Jabu Mabuza. Picture: Freddy Mavunda
Jabu Mabuza. Picture: Freddy Mavunda

Eskom’s new management team delivered an unpalatable message this week: the power utility cannot stay afloat without restructuring its cost base and balance sheet, and without a bigger electricity tariff increase.

"It is not that we think the tariff is the panacea," chairman Jabu Mabuza said at Tuesday’s results presentation. "It is part of the problem that Eskom relies on tariffs and borrowings. It needs to produce electricity in a cost-effective way so it can defend its pricing."

Interim group CEO Phakamani Hadebe says Eskom will approach other state-owned entities with the capacity to take equity stakes in the electricity producer to address its liquidity shortfall, as that cannot only be resolved through borrowings and government guarantees. He names the Public Investment Corp, with R2 trillion in assets, the Industrial Development Corp and the Development Bank of Southern Africa, which already has a R15bn exposure in Eskom’s debt.

The idea is that these entities, which fall indirectly under the control of government, would buy or convert to equity some of the utility’s R367bn in outstanding debt, helping to reduce interest liabilities and freeing cash for investment in operations.

This would allow the utility to receive a cash injection while avoiding two politically sensitive, but crucial matters: another cash bailout from the weary taxpayer, and privatisation.

"All options are on the table. We will work out the scenarios and then present them to the shareholder," says Mabuza.

At a gearing ratio of 72% at the end of September, Eskom’s debt level is unsustainable. It needs to minimise the cost of doing business in order to maximise returns.

But the utility still needs to raise debt to fund infrastructure investments. Eskom raised only R29bn of R55bn targeted for the current year to March, but Hadebe is confident bankers will advance another R20bn, as the utility is addressing their concerns.

In December the National Energy Regulator of SA (Nersa) granted Eskom a 5.23% tariff increase rather than the 19.9% it had applied for. This, and irregular expenditure arising from weak internal systems, meant the auditors could not ratify Eskom’s "going concern" status.

Eskom’s ability to generate revenue has been weakening as electricity sales decline due to sluggish economic growth and energy-saving measures by its biggest customers. Corruption in its ranks has also played a big role in the poor financial performance.

Cash generated from operations dropped 30%, to R22bn in the six months to September, which is normally its stronger financial half because of higher winter tariffs.

Last week Moody’s Investors Service downgraded Eskom’s credit ratings to B1, deeper into junk status, and kept the utility on review for further downgrade. Justifying its decision, Moody’s cites the deterioration in Eskom’s financial position and no prospect of support from government, though it says government’s move to replace the board is a first step towards restoring lenders’ faith.

One of the biggest issues the utility faces is increasing arrears debt, with municipal arrears rising by a third to R12bn. Total arrears at end-September were R19bn, says interim CFO Calib Cassim.

Eskom has applied for another R66.6bn for the under-recovery of costs in previous years. Nersa said last week it would hold public hearings on the application in May and make a ruling in August.

Moody’s says without significant tariff increases or cost-cutting, Eskom’s financial position is likely to continue deteriorating.

Mabuza says Moody’s latest downgrade adds motivation to restoring financial sustainability. "It will not be easy, but we have the strength and courage to turn things around."