Power Producer Seeks South Africa Prices Reflecting Costs

Eskom Holdings SOC Ltd., the South African utility that won half the power-price increase it sought for the five years through 2018, wants tariffs to mirror costs, so that it can stem a revenue gap and prevent higher debt-servicing expenses.

Without cost-reflective prices “we are compromised,” Finance Director Tsholofelo Molefe said after a Johannesburg presentation today. “We rely on borrowings currently and we enjoy government support through guarantees, but we need to make sure that we don’t stretch our balance sheet beyond that which we can manage.”

The utility is cutting expenses to plug the 225 billion-rand ($21 billion) cashflow shortfall through 2018 caused after the energy regulator refused in March 2013 its request for 16 percent annual tariff increases. Standard & Poor’s last month downgraded South Africa’s rating and placed Eskom on negative CreditWatch, meaning it has a 50 percent chance of being lowered again within 90 days to below investment grade.

A downgrade would raise debt-servicing costs by 30 percent to 40 percent, Molefe said. The company is the country’s biggest corporate borrower, with 254.8 billion rand of debt securities and borrowing outstanding at March 31, it said.

The revenue shortfall “can’t be solved through cost savings and efficiencies alone, cost-reflective tariffs remain a key imperative,” Acting Chief Executive Officer Collin Matjila said.

Funding Options

To close the gaps, Eskom is considering a variety of funding options, including the issuing of international bonds, Treasurer Caroline Henry said yesterday. The company “is just getting ourselves fit for it as we’re not going to do something about it now, but we’re definitely going to do something about it this financial year,” she said.

Tariffs may increase by more than the allowed average of 8 percent starting April 1, 2015, should South Africa’s energy regulator find that Eskom’s actual costs in the three years through March 2013 exceeded projections. Nersa, the regulator, will announce its decision at the end of this month.

Eskom’s primary energy costs, mostly coal, rose at rates of 23 percent to 31 percent in each of the three years to 2013. They were 60.7 billion rand in 2013, exceeding the regulator’s projections by 34 percent. The utility uses coal to generate about 85 percent of its electricity.

Profit Increase

Eskom’s profit rose 37 percent to 7.1 billion rand ($662 million) in the year ended March 31, it said today. The utility reported a 2.1 billion-rand gain on derivatives related to negotiated pricing agreements and changes in the rand-dollar exchange rate, with the local currency weakening 12 percent in the reporting period.

Electricity sales rose 0.6 percent to 217,903 gigawatt-hours, while the costs of primary energy, which comprise mainly coal, increased 15 percent to 69.8 billion rand from a year earlier.

The profit “will be reinvested in the company to fulfill and support our capacity expansion program as well as to be able to service our debt,” Molefe said.

The company charged an average of 62.82 cents per kilowatt-hour in the period, 7.4 percent more than a year earlier.

Eskom is struggling to supply sufficient power to the continent’s second-biggest economy after a decade of underinvestment in generation. It resorted to rolling blackouts for the first time in six years in March after rains disrupted supplies of coal. The construction of what will be Africa’s two largest coal-fired plants has been beset by delays for more than two years.

Medupi Power

“We are confident that we will be able to put first power on the grid in December” at the 4,764-megawatt Medupi plant and start full commercial operations six months later, Matjila said. “The problems have now been sorted out on both sides and we have seen a more intense focus and progression.”

Public Enterprises Minister Lynne Brown said today the delays have added an “extra burden on the already-constrained power system; that is having a negative impact on the country.” She has asked the company for a report outlining the holdups and showing new timelines for completion.

The process of finding a new CEO should be concluded by the end of next month, she said.

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