Debt-laden Eskom feels heat
R7.1bn profit hides spiralling costs and declining sales
DO NOT let Eskom’s profit fool you: the utility will be in deep financial trouble if it cannot convince regulator Nersa to increase its tariffs and the state to inject cash or to back more of its debt.
On Friday, Public Enterprises Minister Lynne Brown expressed disappointment at Eskom’s performance, saying it managed to achieve only 58% of the targets it set in an agreement with government.
“I am mindful of the pressure and the daily balancing act to keep the lights on . . . But we will have to do something extraordinary. Growth depends on it. Costs need to be cut. I am very concerned about the rate of the increase in costs.”
Primary energy costs rose 14.2%, driven mainly by the increased use of open-cycle gas turbines.
Eskom has been relying heavily on the turbines — hugely expensive as they use diesel to generate electricity — as its coal-fired power stations have been underperfoming.
On Thursday, unplanned outages totalled 4 800MW, while planned maintenance shutdowns totalled 2 600MW. Total demand was 35 120MW.
Brown said she was studying a shortlist of candidates to fill the CEO post, paving the way to fill three other vacancies on the executive team, and hoped to have it approved by the cabinet by the end of next month.
Brian Dames, who quit as CEO in March, was paid R15.37million, up from R8.5-million in 2013.
With the exclusion of the CEO and chief financial officer, other members of the executive committee saw their pay decline from R33.7-million to R28.6-million as they sacrificed their bonuses during the year.
Chairman Zola Tsotsi earned R1.8-million, up from R1.37-million the previous year.
The new CEO faces a tough battle. While Eskom posted a 37% rise in net profit for the year to March of R7.1-billion, it warned that falling sales to key customers such as mines, an increase in unpaid debt from municipalities, below-cost tariffs and rising costs were putting its financial sustainability at risk.
Chief financial officer Tsholofelo Molefe said that if its assets were valued at depreciated replacement cost, rather than at the historic cost method it currently used, it would have reported an after-tax loss of R12.5-billion.
The utility is facing a revenue shortfall of R225-billion with Nersa having granted it an increase of only 8% for the five years 2012/13 to 2017/18, half of the 16% it asked for.
Acting CEO Collin Matjila said that while Eskom had focused on cutting costs and improving efficiency it needed cost-reflective tariffs to ensure its long-term sustainability.
Operating costs, which consist mainly of primary energy costs such as coal, were 59.67c/kWh in the past financial year, against a target of 52.67c.
If assets were carried at depreciated replacement cost, which Eskom says will be a more accurate reflection of its financial position, average costs would increase to 66.06c/kWh.
A downgrade in its credit rating would increase financing costs by 30%-40%
Revenue was on average 62.82c/kWh. It paid on average 88c/kWh for electricity bought from independent power producers.
Concern was raised about whether consumers could afford higher tariffs, with outstanding debt at year-end rising 11% to R16.6-billion.
Eskom had outstanding debt of R254.8-billion at the end of March and capitalised R13.3-billion of finance cost during the year, up from R3.7-billion in 2013. Outstanding debt would be repaid by 2052, Molefe said.
A further downgrade in its credit rating, reducing its debt to junk status, would increase its financing costs 30%-40%, Molefe said.
The utility is highly leveraged, with a debt:equity ratio of 2.06:1, up from 1.84:1 last year.
It denied reports in April that it had asked the Treasury for a R50-billion bailout.