On life support: Eskom haemorrhaging money
Eskom acting CEO Brian Molefe assured the country on 11 August that Eskom wasn’t insolvent. But this is cold comfort for jaded South Africans who are being asked to pay increasingly inflated prices for electricity while being subjected to regular bouts of load-shedding.
But despite Molefe’s assurances of Eskom’s life force at the state-owned power utility’s results presentation for the year to 31 March, it is evident that it is in fact on life support.
Acting CFO Nonkululeko Veleti made it clear that the dire state of affairs could be laid squarely on the National Energy Regulator of South Africa (Nersa), which held out on Eskom’s demands to increase tariffs in the year to 31 March.
Nersa’s decision to increase tariffs by just 8% instead of the 16% increase Eskom asked for in the third multiyear price determination assessment (MYPD 3) had “left a significant gap we need to close”.
This resulted in the utility earning an “inadequate pre-tax real rate of return”, which was being f urther squeezed by the need to use the dieselguzzling open-cycle gas turbines and independent power producers (IPPs) for longer and more often than was planned for.
Veleti said the revenue shortfall was further exacerbated by the build programme - including Medupi, Kusile and Ingula - on which Eskom had spent R265bn since 2005. The massive projects have been beset by often violent labour action, sub-standard construction work and rampant corruption, all of which have cost taxpayers billions more rands.
One of the major costs Eskom incurred in the year to March was for primary energy, including R8bn it had to pay for coal it wasn’t able to use at Medupi. Eskom has a take-off agreement with coal suppliers that it has to honour despite Medupi being years behind schedule and therefore unable to use the said coal.
There was imminent hope that this massive wastage at Medupi would be curtailed as soon as the first unit came online. The unit in question (unit 6) had fed power into the grid for the first time in March. However, the final handover from contractors to Eskom − when unit 6 is fully functional − has yet to happen. Eskom spokesman Khulu Phasiwe said this is expected at the end of the month.
Molefe had other positive news to spin: Sere Wind Farm, the first utilityscale renewable energy project had started putting its 100MW onto the grid earlier this year. But to put this in perspective, Sibanye Gold, one of the country’s biggest gold miners, needs five times that to keep operations going.
Infrastructure build had not stalled, Molefe added. Rail systems were progressing well, 318km of transmission lines had been installed and 2 090MVA substation capacity had been commissioned. In addition, the state support package of R23bn is expected to help persuade lenders of Eskom’s capacity to pay back loans. Despite high interest rates, this is likely to provide a desperately needed lifebelt.
But the good news was a mere glimmer in the dark.
Primary energy costs − including diesel and payments to independent power producers − rocketed to R83.4bn in the year to March, up 19% from the previous year.
The bloody state of Eskom’s financials was laid bare in Veleti’s statement that “we experienced a deterioration in all of the company’s critical financial solvency ratios”. The pre-tax rate of return, which needs to be positive for the company to be financially viable in the long term, was at 0.57% at the end of March.
Eskom’s f i nancial health had deteriorated to such an extent that the net cash from operations “will soon be insufficient to support both continued operations and growth in the business”.
Eskom generated R27.5bn from operations in the year to March up from the restated R22.8bn in 2014. But after investment in new plants and debt servicing costs, it held only R7.9bn in cash, compared with R19bn previously.
Group net profit for the year to 31 March was R3.6bn, down from R7.1bn.
The figures were also bruised by theft and payment arrears. The figure owed by electricity debtors (before provision for impairment) increased to R22.7bn
ESKOM’S FINANCIAL HEALTH HAD DETERIORATED TO SUCH AN EXTENT THAT THE NET CASH FROM OPERATIONS “WILL SOON BE INSUFFICIENT TO SUPPORT BOTH CONTINUED OPERATIONS AND GROWTH IN THE BUSINESS”.
from R20.3bn in the previous financial year, while the provision for impairment increased to R7.4bn. The total debt of Soweto, including interest, stood at R8.6bn, up from R7bn in 2013/14.
Demand from major industrial users, including the mines and smelters, had dropped, which impacted Eskom’s bottom line. Sales were also impacted by the five-month strike in the platinum sector.
Eskom’s diesel bill for fuelling its open-cycle gas turbines decreased from R10.5bn in the previous year to R9.5bn. Molefe said Sars was giving Eskom a R4 rebate a litre, putting diesel costs at between R6 to R7 a litre.
On the same day that Eskom held its results briefing, President Jacob Zuma told the media that the stateowned power utility’s lack of capacity had cut about one percentage point off the country’s economic growth. GDP currently stands at an alarming 2%, according to the IMF. Zuma said the extent of load-shedding and uncertainty of supply was the “biggest challenge” facing the country.
Molefe’s tenure as the temporary head of the power utility began a little over two weeks after the reporting period ended. He s ai d Eskom’s financial status would radically improve when revenue reflected the cost of production.
But last month Nersa infuriated the board by rejecting Eskom’s request for an additional 10% tariff increase in the current year, on top of the 12.69% already granted. The extra cash was to pay for diesel to run the gas turbines as well as fund extended contracts for IPPs as emergency measures to keep the lights on.
PRIMARY ENERGY COSTS − INCLUDING DIESEL AND PAYMENTS TO INDEPENDENT POWER PRODUCERS − ROCKETED TO R83.4BN IN THE YEAR TO MARCH, UP 19% FROM THE PREVIOUS YEAR.
Brian Molefe Acting CEO of Eskom