Eskom’s Interim Results for the six months period ended September 2020 show the company has achieved progress in some key areas of the business, setting it on a path to operational and financial stability.
Earnings before interest, taxation, depreciation and amortisation (EBITDA) increased to R28.1 billion (September 2019: R26.4 billion).
Eskom recorded a net profit, after tax, of R83 million while navigating a very challenging operating environment. Revenue grew to R108.7 billion compared to R107.5 billion in the same period last year, marking an increase of 1.1%.
Sales volumes fell 10.3% in the period as a result of the COVID-19 national lockdown that took effect in March 2020.
Employee benefit costs and other operating expenses were well contained with employee benefit costs marginally increasing to R16.7 billion, compared to R16.4 billion in September 2019.
In its attempts to rein in costs, Eskom relied mainly on natural attrition and voluntary separation packages for managerial staff to reduce headcount, and there were no salary increases or incentive bonuses for managerial level staff.
Primary energy costs rose to R54.3 billion in the period, versus R52 billion in the same period last year, a 4.4% increase. Eskom has redoubled its efforts to curb coal costs, which remained relatively manageable, with an increase of only 4.6% in the average purchase cost per ton of coal compared to 14.2% in September 2019.
However, Eskom and IPP open-cycle gas turbines (OCGTs) were utilised frequently to support a strained power system. The Eskom OCGT’s generated 496GWh at a cost of R1.4 billion in the period, an increase from the R1.1 billion spent on 331GWh during the same period last year.
Eskom’s chief financial officer, Calib Cassim, said: “Despite having achieved 48% of our funding requirements during the period under review, our access to funding in both domestic and foreign markets remains constrained due owing to low investor confidence as a result of poor financial performance, saturated borrowing capacity and the recent rating downgrades.”
The utility’s CFO added: “These factors have a direct effect on market appetite and Eskom’s future cost of borrowing and may hinder execution of our borrowing programme. Eskom will however continue to explore all avenues.”
Returning Eskom to financial stability
Group Chief Executive, André de Ruyter reiterated that Eskom’s top priority remains to address operational and financial challenges and return to financial sustainability. “Given the challenging environment in which we operate, this will require extraordinary efforts from every Eskom employee, and continued support from government and all South Africans” concluded De Ruyter.
The implementation of our reliability maintenance programme continues to bear fruit, thereby positively impacting plant performance.
De Ruyter explained that the divisionalisation of Eskom has been finalised, with implementation of the new operating models of the functionally separate entities progressing well for completion in the first half of 2021.
Municipal arrear debt remained an area of great concern, with R32.9 billion incurred by 30 September 2020, from R25.1 billion in September 2019. The top 20 defaulting municipalities constitute 80% of the total invoiced municipal arrear debt, with 48 municipalities carrying arrear debt of more than R100 million each by 30 September this year.
Notably, as at 30 September Eskom had secured funding of R19.6 billion, or 48% of the funding requirements of R40.7 billion for the financial 2021. The shareholder provided a further R6 billion in support, with the remainder from the R56 billion committed by government expected by year-end.
Cassim cautioned that Eskom’s financial performance is expected to deteriorate in the second half of the financial year due to seasonality factors, with increased summer maintenance and expenditure required to ensure security of supply, coupled with reduced demand and lower summer tariffs.
“While green shoots have begun to emerge in the economy with the phased easing of lockdown restrictions, the recession and continued uncertainty around COVID-19 is still expected to threaten future sales volumes, the cost of production and customers’ ability to pay. By the end of the 2021 financial year, we expect to record an after-tax loss of approximately R22 billion, due to the continued negative impact of the lower than adequate tariff increase, together with the impact of lower sales volumes due to COVID-19,” added Cassim.
While ensuring liquidity remains Eskom’s top priority, we continue to drive the turnaround strategy which focuses on five key areas, two of which are finance-related; improving our income statement, by achieving revenue certainty, cost optimisation and efficiencies, reducing arrear debts as well as optimising our balance sheet.
Cassim concluded: “Cost savings alone will not solve Eskom’s financial position, the price of electricity must migrate to prudent and efficient cost reflectivity whilst embedding the user pay principle”.