Eskom’s 2028s Above Par for First Time Since Issuance; Utility Continues Fighting Corner in NERSA Public Hearings; National Treasury to Update Investors in Feb. 20 Budget Speech

Relevant Documents:
Statement Jan. 25
RCA Year 5 of MYPD Presentation, Jan. 25 2019
MYPD4 Revenue Application Presentation, Jan. 25 2019

Eskom’s unguaranteed 8.45% 2028 notes have risen to 100.875/101.875 on the back of news that the South African government is taking steps towards a plan to support the state-owned utility, according to sources familiar with the situation. The Government will provide an update on Eskom in the February budget speech on Feb. 20, a National Treasury spokesperson told Reorg.

The long-dated bonds are trading above par for the first time after they were issued in August. The $1 billion 6.35% government-guaranteed 2028s are quoted at 101/101.5 today and yielding about 6.15%.

Eskom’s $1.75 billion 5.75% unsecured 2021s are offered at 97.37/98.12 today. The $1 billion 6.75% unsecured 2023s are at 96.87/97.87 and the $1.25 billion 7.125% unsecured 2025s are at 96.87/97.87.

The National Energy Regulator of South Africa, or NERSA, is currently hosting a number of public hearings across South Africa, during which the regulator discusses, among other things, Eskom’s proposal to increase electricity prices by 15% in financial years 2019/20, 2020/21 and 2021/22. At the first hearing, which took place in Cape Town on Jan. 14, Eskom Group CEO Phakamani Hadebe stressed that the company urgently needs government support to survive.

At a Jan. 25 session in Nelspruit, Mpumalanga, the parties focused on Eskom’s regulatory clearing account, or RCA, application for year five of the third multi-year price determination, or MYPD3 and MYPD4. The RCA acts as a mechanism to balance NERSA’s forecast of costs and revenue in the MYPD to Eskom’s actual costs and revenue recorded in its audited financial statements. It works as a backward-looking reconciliation mechanism.

At the hearing, Eskom’s CFO Calib Cassim raised concerns about NERSA assuming that all transmission and distribution capex - even what was in NERSA’s MYPD3 decision - was considered to be inefficient. Eskom claims that NERSA has not undertaken any efficiency analysis of these network costs, as it would expect from a regulator, according to a source close to the utility. NERSA has now proposed a delay of the process, according to the statement.

In a presentation on costs related to Eskom’s regulatory asset base, or RAB, capital expenditure and network related expenses, Cassim indicated that Eskom’s application took into account its RAB of ZAR 1.268 trillion ($93.2 billion). It is projected to increase to ZAR 1.3 trillion by April this year.

“Eskom has undertaken an independent valuation exercise for existing RAB as at 31 March 2016, resulting in asset valuation of ZAR 853 billion,” Cassim said. “The value of the RAB has been rolled forward with assumptions on consumer price index for the value during application period, amounting to an overall average RAB value of ZAR 1.3 trillion in 2020 financial year.”

Eskom said it has made a proposal to NERSA to remove some units from its RAB, for instance generating units that will not be operable and have been put into reverse storage. Removing certain assets from the utility’s RAB will result in a decrease in depreciation costs and change in return on assets, Eskom said. The units will continue to be available over the longer term and are therefore not being decommissioned.

Eskom’s generation new build program will increase the utility’s generating capacity by 17,132MW, its transmission lines by 9,312 kilometers, and its substation capacity by 42,850MVA. More than 60% of this capacity has already been developed, with 10,750MW grid-connected. In addition, the Medupi and Kusile power plants are 95% and 85% complete, respectively.

In the presentation, Eskom says its generation new build programs are within the acceptable benchmarked range when measured on an overnight cost of construction basis. The utility also pointed to Medupi’s one-year development timetable, stating that “rapid development with shortcuts taken in design and engineering inevitably cause uncertainty, design changes, integration issues and accompanying delay and cost escalation.” Eskom said it did not have sufficient time to undertake the design phase due to delays in the government making decisions on new capacity and the utility being put under pressure to provide further generating capacity.

The cost of Eskom’s environmental projects for the application period amount to ZAR 49.752 trillion. This excludes the costs for the installation of flue gas desulfurization at seven power stations which would cost between ZAR 20 billion and ZAR 30 billion per plant. The addition of flue gas desulphurisation is subject to a proposed postponement application.

The efficiency of Eskom’s network businesses were demonstrated by the below-inflation increase in transmission and distribution costs, the utility said. Based on the MYPD methodology, Eskom’s planned capital expenditure for transmission projects as per its transmission development plan is ZAR 29.4 billion while the total allowable revenue for the distribution division is ZAR 97.7 billion.

Eskom’s capital structure is available HERE and a tear sheet can be found HERE.