Eskom on its 2018/19 Annual Report

Meeting report

Mr Jabu Mabuza, Eskom Acting CEO and Board Chairperson, noted that Eskom has disappointing results for 2018/19 with declining financial, operational and environmental performance. Net loss after tax is R21 billion which is times ten the loss of the previous year. There have been 30 days of rotational load shedding. Industrial action further impacts operations and finance. Generation energy availability factor (EAF) is at 70%. The total spend on diesel-generated power of R6.5 billion to minimise the magnitude of load-shedding (Eskom and independent power producers). The municipal arrear debt rose to R20 billion. Additionally, environmental performance deteriorates further.

He also noted that the EAF (Energy Availability Factor) has declined from 78% to 70%. The coal plant EAF has also declined from 75% to 67% with the energy utilization factor (EUF) increasing to 90% from 81%. He also noted that by the time they reported year-end the coal stock levels had been improving over time. Also, the transmission and distribution networks show stable performance.

The generation nine-point recovery plan realised positive plant performance through winter with no load-shedding since the 24 March 2019.

On the environmental and performance decline, there has been an increase in water consumption and deteriorating particulate emissions. Socio-economic performance was stable with 191 585 new households connected as compared to the 215 519 the previous year. The lost-time injury rate was 0.31 in 2019 as compared to 0.24 of 2018. Regrettably, there were three employee fatalities (2018: three) and three contractor fatalities (2018: 11). B-BBEE attributable spend was R85 billion. Spend with black-owned suppliers was R52 billion. Racial, gender and disability equity improved, albeit small. There were 933 139 beneficiaries through its corporate social investment (CSI) programmes.

Mr Calib Cassim, Eskom CFO, presented the financial report. EBITDA (Earnings before interest, tax, depreciation, and amortization) in 2019 was R31.5 billion compared to R45.4 billion of 2018. Cost savings of R9.9 billion were achieved but absorbed by cost overruns to minimise load shedding. Net loss after tax was R20.7 billion compared to R2.3 billion of 2018. Net cash from operations was R32.7 billion compared to 2018’s R37.6 billion. He noted 58% of the funding required for 2020 was secured to date. There was a qualified audit opinion due to irregular expenditure and fruitless and wasteful expenditure concerns. The auditors stated that material uncertainty exists that may cast significant doubt on Eskom’s ability to continue as a going concern.

Discussion
Mr E Marais (DA) noted that President Ramaphosa had announced the Eskom unbundling and asked how far they are and what the cost implications for this process are and if that will impact further on the cash flow of Eskom. A task team was established to deal with the municipal debt owed to Eskom, but it seems that it has been unsuccessful because there was an increase in municipal debt. He asked what Eskom has learned after escalating costs in the building of two huge plants like Kusile and Medupi. With green energy coming forward and in looking for ways to generate more green energy, how will that impact the next five years on the income of Eskom?

Mr Marais said Eskom stipulated that its current payment level of 81% is by municipalities but then in the presentation, they put in brackets that state excluding metros. He asked where they stand with the metros as far as the current debt payment is concerned because the metros are fundamental and are the major users of electricity generated by Eskom.

Mr Marais had seen the Eskom application to the National Energy Regulator of South Africa (NERSA) which decided on a 9.41% average increase implemented together with a R8 billion regulatory clearing account (RCA) recovery, resulting in a 13.87% average increase. With the current state of the economy of the country, 13.87% is putting pressure on the cash flow of the average consumer.

Ms J Mkhwanazi (ANC) noted the increase in diesel-generated power. She asked the reason for that and what their plan is going forward to decrease this. If the debts of the municipalities were to be settled, how far would that work to assist Eskom?

She noted their socio-economic performance was stable for spend on black-owned suppliers, racial, gender and disability, and CSI beneficiaries. However, their promotion and support are too small. She asked if the company is able to say they have made an impact and what is their impact analysis on that programme. On slide 15 they talk about shortfalls. She asked for clarity on their plan going forward to decrease the shortfall. Slide 16 shows most financial ratios deteriorated and are expected to deteriorate further before improving. She asked what the expected ratio is.

The audit outcome is disappointing due to irregular and fruitless and wasteful expenditure. She asked if there is an investigation on those findings. Have they succeeded in terminating some of the contracts that were the cause of the irregular expenditure?

Ms J Tshabalala (ANC) asked what the progress and the cost implications are for unbundling Eskom. She asked about Eskom's debt and the debt it is owed that they are unable to collect. She asked the CFO to say if Eskom were to be run efficiently and was to collect its money owed, what percentage Eskom could contribute to the South African economy. What strategies has Eskom put in place to deal with the failure to meet their environmental targets?

She noted that a call is being made by the Minister of Energy to increase investment in clean energy. She asked how this is going to be integrated into the Eskom capital investment programme. Eskom is said to be tied into 20-year contracts from earlier bid windows. She asked what the remaining years are.

Eskom had reported on the electrification of households for the year and she asked who of them is not paying Eskom. The Soweto debt in their report is really big. There are people who are unemployed and are indigent in Soweto. What is Eskom doing to have stakeholder engagements with those communities where the municipalities have failed to?

On the challenge of a just transition, she does not know how they are going to deal with that as transition affects the workers. She asked Eskom to share on the just transition implementation – what type of impact will it have and if they have had stakeholder engagement?

She was satisfied with the appointments made in so far as governance is concerned. However she asked when the chief restructuring officer will be appointed.

Ms D Dlamini (ANC) said the presentation noted the challenge of cable theft. She asked what their plan is to stop this. She asked for their analysis on non-paying municipalities.

What is their strategy so that poor people can be able to access electricity?

Mr G Gumede (ANC) asked what the lessons were from the R21 billion net loss. How they are going to control the situation so that they do not experience the same pitfalls again? He asked how many municipalities owe Eskom besides Soweto. He asked if they have considered having people pay Eskom directly. Eskom has been contemplating taking some of these municipalities to court. He asked what Eskom thinks the benefit will be from that process. He thinks this matter might be much more political and it may need the engagement of the three levels of government. Therefore it is not a war that Eskom can fight all by itself.

Mr Gumede asked what their view is on the ever-increasing informal settlements and the non-payment by the communities. Do they see it as something to be controlled or as an insignificant thing?

Ms Tshabalala asked for an update if all Eskom board members have been vetted and if the senior management lifestyle audits have been conducted. Has the disclosure of interests been done as one has to ensure Eskom employees are not in business with state?

She noted the recent high court judgment ordering that Eskom keep the lights on in Newcastle Municipality. She asked what is to be done. Have they looked into ways that the law can assist Eskom with debt collection?

The Chairperson noted that although they appreciate some of the efforts by Eskom, they still see irregular expenditure. Although it has decreased, it is still huge. When Eskom returns the next financial year, they should give them a totally different picture.

He said that the Committee would like to see a situation where unbundling is inclusive and concerns are listened to and it does not impact on jobs as South Africa is sitting with a very low level of employment currently and it is hitting the poor more.

He did not think that Eskom is playing an activist role in dealing with criminal activities. Some communities go to the extent of getting electricity from traffic lights illegally. Eskom is seeing that but they are not doing anything to engage the community on these issues. It is as if Eskom is neutral instead of trying to find ways to supply those communities with electricity as a basic need. Eskom must put pressure on the municipality or on the government so that something is done. He spoke about indigent communities in rural municipalities and those municipalities owed Eskom millions. 

He referred to the Audit Report which stated there was R522 million in fruitless expenditure due to the failure of Eskom to conclude transport contracts to collect the coal supplied to it. Has the person responsible for that been identified and what they are doing to take that particular individual to task? He asked why Eskom has not engaged with the coal supplier to minimise that loss.

Response
Mr Jabu Mabuza, Eskom Board Chairperson and Acting CEO, responded to most of the questions. He noted the important override that they are at a sensitive stage with funders and they are waiting for the Minister of Finance to announce the medium-term budget policy statement which deals very much with the finances and the funding of the SOEs; therefore as a result of this their responses will be curtailed.

Mr Mabuza said Eskom is currently in a terrible situation and unbundling is about de-risking the concentration which comes from a vertically integrated utility. Secondly the unbundling is informed by the global direction on utilities being run in a different way. Eskom is not appropriately structured for a utility of today. Thirdly he noted the technology revolution as they are caught in a very archaic history that does not enable them to be where the world is going. There are increasing environmental issues that come from their history and the fuel they are using is fossil.

Additionally in terms of the social environment, they have communities that live around the power stations who rely on the power stations and some communities would just not be there if there were no Eskom power stations. Therefore, the way they migrate the just transition is that there is the de-carbonisation approach, digitalisation approach, deregulation / democratisation approach and then there is the decentralisation approach. All this has to be done through some social plan. When we think about which way we are going on the renewables, we also have to think about which of these power stations lend themselves to renewable energy - can we use the current infrastructure for battery storage solutions, wind, solar. Previously Eskom built power stations on the mine and used conveyer belts to bring the coal to the burners. Now the mines are further away from the power stations and at the moment Eskom is transporting coal which can cost more than the cost of the coal. The complexity of the model means that Eskom's relook at it has to take these aspects into consideration.  However, we have to keep the lights on now and coal is the only fuel available so we are spending a disproportionate amount of time on the current supply of coal. Performance of the plant is affected by the quality of the coal. The coal blend has to suit the boiler. There is no option to close the plant and build a new one. The world will not allow it. Funders are not funding new coal-fired power stations. He just wanted to paint the field they are operating in before answering Members' questions.

The costs for the completion of Medupi and Kusile are about R18 billion on each. We are at the R145bn level for Medupi and R160bn for Kusile. As the project is coming to a conclusion, a flood of claims are coming into final accounting. The legitimacy of some of the claims has to be investigated as there can be huge inflation. The continued collusion between contractors and Eskom employees is still there. Eskom has to look at every claim painstakingly as one cannot assume that every supplier is doing to right thing even though this is frustrating your suppliers with legitimate claims. "Let me not go there".

The learnings are contained the general statement he made. If Eskom could be paid what it should be paid, maybe the R21 billion loss would be different. What drives the loss is buying more diesel, using more IPPs, which has resulted in spending about 17% more on energy. Employee costs at 7% are locked in for a three year term. A big part is depreciation (just under 30%) as plants are now coming to near completion, one has to take them off the one side of the financial statement and now treat them separately.

Eskom is in the business of generating electricity and selling. According to basic business economics, are they generating sufficient electricity? Are they selling more or are they selling for more in tariffs? This is because if they are not generating more or selling more of selling for more in tariffs, they are going backward. Eskom's three main cost drivers are people costs, primary energy costs and its debt costs.  Eskom revenue has grown by 3% but their sales have actually gone negative by just under 2%; and costs have gone the other way. Therefore between what they sell and their revenue, the gap is what price is what Eskom needs to selling it at as a cost reflective tariff. They are not being paid for what they call revenue and the auditors are saying for that for revenue to be considered it has to be cash in the bank otherwise it will not be recognised. These are the big challenges behind these financials.

On use of OCGTs and diesel, when faced with a choice of spending R6 billion on diesel or the impact on South Africa of R50 billion for load shedding it becomes a no brainer. Therefore in such a dilemma the choices are not whether they should use coal or diesel but rather if they are going to have the lights off or on. The cost of having lights off is R50 billion. The cost of having lights on and using diesel is R6 billion – which of course is way above the allowable 1% NERSA tariff.

The Inter-Ministerial Task Team (IMTT) to date has not been able to see results. There are all sorts of issues at play, including constitutional because one cannot bypass the local level of government and get the money directly from Treasury. There are times where the end user pays but the municipalities do not pass on the consumer payments to Eskom. If one looks at the gap between what Eskom charges and what the municipalities charge communities, it shows that municipalities put on their own mark-up. The IMTT sadly to date has been able to yield results. They have situations where the consumers insist that they have paid and need to be supplied with electricity. The courts have found in favour of the consumers such as in the Newcastle case.

Eskom does not take pride in taking a municipality to court and have Eskom employees face community attacks. There is nothing Eskom can do except cut the supply and when they do they are interdicted. The court considers other factors and tells Eskom to continue to supply. The result is when they started litigating the matter with different municipalities, the debt was about R1 billion and now it is R20 billion. So litigation is not the solution.

There are too many investigations going on for irregular and fruitless and wasteful expenditure - by the thousand. Eskom believes it has given everything required to the SIU and NPA but the wheels of justice turn slowly in a democracy. They have done various lifestyle audits. There are some contracts that although defective, have to continue due to urgency. There is a suspicion that Eskom employees are complicit on the prices and on the service level arrangement but one has to say that one will have to come back to that later.

Mr Mabuza replied that Eskom is not able to give the costs for unbundling. However the benefits include de-concentration of risk, efficiency and focus on each of these entities. When the President presents the Eskom paper, it will provide these details.

Mr Mabuza replied that again in simple business economics, you must sell what you buy, you must collect what you have sold and bank you have collected. Their formula is broken. Eskom is not selling what it has produced, if it sells it, people are not paying for it. If people pay, it gets stolen before it gets banked.
 

He said he has spoken about the environment and making the case for Eskom generation to play in the renewable space more than the little involvement that they have that would replace the coal fired power stations that it is decommissioning.

Electrification of households is an Eskom commitment to the Department of Energy (DOE). DOE gives them a certain amount of money to electrify communities.

On Soweto and all the municipal situations, Eskom has a full appreciation that not everyone can economically be able to pay for electricity. However one really needs to distinguish that a certain consumer cannot pay and one accepts that or that they do not want to pay. There are those that cannot and there are those that will not – we need to separate those. The question is, therefore, those that can pay what is the incentive for them to pay if the neighbour cannot and does not pay. There is a need to bring back the culture of user pays. For those that cannot pay one needs to have a different discussion and "we cannot talk right but walk left". It is a political conversation – these people are part of our communities and they cannot pay and this is the plan that government has for them. However, Eskom must be paid for it whether through the taxpayer, through subsidies, through bailouts – because one has to remember this when discussing Eskom's losses.

Some of the challenges Eskom faces is not only that the communities are not paying them. They have big customers that are not paying which include state-owned enterprises ranging from educational institutions, enterprises and social services providers like hospitals. The only tool Eskom has is cutting the electricity. Eskom produces this electricity at cost and at the very least they have to recoup the cost. Municipalities are selling this electricity, which they have not paid for, at a profit to the detriment of Eskom.

Eskom has a contract with South African Energy Coal (SAEC) which is part of South32 to supply coal which is still going to go for about 15 or so years. Eskom has a say to consent to the cession of that contract to somebody else. Eskom does not get involved about who they sell those mines to but Eskom's role is to ensure that whoever they have sold to will honour the contract in the same manner, if not better, on the quality, security and quantity of the coal they have contracted for. That is the end of the interest and Eskom does not pronounce on who is over-concentrated and competition matters. They are aware of the concerns the communities are raising and they are raising them with the right people.

He thanked them for the compliments on the small improvements in governance. Mr Mabuza replied that chief restructuring officer (CRO) is in place and the office has been established.

Eskom has done lifestyle audits and they have reported on this. Flowing from that, they fixed a date in March last year. From that date no one who works for Eskom would do business with Eskom. Anyone who is found still in business with Eskom, they have the ability to discipline, fire, terminate the contract and blacklist that supplier.

On vandalism, they have their own security and some law enforcement agencies involved. However, as these agencies have experienced, for example with the Zama Zamas, these people are more armed than security guards.

Mr Mabuza replied that they continue to learn every day but what they do know is what drove the R21 billion loss. It was the open-cycle gas turbines (OCGT), employees and Eskom's increasing debt.

Eskom has a list of municipalities that owe and there are about ten municipalities that owe them about 70% of municipal debt and they are concentrated in one province. There is an argument that Eskom electricity is too expensive and the Energy Intensive User Group (EUIG) tells Eskom this and says it is about 60% of their costs.  The EIUG such as smelting and manufacturing companies pay 32% of the revenue and electricity and they do pay us so it is relatively cheap to sell to them but it does not make up for the losses experienced from other customers.

Eskom is experiencing liquidity problems. They have challenges with some irregularities which some of them might stay with him through his term as board chairperson. Some of the contracts irregularly entered into have to run their course. This is because if they terminate the contract, they end up getting into more problems. Some of the contracts are so critical and they are the only ones who can do the work.

On coming to grips with Eskom's challenges, Mr Mabuza replied that he will probably not succeed in his term but he will not fail to try.

On unbundling Eskom, Mr Mabuza replied that the President has given a directive that they do what needs to be done but there will be no retrenchments. The other way is removing people who are not doing what they are supposed to be doing but sadly that process takes longer.

Mr Mabuza explained that the history on coal transporters goes back about four or five years. The coal transport contracts should have ended about four or five years ago. They are being extended on an ongoing basis from year to year, six months to six months, month by month. The real issue is not that they do not want to do coal transportation, but their view is that they should go back to using more conveyer belts and if not they use rail or lastly road. The unfortunate part is that Eskom's existing contractors whose contracts have been extended over these last five years want only themselves to be contracted. This insistence on a right is something Eskom cannot agree to. That is the real crux of the matter and must be seen for what it is. Eskom has started to deal with the contracting and aims to get appropriate contracts that are cost efficient.  

Mr Cassim replied to Ms Tshabalala that the IPP bid window 1 to 4 contracts are generally long term contracts that are about 15-20 years and many of them still have quite a number of years to continue. And in the future there will be IPPs supplying electricity to the grid. It is acknowledged in a tight system that IPPs do contribute positively to reduce the reliance on the OCGTs. We see this benefit coming through in this financial year. Coupled with this, the new build power stations like Medupi with six units coming online has had a positive effect and contributed to uninterrupted power through the winter.

Mr Cassim replied that Eskom has R440 billion worth of debt which will take about ten years to pay, that is, about R45 billion per annum and with interest R40bn per annum. That is why the financials reflect R85bn per annum. If Eskom is only generating R30 billion cash from operations, to improve the ratios either cash from operations must improve from R30 billion to a higher number or the debt service commitment needs to be reduced from R85 billion. The CRO and others will need to get a balance where the cash flow from operations is enough to sustain the operations and the debt service commitment. Currently Eskom is R50 billion short in its cash flow. The R20 billion arrear debt owed by customers is once off so going forward if settled it gives about R8bn relief. This improves the cash flow to R40bn yet the debt commitment is R45bn. This is what Eskom and the government are facing: how to make Eskom sustainable. He agreed that unbundling is important and it must be done. However, if the cake is too small and then it is cut into smaller pieces, it is still too small for everyone to enjoy the cake.

Mr Martin Buys, General Manager: Finance, replied that the payment level of metros is 100%. That is why the presentation showed only the 80% of municipalities; otherwise the percentage would be inflated and make the payment level look good.

Follow up questions
Mr Marais noted that there was a parliamentary commission of inquiry into Eskom and flowing from that is the Zondo Commission. He asked if Eskom itself has a lawsuit against certain executives who benefited irregularly. Has the pension fund payment involving Mr Brian Molefe been paid back as ordered by the court?

Ms Mkhwanazi asked what the impact of a cost-reflective price increase would be on the indigent communities.

Ms Tshabalala said she heard the response on Soweto and implored Eskom to draw up a plan to adequately deal with the challenges. In Soweto some have gone as long as two months without electricity. Some consumers like the grannies are paying and their neighbours are not. Eskom needs to devise a plan for Soweto.

Response
Mr Mabuza replied that he should have responded earlier that Eskom takes on board that they engage the community; talk to the community, they are. There are the elderly and the sickly without power that need nebulisers. There are members of the community in Soweto who are willing to talk and find a plan. Eskom is re-engaging them and it will be able to report on that when it next meets with the Committee.

There are both criminal and civil cases Eskom is pursuing. There is evidence that shows that there are bogus sub-contractors and they have managed to uncover the actual employees behind this. They are waiting for the SIU tribunal that is being set up to prioritise Eskom specific cases.

On the money owed to the pension fund, the process has been exhausted and Mr Molefe has been put to terms to pay the money by a certain date. On the Trillian/McKinsey repayment of R1.6bn, the McKinsey R1bn was returned. A victory in the last ten days is the dismissal of Trillian's High Court appeal and Trillian has been given ten days to repay the R600m to Eskom. Also CEO Mr Wood in his personal capacity cannot be de-linked from that. Of course, the nature of the system is that there may be further appeals.

Mr Buys replied about the cost reflective pricing that as long as one keeps the price of electricity below the cost reflective level, by implication Eskom is carrying that. That is the "embedded subsidy" that we see come through our financials. Government must acknowledge that there is a subsidy, quantify it and understand who is going to pay for that subsidy. There are avenues and mechanisms to protect the indigent and that is where NERSA and the government must come up with those designated sectors and this is how we are going to protect them from any future escalations. However, they must acknowledge that the cost of supply does not go away and it must be covered by some or other mechanism.

Department of Public Enterprises Acting Director General, Mr Kgathatso Tlhakudi, concluded by saying that everyone in the meeting appreciates that the task is huge and that Eskom is dependent on everyone across society in joining it in this effort. The major aim for Eskom is to generate enough cash to meet its obligations and thus reduce its reliance on the state. The green issue, whether it relates to renewables or to emissions, is one of the big risks that we are faced [inaudible].

The meeting was adjourned