Restructuring Report: Eskom ‘Fundamentally Insolvent, Permanently Impaired’

Eskom, South Africa’s state-owned utility that produces nearly 90% of the African powerhouse’s electricity, is saddled with liabilities, unavoidable expenses, and stranded costs that exceed $113 billion, and for various reasons, it is “fundamentally insolvent, permanently impaired, and will never be a true going concern enterprise under its current legal, operational, and governance structure,” concludes a report recently issued by an independent chief restructuring officer (ICRO).

The bombshell two-volume report issued on Oct. 17 by Abu Dhabi–based consulting firm CRO Advisers—a firm that specializes in restructuring and recapitalization of sovereign government assets—was authored by the firm’s chairman, K.W. Miller, whom Eskom stakeholders appointed as ICRO advisor. As part of its independent restructuring analysis, CRO Advisers sought to assess the financial and operational health of South Africa’s Treasury as it relates to Eskom, as well as Eskom’s own governance, credit risk, and quantification. As Miller told POWER on Oct. 22, another key objective was to determine a “realistic path to restructure Eskom, the South Africa electricity sector, deployment of future resources, and achievement of true economic growth.”

But the report’s conclusions are damning. Scrutinizing every detail about Eskom’s finances, operability, and governance, they put the 1923-established vertically integrated utility’s current operations and financial situation under a harsh light, drawing a direly pessimistic picture of the utility’s scramble to avert financial disaster.

POWER contacted Eskom for its view on future restructuring, but an immediate response was not received.

‘Hard Facts’ that Eskom Stakeholders Need to Face

As POWER has reported, the utility resumed power cuts last week after a seven-month lull, and it continues to flail financially, owing largely to the construction of two massive defect-ridden coal plants—the 4.8-GW Medupi and Kusile projects—and a significant decline in liquidity that is exacerbated by lower than required price increases awarded by the National Energy Regulator of South Africa (NERSA). On Oct. 11, Eskom took the desperate step of challenging NERSA’s latest tariff decision in court, even while it underscored that its operations are critically hobbled by a stunning debt burden of 450 billion rand ($30 billion).

South Africa’s government, meanwhile, acknowledges the utility is “too big and important” for the government “to let it fail,” which is why it moved in August to inject $8 billion into the beleaguered utility over a three-year period. However, the government bailout rests on the condition that the company establish a “restructuring office” that would deal with debt and “interrogate various proposals to resolve Eskom financial challenges.” It has suggested one avenue would be to split the company into three entities, starting with the creation of a transmission entity—a recommendation that is in line with government ambitions dating as far back as 1998. President Cyril Ramaphosa in October, however, nixed full-out privatization, claiming Eskom’s power plants are “Crown Jewels,” and that “South Africa is not inherently in the business of selling power stations.”

But according to the ICRO’s findings, the “hard facts that must be faced by all stakeholders” are that “while Eskom is a vertically integrated utility on paper, it has devolved into an operationally dysfunctional, financially insolvent, unreliable and corrupt entity.” At this time, faced with “severe financial and operational challenges and malfeasance,” Eskom is “not ready” to be broken up into separate operating companies, the report concludes.

Soaring Debt and Future Liabilities

Perhaps most critically, Eskom’s current management accounts, internal costing, and qualified financial statements are “not reliable,” it notes. “The ICRO finds that material financial, operating liabilities and unavoidable costs are not properly accounted for, nor are they captured in the Company consolidated financial statements,” the report says. It also alleges “there is no reliable cash management and control structure at Eskom,” and it urges the government to appoint new independent external auditors to examine Eskom’s books and records.