Eskom in danger of being sunk by debt
The electricity business lost R4.6bn, and auditors have raised doubt about the utility's going-concern status
Eskom's annual results show that the situation has grown worse, not better, at the state-owned electricity company.
Sales fell, it posted hefty losses, and its ability to meet debt obligations has deteriorated, casting doubt on its ability to continue as a going concern.
The results, presented on Monday, revealed a loss for the year of R2.3bn at group level, which includes subsidiaries. The loss for the electricity business was R4.6bn for the year.
Auditors flagged both the going-concern status and irregular expenditure of R19.6bn, resulting in a qualified audit.
Interest costs soared by 60% over the past year.
This situation was likely to worsen as the capital build project neared completion, said independent analyst Chris Yelland.
Eskom expects to pay R215bn in interest payments alone over the next five years.
Eskom chairman Jabu Mabuza pointed out that “the bulk of the 12-month reporting period fell outside of our tenure”, and the new board and CEO had been in charge for only 69 days of the period under review.
In that time, Eskom had launched a clean-up, revisiting all contracts since 2012, with 10 senior managers implicated in corruption having left the organisation.
“The irregular expenditure [we are uncovering] is partly a function of us shaking the cupboard so hard all the skeletons are falling out,” said Mabuza.
However, Eskom has a huge task ahead to raise R52bn in funding for the 2019 year to fund its capital build programme.
It must also repay a R20bn short-term loan by August 31, obtained from a consortium of banks, bringing total funding needs to R72bn for the year.
Despite the weak financials presented on Monday, Eskom CEO Phakamani Hadebe said the utility, under new management, was on the right track and would have no trouble securing funding when it goes to market.
Hadebe said Eskom had raised R16.1bn, or 22%, of its funding requirement for the 2019 financial year.
While this marks a positive turn in investor sentiment — the markets had been closed to Eskom since July 2017 — half of the funds have come from development financiers.
The head of credit at Futuregrowth, Olga Constantatos, said a big concern for the asset manager, as an Eskom bondholder, was that the utility was not generating enough cash to meet its debt obligations.
The balance sheet showed cash generated from operations was R37.5bn, compared with cash required for debt servicing of R44bn.
Eskom’s cash interest cover ratio — which indicates how much cash is available to service debt — declined over the past year.
Constantatos said Eskom had not held a primary auction on the local bond market for some time and the reaction from local investors would be an interesting test case.
In its funding plan, Eskom says it plans to raise R23bn in domestic bonds and R20bn in foreign bonds.
Eskom has R350bn in government guarantees, R79bn of which has not yet been drawn down on. Hadebe said the utility would not go beyond the current allocation.
A number of factors will affect Eskom’s balance sheet, including the outcome of a new tariff application to Nersa, the energy regulator; the final wage settlement with Eskom employees; and the primary energy budget, which appears at risk of being breached if Eskom continues to truck coal across provinces.