SAnews.gov.za (Tshwane)

11 July 2014

South Africa: Eskom Net Profit Rises

Electricity parastatal, Eskom, on Friday reported a net profit of R7.1 billion for the year ended 31 March 2014 - up from R5.2 billion in the previous year.

The utility reported a R2.1 billion gain on derivatives.

The surplus will be reinvested in the company in full, to support its capacity expansion programme and to service debt.

The utility's revenues and profits are higher in winter because of greater sales volumes, seasonal tariff adjustments and lower maintenance costs. Revenue for the year ended 31 March 2014 increased to R139.5 billion from R128.8 billion in the previous year, reflecting the impact of the 8% tariff increase and the flat demand for electricity (0.6% growth compared to the previous year). However, the increase in revenue was offset by escalating primary energy costs, especially on open-cycle gas turbines (OCGTs), and an increase in maintenance costs.

"This translated into revenue per kilowatt hour of 62.8c (2013: 58.5c), while costs per kWh in Eskom's electricity business were 59.7c (2013: 54.2c). Primary energy costs have increased significantly by 14.2% to 32.0c/Kw," it said.

On progress at its plants, the entity said its R300 billion funding plan was progressing well with 90.5% of funding secured.

"However, the plan from 1 April 2010 to 31 March 2017 was based on the assumption of a 16% third Multi-Year Price Determination (MYPD 3) tariff increase and will need to be extended to support the capital expansion programme to 31 March 2018," it added.

For some time, Eskom has said that the National Energy Regulator of SA (Nersa's) 2013 third Multi-Year Price Determination decision to allow Eskom an 8% annual tariff increase left Eskom with a R225 billion revenue shortfall over a five year period between 2013 and 2018.

In its application to Nersa in October 2012 for a tariff hike, Eskom asked the regulator to grant it a total 16% hike over the course of a five-year period.

The revenue shortfall created by the MYPD 3 determination requires a shift in the business.

"A number of options are being pursued together with government, including the regulatory clearing account (RCA) adjustment and other funding alternatives," said Finance Director, Tsholofelo Molefe.

Eskom is awaiting a determination from Nersa on its submission for the evaluation and approval of the RCA balance for its previous MYPD 2 control period. The RCA submission was made during the last quarter of 2013 in line with Nersa rules.

The RCA mechanism allows Eskom to adjust for variances between costs and revenues assumed in MYPD 2 compared to the actual costs incurred and revenue received by Eskom, to ensure that both Eskom and the customer are treated fairly.

The resulting under- or over-recovery is then recovered through the electricity tariff in the following or subsequent years. Customers could experience an increase or decrease in the price of electricity as a result thereof.

Standard & Poor's recently downgraded Eskom's credit rating and placed it on CreditWatch with potential negative implications, while Fitch Ratings revised Eskom's outlook to "negative".

Credit ratings remain at the lowest end of investment grade. Eskom is at risk of a further downgrade in the next 90 days if the Eskom standalone financial profile weakens materially.

The utility is currently engaging government to address the company's capital structure.

"Eskom's financial sustainability is under pressure but we have investigated alternative funding, including possible equity and quasi-equity, in response. We have applied to Nersa for the RCA adjustment, and we have launched a business productivity programme to reduce cost, increase productivity and enhance efficiencies," Molefe added.

Eskom's going-concern status will continue to be a key focus for the coming year, said Eskom acting chief executive officer Collin Matjila.

"Eskom's going-concern status will continue to be a key focus for the coming year, as the revenue shortfall created by the MYPD 3 decision cannot be solved through cost savings and efficiencies alone - cost-reflective tariffs remain a key imperative. Eskom has to balance short-term priorities with long-term sustainability requirements," he said.

The return-to-service programme has been concluded with the successful commissioning of the final unit at Komati power station. A total of 3 741MW has been returned to service.

The delivery of Medupi Unit 6 (794MW) remains a key focus area and the synchronisation (first power to the grid) date is scheduled for the second half of 2014, with commercial operation (full load) following approximately six months thereafter.

Meanwhile, Kusile power station's Unit 6 is due to be synchronised in the second half of 2015, with the first unit of Ingula pumped-storage due for synchronisation in the second half of 2015.

Total energy procured from Independent Power Producers (IPPs) for the year is 3 671GWh at a cost of R3 266 million, at an average cost of 88c/kWh.

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