Auditors question Eskom’s going concern status

Moneyweb has learnt that Eskom will be engaging National Treasury and broader government in an effort to keep its status as a going concern, in the wake of a devastating tariff determination by electricity regulator Nersa.

Read: Regulator slashes Eskom’s revenue

This is one of the steps the utility is taking in an effort to satisfy its auditors SizweNtsalubaGobodo Inc. and release its interim results early in January.

The auditors are also not yet satisfied with Eskom’s response to the R3 billion-worth of irregularities that led to a qualified audit report for the 2016/17 financial year, a source with intimate knowledge of the organisation’s affairs told Moneyweb.

In the past, Eskom has announced its results for the six months ending September 30 in October or November. The utility has so far been quiet about the reason for the delay this year.

Eskom spokesperson Khulu Phasiwe told Moneyweb on Thursday that the utility now hopes to release the results in the first half of January, but that the auditors are “still busy finalising the audit”.

According to Moneyweb’s source, the auditors are currently not prepared to sign off the financial statements and are questioning Eskom’s response to the irregularities raised in the 2016/17 financial statements. This pertained to a variety of contracts.

In their report the auditors also flagged events after the year-end, around the controversial R30 million pension pay-out Eskom made to the Eskom Pension and Provident Fund, meant for then-outgoing Group Chief Executive (GCE) Brian Molefe, as well as the alleged conflict of interest of interim GCE Matshela Koko in relation to Impulse International, a company with ties to Koko’s stepdaughter.

Molefe’s pension matter is still before the courts and Koko’s disciplinary hearing has been concluded, but Eskom has made no announcement regarding the findings and how it affects Koko’s position within Eskom.

Several other executives and senior officials have been suspended, including financial director Anoj Singh, Exco member Abram Masango and company secretary Suzanne Daniels. There has been little visible progress with disciplinary processes against them.

In their audit report signed on June 23, SizweNtsalubaGobodo confirmed Eskom’s going concern status, based on its and the government’s credit ratings, availability of funding, revenue determination by Nersa and Eskom’s cash cash flow, budgets and forecasts.

The auditors studied among other things, Eskom’s tariff application to Nersa for 2018/19.

Eskom at the time had 53% of its funding requirements for 2017/18 secured and was confident of its ability to secure the balance. It liquidity was healthy, SizweNtsalubaGobodo stated in June.

Since then Eskom has admitted that its cash has dried up. It has secured only 57% of its funding requirements for 2017/18 and Phasiwe has confirmed that it is battling to secure new loans.

Read: Nersa induces Eskom’s Rubicon moment

He has also confirmed that Eskom has expedited drawdowns on existing loans and is using borrowings to pay salaries.

Nersa last week announced that is has granted Eskom a tariff increase of only 5.23% instead of the 19.9% Eskom applied for. This translates to a decrease of revenue of R15 billion compared with the current year.

This drastic change in one of the fundamental considerations determining its going concern status, is one of the large stumbling blocks in finalising the interim financial statements.

Nersa criticised Eskom’s high staff costs and reduced its allocation for primary energy drastically. The detailed reasons for its decision have not yet been published.

Christo Luus, economist at Ecoquant, says to make up the hole Nersa’s decision has left in its pocket by saving on staff costs alone, Eskom would have to reduce staff numbers by half.

Eskom earlier indicated that it plans to reduce staff numbers over the medium term through natural attrition, which would be a slow process.

Luus supports the suggestion of several analysts that Eskom should close some of its older and less efficient power stations. He says the only other options open to Eskom is to get assistance from government or in the longer term, get an equity partner from the private sector.

Another source with intimate knowledge of Eskom’s affairs, says the electricity tariff is not Eskom’s real problem. The issue is that its cost base is too high.

He says Nersa clearly realised that Eskom’s coal cost is too high. Closing the older, less efficient Hendrina, Komati, Grootvlei and Arnot power stations will save Eskom costs and reduce staff numbers by about 1 500 per power station, he says.

This would however be politically difficult to do.

He says staff numbers at Eskom’s Megawatt Park head office are also excessive. “Eskom has no other choice but to retrench excess staff. That’s what you would do in the private sector,” he says.

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