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Eskom: There is no cash crisis ... yet

Jul 20 2017 07:31
Yolandi Groenewald

Johannesburg - If all goes according to plan Eskom has a bright future ahead, its executives said on Wednesday during the release of its financial results. Unfortunately hidden in the financial statements a tale emerged that questioned whether the state utility had reversed its fortunes.

Eskom's irregular expenditure alone ballooned to R2.996bn this year, amidst a host of disreputable actions and tenders. Also declining electricity sales, significant governance issues and a market that is increasingly suspicious of Eskom's scandals might scuttle the firm's best laid plans going forward.

ICYMI: News on Eskom's financial results

New Eskom interim CEO Johnny Dladla, interim chair Zethembe Khoza and Eskom chief financial officer Anoj Singh emphasised that Eskom had no cash crisis, after weekend reports indicated that the company was basically broke.

“We are financially sound and stable,” Dladla affirmed, despite a qualified opinion by its auditors.

Khoza added that the qualified audit did not materially impact Eskom.

Qualified audit

Last week Eskom's results were delayed to this week after auditors raised the qualified audit opinion on the state utility's accounts. 

At first glance Eskom's balance sheet looks quite promising. Revenue rose by 7.9% to R177bn from last year's R164.2bn. Dladla said this was 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.

Singh said the company’s cost-cutting measures were also bearing fruit, with a saving of R20.2bn realised in the year under review, up from R17bn achieved previously. The savings were achieved from coal operational expenditure and other operating costs. Coal prices had decreased significantly, helping Eskom to cut down on its operational costs.

But Eskom profit plummeted 83% to R888m, down from R5.1bn last year.

Eskom tried to paint a rosy picture, showcasing its positive growth in Ebitda - a form of measuring operating profitably. Also, Singh said the executives controversial bonuses were paid out because of Eskom's strong financials, as measured by Ebitda.

Dladla said Eskom's Ebitda surged by 14% to R38bn from last year.

But Ebitda can distort a company's financials, especially in the case of a company such as Eskom that depends heavily on debt as a measure to raise funds.

Singh said Eskom expected their debt to peak at R500bn over the next five years. The borrowings come despite the power utility being downgraded by rating agencies this year, after Moody’s, S&P and Fitch cut South Africa’s sovereign credit ratings. Eskom's current total debt was R350bn.

Singh defended Eskom's reliance on Ebitda, saying that credit agencies also measured success in terms of Ebitda instead of straight profitability.

Eskom's reliance on debt

The qualified audit also raises red flags about whether credit facilities might be cancelled, leaving Eskom in the lurch.

Already interest costs are spiraling, with Eskom's finance costs increasing by 82%.

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.

"In the last financial year Eskom had for the first time managed to increase its borrowings by over R60bn in one single year, a move that is indicative of the confidence that the investors still have in Eskom," he said.

Dladla said, as affairs stood currently, Eskom didn't need a bailout. 

"Eskom has not made a formal application of any form to the government for support, going forward," said Dladla.

But if a loan should be defaulted due to the qualified audit, Eskom could come to Finance Minister Malusi Gigaba cap in hand. And if Eskom should find international capital markets increasingly averse to its bonds, a bailout might be the only option.

"If we have limited access to foreign capital markets, we would need to approach Treasury," he said. "But on current circumstances that is not necessary."

In the last week it appeared that both the Development Bank of Southern Africa (DBSA) and US lender Citibank got jittery about their Eskom loans after Eskom's unqualified audit, but Eskom was able to overcome their concerns.

Electricity sales

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 five years. Yet locally Eskom's sales are plummeting. 

Overall Eskom's electricity sales decreased by 0.2% and local sales by 1%. The picture would've been even more dire without the support of South Africa's neigbours. Eskom's international sales volumes increased by 12.1%.

It also remains to be seen if the regulator grants Eskom an exuberant tariff hike of close to 20%, whether they will come even close to their growth target. According to a leaked application, Eskom will ask for a 20% tariff hike next time around on the grounds that it won't be able to operate sustainably without collecting on that revenue.

Irregular expenditure

Eskom's balanced sheet was most marred by the increase in irregular expenditure. This number increased significantly from R348m last year to R2.996bn in 2017. 

The auditors said irregular expenditure estimated at R1.5bn was incurred because of the placement of contracts without proper delegation of authority or without following established processes from  2008 to 2015.

The auditors were particularly scathing about one case concerning R547m, where they stated that effective steps were not taken to prevent fruitless and wasteful expenditure.

Eskom also suffered material electricity losses of R1.268bn from meter tampering and bypasses, illegal connections to the electricity network and illegal vending of electricity. 

Also worrying was the R4.236bn in bonuses, which doubled from last year's  R2.14bn. 

Singh said he as a executive earned the bonus due to his hard work in turning around the precarious financial postion of Eskom from three years back and ending rolling blackout.

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eskom  |  financial results

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