Eskom tells senior managers unit separation to take three to five years

Eskom, the South African power utility struggling with almost R440 million 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 R128 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.

Cost cuts

Under the plan presented by Mabuza, South Africa’s second-biggest company by revenue after Sasol 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 R33 billion and is targeting annual earnings before income tax depreciation and amortisation of R79.3 billion, compared with R31.6 billion in the year ended March 31. It would also seek to develop more renewable power.

“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 or least cost.”

In a statement Friday Eskom said it met with labour unions to discuss the future of the company. It said unions have asked for additional information and that officials explained the turnaround strategy.

© 2019 Bloomberg L.P.