to be synchronised to the grid towards the end of 2013 and then the other units will be at eight-month intervals after that. At the end of 2014 we would start getting the units of Kusile online and there is the Ingula pump storage scheme, which is also advancing nicely. It is challenging but I think next year will be exciting. Why are those projects important? I think those projects are really important for not only for Eskom but also for the country, least because of the job creation. We have 17,000 people at Medupi and another 14,000 onsite at Kusile, so there are a lot of people working on these projects, and the positive for the country is that SA will be able to hold on to the legacy in terms of the skills that are being developed by these people. That is really one of the reasons why we have been urging that the country starts making decisions on new build projects beyond Medupi and Kusile – because we will need them.
There has been a lot of kickback from various people in the media about the tariff increase. What is your view on this? We don’t have the tariff increases yet. The Nation Energy Regulator of South Africa (Nersa) decides those, and they will make the decision after an extensive process of public participation. We have two weeks of public participation throughout the country and they take place in January. We have submitted our application and we have been having lots of talks and engagements with stakeholders across the board, appeared in parliament several times, engaged with customers and labour unions and everything else, and the public hearings are the next step. Nersa will make its decision on February 28 and the tariff increases would be implemented from the April 1 for Eskom customers and July 1 for municipalities. So, we submit our application to Nersa and they have a careful look at it. We have submitted inline with the strict regulatory rules that are in place. www.southafricamag.com
5
Why are the tariff increases important, from an operational perspective? They’re vital. The tariffs are another landmark event happening next year for us. It will really shape our positive financial sustainability for the next few years. In terms of what we’re trying to achieve it is to make sure that we have the resources to secure a supply of power to support growth and development in South Africa and that means ensuring we have the resources both to supply electricity using our existing assets, but also to support the financing of the new assets that we are putting on the ground – power stations, extensive investments, etc. In addition to our big building programmes there is also a very extensive programme of capital spending to lengthen lines, refurbish and extend our existing infrastructure. Eskom has applied for increases of 13 6
www.southafricamag.com
percent annually over each of the next five years plus another three percent to pay for new independent power producers, which are mainly renewable energy producers that the government programmes will be bringing in. We have to connect them to the grid and we have started signing agreements with them. A couple of things to note are, first of all, the regulator’s decisions were previously in three year cycle but we are asking for a five year cycle so that we can transition to cost effective tariffs over a longer periods and lessen the impact on the economy. I think also that even though the tariffs have been rising in the past four years, prior to that, for more than two decades, South Africa had below inflation electricity price increases. They were very far below cost reflective levels and we are migrating towards tariffs that cover the full costs of producing electricity.
Eskom focus ENERGY
What would be the consequence if, for example, Nersa came back and wanted something lower? People do ask us why the tariff increase is above inflation but there are a couple of factors. Some of our key input costs are rising at rates, which are well above inflation, most notably coal. We applied to the regulator for a revenue requirement to cover our costs and of the revenue that we’re applying for, between a fifth and a quarter is coal. Our coal costs have been increasing in the last three years at an average of 17 to 18 percent. We have capped that over this coming five years at 10 percent and we are hoping to even get it lower if we can agree a coal pact with the mining industry. Our maintenance costs are also running above inflation because our power stations are aging and it is very hard to keep the lights on. We’ve capped staff costs at about inflation with some provisions for head count increase because of the new power stations and new customers. We have built in significant efficiency savings over the five years and challenged ourselves to achieve efficiencies. We need to be looking at being an efficient producer. Some of the big drivers of the increase that we’ve put in for relate to the need to support the financing that we have done, and need to do, to invest in infrastructure. We have got R213 billion of debt on our balance sheet and we expect that over the next five years to increase to about R360 billion. That will be the kick as we finish the big build programme and we need to be able to support that. On the one hand, we have to allow for a return on assets. In practical terms, most of the return on assets that we protect over the next five years will go towards meeting the interest costs on that debt. One of the drivers is to ensure that we can get the ratings that we need from the rating agencies to support financing this build programme and future
builds that we would be able to do and at the moment Eskom has an investment grade rating only by virtue of the support that we have from the government. So we are looking at getting to a standalone investment grade rating by the end of the five year period. We want to emphasise that those investment grade ratings are very important in terms of enabling us to access the capital markets to get the funding that we need at cost effective rates for our very significant investment in capital spending that we’re doing. In the past we have been granted less than we’ve applied for and if that does happen – and it will depend on how much less than we’ve applied for – we will have to look at our numbers and see what we can do and what we can’t do. END To learn more visit www.eskom.co.za. www.southafricamag.com
7
South Africa Magazine, Suite 9 and 10, The Royal, Bank Plain, Norwich, Norfolk, UK. NR2 4SF TNT Multimedia Limited, Unit 209, 16 Brune Place, London E1 7NJ Enquiries Telephone: +44 (0) 1603 343367 Fax: +44 (0)1603 343502 andy.williams@tntmultimedia.com Subscriptions Call: +44 (0)1603 343502 andy.williams@tntmultimedia.com
www.southafricamag.com
Megawatt Park Maxwell Drive Sunninghill Sandton Tel: +27 11 800 8111 Fax: +27 800 4299 Email: CSOnline@eskom.co.za
www.eskom.co.za