investor presentation - eskom
TRANSCRIPT
April 2018
Investor Presentation
Contents
2017 Financial year
Financial performance
1
Leadership and governance
Operational performance
Conclusion
Debt management
2017 Financial year in
perspective
• The March 2017 results show good overall
performance
• Eskom has since released the Sept 2017
results, with the Full Year 2018 results
scheduled for release in July 2018
• The environment in which Eskom operated in
during the period March to December 2017
was significantly impacted by:
2016/17 audit qualification on irregular
expenditure
Restricted access to funding which
impacted on liquidity
Deteriorating governance conditions
2017 financial year in perspective
4
• Post December 2017 Eskom made a concerted
effort to address governance concerns
• The appointment of the new Board in January
2018 and their decisiveness was well received
by the financial markets
• To ensure Eskom’s future sustainability the
Board has embarked on a turnaround business
strategy with a core focus on
financial viability
continued strong operational performance
governance
2017 financial year in perspective
5
Leadership and governance
• New Board appointed by Government on 20
January 2018, with Mr Jabu Mabuza as Chairman
• Mr Phakamani Hadebe appointed as Interim Group
Chief Executive
• Board is in the process of appointing key executive
management:
Appointment of permanent Group Chief
Executive by end April 2018
Following which a permanent Chief Financial
Officer will be appointed by mid-May 2018
Progress on leadership and governance concerns
7
Financial performance
Overview of financial performance (as at 30 Sept 2017)
• External auditors have issued an unqualified review
conclusion, with an emphasis of matter regarding
Eskom’s going concern position
• EBITDA of R30 billion (Sept 2016: R32 billion), due to
2.2% tariff increase and declining sales, offset by cost
containment measures
• Net profit after tax of R6 billion (Sept 2016:
R10 billion), with higher depreciation and net finance
cost due to new build units coming online
• Net cash from operations of R22 billion (Sept 2016:
R32 billion), due to lower profit and increase in
municipal arrear debt
• Liquid assets of R9 billion (Sept 2016: R30 billion) 9
Year-on-year financial performance
Gross debt/EBITDA ratio 14.1
(Sept 2016: 12)
Cash interest cover ratio 1.5
(Sept 2016: 2.7)
FFO as % of gross debt 3.4%
(Sept 2016: 5%)
Revenue R96bn
2%
EBITDA R30bn
6.8%
Primary energy cost
2%
Debt service cover ratio 1.0
(Sept 2016: 1.9)
Profitability Solvency
Key financial ratios Financial performance
Cash from operating activities R22bn
30%
25
20
15
10
5
0
R billion
35
30
Sep-12 Sep-13
EBITDA
Sep-14 Sep-15
Net profit after tax
Sep-16 Sep-17
EBITDA margin %
%
40%
35%
30%
25%
20%
15%
10%
5%
0%
70%
68%
66%
64%
62%
60%
58%
56%
54% 0.0
0.5
1.0
1.5
2.0
2.5
Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17
Debt/ Equity Gearing (%)*
10
R billion %
*Debt as % of assets
Income statement for six months ended 30 September 2017
11
R billion
Sept
2017
Sept
2016
YoY %
change
Revenue 96 97 (2)
Other income – 1 (3)
Primary energy (41) (40) (2)
Net employee benefit expense (15) (16) 4
Net impairment loss (1) (1) (10)
Other expenses (9) (9) 2
Profit before depreciation and amortisation and net
fair value loss (EBITDA) 30 32 (7)
Depreciation and amortisation expense (11) (10) (8)
Net fair value loss on financial instruments and embedded
derivatives – (2) 106
Net finance cost (10) (7) (53)
Profit before tax 9 13 (34)
Income tax (3) (4) 33
Net profit for the period 6 10 (34)
1. Figures for 2016 were restated due to the impact of accounting for self-built assets.
R billion Sept 2017
Sept 2016
YoY % change
Property, plant and equipment and intangible assets 614 555 11
Working capital 50 44 14
Liquid assets 16 44 (64)
Other assets 43 47 (7)
Total assets 723 690 5
Equity 183 187 (2)
Debt securities and borrowings 367 333 10
Working capital 49 50 (1)
Other liabilities 124 120 4
Total equity and liabilities 723 690 5
12
Financial position
1. Figures for 2016 were restated.
Cash flow statement for six months ended 30 September 2017
13
R billion
Sept
2017
Sept
2016
YoY %
change
Net cash from operating activities 22 32 (30)
Cash required for debt servicing (23) (18) (26)
Cash flows used in investment activities (29) (29) (1)
Cash flow from financing activities 18 17 6
Net (decrease)/increase in cash and cash equivalents (12) 2
Electricity sales volumes decreased 1.9% year-on-year
• Overall electricity sales
volumes reduced by 1.9%
(2 038GWh) compared to
comparative period
• Redistributors declined due to
warmer winter conditions and
end-users switching to more
efficient use of electricity
• International sales declined
due to increased hydro use by
neighbouring countries after
good rainfall in the region
Electricity volumes % growth/(decline) & contribution
3.5%
14
0.5%
1.4%
0.8%
0.6%
4.6%
0.9%
1.9%
-8% -6% -4% -2% 0% 2% 4% 6%
Redistributors
Residential
Commercial
Industrial
Mining
Agriculture
Rail
International 6.8%
Total
42%
6%
5%
22%
15%
2%
1%
7%
Contribution
Primary energy cost increase contained
2016 vs 2017
R40.0
R1.4
(R0)
(R0)
R41.0
R0
(R0.2)
R billion
Sep-17
15
Other
Imports
IPPs
OCGT
Nuclear
Coal
Sep-16
(R0.3)
• Historic coal cost increases have
been in excess of 15% per year
• 2017/18 increase in purchase coal
cost per ton limited to inflation
• IPP expenditure declined by 3.5%,
although volumes supplied by IPPs
declined by 17.8%
Average renewable IPP
purchase cost of 205c/kWh
(Sept 2016: 218)
Progress addressing audit qualification
16
• 2016/17 financial statements were qualified based on completeness of
irregular expenditure reported in terms of the PFMA
• A recovery plan is in place, monitored by Board Audit and Risk Committee
160 contracts over R1 billion (80%) and 5 110 contracts under
R1 billion (80%) reviewed
Emergency procurement over past two years being reviewed
• Plan is on track to address the completeness weakness
• Irregular expenditure can be expected at year end, but should not result in
an audit qualification
• Irregular expenses do not imply fruitless and wasteful, examples include:
Tender processes not adhered to
Quality management
Use of labour broker – internal processes not followed
Arrear debt and debtors ageing
17
Electricity debtors age analysis, R million
Sept 2017 Sept 2016
overdue Total overdue
Large power users, municipalities (including interest) 22 717 12 168 9 181
Large power users, excluding municipalities (including interest) 7 449 258 680
Small power users (SPU) (including interest) 2 568 902 1 205
Soweto SPU (excluding interest) 5 668 5 425 4 997
Other customers (including interest) 1 908 657 –
Total at 30 September 2017 40 310 19 410 16 063
• Arrear debt due by municipalities, including interest, increased from R9.2 billion to R12.4 billion
• There has however been a significant (62%) reduction in outstanding debt from other large power
users
Sept
2017
Sept
2016
Average debtors days (all categories) 63 51
% increase 24%
Municipal debt strategy
18
• Eskom is actively working to mitigate the increase in municipal debt and recover
overdue debts
Recent actions Ongoing/ future efforts
• During the period, 6 481 split meters were
installed in Soweto, and 4 199 meters
converted to prepaid meters
• A total of 10 014 smart meters were
installed in Midrand and Sandton; 2 986
meters have been converted to prepaid
meters during the period
• Eskom has engaged with relevant parties
to have appropriate policies and
legislations revised to recover revenue
due
• Provincial and national government to
implement corrective action in terms of
the Constitution and put the
municipalities under administration
• Eskom will continue intensifying its
efforts to arrest municipal debt, which
has significantly increased, impacting
the utilities financial sustainability.
• Scheduled power cuts to defaulting
municipalities
• Debt restructuring and concessions
• Continued support and co-operation
from government and other
stakeholders to manage the
municipality debt issues
Status of Independent Power Producers (IPP)
program
• Power Purchase Agreements were signed with 20
IPPs on 4 April 2018 and 5 IPPs on 19 April 2018
The IPPs generate wind, biomass, and solar
energy
Eskom together with IPPs will negotiate
pricing
• Eskom continues to review both the balance sheet
and income statement impact of increased IPP
purchasing to mitigate potential negative effects
• Expected renewable IPP electricity purchase cost
of 203c/kWh compared to 56c/kWh for current
Eskom electricity production (a saving of 2c/kWh)
19
IPP history
20
9.4
0.1
11.5
4.2
7.2
0.1 9.0
4.0
5.0
0.1 6.0
3.0
3.0
3.7
3.4 0.3
3.5
Volu
mes
- G
Wh
+22.0%
9.5 0.0
Co
st – R
’bn
+45.9% 19.5
19.0
0.4
19.8
4.4
15.1
0.2 15.1
3.7
11.2
0.2 9.5
2.9
6.6 3.3
2.9 0.4
2.9
Unit
Cost
–
R/M
Wh
+19.6%
**2018
2 0
43
2 0
24
3 3
29
2017 1
71
4
1 0
46
2 0
90
3 3
28
2016
1 6
72
93
2
2 2
30
4 1
50
2015
1 5
70
96
5
2 1
72
2014
89
0
85
2
1 4
04
2013
83
6
83
6
Other
RE-IPP
DOE Peaker
Other
RE-IPP
DOE Peaker
Total IPP’s
Other
RE-IPP
DOE Peaker
* Other relates to MTPPP, STPPP, WEPS and Municipal programmes
** Forecasts
Operational performance
Operational performance shows positive trend
(at 30 Sept 2017)
• Generation plant performance improved, with plant
availability at 83.2% (Sept 2016: 78.4%)
• Transmission system minutes lost at 1.04
(Sept 2016: 2.74), with no major incidents
• Distribution network interruption frequency
improved, although interruption duration declined
slightly
• At end Sept 2018, 100 380 households electrified,
Kusile Unit 1 and Medupi Unit 5 achieved
commercial operation, adding combined installed
capacity of 1 594MW
• 350km transmission lines constructed and
1 000MVA transformer capacity commissioned 22
Overview of operational performance (continued)
• Significant improvement in environmental
performance, with particulate emissions of
0.25kg/MWhSO (Sept 2016: 0.29), and water usage
of 1.29l/kWhSO (Sept 2016: 1.43)
• Lost-time injury rate improved to 0.23 (Sept 2016:
0.28)
• Regrettably, Eskom suffered two employee fatalities
(Sept 2016: one) and five contractor fatalities (Sept
2016: three)
• B-BBEE attributable spend of 71.2% (Sept 2016:
65.4%), and spend with black-owned suppliers of
38.9% (Sept 2016: 30.2%)
• Employment of female employees in senior
management positions 36.9% (Sept 2016: 28.5%) 23
Capital expenditure
We remain focused on bringing new capacity online, delivering earlier than P80 on average
P80 dates
CO = Commercial Operation
FY 2015 – FY 2017
Ingula
Unit 4
Mar-17
Jun-16
333
Ingula
Unit 1
Jul-17
Aug-16
333
Ingula
Unit 2
May-17
Aug-16
333
Ingula
Unit 3
Jan-17
Jan-17
333
Medupi
Unit 5
Mar-18
Apr-17
794
Kusile
Unit 1
Jul-18
Aug 17
799
Kusile
Unit 2
Jul-19
800
Medupi
Unit 4
Jul-18
Nov-17
794
Medupi
Unit 3
Jun-19
794
Medupi
Unit 2
Dec-19
794
Medupi
Unit 1
May-20
794
Sere Wind
Farm
Mar-15
100
Medupi
Unit 6
Aug -15
Aug-15
794
Kusile
Unit 4
Mar-21
800
Kusile
Unit 3
Aug-20
800
Kusile
Unit 5
Nov-21
800
…6 382 MW to be commissioned over the next 5
years
Kusile unit 6 (800MW) is scheduled for 2022
4 613 MW commissioned since 2015 &
10 750 MW commissioned since 2005 ….
FY 2018 – FY 2022
Medupi, Kusile - Coal fired
Ingula – Pumped storage scheme
P80 schedule
Achieved
commercial
operation on or
earlier than P 80
25
Overview of capital expenditure
25 237 26 311 23 837
10 000
5 000
0
20 000
15 000
30 000
25 000
Sep-15 Sep-16 Sep-17
Estimated cost to completion
Total Eskom funded capital expenditure
53 942
135 075
33 870
104 354
156 064
119 741
Inception-to-date
Kusile Medupi
Cost to completion
Transmission
26
R million
R million
• Stopping or slowing down the new build
programme has several negative impacts
Penalties to contractors
Capital expenditure required on
existing plant
Thermal efficiency of new stations is
significantly better, thus less coal
burnt
New plant has lower environmental
impact through lower emissions and
water usage
• All projects inside approval limits
Debt Management
Funding for 2017/18
R billion
Original
funding plan
Revised
funding plan
Committed
Signed DFIs 27.4 19.6 18.6
Signed ECAs 2.2 3.6 3.8
Swap restructuring 2.5 2.5 2.5
New DFIs 12.1 – –
Domestic bonds/notes 8.0 7.3 8.4
Commercial paper 7.5 4.4 4.2
Bank funding - 20.0 20.0
New ECAs 5.0 – –
International bonds 7.0 – –
71.7 57.4 57.5
% secured 100%
28
• Successfully raised R57 billion from the financial market for the year ending 31
March 2018
Borrowing programme – FY2018/19
29
R billion
Funding plan
Committed
DFIs 15.3 8.8
ECAs 5.8 1.0
Bonds – International 20.0 0
Bonds/Notes – Domestic > 1yr 13.0 1.5
Notes – Domestic <= 1yr 10.0 0
Structured products 8.0 0
72.1 11.3
% secured 16%
(As at Mar’18)
• Funding raised will meet the business requirements and ensure appropriate
liquidity levels
Guarantee utilisation
30
75
Portion
Allocated
Under
Negotiation
Remaining
58
17
Unallocated
Portion
350
275
Total
Government
Guarantee
Guarantee utilisation allocation R’bn
2019 2018
5
2022 2020 2021
27
12
6
20
Nominal maturities of guaranteed debt R’bn
8
20
12 9
13
21
12
9
22
0
22
28
8 6
2022 2021
8
2018 2019 2020
Incremental Envisaged
Guarantee Projected Utilisation R’bn
• Incremental funding represent drawdowns of existing
facilities
• Envisaged funding includes debt under negotiation
Projected guarantee utilisation R’bn
31
267
2037
2036
2038
2041
2040
2042
2039
2019
2023
2021
2020
2018
Feb-1
8
2022
250
246
290
286
252
2030
2029
2025
2031
2026
2034
2027
2035
2024
2028
2032
2033
287
298
291
285
252
242
210
184
159
136
119
69
61
43
27
20
15
15
15
15
DTMN Under Negotiation Interest Payable Loans
Total government
guarantee
R350bn R350bn
Debt Maturity
32
Debt Maturity Profile R’bn
2031
63
2030
81
2029
94
2028
70
2027
83
2026
67
2025
90
2024
91
2023
80 2022
81
2021
77
2020
66
2019
70
2018
9
2043
15
2042
1
2041
1
2040
24
2035
13
2034
71
2033
59
2032
77
1
2039
7
2038
10
2037
24
2036
Incremental Interest Incremental Capital Total Interest Total Capital
Rating agency views on Eskom
33
Standard & Poor’s
Strengths
Sustained government support both in finance and
governance
Weaknesses
High cost of debt servicing
Negative cash flow generation and low (sub-inflation)
tariff increase environment
Low investor sentiment
Rating CCC+/Negative
Commented February 27, 2018
Moody’s
Rating B2/Negative
Commented March 28, 2018
Fitch
Rating BB-/Negative
Commented January 31, 2018
Strengths
Critical importance to South Africa’s economy, evidenced
by government support
Weaknesses
Weak liquidity and financial profile
Large capex program resulting in rising debt levels
Challenging regulatory environment against backdrop of
rising costs
Strengths
Strong position in the domestic electricity market
New Board taking active steps to improve liquidity
Weaknesses
Liquidity challenges
Uncertainty over ability to meet financial obligations
CCC
Sustained improvement in
liquidity position
Additional government support
Improved local and domestic
investor sentiment
B-/
Stab
Rati
ng
tri
gg
ers
Distressed exchange or default
Likelihood of extraordinary
government support weakens
further
Sovereign downgrade B3
Demonstrated ability to meet funding
needs
Progress towards a more stable
business and financial conditions
established
B1
Rati
ng
tri
gg
ers
Continued instability in near term
liquidity
Lack of sustainable long term
business, financial, and funding plan
Diminished view of strong government
support
Sovereign rating downgrade B+
Improvement in corporate
governance, liquidity, and funding
position
Further tangible government
support
Higher tariff increases
BB
Ra
tin
g t
rig
ge
rs
Weakening links with government
evidenced by a lack of tangible
support
Negative sovereign rating action
Conclusion
• The appointment of the new Eskom Board has resulted in increased
investor confidence with Eskom securing a bridging loan of R20bn
• The governance, ethic and accountability concerns are being
addressed
• The investors in the domestic market have shown supportive
sentiment
• Eskom is continuously seeking efficiencies and will continue to do so
• Improving liquidity and ensuring financial sustainability of Eskom
including ensuring the funding plan is realised
• Eskom’s cost structure is a key focus area, but financial
sustainability cannot be achieved through cost savings alone, the
price of electricity must migrate to a more appropriate level
35
Conclusion and way forward
23
End
Thank you.