Red lights flashing for Eskom’s finances

Eskom’s finances have deteriorated worse than expected this year as the Covid-19 stranglehold over the economy saw its revenue decline against coal contracts that have pushed costs up.

The National Treasury this week told Parliament the utility was facing declining revenues against an onerous debt.

The Treasury’s chief director for state-owned entities’ oversight, Ravesh Rajlal, said the situation was not expected to improve any time soon. The utility had faced mounting challenges since lockdown was imposed in March, with the country’s business activity falling.

Rajlal noted the immediate task was to restructure the utility in order to arrest its high-cost structure and the increasing municipal arrear debt due to non-payment.

“Eskom is facing liquidity challenges, declining revenues, the onerous debt issue,” he indicated.

“The year-to-date financial performance is worse than budgeted due to the impact on revenue as a result of limited economic activity amidst the Covid-19 pandemic.”

Rajlal said Eskom was going to operate within the R56 billion funding allocated to it this fiscal year as there was no further additional funding forthcoming.

Last week, Eskom implemented stage 4 load shedding, resulting in the suspension of managers at its biggest generating plants of Kendal and Tutuk on sustained poor performance by the plants.

Eskom is also said to be considering further internal cost savings of about R14bn this year while also attempting to recover money lost due to corruption, totalling just under R10bn.

Investec chief economist Annabel Bishop said things were getting tougher for Eskom financially. “Last year, Eskom generated operating cash flow of R36.2bn, but this year it will have been impacted by lockdown,” Bishop said.

“The utility risks a gap in making interest and recapitalisation payments and further application to the government.”

Eskom has said its debt had risen to R448bn in the year to end March from R440bn the year before. I

It said it paid R31.5bn towards principal debt and R39.1bn towards servicing interest, the bulk of these payments coming from the R49bn government bailout.

Chief financial officer Calib Cassim said the utility needed an electricity hike of up to 25 percent to recover its costs.

Further progress needed to be made as the missing link had been tariffs that reflected efficient costs for Eskom.

“Currently Eskom’s average is less than $0.07/kWh at an exchange rate of R15.75 to the US dollar, which is extremely low by any credible international benchmark,” Cassim noted.

“It is significantly below cost-reflectivity and it is the main cause of Eskom’s financial unsustainability,” he added.

Head of Eskom’s Cluster 2 of power plants Dan Mashigo said the utility had undertaken a bottom-up cost of mining exercise to review the entire portfolio of its short- and medium-term coal contracts to ease its financial challenges.

Mashigo pointed out Eskom had identified seven coal suppliers whose contracts were outside industry norms and deemed that their higher profit margins were unjustifiable.

“We approached these suppliers on an individual basis, however, when they counter-proposed they basically wanted Eskom to open up all their contracts,” Mashigo said.

“Some of them have historical contracts which, in Eskom’s terms, are favourably priced.” –BusinessReport