By Sibongile Khumalo for Fin24
Eskom suffered a net loss of R2.3bn in 2018, compared with a R0.9bn profit the previous year, the state-owned power producer revealed at its financial results presentation on Monday.
CEO Phakamani Hadebe said the poor results were compounded by allegations of corruption and mismanagement, challenges of governance and negative investor sentiment.
The power utility said its net cash from operations declined from R45.8bn to R37.6bn, as it struggled with leadership and operational challenges.
Eskom Chair Jabu Mabuza also said there had been R19.6bn in irregular expenditure since 2012, with much of the irregular expenditure being reported in 2018.
“This was a result of us shaking the cupboard so hard that so many skeletons came tumbling down,” he said.
“The verification and cleaning up exercise resulted in a significant increase in the number of reported irregular expenditure in 2018 (from R3bn to R19.6bn), with many of the items reported arising in prior years. Where information was not readily available, alternative methods were used where practical to identify irregular expenditure,” the utility said.
The power utility admitted that its “transition towards financial and operational sustainability required resolute, tough and decisive leadership”.
Its liquidity remained a going concern, with a massive R4.2bn owed to it by municipalities.
“Eskom continues to face significant financial and liquidity challenges in the short term, mainly due to the high debt burden, low sales growth and increased finance costs”.
Eskom debt has increased from R387bn to R600bn withing four years, but steps have been taken by the board to boost investor confidence, Hadebe said.
“We have raised 22% to date of [the] R72bn borrowing requirement for 2018/19, and have a firm commitment to increase funding to 62% of the 2018/19 borrowing requirement.” He said growing investor appetite for Eskom bonds was a concern.
The power utility, which has been hit by leadership challenges, is battling a long-standing financial stability crisis, including a debt of R13.5bn owed to it by a number of municipalities.
In March, Moody’s downgraded Eskom’s credit ratings from B2 from B1, citing an absence of concrete plans to place its business on a sound financial footing. B2 is the fifth rung of sub-investment grade debt.
The current wage demands by unions are also adding to the firm’s financial woes, with labour unions currently discussing Eskom’s latest options of 7% and 7.5% increases, which were tabled after a round of bruising negotiations.
The firm initially offered no increases, citing its difficult financial position. Eskom and the unions were drawn to the negotiation table by Public Enterprises Minister Pravin Gordhan in a bid to avert a crippling strike by workers.
In June, the National Energy Regulator (Nersa) has approved R32.69bn for Eskom’s multi-year price determination Regulatory Clearing Account (RCA) applications – funds Eskom must recover due to an electricity shortfall or an escalation in operating costs.
Debt and corruption scandals at Eskom Holdings SOC Ltd. make the utility the biggest risk to South Africa’s economy and the government needs to replace its management, Goldman Sachs Group said.
Eskom plans to raise almost R340 billion ($26 billion) in the next five years, while meeting R413 billionof interest and debt repayments, which amount to 8% of South Africa’s gross domestic product.
The utility is caught up in allegations of corruption related to contracts it signed with companies linked to the Gupta family, who are friends of President Jacob Zuma. It’s also without a permanent chief executive officer and has suspended its finance director. Zuma and the Guptas deny any wrongdoing.
“We are having discussions on solutions,” Colin Coleman, a partner of Goldman Sachs and head of sub-Saharan Africa, said in an interview in Johannesburg on Thursday, without elaborating.
“Government has got to put the governance in place and clean it out. It needs a permanent credible, independent non-conflicted chairman and a credible board and from that, credible managers.”
The New York-based lender in 2015 provided informal advice to the South African government on the sale of state assets to raise money for Eskom and proposals on how to improve the utility’s cash flow, people familiar with the matter said at the time.
Eskom faces lower demand, with South Africans last year using the least amount of electricity generated by Eskom in more than a decade.
The utility is also spending billions of dollars on new power plants that are years behind schedule and over budget. The company disclosed R3 billion of irregular expenditure in its financial results on July 20, a figure which its auditors said they couldn’t independently confirm.
“Eskom is the biggest single risk to the South African economy,” Coleman said.
“If you strip out corruption and sort out procurement, I’m sure there are efficiency gains there. There are self-help initiatives that can deliver a company that’s a lot more efficient. You’ve got to incentivize efficiency.”
The South African government, which saw its budget deficit widen to 92.2 billion rand in July, is hamstrung by an economy that’s barely growing, political infighting, and losses at other state-owned companies such as South African Airways.
Two ratings agencies cut South Africa’s foreign debt to junk in April, citing the firing of former Finance Minister Pravin Gordhan at the end of March and poor governance at state-owned enterprises.
Eskom, which has used R218.2 billion in government guarantees, hasn’t held a public auction for its debt in South Africa since 2014, relying on development finance institutions and export credit agencies for loans.
The power utility is confident it can reduce its dependence on the government by targeting funding sources that do not require explicit guarantees, the power utility said in an emailed response to questions.
“Eskom continues to access various debt markets, which include funding from development finance institutions, domestic and international bond issuances, funding supported by export credit agencies as well as short-term commercial paper bill issuances,” the company said.