LIGHTS GOING OUT ON ESKOM? Utility Forecasts Slump In Profits

NOVEMBER 26, 2014

Just to add to Eskom’s list of problems, the state power utility is forecasting a dramatic slump in profitability for the full-year to March 31, 2015. According to CEO Tshediso Matona, its profit is likely to fall to R500 million in 2014/15 from nearly R7.1 billion in 2013/14.

Releasing Eskom’s interim results on Tuesday, also Matona indicated that the power utility was facing serious operational troubles that, together with its financial constraints, meant that it was in its “most challenging position in living memory”.

According to the results, in the six months to September 30, 2014, Eskom recorded a 5.4% rise in revenue to R82 billion period on period – a rise that was attributed entirely to higher electricity tariffs, with electricity sales falling by 1.4% to 103 494 GWh.

The decline in revenues was attributed to industrial action in the platinum sector, a contraction of the gold industry and the closure of the Bayside aluminium smelter.

Revenue for the full year was expected to come in at only R146 billion and finance director Tsholofelo Molefe said sales were expected to decline materially in the second half of the financial year, while profits earned in the first half would be more or less “wiped out” in the second half.

Profit for the interim period fell to R9.3 billion from R12.2 billion when compared with the corresponding six months in the previous year, as a result of a rise in costs. Primary energy costs, comprising mostly coal and diesel, surged by 22% to R38 billion.

Costs associated with operating the diesel-fuelled open-cycle gas turbines, in the Western Cape, rose to R3.62 billion in the period, which was higher than the R3.3 billion spent in the first half of 2013/14 and also above budget.

Municipal debt

Municipal debt, which exceeded R7 billion, had also become a major drain on the utility, whose cash and cash equivalents declined to R12.9 billion by the end of September, from R19.7 billion at the end of March.

Unplanned outages

Adding to poor business performance, where unplanned outages increased. The energy availability factor (EAF) was recorded at 76.7% at the end of September, which was well below the group’s 80% target level.

However, the EAF was likely to deteriorate further in the second half following the November 1, 2014, coal silo collapse at the Majuba power station, which led to the first load shedding of summer on November 2 and had made the already-tight system increasingly vulnerable.

Matona indicated that the Majuba event had thrown the summer plan into “crisis” and confirmed that any minor event, from inclement weather to equipment failure, could push the system over the edge.

“We will be under pressure and we cannot guarantee that there won’t be load shedding,” Matona, who took over as CEO on October 1, said.

He warned that, absent something "miraculous happening", South Africa would be "living on the edge" until new generation was introduced and the performance of the existing plant was stabilised. "It's not going to happen overnight," Matona warned, adding that it could "get worse before it gets better".

Not enough bail out

A financial bail-out announced by Finance Minister Nhlanhla Nene in October is expected to help stabilise the group in the short-term, however, this support would be insufficient to guarantee the group’s longer-term sustainability and would need to be supplemented by an accelerated transition to “cost-reflective tariffs”.

Eskom might approach the National Energy Regulator of South Africa (Nersa) for a tariff reopener. Matona said there was “also an agreement with government that the tariff will need to be reviewed”.