Ensuring Eskom's financial sustainability

Eskom’s going-concern status will continue to be a key focus for the coming year as the revenue shortfall created by the MYPD 3 decision cannot be solved by cost savings and efficiencies alone – cost-reflective tariffs remain a requirement. Eskom has to balance short-term priorities with, long-term sustainability requirements and has to ensure that it will be able to repay a significant amount of current and future borrowings

Notwithstanding the significant effect that the MYPD 3 tariff increase has had on the expected revenue for the year, as well as the
R225 billion revenue shortfall over the five-year MYPD 3 period, Eskom has identified and largely secured funding for the current capacity expansion programme up to the completion of the Kusile power station.

Eskom has sufficient liquidity to meets its current liability requirements. Eskom remains confident that it will be able to raise the remaining funding for the current capacity expansion programme, but this must be balanced against the negative outlook from the rating agencies and the possibility of a downgrade due to the deterioration in the credit metrics.

Eskom remains focused on re-engineering the business to achieve sustainability and cost efficiency by striking a balance between reducing costs where appropriate and the three sources of funding: equity, debt and revenue. The need for a supportive credit rating that reduces the cost of funding as well as retaining access to funding markets, and therefore, the need to migrate to cost-reflective tariffs in the future, will play a key role.

Eskom implemented the business productivity programme (BPP) which focuses on the reduction of the cost base, increased productivity and revisions of the Eskom business model and strategy in order to close the revenue shortfall. Cash savings of between R50 billion and R60 billion are targeted over the MYPD 3 period. Please refer to page 73 for further detail on BPP.

Eskom submitted a regulatory clearing account (RCA) application to NERSA for the MYPD 2 period during the last quarter of 2013 regarding the variances between costs and revenues assumed in MYPD 2 compared to the actual costs incurred and revenues received by Eskom. In terms of the regulatory rules, the regulator can increase future electricity tariffs to compensate Eskom for an under-recovery of revenue or it can reduce tariffs in the future if Eskom has over-recovered revenue. The electricity sub-committee has made a recommendation on the RCA to the NERSA board and a decision is awaited in the first quarter of the new financial year. It is anticipated that this adjustment is likely to commence no later than 1 April 2015.

While the regulatory mechanism does not take into account Eskom’s capital expenditure, other than depreciation once in commercial operation and a return on assets, the revenue shortfall due to the lower tariff does have an impact on the cash available to Eskom for capital expenditure. Eskom submitted a capital programme amounting to R337 billion over the MYPD 3 period and the result of the determination implies that Eskom has to reduce its capital programme to R251 billion taking into account the cash position. There is an additional requirement for critical project that can’t be executed within the R251 billion budget. The capital expenditure portfolio will be managed by Eskom within the funds available, and should additional funding not be secured for the additional capital requirements, the current capital portfolio of R251 billion will be reviewed to reprioritise projects to ensure that environmental and regulatory legal requirements are met. Eskom is currently nine years into a capacity expansion programme which is funded from various local and international funding sources and relies on Eskom’s credit rating, which is linked to South Africa’s sovereign rating.

The board has emphasised that by implementing the corporate plan for 2014/15 to 2017/18 and all the approved initiatives to ensure the continued operation of Eskom, it is a specific prerequisite that Eskom remains a going concern and financially sustainable.

Operating highlights

Eskom successfully raised USD1 billion through an international bond issue during July 2013
The original R300 billion funding plan that covered the capacity expansion programme to the end of Kusile, from 1 April 2010 to
31 March 2017, is progressing well with 90.5% of the R300 billion secured
During the period, Eskom entered into a loan amendment whereby the currency of the World Bank loan was changed from a floating US dollar loan to a fixed-rate rand loan, the effect being that Eskom now no longer has a US dollar exposure to hedge
Eskom restructured a cross-currency swap and as a result released R2.3 billion in March 2014 (cash received), and also reduced the coupon payable over the period

Operating challenges

Bridging the R225 billion five-year revenue shortfall resulting from the 8% MYPD 3 tariff increase which is exacerbated by the decline in local sales volumes (compared to budgeted sales volumes), the impact of the determination on operations and capital expenditure and the net impact on Eskom funding requirements
The high cost of the liquid fuel for open-cycle gas turbines to maintain security of supply
The cash flow impact of electricity theft and the increase in outstanding debt of electricity debtors like municipalities and residential customers

Future focus areas

In light of Eskom’s financial sustainability, it is imperative that the following are undertaken to maintain a positive outlook for the organisation’s liquidity:

Disciplined execution of the BPP workstream opportunities that are identified
Continuing engagement with NERSA on regulatory clearing account recovery
Exploring other funding alternatives to unlock cash, including investigating additional equity

Performance indicators for ensuring Eskom’s financial sustainability

Indicator and unit
Electricity revenue per kWh, c/kWh 89.30   62.37   62.82   58.49   50.27    
Electricity operating costs per kWh (including depreciation and amortisation), c/kWh 73.21   52.67   59.67   54.15   41.28    
Interest cover, ratio 1.06   1.18   0.65   0.27   3.27    
Debt:equity (including long-term provisions), ratio 3.40   2.17   2.21   1.96   1.69    
FFO as a percentage of gross debt (target >20%), %2 11.08   9.11   9.21   8.55   15.06    
Working capital ratio, ratio 0.79   0.65   0.71   0.68   0.76    
Free funds from operations, R million1 49 119   29 653   27 542   18 108   30 483    
Gross debt/EBITDA (target < 3), ratio2 6.80   7.95   10.96   16.20   6.46    
Debt service cover (target >2.5), ratio3 2.17   1.55   1.21   2.01   3.50    

1. Comparative restated.
2. The target reflects investment grade aspiration.
3. The target reflects a loan covenant.

Actual performance for the year ending 31 March 2014 has been significantly different from the budgeted outlook, which can be directly linked to the reduction in local sales volumes, and the additional OCGT expenditure necessary to ensure the security of supply.

The following Eskom company financial ratios have been recalculated to reflect a scenario that assumes that Eskom’s sales volumes were as budgeted and that the OCGT spend was only at budgeted levels:

Indicator and unit
March 20141
2014 adjusted
EBITDA, R million 23 497   36 228   12 732  
Electricity operating costs per kWh (including depreciation and amortisation), c/kWh 59.67   54.11   (5.55)  
Interest cover, ratio 0.65   1.36   0.71  
Free funds from operations (FFO), R million 25 874   38 612   12 732  
Debt service cover ratio, ratio 1.16   1.94   0.77  
FFO as percentage of gross debt, % 9.21   13.74   4.53  
Gross debt/EBITDA, ratio 11.96   7.76   (4.20)  
Sales volumes, GWh 217 903   227 393   9 490  

1. The figures reflect company numbers which are not necessary comparable to those in the table on page 155, which shows group figures.

Financial results of operations

Eskom achieved a group net profit of R7.1 billion for 2013/14 (2012/13: R5.2 billion). Operating profit before fair value gains and losses on embedded derivatives and net finance costs was R11.4 billion (2012/13: R10.4 billion). Compared to 2012/13, the 8% tariff increase resulted in a 7.4% average increase in electricity revenue per kilowatt-hour (kWh). This increase was offset by a 10.2% increase in operating costs per kWh compared to the previous year. The decline in local sales volumes has an impact on the calculation of operating costs per kWh sold (compared to target), as a significant portion of Eskom’s operating cost base is fixed.

The effect of applying the replacement value approach to Eskom’s assets results in the group reporting a net loss of R12.5 billion (2012/13: R8.7 billion). This equates to a negative return on assets of 1.89% (calculated before applying the impairment provision). For further details on the replacement value approach, refer to note 52 in the annual financial statements available at www.eskom.co.za/IR2014/01.html

This section should be read in conjunction with the summarised financial statements on pages 164 to 166 as well as the full annual financial statements available at www.eskom.co.za/ IR2014/01.html

Sales and revenue

Group revenue for 2013/14 was R139.5 billion (2012/13: R128.8 billion) and the increase is mainly as a result of the electricity tariff increase of 8% as determined by NERSA. Electricity sales for the year amounted to 217 903GWh, representing a 0.6% increase on the previous year (2012/13: 216 561GWh). Local sales to industrial customers have increased by 5.6% year-on-year, mainly due to increased operations by certain key customers as well as less power buybacks during 2013/14. This increase is offset by a decline of 3% in the mining sector and a 9.6% decrease in international sales. Refer to pages 110 to 111 for more detail on international sales.

Operating costs

Primary energy costs for the year amounted to R69.8 billion (2012/13: R60.7 billion). This included R10.6 billion
(2012/13: R5.0 billion) relating to the fuel for the open-cycle gas turbines (refer pages 106 to 108 under “Keeping the lights on”). Per unit, primary energy costs increased by 14.2% per unit of electricity sold, from 28.05c/kWh in 2012/13 to 32.04c/kWh in 2013/14. The 3.99c/kWh increase is mainly due to:

Coal usage costs increasing by 0.74c/kWh
The cost of using open-cycle gas turbines increasing by 2.54c/kWh
Demand-market participation, power-buyback and co-generation costs decreased by 1.27c/kWh – this was mainly due to power-buyback costs decreasing from R2.8 billion in 2012/13 to R0.01 billion in 2013/14
Other expenditure including coal handling, fuel for gas-fired start-ups, water usage, environmental levies and international purchases made up the remainder of the increase

The amount paid to the South African Revenue Service regarding the environmental levy for the 2013/14 financial year was
R8.5 billion (2012/13: R8.0 billion).

Group employee numbers, inclusive of fixed-term contractors, reduced by 376 from 47 295 at 31 March 2013 to 46 919 at
31 March 2014. Group gross employee costs (before capitalisation) for the year amounted to R31.3 billion (2012/13: R28.6 billion). The increase in gross employee cost is mainly as a result of the increase in contract labour cost relating to the capacity expansion programme.

Group arrear bad debt was 1.10% of external revenue for the year (2012/13: 0.82%). The municipality arrear debt as well as residential arrear debt in Soweto continues to grow. Refer to pages 96 to 97 under “Being customer-centric” for more detail on electricity debtors.

The group’s other operating expenses for the year came to R19.2 billion (2012/13: R23.0 billion).

The main items in this category are:

The company’s net repairs and maintenance cost1 (after capitalisation) of R12.9 billion (2012/13: R10.6 billion). Refer to pages 114 to 115 under “Keeping the lights on” for more detail on generation’s maintenance, which is on average about 60% of the total of repairs and maintenance cost
The company’s demand-side management (DSM) cost for Eskom amounted to R1.4 billion in 2013/14 (2012/13: R3.0 billion). The decrease is as a result of the reduced amount allowed by NERSA in its MYPD 3 determination. Refer to pages 111 to 113 under “Keeping the lights on” for more detail on IDM

Eskom’s focus on cost efficiencies has had a positive impact on the other items included in other operating costs.

1. A significant amount of repairs and maintenance cost incurred by the Eskom company relate to its subsidiaries Roshcon and Rotek and therefore the cost is eliminated against the repairs and maintenance line upon consolidation of the group results, in accordance with IFRS.

Net fair value on financial instruments and embedded derivatives

The net fair value loss on financial instruments, excluding embedded derivatives, was R0.6 billion for the year (2012/13: R1.7 billion). These gains and losses consist primarily of the costs attributable to the rolling over of forward exchange contracts, which vary from period to period due to the timing of the placement of related procurement contracts and exchange-rate fluctuations.

The net impact on the income statement of changes in the fair value of the embedded derivatives (relating to the negotiated pricing agreements) was a fair value gain of R2.1 billion for the year (2012/13: R5.9 billion loss). Embedded derivative liabilities amounted to R9.3 billion (2012/13: R11.5 billion). The loss in 2012/13 was mainly due to the decision at 31 March 2013 to account for the full term of the underlying negotiated pricing agreement contracts. The profit in the current year is mainly as a result of the changes in the USD/ZAR exchange rate and interest rates. Eskom submitted the remaining contract to NERSA in the previous year and is awaiting its decision.

Euro and US dollar to rand exchange rate movements
Euro and US dollar to rand exchange rate movements

Finance costs

After capitalising borrowing costs and including the unwinding of interest on provisions, the net finance cost for the group for 2013/14 was R4.8 billion (2012/13: R3.0 billion income). Gross finance income was R2.5 billion (2012/13: R2.8 billion) while the gross finance cost was R17.6 billion (2012/13: R1.1 billion). The borrowing costs capitalised for the year were R13.3 billion (2012/13: R3.7 billion), while the unwinding of interest amounted to R2.9 billion (2012/13: R2.4 billion).

The gross finance cost, as well as borrowing costs capitalised for the 2012/13 year, were impacted by the remeasuring of the government loan which amounted to an income of R17.3 billion. The remeasurement of the government loan is based on the MYPD 3 price path and no remeasurement was required in the current year.


The effective tax rate for the year was 23.3% for the group (2012/13: 26.4 %). Please refer to note 42 of the annual financial statements available at www.eskom.co.za/IR2014/01.html for more information.

Liquidity and capital resources

Cash and cash equivalents, together with liquid investment in securities, amounted to R30.6 billion as at 31 March 2014
(31 March 2013: R28.0 billion). In terms of the latest projections, assuming no further drawdowns on borrowings, Eskom’s liquidity reserves cover its requirements for approximately 120 days.

The group’s net cash inflow from operating activities for 2013/14 was R33.6 billion (2012/13: R27.7 billion). The group’s working-capital ratio was 0.71, compared to 0.68 as at 31 March 2013.

Cash flows used for investing during the year stood at R57.2 billion (2012/13: R58.4 billion). The capital expenditure cash flows included in this item, excluding capitalised interest, amounted to R55.8 billion (2012/13: R57.9 billion). For details on the capital expenditures incurred for the year refer to the table on page 124.

The net cash inflows from financing activities for the year were R32.8 billion (2012/13: R21.8 billion). The raising of borrowings and the issuing of securities have been managed to match the capital expenditure.

Gross debt increased by R51.9 billion during the year. The debt-to-equity ratio for the group (including long-term provisions) was 2.06 as at 31 March 2014 (2012/13: 1.84). The free funds from operations as a percentage of gross debt was 9.73% for the group at
31 March 2014 (2012/13: 8.04%), while the gross debt as a percentage of earnings before interest, taxation, depreciation and amortisation was 10.96% (2012/13: 16.20%).

Funding progress

As at 31 March 2014, R271.6 billion or 90.5% of the R300 billion borrowing programme had been secured. The R300 billion borrowing programme is based on the original funding requirements as at April 2010 and covers the period 1 April 2010 to
31 March 2017. Further funding requirements, including those resulting from the lower than expected MYPD 3 tariff determination, are not included in this borrowing programme.

The tracking of execution progress of the original R300 billion plan will have to be replaced over time, with the R251 billion borrowing requirement which covers the period 1 April 2013 to 31 March 2018. Eskom’s current funding plan does not take into account allocations of capital projects in terms of the IRP 2010 post-Kusile.

Progress on the original R300 billion funding plan as at 31 March 2014

April 2010 –
March 2014
to date
April 2010 –
March 2013
April 2013 –
March 2014
since April
supported by
Bonds 90.0   65.4   44.8   20.6   65.4   42.6  
Commercial paper1 70.0   70.0   30.0   10.0   40.0   0.0  
ECAs2 32.9   32.9   19.4   2.3   21.7   0.0  
World Bank 27.8   27.8   8.6   3.4   12.0   27.8  
AfDB3 20.9   20.9   13.3   2.8   16.2   20.9  
DBSA4 15.0   15.0   7.0   2.0   9.0   0.0  
Shareholder loan 20.0   20.0   20.0     20.0   20.0  
Other/new sources 23.4   19.64   0.9   3.59   4.5   5.0  
Total (R billion) 300.0   271.6   144.1   44.7   188.7   116.2  
Percentages     90.5           69.5   42.8  
      (% of R300 billion)           (% of
  (% of

1. Commercial paper is issued for up to one year and then redeemed and re-issued for the same net amount. The commercial paper is thus by definition not fully secured for the full period, however, Eskom’s long-term observations and past trends support a high level of confidence that Eskom will be able to roll over the redemptions each year. For this reason, the gross value of the commercial paper is shown under the “secured” column in the table above.
2. Export credit agencies.
3. African Development Bank.
4. Development Bank of South Africa.

Summary of Eskom’s credit ratings as at 31 March 2014


Standard & Poor's


Local currency
National scale
Foreign currency BBB   Baa3     AAA*  
Local currency BBB   Baa3   BBB+   F1+  
Standalone b-   b1   B   None  
Outlook Negative   Negative   Stable   Stable  
Action date 14 Oct 2013   19 Jul 2013   11 Jan 2013   15 Jan 2014  
Affirmation date 14 Oct 2013   19 Jul 2013   12 Dec 2013   15 Jan 2014  

* Adjusted from AA+ to AAA in January 2014.

For the rating rationale of Standard & Poor’s and Moody’s, please refer to the interim integrated report (www.eskom.co.za/IR2014/06.html).

Hitachi, one of the main suppliers for the Medupi power station project, funded the Segwati Pre-school in Shongoane village, Lephalale
Hitachi, one of the main suppliers for the Medupi
power station project, funded the Segwati
Pre-school in Shongoane village, Lephalale

Eskom continues to monitor the effects of its funding initiatives and operations on the ratios that impact on its credit rating. Eskom’s credit rating continues to reflect its highly leveraged financial profile, the execution risks associated with its capacity expansion programme and a degree of regulatory uncertainty.

Funds for the next 12 to 18 months will be sourced mainly from a combination of issuing domestic and international bonds, export credit agency-backed financing, development finance institutions and the domestic commercial paper market. New opportunities from alternative funding sources and products, such as Islamic (Sukuk) funding, preference shares, syndicated loans and project-based funding are also being explored and considered to complement the current funding sources. Eskom’s current funding plan does not take into account allocations of capital projects in terms of the IRP 2010 post-Kusile.

Activities remain focused on funding the remaining balance of the committed capacity expansion programme and the maintenance of a liquidity buffer. The additional capital requirements will only be approved if additional funding can be secured.