On life sup­port: Eskom haem­or­rhag­ing money

Finweek English Edition - - IN THE NEWS - BY THE FIN­WEEK TEAM

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

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