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 willem.debeer@ediholdings.co.za

www.ediholdings.co.za

Media Contact: Billy Mawasha Tel: +27 12 316 7722Fax: +27 12 316 7703Mobile:+27 82 337 9692billy.mawasha@ediholdings.co.za

Contact Info