Bloomberg News

Eskom Profit Falls as Strikes, Slow Growth Cut Power Demand

November 20, 2012

Eskom Holdings SOC Ltd., the state- owned supplier of about 95 percent of South Africa’s power, said first-half profit fell as strikes and slower growth in the continent’s biggest economy curbed demand.

Profit after tax declined to 12.6 billion rand ($1.4 billion) in the six months through September from 12.8 billion rand a year earlier, the company said in a statement handed to reporters in Johannesburg today. Power sales retreated 2.9 percent to 110,766 gigawatt hours, it said.

South Africa’s economy is growing this year at the slowest pace since a 2009 recession as strikes that started in platinum mines and spread to gold operations cut output and exports. The utility is seeking a 16 percent increase in average electricity prices each year until 2018 to avoid a repeat of energy shortages that halted mines in 2008.

The labor unrest at mines contributed to lagging demand, and Eskom would consider breaking even at the end of the fiscal year a good performance, Chief Executive Officer Brian Dames told reporters in Johannesburg. “All of that impact we will feel toward our year-end results,” he said.

Revenue advanced 15 percent to 73.4 billion rand as tariffs climbed, and primary energy costs rose 14 percent, Eskom said.

The company expects sales to drop to 219,342 gigawatt hours in the year through March from a budgeted 222,083 gigawatt hours, according to its interim report.

“At best, if we achieve breakeven results, that would be a great performance,” Dames said.

Expansion Plans

The National Energy Regulator of South Africa is to make a decision on Eskom’s application by the end of February, after public hearings. An annual 16 percent increase would raise prices to 128 cents per kilowatt hour by 2017 from 61 cents.

Eskom is spending about 500 billion rand through 2017 reviving old power plants and building new ones to overcome a generation capacity shortage. It increased tariffs by an average 25 percent each of the last six years. BHP Billiton Ltd. (BHP), Xstrata Plc (XTA) and Anglo American Plc (AAL)’s aluminum, ferrochrome and platinum smelters are among its largest customers.

The utility has asked the regulator to review a power- supply deal with BHP Billiton, the biggest mining company, drafted when Eskom had surplus capacity, spokeswoman Hilary Joffe said in an e-mail yesterday.

Rating Assessment

Standard & Poor’s downgrade of Eskom’s credit rating to match a lower sovereign rating is a concern, the utility said Oct. 17. Moody’s also downgraded the utility last month.

“Investment-grade status is necessary to secure the balance of funding and is critical for long-term expansion,” Eskom Finance Director Paul O’Flaherty said today.

Eskom expects power shortages to last until the end of 2013, when the first unit of the Medupi coal power plant it’s building in the north starts generating electricity. The nation had rolling blackouts across the country in the first quarter of 2008 as Eskom rotated the limited power available.

The government prevented Eskom from expanding from 2004 to 2008 as it sought to attract investments in the power industry. The tariff increase includes 3 percent to support the introduction of independent renewable energy power producers through a bid program of 3,725 megawatts.

Last week, SolarReserve LLC, a closely held U.S. solar- energy developer, closed on $586 million in equity and debt financing for two South African projects. Mainstream Renewable Power Ltd. said it will begin building one wind and two solar plants costing 500 million euros ($636 million) after agreeing on power-purchase, funding and implementation deals with the state.

O’Flaherty will leave the company in July, the company said. He was appointed to his position about three years ago to put in place funding for the new building program, consolidate, and standardize management of the utility’s capital program, the company said.

To contact the reporter on this story: Paul Burkhardt in Johannesburg at pburkhardt@bloomberg.net

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


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