Big challenges remain but Eskom is making progress

From restructuring to maintenance and cost-cutting, CEO says utility is on track to achieving its turnaround targets.
A sign of improvement … the utility has been guzzling diesel to meet demand, but on Wednesday night achieved 30 000MW of availability without diesel. Image: Waldo Swiegers, Bloomberg

Eskom has made “key” progress in restructuring the operations of the business, with chief executive Andre De Ruyter saying the power utility is committed to meeting the “ambitious” unbundling target date, which has been set down for 2021.

Speaking at a briefing on the state of Eskom’s power system on Thursday, De Ruyter said the utility’s business model is “outdated”, with Eskom being the “last remaining very large vertically integrated” power utility in the world. 

The divisionalisation of the utility into three separate entities – generation, transmission and distribution – is expected to improve the structural and operational efficiencies of the entity, which has been racking up debt and unable to provide reliable power. 

Advanced stage

De Ruyter said the divisional boards have been established, with the three components now running as separate entities. 

The three new divisional MDs, all internal appointments who were previously the group executives of these divisions, are:

  • Bheki Nxumalo (generation)
  • Segomoco Scheppers (transmission) and
  • Monde Bala (distribution). 

Read: Finally, a credible plan to fix Eskom

The business and operating models for each division are at “an advanced stage”, said De Ruyter.

“They have got their own income statements [and] we are in the process of establishing appropriate balance sheets and apportioning the relevant amount of debt to each of those,” he said. 

Eskom has a debt burden of R450 billion, which it is unable to service from its profits. 

According to the timelines set in the Department of Public Enterprises’ (DPE’s) roadmap on the legal and operational unbundling of the entity, the restructuring should be concluded by the end of 2021.

Read: Eskom sees no need for more state funding

“That is an aggressive timeline because there is a lot of work to be done,” said De Ruyter.

He explained that restructuring large corporates is not a simple process and could run for two to three years or more as the company considers issues such staff, operational concerns, financial issues, transfer pricing and debt.

“All of these need to be navigated properly if we don’t want the wheels to come off halfway through this process,” he said

However, he said the utility is “committed to meeting that timeline and we are working hard to achieving the policy objectives set by our shareholder [DPE].”

Apportioning debt

Speaking on dividing the R450 billion debt bill between the three divisions De Ruyter explained that while most of the debt was incurred by generation, due to the ballooning costs of building the Medupi and Kusile power plants, the debt “can’t all stay with generation”. 

“We need to take account for the fact that we have two other divisions which each generate revenue and have a capital base that needs to be supported,” he said. 

Read: Eskom CEO on the need to restructure

De Ruyter said the utility is actively engaging its lenders on the restructuring of the debt to ensure that there are no inadvertent contractual breaches or defaults on the loan agreements.

“We truly understand that that would be highly undesirable and therefore we are doing this in a structured manner,” he said.

“Part of the reason for opting for a divisionalisation approach rather than an immediate legal separation is exactly our understanding that a precipitous legal unbundling would have created enormous concerns amongst our lender base.” 

The entity’s objective is to achieve a reduced debt balance of R200 billion and 35% Ebitda (earnings before interest, taxes, depreciation and amortisation) margin for Eskom to become a financially sustainable business that does not need support from the government. 

“When we would be able to achieve that, I would not be able to give you firm guidance on that.”

Making strides

Getting Eskom onto a firm footing will require a combination of factors such as getting cost-reflective tariffs, eliminating load shedding, cutting costs, and converting coal and other energy sources into energy as efficiently as possible. 

De Ruyter said despite facing major challenges over the past four months, including a drop in electricity sales due to reduced demand in light of the country’s Covid-19 lockdown, the entity had made good progress on its turnaround plan. 

He said the utility had “taken a knife” to costs. For instance, it reduced its use of open gas cycle turbine fuel, with the cost for this coming in at R2.67 billion less than the provided R6.98 billion. The entity also managed to begin work on its wage bill through the issuance of 164 voluntary severance packages to senior executives.

It will also begin renegotiating costs with independent power producers.

The reduced demand under lockdown allowed the entity to execute “aggressive” short-term maintenance to address issues that lead to partial load losses, and this has allowed it to reduce the possibility of load shedding in winter, said chief operations officer Jan Oberholzer.

De Ruyter said the utility managed to achieve 30 000 megawatts (MW) of availability on Wednesday night without using any diesel, which “is testament to the fact we are seeing a turnaround in our generation system”.

Revised load shedding forecast

Before the lockdown, Eskom had forecast 31 days of Stage 1 load shedding in winter.

With the short-term maintenance that has been done, there is now an 80% chance that there will only be three days of load shedding.

Ten years of neglect means the system remains unpredictable and unreliable, and there may still be trips and breakdowns, which means the risk of load shedding remains. 

Oberholzer said this unreliability will remain until Eskom completes its reliability maintenance at the end of August 2021.

The utility is behind on the implementation of this long-term maintenance programme because of the lockdown, but said it has used the period to prepare its systems and secure contracts with the original part manufacturers and it intends on begining work on July 1.

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Progress in trying circumstances. Well done!
Maybe Sasol should have appointed De Ruyter in stead of Constable as CEO

Sasol’s loss is Eskom’s gain.

Here we go again running ESKOM like an accounting company and not an engineering company.

What did Facebook do when zoom threatened them? The launched a competitive product. What does ESKOM do when IPPs threaten them? They negotiate good deals while trying to optimise their ancient electrification methods. Until Eskom puts a stop and says from tomorrow we will build renewable they’ll struggle. And soon they’ll struggle to attract investors because all major funds are going green.

Sasol made the same mistake by neglecting innovative ideas and pushing antique coal based methods for far too long.

Renewable energy is not the way to go. We will have to do nuclear and clean up coal. Eskom is full of lovely plans, lot’s of talk. But they still have too many employees and dead meat on the payroll.

I am afraid where Eskom finds itself now it needs bean counters more than engineers. Not even the best engineers can fix it without beans!

Renewable, green energy also comes with a big carbon footprint that puts into question, not just viability but also savings in emissions. We simply need to find ways to burn coal more efficiently. I recall that some years ago there was a South African company that had come up with “Biological scrubbers” that could reduce the damage done to the environment by a lot of industries but due to a lack of interest moved their business to Germany who saw the value in their product in the long term.

Farsightedness is not exactly our strongest suit it seems.

Well I think “re-structuring” will be heaven for bean counters. Each “division” will need a CEO, a CFO, HR and all the trappings juicy SOE’s afford (but can’t really afford). Same as SAA, Mango and SA Express.

Whether it will actually and suddenly be more efficient seems to me anyway, doubtful.

Three money pits instead of one or two “profitable” entities and one horrendously loss making.

My view; sell everything; same as SAA.

And still they soldier on with the bloated staff numbers……

With the greatest will in the world De Ruyter will not succeed – the terrible twins are against him in the long run – government and the trade unions

Some strides are obviously being made and setting targets important.

One I don’t agree with is “cost-reflective tariff’s”. Should it not be cost effective tariff’s.

Is it possible that competed , capable, well oiled people don’t talk much , but act and always around and watching , when the wheel turn . Eskom”s team is outspoken and now all the ” big talk” silenced.!! Government’s SOE’s when handled accordingly works as plan – and sovis Eskom. Period.!! Remember – to follow the money – corruption !! Follow the money , ( hope that would be simple ) Bravo – team Eskom.!!

I think De Ruyter will pull this through for two reasons: (1) he has the backing of Ramaphosa, who is at the very least capable and (b) COVID has created breathing space for much needed repairs and massive demand side breathing space (obv terrible consequences elsewhere) but for ESKOM this should be good. If it isn’t then there is simply zero hope and we should just all bugger off

End of comments.

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