Eskom Tells Senior Managers Unit Separation To Take 3 to 5 Years

(Bloomberg) -- Eskom Holdings SOC Ltd., the South African power utility struggling with almost $30 billion in debt, said it will take as long as three to five years to comply with the government’s plan to split the company into three separate units.

President Cyril Ramaphosa said in February that the company would be divided into generation, transmission and distribution units to make it more manageable. The split is part of a rescue plan that also committed the government to pay $8.4 billion over three years in bailouts.

“Eskom ran out of cash and came close to complete collapse on multiple occasions in 2019,” Jabu Mabuza, the company’s interim executive chairman and chief executive officer, said in a presentation made Thursday to the company’s top 500 managers. It was seen by Bloomberg. “Eskom’s importance to South Africa is the only reason why the company still exists.”

The slideshow was confirmed by Lwanda Zingitwa, Mabuza’s chief of staff.

Eskom is seen as a risk to the country’s financial stability and could cost South Africa its last investment-grade rating. Expected subsidies over coming years will drain money needed for other government projects, and the company’s inability to carry out sufficient maintenance on its fleet of 15 coal-fired power plants threatens to cause blackouts, which have in the past slashed economic growth.

Mabuza said that the impact of a collapse of Eskom, the debt of which makes up 17% of total sovereign debt, would cause the country to have its credit rating slashed to junk, prompting a depreciation of the rand and a sell off of government bonds. The country would need to seek an international bailout, he said.

Cost Cuts

Under the plan presented by Mabuza, South Africa’s second-biggest company by revenue after Sasol Ltd. would split into the three units at an operating level in 12 to 18 months. The legal separation would occur in two to four years and the transmission unit would become a standalone state-owned company within three to five years. Generation and distribution would remain under an Eskom holding company.

He also said that the company would cut annual costs by 33 billion rand ($2.2 billion) over five years and is targeting annual earnings before income tax depreciation and amortization of 79.3 billion rand, compared with 31.6 billion rand in the year ended March 31.

It would also seek to develop more renewable power and raise the amount of its plant available to generate power at any given time to an average of 78% rather than the below 70% it saw in the last fiscal year. Among the company’s woes was a 30% increase in operating expenditure over the last five years to 151 billion rand a year.

“The separation time lines are very long, requiring bailouts in the interim,” said Peter Attard Montalto, head of capital markets research at Intellidex. “The fact generation will remain under Eskom holding would not be positive for competition.”

In a statement on Saturday, the Department of Public Enterprises said about 200 technical and engineering staff will deployed at power stations to ensure operational discipline as it tries to stabilize electricity supplies. The turnaround strategy has been explained to labor unions, the utility said on Friday.

A special paper on options to tackle Eskom’s debt challenge and restructuring efforts would be released over the coming weeks, the ministry said. Freeman Nomvalo, who was appointed recently to push through the utility’s restructuring, has started his work, it said.

©2019 Bloomberg L.P.

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