INTERIM FINANCIAL STATEMENTS
Eskom’s R367bn debt burden must be dealt with, says chairman
Liquidity, outstanding debt and how to tackle tariff hikes are just some of the challenges facing the new team
Eskom’s new board released the company’s delayed interim financial statements on Tuesday, indicating that credit lines to the company had been restored but warning that its R367bn debt burden was unsustainable and had to be dealt with.
The restructuring of the debt will include the possibility of some of the lenders swapping their debt to equity.
"No company can be sustainable with that kind of gearing. We can’t run a business that relies on borrowing to cover consumables. So there is a discussion on this … to determine what kind of structure we need," said chairman Jabu Mabuza.
Mabuza named key state institutions such as the Public Investment Corporation (PIC), the Industrial Development Corporation and the Development Bank of Southern Africa (DBSA) as those that would be approached to either swap their debt to equity, or to acquire shares in Eskom.
The PIC, which manages the pensions of public servants on behalf of the Government Employees Pension Fund, is already among Eskom’s largest bond holders. It has about R90bn exposure to Eskom’s bonds while the DBSA holds R15bn of Eskom debt. Both of these institutions fall under the political control of the finance minister, who would in any case have the overall responsibility of ensuring Eskom’s financial stability. Standard Bank, Barclays Africa and JP Morgan are the other big investors in Eskom’s debt.
Swapping debt owed to the state entity would solve two crucial issues for Eskom and the government: providing the utility with a much-needed cash injection without raiding the exhausted national coffers through another government bail-out or the politically sensitive privatisation.
Private participation through the possible sale of equity stakes in Eskom assets would also come under scrutiny. Mabuza said the utility’s board would consider all the possibilities and then present them to the government for a decision.
Converting debt to equity would mirror the Chinese model of diversified shareholding in major utilities while maintaining state control, under which the country has grown to be the second-largest economy in the world. Locally, Telkom is an example of private share ownership dominated by government control, which allows the company to be run along corporate principles.
On resolving Eskom’s liquidity issues, new interim CE Phakamani Hadebe, who has been in the job only 10 days, said while the money was "not yet in the bank", Eskom had secured additional funding of R10bn by February 1 and another R10bn by the end of the month.
Lenders had also required that Eskom deal with "the elephant in the room – corruption" and as a result the board had acted speedily to remove those suspected of corruption, he said. In the past week, five executives have left the company, including chief financial officer Anoj Singh. Head of generation Matshela Koko and former acting CEO Sean Maritz face disciplinary processes.
With lending restored, auditors had issued an unqualified review for the period – the six months ending September — but with an "emphasis of matter" on Eskom’s ability to continue as a going concern over the next 12 to 18 months.
Restricted access to funding due to governance concerns; the qualified audit for the 2017 financial year ended March, which had also affected borrowing; and flat revenue from falling sales and the 2.2% tariff increase granted by the National Energy Regulator of SA (Nersa) were the key challenges over the period.
Eskom’s liquid assets dwindled to R9bn at the end of September, from R30bn a year previously. Cash generated from operations plummeted by R10bn due to lower profit and a jump in municipal arrear debt from R9bn to R12bn. Total outstanding debt stands at more than R19bn.
The 5.5% tariff hike granted by Nersa for the current financial year starting in April was a key contributor to doubts around Eskom’s going concern status, and Hadebe said it was a priority of the new management team "to work with Nersa to find a solution to the future price path".
Nersa has been particularly harsh on Eskom in recent years and has not been persuaded that it is doing what it can to control costs. In its last tariff application for 2018-19, Eskom had asked for a 19.9% increase.
While tariffs were "not a panacea" Eskom needed to persuade Nersa it was able to produce electricity in a cost-efficient way. "We don’t think it should be a relationship of acrimony, but we need to have the ability to converse," said Mabuza.
The bigger, more long-term problem, said Hadebe and Mabuza, was Eskom’s capital structure, which was unsustainable. Eskom’s gearing ratio at the end of September was more than 70%. The problem of the debt to equity imbalance will necessitate a discussion with the government over the future of Eskom, with possible solutions on the table including a capital injection and the sale of assets.
Mabuza said all contracts above R1bn were being scrutinised. The board had also decided to undertake asset audits of all management in the two levels below the group executive to root out corruption.
Head of fixed income at Investec Asset Management Nazmeera Moola said Eskom had done well "to stabilise its liquidity problem and has a plan to restore confidence".
"However, none of this solves the long-term problem, which is that there is a major solvency issue. It is not simply a question of selling assets, because that also means selling revenue. But it is an issue that will have to be addressed, and part of that will be higher electricity prices."