Eskom’s financial, operational and environmental performance will continue to be challenging for some time before significant improvements are realised. However, there has been encouraging progress to instil governance and to root out financial mismanagement, malfeasance, and maladministration.
After its appointment last year, the Board’s focus was on three key issues – Addressing governance failures and rooting out corruption, the weak financial position, and the declining revenue, all of which were threatening the sustainability of the Company.
“On restoring governance, Eskom is cooperating with regulatory bodies and law enforcement agencies conducting major investigations into matters of fraud and corruption affecting the organisation. Investigations are by nature lengthy, given legislative processes” outgoing Eskom Group Chief Executive Phakamani Hadebe said.
Nevertheless, the company has made significant progress in addressing a number of governance issues. Around 95% of the open disciplinary cases relating to procurement breaches have since been finalised, with about 10% of cases resulting in employee exits. Lifestyle audits of 365 senior employees have been conducted to ensure that those employees comply with the highest standards of integrity and ethics. The high-risk cases have been handed over to the Special Investigating Unit (SIU) for further investigation.
Furthermore, with the restoration of a culture of ethics and whistle-blowing, there has been an increase in total whistle-blowing incidents reported resulting in investigations and employee exits.
Progress was also made in cleaning up the prior year audit modification relating to the completeness of irregular, fruitless and wasteful expenditure and losses due to criminal conduct.
Despite efforts by the utility, Eskom’s auditors issued a modified opinion relating to the accuracy and reasonableness of the PFMA reporting. Irregular expenditure for the current year totalled R6.6 billion [$465 million], of which R1.5 billion [$106 million] relates to new transgressions. The remaining R5.1 billion [$360 million] is attributable to issues which had been detected previously and are continuing until the related contract is condoned, or to prior year transgressions identified during the year as part of the clean-up process.
“It is to be expected that new instances of irregularities will be detected as we continue our governance clean-up exercise. We have also made progress in clearing the reportable irregularities previously reported by the external auditors. However, some irregularities will remain open until finalisation of court cases or conclusion of investigations by external parties,” Chairman Jabu Mabuza said.
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.
As a result of the extensive challenges confronting the organisation, Eskom has embarked on a comprehensive strategic review to develop a turnaround plan that would put the organisation on a path towards achieving structural, financial and operational sustainability. The turnaround plan supported by the nine-point generation recovery plan; is enabled by four pillars, namely cost containment and sales growth, cost-reflective tariffs, balance sheet optimisation, and business separation.
“In terms of cost savings, we must reduce our overall annual cost base by at least R33 billion [$2.3 billion] in 2022/23, with cumulative cash savings of approximately R77 billion [$5.4 billion] required over the next four years. This pillar also covers growing sales volumes in order to increase revenue.
When it comes to cost-reflective tariffs, we submitted the MYPD 4 revenue application to NERSA, based on revenue that caters for prudent and efficient costs as well as a reasonable return that matches our debt service commitments,” Group Chief Financial Officer Calib Cassim said.
“The debt relief pillar saw Eskom approach Government for financial assistance to reduce debt and interest to a sustainable level. Government has committed to providing R230 billion [$16.1 billion] over the next 10 years,” Cassim said.
The business separation pillar seeks to redress structural deficiencies and will see Eskom being split into three entities, namely Generation, Transmission and Distribution, each wholly-owned by Eskom Holdings. These three entities will have separate assets, debt, employees, licences and financial statements, and will deal with each other at arm’s length.
The group recorded a net loss after tax of R20.7 billion [$1.4 billion] for the year (March 2018: R2.3 billion [$161 million]), and EBITDA of R31.5 billion [$2.2 billion] (March 2018: R45.4 billion [$3.2 billion]). The EBITDA margin declined to 17.5% (March 2018: 25.6%, restated), mainly due to increased primary energy and employee benefit expenditure, combined with largely-stagnant revenue growth during the year. There was a substantial increase in depreciation and net finance cost resulting in a growth in a net loss.
Primary energy costs (including coal, liquid fuels and Independent Power Producers) increased to R99.5 billion [$7 billion] (March 2018: R85.2 billion [$6 billion]). Usage of OCGTs, Eskom and IPPs, increased substantially driven by poor plant performance and supply constraints at a cost of R6.5 billion [$457 million] (March 2018: R0.3 billion [$21 million]). Expenditure on renewable IPPs increased to R22.2 billion [$1.5 billion] for the year (March 2018: R19.0 billion [$1.3 billion]) primarily due to the commissioning of new renewable IPPs during the year.
191,585 new households were connected to the grid as part of the Government electrification programme. Electricity sales of 208 319GWh for the year were 1.82% lower than last year (March 2018: 212 190GWh). Mining customers recorded a decline of 4.2% due to the economic downturn leading to the closure of a number of mines and shafts while international sales also declined by 18.4% due to neighbouring countries utilising more of their own generation.
Eskom lodged two High Court reviews, the first to set aside NERSA’s revenue decision for 2018/19 and a second on the NERSA’s decision for the three regulatory clearing accounts (RCAs) for the 2015, 2016 and 2017 years. The Energy Availability Factor (EAF) declined to 70.0% for the year (March 2018: 78.0%) and planned maintenance was stable at 10.2% (March 2018: 10.4%) whilst unplanned maintenance deteriorated to 18.3% for the year (March 2018: 10.2%).
“We are however starting to see the fruits of the implementation of the Generation nine-point recovery programme and the winter plan. OCGT usage has reduced significantly and we have not implemented rotational load shedding since 23 March 2019,” says Chief Operations Officer Jan Oberholzer.
Coal stock levels (excluding Medupi and Kusile, and excess stock at Lethabo) stood at 36 days at year-end (March 2018: 28 days), with four power stations below their minimum stock levels. Since year-end, this has reduced to one (Kriel Power Station), due to focused delivery against the nine-point recovery programme.
The new power stations – Ingula, Medupi and Kusile – have not achieved the desired levels of performance and reliability due to a combination of plant design deficiencies and operational and maintenance inefficiencies. A plant defect correction plan is being executed and closely monitored to effectively resolve all major plant defects, and improve inefficiencies in the operation and maintenance of the new units. We remain confident that the build programme will be completed by 2022/23, barring other issues outside our control.
Yesterday the Public Enterprises Minister Pravin Gordhan announced the appointment of Jabu Mabuza as Interim Executive Chairman and Acting Group Chief Executive of the company with effect from 1 August 2019. He will be taking over from Hadebe for the next three months.
“I would like to take this opportunity to thank Phakamani for the excellent work he has done since joining Eskom in January last year and working with us as the Board in navigating our challenges and crafting a way forward that will see Eskom to sustainability. My priority will be to take forward the work that he has been spearheading. Equally, the Board’s priority will be finalising the process of finding a permanent Chief Executive to deliver the Eskom of the future,” Mabuza said.
“We remain committed to contributing to the development of the South African economy, and we recognise our responsibility to society and industry to provide an enabling environment that fosters welfare, economic growth and equality,” he concluded.