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08 Mar 2019

Eskom's financial stability uncertain despite tariff hikes and bailouts

Nersa's tariff increase is a clarion call for the political will to effect changes at Eskom.     

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We South Africans are becoming unwitting experts in all things electricity-related. Who'd have thought we'd be holding forth with such confidence about the KW output of inverters and generators as we stare into each others' battery-powered headlamps across the braai? And invariably that's just the precursor to the real conversation: theories and conjecture about what's actually going on inside Eskom and the minds of the politicians tasked with solving this crisis.  

By now it's common knowledge that the National Energy Regulator of South Africa (Nersa) recently approved electricity tariff escalations of 9.41%, 8.1%, and 5.2% respectively over the next three years. 

But to really understand the extent of the financial pickle that Eskom now finds itself in, consider that the debt-ridden utility originally requested a flat 15% for the next three years. Eskom then revised the request to 17.1% in 2019/20, followed by increases of 15.4% for 2020/21 and 15.5% for 2021/22 respectively. 

So, even though the increases are still significantly higher than consumer inflation - not to mention the costs of inverters, generators and other things we never thought we'd need - Nersa's determination was markedly below what Eskom thinks it will need to stay afloat.

Eskom's basic tariff applications versus Nersa's approval:

17.1% vs 9.41%

Eskom's submission for F.2019/20 versus Nersa's approval

15.4% vs 8.1%

Eskom's submission for F.2020/21 versus Nersa's approval

15.5% vs 5.2%

Eskom's submission for F.2021/22 versus Nersa's approval

Nersa explains the three percentages increase

Courtesy: eNCA | DSTV channel 403

At first glance, the shortfall might not seem so dire. Consider that the 2019/20 escalation of 9.41% is in addition to a 4.41% hike already approved in October 2018 on Eskom’s Regulatory Clearing Account (RCA) application.  This was to allow Eskom to recoup shortfall costs from customers for a previous 3-year period (F14/15, F15/16, and F16/17). 

So the implementation of the RCA revenue increase amounts to R8.7bn per annum for the next three years starting 1 April 2019 (see Table 1 below). 

As such, electricity prices for F19/20 are set to rise by a total of 13.8% from April 1.

Apart from putting further pressure on the already constrained consumer, job cuts are a very real possibility as electricity-intensive industries (such as the mining sector) struggle to cope with elevated input costs.

But it's by no means certain that the hike is high enough to keep Eskom financially stable, as is evident in the table below.

Table 1
Source: Eskom; Nersa; ICIB
MYPD4 and RCA effect on Eskom’s revenue projection over the next three years

The increased revenue from tariff increases to households and business should be understood in the context of government’s financial assistance announced in the 2019 Budget Review (R23bn p.a. for three years), Eskom’s unbundling into “three pillars” (generation, transmission, and distribution) and its overall turnaround strategy.

The total tariff increase, along with the government assistance package, is forecast to affect Eskom’s cash flows over the next three years as follows: 

  • F19/20: Small shortfall in net cash flow of approximately R4.8bn
  • F20/21: Large shortfall in net cash flow of R22.6bn
  • F21/22: Large shortfall in net cash flow of approximately R26.8bn.

Analysis of the above suggests that the tariff increase, RCA increase, and government assistance could ‘nearly’ stabilise Eskom’s financial position in F19/20 but the timing of cash flows and the effect on liquidity bears scrutiny.

In particular, the negative cash flows forecast for F20/21 and F21/22 underscore the urgent need for Eskom to implement annual cost savings to the tune of over R20bn. 

Eskom, which carries a massive R420bn debt, poses a considerable risk to the economy, SA’s public finances, and the country’s sovereign credit rating. It was, therefore, no surprise that immediate measures to address the crisis were central to Finance Minister Tito Mboweni's first Budget. But a widely-expressed concern is whether the financial assistance announced in February is adequate. 

The R23 billion a year in financial assistance from the Treasury was assigned over the medium term to “service its debts and meet redemption requirements while making resources available for urgent operational improvements”.

Mboweni did, however, assure the investment community that government would not take the beleaguered power utility’s debt on to its books, as many had feared, and strict conditions surrounding the implementation of a turnaround plan accompanied the financial support.

The negative cash flows forecast for F20/21 and F21/22 underscore the urgent need for Eskom to implement annual cost savings to the tune of over R20bn.

In addition, the division of Eskom into three independent units, initially announced in the President’s State of the Nation Address (SONA) was restated in the Budget, reinforcing the necessity of establishing a “more competitive electricity sector”. This would ultimately “improve business and consumer confidence, encourage private investment and reduce upward pressure on prices”, according to Treasury. It was announced that the transmission company will be established first, with its board expected to be appointed by mid-2019.

In the analysis below, we consider the implications for Eskom’s net cash flow, inflation, household disposable income, credit rating and what we are watching following Nersa’s announcement.

Nersa responds to 'scathing' Eskom comments

Courtesy: eNCA | DSTV channel 403

Expected petrol price hike in April
Petrol price hike

As a double whammy, rising oil prices to around US$65/bbl (from December 2018’s US$58/bbl) have led to petrol price hikes for the already cash-strapped South African consumer.

The rand would need to strengthen substantially to counteract this rise. It has failed to do so, with the news flow on Thursday having caused the USDZAR to rise to 14.50 (at the time of writing) from around 14.30/$.

A substantial petrol price hike for April (R1.24/litre) is now expected.

Sovereign and Eskom credit rating implications

While the tariff increases, combined with government assistance is a positive for Eskom’s credit rating (S&P CCC+), it bodes poorly for the rating of South Africa’s sovereign credit.

The probability of Moody’s changing its outlook from stable (BBB-) to negative has increased in view of the February 2019 Budget, yet again showing a deterioration of South Africa’s fiscal metrics. 

    Read more: Has the downgrade already been priced in?

The Budget deficit for F19/20 was revised from 3.6% of GDP in February 2018 to 4.5% in February 2019.

The debt/GDP ratio is forecast to rise above 60% of GDP in F22/23, compared with 59.6% of GDP last year.

About the author

Angela Rettenbacher headshot

Angela Rettenbacher

Digital content specialist

Angela read for a Bachelor of Journalism degree at Rhodes University in Grahamstown in the early nineties, followed by a two-year stint at the SABC. Soon after, she went backpacking for 10 years! Prior to joining Investec's content team, Angela spent nine years as an Output Editor on the newsdesk at eNCA, both in TV news and Online. Before that, she spent eight years in the corporate sphere, in the Investment Banking and other divisions of Goldman Sachs both in London and Johannesburg.