Eskom debt plan promised

Gordhan says solution to crippling burden will be revealed before the end of the year

● Eskom and the government are working on a solution to the power utility’s unsustainable debt burden, whichwill be revealed before the end of this year, with public enterprises minister Pravin Gordhan on Friday promising to communicate this “in a month or so when we have a clearer idea”.

Eskom, which had R484bn of debt on its balance sheet at its March year-end, has long said it needed to reduce this to R200bn, and the belated year-end results it published on Friday showed once again that it is not generating enough cash from its operations to cover the cost of servicing its debt.

“We are spending almost R1bn a week just in interest costs. That is not sustainable,” Eskom CFO Caleb Cassim said at a results briefing on Friday.

Eskom posted a bottom-line loss of R20.5bn (2019: R20.9bn) after net finance costs of R37bn, even though its earnings were up 17% to R37bn on higher revenues and better cost control. Its auditors were able to sign it off as a “going concern” only thanks to the R49bn in equity it received in the year from the government, which committed a further R56bn in 2021.

The solution to the debt issue has been long in the making, and neither Gordhan nor Eskom’s executives would comment on what options were being considered.

There has been speculation about various options, including a debt to equity swap and taking the utility’s guaranteed debt on to the government balance sheet, as well as about a debt restructuring that could see bond market investors agree to take a “haircut” that would reduce the value of their debt.

However, CEO André de Ruyter was emphatic that Eskom did not intend to “restructure” debt. “Restructuring has a very specific meaning in corporate finance but we will honour all our debt obligations … and as the debt matures we will look to opportunities to refinance it using cheaper finance which is more advantageous for Eskom,” he said.

Eskom is looking to tap new sources of “green financing”, which it is understood could be tied to reducing its dependence on coal-fired power as it brings new renewable energy generation onto the grid and closes old coal-fired power stations that have reached the end of their lives.

De Ruyter said it appeared up to R200bn in green financing was potentially available in the market. He said climate financing was an exciting prospect, though it was complex in Eskom’s case because SA would still retain a large amount of coal-fired generation even as it moved to a greener asset base.

The move to finalise a debt solution for Eskom comes after the business, labour, government and community partners at Nedlac last month signed a long-negotiated social compact on Eskom.

They recognised “the need to reduce Eskom’s debt burden which has had significant negative implications for the country’s fiscus, for the sovereign debt, for consumers and the broader economy”.

They agreed the debt burden must be cut as part of a turnaround strategy and new business model for the power utility, and committed to mobilise adequate financial resources for Eskom in a way that would provide investors, that include retirement funds holding workers’ savings, with appropriate long-term social and financial returns and in a financially sustainable manner.

Though De Ruyter described the results as disappointing, he reported good progress on containing costs and collecting on the R28bn in outstanding debt owed by municipalities.

Eskom, which has a procurement bill of about R140bn annually for goods and services, has been renegotiating or cancelling high-priced contracts for items such as coal, fuel oil and diesel in an effort to curb costs.

Coal is its largest single cost item and in the year to March coal costs climbed 16.3% after its power stations were allowed to run short. It had to rush to buy large quantities of coal on short-term contracts.

However, De Ruyter said coal costs for the current year would rise by only 0.3%.

Eskom has also this year taken aggressive action to recover the R28bn in debt owed by municipalities, and De Ruyter said it had as a result seen a 17% increase in the top 20 municipal defaulters’ payment rate.

In Soweto, which Eskom supplies directly and has long had a culture of non-payment, the payment rate has increased from 12.5% to 21% at end-March.

Eskom achieved R16.3bn in cost savings overall, though much of this was absorbed by higher diesel costs in a year which saw significant load-shedding.

The energy availability factor — the measure of how much of the capacity of Eskom’s fleet of power stations is available to meet demand — fell to just 66%, where it should be closer to 80%. That in part reflected the fact that the utility is doing more planned maintenance, in an effort to improve the reliability and stability of its fleet.

De Ruyter said recently that Eskom expected to make meaningful progress on its reliability maintenance programme by April though the risk of load-shedding would only reduce significantly by September 2021.

With the full-year 2020 results coming more than six months after year-end, Eskom has committed to report its interim financial results for the six months to end-September in the near future.

We are spending almost R1bn a week just in interest costs Caleb Cassim

Eskom CFO