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The devil in the detail of Eskom’s interim results

And what they didn’t tell us….

Having covered Eskom’s results for several years, it has become clear that there is always more to the story than what the power utility presents in its Power Point.

The results presentation and question-and-answer session is usually about a three-hour affair with a barrage of information being disclosed to journalists who have to file their stories in some cases even before the presentation is over.

A second reading often provides a different perspective from the “company line” that Eskom presents and gets widely reported. Here are a few crucial observations.

On January 30, with one day left before the listing of its debt instruments on the JSE or it would be suspended for late filing, Eskom released its interim results, which showed a much reduced profit of R6.3 billion, down from R9.5 billion a year ago.

All financial metrics deteriorated with cash flow and liquidity under severe pressure.

What’s going on at SOC level?

The first important observation from a second reading of the interim results is that Eskom only reported its interims at group level. When questioned about the results at state-owned company (SOC) level, Eskom told Moneyweb that it only discloses the results of the SOC at year-end.

This is especially important in the light of the difference between the two sets of results at the previous year-end.

In the last set of annual results a small profit in fact proved to be a loss when Eskom Holdings’ other subsidiaries were stripped out and the power utility, Eskom SOC, was considered in its naked truth.

In its presentation at that stage, Eskom stated that it made a small profit of R1 billion, down more than 80% from the previous year.

On a proper reading of the financial statements it was clear that this figure was rounded up from the actual profit of R888 million. Furthermore, this was the profit at group level. At the level of SOC, Eskom in fact reported a loss of R870 million.

At that stage the group consisted of the power utility and also the Eskom Finance Company, Escap (a captive Eskom insurance company) and the Eskom Development Foundation. The results of these other entities, in other words, boosted the power company’s loss-making numbers at a group level.

It is not clear whether this structure is still the same, since Eskom Finance Company was held for sale.

The Public Investment Corporation (PIC) in October last year confirmed to Moneyweb that it had responded to a request for proposals from Eskom in this regard, but denied that the two parties were finalising a deal. Eskom hasn’t made any announcement either.

Nevertheless, newly-appointed Eskom chairman Jabu Mabuza was not prepared to answer Moneyweb’s question at last week’s interim results presentation on whether the Eskom Finance Company has been sold or not.

Eskom established the wholly-owned Eskom Finance Company in 1990 to provide employees with access to home loan finance at optimal home ownership costs. The loan book built up over the years and at year-end at the end of March year, stood at R8.6 billion.

The crucial issue that led to the delay in releasing Eskom’s interim results was the auditors’ concern about Eskom’s going concern status. In the end they did not qualify the group’s results on this basis, but did raise their concern as an emphasis of matter.

If the previous annual results are anything to go by, one would therefore wonder whether Eskom SOC is a going concern. Eskom did not respond to Moneyweb’s question in this regard.

Changing debtors terms

Another feature that Eskom failed to mention in its interim results presentation, but which was disclosed in the interim financial statements, is the shocking increase of 35% in overdue debt from municipalities to R12.4 billion.

The presentation failed to mention that this increase was despite Eskom doubling the payment terms from 15 to 30 days. It does not disclose the comparable outstanding debt at 15 days.

Spending insurance money

Eskom further raised a contingent liability of a massive R1.7 billion in its financial statements for a claim from its reinsurers.

This relates to the settlement its former CFO Anoj Singh earlier reached with the reinsurers with regard to the explosion at Duvha Unit 3 in March 2014 due to over-pressurisation.

The payment was made to Eskom on condition that it concludes a binding contract for the reconstruction of the unit by March 31 last year.

Eskom failed to meet the deadline as it cancelled the first tender and then awarded it to the highest bidder, Chinese company Dangfong.

The losing bidders Murray & Roberts and General Electric obtained a court interdict to stop the implementation of the award and litigation is ongoing.

As a result the reinsurers want their money back and have embarked on litigation to get it.

Eskom has confirmed to Moneyweb that the R1.7 billion was not ring-fenced and since Eskom has been borrowing money to pay salaries, it is doubtful that the insurance money has been left untouched.

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We have seen this boring horror movie many times. The socialist looters who constantly blame the owners of capital for the lack of equality in society, are the very ones who go on their knees, cap in hand, begging the owners of capital to bail them out when their central planning efforts inevitably fails. The socialist leaders created the worst levels of inequality as they stole the infrastructure and service delivery from the poor.

It is all about the personal narrow interests of the leaders, but the moment the infrastructure begins to collapse, all of a sudden they plead with investors to save the nation. Investors should sit on their hands until those who looted the assets of the nation are in jail. At the moment they are still in Luthuli House.

DITTO on that one, Sensei!

The rot is deep & it will take a huge half-circle to turn this big ship around as it approaches the coastline. But the rocks seems to be closer than the ship is capable to turn within…

Let’s hope not the lights go dead on the listing Titanic! 😉

“Borrowing money to pay salaries”. Sounds like Eskom has reached the end of the road. Eskom should be broken up and be sold to the private sector. As for its debt, lets hope all its creditors lose all their investments. It was imprudent to invest in Eskom in the first place. The PIC is now basically tossing R5 billion into salaries. That’s not an investment.

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