NERSA COMMENTS ON ESKOM S REVENUE APPLICATIONFOR 2018/19 FINANCIAL YEAR

Transcription

1 NERSA COMMENTS ON ESKOM S REVENUE APPLICATIONFOR 2018/19 FINANCIAL YEAR TO NERSA 16 NOVEMBER 2017 by Nico Bruwer (Member of the public)

2 CONTENTS Introduction Strategic considerations Important and strange aspects observed Financial position of Eskom Financial performance of Eskom Cash flow of Eskom Capex Corporate Governance Sales in Gwh and ZAR Tariff adjustments and inflation Debt Maintenance Trust Management of Eskom and Government Eskom as a standalone Impact on the economy Ideal structure Conclusion and recommendations

3 Introduction Request for comments welcomed Challenge taken up as there is no other alternative Why still experiencing challenges on requirements Background on Denton, Deloittes, Duvha, Brian Molefe fiasco, Chairman, Lies etc First strategic considerations Why is Eskom intent on hiding information? Nuclear against existing background?

4 Strategic considerations

5 Strategic aspects: Demand? Demand for electricity: No increased trend Primary energy expenses: growth 22.8% p.a over 10 years Savings in staff numbers? Releasing Government Guarantees? Optimising Capex? Substitutes? Households finding alternatives?

6 Important and strange aspects observed Eskom applying for 19.9% increase based on lower sales: Due to poor management and projections: Eskom says it should be 44% RCA increases not included: Another 30%? Structure of application not acceptable: piecemeal approach followed and not properly build feasibility Should be on same basis as project finance RAB: Ensure cost recovery but not efficiency: WACC calculated on R764 billion: 29% more than Balance sheet

7 Sales in GWh vs Sales in Rand plus forecast Revenue(R'm) Sales (GWh)

8 250 Sales versus Total production in GWh plus coal burnt (Mt) Coal burnt in power stations, Mt Sales (GWh) Linear (Coal burnt in power stations, Mt) Linear (Sales (GWh))

9 40 27,5 31,3 Eskom vs Cpi ,8 25, , , , ,3 7,1 6,16 5,4 4,5 5, CPI Average tariff Adjustment

10 Eskom s Financial Position Balance sheet under pressure Equity to debt declined from 39% in 2006 to 25% in 2017 Reason: Shareholder did not ensure proper structure Eskom relies on the ability of the Income Statement: No proper Long term Plan Current ratio 1:1 Affordable Capital expenditure not prudently performed: Risk if debt exceeds 50% of Total revenue

11 Equity versus debt % 39% 41% 37% 30% 29% 27% 27% 25% 24% 22% 27% 25%

12 600,0 500,0 Debt bearing securities to Revenue(R'billion) 297,4 322,7 355,3 400,0 254,8 300,0 160,3 182,6 203,0 200,0 100,0 0,0 50,7 40,3 30,2 36,1 40,1 44,4 106,0 74,2 128,9 138,3 147,7 114,8 91,4 71,1 54,2 164,2 177, Revenue Debt securities and borrowings(interest bearing)

13 Financial performance of Eskom Profit FYE 2017 R888 mil or 0.5% of Total revenue Cumulative tariff adjustments vs Cumulative Inflation: factor 2.59: Not affordable to economy Also destroying households affordability levels Lines moved apart since 2008: Serious implications Substitutes or alternatives become more likely

14 200,0% 180,0% 160,0% 140,0% 120,0% 100,0% 80,0% Cumulative revenue growth % 166,9% 155,7% 148,9% 141,6% 129,4% 103,8% 75,3% 174,8% 60,0% 40,0% 20,0% 11,1% 22,1% 44,0% 0,0%

15 Cumulative Eskom Tariff Adjustments vs Cumulative CPI 800 ( ) % Increase Cumulative CPI Cumulative Tariff Adjustment

16 Employee related costs During 2006 to 2017 employees increased cumulatively by 42.58% Yet sales in GWh stable: Horizontal line Only conclusion is that Eskom did not manage this Ave cost/employee up by 19.1% in 2017

17 60,0% Annual and Cumulative % increase in employee numbers 50,0% 40,0% 29,3% 33,3% 40,6% 41,2% 40,3% 43,5% 42,8% 30,0% 20,0% 12,2% 19,1% 22,8% 10,0% 0,0% -10,0% 3,9% 3,9% 8,4% 6,9% 3,6% 6,5% 4,1% 7,2% -0,9% 0,6% 3,2% Cumulative % increase in number of employees -0,7% Annual % increase in number of employees

18 800,0 Ave cost per employee (Based on direct costs)(r'000) 700,0 684,1 600,0 500,0 400,0 394,2 419,5 446,0 449,8 489,7 520,8 536,9 574,2 300,0 237,8 284,1 315,2 200,0 100,

19 Cash flow aspects Reality is that except for 2006 cash flow was negative after investing activities Major risk if occurs consecutively Funded by financing of R billion (Net figure)

20 60,0 40,0 20,0 0,0 (20,0) 12,3 14,0 (9,0) Net cash flow from operating and investing activities (R'billion) (1,9) (16,9) (22,9) 11,8 9,1 22,3 38,5 27,7 23,6 27,3 37,2 45, (40,0) (60,0) (80,0) (42,9) (47,5) (46,0) Net cash flow from operating activities (60,0) (58,4) (56,5) (56,4) (58,6) (62,3) Net cash used in investing activities

21 Rm Rm Rm Rm Rm Rm Rm Rm Rm Abridged Cash flow statement Net cash flow from operating activities Net cash used in investing activities (42 945) (47 524) (45 995) (60 013) (58 408) (56 461) (56 386) (58 590) (62 286) Net shortfall before financing (31 181) (38 406) (23 711) (21 491) (30 739) (32 819) (29 075) (21 348) (16 445) Net cash flow from financing activities Net (decrease)/increase in cash and cash equivalents (2 906) (3 381) (8 955) (11 121) (8 590) Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Adjustments (201) 65 (73) Cash and cash equivalents at end of year after adjustments

22 Eskom debt: Guarantees Taking on total debt of R534 billion Divided by total revenue of R177.1 billion debt exceeds revenue by factor of 3.02 Even for Eskom this is considered excessive SUBMITTED STRATEGIC PLANNING IN AFFORDABLE CAPEX NOT PRUDENTLY REVIEWED Risk if total debt exceeds 50% of revenue

23 600,0 500,0 Debt bearing securities to Revenue(R'billion) 297,4 322,7 355,3 400,0 254,8 300,0 160,3 182,6 203,0 200,0 100,0 0,0 74,2 106,0 164,2 177,1 50,7 128,9 138,3 147,7 40,3 30,2 114,8 91,4 71,1 54,2 36,1 40,1 44, Revenue Debt securities and borrowings(interest bearing)

24 2,50 Debt securities and borrowings(interest bearing)/revenue(times) 2,00 1,75 1,84 2,01 1,96 2,01 1,50 1,37 1,49 1,59 1,57 1,00 0,84 1,01 1,14 0,

25 3,50 Total debt to revenue(times) 3,00 2,50 2,41 2,63 2,47 2,62 2,47 2,55 2,81 2,98 2,93 2,16 2,16 2,00 1,50 1,00 0,50 0,

26 TRUST Good Corporate citizen? History makes it doubtful as well as management capability and practices Examples: Capex pgm, R&M, Cum Tariffs exceeding Cum inflation 2.59x, 7 CEO s since 2014 Tariffs increase but volume output decreased Employee numbers increased by 41% without additional sales Eskom not instilling trust Reputation: Focus on need for electricity and product rather than Total scenario of country

27 Eskom as a standalone Capex program: Can figures be trusted? Not investment grade Raises serious questions on management capacity Fitch B-, Moody s b3 and S&P ccc+ 2015: DSCR below 1 Eskom not sustainable without government support

28 Impact on the economy Cumulative electricity tariffs 2.59x cumulative inflation Many businesses forced to close due to Eskom Consumption and expenditure trends changed due to Eskom tariffs Away from private sector DSCR 0.82 (2015) 1.00(2016)

29 800,0 700,0 600,0 500,0 Cumulative cash flow from operating and investing activities 413,72 357,33 300,87 472,31 400,0 242,51 300,0 182,50 200,0 100,0 0,0 136,51 228,1 88,98 190,9 163,6 46,04 140,0 23,11 112,3 9,00 73,8 51,5 12,3 25,6 23,7 35, Cumulative cash flow from investing acitivities(r'm) Cumulative cash flow from operating acitivities(r'm)

30 GDP Sub-Saharan Africa vs RSA 7,3 7,1 7,1 8,1 6,7 6,6 5 5,2 4,3 5,1 3,4 5,3 5,6 5,5 3 4,6 4 3,6 2,9 3,1 2,2 2,3 0,4 1,6 1,3-1, ,7 1,7 1, South Africa Sub-Saharan Africa*

31 IDEAL STRUCTURE Strategic planning and strategy not performed well Imperative for hybrid structure not just focussing on Financial position or performance but also cash flow Require overall framework ito balance sheet linked to income statement and debt strategy Presently seems impossible but this is critical not only for Eskom but also for consumers

32 CONCLUSION How poor the management was is shown up in the Soweto figures where payment levels remained at about 16%, and Eskom has not improved the position, but acted to the detriment of other consumers. What may have been politically expedient is now biting, and consumer numbers are not regarded as a fair reflection of the consumer base. We have to work us out of the predicament over time only but the damage done is considered immense. The fact that we do not have power outages at present is also testimony to the fact that they have budgeted and forecasted wrongly. The only way out is to take hands and manage us out of this position and try to make Eskom a trustworthy institution for the benefit of consumers, and not only for Eskom.

33 Conclusion (cont) The following aspects are highlighted: A 19.9% increase in tariffs is not affordable Increase should follow and be in line with inflation Eskom should provide proper submissions on the same basis as for project finance submissions Eskom should provide develop a long term strategic plan for at least 5 years Information is important regarding the nuclear impact as well as other major projects Eskom should provide detail as to why they applied to National Treasury for exemptions of R31.3 billion. Eskom s piecemeal applications should be terminated where not a total picture is provided with assumptions. Eskom should prepare a sensitivity analysis providing details on the base case, worst case scenario and optimistic scenario.

34 Conclusion(cont) We are at crossroads with Eskom Heading for serious consequences Country cannot afford Eskom any longer the way it is run