Eskom debts to rise in new era

BRIAN Molefe, outgoing Eskom CEO, has been hailed for doing great things for the state-owned company, but his achievements were much exaggerated by himself and his colleagues.

As interim CEO Matshela Koko takes over, it’s appropriate to shine a light on Eskom. Is it, as the government says, now on a sustainable footing? What does the future hold?

Molefe’s key achievement was to put an end to load shedding. Two things made this possible: a reorganisation of the maintenance schedule, which resulted in improved plant performance and falling demand for electricity.

With the 2010 “keep-the-lights-on-at-all-costs” philosophy of former public enterprises minister Malusi Gigaba, Eskom was under orders to skimp on planned maintenance. When Molefe arrived in April 2015, Eskom’s energy availability factor had plummeted from 85% to 70% as plant breakdowns increased due to neglect.

Molefe beefed up the schedule in low-demand periods to catch up, he deployed staff to the power stations and visited them to restore confidence. When he left Eskom plant performance had improved to 78.49% and load shedding had ended.

He was helped by a surprise fall in demand for electricity from industry, mining, agriculture and transport – all at lower levels than 2007. Had demand risen in line with projections, load shedding – or the use of diesel to keep the lights on – would not have ended. But bringing an end to load shedding is where Molefe’s success ended. In many other respects, Eskom remains a company with serious challenges and its future has become increasingly laden with risk.

First, there is the problem of debt. Eskom has not yet reached the peak of its borrowing programme for Medupi and Kusile. Chief financial officer Anoj Singh says that Eskom’s debt will hit R330-billion over the next five years. There are plans to borrow about R68-billion more a year until the end of that period.

The more debt Eskom takes on, Rand Merchant Bank credit analyst Elena Ilkova points out, the greater the share of its income that is consumed by interest. For debt investors, alarm bells are ringing as Eskom’s credit ratios – which reflect its ability to generate sufficient cash to finance operations and pay interest – deteriorate.

The interim results for 2017 show a sizeable jump in finance costs from R5-billion in 2016 to R9.3-billion for the six months ended September 30.

Singh says that this is not due to rising finance costs alone. The absolute level of debt rose and part of the interest – for Medupi and Ingula – had to be brought onto the income statement because once these assets start operating, the interest can no longer be capitalised.

This will be a much bigger issue in the future as Eskom’s finance costs are about R30-billion, which all at some point will have to be brought onto the income statement. This means that although Eskom shows healthy profit at present, in the coming years, this will vanish from the income statement.

It does seem, though, that it is becoming more expensive for Eskom to borrow, but by exactly how much is difficult to know. RMB’s analysis shows that over the past 12 months, local bond spreads widened by between 5 basis points and 7.5 basis points – a 6%8% move. But as Singh points out, this is not due to Eskom credit problems alone, but also due to investor uncertainty about SA.