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Eskom financial results indicate solid finances

On Wednesday, South African state-owned power utility Eskom released their financial integrated results for 2016/2017, claiming to be on a “firm operational and financial footing”.

Whereas security of power supply was the key concern nearly two years ago, the focus has now shifted to managing surplus capacity, said Eskom’s interim group chief executive Johnny Dladla.

To manage the surplus capacity, Dladla said Eskom has adopted an aggressive sales volume growth to support economic growth by encouraging an annual growth of 2.1% in local demand and 8% in export sales over the next 5 years.

“Eskom is ideally positioned to support the economic recovery of South Africa and enable industrial growth across Southern Africa. We will build on the momentum of our performance and efficiency improvements over the recent years and become a more customer-centric organisation that partners with key sectors to increase industrial activity, electricity consumption and job creation,” said Dladla.

Eskom financial results: operationally and financially sound

Reflecting on the operational and financial performance of the company in the year under review, Dladla said Eskom’s turnaround plan was premised on three key focal areas, namely, improving generation performance; ensuring financial sustainability; and completing the new build programme.

To this end, generation plant availability increased from 71.1% to 77.3% due to Eskom’s strict adherence to its plant maintenance plans, the parastatal said in a statement.

As a result of this increased availability and the additional new generating capacity added from Medupi, Ingula and Kusile, the reliance on open-cycle gas turbines (diesel generators) has reduced considerably.

Eskom has not implemented load shedding for the past 23 months, and the plan is to continue implementing appropriate levels of planned maintenance to ensure long-term plant reliability.

In terms of Eskom’s existing Generation Sustainability Strategy, its aim is to achieve 80% plant availability, 10% planned maintenance and 10% unplanned maintenance by 2020.

Dladla has put special focus on corporate governance and ethics as per the Shareholder and the Board’s mandates.

Revenue growth

Eskom’s chief financial officer, Anoj Singh, said the company’s earnings before interest, taxes, depreciation and amortisation (EBITDA), which is a measure of a company’s operating performance, surged 14.4% to R37.5 billion [$2.7 billion] in the year-ended 31 March 2017, up from R32.8 billion [$2.5 billion] in same period last year, the utility explained in a statement.

The company added that revenue rose 8% to R177 billion (2016: R164.2 billion), driven largely by a 12.1% increase in export sales and a 9.4% tariff increase that was granted by the energy regular last year.

In order to grow export sales, Singh said Eskom has concluded new export sale agreements with a number of regional trading partners, ranging from 50MW to 200MW.

He said the company’s cost-cutting measures were also bearing fruit, with a saving of R20.2 billion [$1.5 billion] realised in the year under review, up from R17 billion [$1 billion] achieved previously. The savings were achieved from coal operational expenditure and other operating costs.

Primary energy costs were reduced by 2.3% to R82.8 billion [$6 billion] compared to an average increase of 13% over the last five financial years.

Eskom’s own generation costs, including environmental levy, of R60.1 billion (2016: R65.7 billion) generated 215 358GWh and reflects a decrease of 8.5% compared to the previous year. Coal purchase costs per tonne increase were contained to 3.5%, which well below inflation of 6%.

Independent Power Producers (IPPs) generated 11,529GWh at a cost of R19.8 billion (2016: R15.1 billion), reflecting an increase of 30.8% compared to the previous year. The average cost increased to 188c/kWh (2016:171c/kWh), as proportionately more energy was procured from the renewable energy projects at higher costs than the other IPPs.

The cost is much higher than Eskom’s short run marginal cost and the average price of electricity.

“We will continue to engage with Government, collaborating closely with the Department of Energy and Nersa to manage IPP programme risks and mitigate any unintended negative operational and financial impacts on Eskom,” said Singh.

The group’s net cash inflow from operating activities was R45.8 billion for the year (2016: R37.2 billion), reflecting an increase of 23.1%. Cash flows used in investing activities were R62.3 billion for the year (2016: R58.6 billion).

The group’s liquidity position, comprising cash and cash equivalents plus investment in securities, was R32.5 billion [$2.5 billion] at 31 March 2017.

Singh said Eskom has managed to secure 77% of its funding requirements, including cash on hand, for the current 2017/18 financial year despite tough market conditions.

Furthermore, Eskom in the 2016/17, Eskom had for the first time managed to increase its borrowings by over R60 billion [$4.6 billion] in one single year, a move that is indicative of the confidence that the investors still have on Eskom.

“We remain resolute that we will fully execute the required funding for the year, albeit under challenging market conditions. Our liquidity levels remain healthy and Eskom’s financial profile continues to improve and stabilise. Backed by the availability of the government guarantees and the stable financial profile; we do not foresee significant impediments in the execution of the remainder of the FY17/18 funding requirement,” said Dladla.

Notwithstanding the good results, Eskom’s Interim Chairperson Zethembe Khoza said it was a matter of great concern that there were reportable irregularities that were raised by Eskom’s external auditors.

“It is worth noting that the Board has taken adequate steps to the satisfaction of the auditors that the irregularities have been mitigated to an acceptable level,” said Khoza.

He added that: “Management has shared plans to facilitate improvements in relation to the qualified audit. The Board has impressed upon the executive team that the issues raised will demand special attention and oversight going forward.

“I would like to talk to a few matters that have been of interest to the public recently. The investigation into Mr Koko and the alleged conflict of interest as it related to Impulse International has been completed. The Board has taken a decision to pursue disciplinary against Mr Koko and this will follow the normal labour relations. The Minister of Public Enterprises has been informed of this decision.”

 Report highlights 

  • EBITDA surged 14% to R38 billion [$3 billion]
  • Revenue rose 8% to R177 billion [$13.7 billion]
  • Own generation cost decreased by 8.5% to R60 billion [$4.6 billion], with cost of IPPs up by 30.8% to R20 billion [$1.5 billion]
  • Primary energy costs down by 2.3%
  • R20.2 billion cost-saving achieved
  • Energy availability improved significantly to 77.3%
  • Medupi Unit 5 in commercial operation (producing 794MW) since 3 April 2017
  • All 4 Ingula units in commercial operation (producing 1 332MW) since January 2017
  • Kusile Unit 1 and Medupi Unit 4 synchronised
  • 207,189 new households connected to the national grid

Highlights for 2018

The utility highlighted their core focus areas for 2018:

  • Cohesion of the Exco team
  • Implementation of the Design-to-Cost strategy (DTC)
  • Governance, ethics and accountability
  • Stakeholder engagement
  • Communication

Download the Integrated Results 2017 presentation here.

Ashley Theron
Ashley Theron-Ord is based in Cape Town, South Africa at Clarion Events-Africa. She is the Senior Content Producer across media brands including ESI Africa, Smart Energy International, Power Engineering International and Mining Review Africa.