Eskom's annual results reveal just how deep in the red it is

Outgoing Eskom Group Chief Executive Officer, Phakamani Hadebe

The board of the utility led by Jabu Mabuza said while the results were expected, they are unfavourable. He said that the results come at a tumultuous time for the country and at a time the utility faces a R440bn debt.

Outgoing Group Chief Executive Officer (GCEO) Phakamani Hadebe said the last 18 months as head of the utility have been challenging. “We were unfortunately oblivious to underlying factors including declining maintenance spend over years that was faced by power stations.”

Hadebe said the rate of increasing cost has always been ahead of revenue. For example, between 2010 and 2018 there have only been four instances where Eskom has been able to generate enough income or earnings to service its debt. “That happened due to high tariff increases. It also happened when government recapitalised [the utility]."

Eskom, he said, is working on cost containment measures, with employee benefit costs being contained and head count reduced.

Primary energy costs (including coal, liquid fuels and independent power producers) increased to R99.5bn (March 2018: R85.2bn). The usage of open-cycle gas turbines (OCGTs), Eskom and independent power producers (IPPs), increased substantially driven by poor plant performance and supply constraints at a cost of R6.5bn.

Expenditure on renewable IPPs increased to R22.2bn for the year from a previous R19bn primarily due to the commissioning of new renewable IPPs during the year.

Revenue challenges

Eskom’s revenue was negatively impacted by non-payment by municipalities as well as tariffs that are not cost reflective.

“With declining revenue Eskom should receive cost reflective tariffs in order for it to service debt. The appropriate price should be 120 cents per kilowatt hour but what we’re being paid now is 90 cents per kilowatt hour,” he said, adding that other challenges are of the utility’s own making.

“In the past five years, the sales volumes annually have decreased by about 1% equating to about R2bn cut in revenue. During the year under review the sales volume dropped by 1.8%. Costs of Eskom has been rising, revenue decreasing and the bottom line has been decreasing.

“We are now facing a death spiral,” said Hadebe.

Non-payment by municipalities and Soweto

Also compounding the challenges at the utility was the non-payment of services by Eskom to municipalities, which Hadebe said is of concern.

“Non-payment by municipalities has been a cause for concern, this has increased from R13.5bn and by the end of the year it was R19bn. Now it’s at R22bn. The speed with which its moving is of concern,” said the outgoing GCEO who will be leaving the utility at the end of July 2019.

Eskom is in talks with ministers to find a solution to the matter.

The power utility also expressed concern at residential arrear debt. In comparison to municipal arrear debt, which covers only a few hundred municipal customers, defaulting small power user (SPU) customers, particularly in Soweto, comprise tens of thousands of residential customers, making them much more difficult to manage and to collect arrear debt.

Total invoiced Soweto SPU debt has increased to R13.6bn (including interest) at year end from R12.4bn in March 2018 of which only R795m is deemed collectable.

Meanwhile, lifestyle audits at the utility are almost complete and the utility has held over 1000 disciplinary hearings of which 20% of these have resulted in employee exits.

Debt position and cost containment

Hadebe also spoke of the improved financial oversight at the utility.

“The debt position of Eskom is such that there is a need to optimise the whole balance sheet to deal with the debt issues, if you’re looking at the numbers, our earnings or EBDITA are sitting at R32bn and debt servicing costs amounts to R70bn. The amount we are generating is not sufficient to even pay the interest, so we are like an individual who borrows money to pay interest in the credit card, that has to change.”

The utility’s turnaround strategy also speaks to cost containment with Eskom having committed itself to duct costs by R33bn in 2023/24. In 2019/2020 set itself a target of R6bn and by the end of the first quarter of this financial year, it has saved R 3.4bn.

Commenting on government appropriations, Hadebe said government through a special appropriation will provide Eskom with R26bn this year and a further R33bn.

“There are still other discussions that are ongoing, this ensures that Eskom maintains the status as a going concern and that we are not trading recklessly.”

On this issue, the utility’s Chief Financial Officer Calib Cassim said the utility has a going concern status given the support obtained from government.

“We have a going concern with the support of government of the next 12 to 18 months, it’s not the end solution, it’s the journey we’ve just begun, it allows us to keep operating over the next 12 months to keep the lights on and to ensure we have time to engage with government on the sustainable solution from a financial perspective,” said Cassim.