Eskom is facing a spiralling debt load and annual interest bill that is already in excess of R45bn/year, coupled with a more assertive regulator that keeps fobbing off its requests for electricity tariff increases far above the inflation rate.
It will now reduce its capital expenditure over the next few years in an attempt to contain costs and to become sustainable. The utility will not, however, curtail investment in its much-delayed and ballooning new capital assets of Medupi and Kusile power stations.
Phakamani Hadebe, Eskom’s 11th CEO since 2007, says the utility needs to contain its gearing ratio to 72% of equity. "We need to reduce capital expenditure over the next three years. If we fail to do this the gearing ratio will jump to over 78% in three years’ time," says Hadebe.
Eskom spends an average R70bn annually on infrastructure, which will be reduced to a minimum R45bn under its latest corporate plan.
The bulk of the expenditure goes to building its newest power stations — they will increase its installed generation capacity by 9,600MW when complete in 2023. Eskom has recently added the 1,033MW Ingula pumped storage station in the Drakensberg to its generating capacity, which stands at just under 48,000MW.
The utility funds the investment expenditure from borrowings in the capital markets and other lenders, together with cash raised from its own operations. Eskom has to service the debt as soon as it draws down on funding facilities. This means that for about seven years it has been struggling with ballooning interest payments as it does not yet generate revenue from those investments. Interest expenditure will top R45bn for financial 2018 when it reports in July.
In five years’ time we’ll be going to outstanding debt of about R600bn if nothing changes
— Phakamani Hadebe
The problem is that Eskom’s operating costs have increased at an average 15%/year for the past 17 years, mainly from its primary energy division. Revenue, on the other hand, has only been increasing by an average 13.5%/year, making for a poor return on investment. This rendered Eskom unable to independently fund its financial obligations.
"In five years’ time we’ll be going to outstanding debt of about R600bn if nothing changes," Hadebe tells the FM. At the interim period in September outstanding debt was R367bn. It generated R23.6bn cash from operations while it paid R15.7bn in interest.
"We’re borrowing money to pay debt," says Hadebe. In the absence of a cash bailout by government, Eskom would need higher than normal electricity price increases to be able to meet its financial obligations.
To arrest this situation, Eskom will limit its investment expenditure to the upper limit of R60bn a year until its financial situation stabilises, says spokesperson Khulu Phasiwe.
Reductions will be on assets such as new transmission lines, particularly those that are planned to connect the new independent power projects that government was meant to implement in the third and fourth rounds of its IPP projects.
Eskom’s operating costs have been increasing at an average 15%/year while revenue has only been increasing by about 13.5%/year
— What it means
"We will not cut expenditure on maintenance," says Phasiwe. There is also no question of stopping the building programme at Medupi and Kusile. These are 90% and 80% complete, respectively, and Eskom would incur unaffordable penalties should it mothball any parts of them. They also are now helping to contribute revenue, as most generating units have been connected to the grid.
Three generating units at Medupi and one at Kusile are in commercial operation already, as building on them is complete. One generating unit at Medupi was synchronised into the grid in April and is undergoing tests before it is released into commercial operation within the next three months. Another two Kusile units are also contributing to the grid, and should enter the commercial stage within six months.
Other measures to arrest spiralling costs will be unveiled once the utility agrees on a new shareholder compact with the public enterprises minister, expected in October, says Hadebe. Other than significantly slashing its headcount, Eskom will have to look at decommissioning four old power stations that have exceeded their useful lifespan of 50 years.
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