Eskom CEO Quits as South African Utility Faces Blackout Threats

Eskom Holdings SOC Ltd. Chief Executive Officer Brian Dames resigned as the supplier of most of South Africa’s power confronts a deepening threat of blackouts in the continent’s largest economy.

Dames will remain at the company until March 31 and a search for his successor has started, Chairman Zola Tsotsi said at a presentation in Johannesburg yesterday. Eskom, which evoked emergency restrictions on its biggest users for three days last month, said this week power supply will be “very constrained” from January.

Eskom “has kept the lights on by the skin of our teeth,” Tsotsi said. He commented after the company said fiscal first-half earnings dropped 3.2 percent amid the supply constraints and as costs increased.

The utility is spending 500 billion rand ($48 billion) through 2017 to replace aging equipment and add plants to avoid a repeat of 2008 blackouts that halted mines, including those owned by companies such as Anglo American Plc (AAL) and BHP Billiton Ltd. (BHP), for five days and paralyzed factories. Dames, CEO since 2010, told reporters his departure is “really my own decision” and there was no pressure to step down.

“We’ve had a power system that we’ve managed that is constrained and will remain so until we get through two things: the build program to come online and secondly the maintenance, to really get that addressed because that creates more reliable capacity,” Dames said.

Emissions Rules

Eskom said this week it may shut generation units or reduce capacity at its Kriel power plant in Mpumalanga, which provides 2,000 megawatts to 3,000 megawatts to the system, to meet emissions regulations passed earlier this year. The utility is in talks with the Department of Environmental Affairs, appealing for an exemption to the rules, Andrew Etzinger, an Eskom spokesman, said Dec. 4.

The Medupi and Kusile coal-fired facilities and the Ingula hydropower plant that the company is building will add 10,896 megawatts to South Africa’s national grid, expanding Eskom’s production by more than 25 percent.

Work was suspended at the Ingula construction site for about three weeks after six workers were killed in an Oct. 31 accident.

Labor Issues

The projects also have been stalled by labor disruptions and equipment malfunctions. Stockpiling of coal for Medupi stopped in March after workers at Exxaro Resources Ltd. (EXX), an Eskom contractor, went on strike. A month later Eskom said Hitachi Power Africa would test and repair about 9,000 faulty welds on a boiler at the project. Construction at Kusile, in Mpumalanga province, was disrupted in April because of a labor dispute.

Yields on Eskom’s $1.75 billion of bonds due in January 2021 rose for the first time in three days, adding 4 basis points, or 0.04 percentage point, to 6.12 percent, the highest in 2 1/2 months, by 5:55 p.m. yesterday.

Dames has had to contend with delays at Medupi and other “background political noise,” said Peter Attard Montalto, a London-based strategist at Nomura Holdings Inc. The utility also apologized to environmental groups after a security company it hired spied on them.

“I think there was a lot of pressure on him,” Montalto said by e-mail. “It is a great loss. Whilst Eskom is still in a lot of stress, Brian has helped to drastically turn the balance sheet and operations around.”

Profit Drop

Eskom’s profit after tax in the six months ended September declined to 12.2 billion rand from 12.6 billion rand a year earlier, the company said yesterday in a presentation on its website.

Energy costs climbed 25 percent to 31.3 billion rand from a year earlier, with expenses from running open-cycle gas turbines more than tripling to 2.3 billion rand, according to Eskom.

“That impacts the most in terms of primary energy costs,” said Treasurer Caroline Henry, who stepped in as Eskom’s interim financial director since Paul O’Flaherty resigned on July 10. Tsholofelo Molefe, the company’s group executive for customer services, will take on the post of finance director permanently, Tsotsi said.

The utility is faced with closing an income gap of about 191 billion rand. Dames said that a rate increase may be needed to solve the issue. “Nothing is sacred” in solving the funding issue, Henry told reporters.

Operating costs per kilowatt-hour rose 18 percent to 55.3 cents. Sales increased 6.1 percent to 77.8 billion rand and revenue for each kilowatt-hour was 69 cents, down from 64.9 cents a year earlier.

Dames “has led Eskom during a period, when the company is busy with the implementation of the massive build program while at the same time managing a tight system aimed at ensuring security of electricity supply,” Minister of Public Enterprises Malusi Gigaba said in a statement.

To contact the reporter on this story: Ana Monteiro in Johannesburg at amonteiro4@bloomberg.net

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

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