Electricity utility Eskom on Tuesday reported net profit after tax of R3.535-billion for the year-ended December 31, 2003, from R3.707-billion in the prior year.

Net operating income was R6.818-billion, while the profit after interest was R5.514-billion.

Revenue rose 10.6 percent to R32.848-billion from R29.684-billion as electricity sales increased by 4.8 percent compared with 3.5 percent in 2002.

In February 2004, electricity consumption in South Africa rose by 7.2 percent year-on-year bringing electricity consumption growth in the three months December to February to 6.3 percent year-on-year.

Eskom CEO Thulani Gcabashe expects growth for the full year to be in the range of 4.5 percent to five percent.

Delays in SNO stake

The utility raised an impairment provision of R649-million against the investment by its commercial subsidiary, Eskom Enterprises, in the fixed-line second network operator, due to delays in the licensing of the new competitor to Telkom. It is expected to be licensed in June.

It also wrote off a R154-million investment in Lesotho Mountain Communications.

No pressure on bond market

Eskom will not put any pressure on the South African bond market, as its bond issuance will be R4-billion at most this year, Eskom finance director Willem Kok told I-Net Bridge on Tuesday.

Speaking after the electricity utility's annual results presentation, Kok said it would most probably be less than R3-billion, but could go to R4-billion if Eskom Enterprises needed funds for one of their projects in the rest of Africa.

"We actually do not need to come to the capital market this year, as we have more than enough free cash flow to cover our capital expenditure needs of R6-billion, but we are committed to keeping a profile in the capital market on an ongoing basis," Kok said.

Debt-equity ratio

Eskom reduced its debt-equity ratio to 0.3 in 2003 from 0.46 in 2002. This is its lowest debt-equity ratio in 30 years.

"I would prefer this kind of debt-equity ratio compared with the above three ratio that we had in the mid-1980s. We can comfortably grow this ratio to parity, but it all depends on how much of the new electricity generation capacity will be funded by Eskom," Kok added.

Eskom asked for a 8.5 percent electricity tariff increase for this year, but the National Electricity Regulator (NER) only granted a 2.5 percent increase.

Underlying its request for an 8.5 percent increase is Eskom's argument that its average prices need to increase from 2004 onwards in order to fund the new generation capacity required by the country in the future. Current forecasts indicate that significant investment in new capacity will start picking up from 2007.

Re-commissioning power stations

At present Eskom will first re-commission mothballed power stations such as Camden. It also has plans for a pumped-storage hydro-electric plant at Braamhoek in the Drakensberg that can be used to meet peak demand.

Eskom also argued that an increase in current electricity prices would ensure that there would not be any significant increases in average prices when new capacity comes on stream. In the mid-1980s there were sharp price hikes as new coal-fired capacity came on stream.

Lower price increase

The NER fundamentally disagrees with Eskom's arguments and its reasoning behind the approval of a lower price increase in 2004 is as follows:

  • Electricity customers have already contributed towards financing future investment as electricity price levels have allowed Eskom to make substantial reductions in its debt levels over the past 15 years. If Eskom is required to build new generation plants, the NER's analysis shows that this is possible without increasing real prices at this stage. Other investigations conducted independently of the NER's analysis, support this conclusion;
  • There is no guarantee that Eskom will be required to build new generation capacity as the government has announced its intention to allow new players into the generation sector. Therefore, it is inappropriate and unnecessary for Eskom to collect revenue now to fund investment that may be provided by other future investors; and
  • The NER does not expect a dramatic step increase in average electricity prices when new capacity is commissioned, regardless of who provides it.

    This is because average prices will be mainly determined by existing capacity (which will continue to generate the majority of the country's electricity requirements) rather than the higher cost new capacity.

    Government expects any big new investment in power stations, likely after Eskom's excess capacity runs out in about 2010, to be driven by the private sector.