South Africa: Eskom's Operational and Financial Position Remains Under Pressure

Photo: warrenski
Eskom Generation's pilot wind-farm facility at Klipheuwel in the Western Cape, South Africa.
29 November 2018
Eskom (Johannesburg)
press release

While progress has been achieved in laying the building blocks for a sustainable turnaround of Eskom, the company's operational and financial performance continued to deteriorate in the six months to the end of September 2018, with the situation expected to worsen before it improves by 2023.

Releasing the company's interim financial results for the period under review, Eskom's Group Chief Executive, Phakamani Hadebe, said: "There will be pressure in the short- to medium-term as we transition towards financial and operational sustainability, a move that will require resolute, tough and decisive leadership. Eskom has defined an ambitious turnaround plan, largely within its own control, to improve financial performance by 2023."

Hadebe said the company is facing severe challenges both operationally and financially. He said Eskom is currently in a debt reliant liquidity situation as a result of low tariffs, limited growth in sales, increased costs, and the rising capital investment programme.  In addition to this, the company is facing reduced generation performance, low coal stockpiles, and increases in municipal debt.

"Notwithstanding the above challenges, Eskom's Board and executive management team have dedicated their efforts on five key priorities to create a platform for future growth. These include addressing poor governance controls; improving liquidity; ensuring a financially viable entity; completing phase 1 of the of the strategic review, and executing a nine-point generation recovery programme.

Newly appointed Chief Financial Officer, Calib Cassim, said most of Eskom's financial ratios had deteriorated during the period under review, and that the situation is expected to worsen further in the second half of the financial year.

Revenue rose marginally to R98.1 billion from R95.5 billion previously, largely driven by a 5.2% tariff increase that was implemented in April this year. Net profit decreased 89% to R671 million from R6.3 billion last year.

Although coal costs were contained to 7%, independent power producer costs surged 29%, mainly due to volumes being 25% higher. The recent wage increases for workers in the bargaining forum have also put pressure on costs. Employee costs rose 12% to R16.9 billion, up from R15.1 billion in the same period last year.

Historically, any profitability generated during the first half of the year is eroded during the second half, due to lower summer tariffs and higher planned maintenance. The full impact of the wage settlement will also be experienced over the next six months, combined with higher diesel usage to avoid or minimise loadshedding.

"Eskom cannot solve the financial and operational sustainability challenges that it faces alone. The shortfall in tariff cannot be solved though cost reductions alone, and further indebtedness adds to the problem," said Cassim.

Chief Operating Officer, Jan Oberholzer said the power system would remain constrained for the foreseeable future, until generation plant performance and coal stock levels improved. This means that loadshedding in the coming months remains a risk.

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