NERSACOMMENTS ON

ESKOM’S THIRD MYPD3 RCA FOR YEAR 2 TO 4 (2014/15 TO 2016/17) APPLICATIONS

TO

NERSA

11 MAY 2018

by

Nico Bruwer

(Member of the public)

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

RCA applications

Ideal structure

Possible alternatives

• Conclusion and recommendations

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?

Strategic

considerations

Strategic aspects: Demand?

• Demand for electricity: No increased trend

• Primary energy expenses: growth 22.8% p.aover 10 years

• Savings in staff numbers?

• Releasing Government Guarantees?

• Optimising Capex?

• Substitutes? Households finding alternatives?

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%. Granted 5.23%

• RCA increases R66.69 billion: Another 37.65%

• 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

36 39 44 53

71

91

113

127 137

163

187

197

216 208

218 224

215 219 224 225

217 218 216 214

229 235

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Sales in GWh vs Sales in Rand plus forecast

Revenue(R'm) Sales (GWh)

119 125 121 123 125 125 123 122 119 115 114

218 224 215 219 224 225

217 218 217 214 215

-

50

100

150

200

250

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

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))

7,1

10,3

6,16 5,44,5

5,7 6 6 6 6

5,9

27,5 31,3

24,8 25,8

8 8 8

12,69

9,4

0

5

10

15

20

25

30

35

40

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Eskom vs Cpi

CPI Average tariff Adjustment

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

39%41%

37%

30%29%

27% 27%25%

24%22%

27%

25%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Equity versus debt %

36,140,1 44,4

54,271,1

91,4114,8

128,9 138,3 147,7164,2

177,1

30,2 40,3

50,7

74,2

106,0

160,3

182,6

203,0

254,8

297,4

322,7

355,3

0,0

100,0

200,0

300,0

400,0

500,0

600,0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Debt bearing securities to Revenue(R'billion)

Revenue Debt securities and borrowings(Interest bearing)

0,84

1,01 1,14

1,37 1,49

1,75

1,59 1,57

1,84

2,01 1,96 2,01

-

0,50

1,00

1,50

2,00

2,50

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Debt securities and borrowings(Interest bearing)/Revenue(Times)

1,28

1,521,57

0,97 0,99

1,42

1,12

0,91 0,88

0,77

1,17

1,00

0,00

0,20

0,40

0,60

0,80

1,00

1,20

1,40

1,60

1,80

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Current ratio

Financial performance of Eskom

• Profit FYE 2017 R888 mil or 0.5% of Total revenue

• Cumulative tariff adjustments vs Cumulative Inflation: factor 2.96: Not affordable to economy

• Also destroying households affordability levels

• Lines moved apart since 2008: Serious implications

• Substitutes or alternatives become more likely

11,1%

22,1%

44,0%

75,3%

103,8%

129,4%

141,6%148,9%

155,7%

166,9%

174,8%

0,0%

20,0%

40,0%

60,0%

80,0%

100,0%

120,0%

140,0%

160,0%

180,0%

200,0%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Cumulative revenue growth %

2000 2001 2002 2003 2004 2005 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Cumulative CPI 105 111 122 129 130 135 141 151 167 177 187 195 206 219 232 246 260 276 293 310

Cumulative Tariff Adjustment 106 111 118 128 131 136 143 152 194 254 317 399 431 465 503 566 620 633 666 917

105 111 122 129 130 135 141 151 167 177 187 195 206 219 232 246 260 276 293 310

106 111 118 128 131 136 143 152194

254

317

399431

465503

566

620 633666

917

0

100

200

300

400

500

600

700

800

900

1000

% In

cre

ase

Cumulative Eskom Tariff Adjustments vs Cumulative CPI (2000-2017)

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

3,9% 8,4% 6,9%3,6% 6,5% 4,1%

7,2%0,6%

-0,9%

3,2%

-0,7%

3,9%

12,2%

19,1% 22,8%

29,3% 33,3%

40,6%

41,2%40,3%

43,5%

42,8%

-10,0%

0,0%

10,0%

20,0%

30,0%

40,0%

50,0%

60,0%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Annual and Cumulative % increase in employee numbers

Cumulative % increase in number of employees

Annual % increase in number of employees

237,8

284,1 315,2

394,2 419,5

446,0 449,8 489,7

520,8 536,9 574,2

684,1

-

100,0

200,0

300,0

400,0

500,0

600,0

700,0

800,0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Ave cost per employee (Based on direct costs)(R'000)

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 R271.57 billion (Net figure)

12,3 14,0

(1,9)

11,8 9,1

22,3

38,5

27,723,6

27,3

37,2

45,8

(9,0)(16,9)

(22,9)

(42,9)(47,5) (46,0)

(60,0) (58,4) (56,5) (56,4) (58,6)(62,3)

(80,0)

(60,0)

(40,0)

(20,0)

0,0

20,0

40,0

60,0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Net cash flow from operating and investing activities (R'billion)

Net cash flow from operating activities Net cash used in investing activities

2009 2010 2011 2012 2013 2014 2015 2016 2017

Rm Rm Rm Rm Rm Rm Rm Rm Rm

Abridged Cash flow statement

Net cash flow from operating activities 11 764 9 118 22 284 38 522 27 669 23 642 27 311 37 242 45 841

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 38 871 35 500 20 330 28 727 21 784 41 519 17 954 40 927 7 855

Net (decrease)/increase in cash and cash equivalents 7 690 (2 906) (3 381) 7 236 (8 955) 8 700 (11 121) 19 579 (8 590)

Cash and cash equivalents at beginning of year 10 893 18 382 15 541 12 087 19 450 10 620 19 676 8 863 28 454

Cash and cash equivalents at end of year 18 583 15 476 12 160 19 323 10 495 19 320 8 555 28 442 19 864

Adjustments (201) 65 (73) 127 125 356 308 12 561

Cash and cash equivalents at end of year after adjustments 18 382 15 541 12 087 19 450 10 620 19 676 8 863 28 454 20 425

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

36,140,1 44,4

54,271,1

91,4114,8

128,9 138,3 147,7164,2

177,1

30,2 40,3

50,7

74,2

106,0

160,3

182,6

203,0

254,8

297,4

322,7

355,3

0,0

100,0

200,0

300,0

400,0

500,0

600,0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Debt bearing securities to Revenue(R'billion)

Revenue Debt securities and borrowings(Interest bearing)

2,16 2,16

2,41

2,63

2,47

2,62

2,472,55

2,81

2,98 2,93

0,00

0,50

1,00

1,50

2,00

2,50

3,00

3,50

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Total debt to revenue(Times)

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 2.96x, 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

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

Impact on the economy

• Cumulative electricity tariffs 2.96x 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)

12,3 25,6 23,7 35,551,5

73,8

112,3140,0

163,6190,9

228,1

9,0023,11

46,04

88,98

136,51

182,50

242,51

300,87

357,33

413,72

472,31

0,0

100,0

200,0

300,0

400,0

500,0

600,0

700,0

800,0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Cumulative cash flow from operating and investing activities

Cumulative cash flow from investing acitivities(R'm) Cumulative cash flow from operating acitivities(R'm)

4,65,3 5,6 5,5

3,6

-1,5

2,9 3,12,2 2,3

1,6 1,30,4

0,7 1,11,7

7,37,1 7,1

8,1

6,7

4

6,6

5

4,35,2

5,1

3,4

3

4 44

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

GDP Sub-Saharan Africa vs RSA

South Africa Sub-Saharan Africa*

IDEAL STRUCTURE

• Strategic planning and strategy notperformed well

• Imperative for hybrid structure not justfocussing on Financial position orperformance but also cash flow

• Require overall framework ito balance sheetlinked to income statement and debt strategy

• Presently seems impossible but this is criticalnot only for Eskom but also for consumers

RCA APPLICATIONS

• Total claim for 3 years R66.685 billion

• Revenue claim 84% of total and other aspects

• Payback by Eskom is 13%

• No steps taken to counter lower sales

• Major aspect: Know they can claim it back

• IPP only claimable aspect

• Eskom not managed as business entity: Claim should be in the order of 5 to 6%

MYPD3 RCA Trends Decision Application Application Application

RCA 2013/14 RCA 2014/15 RCA 2015/16 RCA 2015/17

Revenue 6 175 8 787 15 578 20 016

Independent PP(IPP) 580 4 346 620 2 452

International purchases 2 700 3 299 3 567 2 282

Coal 2 000 574 3 258 (359)

Open Cycle gas Turbines (OCGT's) 1 252 1 944 689 (1 259)

Other primary energy 72 1 355 728 722

Environmental levy (312) (683) (1 180) (1 404)

Nuclear decommissioning of R830 m

from RCA 2012/13 decision phased in

over 10 years 83 83 83 83

Nuclear decommissioning of R361 m

from RCA 2015/16 decision phased in

over 8 years 0 0 45 0

Energy efficientcy & demand side

management (EEDSM) (432) (149) (368) 0

Demand market participation (DMP) (905) (379) 248 194

Capital expenditure Clearing Account

(CECA) 9 91 332 636

Service Quality Incentives(SQI) 339 236 318 343

Inflation adjustment - Opex 33 209 (152) 162

Other income (353) (528) (134) 0

RCA balance R'millions 11 241 19 185 23 632 23 868

Eskom payback (2 002) (1 739) (1 834) (3 022)

Eskom claiming 7 068 12 137 9 888 6 874

Revenue claim 6 175 8 787 15 578 20 016

Total 11 241 19 185 23 632 23 868

Eskom payback -18% -9% -8% -13%

Eskom claiming 63% 63% 42% 29%

Revenue claim 55% 46% 66% 84%

Total 100% 100% 100% 100%

POSSIBLE ALTERNATIVES

• Increase revenue?: Not really appropriate

• Reduce cost side: Staff complement, Curbed generation due to demand

• Capex: Major contributor to crunch

• Financing: Require total review

• Stabilising cash flow: 1 st Priority

• Government assistance: Strategic plan 5 years

• Sell assets to reduce debt where possible and appropriate

CONCLUSION

• How poor the management was is shown up in the Soweto figureswhere payment levels remained at about 16%, and Eskom has notimproved the position, but acted to the detriment of otherconsumers. What may have been politically expedient is nowbiting, and consumer numbers are not regarded as a fair reflectionof 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 alsotestimony to the fact that they have budgeted and forecastedwrongly. The only way out is to take hands and manage us out ofthis position and try to make Eskom a trustworthy institution forthe benefit of consumers, and not only for Eskom.

Conclusion (cont)

• The following aspects are highlighted:• A 37.65% increase in tariffs is not affordable: Order should be 5-6%• Increase should follow and be in line with inflation: This claim not based on this• 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.• Revisit the alternatives outlined above as major aspects

Conclusion(cont)

• We are at crossroads with

Eskom

• Heading for serious

consequences

• Country cannot afford Eskom

any longer the way it is run