Despite having received a qualified audit opinion for the 2018 financial year, reporting a R2.3-billion loss and nearly R20-billion in irregular expenditure, warning of yet more financial difficulties ahead and acknowledging that its current business model is no longer sustainable, Eskom expressed confidence last week that it would be able to raise the R72-billion it required for its 2019 financial year.

Investors resumed lending only after then Deputy President Cyril Ramaphosa made wholesale changes to the board and executive team on January 20. For six months prior to that intervention, lenders had refused to take on additional Eskom debt, owing to serious corruption allegations.

In fact, the State-owned utility narrowly avoided running out of cash in the first two months of 2018. Eventually, several banks stepped in to provide the utility with a R20-billion ‘bridge-to-bond’ loan, controversially facilitated through a R5-billion bridging loan extended by the Public Investment Corporation. The loan matures at the end of August and is largely responsible for the rise in Eskom’s funding requirement for 2019, during which R27-billion of government-guaranteed debt would mature. Eskom had been granted guarantees of R350-billion, of which R75-billion was currently unallocated.

CEO Phakamani Hadebe offered few details at the group’s 2018 results presentation as to how the funding would be secured, saying only that, subsequent to recent governance actions, lenders had expressed an appetite for Eskom debt. In addition, a previous cash-holding buffer of R20-billion had been relaxed to R5-billion.

However, the next day, the utility secured a $2.5-billion loan from China Development Bank, increasing the amount secured for 2019 from 22% to over 60%.

CFO Calib Cassim indicated that Eskom would be seeking to tap various funding sources, including the domestic and international bond markets, export credit agencies and development finance institutions. Hadebe confirmed that discussions were under way with the New Development Bank, which was targeting infrastructure investments in the Brics countries of Brazil, Russia, India, China and South Africa.

Cassim also revealed that, while Eskom’s qualified audit had resulted in the breaching of covenants with certain lenders, the risk of loans being recalled had been mitigated. He said that, prior to the release of the results, Eskom had received waivers from those lenders whose covenants were affected.

Eskom chairperson Jabu Mabuza also highlighted the fact that qualification related to the Public Finance Management Act (PFMA) reporting requirements, rather than any breach of International Financial Reporting Standards. The PFMA-related qualification arose as a result of Eskom’s failure to offer a complete picture of irregular expenditure, despite a ballooning in the figure from R3-billion in 2017 to R19.6-billion in the 2018 financial year.

Eskom would be approaching lenders and capital markets despite not having completed its long-term corporate strategy and plan, which was scheduled for finalisation in September.

The plan is expected to include reducing the utility’s 48 000-strong headcount, which Mabuza indicated was about one-third too large for a utility the size of Eskom, whose sales had remained flat for over ten years. The plan would also outline a new business model and operational structure, which could result in Eskom disposing of certain assets, or even unbundling its generation, transmission and distribution businesses.

Hadebe indicated that the new Eskom leadership had already agreed that the business could not be as reliant on debt and tariff increases as had been the case hitherto. Under the current corporate plan, the utility’s debt, which stood at over R380-billion, was expected to rise to R600-billion in the coming four years, increasing gearing from 72% to 80%.

“We are aiming to transition from ‘business as usual’ to sustainability,” Hadebe said, adding that the review included revisiting the group’s coal and independent power producer (IPP) strategies.

IPPs ‘Cash Neutral’
Until recently, Eskom had adopted a hostile stance toward IPPs, which the previous executive team, led by Brian Molefe and later by Matshela Koko, blamed for weakening Eskom’s financial position.

However, Mabuza stressed that Eskom did not make policy and, in implementing government policy on IPPs, the utility took no financial risk, as IPP costs were treated as a ‘pass-through’ in the tariff.

“The IPPs are cost neutral to Eskom and they are paid in advance,” Mabuza said, adding that, during the 2018 financial year, Eskom recorded IPP underspending of R2-billion.

Public Enterprises Minister Pravin Gordhan, who attended the presentation, indicated that, besides addressing Eskom’s corruption and financial and operational stabilisation, government expected the current leadership to begin crafting a new business model for the utility that took account of technology changes under way in the energy industry.

Once the current wage negotiations had been concluded, Gordhan said, it would be important for Eskom to engage with labour on a “just transition” from the current model to one that was more sustainable.

“Once we are over the negotiations on the wages and benefits issues, we need to create the right basis for dialogue between unions and the board, and government, more generally, to develop a common understanding of the energy mix: [the role played by IPPs]; whether they’re a burden or not; how we are going to have a just transition executed in South Africa, hopefully, in a painless kind of way,” the Minister elaborated.

He also noted that many financial institutions were refusing to fund coal projects. “So, we need to be constructive in this debate so that, while there might be very special interests . . . we need to come up with an Integrated Resource Plan that suits our situation, enables us to execute a just transition and get to a place in five or ten years, where we can say we have the right balance and the right mix.”

However, until the new corporate plan was in place, Eskom would, in its communication with lenders, emphasise the actions it had taken to improve governance, tackle corruption and reduce capital and operation expenditure.