Eskom recorded a net loss of R20.7 billion for the year ended March 2019, from R2.6 billion in 2018, interim chief executive officer and chairman of the power utility, Jabu Mabuza, said on Tuesday (30 July).
“Today Eskom releases results that, while expected, are unfavourable. The organisation disappointingly incurred a net loss after tax of R20.7 billion for the year,” he said.
Revenue climbed to R180 billion, from R177 billion in the prior year, however, earnings before interest, taxes, depreciation, and amortisation (EBITDA) for the year deteriorated to R31.5 billion (March 2018: R45.4 billion) and the EBITDA margin dropped to 17.51% (March 2018: 25.57%).
The power utility has amassed net debt of R430.8 billion at the end of the financial year and the government is giving it a R128 billion bailout over the next three fiscal years to keep it afloat. The company reported total liabilities amounting to R605 billion.
Eskom listed ‘unsustainably low liquidity levels’, among its biggest challenges, “requiring ongoing monitoring of cash requirements”.
Cash and cash equivalents were severely constrained, at only R2 billion at year end (March 2018: R15.8 billion), said chief financial officer, Calib Cassim. The significant deterioration in cash on hand was due to poor operational cash flows and increased debt servicing costs, he said.
A R20 billion bridge-to-bond facility obtained in February 2018 was settled upon the issuance of an international bond in August 2018. Furthermore, delayed drawdowns of a R7 billion facility resulted in short-term bridging finance of R3 billion being required at the end of March 2019.
Net cash flows from operating activities for the year were R32.7 billion (March 2018: R37.6 billion). As a result, liquidity ratios worsened considerably compared to the prior year, and remain well below investment-grade levels required by ratings agencies, the financial lead said.
Eskom warned that financial performance ratios deteriorated in comparison to 2017/18, which negatively affected investor confidence. It said that operating cash flows insufficient to fund debt service requirements, while funding efforts were hampered by low levels of investor confidence.
Additional woes, include declining sales volumes due to prevailing economic conditions, supply constraints and load reduction, as well as some customers opting for alternate technology and self-generation. It also pointed to a significant escalation in municipal arrear debt.
“Our access to funding in both the domestic and foreign markets was restricted due to decreased investor confidence, as a result of reputational damage owing to the audit modifications in the 2016/17 and 2017/18 financial statements related to the completeness of irregular expenditure; previously reported governance issues; ongoing operational challenges; as well as uncertainty regarding our proposed restructuring.
“Nevertheless, with the announcement of government’s financial support we were able to secure R63.3 billion, or approximately 88%, of our R72 billion funding target for the year. We had to manage liquidity by reducing capital expenditure, and utilising cash reserves,” Cassim said.
“Other issues contributed to our liquidity problems, such as escalating municipal arrear debt; a price increase of only 5.23% granted by NERSA for the 2018/19 financial year; a 1.82% decline in sales volumes; as well as an above-inflation wage settlement agreement, accompanied by a once-off payment totalling R0.6 billion, for bargaining unit employees.
“These issues were exacerbated by deteriorating Generation plant performance, necessitating increased use of Eskom and IPP OCGTs in order to avoid or minimise the impact of load shedding, at a total OCGT fuel cost of R6.5 billion.”
Rebuilding coal stock levels at a number of power stations also negatively impacted liquidity by approximately R2.5 billion. A maximum of 812GWh was lost due to rotational load shedding and load curtailment, further reducing our already stagnating sales,” Cassim said.
Looking ahead, Eskom said that the viability of its turnaround plan is based on four pillars, one of which relates to cost containment.
“We instituted a cost containment plan to drive a savings target of R10.6 billion for the 2018/19 financial year, which included an improvement in revenue.We did well to save R9.9 billion in terms of this plan, mainly from other operating expenses, interest paid and non-electricity revenue.
“However, savings have been eroded by significantly higher primary energy costs incurred in the last few months of the year, as well as the above-inflation wage settlement and once-off payment to bargaining unit employees,” said Cassim.
The finance chief said that the group is targeting cumulative cash savings of R77 billion over the next four years, comprising operating expenditure of R44.3 billion, capital expenditure of R19.9 billion and working capital of R12.8 billion. The savings in 2022/23 alone amount to about R33 billion.
“Estimated savings are built on several initiatives, such as optimising primary energy costs, growing coal volumes from cost-plus mines, programmes geared towards generation and network excellence, procurement and human resources initiatives, and reducing sundry expenses. Nevertheless, as we’ve noted before, cost savings alone are not enough to ensure Eskom’s financial sustainability, but it is a key part of the turnaround plan,” Cassim said.
“We must reduce our reliance on debt funding as a source of liquidity; the only way to achieve that is to improve operating cash flows, therefore the strong focus on moving to a prudent cost-reflective tariff.
Eskom also has more employees than it needs, leading to further unnecessary monthly costs. However, it is currently constrained by labour unions, which have played a role in seeing president Cyril Ramaphosa into power, who oppose staff cuts and potential privatisation.