Tuesday , January 26 2021

Eskom CFO on debt, prices, bailouts and separation

Given its importance to the South African economy, many people are deeply concerned about the power tool Eskom's financial status as an ongoing business.

EE Publishers Investigative Editor and CEO Chris Yelland captured Eskom's new Chief Financial Officer after President Cyril Ramaphosa's Nation Address to find out more about the help program's financial position.

Calib Cassim CA (SA) was appointed Finance Assistant at Eskom in November 2018 after serving as Chief Financial Officer from July 2017 after the dismissal of former Eskom Finance Minister Anoj Singh.

Cassim also serves as director of Eskom Enterprises, Escap and Eskom Finance Company.

YELLAND: First, congratulations on your recent agreement as Eskom CFO. I think it's been a baptismal baptism. Are you recreating the prospect of transforming Eskom financially, or has this new position been something of a poisoned chalice?

CALIB CASSIM: Thank you. I absolutely look to the challenge of contributing to Eskom, and more importantly to the country as a whole. I recognize that it would never be easy, but I think that with the support of the board, the shareholder and government will help navigate the waters.

Philosophically, are you from the mindset that sees South Africa's development needs best to serve Eskom as a vertically integrated state-owned monopoly or do you think that Eskom must be separate and restructured to better serve the country?

I believe that at the end of the day, we must ensure that we have a sustainable electricity supply industry, and the question is how Eskom can best contribute to the sustainable future. I fully support and are familiar with what the President has said in his state-of-the-nation address last week and the direction indicated. Now it's about getting into the details. Transparency is in everyone's interest, and most importantly, the consumer.

Separation and restructuring of large companies such as Eskom is notoriously expensive, and also the costs of decommissioning and rehabilitation of old coal mines and power plants. What can such costs amount to, and has there been any budget for this in the MYPD4 application?

First, I agree with you that the costs of decommissioning and rehabilitation can be enormous. Eskom has arranged for the restoration of power plants of around R30 billion. And mine-related closure rehabilitation of around R13 billion. In September 2018.

We explain this with regard to our annual accounts. Whatever provisions we have made for accounting purposes, based on our expert advice, are incorporated into our MYPD4 (multi-year pricing) revenue application. But I would like to add that we have not decided to shut down a production plant at this time. The cost of separating and restructuring Eskom still needs to be determined.

On November 20, 2018, you expect a deficit of R15 billion. For the financial year 2018/19. Last week, this deficit was changed to R20.2bn, with an additional forecast of 19.9bn. Kr. For 2019/20, although Eskom gets the 17.1% increase applied for, plus 4.41% RCA (Regulatory Clearing Account) Allocation already awarded on April 1, 2019. What happens?

Correct – in the medium-term income statement, we measured a loss of R15bn. By the end of the year. However, the generation performance deteriorated significantly. To meet the restoration through the 9-point plan and to balance supply and demand, we see an increased use of more expensive tender options.

In particular, the increased use of OCGTs (open cycle gas turbines) with more expensive through-going coal and increased maintenance are the main contributors to the $ 15 billion loss.

Another contributing factor is that for accounting purposes we now have to deal with questionable debt on a cash basis. Thus, the escalation of debt with municipal and Soweto customers is also reflected as a reduction of the revenues we recognize.

With regard to FY 2019/2020, we have added the forecast cost for next year, and with the increased tariff increase this gives a further deficit of R19.7 billion. But to clarify, the loss was R19.7bn. Based solely on the MYPD4 application and did not include R7.8 billion. (4.41%) for the first year of RCA claw back, which Nersa already issued to FY 2019/20. This will reduce the loss of R19.7 billion.

The idea of ​​a R100 billion. Citizenship has been flown by Eskom. How do lenders view this and is it really enough? Some financial analysts have mentioned figures for much higher bailouts required. How much more can it be necessary?

From an Eskom turnaround plan perspective, we focused on three elements – our own costs, tariffs and revenues and finally the balance optimization. This led to Eskom's proposal to move R100 billion. Debt from our balance to the state. R100 billion Would make sense, assuming that Eskom charges applied for, and the cost reductions we have put into our forecast materialized.

You have different opinions. Some investors and lenders support the proposal, some do not. The positive is from our point of view that the credit rating agencies see that this proposal can be a "win-win" for both Eskom and the sovereign. But in the end, it is the case that if the tariffs granted are much lower than what is requested, the necessary amount of aid must increase accordingly to balance the cash flows.

With the former R83 billion. Clearing already wiped out, how can the government and the Treasury be sure that if they provide an additional R100 billion rescue now, it will not happen again in a few years? Is there any end to this?

For me, I believe that the key to ensuring long-term sustainability is that Eskom must be effective in its cost base through the recovery mechanism. However, if the tariffs do not allow for the recovery of these operating costs and allow for debt servicing forward, it would simply be a repetition of R83 billion. And in a few years, say three to five years, we could find ourselves in a similar position. So I think it's the trick to ensuring Eskom's sustainability.

Power cables supply power to the national network

Power cables supply power to the national network from Koeberg Nuclear Power Station. (Educational Images / UIG via Getty Images)

YELLAND: If, as I said, Eskom does not generate enough cash flows annually to service the debt principle and interest payments, how will it survive? What will Eskom's debt ratio be (ie net operating income / debt expenses) for the financial year 2018/19?

Cassim: Currently, based on our December 2018 forecasts, we assume that our debt insurance coverage ratio is 0.47, which is less than half of where it should be to meet our obligations. As I have said, as we approach the turn of the year, Eskom effectively uses one credit card to repay the other credit card, which is never sustainable in any case.

If Eskom does not get the 17.1%, 15.4% and 15.5% MYPD4 tariff increases, it wants the next three years, what are the consequences for Eskom? For example, if Nersa only allows 10% for three years, what will the financial hole be plugged into through increased debt and equity and reduced costs?

On average, Eskom sees a turnover requirement of around R200 billion. Per year. So, every 1% of that in terms of price hike that is not provided would result in a deficit of about R2bn. Thus, a drop from 17.1% applied for, to 10% for the first year of MYPD4, increase the financing difference by approx. R15 billion Alone for that year.

But it will get worse over the next three years. Ultimately, we can manage short-term cash flows by postponing some of our investment expenses. But it would come to a point where Eskom cannot meet its debt repayments. As a significant portion of our debt is guaranteed, it will ultimately lead us to go to the government card in order to get into our shoes and take over these obligations.

I think it is important to emphasize that it does not mean the full R240 billion. Warranty guarantee must be refunded immediately. The Government will only serve these terms and conditions in the future. However, this would result in a potential debt restructuring event that we had to deal with all lenders.

Has Eskom had any financial obligations from the government yet to support its balance sheet, for example through additional state guarantees, additional equity investments or the acquisition of some of Eskom's debt burden? If so, how much?

The president mentioned that further details of the balance would come through the finance minister's budget number later in the month. But we have to admit that the government has clearly stated that they will support us through the R350 billion guarantees, and as mentioned earlier, R83 billion. Egenkapitalindsprøjtningen.

At the end of the day, if Eskom cannot supply the country's electricity needs, we understand the impact on the economic and economic growth of the president and the country. So we have to solve the situation. We have no other option.

In the coming year, and in the three-year MYPD4 period, to what extent will Eskom rely on international bonds and financing of development finance institutions (DFIs) given the amount of money flowing into emerging markets? How much do you depend on local ZAR bonds, and is there an appetite for this?

There is definitely an appetite for local domestic debt. In its portfolio, Eskom has currently increased approx. one third of the funding is domestic and two thirds of foreign lenders. Foreign debt, however, comes at a much more expensive price. In the short term, we see that the mix continues for the next financial year.

So our plan is to migrate more to domestic debt and get to the point where the mix is ​​at least 50/50, probably in the next three to five years. But our one-third domestic and two-thirds foreign plans will continue in the next financial year. We would also clearly focus on DFI debt. DFI & # 39; has been very supportive of Eskom through these difficult times and we have developed good partnerships with them.

Power cables supply power to the national network

YELLAND: Can you generally state and comment on the World Bank, Development Bank of Southern Africa. China Development Bank and other DFI loan pacts, and what to doy is considered a breech, such as. Failure to meet the required status, debt coverage and / or other calculations?

CASSIM: I'm careful not to prevent creditors' confidentiality, but generally, Eskom's status for operations is disclosed by normal credit measurement – interest coverage, debt termination, etc. When we were in a situation where we do not meet these requirements, many of the terms allow for us to make an action plan for how to solve it.

Therefore, the conditions we have developed in recent years (and we will continue to focus on this) are so important. DFI's are aware of Eskom's long-term character and its importance to the country. At the end of the day, I am actually worried as I have highlighted in Nersa's public hearings. Getting a qualification on "going concern" changes everything. So between now and the end of the financial year and the release of our finances, it is the balance that all decision makers must have the right to resolve the situation and its potential risk.

What is the total municipal debt obligation, including Soweto, and how much does it grow per month? How will this bleeding be stopped and how will electricity theft and non-payment be affected by the tariff increases that Eskom wants?

Municipal debt is currently R18 billion. And grows by about R450 million. Pr. Month, while Soweto debt adds another R17bn. And grows by around R50 million. Pr. Month. Thus, the total debt grows by R500 million. Per month.

There is an inter-ministerial bag team that looks at this where Eskom participated. We expect the Minister to make proposals to the Cabinet to resolve the situation. Through its processes, Eskom has tried to interdict and cut off non-paying municipalities. But what we find is that we are being promoted by paying customers within the municipalities, and many of the judgments have then decided that paying customers within municipal boundaries can pay Eskom directly.

With regard to Soweto, we have looked at technology and roll-out of predetermined electricity meters, but have experienced resistance from society. With Eskom's financial position and the low margins of our product and the price of electricity, if we are not paid for what we deliver, it only worsens our financial and cash flow position.

What does Eskom do or will do to cut the largest cost elements in the income statement – coal and staff remuneration – taking into account the interests of coal mines, the high international coal prices and the organized labor force militias?

Eskom spends around R55 billion. On fun every year. We know that the cheapest coal is from dedicated mines. So Eskom has restored a strategy for investment in cost plus mines. This eliminates transportation costs and provides a much cheaper price to the consumer through tariffs.

But it doesn't happen overnight and it takes a few years for the benefits to come through. On average, we have allocated around R2 billion a year. Year to this capital investment in free mines over the next five years.

With regard to staff costs, we recognize that we need to address this. We have started by not giving bonuses or wage increases to senior executives, while for middle managers there was only an inflation-wage adjustment without bonus. With regard to the staff complement, we need to look to reduce this over the next three to five years to comply with an efficient base.

We must not forget that financing costs are also significant and must be in line with our proposals for balance optimization. A focus on our capital expenditure must ensure that we make the right capex expenses, where there is added value from an operational and economic point of view.

With regard to organized work, as the President said, we must engage with the leaders to ensure that they understand the situation and that we should all contribute to part of the pain to balance this equation.

What should you change, both structurally and in Eskom's business model, to switch to a more sustainable way? Is the internal functional ring shield that you proposed in December 2018 sufficient, or should Eskom be unbounded and restructured with greater urgency?

President Cyril Ramaphosa has given Eskom its "marching orders" for the separation of the utility into separate generation, transmission and distribution companies. I think that there is absolutely a requirement for urgency, and together with the government we must now make plans to implement this.

Ultimately, it will help as we see value, from a transparency perspective, to the real cost of generation, transmission and distribution. It will also highlight the cross-subsidies that can exist between the different business units. More importantly, the controller's perspective will require greater clarity on what the prices for each of these services should be to the end user. This will help everyone focus on the efficiency gains to be achieved from the respective elements of this value chain.

Recognize Eskom and take responsibility for what is undoubtedly the biggest economic crisis facing the government, and would you agree with that assessment?

I totally agree. I have said that when I come home every day, I am exhausted and I sleep well. But it also gives sleepless nights. At the end of the day, it's no longer about Eskom with the guarantees. If we go down, we bring down the sovereign and the economy.

For me, the best thing that has ever happened is the president's task team, and the fact that we have the ear of the president who understands urgency. He used the words & # 39; financial crisis & # 39; in its state address, and it is the best way to describe where we are, hand in hand with our operational challenges.

I'm not sure which comes first to Eskom's operational or financial sustainability. I need electricity to be produced, sold, and the revenue collected to restore Eskom's financial and cash flow situation. If we do not achieve that, even with all the support we receive from the government, we will not be economically viable. So positively, I think the right questions are dealt with at the highest level.

* Chris Yelland is the research editor at EE Publishers, where this interview was first published.

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