Securing financial sustainability
(in response to lower tariff decision)
May 2013
Content
1
Nersa Decision, Rationale and Implications
2
Eskom Response
2
Summary
• NERSA granted Eskom 8% X 5, equating to revenue of R862bn which results in a
shortfall of R225bn
• Without appropriate intervention the NERSA decision will impact Eskom
• The shortfall cannot be made up with efficiencies alone
• Eskom’s response is being finalised through an integrated delivery programme
which will:
•
•
•
•
continue to implement the committed savings of R30 bn and find further efficiencies
Consider how the business can be reshaped
Identify additional support that may be required
Look to the regulatory framework and rules to assist in addressing the challenge
• Certain policy implications will have to be addressed with Eskom’s shareholder
3
Eskom’s MYPD3 application has a well defined
point of reference
 Application was based on the regulatory formula allows for the recovery of prudent
costs (primary energy and operating ) depreciation and a return on assets which
encompassed the following key principles:
1.
Eskom’s aim shift its performance across all metrics in line with world class utilities
2.
Costs kept at single digit increases
-
Primary energy increases of 8,6% (including coal at 10%), operating costs increases
of 8% (maintenance key driver)
Electricity Pricing Policy (DoE - December 2008) – recovery of costs and earning return
3.
on assets at replacement value
4.
NERSA previously allowed targeted return of 8.16%
-
Debt guarantees – government support of R350bn
5.
6.
Application reached 7,8% by 2017/18, averaged 4% over MYPD period
R60 billion subordinated loan fully drawn
Debt levels maintained within R350 billion guarantee ceiling – approximately 80% of
funding secured
Aim to achieve cost reflectivity improved Eskom’s financial profile and
complimented its ability to fund itself with lower risk and government support 4
NERSA’s disallowances result in a R225 billion
cash flow gap over the 5 year period
Revenue reconciliation to application
-61.5
1 100
Commentary
1 050
-47.8
ZAR billions
1 000
• Total disallowed
revenue equates
to
R225 Billion
-45.5
950
-12.8
1 087.6
-7.9
-49.1
900
850
862.9
800
Applied for
Revenue
Primary
energy
Operating Depreciation
costs
IPPs
IDM
Return
Allowed
revenue
Capex
Phasing of disallowances
FY13/14
FY14/15
11.1
4.7
-10.4
-8.2
-1.8
-7.9
FY15/16
FY16/17
-12.9
-3.2
-13.3
-1.0
-10.6
-13.3
-0.9
FY17/18
• Key reductions in
Primary Energy,
Depreciation,
Opex and returns
20.0
-
-11.3
-2.5
-1.5
-6.2
-20.0
10bn
-40.0
-60.0
-100.0
-35.0
-1.3
-11.2
62bn
-80.0
5
Operating Costs
IDM
24bn
41bn
2.0
-13.6
Capex
-62.2
IPPs
Primary Energy
-2.4
-12.0
88bn
• The implications
have been
weighted towards
the end of the 5
year period
Key items which were disallowed by NERSA
Cost
Eskom
Nersa
Reason given by NERSA
Eskom response
Primary
energy
R355bn
R293bn
•
•
•
•
•
•
•
•
•
DMP
R11bn
R1.9bn
• Sufficient capacity after Medupi and
Kusile to address energy shortfall
• Mistakenly understood as power
buyback programs.
Impact on KLO for next 2 years due to
shortage in capacity prior to new stations
producing energy
IPPs
R78bn
R65bn
Rephasing of IPPs.
Accepted
Opex
R270bn
R222bn
•
•
•
•
•
•
•
Based on MYPD 2 coal costs
Assumed lower water costs
Assumed stable gas prices
Used nuclear fuel benchmarks
Limited OCGT load factor and
stable diesel prices
MYPD 2 approved manpower
Double counting, efficiency for
maintenance
Other opex escalated with CPI from
MYPD 2
Corporate overheads from MYPD 2
•
Based on actual coal costs
Based on actual water costs
Realistic commodity fluctuations
Used actual contractual costs
Based on actual numbers
Did not double count for maintenance
Other opex considered change in
operating model
Corporate overheads on actual
IDM
R13bn
R5bn
Assumed that IDM will be undertaken by
an agency, based on MYPD 2
performance, limited to inflation
Impact on keeping lights on.
Return
R187 bn
R138 bn
Disallowed inflation adjustments since
subject to periodic revaluation; differing
WACC and RAB; capex disallowed
Incorrect to have real WACC on RAB that
excludes inflation
Depreciation
R185 bn
R140 bn
Depreciation linked to RAB and Capex
allowed. Ignores inflation adjustment
Method of depreciation is correct based on
allowed RAB and capex. Must adjust RAB
6
Eskom View
 Different assumptions :
− What was efficient costs
− Execution capability
− Steps necessary to ensure security of supply
− Inflationary increases in areas not subject to inflationary increases
(insurance)
 Different cost benchmarks assumed
 View of starting point of cost base – forecast MYPD 2 decision v
actual results
7
Strategic Implications
 No explicit limitation of Eskom’s mandate
 The following policy issues need to be addressed with the Shareholder to
ensure alignment:
− Eskom’s role in build beyond Kusile
− Future role in IDM
− Further Government support
− The regulation of coal prices in SA and declaring coal a strategic resource
8
2
Eskom Response
9
 In line with prudent operator principle, Board
approved a technical operating standard of 80
(EAF) – 10 (PCLF) – 10 (UCLF)
 We have secured demand market
participation programs
 Board decision to reprioritise and redeploy
manpower to support operational and
strategic imperatives
 A joint Shareholder – Intergovernment workgroup has been
established to consider medium term
constraints
 We are engaging with NERSA on
their MYPD3 determination, relating
to the reasons for decision and
assumptions made
Stakeholder
Operational
 IPP determination was reduced due  Despite operational challenges,
Eskom closed in a stronger
to rephasing per DOE allowances
financial position for FY13 than
and thus reducing costs
anticipated at time of submission
 An update of IRP2010 is under
development to adjust for changes in  We have approved a business
optimisation and efficiency
assumptions
programme (R30bn cost reduction
 To date no build beyond Kusile is
included in MYPD3 submission has
allocated to Eskom
been identified)
 Discussion on a country pact for
coal prices has commenced
Board approved a
Business Productivity Program
Financial
Mandate
New considerations, developments and strategic
levers are available since MYPD3 submission
10
Eskom has developed a holistic plan to address
the challenges posed by the determination…
… which also gives consideration to the new levers available
 Eskom has 2 year period in which to implement substantial changes to mitigate the shortfall
 We have initiated an integrated delivery program to engage stakeholders and ensure
financial sustainability
 The integrated delivery program has been approved by our board and supported by our
shareholder
 Business Productivity program delivers 4 key objectives within Eskom’s Integrated Delivery
Program
NERSA response
Efficiency and
reshaping drive
Strategic response
for long term
11
sustainability
This plan encompasses a systematic, rational
approach to ensure that we are sustainable
1
2
Efficiency
Mandate
4
5
Re =shape
Funding
Options
6
GAP
Regulatory
Clearing
Account
8
3
7
Capex
Business
Productivity
Program
Shareholder
R225bn Gap
Major efficiency and
sustainability drive
NERSA response
1.
2
Use the Regulatory
Clearing Account as a
mechanism to claw back
against the NERSA
determination
Gap
closed
Strategic response to ensure
long-term sustainability
1
1.
Immediate reprioritisation and efficiency drive to identify cash
reduction opportunities (over 5 years but with a specific focus on
years 1 and 2)
31. Address the Eskom
mandate with key
stakeholders, to reduce
mandatory spend
4
1.
Shape the business to realise long term efficiency gains
5
1.
Explore funding alternatives
6 Align capex programme in line with available funding options
1.
7
8
Additional shareholder
support
Roll out of Business Productivity Program (BPP)
12
Key Issues to clarify with Nersa
 Nersa will be approached to ensure clarity on the application of the regulatory
rules and framework to inform decisions that need to be made towards
achieving financial sustainability.
− The application of the Regulatory Clearing account (RCA)
− Commitment in writing on specific treatment of cost variances
− Reviewing the benchmark for coal costs and putting in place the sharing
mechanism for variances in advance each year
− Allowing for shifting of capital expenditure within allowed amount
− Allowing for additional benchmarks to be obtained and this be considered in
prudency reviews
− Committing to an annual valuation of the regulatory asset base
− Agreeing on appropriate timing of efficiency improvements, eg, UCLF
13
Next steps
1.
Stabilize the business for the next 2 years and roll out of business
productivity and re-shaping programme to identify and extract operating and
capital efficiencies
2.
Achieve a country pact on coal prices
3.
Deliver on our capacity expansion program
4.
Determine the maximum amount that can be recovered by applying the
RCA methodology
5.
Agree RCA principles and implementation process with NERSA
6.
Confirm Eskom’s role beyond Kusile
7.
Explore shareholder support.
8.
Confirm list of projects for next 5 years which is aligned to the capital
expenditure
14
Thank you
15