Eskom Anticipates R55 Billion Shortfall

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JIMMY MOYAHA: Earlier today, we received a Sens announcement that updates us on Eskom’s performance for the year. They reported a loss of R55 billion for the previous fiscal year, but they foresee a return to profitability next year.

Read: Eskom forecasts first profit since 2017

I’m joined by Eskom’s CFO, Calib Cassim, to delve into these numbers and gain deeper insights. Good evening, Calib. It’s a pleasure to connect especially during this period. To begin, how do you assess Eskom’s performance over the last year?

CALIB CASSIM: Jimmy, thank you for having me. Up until the end of March, we encountered a tough year both operationally and financially, compounded by governance issues, leading to a R55 billion loss.

The loss before tax showed a year-on-year improvement of R9 billion thanks to an 18% tariff increase during the year.

However, with significant load shedding and surging diesel costs—around R34 billion spent on diesel this year—we had to account for the derecognition of a deferred tax asset, which added R37 billion to our tax liability, resulting in the net loss of R55 billion as of March.

JIMMY MOYAHA: Calib, regarding the challenges you’ve outlined, I noticed governance and audit-related concerns. The external auditors provided a 12-page list of issues in their report to parliament, notably a material uncertainty concerning Eskom’s ‘going concern’ status following the R55 billion loss.

Your team projects a return to profitability next year. Could you elaborate on this turnaround? How do you plan to transition from a substantial loss to profit, aside from the deferred tax impact?

CALIB CASSIM: Excluding the deferred tax, considering we faced a loss before tax of R25 billion instead of a forecast of R10 billion profit, key factors involve eliminating load shedding and improving operational efficiency, which would reduce our diesel expenditure from R34 billion by approximately R20 billion year-on-year leading into March 2025.

Moreover, without load shedding, we expect a 4% year-on-year growth in sales.

For March 2024, we indicated an estimated sales volume of 13 terawatt-hours, reflecting about 7% growth in sales volumes, as load shedding caused a R22 billion revenue loss. We believe much of this can be recovered since numerous customers have rooftop photovoltaic systems. Therefore, there exists significant upside potential if we avoid load shedding.

Additionally, we’ve been engaged in long-term discussions with SARS about rebates for our diesel costs.

We managed to conclude these discussions in October, resulting in a R9 billion recovery, which will be recorded in the March 2025 income statement.

Furthermore, by focusing on various cost-reduction initiatives and benefiting from government debt relief converted to equity, we will reduce our interest expenses, leading to fewer borrowings and lower levels of debt.

JIMMY MOYAHA: Calib, let’s discuss the pressing issue concerning revenues and projections. As of November, municipalities owe Eskom R95.4 billion, an increase of nearly 30% since the figures reported in March. This data indicates that municipalities are struggling to pay their debts, complicating your outlook for a robust business performance. Will this result in further tariff increases for consumers?

CALIB CASSIM: This indeed represents our primary concern as a board and management team. The minister has pointed out the unsustainability of current trends, and as of November, we were facing R95 billion in arrears.

If this trend continues, we might see this rise to R110 billion by March 2025.

This situation raises two significant issues: if not addressed at the governmental level, it undermines the benefits of the R250 billion debt relief. Besides that, we did not acknowledge R9 billion in potential revenue because we have to account for it on a cash basis. If default rates worsen, we’ll accumulate more unrecoverable amounts. Although we accounted for a 2% arrear percentage in our tariff application, we are currently closer to 5%.

Read:
Municipal ‘Get out of debt free’ cards left standing … [Jun 2024]
Government support to municipalities for Eskom debt arrears appears to be bearing fruit [Oct 2024]

Our message is unambiguous: this situation is not sustainable. Eskom cannot serve as a bank for municipalities, and the minister has emphasized that early next year, Eskom, along with him, his department, the National Treasury, and local government, must come together to address these challenges.

He has put forward some suggestions, and we are dedicated to working with the minister to alter this trajectory.

JIMMY MOYAHA: Calib, addressing other unsustainable challenges for Eskom, external auditors flagged critical audit issues about the illegal creation of prepaid tokens. This is quite concerning. Have Eskom’s recent efforts to recalibrate meters resolved the issue of illicit token creation, and can we deem this matter settled?

CALIB CASSIM: Absolutely, that was one initiative intended to mitigate the risk related to illicit tokens. Ongoing monitoring will be necessary, but it is part of our broader strategy. Moreover, we plan to deploy around seven million smart meters in the next three years to further tackle this issue.

However, ultimately, we must confront collusion and corruption.

This includes addressing the issues between Eskom employees and suppliers, which requires collaboration with law enforcement to ensure proper legal action is taken. We look forward to the KRN2 rollout to help address much of this, but we need to be cautious about declaring it resolved.

JIMMY MOYAHA: Tackling collusion and corruption is essential. The qualified opinion was partially based on ‘criminal conduct,’ resulting in losses of roughly R6.7 billion. This is a significant issue that directly affects Eskom’s profit margins.

Considering the potential shift from a negative R25 billion to a positive R10 billion, the losses attributed to criminal behavior could add another R6 billion, in addition to R4 billion in irregular expenditures noted in the audit. You indicated governance challenges amounting to R10 billion in total. What measures is Eskom taking to address these issues? What is the strategy adopted by the board?

CALIB CASSIM: We’ve kickstarted two vital strategies. First, we created a project management office dedicated to high-level investigations to streamline the process, which reports directly to the CEO, alongside our audit and risk committee.

The second initiative involves consolidating our forensic investigations and security teams for a unified approach. We are closely collaborating with the security sector, which includes state intelligence and the Special Investigating Unit (SIU). We’ve begun to see several arrests and convictions recently, indicating a positive effort.

Regrettably, though, the actions of a few individuals tarnish the reputation of our diligent employees at Eskom. It is crucial that we deal with these bad actors.

JIMMY MOYAHA: Accountability is indeed necessary, and we will keep a close watch on developments.

We are hopeful that the forthcoming year will yield profits, and I look forward to our discussions reflecting on a successful year ahead. For now, we will conclude this discussion. Thank you for your time and insights, Calib.

Calib Cassim, chief financial officer at Eskom, joined us to discuss their financial year ending March 2024.

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