The rejection by the National Energy Regulator of SA (Nersa) of Eskom’s request for a 16 percent tariff increase will probably force the power monopoly to sell bonds to plug a funding gap amid a R500 billion expansion plan.
Yields on the company’s rand bonds due in December 2032 had the biggest weekly advance since the start of November last week, when the regulator said Eskom would be allowed to raise fees by 8 percent a year up till March 2018. Centrais Elétricas Brasileiras, South America’s largest power utility, had a 1 basis-point drop on its dollar bonds due in October 2021 last week.
Nersa’s ruling cuts Eskom’s revenue approved for five years to R906.6bn, or 17 percent less than the utility asked for. South Africa’s biggest state-owned borrower is investing in new plants to end power shortages.
State-owned firms “are facing increased balance-sheet pressure at the moment as the user-pay principle seems to be eroding at the edges”, Nomura International economist Peter Attard Montalto said in an e-mail on Friday. “Debt issuance plans now look increasingly strained.”
Eskom’s net debt soared to R138bn in the year to March 2012 from R1.9bn in 2006, according to its annual reports. The utility has R195.6bn of bonds and interest payments outstanding.
The company shares South Africa’s credit rating of BBB at Standard & Poor’s (S&P), the second-lowest investment grade. Without the state’s support, Eskom’s assessment would be six steps lower at B, the fifth-highest junk level, according to S&P.
“The stand-alone credit profile could come under pressure if the regulator does not approve in full the tariffs Eskom has applied for,” S&P analysts Mark Davidson and Karim Nassif said in a report last October.
It was too early to comment on the fee increase, Davidson said on Friday.
Moody’s Investors Service, S&P and Fitch Ratings have downgraded South Africa’s debt since last September, concerned by a slowing economy and rising spending pressures.
On average, about 18 percent of Eskom’s capacity of 41 647 megawatts was unavailable last year because of both planned and unplanned maintenance, according to information provided twice weekly by Eskom. Unplanned outages averaged 4 200MW.
The utility is building the world’s third- and fourth- biggest coal-fired power plants as part of plans to overcome an electricity deficit that halted factories and mines of companies including Anglo American for five days in 2008.
Work at the Medupi station has been halted since January 16, when Eskom sent home 13 000 workers after protests involving union members who are employed by contractors.
The plant, which will produce 4 800MW of power and whose price was estimated at R91.2bn excluding capitalised borrowing costs as of March last year, was due to start output from its first unit at the end of the year.
The 16 percent increase that Eskom sought, which included 3 percentage points to support independent power producers, would have been for recovering input costs such as coal and the cost of servicing the debt raised to finance investment in new plants, it said.
“We will have to study the decision in detail to understand the consequences,” Eskom said on Friday.
Eskom has been allowed to raise fees by an average 25 percent in each of the past five years, more than three times the mean inflation rate. Above-inflation gains in tariffs have contributed to lower profit for mining, agriculture and steel-producing sectors.
Consumer price growth eased to 5.4 percent in January, the first month in which Statistics SA based the rate on data using new weightings that more than doubled the importance of electricity.
The rand has lost 7 percent against the dollar this year, making it the worst performer among emerging market currencies.
Yields on Eskom’s dollar debt due in January 2021 have increased 49 basis points to 4.32 percent, compared with a 2 basis-point increase in emerging market utilities’ dollar debt to 3.8 percent, JPMorgan Chase indices show.
South Africa’s May 2022 dollar bond rates have risen 50 basis points to 3.51 percent.
The government has provided Eskom with R350bn of debt guarantees. Bonds and borrowings would exceed that in the year to March 2016 and peak at R366.9bn in fiscal 2017, Eskom said in January.
Investment grade status was needed to secure the balance of funding and was critical for expansion, finance director Paul O’Flaherty, who will leave the company in July, said last November. He was appointed to his position about three years ago to put in place funding for the new building programme.
The effect of the reduced fee increase on Eskom’s finances was significant, RMB Global Markets Research analysts Carmen Nel, Elena Ilkova and Mamello Matikinca said in a note on Friday.
“The company will clearly have to give up its stated objective to improve its standalone credit profile over the next five years,” they wrote.
“A slowdown in capital expenditure seems inevitable.” – Ana Monteiro and Paul Burkhardt from Bloomberg