Eskom Must Plug $19 Billion Gap to Avert South African Blackouts

South Africa’s main electricity provider is running out of capacity and now needs to find 191 billion rand ($19 billion) to fill a funding gap to avert a repeat of blackouts that closed mines and factories in 2008.

The national energy regulator on Feb. 28 allowed Eskom Holdings SOC Ltd. to raise prices by an average of 8 percent in each of the next five years, half the amount sought creating a 225 billion-rand cash-flow shortfall. While the company will be able to absorb the gap this fiscal year and next, it’s redrafting its strategy for the 191 billion rand needed in the period after that, Finance Director Paul O’Flaherty, who is leaving the company today, told reporters in Johannesburg.

The utility needs funds to meet a 500 billion-rand spending program to replace equipment and add capacity through 2017. The power system is straining to meet the needs of the continent’s biggest economy, with supply exceeding demand by razor-thin margins after Eskom deferred maintenance on some aging stations to the colder winter months because of higher unplanned shutdowns in the summer.

“We will have to re-engineer Eskom to respond to the tariff increase,” Eskom Chief Executive Officer Brian Dames told reporters. “We can’t just make up by saving a bit of money here and there. It will require a fundamental rethink about what we do.”

Debt Issuance

The company may have to raise debt levels beyond the 400 billion rand budgeted for in its price application to the regulator, Dames said. Eskom has about 203 billion rand of debt and interest outstanding, it said.

While the utility had planned to issue 200 billion rand of bonds in the five years through 2018, the lower-than-requested price increase means it may need to borrow a further 50 billion, Caroline Henry, who is treasurer and will act as financial director until a replacement for O’Flaherty is found, said on a conference call. Eskom will have to go to domestic and international markets and is looking at other forms of financing, she said.

Dan Marokane, group executive for technical and commercial, will take over O’Flaherty’s second role as head of the build program.

The income shortfall will have no effect on the capacity-extension program, Dames said. “We have solved the funding for our committed projects and will see them through,” he said.

It may also ask Nersa to reopen the tariff application if costs exceed the estimates in the application, Dames said.

Profit Decline

Profit declined 61 percent to 5.18 billion rand in the year through March as operating costs climbed 31 percent to 54.2 cents per kilowatt-hour, the company said in a statement.

Costs rose because Eskom bought back power from large customers including the local ferrochrome-smelting operations of Glencore Xstrata Plc (GLEN) in 2012, it said. Sales dropped 3.7 percent. Primary energy charges climbed 36 percent to 28.1 cents per kilowatt-hour, while coal expenses surged 24 percent, it said. Eskom generates about 80 percent of its power by burning the fuel.

Without the South African government declaring coal a strategic asset or finding a way to control price increases, “it will be difficult” to curb costs, O’Flaherty said.

The company charged an average of 58.5 cents per kilowatt-hour in the period, 16 percent more than a year earlier. Average annual inflation in the period was 5.6 percent.

The company spent 60 billion rand on capital expenditure in the year through March, Dames said.

Funding Requirements

Eskom has already secured 83 percent, or 248.8 billion rand, of the 300 billion rand of funding it requires for its capital projects through 2017, and has used 144.1 billion rand of that, according to the statement.

The company will draw down a further 57 billion rand in the year through March, Henry told reporters.

Eskom’s net maximum generating capacity increased to 41,900 megawatts by the end of March from 41,600 megawatts a year earlier. One megawatt is enough to power 500 to 1,000 homes.

The company had an average of 46 days of stocks of coal in the year, compared with 39 days in financial 2012, it said.

Eskom paid 2.9 billion rand, or 83.6 cents per kilowatt-hour, to independent power producers and municipalities for electricity in the year, contracting 1,135 megawatts of capacity from IPPs, it said.

Medupi Delay

The country plans to add 3,725 megawatts from renewable sources by 2016 through a program of five tenders, with Eskom buying that power.

Delivery of the first power from Eskom’s 4,800-megawatt Medupi coal-fired plant has been delayed by at least six months to mid-2014 because of labor unrest and “underperformance” by contractors, raising the station’s cost by as much as 15 percent to 105 billion rand. Sixteen people employed by contractors have died on site, O’Flaherty said.

“The construction industry is in real trouble in this country,” he said. “It’s in real trouble because we’ve lost the ability to manage and supervise the labor force. It’s as simple as that.”

To contact the reporter on this story: Andre Janse van Vuuren in Johannesburg at ajansevanvuu@bloomberg.net

To contact the editor responsible for this story: John Viljoen at jviljoen@bloomberg.net

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