State-owned electricity provider Eskom argued on Friday that, in the absence of any immediate prospect for an equity injection, it had reached the limit of its capacity to cost-effectively raise new debt and that it, therefore, had no other option but to seek yearly increases of 16% between 2013 and 2018 to become financially sustainable.
CFO Paul O’Flaherty calculated that R25-billion would be shaved off its revenues over a five-year period for every percentage-point reduction in its yearly price-increase request. To avoid capital and maintenance slippages, this funding shortfall would have to be met through additional debt, which was likely to be extremely expensive, owing to the fact that Eskom was already "heavily geared" and lacked a standalone investment grade rating.
Addressing the final day of tariff hearings in Gauteng, O'Flaherty again stressed that there was no immediate prospect of further government support beyond the R60-billion subordinated loan already extended, along with R350-billion in government guarantees.
He told the National Energy Regulator of South Africa (Nersa) panel – comprising of Thembani Bukula, Ethèl Teljeur, Dr Rod Crompton and Joe Lesejane – that there was also no guarantee that any additional debt would be secured at competitive rates, owing to the fact that the group was currently considered an investment-grade risk only because of the “uplift” it was receiving from government.
That “uplift” had enabled the group to close what had been a R300-billion funding gap in 2009, but was not sufficient to enable the utility to raise additional debt. Therefore, the group was focusing on securing additional revenue from price increases.
“We are already heavily geared within our investment guarantees. That is pushing the debt limits to the maximum. There is no further equity injection,” O’Flaherty stressed.
In the period covered by the third multiyear price determination period (MYPD3) the utility was obligated to make debt repayments of R127-billion and interest payments of R115-billion.
“We need to maintain our debt within [the current] ceiling. We cannot operate outside of that ceiling, because on a stand-alone basis, we are not investment grade,” he insisted.
INVESTMENT GRADE QUESTIONS
However, Eskom’s emphasis on securing an investment grade rating over the MYPD3 period, primarily through large increases in its depreciation and its returns, has come in for sharp criticism during the hearings process. Together the depreciation charges and the returns made up R372-billion of an allowable-revenue application of nearly R1.1-trillion.
Crompton, for instance, questioned whether the aspiration to secure an investment grade could be considered a deviation from government policy, as there was no such stipulation in the shareholder compact governing the relationship between Eskom and the Department of Public Enterprises.
Chamber of Mines senior executive for strategy and economics Roger Baxter noted that return on capital and the return of capital, or depreciation, being sought constituted 65% of the average price increase proposed. He argued that the increases were designed to accelerate Eskom’s transition to a standalone investment grade at the expense of other economic and policy imperatives.
The chamber, therefore, called on government, to consider providing further sovereign balance sheet support to Eskom to reduce the pressure on cost rises in the short- and medium-term.
Similarly, Energy Intensive User Group chairperson Mike Rossouw called on government to “put skin in the game”, by extending further guarantees and by lowering the electricity environment risk through greater policy certainty.
But O’Flaherty argued that the transition to a standalone investment grade was implicit in the shareholder compact stipulation that Eskom be financially sustainable.
“What is absolutely important . . . is that we have to be a ‘going concern’ . . . we must be financially sustainable. The investment grade and where you pitch the business within the support you get, determines your going-concern nature.”
He acknowledged that the main drivers behind its double-digit request did relate to the depreciation and return-on-assets components of the application, but stressed that this should be understood within the context of an “historical under-recovery”.
Bukula promised that Nersa would deliberate on Eskom’s application and take account of the submissions made before delivering its determination on February 28.