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Johannesburg - The low electricity price increase granted by energy regulator Nersa for the 2016/17 financial year, coupled with declining sales volumes, rising costs and debtor payment challenges, are all working to put Eskom’s revenue, cash flow and bottom line under severe pressure.
As a result, the Eskom Group profit of R6.38bn for the six-month period ending 30 September 2017 is projected to reflect a loss of some R3.55bn by financial year-end. This is according to a final draft report that has been viewed by EE Publishers and Fin24, from Eskom to its shareholder representative, Public Enterprises Minister Lynne Brown, for the second quarter of 2017 ending September 30, 2017.
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Declining electricity sales volumes
Sales volumes of 106,36 TWh for the period ending 30 September 2017 are said to be 2,80 GWh (2,56%) lower than budget, and 1,81 TWh (1,67%) lower than for the same period the previous year. The year-end sales volume is projected to be 211,91 TWh, some 3,54 TWh (1,64%) below the budget of 215,44 TWh, which reflects a projected year-on-year decline of 1,03%.
Both local and international sales volumes reflect a negative variance against budget. In addition, all local customer categories – industrial, mining, municipal distributors and other – also reflect this negative variance.
Demand from key industrial customers (KICs) is said to remain low, declining further to approximately 8200 MW during the past quarter, from an average of 8500 MW in the first quarter, mainly due to customers' response to higher winter electricity tariffs. Some recovery in demand is anticipated as KICs return plant after the higher winter tariffs and plant maintenance.
Eskom's current excess capacity had provided an opportunity to make additional international electricity sales. However, the report says that international sales volumes of 7325 GWh for the six months to September 2017 are 423 GWh (5,4%) lower than budget, and 7% lower compared to the six month period to September 2016.
This is attributed to the increased rainfall within the region which has resulted in improved availability of hydro generation plant owned by trading partners.
International sales to Botswana Power Corporation (BPC) were also lower due to additional self-generation of 428 GWh by BPC. Delays in contract finalisation have also resulted in reduced sales of 277 GWh to ZESCO (Zambia).
Declining electricity sales revenue
The report indicates that electricity sales revenue for the period to 30 September 2017 (after adjustment for revenue not recognised) amounted to R94.75bn, which is R4.07bn (4,1%) below the R98.82bn sales revenue budgeted for the period.
Electricity sales revenue at year end is projected to be R175.96bn against a budget of R179.65bn – a shortfall of R3.69bn (2%).
This is attributed to lower local sales volumes and revenue (R1.44bn lower), and a higher than budgeted adjustment for revenue deemed uncollectable at the time of sale (R391m higher) for the six month period ending September 30, 2017.
In addition to the decline in international sales volumes detailed above, the report indicates that international sales rate was unfavourable at R663/MWh against a budget of R762/MWh (13%), leading to a shortfall in international sales revenue of some R280m against budget for the six-month period.
The decline in the international sales rate is attributed to Eskom reducing its regional prices in order to ensure a competitive and sustainable offering.
Municipal arrear debt and defaulting municipalities
Municipal arrear debt increased by a further R974m (8,5%) from R11.45bn to R12.43bn in the past quarter alone, and by R3.02bn (32%) from R9.41bn to R12.43bn since March 31, 2017.
The report indicates that the top 20 defaulting municipalities constitute 78% of total municipal arrear debt, while the top five defaulting municipalities account for 52% of total municipal arrear debt. More than 45% of the arrear debt is owed by Free State municipalities. There are currently 27 municipalities with total arrear debt of more than R100m.
The top three Free State distributors account for almost R4.6bn of the total outstanding debt. The interest on these accounts increases the debt significantly. Some Free State municipalities are in the process of litigation, and as a result there is still no urgency on their side to settle overdue debt.
A total of 57 active payment agreements are in place with defaulting municipalities, including 14 of the top 20 defaulters. However, of the 57 agreements, only 16 are being honoured. Of the top 20 defaulters only one is fully honouring their agreement. None of the Free State municipalities is honouring their payment arrangement.
During the past quarter, numerous municipal distributors concluded agreements with Eskom or made suitable arrangements supported by their Provincial Treasury. The agreements by some Northern Cape Province municipalities were not complied, resulting in supply interruptions by Eskom. Eskom says it will continue with supply interruptions to other municipalities unless agreements can be reached, and the interruption schedule is formally published on the Eskom website.
Eskom says customer agreements are now being closely monitored and managed, as the financial risks for non-compliance are material, and impact its business directly.
Soweto small power user arrear debt
Soweto residents/small power users (SPUs) are suppled directly by Eskom, and not via a municipal electricity distributor.
Total Soweto SPU payments received year-to-date amount to only R57.2m (17%), against billing of R336.9m, resulting in a shortfall of R279.8m. The outstanding Soweto SPU debt (excluding interest) increased from R5.43bn to R5.67bn in the last quarter to September 30, 2017 alone.
This despite the installation of 16 465 split and/or smart meters in Soweto, Sandton and Midrand, and 7185 meters converted to prepaid during the six month period ended 30 September 2017.
International debt
The report indicates that international arrear debt over 60 days has increased from R440m for the first quarter ending June 30, 2017 to R456m at 30 September 2017. This consists mainly of debt owed by Zimbabwe, Zambia and Mozambique.
Electricity theft
There is no indication in the report of the level and value of electricity theft experienced by Eskom resulting from illegal connections “before the meter”, from bypassing or bridging of both credit and pre-payment meters, from “ghost vending, and/or from other fraudulent activities.
Revenue lost by Eskom through unbilled electricity theft is very significant, and adds to the problem of non-payment by both Eskom direct SPU customers and municipal distributors, yet this is not reflected within Eskom’s financial reports.
Levels of customer (dis)satisfaction
The report states that the 12-month moving average metrics of customer satisfaction for Eskom’s top customers are currently below target, and show a declining trend over the past quarter. Customers remain dissatisfied with poor quality of supply, perceived high electricity prices, and slow restoration times.
Overall, for the top customer group, the report says that Eskom is perceived as an unreliable provider of electricity-related services. The top priority remains the extent to which Eskom supplies electricity at internationally competitive prices.
The report further indicates that customer-care metrics have remained stable and above target, and staff friendliness consistently continues to score the highest. Satisfaction levels with the Eskom Contact Centre remained the same since the previous quarter.
The Enhanced MaxiCare perception survey score has decreased since the previous quarter, but has improved since year end. The most common complaints are about the accuracy of Eskom estimations, how Eskom fails to keep to the notified dates and times of planned electricity interruptions, and the number of power surges and voltage drops (dips) in electricity supply.
In the pre-paid customer segment, customers are unhappy about the lack of community meetings held in their areas.
Agricultural customers were unhappy about the number of power surges and voltage dips in their electricity supply.
Strategic risks and responses
Amongst other issues, Eskom has identified decreasing local sales volumes, coupled with surplus capacity and the difficulties in selling electricity into the region, as a strategic risk that may lead to stranded assets. In response, the utility says it is developing a sales growth and asset management strategy.
Escalating municipal debt and revenue shortfalls leading to financial and liquidity constraints has also been identified in the report as a strategic risk, requiring a careful debt management strategy involving the installation of split, smart and prepaid meters.
Note: This article is a collaboration between EE Publishers and Fin24.
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