November 28, 2019 / 5:42 PM / 8 days ago

South Africa's Eskom makes interim profit on higher tariffs

JOHANNESBURG (Reuters) - South Africa’s struggling state power firm Eskom made a 1.3 billion rand ($88 million) profit in the six months to the end of September thanks to higher tariffs during the winter months when demand is greater.

FILE PHOTO: The logo of state power utility Eskom is seen outside Cape Town's Koeberg nuclear power plant in this picture taken March 20, 2016. REUTERS/Mike Hutchings/File Photo

But the utility predicted a 20 billion rand full-year loss for a second year running, as electricity tariffs are lower in the summer season in the second half of the year, and spending on plant maintenance, debt repayments and salaries will rise.

Eskom’s fragility is one of the biggest challenges for President Cyril Ramaphosa, who is trying to revive growth in Africa’s most advanced economy.

The company produces more than 90% of the country’s power but has struggled to keep up with demand, leading to nationwide power cuts that have deterred investment.

Eskom does not generate enough cash to service its 450 billion rand debt burden - equivalent to more than 8% of South Africa’s gross domestic product - and is dependent on bailouts to remain solvent.

Chairman Jabu Mabuza told a results presentation on Thursday that Eskom’s financial challenges should not be understated.

“We face the reality that the organization needs to borrow to service debt, our existing cost base simply cannot accommodate sufficient efficiencies to breach the revenue gap,” Mabuza said.

Chief Financial Officer Calib Cassim said he hoped Eskom’s performance would improve from 2020/21 but more losses were probable.

Eskom argues its financial position has been severely damaged by years of low tariff awards which have not allowed it to recover its costs, as well as corruption under its previous management.

Ramaphosa has ruled out redundancies at Eskom - a politically sensitive issue in a country with 29% unemployment - which has made it harder to cut costs. Eskom is holding talks with miners to try to reduce ballooning coal costs.

But the big unresolved issue remains Eskom’s debt.

The government has promised bailouts of roughly 105 billion rand in the 2019/20 and 2020/21 financial years. But analysts say a full-blown restructuring will be needed to make the utility sustainable in the longer term.

Officials and bankers are working on options such as swapping Eskom debt for government bonds or moving the debt to a government-owned special purpose vehicle, but a decision on the preferred option is not expected until the second half of next year. Execution of the debt relief plan could only come in 2021.

For a factbox on reforming state utility Eskom

Reporting by Alexander Winning; Editing by Alexandra Hudson and David Evans

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