Embattled state-owned power utility Eskom, which is on the verge of a massive bailout from taxpayers, has warned its debtors that its loss for the financial year to March 2021 has likely ballooned to a mammoth R25-billion from the R19-billion it initially reported last year.
According to the entity’s 2021 annual financial statements, it had an annual loss after tax of R18.9-billion for the year to March 2021.
However, the reliability of the financial statement came into question in September when the debt-ridden entity notified its debt investors that it was not able to publish its financial results for the year to March 2022 (2022 AFS) by the statutory end of the September deadline.
The delay in publishing the 2022 AFS would also affect, in a material way the 2021 AFS, Eskom said at the time.
The power utility said one of the reasons for the delay was the delayed appointment of external auditors and “anticipated restatements to its previously issued audited financial statements for the prior year ended 31 March 2021, which will have an impact on the group’s statements of financial position and income statement in the 2022 AFS”.
The process of restatements of the 2021 financial statements seems to have been largely concluded, if the latest notification released by the entity on Tuesday is anything to go by.
The entity said it will now report a loss before tax of R33-billion, R8.3-billion more than it had previously stated. The loss for the year after tax also widened to a record R25.2-billion from the R18.9-billion it previously recorded.
Eskom provided a brief explanation on the work undertaken by the auditors and the information coming up from the audit process.
“A portion of coal inventory held at power stations was reclassified from current to non-current assets with a related increase in primary energy cost following a review of the quantity and usage of coal at power stations,” the notification from Eskom, published on the JSE, reads.
“It was concluded that a portion of the coal inventory, specifically for those purchases under ‘take or pay’ contracts, is not expected to be used within the normal operating cycles. The weighted average price relating to separate stockpiles in excess of required levels in terms of ‘take or pay’ contracts were separately calculated resulting in a correction of the coal inventory.”
The entity also said there was a further decrease in consumable inventory (everyday items with short lifespans that businesses use to fulfill daily operations), as certain critical spares were reclassified to property plant and equipment.
Eskom added that another issue the auditors had to grapple with was the fair values of derivatives held for risk management, saying these were restated to “correct the curve methodology applied in determining the fair values of the financial instruments, which were not aligned to market practice”.
“The cashflow hedge reserve was further restated because of the incorrect application of certain requirements of IFRS [International Financial Reporting Standards].
“The correction of these errors resulted in certain hedge relationships that were historically considered as effective and no longer meeting the hedge effectiveness requirements of IFRS, resulting in the immediate unwinding of the cashflow hedge reserve.”
In finance, a derivative is a contract that derives its value from the performance of an underlying instrument. Common underlying instruments include currencies, bonds, commodities, interest rates, market indices, and shares.
One of the main functions of derivatives is risk management, which is done by using derivatives to protect against possible hostile market movements. The other function is trading, which happens when derivatives are used to express a directional trade or exposure via the use of leverage.
Three weeks ago, Moody’s Investors Service raised its outlook on Eskom’s debt ratings to positive for the first time in 15 years in a move seen to be an affirmation to the announcement by government in the medium-term budget policy statement that it will absorb a large chunk of the utility’s R400-billion debt.
“To ensure Eskom’s long-term financial viability, government will take over a significant portion of the utility’s R400-billion debt,” Finance minister Enoch Godongwana said in October.
“While the selection of the relevant debt instruments and the method of effecting the relief is still to be determined, the quantum is expected to be between one-third and two-thirds of Eskom’s current debt.”
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