LIGHT IN THE DARK

A new research report lays out four possible fixes for struggling power utility Eskom — but implementation and politics may prove problematic

Eskom’s troubles are undeniably big. But from a bird’s-eye view, they are also very simple: quite plainly, SA’S largest state-owned company is not generating enough money to cover its enormous costs.

In the annual results for the financial year ended March 2019, Eskom reported a severely worsened financial position — a loss of almost R21bn after tax, against a R2.3bn loss in the previous year.

The utility remains the biggest risk to the SA economy, not only because it is the monopoly power supplier, but also because the government is on the hook for about R350bn of its debt.

Two task teams have dived into Eskom’s issues this year, and a chief restructuring officer has started looking into ways to resolve the utility’s financial challenges.

But to save Eskom from defaulting on its debt obligations in the near term, the government is dishing out one R69bn bailout, to be paid over the next three years, plus

R59bn for the current and next financial years. The National Treasury has warned it will come at significant cost to South

Africans, and the move has reignited speculation as to whether SA could be driven into the arms of the International Monetary Fund (IMF).

If you could ignore the politics (you can’t), the solution would be simple: increase income, or cut expenses.

A research report, published by equities brokerage Mazi Macquarie Securities this month, puts forward four scenarios that could stabilise Eskom’s finances over the next four years. They are: cutting Eskom’s debt to R300bn; pausing the renewable energy programme for three years; raising the electricity tariff to 120c/kwh; and cutting 33% of Eskom’s wage bill.

Rowan Goeller, the author of the report, says he makes no presumption that any of the interventions are politically possible, nor does he extend any suggestions as to how the government might go about implementing them.

However, he says these are the four obvious

interventions the IMF might weigh up if SA were subject to one of its programmes.

The Mazi Macquarie research models a four-year outlook to the 2023 financial year, and assumes that electricity sales remain largely flat and the National Energy Regulator of SA (Nersa) awards Eskom an inflationlinked tariff increase of 7% for the 2023 financial year.

Scenario 1: Cutting debt

Eskom’s biggest expense is to service a R440bn debt mountain. So big is the burden that the utility’s income from operations is not enough to even cover its monthly debtservice costs.

As Mazi Macquarie points out, the debt burden has increased substantially recently, primarily due to the construction of Medupi and Kusile power stations at an estimated capital cost of R300bn.

“The ability to raise more debt is limited, especially as debt is currently being raised to cover interest payments as well as capital repayments. This is clearly unsustainable,” the report says.

Eskom’s management has said several times that it requires about R100bn in debt relief. A bailout for this year alone will amount to R82bn, and will be used to prevent Eskom from defaulting on its debt obligations.

According to Mazi Macquarie’s research, bringing Eskom’s debt down from R440bn to R300bn could quickly put it on the right track.

Under this scenario, Eskom’s earnings before interest, tax, depreciation and amortisation (ebitda) — a measure of operational performance — almost cover total finance costs of R60bn in the current financial year.

Thereafter, ebitda comfortably covers these costs as it rises to over R110bn in the 2023 financial year.

Profit before tax is slightly negative in the current financial year, but in 2021 revenues outpace costs and Eskom swings into profit. By 2023 it generates R60bn in gross profits.

In this scenario, some financial assistance will still be required at first.

Scenario 2: Pushing pause

In this scenario, the renewable energy independent power producers (IPP) programme is paused for three years — “removing a significant and growing cost for Eskom during the years when [it] is forecast to be under severe financial pressure”.

The power purchase agreements from IPPS are on a take-or-pay contract, meaning that Eskom is obliged to buy all IPP power when it is available, whether it wants it or not. And the tariffs escalate in line with the producer price index every year for the 20year period of the agreement.

“This can effectively be looked at as an extra back-loaded debt burden for Eskom, as it obliges Eskom to pay an escalating cost every year,” the report says. “The numbers here are significant — the IPP cost peaks at over R70bn per annum in 2032/2033, and the total programme will result in IPP power purchases of approximately R1-trillion over the 20-year [agreement] period.”

It is, however, a highly contentious issue. The renewables programme is part of the government’s bid to move towards a lowcarbon economy. But the scale and success of the programme has ruffled feathers in the coal industry, and especially of labour, which fears job losses as the transition to greener technologies continues.

Disgraced former Eskom CEO Brian Molefe first raised the IPPS as an issue for the utility’s financial sustainability.

It has since been fervently argued that renewables do not have a negative impact on Eskom. And in March, Eskom chair Jabu Mabuza categorically stated that IPPS are not a source of the utility’s problems.

Though Eskom is contractually obliged to take or pay for IPPS’ power, a “passthrough” mechanism means the regulator must allow it to recover all of these costs through the tariff.

However, Goeller says the obligation to pay upfront for this power adds to the pressure on the utility. And when it comes to Eskom’s impossible choices, “the IPPS are the least bad place to default”, he says.

Under this scenario, Mazi Macquarie