The balance sheet
Eskom’s debt risk is everybody’s risk
Right now, Eskom owes various domestic and foreign lenders more than R400 billion (almost 10% of the country’s total debt). Two-thirds of that is guaranteed by the state. Default would amount to a sovereign, national default and doesn’t bear contemplating.
By 2025 Eskom has to repay some R200 billion of its debt and make interest payments of R145 billion. In FY 2021, at R37.1 billion, its interest bill was higher than in its wage bill. And, astonishingly, at R102.7 billion, in FY2021, Eskom’s debt and interest payments were slightly more than half of its total revenue.
It should be noted that the much-quoted amounts of debt which Eskom needs to repay or service over the next four years are, in a sense, “gross” numbers – each year the utility refinances or rolls over part of its debt. In FY2019 Eskom redeemed some R35 billion of debt but raised a further R59 billion; in other words, its “net” debt rose by some R24 billion in that year. In addition to the daunting size of its debt, Eskom can’t always source loans when it goes looking for them. The 2021 Eskom integrated report revealed that in the year the group could only secure R19 billion of the R39 billion debt funding it thought it needed.
But the Eskom debt story is not all bad news. In June 2021 it was reported that in the 18 months since new CEO Andre de Ruyter took over the reins, Eskom’s debt had reduced from R496 billion to R401 billion. Figuring in this was government’s equity injection. Of course we would have liked to have seen it reduce by even more but at least things are moving in the right direction. . .
For three years – 2019 to 2021 – Eskom has received a total R69 billion equity injection from the state. All of has gone towards servicing and reducing debt (there have been claims that some of it should or actually does go towards operational costs, towards bolstering Eskom’s return on assets, a view which Nersa holds to. (Nersa’s position, though, was dismissed by the High Court in July 2020.) And Eskom is to get a further R56 billion of public funds to deal with its debt. This is taxpayer money that is not productively spent.
On top of the amounts already committed to Eskom by its shareholder (the state), further announcements on reducing the power utility’s debt from almost half-a-trillion rand to under R200 billion are expected by Q2 2022.
If this further shareholder support is forthcoming, it is not beyond the realms of possibility that Eskom’s debt could be positively rerated and that the SOE would be able to raise finance without the need for guarantees. Obviously this would have tremendously beneficial consequences for the entity and the country, including Eskom’s cost of borrowing and the currency.
Despite the multiple and mounting demands on National Treasury, we are confident that government is fully alive to the urgent need to restructure Eskom’s balance sheet.
Recently deputy finance minister David Masondo Masondo floated a number of interesting ideas in what essentially boiled down to a debt-for-climate swap. Masondo talked about lenders forgiving some R146 billion of Eskom debt. Although he was only speaking in his personal capacity and it’s unclear what investors will make of any such moves, at the very least, the deputy minister’s comments point to some creative thinking in the corridors of power.
As of 31 March 2021 municipalities had arrear debts to Eskom of R35.3 billion, up R7 billion in the year (although it should be noted that there are “recoverability” and therefore impairment concerns around much of this amount). It is the state’s obligation under Section 192 of the Constitution to ensure that all organs of the state, including local government, can pay their debts - obviously this is not always happening.
The SOE has developed detailed plans which it refers to as “active partnering” where it will take over municipal distribution from struggling local authorities. This kind of intervention will be fraught with political considerations and local interests, but such an approach can reference no less an authority than the National Development Plan.
Eskom’s top 10 municipal debtors (responsible for 68% of total municipal debt at 31 March 2021) are almost all among the most insolvent local governments. (In August 2021 Western Cape MEC Anton Bredell disclosed that municipalities in the province owed Eskom R1.5 billion – and that “organs of state” owed Western Cape municipalities R385 million for rates and services.) Distribution is a political (rather than administrative) hot potato. For more than a decade central and local government and parliament have failed to break the impasse which ostensibly stems from the fact that municipalities are determined to hold onto the money they make from supplying electricity to end users. (Remember the six regional electricity distributors or REDs?)
Today we need national political leadership to effectively tackle the issues of municipal debt and the often chronically poor state of non-Eskom distribution. Eskom’s 2021 integrated report notes that it has “developed a proposal for National Treasury to take over the municipal arrear debt, with the intention of reinforcing National Treasury's financial oversight of affected municipalities”.
At least one part of solving the problems surrounding local distribution could entail deploying Eskom engineers and financial managers to run services and infrastructure where councils are failing to do so effectively and reliably.
(The Presidency’s Operation Vulindlela has been created to drive necessary structural changes to aid economic recovery through direct access to the president and Cabinet. It commits government, by December 2021, to implement a “comprehensive national programme to support municipalities to improve electricity distribution performance” and to “enforce municipal distribution license conditions”. The reality is that it's hard to see where most of these implementing resources would come from other than from Eskom.)
Most manufacturers know from bitter experience that a loss of electricity is by no means always down to Eskom. We believe that the solution to local distribution woes is to entrust this responsibility, where it is failing, to Eskom. But only in the short term.
In April 2021 it was announced that Eskom and the Msunduzi municipality had signed a three-year agreement in terms of which Eskom had been appointed a “network maintenance services agent”.
In June Eskom took its first concrete steps to intervene in electricity distribution by a metro when it took over the job of implementing load shedding in Ekurhuleni.
Investment needed in distribution
At present, Eskom’s 33 000km of distribution infrastructure is skewed towards bringing power generated mostly in Mpumalanga to the rest of the country. As the power system transitions to renewables, massive investment (roughly R120 billion to R150 billion) will be needed to build out and strengthen the grid to transmit more power from the Northern and Eastern Cape to the rest of the nation.
In June 2021 Eskom released Phase 1 of a “Generation Connection Capacity Assessment” to the year 2023. This sort of up-to-date information is essential for IPPs to know what capacity exists where for them to connect the electricity they plan to generate. The latest report was prepared looking towards the planned procurement of 2 600MW by 2023. (Phase 1 included detailed information on connection-node capacity in six areas south from the North West and Free State provinces; Phase 2, covering other regions, is due for release later this year.) In a nutshell, the June 2021 report found that there was capacity for dispatching power in most regions surveyed but that the Northern Cape was constrained and would require further investment to accommodate new connections, beyond those already approved.
The income statement
In FY2021 Eskom achieved EBITDA of R32.8 billion and an EBITDA margin of 16%. Both numbers showed deterioration from the previous year, revenue being essentially unchanged year on year.
As with most companies, measures to improve its income statement that are within Eskom’s control essentially boil down to increasing revenue and reducing costs.
In a widely circulated presentation, Eskom argues that, of its R58 billion revenue shortfall in the 2019/20 financial year, it might be plausibly argued that R12 billion could be considered discretionary expenditure. This “illustrative” amount has not been independently calculated or assured. The R12 billion, according to the presentation, is divided in equal parts between primary energy, “employee benefits” and operations and maintenance.
In FY2021, it did significantly better on operating costs – claiming to have achieved “combined savings” of R30.7 billion. The 2021 integrated report projected sustainable cost curtailment initiatives to achieve “cumulative savings of R61.8 billion by 2023”.
Eskom’s 2019 turnaround plan envisaged cost savings of R32.7 billion in 2023 but as its latest (2020) integrated report noted, this had been revised down to R21.4 billion “due to the removal of aggressive headcount reduction initiatives, because of a lack of support from the shareholder for such measures”.
This approach seems to be fully aligned with the DPE Roadmap which devoted all of 18 words to the matter of “execution of employee-related cost-savings initiatives”. Those 18 words were: “Eskom will conduct a review of unrealistic and unacceptably generous benefits which impose financial implications on the company.”
Which means that, unless government adopts a new policy stance towards its largest wholly-owned enterprise (which seems most unlikely, particularly with local government elections looming in October 2021) there is likely to be little movement on a large chunk of Eskom’s 70% fixed-cost base for the foreseeable future. (In the case of Eskom, determining what are fixed and variable costs is not as straight-forward as they are for most other businesses.)
Positively, though, Eskom’s executive leaders are using whatever wiggle room their political masters grant them, to reduce the wage bill. In FY2021, “employee benefit cost” fell from R33.2 billion to R32.9 billion as headcount dropped by 4.4% - from 44 772 to 42 749. But management are still not allowed to retrench anyone.
Eskom leadership has repeatedly, and increasingly, supported incentives for embedded power generation and even a return to tax incentives for energy efficiency. These positions are clearly incompatible with other statements from the utility suggesting that it is seeking to increase electricity sales.
Eskom has to accept that its sustainability in an unbundled future depends not on its revenue but on its ability to operate cost-effectively while serving as a system operator or as competitive providers of generation and distribution services. To remain sustainable, an Eskom that cannot and should not chase revenue has to reduce its cost base. We appreciate that this is easier said than done but a process of radical restructuring contains within it the opportunities to engineer a more fit-for-purpose profile.
A particular problem facing Eskom, even as it unwinds its dependence on coal, is the cost of its emissions. A 2019 atmospheric emissions reduction plan put the “overnight cost” of this plan at R46 billion – a nominal cost of R67 billion over 10 years. Eskom’s 2020 emission reduction plan, if approved by the Department of the Environment, Forestry and Fisheries (DEFF), would reduce the overnight cost to R15 billion over 10 years.