July 17 (Bloomberg) -- Eskom Holdings Ltd., South Africa's state-owned power utility, said full-year profit plummeted 86 percent as coal prices jumped and it spent more on diesel to ease a national electricity shortage.

Net income fell to 923 million rand ($121.4 million) in the year to March 31, from 6.5 billion rand a year earlier, the Johannesburg-based company said today in its annual report. Sales rose 11 percent to 44.4 billion rand.

``The underlying health metrics are not going in the right direction,'' Chief Executive Officer Jacob Maroga said in a speech. ``Our financial performance was severely impacted by the increasing cost of primary energy, mainly coal and diesel.''

While Eskom's coal consumption climbed just 5.2 percent, prices of the fuel at South Africa's Richards Bay port tripled in the past year. The utility also purchased more coal on expensive short-term contracts and put greater reliance on higher-cost diesel-fired plants as it ran short of generating capacity.

``From a financial perspective there really are problems,'' Fanie Joubert, an economist with Pretoria-based Efficient Group, said from his mobile phone today. ``For credit ratings agencies, there must be a red light flickering somewhere.''

South Africa is suffering a power shortage after the government delayed the utility's expansion program. Eskom will spend 343 billion rand over the next five years to boost generating capacity by 11 percent to 47,681 megawatts.

Power Crisis

Most gold and platinum mines in South Africa, among the world's biggest precious metals producers, were shut for five days in January to avoid a national blackout. The national energy regulator also blamed Eskom's poor management of coal stocks for the crisis.

The utility purchased about 21 percent of its coal on expensive short-term contracts compared with about 17 percent a year earlier. Eskom increased diesel purchases 30-fold to run plants that are 30 times as expensive to operate as their coal- fired equivalents.

Eskom expects to post an operating loss in the year ending March 31, 2009, even after the regulator allowed the utility to boost tariffs by 27.5 percent. Eskom had asked for a 61 percent price increase after tariff gains didn't keep pace with inflation over the previous nine years. South Africa's annual inflation rate is currently 10.9 percent.

The National Energy Regulator of South Africa said on June 18 it will allow Eskom to pass on some coal and diesel price increases to customers this year. The regulator may allow annual tariff increases of 20 to 25 percent for the next three years.

Rating Outlook

Moody's Investors Service said on May 20 it may cut Eskom's credit ratings by several notches if tariff increases weren't approved. Standard & Poor's has also said it may downgrade the utility's ratings.

Eskom, which plans to borrow as much as 150 billion rand over the next five years, may postpone plans to sell bonds and secure overseas loans while uncertainty over its credit ratings remains, Finance Director Bongani Nqwababa told reporters in the city yesterday.

Last year, Eskom's profit was boosted by aluminum customers including BHP Billiton Ltd. paying more for the electricity used by smelters. The income Eskom receives from such customers varies depending on the metal price and exchange rate. Aluminum prices were little changed in the year under review.

The government may say this week how it will assist Eskom, after committing 60 billion rand to the company in February. Eskom plans to spend 46 billion rand this year, after spending jumped 40 percent to 24.8 billion rand last year.

Government Support

``There will have to be further support to bring about changes in equipment and energy efficiency measures,'' Public Enterprises Minister Alec Erwin said at the presentation, adding the government is ``very close'' to finalizing how financial assistance to Eskom could be structured.

Eskom and state-owned transport company Transnet Ltd. will probably decide by March 31 whether to sell computer services company Arivia.kom to Dimension Data Holdings Plc or to Deutsche Telekom AG's T-Systems. Eskom owns 58.5 percent of Arivia.

To contact the reporters on this story: Carli Lourens in Johannesburg at clourens@bloomberg.net

Last Updated: July 17, 2008 11:43 EDT