A Rational Price Path for South Africa

Transcription

1 A Rational Price Path for South Africa

2 Finding the Balance Nersa s task in MYPD3 Serious Imbalance Not in Balance Balanced

3 c. Contain taxes and levies A Balanced Solution Set Business, Eskom, NERSA and Government all must put Skin in the Game Business accept prudent cost increases. NERSA allow Prudent Funding ESKOM improve efficiencies Government give policy certainty and coherence and contain taxes and levies Further super inflation increases will lead to a rapid decline in industry and manufacturing. 1. Safeguard Consumption - Competitiveness and Affordability 2. Prudent strategy towards financial ratings. 3. Improve Cost and Operational Inefficiencies 4. Policy certainty on Electricity Pricing. a. One hymn sheet for all on RSA pricing policy. b. Guarantees as required.

4 A Rational Price Path SA Revenue Price Paths Eskom Scenario 130 c/kwh by 2022! MYPD3 IRP 2010 Review! Growth CC? Sources: IRP2010, Eskom, Frost & Sullivan, DH Consulting, EIUG

5 MYPD3 Pricing South Africa out of the game Who will be able to afford it? Note: For some time into the future South Africa will remain reliant on its energy intensive sector to drive its economy and balance its foreign account. South Africa can ill afford to be an outlier on the Normal Distribution Curve of Intensity vs. Price

6 RSA Price/Demand Tipping Point - Leading to a collapse in demand Source: Eskom and The U.S. Energy Information Administration (EIA)

7 Growing demand from the Residential Sector - is being subsidised by Industry, whose consumption is dropping! = Growth Prognosis??? Sources: Eskom, Frost & Sullivan, EIUG

8 Electricity must be affordable for all Industry provides a substantial cross-subsidy to rural, agricultural and residential customers Tariff they pay Cost to serve Cross-subsidy from Industry Cross-subsidy = more than 10% of large customer tariffs!!!

9 Current prices already impair Competitiveness and Jobs - Eskom's MYPD3 Application will exacerbate the problem RSA Silicon RSA Ferro Chrome A survey of energy intensive users, indicate that electricity portion of total input costs, has on average increased from 9-18% between Si Manganese RSA

10 Foundry Industry is shrinking SA will struggle to reach the goals of the New Growth Path Source: National Foundry Technology Network Recent Plant closures: Eclipse West Plant- 500 jobs lost Eclipse East Plant partial closure Eclipse Dimbaza in EC- 350 jobs lost 2011 Krynie Brothers in Gauteng 22 jobs lost 2011 Belmec in EC 70 jobs lost 2011 Alfa Foundries Springs 60 jobs lost 2012 Crown Cast closed its doors 130 jobs lost

11 Rapid Loss of competitiveness - South Africa's commercial electricity price increases are rising too fast and already amongst the highest Source: NUS Consulting 2012 Survey 11

12 Residential tariffs breaching affordability - USA vs. RSA average residential prices US c/kwh USDc /kwh Source: : EIA, Eskom, Meter-it

13 Affordability Summary Current prices are already too high for some and rapidly eroding international competitiveness All tariff categories (industrial, commercial, residential etc.) are expensive when benchmarked internationally Prices rising too fast and too high risk of revenue collapse If Eskom s application is approved, this will threaten SA s economic growth objectives as defined in the New Growth Path and National Development Plan

14 A Prudent Funding Strategy - Consider all KPI s - Find a fair balance Equal amongst Peers

15 ESKOM will build an unnecessarily strong balance sheetat the expense of economic growth and jobs W A CC Input A ssumptions NERSA MYP D2 EIUG Notes/Source Gearing % 60.00% 60.00% Target gearing Risk free rate (nominal) % 10.80% 7.00% 10 yr bond R2023 (18/1/13) Debt premium (nominal) % 2.40% 2.00% To deliver debt cost of 9% Market Risk P remium (nominal) % 1.9% 3.8% Global equity risk premium Unleveraged Beta # Based on ave of 50 US Utilities Corporate Tax Rate % 28.00% 28.00% E xpected Inflation % 5.50% 5.50% Calculations Cost of debt Nominal before tax % 13.20% 9.00% Nominal after tax % 9.51% 6.48% Real before tax % 7.30% 3.32% Real after tax 5.26% 2.39% Cost of equity E quity beta (leveraged) # Harris & P ringle (excl. tax shield) Nominal after tax % 12.70% 11.56% Nominal before tax % 17.64% 16.06% Real after tax % 6.83% 5.74% Real before tax % 9.48% 7.98% Results W A CC (nominal before tax) % 15.0% 11.8% 10% 9% W A CC (nominal after tax) % 10.8% 8.5% 8% W A CC (real before tax) % 8.17% 5.18% W A CC (real after tax) % 5.9% 3.7% 7% NERSA-approved WACC 6% 5% 4% 3% 2% 1% 0% Current Eskom real pre-tax WACC of 8.16% excessive, given Eskom s risk profile as a regulated utility EIUG analysis indicates a market related figure of around 5.2%. Asset Revaluation based on MEAV high level of subjectivity REAL RoA (5x16% increases) MYPD3 '13/14 '14/15 '15/16 '16/17 '17/18 '18/19 '19/20 '20/21 '21/22 '22/23 REAL RoA (5x16% increases) MYPD4 Market related WACC

16 CFROI Indicates that the 16% provides excessive returns when benchmarked internationally Excessive Returns? 10 year median 100 globally listed power utilities CFROI Median 3yr 10yr EDF (France) 3.6% 3.6% Southern Company (USA) 3.3% 3.4% Duke Energy Corp (USA) 2.7% 3.1% ENEL SPA (Italy) 2.8% 2.9% Iberdrola S.A. (Spain) 3.4% 3.3% Similar Country Credit Ratings to SA CFROI used extensively worldwide by companies to evaluate investments as well as by asset/portfolio managers to evaluate investment decisions and economic performance

17 Does Eskom need a standalone investment Long Term Rating Moody's S&P Prime Aaa AAA Aa1 AA+ High grade Aa2 AA Aa3 AA- A1 A+ Upper medium grade A2 A A3 A- Baa1 BBB+ Lower medium grade Baa2 BBB Baa3 BBB- Non-investment grade Ba1 BB+ speculative Ba2 BB Ba3 BB- B1 B+ Highly speculative B2 B B3 B- Substantial risks Caa1 CCC+ Extremely speculative Caa2 CCC In default with little Caa3 CCCprospect for recovery CC Ca C C In default / / D grade credit Rating? Fitch: Eskom s ratings remain linked to the sovereign rating (Parent and Subsidiary Rating Linkage ) NERSA to assess the real need and costs associated In fact Eskom s financials are rated A. The down rating is mainly due to Policy Uncertainty! See Moody s ratings of Eskom Financials below NERSA could take the lead in facilitating improved understanding of policy and regulatory certainty by rating agencies and funders Headline Rating Moody s Financial Ratings of Eskom All A s

18 Eskom Viability can be attained within a reasonable time frame given lower increases Annual Increases '13/14 '14/15 '15/16 '16/17 '17/18 '18/19 '19/20 '20/21 '21/22 '22/23 MYPD3 MYPD4 16% N N N N Y Y Y Y Y Y 14% N N N N N Y Y Y Y Y 12% N N N N N N Y Y Y Y 10% N N N N N N N N Y Y 8% N N N N N N N N N N 6% N N N N N N N N N N Investment Grade Targets Leverage Ratio >20% Total Debt/EBITDA <3 DSCR >1.5 EIUG modelling applied a range of different average price increase scenarios together with Eskom MYPD3 operating and costs assumptions to test Eskom viability The results indicate that annual increases of around 10% reach standalone investment grade credit ratings over more manageable time frames (i.e. during MYPD4) Additional mitigating measures needed to enhance and accelerate viability and fundability Eskom operating and cost efficiency gains Government Guarantees Policy and Regulatory certainty

19 Retail Tariff Restructuring complicates the Revenue application Supported by EIUG in particular the unbundling of subsidies and cross-subsidies However, simultaneous consideration of MYPD3 and tariff restructuring poses additional challenges NERSA capacity and isolation of tariff impacts

20 Municipal price increases an even greater impact over and above Eskom MYPD3 ESKOM focus, but the threat to affordability is arguably even greater within the municipalities - consequences need to be assessed holistically Municipal electricity prices need to be more vigorously and carefully regulated - need for coordination between NERSA, DoE and NT on taxes, levies and surcharges

21 CFROI EIUG proposes 10% increases that align with international benchmarks 10 year median 100 globally listed power utilities Market-related Returns? CFROI Median 3yr 10yr EDF (France) 3.6% 3.6% Southern Company (USA) 3.3% 3.4% Duke Energy Corp (USA) 2.7% 3.1% ENEL SPA (Italy) 2.8% 2.9% Iberdrola S.A. (Spain) 3.4% 3.3%

22 The Set of Interdependent Recommendations 1. Business accept prudent price increases and, 2. Regulator review WACC of not more than 5.2% and MYPD3 increases of around 10% pa and, 3. Eskom cost saving ~9% i.e. R100bn over 5 years and improve operating performance: 1. UCLF <5% 2. EAF >86% and, 4. Primary Energy focus must be on improving operational issues and logistics regarding coal delivery not only mine-mouth prices and, 5. Government to produce policy certainty: 1. One hymn sheet for all on RSA pricing policy 2. Guarantees as required. 3. Contain taxes and levies 4. Review IRP2010

23 Thank You