Eskom fears resurface as Dames resigns

[miningmx.com] – BRIAN Dames today announced his resignation as CEO of South African power utility, Eskom, less than six months after the departure of his counterpart and Eskom CFO, Paul O’Flaherty – a development that raises questions over the ability of Eskom to deliver on its undertakings.

Eskom chairman, Zola Tsotsi, cited personal reasons for Dames’ shock resignation adding that Dames would leave the group at the end of March. “The process of finding a successor is already underway,” he said. “We expect to conclude it timeously.”

Asked if he had been placed under pressure to resign – after 25 years at the company of which nearly four will have been as CEO by the time he leaves – Dames said: “It was my own decision. Absolutely, I was not pressurised at all”.

Eskom is due to deliver on the first of its large capital programmes in July with the commissioning of the R105bn Medupi power installation albeit six months later than its re-scheduled deadline.

However, many challenges face the utility not least of which is how it will overcome the financial problems posed by having to settle for a lower-than-desired, five-year tariff increase of 8.5% awarded to it by the National Electricity Regulator of South Africa (Nersa).

Announcing the group’s interim results today, in which the company posted a R12.2bn profit (2012: R12.6bn), Eskom’s acting financial director, Caroline Henry, showed how R19.6bn generated in cash by the company’s operations was insufficient to cover R23bn in capital expenditure in the six months ended September.

The group ended the period with net cash and cash equivalents of R30bn from a cash position of R10bn, but only after raising R29.5bn in debt. Henry said that Eskom’s balance sheet would be placed under further pressure when the group’s interest burden was expensed (it is currently capitalised).

“It is comforting to see that people realise how difficult an environment it is in which Eskom operates,” said Tsotsi. “It is a huge tribute to the people at Eskom that they have kept the ship afloat,” he added. “But from a leadership perspective, the company is sustainable,” he said.

The cash outflow would require Eskom to extract efficiencies internally and with partners as part of a repositioning of the business model, a challenge Tsotsi said was normal for any business. “The revenue is based in a regulatory environment and that won’t change. So revenue has to adapt to the set tariffs.”

Eskom added, however, that it would resume discussions with Nersa on the tariff with an assessment of efficiencies it could extract from the business set against the effects of lower demand for electricity on revenue.

In addition to new build delays and financial pressure, Eskom was also juggling with operational pressures.

The narrowness of the reserve margins under which Eskom operates, for instance, were demonstrated last month when it announced an emergency protocol and called on heavy industry to cut consumption by up to 10%.

“We kept the lights on,” said Tsotsi, adding “… by the skin of our teeth … The system emergency was not an easy decision, but it was necessary to protect the power system, the first since 2008,” he said.

Other issues facing Eskom’s new CEO include securing enough coal to feed its fleet, diversifying its sources of coal supply in terms of its emerging miner strategy announced 12 months ago, and raising finance against a backdrop of credit rating downgrades – a development Dames said was largely predicated on South Africa’s sovereign rating.

Dames said in an interview with Miningmx, however, that Eskom was a more solid place. “A company like Eskom will always have challenges, but it is in a different shape. It is stable, profitable and engaged with the shareholder,” he said.