Eskom

Eskom outlines streamlined restructuring model to deliver independent grid company by end-2021

Eskom outlines streamlined restructuring model to deliver independent grid company by end-2021

Photo by Creamer Media's Donna Slater
Eskom CEO Andre de Ruyter

14TH DECEMBER 2020

BY: TERENCE CREAMER
CREAMER MEDIA EDITOR

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Eskom CEO Andre de Ruyter outlined a streamlined approach on Monday to the vertical separation of the State-owned utility into three businesses of generation, distribution and transmission, which he said could accelerate the process of establishing an Eskom-owned independent transmission system and market operator (ITSMO) without the threat of any debt default.

Speaking at the release of the group’s interim results to the end of September, De Ruyter again emphasised the importance of creating the ITSMO to support much-needed generation investment by independent power producers (IPPs) and indicated that the target date for the creation of a separate transmission entity remained December 2021.

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He acknowledged that the restructuring, which would involve a transfer of assets, the secondment of staff and the transfer of contracts, also depended on securing external policy, regulatory and legal permissions.

Nevertheless, he presented a more optimistic prognosis for securing these than he did in a previous engagement with lawmakers in May, when he outlined the need for nine steps outside of Eskom’s control, which meant that the ITSMO might be fully independent only in 2023.

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“That would have resulted in a very protracted process towards the implementation of the ITSMO. We have developed an internal plan and we believe that plan allows us to accelerate the establishment of the ITSMO, with a view to putting that in place by the end of next calendar year.”

He said the modality selected to facilitate the acceleration was the retention of the ITSMO as a wholly-owned, yet independently governed, subsidiary of Eskom, as allowed for under Section 66(4) of the Companies Act. The legislation allows for an independent board and for State-owned companies to have their boards appointed by an external party.

“The reason why this is an important nuance is that we, under no circumstances, wish to create any risk of default under our loan agreements and, therefore, if we have a wholly-owned subsidiary that risk is mitigated.

“If we are required to completely legally separate the ITSMO, we will have to renegotiate loan conditions for some 167 different loan agreements, which will be extremely time consuming, but also extremely risky in terms of the potential for triggering a default event.”

In parallel, work was under way to prepare Eskom’s information-technology governance for the separation by ensuring “appropriate Chinese Walls are in place so there is no cross contamination of information between various parts of Eskom”.

Both steps, De Ruyter stressed, were designed to offer IPP investors the assurance of the ITSMO’s independence.

This “alternative programme” aligned the introduction of the ITSMO with the timelines originally outlined in the Department of Public Enterprises’ ‘Roadmap for the Reform of Eskom in a Changing Energy Supply Industry’, published in 2019.

Legal separation of the generation and distribution entities was envisaged to follow by December 2022.

However, CFO Calib Cassim used the platform of the results presentation to highlight that the restructuring alone would not deliver three financially sustainable businesses.

“Using current tariffs, the separated generation, transmission and distribution entities will be in a similar loss-making position,” he stressed, displaying pro-forma separated financials for the year to March 30, 2021, during which each entity would be lossmaking.

Eskom, which reported an interim profit of R83-million, is forecasting a full-year loss of R22.1-billion.

Cassim reiterated that without government support of R56-billion during the year, which would grow to R225.8-billion by 2026, the group would not be in a position to service its debt, which stood at R420-billion at the end of September.

“The price of electricity in South Africa must migrate towards a cost-reflective tariff that covers prudent and efficient costs to ensure the long-term viability of the electricity supply industry and restore Eskom’s independent financial sustainability,” he argued.

Eskom estimated a cost-reflective tariff to be about 26% higher than its current tariff of 105c/kWh.

The group was also actively working with the National Treasury on debt-reduction plans, deliberations on which were being hastened following the signing of the so-called ‘Eskom Compact’ by the social partners at the annual summit of the National Economic Development and Labour Council on December 8.

De Ruyter said it would be premature to outline the debt-reduction options being considered or speculate on timing of a transaction or series of transactions.

He stressed, however, that any concerns that bondholders could be forced to take a “hair cut” were unfounded. “None of that is on the table at all.”

Eskom had indicated previously that a sustainable debt level would be about R200-billion. 

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