Eskom reports on its interim results for the six months ending September 2012 Tuesday, 20 November 2012: Eskom has continued its progress towards financial sustainability, reporting another sound set of interim financial results. This is the third time Eskom has released interim results, a practice it began in 2010 in line with its commitment to transparent reporting.
"With three and a half years of sound financial results, Eskom is a more stable, more predictable company," said Eskom Chief Executive Brian Dames. "Our profits are reinvested in full in Eskom's business to service debt and support the funding of our capacity expansion programme."
"We have kept the lights on, despite a tight power system, and the building blocks are in place to ensure we can become the high performing utility we aspire to be," he said. The results for the six months to end September 2012 reflect a net profit of R12.6 billion, compared to R12.8 billion for the first six months of the previous financial year and R13.2 billion for the full 2011 financial year. However, profits for the full 2012 financial year are expected to be lower, with breakeven at best during the second half, when Eskom must take advantage of lower summer demand to do higher levels of maintenance on its power stations.
Revenue increased to R73.4 billion for the six months to September 2012, up from R63 billion in the same period in the previous year. This was driven mainly by the 16% tariff increase which the National Energy Regulator of South Africa (Nersa) granted Eskom earlier this year, after Eskom applied to the regulator to reduce the tariff increase from 25%. However, the tariff increase was offset by a 2.9% decline in the demand for electricity due to weaker economic growth and industrial unrest which affected key customer sectors during the six months period.
Eskom recently submitted its application to Nersa for a third multi-year price determination (MYPD3), requesting an average 16% tariff increase over five years. Revenue per kilowatt hour sold increased to 64.9 cents (2011: 55.3 cents) for the six months to September, while operating costs rose to 47 cents (2011: 38.2 cents). Primary energy costs increased by 17.6% from 19.2 c/kWh in the six months ending September 2011 to 22.5 c/kWh for the current half-year period to 30 September 2012. Half of the costs are attributable to higher coal costs, and almost a third were as a result of the utilisation of open cycle gas turbines (OCGTs) and government's environmental levy.
Since 2005, Eskom has spent R156.5 billion (excluding capitalised interest) on its build programme, which has so far added 5 776 MW of generation capacity to the national grid, as well as, 4 327 km of transmission network and 22 445 sub-station transformers. "We are working hard to deliver on Eskom's new build programme, with a special focus on bringing in the first unit of Medupi online next year," Dames said. Eskom's funding plan is well advanced and approximately 80% of the funding needed for the new build programme has been secured. Eskom's gross debt stood at R213 billion at end-September 2012 and is expected to go as high as R360 billion as Eskom completes its committed build programme over the next six years.
Rating agencies Moody's and Standard & Poor's downgraded their ratings of Eskom by one notch to Baa3 and BBB respectively last month, following their downgrades of South Africa's sovereign rating. Their actions highlighted the need for Eskom to be financially sustainable.
"It is crucial that Eskom remains in a position to access local and international capital markets to raise funding for its new build projects at attractive rates," Finance Director Paul O'Flaherty said. "Investment grade status is necessary to secure the balance of funding and is critical for long-term expansion post Kusile. Certainty on the application of the regulatory rules is essential from a ratings perspective," he said. The embedded derivative liability (which represents the present value of the future opportunity loss of revenue to the end of the contracts) at end-September 2012 was just under R5 billion, reflecting the special pricing agreements which Eskom has with BHP Billiton's aluminium smelters in KwaZulu Natal. Eskom has submitted an application to Nersa to review these special pricing agreements.
Eskom remains committed to facilitating the entry of independent power producers (IPPs) and welcomes their entry into the South African electricity market. Eskom is supporting the government's renewable energy independent power producer programme, which aims to bring 3 725MW of renewable IPPs onto the national grid. On 5 November 2012, Eskom signed 28 power purchase agreements for the first round totalling 1 441.7 MW of renewable energy capacity with an average price between 114 c/MWh and 275 c/MWh (dependent on technology). The 20-year agreements will introduce renewable energy on to the national grid on a significant scale, and are the first long-term power purchase agreements to be signed with IPPs since the mid-1970s.
Eskom also signed a short-term power purchase agreement for two years with Agrekko in Mozambique for 93 MW from July 2012. As at 30 September 2012, Eskom had a total capacity of 1 082.6MW contracted from IPPs (September 2011: 888MW) on short and medium term programmes, at an average price of 80 c/kWh. The amount paid in relation to IPPs in the period to 30 September 2012 totalled R1.3 billion.
There has been no load shedding since April 2008, despite an extremely tightly balanced power system. Severe winter weather this year impacted the supply to customers in some provinces, but Eskom's preparedness helped to mitigate the risk. The security of supply remains a challenge as Eskom works to balance the need to do planned maintenance on its ageing plant while meeting the demands of a growing economy. "We have kept the lights on through a challenging six months - and are resolved to continue to do so, in partnership with all South Africans," Dames said. "My thanks go to the Eskom staff who worked long hours to keep South Africa's lights on through winter."
Safety remains a concern, though Eskom's safety record improved over the reporting period. Dames said that the safety of their employees, contractors and members of the public continues to be of primary focus.
Eskom's results also include an update on Eskom's black economic empowerment spending, which totalled R44.1 billion (2011: R31.8 billion) during the six months to September 2012, which is 72.5% of total measurable spend for the year. "We implemented initiatives to transform Eskom and improve its operations. The focus is on boosting the performance and reliability of our power stations, and implementing excellence programmes in our distribution and customer services divisions," Dames said.
"Eskom turns 90 next year and it is investing in the future. We are looking ahead to provide the electricity South Africa needs to power growth and development," Dames said.
Eskom also announced the resignation of O' Flaherty, who will leave in July 2013.
O'Flaherty was appointed to his position approximately three years ago. He was recruited to put in place funding for the new build programme, consolidate, standardise and monitor the management of the entire capital programme of Eskom, modernise the financial management system and lay the foundation for a sustainable financial future for the Group. Eskom now has a consolidated platform in place to provide complete and accurate information on which to base decisions.
Having substantially achieved his goals, O'Flaherty wants to move on to new challenges. "My job was to put in place the financial foundation for a new era of growth and improvement. Today Eskom is ready for that new era and it is an opportune and logical time for me to move on. To stay longer would require a commitment to a much longer time frame than I had envisaged. My job is done and my successor can take it further," he said. O'Flaherty will leave at the next AGM in July 2013 so that he can see through this financial year and the MYPD3 tariff process.
By then, the new Finance Director and the Capital Management Executive are expected to be in place. This time frame allows for a planned succession process that will not disrupt anything at Eskom. The recruitment process has already started. "We regret losing his talents but we remain friends," said Dames. "On behalf of the Minister and the Department of Public Enterprises, our Board and Executive Committee and all 44 000 colleagues at Eskom, I sincerely thank Paul for his enormous contribution to Eskom and his commitment to ensuring a smooth and managed transition for his successor."
Statement issued by Eskom, November 20 2012
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