Take Eskom’s bitter pill and pay up
Eskom is forecasting a pre-tax loss of R15-billion for the year ending March 2019 and it is consumers and taxpayers who will have to help dig it out of this hole, warned the utility’s chairperson, Jabu Mabuza.
At its interim results on Wednesday Eskom revealed that it is likely to require some form of financial support from the state (the details of which are yet to be clarified) along with a tariff increase from the National Energy Regulator of South Africa, which the utility has applied for.
But analysts say the options Eskom is contemplating are not without their own equally thorny problems, and the treasury has said the government has not agreed to increase Eskom’s existing R350-billion government guarantee facility and that no “injection of equity into Eskom is provided for”.
Mabuza told the Mail & Guardian that Eskom was working with government to solve the utility’s debt burden and he highlighted the “severe financial difficulty” that Eskom is in.
“If we do not make significant changes now, Eskom will have even bigger problems of viability. We therefore are faced with some difficult, unavoidable decisions,” he said.
Its problems could not be solved by Eskom alone and containing costs would “go some way but is not enough, and neither are tariffs. Ultimately it is a public policy matter to determine which of consumers or the taxpayers should foot the bill.
“We have no doubt that whatever solution is ultimately on the table [it] will be prudent and will take into account our shareholder objectives,” he said.
Eskom’s financial woes, laid out in stark detail in its presentation, have been aggravated by operational difficulties that have required it to spend much more than was budgeted to address coal-supply shortages and to run costly open-cycle gas turbines to keep the lights on.
For the six months ended in September, Eskom’s net profit was R671-million, down 90% from R6.3-billion over the same period in the previous year.
Eskom is expecting the full-year loss to reach R15-billion, according to newly appointed chief financial officer Calib Cassim.
This is, in part, because of the seasonality of Eskom’s results. Its revenues are typically higher in the first half of the year, which includes the winter months when sales volumes, tariff charges and peak demand are higher.
The unsustainability of Eskom’s debt is increasingly evident, with cash from operating activities, at slightly less than R27-billion, unable to service debts of just more than R45-billion, which is up 94% on September last year.
More borrowing is required for capital expenditure and to cover the debt shortfall, which Cassim likened to using one credit card to pay off another.
To add to these problems, security of supply is again haunting Eskom. Reduced maintenance on power stations, done to save costs in recent years, has also hit home with a higher than usual number of unplanned outages.
In October, Eskom’s energy availability factor hit a low of 69%, against a target of 78%. Eskom has warned that load shedding is likely in the coming months.
Limited detail of a long-awaited long-term strategic plan to make Eskom sustainable was provided with the results.
Although the plan was presented to the president on Tuesday, Mabuza said it was still subject to discussions with other arms of government, such as the treasury and the department of energy, and the labour unions.
As part of the plan, Mabuza said Eskom would move towards ring- fenced, more transparent profit-and-loss accounting for each of its business units to better understand where its problems lay.
Eskom would not sell any major assets and it would not attempt to convert debt to equity, Mabuza said.
“We did think about this as an option. But we soon got taught that this is bad news,” he explained
The Public Investment Corporation could not responsibly convert its debt to equity in a loss-making entity, said Mabuza, and if Eskom could not convince its major debt- holder to do so, “why would international funders and bond-holders allow us to do that?”
Asset sales were a nonstarter, he said, and Eskom could only viably sell Medupi and Kusile. Although still incomplete, they were the company’s best-performing assets. Building the two power stations had also cost Eskom almost double what it had planned and buyers were unlikely to buy them for the price Eskom paid to build them, Mabuza said.
Analysts have said containing costs is vital to rescuing Eskom, which includes addressing the issue of staff numbers, though unions are opposed to retrenchments. But Mabuza insisted that “everyone involved will need to make difficult decisions and take some pain”.
Eskom chief executive Phakamani Hadebe also made it clear that the company would not be looking to its lenders and bondholders to restructure its debt. Much would depend on negotiations with the government and what options it was willing to put on the table he said.
These could take different forms, such as a capital injection or transferring some of Eskom’s government debt guarantees directly on to the government’s own balance sheet. Hadebe said the utility was looking for ways to increase revenue, including by selling more power to large users and to other countries.
Olga Constantatos, Futuregrowth Asset Management’s credit and equity process manager, welcomed the “refreshing frankness” of Eskom’s new team of leaders about the extent of the power utility’s problems, but added that many of the options being explored by Eskom to deal with them came with other difficulties.
Eskom was proposing three solutions: increasing revenue, cutting costs and reducing debt.
Referring to the first, she said that required excess supply. “They don’t really have that option because they don’t have the supply.”
Two areas where Eskom could cut costs would be in primary energy, particularly in coal procurement, and staff headcount. But Eskom’s coal shortages meant suppliers had it over a barrel and the utility might have to pay a premium to get its stockpiles back up to the required levels, Constantatos said.
Referring to the utility’s headcount, she said, judging by Eskom’s inability to get its 0% wage increase past unions earlier this year, it was unlikely to be able to achieve meaningful reductions.
Eskom’s proposals for addressing its debt burden raised more questions than answers, Constantatos said. Shifting the debt to the government’s balance sheet would “crystallise” the government’s contingent liability created by its guarantees to Eskom, with serious implications for the state’s own finances and key indicators, such as its debt-to-gross domestic product numbers.
Similarly, a direct cash injection would have implications for the government, which would probably have to raise funding to pay for it, with a consequent impact on the state’s balance sheet, she said.
In all likelihood, the right answer would be a combination of cost cutting, tariff increases and government equity, but “it just means more pain for everyone”.
Without more clarity about its strategic plan, which appeared unlikely to be announced by the end of November, it may become increasingly difficult for funders to lend Eskom more money, she added.
Eskom has secured 73% of its funding for the current year. It has targeted borrowing about R19.8-billion from the domestic market.
It has only secured a little more than R8.5-billion of that amount, although committed funding from development finance institutions and international lenders has exceeded its targets.
Constantatos said credit spreads on government-guaranteed Eskom bonds in the local market suggested that the utility’s cost of funding is rising. Eskom’s ESFR03 issued in April 2018 with a maturity of three years was launched with a credit margin of 150 basis points. Compare this with Eskom’s ES42, which matures in 2042, issued in mid-2013 with a much lower spread of about 60 basis points.
This bond is now trading at a spread of almost 140 basis points. This suggests that investors require higher returns for their funding, over a shorter term.
Demands on the state pile up
The treasury, to reassure external auditors that Eskom is a going concern and to help it when it approaches lenders, has provided the utility with a letter of support, recognising its role as a strategic asset.
But the treasury’s spokesperson, Jabulani Sikhakhane, said the government had not agreed to increase its R350-billion guarantee facility and no provision had been made for an injection of equity. “What government is doing is to assist Eskom in engaging [with] the lenders to raise debt funding,” he said.
But the utility is not the only parastatal in trouble, which is placing greater pressure on the state’s already constrained resources.
This week, SAA reportedly said it would need further government assistance or financing from banks amounting to R17-billion in the coming months.
But Sikhakhane said SAA had used R16-billion of its existing R19.1- billion government guarantee facility and “no increase in the existing facility [is] required”. With the special appropriation for SAA of R5-billion to settle its debt, announced in October, the amount of guarantees drawn down will decrease to R11-billion. — Lynley Donnelly