Delays in the commissioning of the country’s two new power stations – Medupi and Kusile – risk compounding Eskom’s financial problems, and without urgent government help the embattled utility could be forced to renegotiate the terms of its borrowings to avoid violating bond covenants, according to analysts.
Eskom is not only facing a R225 billion funding gap, but it is also facing a mounting cash- flow squeeze. It continues to burn cash feverishly to keep the lights on by using diesel-guzzling gas turbines.
Even though the government has committed to raise at least R20bn via the sale of non-strategic assets to plug the funding gap in Eskom, the utility’s cash needs are of an immediate nature as it wrestles with daily system failures due to ageing infrastructure.
Commitments
Analysts said the government was the only thing standing between Eskom honouring its borrowing commitments or having to renegotiate its bond repayments. This year alone, Eskom faces as much as R9bn in interest payments, which is almost the equivalent of what it would have cost Eskom to run its open cycle gas turbines (OCGTs) since October.
The utility is spending close to R2bn a month on diesel supplies after deciding to ramp up its use of the OCGTs to supplement power generation.
It emerged this week that moves are afoot to allow Eskom to recoup some of these costs through tariff hikes.
Francois Stofberg, an economist at Efficient Group, said international lenders were not going to be lenient on the struggling utility when it came to payment or keeping to terms and conditions.
The persistent delays at Medupi and Kusile also mean that Eskom will not see returns anytime soon from the power it had planned to sell from those stations.
“If they do not honour their financial commitments, it is going to be like a firestorm that will go up in the international markets. The rule of thumb in international markets is that you honour your financial commitments,” Stofberg said.
Eskom denied that it would be under pressure to renegotiate its borrowing terms or seek to push back interest payments that would soon be due.
Eskom’s spokesman Khulu Phasiwe said the utility was in compliance with all its bond covenants. “Eskom has always factored in all its debt obligations into its liquidity and funding plans. There is no need nor any plans to renegotiate bond repayments,” he said.
Even so, concerns are mounting about the timing of the government’s assistance.
Peter Attard Montalto, an emerging markets analyst at Nomura, said the Eskom “crisis has morphed into a cash and equity problem thanks to such significant diesel purchases that have been undertaken to power the continually run-at-peaking plants that Eskom is forced to use”.
Earlier yesterday, Bloomberg reported that Eskom is planning a benchmark-sized issue of 10-year, dollar-denominated bonds, according to a person with knowledge of the offering.
The initial pricing talks for the debt are at mid-7 percent, said the person, who asked not to be identified because they were not authorised to speak publicly. Deutsche Bank, FirstRand’s Rand Merchant Bank and Standard Bank Group are arranging the sale.
Constraints
“Expectations of a debt issue therefore fit into a much more stressed Eskom balance sheet,” Montalto said.
He acknowledged that Eskom, nonetheless, retains an “extremely strong implicit guarantee for its external debt, which the government has not wanted to convert into an explicit guarantee because of the impact on its balance sheet”.
Montalto said there would probably be a delay in the capital injections to Eskom via the R20bn – due from yet-to-be-determined asset sales – “owing to political and logistical complications”.
Analysts said Eskom would not be able to solve power generation constraints while dealing with the financial straightjacket at the same time.
The struggling utility implemented Stage 3 of load shedding yesterday as a result of a “severely volatile system”, marking a shift in how the utility characterises the crisis.
Until yesterday, Eskom had often talked of the system as being constrained, but its tune had changed as more power generation units failed, putting the country one step away from a catastrophic total blackout.