Eskom Faces New Hurdles in Recovering R30.3bn Profit
You can also listen to this podcast on iono.fm here.
JIMMY MOYAHA: Eskom Holdings Limited, the state-owned entity tasked with our electricity supply, has released its financial results for the fiscal year. We’ll analyze the performance of this entity, which reported a profit of R30.3 billion for the period.
I’m joined by Dan Marokane, the group CEO, to discuss the company’s performance and insights.
Read: Eskom doubles profit after ending load shedding
Ntate Marokane, it’s great to have you on the show. Thank you for your time. What are your initial thoughts on the financial performance of the business? This marks a stronger financial year; the second consecutive solid year following the previous one.
How has you and the management team reflected on the past year?
DAN MAROKANE: Thank you, Jimmy. As you may know, this is the second consecutive year in which the group has turned a profit, largely due to the careful implementation of the generation recovery plan that started in 2023.
We have consistently stated that once our fleet operates effectively, we can reduce costs from a generation standpoint.
Additionally, with our heightened focus on cost management and boosting revenues throughout the organization, we’re pleased to report these financial results – a profit of R30.3 billion compared to R14.1 billion last year, with a commendable EBITDA (earnings before interest, taxes, depreciation, and amortization) margin of 30.63%.
Our primary concentrate now is enhancing efficiencies across the company as we prepare to tackle challenges posed by the forthcoming electricity market liberalization and the new electricity pricing policy as suggested by the minister.
JIMMY MOYAHA: Ntate Marokane, we’ve taken a look at that pricing policy, and I want to understand what it could imply for Eskom’s revenue and balance sheet.
You mentioned facing challenges in meeting some of your targets, particularly regarding the energy availability factor, which stands at 65% instead of the 70% goal for the prior fiscal year.
Read: Eskom responds to industry concerns over electricity pricing
This, along with reduced electricity sales – how do you assess the current risks facing the business?
ADVERTISEMENT
CONTINUE READING BELOW
As you approach a new fiscal year with an altered pricing policy that could complicate matters further, and amid falling electricity sales from the last financial year, how is this altering the business’s strategy moving forward?
DAN MAROKANE: Jimmy, we must interpret the decrease in sales in the context of the increase in generators enabled by the Energy Action Plan, which is part of overall reforms.
This decline should be viewed against an economy that has only grown approximately 1.1% over the last three years. It’s worth noting that the electricity prices over time have contributed to this economic contraction.
Our initial goal was to ensure electricity availability by enhancing Eskom’s operational performance.
The next objective, which both we at Eskom and the government share, is to transition toward more affordable electricity pricing.
With a targeted 3% economic growth rate, we believe that demand will pick up.
We’ve already observed this with the smelter industries, which have experienced a reduction of nearly 10 terawatt-hours in sales over the last year.
We’ve initiated agreements that offer them pricing advantageous enough for their operations to restart. We anticipate seeing that volume return.
However, as the industry evolves, we too must adapt and attract a new customer base.
With households increasingly turning to rooftop solar, there are new product avenues we can pursue. Data centers are expanding, necessitating transparent licensing arrangements in that space. We recognize vast opportunities there.
We’re also seeing significant prospects within the electric vehicle charging market, and our teams are dedicated to advancing these initiatives.
JIMMY MOYAHA: Ntate Marokane, let’s discuss something that has likely troubled Eskom’s balance sheet – municipal debt.
As of the reporting period, we were just above R111 billion, and now it’s close to R120 billion due to new billings.
Read: Eskom CEO states overdue municipal debt hinders firm’s restructuring
From a business standpoint, you’ve indicated that this revenue is effectively lost until payment is received since Eskom has delivered the service without compensation. This is clearly a non-sustainable situation, an issue that must keep you and your team up at night, I presume?
ADVERTISEMENT:
CONTINUE READING BELOW
DAN MAROKANE: This has consistently been a major concern for us.
It’s reached the point where it’s no longer just an Eskom issue; this represents a national risk.
The municipalities’ inability to pay for basic services calls for urgent attention from both within and beyond Eskom.
Addressing municipal debt is crucial within the Eskom Debt Restructuring Task Team as we seek solutions for the financial viability of entities emerging from the planned unbundling process.
I’m encouraged that all stakeholders recognize the significance and urgency of finding a solution.
We’ve been aware of this issue for some time. Previous attempts to resolve it fell short, and now we need to be innovative and open-minded in seeking solutions.
It indeed poses a significant challenge for the business.
JIMMY MOYAHA: Ntate Marokane, you mentioned the unbundling process, which deserves more attention as we’ve heard mixed messages regarding this. There is a clear directive from the president and government to unbundle Eskom into three entities.
Read: Eskom unbundling stalls as board grapples with lender complexities
However, there have been discussions within Eskom’s board suggesting that unbundling may not be the best path forward for the organization.
This remains a topic of ongoing conversation, but could you clarify where Eskom stands as we move ahead?
DAN MAROKANE: Jimmy, let me clarify that.
The Eskom board has consistently supported the reforms outlined by the president. We embarked on the unbundling process three to four years ago, resulting in the establishment of the unbundled National Transmission Company of South Africa (NTCSA), which was spun off from Eskom.
We recognize that these reforms are essential, but we have also stressed that their execution must mitigate any undue risk to the remaining entities, which could in turn jeopardize the entire country.
The focus has been on how to implement these reforms effectively.
ADVERTISEMENT:
CONTINUE READING BELOW
We specifically raised concerns about the increasing municipal debt and cautioned that if left unaddressed, it could undermine the fiscal health of the remaining business.
In fact, we could have already unbundled the distribution business, and we are prepared to proceed immediately.
The only barrier is meeting the solvency and liquidity criteria mandated by company law for this type of transaction.
We are committed to resolving this issue to ensure that sustainable entities can emerge from the envisioned transactions. This perspective has been consistently communicated by the Eskom board.
We’re glad to see that this narrative is gaining prominence in discussions surrounding anticipated reforms. You might recall that phase two of the Eskom Restructuring Task Team is addressing several of these essential elements regarding sustainability, including the unbundling aspect.
JIMMY MOYAHA: Ntate Marokane, as we conclude our discussion, I want to touch on some unfortunate news regarding Eskom. We have confirmed that Chief Financial Officer Calib Cassim will be stepping down after over two decades with the entity.
From a continuity standpoint, we don’t foresee issues as the company will begin its search for a suitable replacement. Nonetheless, it marks the end of an era for a CFO who has been with Eskom for such a long time. Do you have any thoughts or parting messages for him?
DAN MAROKANE: Calib has served as a steward for the last 24 years, with the last seven or eight years in the role of CFO.
His intention to retire early was communicated last year.
We noted that he would reach the early retirement age in October this year, which is just around the corner. We initiated the search for his successor, and that process is currently underway. We will make an announcement in due time.
We have expressed our gratitude to Calib face-to-face for his dedication to the company, which he continues to show, and he has committed to assisting with the transition typically associated with such a role change.
JIMMY MOYAHA: This marks a second consecutive year of profitability for the national power utility, with the potential for increased profits in future fiscal years if we can resolve some long-standing issues.
The business remains hopeful about the management of the country’s electricity future.
We’ll wrap up our discussion on that note. Group CEO Dan Marokane was with us to reflect on Eskom’s recent performance.