Eskom’s debt-servicing costs to surge to R84bn as it warns of another R20bn loss

30th July 2019

By: Terence Creamer

Creamer Media Editor

     

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State-owned electricity producer Eskom’s debt-servicing costs are set to surge to a whopping R84-billion in 2019/20, from a record R69-billion last year, amid a R441-billion-and-rising debt burden, declining sales and increasing costs.

At R31-billion, the utility’s earnings before interest, taxes, depreciation and amortisation (Ebitda) fell well short of its 2018/19 debt-servicing costs and the trend will persist in 2019/20, with Eskom forecasting only a modest rise in Ebitda to R34-billion on the back of tariff increases.

Sales, which fell 1.8% in 2018/19 to 208 TWh, are not expected to recover, with outgoing CEO Phakamani Hadebe warning on Tuesday that the group might be entering a “death spiral” as some customers sought alternatives and others failed to pay – municipal and Soweto debt climbed last year to R38-billion.

The utility is, thus, warning that its record R20-billion loss of 2018/19 will be repeated in 2019/20, as cash generated from operations continues to be insufficient to cover surging debt-servicing costs.

Debt-servicing costs have already overtaken capital expenditure (capex) at the utility, with Eskom spending R34-billion on stay-in-business and growth capital last year and CFO Caleb Cassim said the shift from capex to debt-servicing would accelerate as expenditure on Medupi and Kusile tailed off.

Recent fiscal transfers had provided Eskom a short going-concern “runway” for the coming 12 to 18 months, but Cassim said “difficult choices” would have to be made during that period if the company was to be returned to financial sustainability.

Chairperson Jabu Mabuza, who will also act as CEO for the coming three months following Hadebe’s resignation, confirmed on Tuesday that the group’s financial statements had been qualified by its auditors, owing to outstanding investigations into irregular expenditure and material uncertainty related to its going-concern status.

The utility’s position as a going concern has been bolstered by fiscal transfers, including an initial commitment of R23-billion announced in the February Budget and more recently as a result of a Special Appropriations Bill, through which government committed to transferring a further R26-billion in 2019/20 and a further R33-billion in 2020/21.

Despite these transfers, Eskom would still have to raise R46-billion in 2019/20, of which 58% had been secured, mostly from development finance institutions.

A turnaround plan had been presented to government in November, but had as yet not been finalised. The plan is likely to be unveiled only after government has published a White Paper providing the policy framework for Eskom's future structure, including its unbundling into three separate State-owned companies of generation, transmission and distribution.

Public Enterprises Minister Pravin Gordhan indicated that the paper should be finalised during the course of August and also announced that Freeman Nomvalo, who is currently CEO at the South African Institute of Chartered Accountants, had agreed to assist government in the establishment of a Chief Restructuring Officer (CRO) office.

The CRO office would include individuals with a diverse set of skills including expertise in corporate finance, debt management and balance-sheet optimisation and its initial focus would be to interrogate Eskom's unsustainable debt and the various proposals that had been made to address the problem.

Cassim indicated that, while Eskom would pursue cumulative cost savings of R77-billion by 2023, it would also be more assertive in seeking a transition to “cost-reflective” tariffs.

The utility is adamant that the tariff should be closer to 120c/kWh, rather than the 90c/kWh approved by the National Energy Regulator of South Africa (Nersa).

Eskom has already taken the unprecedented step of seeking a legal review of Nersa’s determination for the 2018/19 financial year, as well as three Regulatory Clearing Account determinations for the 2014/15, 2015/16 and 2016/17 financial years.

The utility claims that, despite a 345% increase in the tariff over the past ten years, the tariff remains “below prudent and efficient cost reflectiveness”.

Its cost containment measures, meanwhile, would focus mainly on reducing procurement-related costs after President Cyril Ramaphosa requested Eskom to avoid retrenchments in light of South Africa’s unemployment crisis.

Eskom’s results were released on the same day that Statistics South Africa confirmed that the country’s unemployment rate had increased to 29% in the second quarter.

The utility shed over 1 900 employees in 2018/19 as a result of natural attrition, which it expected to continue at a yearly rate of 3%. It was also considering pursuing voluntary severance package offers in future.

Eskom employs 46 665 people.

 

Edited by Creamer Media Reporter

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