South Africa: Eskom's Profit Falls as Diesel Use Rockets

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Business Day (Johannesburg)

18 July 2008
Posted to the web 18 July 2008

Siseko Njobeni
Johannesburg

ESKOM CEO Jacob Maroga painted a gloomy picture of the power utility's financial performance yesterday as he said soaring coal and diesel costs had taken their toll on it s bottom line.

Presenting the group's financial results for the year to March, Maroga said the group had experienced falling profits, a lower return on assets and less cash generated from operations as primary energy costs rose 40% from the previous period's R13 billion to R18,3 billion .

Revenue was R44,4 billion, up from R40 billion last year. Profit fell from the previous year's R6,5 billion to R974 million.

Announcing the group's acceleration in its multibillion-rand capital expenditure programme, with R46 billion budgeted for this financial year , Eskom sounded alarm bells at what it said was low coal production in SA, which could lead to a coal shortage.

"If there is no intervention, SA may face an annual coal shortage of up to 100-million tons by 2017," Eskom said.

With the country's electricity reserve margin at 8% , Eskom is under pressure to create additional capacity .

Furthermore, the addition of new coal-fired power stations would heighten its exposure to coal market dynamics.

Eskom, which relies on local coal, said production had not kept up with demand. With its low reserve margin, Eskom used its fuel-guzzling open cycle gas turbine stations often, exposing the group to the full brunt of the rising diesel price.

Diesel consumption rose from the previous year's 11,3-million litres to 345,9-million litres. Expenditure on diesel increased from R1,9 billion to R23 billion.

Generation projects account for 73% of its R343 billion capital expansion programme, with transmission investment accounting for 13%. The rest would go towards "improvement of the distribution network and efforts to diversify our energy mix", the utility said.

Eskom has said it could raise as much as R150 billion of the R343 billion needed for the programme through loans .

Financial director Bongani Nqwababa said Eskom wanted to raise about 40% locally. This would include issuing long-term bonds.

The other 60% of international funding would include borrowing from development finance institutions such as the World Bank and the African Development Bank, export credit agencies and traditional offshore bond issues.

Nqwababa said Eskom wanted to diversify its sources of the funding, adding South America and the Middle East to the targeted markets. Eskom has traditionally concentrated on Europe .

A major threat to Eskom's fundraising initiatives could be rating agencies' continued placement of the entity on credit watch while they await indications of the nature and extent of support from the government.

Nqwababa said Eskom and the government were close to finalising the terms of a R60 billion loan and he was optimistic the government would provide clarity ahead of its international results roadshow, which start s this weekend.

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