‘Ready for unbundling’
ESKOM: DE RUYTER SAYS UTILITY COMMITTED TO MEETING TARGET DATE
Dividing it into three separate units expected to improve productivity.
Eskom has made “key” progress in restructuring the operations of the business, with chief executive Andre De Ruyter saying the power utility is committed to meeting the “ambitious” unbundling target date, which has been set down for 2021.
Speaking at a briefing on the state of Eskom’s power system on Thursday, De Ruyter said the utility’s business model is “outdated”, with Eskom being the “last remaining very large vertically integrated” power utility in the world.
The divisionalisation of the utility into three separate entities – generation, transmission and distribution – is expected to improve the structural and operational efficiencies of the entity, which has been racking up debt and unable to provide reliable power.
De Ruyter said the divisional boards have been established, with the three components now running as separate entities.
The three new divisional MDs, all internal appointments who were previously the group executives of these divisions, are Bheki Nxumalo for generation, Segomoco Scheppers for transmission, and Monde Bala for distribution.
The business and operating models for each division are at “an advanced stage”, said De Ruyter.
“They have got their own income statements [and] we are in the process of establishing appropriate balance sheets and apportioning the relevant amount of debt to each of those,” he said.
Eskom has a debt burden of R450 billion, which it is unable to service from its profits.
According to the timelines set in the department of public enterprises’ (DPE’s) roadmap on the legal and operational unbundling of the entity, the restructuring should be concluded by the end of 2021.
“That is an aggressive timeline because there is a lot of work to be done,” said De Ruyter.
He explained that restructuring large corporates is not a simple process and could run for two to three years or more as the company considers issues such staff, operational concerns, financial issues, transfer pricing and debt.
“All of these need to be navigated properly if we don’t want the wheels to come off halfway through this process,” he said
However, he said the utility is “committed to meeting that timeline and we are working hard to achieving the policy objectives set by our shareholder [the department of public enterprises]”.
Speaking on dividing the R450 billion debt bill between the three divisions, De Ruyter explained that while most of the debt was incurred by generation – due to the ballooning costs of building the Medupi and Kusile power plants – the debt “can’t all stay with generation”.
He added: “We need to take account for the fact that we have two other divisions which each generate revenue and have a capital base that needs to be supported.”
De Ruyter said the utility is actively engaging its lenders on the restructuring of the debt to ensure that there are no inadvertent contractual breaches or defaults on the loan agreements.
“We truly understand that that would be highly undesirable and, therefore, we are doing this in a structured manner,” he said.
“Part of the reason for opting for a divisionalisation approach rather than an immediate legal separation is exactly our understanding that a precipitous legal unbundling would have created enormous concerns among our lender base.”
The entity’s objective is to achieve a reduced debt balance of R200 billion and 35% Ebitda
We are working hard to achieve objectives.
(earnings before interest, taxes, depreciation and amortisation) margin for Eskom to become a financially sustainable business that does not need support from the government.
“When we would be able to achieve that, I would not be able to give you firm guidance on that.”
Getting Eskom onto a firm footing will require a combination of factors such as getting cost-reflective tariffs, eliminating load shedding, cutting costs, and converting coal and other energy sources into energy as efficiently as possible.
De Ruyter said despite facing major challenges over the past four months, including a drop in electricity sales due to reduced demand in light of the country’s Covid-19 lockdown, the entity had made good progress on its turnaround plan.
He said the utility has “taken a knife” to costs. For instance, it reduced its use of open gas cycle turbine fuel, with the cost for this coming in at R2.67 billion less than the provided R6.98 billion.
It has also managed to begin work on its wage bill through the issuance of 164 voluntary severance packages to senior executives. And it will begin renegotiating costs with independent power producers.