Part 1 Revenue Application: Multi-Year Price Determination ... - Eskom
Part 1 Revenue Application: Multi-Year Price Determination ... - Eskom
Part 1 Revenue Application: Multi-Year Price Determination ... - Eskom
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Overview of <strong>Multi</strong>-<strong>Year</strong> <strong>Price</strong> <strong>Determination</strong><br />
2013/14–2017/18 (MYPD 3)<br />
Determining a “fair” return on assets<br />
Page 22 of 144<br />
In assessing its revenue requirement, <strong>Eskom</strong> is allowed to factor in a fair return on assets<br />
used to generate, transmit and distribute electricity, including assets under construction. The<br />
return is earned on the assets operated by <strong>Eskom</strong> and should represent the total cost of<br />
funding the business (both equity and debt) based on the weighted average cost of capital<br />
(WACC), as determined by Nersa. This return is applied to the depreciated replacement<br />
value of the assets (including assets under construction). The return is a key determinant of<br />
<strong>Eskom</strong>‟s financial sustainability: it provides the revenue to meet debt interest payments and<br />
build a base of retained earnings – essentially equity returns – that can anchor the balance<br />
sheet. This will enable future borrowing and expansion of the asset base and ensure that<br />
current debt can be repaid while providing <strong>Eskom</strong> with ability to achieve cheapest financing<br />
option supported by standalone credit rating.<br />
The revised funding plan for MYPD 3 will see <strong>Eskom</strong> reach a total debt of over R333 billion<br />
on domestic and international capital markets at the end of the MYPD 3 period (peaking at<br />
over R 360 billion in 2016/17). The net finance costs (cash component) will total R115 billion<br />
over the same period. Total interest over the period is R140 billion including accruals.<br />
<strong>Eskom</strong>‟s ability to service this debt – and build a base of retained earnings to secure future<br />
borrowing – depends on its returns, which will swing from negative to positive after 2014/15,<br />
resulting in a total return of R186 billion for the period. This leaves a cumulative return of<br />
R46 billion to the shareholder at the end of MYPD 3. <strong>Eskom</strong> will sacrifice R209 billion by<br />
earning less than the 8.31% return on assets. The R46 billion will not be paid as a dividend<br />
but will be reinvested in the business, strengthening <strong>Eskom</strong>‟s balance sheet and contributing<br />
towards a standalone credit rating.<br />
By 2017/18, <strong>Eskom</strong>‟s real returns will have reached 7.8% before tax, which is lower than<br />
Nersa‟s WACC of 8.16% (as determined for MYPD 2) and <strong>Eskom</strong>‟s currently calculated<br />
WACC of 8.31% before tax. <strong>Eskom</strong>‟s real returns are also well below the returns any private-<br />
sector investor would require. However, as a state-owned company with the benefit of<br />
government guarantees, <strong>Eskom</strong> can tolerate a lower rate of return and still source funding<br />
for its capacity expansion drive. The government of South Africa – <strong>Eskom</strong>‟s sole