willie de beer, coo, edi holdings potential impacts of edi restructuring potential generation and...
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Willie de Beer, COO, EDI Holdings
Potential Impacts of EDI Restructuring
Potential generation and transmission impacts as a result of restructuring the RSA Electricity Distribution Industry (EDI)
16-19 May 2005
South Africa ’s real gross domestic product (GDP) grew 2.6% in 2004, and is forecast to grow 3.2% in 2005. Forecasts may cause shortages in as early as 2007 or as late as 2011.
Building increased capacity requires significant funding, which requires excellent credit ratings.
Source: EIA (U.S) and Eskom
PossibleShortages
20011
Access to Capital Markets
Dependent on
SA Electricity Industry Outlook GDP Growing
Credit ratings
Current Industry Structure
Scheduling
Metering & Billing
Currently, South Africa operates in the traditional mode of vertical integration with financial and physical flows following the same path
Mu
nicip
alitiesE
SK
OM
Generation
Physical Energy Flow
Financial Flow
Transmission Distribution Industry
Business
Residential
Energy Market
Coal
Renewables
Gas
Electricity
Liquid Fuels
Eskom
Others
21% 20%
4%
29%26%
5%
95%
Electricity Market
Electricity Supply in SA
EskomDistribution
40%
60%
PERCENTAGE OF CUSTOMERS
187 Municipalities
Current Situation
60%
40%
SALES VOLUME
EskomDistribution
187 Municipalities
Units 2000 1999 1998
% Change (1999 to 2000)
Customers No. 6 794 383 6 780 299 6 072 764 12%
Energy purchased from GWh 8 392 7 827 9 608 13%
Gross energy received GWh 189 47 5 181 250 181 514 4%
Energy losses GWh 12 071 8 688 10 301 17%
Energy sold for end use GWh 177 405 172 561 171 214 4%
Energy exported by Distributors GWh 756 856 896 16%
Sold for end use in South Africa GWh 176 649 171 805 17 0 318 4%
Distribution in South Africa:Eskom and municipalities
municipal and private generators
SA EDI Statistics
Challenges Facing the Industry Current industry structure is highly inefficient
owing to fragmentation Inadequate maintenance of networks Inability to supply electricity to the indigent Unequal treatment of consumers across the
country Significant disparities in tariffs Ineffective regulation over the whole industry Absence of economies of scale in respect of
investing in assets, sharing of facilities, services, people development etc.
EDI- the need for restructuring
• Five National Objectives:1. Provide low cost electricity2. Provide reliable and high quality
supply and service3. Meet country’s electrification
targets cost effectively4. Meet legitimate interests of all
sector employees5. Operate in financially sound and
efficient manner
• Implications:1. Stabilise tariffs2. Infrastructure
improvements3. Significant costs
to implement4. Provide salary
harmonisation5. Financial viability
Objectives 1 through 4 will require significant additional investment, and objective 5 will require effective governance and optimisation of spending to ensure all objectives are met.
Industry
Business
Residential
Scheduling
Physical Energy Flow
Financial Flow
Metering & Billing
Current Blueprint view is focusing on resolving current issues within the Electricity Distribution Industry
Physical and financial flows follow the same path, allowing for in-house cross subsidisation.
Blueprint view of the EDI
NCDMA08
CBDMA4
NCDMA06
Frasuwil [NC066]
Hantam [NC065]
NP344
ECDMA10
Lephalale [NP362]
WCDMA02
Kareeberg [NC074]
Sentrale Karoo [NC071]
Mier [NC081]
NCDMACB1
Kopanong [FS162]
Kagisano [NW391]
Nama Khoi [NC062]
NCDMA07
Molopo [NW395]
Beaufort West [WC053]
GAROP [NC073]
WCDMA01
KZ263
NP364
Gariep [EC144]
Kamiesberg [NC064]
NCDMA09
Letsemeng [FS161]
Tokologo [FS182]
NW374
Siyancuma [NC078]
WCDMA05
NW372
Mohokare [FS163]
Thabazimbi [NP361]
KZ272
Inxuba Yethemba [EC131]
Senqu [EC142]
Richtersveld [NC061]
Musina [NP341]
Baviaans [EC107]
Naledi [NW392]
Laingsburg [WC051]
Moqhaka [FS201]
KZ5a4
NP343
Zeerust [NW385]
Ngwathe [FS203]
Priemanday [NC077]
Phumelela [FS195]
WCDMA04
Blue Crane Route [EC102]
Prince Albert [WC052]
Camdeboo [EC101]Cederberg [WC012]
Setsoto [FS191]
Boesmanland [NC067]
I Poort [NC084]
Towerberg [NC072]
Seme [MP304]
! Kei ! Kariep [NC082]
Tsolwana [EC132]
Mangaung [FS172]
Elundini [EC141]
Tswelopele [FS183]
Masilonyana [FS181]
Modimolle [NP365]
Oranje-Karoo [NC076]
Nala [FS185]
Ikwezi [EC103]
Nketoana [FS193]
Re A Ipela [NC085]
KZ5a1
Langeberg [WC042]
Lichtenburg [NW384]
Lekwa [MP305]
Segonyana [NW1a1]
Msukaligwa [MP302]
Mafube [FS205]
Matzikama [WC011]
Lukanji [EC134]
KZ221
Gariep [NC083]
Makana [EC104]
Mkhondo [MP303]
Mogalakwena [NP367]
Dihlabeng [FS192]
Matjhabeng [FS184]
Amahlati [EC124]
KZ223
Ulundi [KZ266]
KZ5a5
Renosterberg [NC075]
Umzimvubu [EC05b2]
Kannaland [WC041]
Albert Luthuli [MP301]
Blouberg [NP351]
KZ241
Highlands [MP314]
Thaba Chweu [MP321]
KZ222
Mantsopa [FS173]
Naledi [FS171]
Bergrivier [WC013]
Greater Taung [NW394]
Malethswai [EC143]
Utrecht [KZ253]
KZ242
KZ5a3
Setla-Kgobi [NW381]
Nkonkobe [EC127]
Inkwanca [EC133]
Mankwe-Madikwe [NW375]
Greater Delareyville [NW382]
Swartland [WC015]
Mnquma [EC122]
Dan-Lime [NC086]
Middelburg [MP313]
Mafikeng [NW383]
Maquassi Hills [NW404]
KZ227
Nxuba [EC128]
Polokwane [NP354]
KZ5a2
Bela Bela [NP366]
Nkomazi [MP324]
Kou-Kamma [EC109]
Oudtshoorn [WC045]
Mbhashe [EC121]
Maluti a Phofung [FS194]
Molemole [NP353]
Greater Tubatse [CBLC5]
Klerksdorp [NW403]
Intsika Yethu [EC135]
Ventersdorp [NW401]
Emalahleni [EC136]
Kouga [EC108]
uPhongolo [KZ262]
Mbombela [MP322]
Okhahlamba [KZ235]
Umvoti [KZ245]
Mhlontlo [EC156]
Rustenburg [NW373]
Ingquza [EC153]
KZDMA27
Nyandeni [EC155]
Swellendam [WC034]
Kuruman-Mothibistad [CBLC1]
Emnambithi [KZ232]
KZ224
Umsinga [KZ244]
Mbizana [EC151]
Witzenberg [WC022]
Mutale [NP342]
KZ226
Lepelle-Nkumpi [NP355]Drakensberg [NP04A1]
Umhlabuyalingana [KZ271]
Breede Valley [WC025]
Engcobo [EC137]
Theewaterskloof [WC031]
Emalahleni [MP312]
Umlalazi [KZ284]
Buffalo City [EC125]
Dipaleseng [MP306]
Highveld East [MP307]
Schweizer-Reneke [NW393]
Sunday's River Valley [EC106]
Thembisile [MP315]
Greater Groblersdal [CBLC4]
Christiana/Bloemhof [NW396]
Ngqushwa [EC126]
Greater Giyani [NP331]
Greater Tzaneen [NP333]
KZDMA43
Ba-Phalaborwa [NP334]
Umtshezi [KZ234]
Nongoma [KZ265]
Ndlambe [EC105]
Thusanang [NC092]
Umzimkulu [EC05b1]
Sakhis izwe [EC138]
eDumbe [KZ261]
Kungwini [CBLC2]
Overstrand [WC032]
Potchefstroom [NW402]
Nkandla [KZ286]
Cape Agulhas [WC033]
Gammagara [NC01B1]
Bushbuckridge [CBLC6]
Breede River/Winelands [WC026]
Umjindi [MP323]
Midvaal [GT422]
Mossel Bay [WC043]
Aganang [NP352]
Kimberley [NC091]
KZ225
Great Kei [EC123]
Newcastle [KZ252]
KZ292
Lesedi [GT423]
King Sabata Dalindyebo [EC157]
Delmas [MP311]
Hlabisa [KZ274]
Saldanha Bay [WC014]
Cape Town Metro [Cape Town]
KZDMA23
Metsimaholo [FS204]
Warrenton [NC093]
Greater Letaba [NP332]
Makhudutamaga [NP03A2]
Drakenstein [WC023]
Ntabankulu [EC152]
Moretele [NW371]
Dannhauser [KZ254]
Merafong City [CBLC8]
Tshwane Metropolitan
George [WC044] Knysna [WC048]
Indaka [KZ233]
Nelson Mandela [Port Elizabeth]
Mbonambi [KZ281]
Ndwedwe [KZ293]
eThekwini Metropolitan
Umzinene [KZ273]
Khiphinkunzi [KZ213]
Nokeng tsa Taemane [GT02b1]
Greater Marble Hall [CBLC3]
Dr JS Moroka [MP316]
Port St Johns [EC154]
WCDMA03
Emfuleni [GT421]
Mthonjaneni [KZ285]
Mogale City [GT411]
Vulamehlo [KZ211]
Ntambanana [KZ283]
Fetakgomo [NP03A3]
Ekurhuleni [East Rand]
uMuziwabantu [KZ214]
Maphumulo [KZ294]
Johannesburg
Imbabazane [KZ236]
Plettenberg Bay [WC047]
NWDMA37
uMhlathuze [KZ282]
Stellenbosch [WC024]
KZ212
Hibiscus Coast [KZ216]
Mandeni [KZ291]
Izingolweni [KZ215]
Westonaria [GT414]
Vaalharts-Morobeng [CBLC7]
Inyala/Mtubatuba [KZ275]
GTDMA41
Randfontein [GT412]
KZDMA22
ECDMA44
CBDMA3
ECDMA14
MPDMA32
ECDMA13
FSDMA19
MPDMA31
NCDMA08
Northern Cape
Eastern Cape
Free State
North West
Western Cape
Northern Province
KwaZulu-Natal
Mpumalanga
Lesotho
Gauteng
DC6
DC7
DC8
DC10
DC5
DC36
DC39
DC1
DC13
DC16
DC18
DC4
DC30
DC2
DC19
DC38
DC14
DC12
DC20
DC34
CBDC4
DC37
CBDC1
DC31
DC15
DC35
DC9
DC3
DC26
DC40
DC17
DC32
DC27
DC23
DC33
DC43
CBDC3
DC22
DC28
DC24
DC25
DC44 DC21
DC42
DC29
CBDC8
CBDC2
300 0 300 Miles
N
EW
S
REDs with Provinces, DCs & Municipalities
Red1Red2Red3Red4Red5Red6
Cape TowneThekwiniEkurhuleniJohannesburgNelson MandelaTshwane
District MunicipalitiesProvinces
Municipalities
Last Revised: 18 June 2004
RED Boundaries
Eskom Generation needs a major capital improvement program to build new capacity
Eskom Transmission needs network enhancement
Eskom Distribution currently provides surpluses to Generation & Transmission
Municipalities use some electricity surpluses to pay for municipal services and for credit leverage over other services
Credit Ratings for Eskom and Municipalities are critical
Stakeholder Interests
EskomDistr.
187Munics
Generation Transmission
RED
Surplus Needs
Surplus Needs
Capacity Needs
Network Needs
Everyone is looking for REDs to fund cash needs
• Success of Generation and Transmission are dependent on success of Distribution
• Revenues and Credit Ratings are highly correlated…..
Generation TransmissionDistribution
(EDI)
Customer Revenues
Generation & Transmission dependent on revenues, credit ratings, and overall viability of the EDI
Customer
ESI Viability is Critical
• EDI is “owned” by Municipalities and Eskom
• How do you Value the assets and Compensate Owners (V&C)? (without jeopardising the Electricity Supply Industry?)
Generation TransmissionDistribution
(EDI)
Eskom
Customer
Eskom Eskom Munics Current Owners
Value Chain
Distribution Owners
• Structure all parts of value chain with low cost of capital to the benefit of low tariffs
• Secure access to capital for plant expansion, refurbishment, and strengthening
• Promote the recovery of costs of capital & asset replacement, without price shocks, through long term sustainable tariffs
• Avoid negative impacts on municipalities who are key elements within Government strategy for other service delivery.
V&C Objectives
• Major challenges for REDs are to: • acquire EDI assets without raising tariffs, • provide for compensation to ensure Munics
made whole, and Eskom has sufficient monies to provide for generation and transmission
Major Challenges
Distribution(EDI)
MunicsEskom
6 REDs
(Future Owners to acquire Eskom &
Municipal distribution businesses)
V&C
Current Owners
Raise Debt?
Buy Assets?
Provide Shares?
Raising new debt created significant tariff challenges
Buying assets precluded Munics and Eskom from financial and operating control
Providing shares was the best option. It provided Munics and Eskom with operational and financial oversight over REDs
Valuation OptionsHow to Acquire the Assets from Eskom and Munics?
Valuation option chosen is to provide share ownership of REDs by Municipalities and Eskom
• How do you value the Munic and Eskom Distribution businesses?• Eskom focused on Assets• Some Munics wanted to use Revenues
to determine value of their businesses• Other Munics found Profits to be most
indicative of value
Valuation View Points
Assets Revenues Profits
Three stakeholders had different views of which criteria to use:
Balancing Stakeholder interests -- Implications
Pay highsurpluses to Eskom and Munics
• REDs Credit Ratings will suffer• No funds will be available for national objectives
REDs retain surpluses
for National Objectives• Munics credit ratings drop• Eskom credit ratings drop• Both have higher cost of capital The key is to find the right
amount of surpluses to ensure viability of all
Answer – Use Best Practice
Using 16 different utility deals, a weighted combination of assets, profits, and revenues are being used.
SUGGESTED METRIC ‘BASKET’ WHY
1. Net Assets Simple Accounts-based Regulatory economics
2. Profits (Earnings Before Depreciation, Interest and Adjustments
Simple Accounts-based Cash-based measure consistent
with DCF techniques
3. Revenues Simple Accounts-based
Valuation & Compensation
Step 1 – Value the Businesses, determine shares as % of total
Step 2 - Adjust the valuation shares based on actual conditions of assets and revenue management
Step 3 - Compensate fairly, adjust for poor infrastructure or high bad debt
Value Businesses
in Rand
+ / - based on Asset & revenue
conditions
Compensatefairly
Use international experience to weight assets, profits, and revenues
Use agreed upon % to modify valuation and monthly surpluses to take into business value
Compensate in the form of shares in exchange for adjusted value (revenue, profits, and assets) and cash income based on surpluses adjusted for asset condition and revenue management
How to ensure viability
Value (acquire) businesses with shares. Compensate to ensure stable Municipal
and Eskom credit ratings Ensure REDs achieve national objectives
and REDs are financially viable.
Good Governance - Vital
A sound Governance framework will: Improve and sustain the economic viability of the electric industry Improve overall reliability and service orientation of the industry Facilitate the fair treatment of all customers Assure equitable and transparent dealings with all electric service entities Build a foundation for economic development throughout South Africa
GovernanceInvestor
Confidence
National ObjectivesLow cost electricity
Reliable, high quality supply
Electrification
Employee opportunity
Financially sound & efficient
RED value-based decisions and
actions
RED value-based decisions and
actions
Financial Viability
Better access to capital markets
at cheaper rates
More efficient operations
Better collection rates
Shareholder Policies
Board Composition
Transaction Structure
HR Policy
Financial Procedures Legal Structure
Performance Measures
Summary –
A viable restructured EDI will provide for the national objectives,
Properly structured V&C will provide for control by Munics and Eskom,
A credit worthy (and financially successful REDs) will provide good revenue streams for Munics, Eskom Generation, Distribution, and
A well restructured EDI will ultimately provide reliable, safe, and economic power to South African industry, commercial, and residential customers
For any additional information, please do not hesitate to contact EDI Holdings
Willie de BeerEDI HoldingsPresidia House 255 Pretorius Street Cnr. Paul Kruger PRETORIA 0001, South Africa Phone: +27 12 316 7824Fax: +27 12 316 7788 [email protected]
www.ediholdings.co.za
Media Contact: Billy Mawasha Tel: +27 12 316 7722Fax: +27 12 316 7703Mobile:+27 82 337 [email protected]
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