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D-Day: Extent of Eskom's cash crisis set to be revealed

Jul 19 2017 10:03
Yolandi Groenewald

Johannesburg - Eskom's solvency is under the spotlight on Wednesday. The power utility will report back on its annual results amid reports that it is facing a cash crisis and will not be able to pay salaries in three months' time.

On Tuesday, Public Enterprises Minister Lynne Brown said she would comment on Eskom's finances only after the financial results are released.

She also did not want to comment on Finance Minister Malusi Gigaba's hint last week that Eskom might need some kind of "soft support."

Brown recently insisted that Eskom is doing well. Last month, after Eskom’s annual general meeting, she reiterated that Eskom “recorded positive results according to its financial results presented to the AGM”. She said Eskom is in a better financial position than it was a year and two years ago, at this time.

In March she told Parliament’s public enterprises committee that Eskom expected a profit for the financial year to end-March 2017.

Last year Eskom posted a net profit of R4.6bn.

In Parliament Brown said the current tariffs Eskom is charging are unsustainable and unaffordable for it to remain sustainable, despite the utility's recent good performance.

She said the "regulatory uncertainty" regarding regulator Nersa's multi-year price determination (MYDP) decisions poses a significant challenge to Eskom’s revenues, threatening the power utility's ability to meet its debt payment obligations

Most of Eskom's operating costs are covered by its tariffs. But it faces the conundrum of selling electricity at higher prices with consumers seemingly using less of its product.

According to a leaked application, Eskom will ask for a 20% tariff hike next time around on the grounds that it won't be able to operate sustainably without collecting on that revenue.

Over the weekend, Eskom refuted claims that it has only R20bn left in the kitty.

The Sunday Times, citing leaked financial statements, reported that the utility's current funds are only likely to last for the next three months and that Eskom may not be able to pay its 49 000 employees' salaries come November, unless it receives a bailout.

The Sunday Times report also suggested the postponement of Eskom’s results is to avert a crisis that would have required it to pay back R15bn owed to the Development Bank of Southern Africa (DBSA).

READ: Koko in firing line as Eskom cans results presentation

The DBSA granted that loan to Eskom in 2010, and Eskom has drained the facility. But one of the conditions in the loan is that it would be recalled if Eskom failed to achieve a clean audit, a disaster for the apparently cash-strapped state utility.

Eskom: No cash crisis

But Eskom on Sunday denied that it is facing a cash crisis.

"External auditors have confirmed Eskom is a going concern, and as a result the company sees these reports as being inaccurate and misleading," it said in a statement. "It is important to reiterate that Eskom is not facing any liquidity challenges, and that the company is confident that it will maintain sufficient liquidity to support its operations."

Eskom didn’t want to go into specifics, citing the limitations placed on disclosing financial information before the official announcement, scheduled for Wednesday.

The state utility however highlighted that its financial position has always been supported by significant reliance on debt and borrowings. Eskom said that as a result of its improved overall financial and operational performance over the last two years, it now has an improved balance sheet.

"Eskom also has sufficient government guarantees to execute its funding plan," it said."It has also maintained access to capital markets and raised committed funding."

Possible bailout

Hints of a bailout started surfacing last week at Gigaba’s media briefing on inclusive growth.

City Press reported that Gigaba's plan to revive the economy revealed that National Treasury intends to provide Eskom with “soft support”, which could mean a multibillion-rand bailout or increasing Eskom’s government guarantees to above R350bn.

Eskom was given a July deadline to submit a case for "soft support" to Treasury and the Eskom board.  Gigaba said at the briefing that details of a bailout will be unveiled as the process unfolds.

“What we are expressing is a deep appreciation of the weakening of the Eskom balance sheet,” he said.

“There is an urgency for us to provide assistance so that it is able to implement the capital build programme and fulfil its mandate. The Department of Energy will unveil what interim mechanisms are required in order to support Eskom until the next tariff application.”

Raising debt

With its governance crisis and despite still having the backing of government guarantees to the tune of R350bn, sources for funding are becoming more difficult to find. Government guarantees imply that Eskom can secure lenders, backed up by an undertaking from the South African government that it will honour any default.

South Africa has R477.7bn of guarantees available for public institutions. Of that, R308.3bn has been used. Information from Treasury indicates that Eskom is the biggest recipient, having used R218.2bn of the R350bn available to it by the end of the last financial year.

Chief financial officer Anoj Singh said that Eskom’s debt is expected to peak at R500bn.

READ: Eskom to borrow R50bn a year in debt financing - analyst

Singh said international roadshows indicated there is still a significant appetite from international investors for Eskom’s bonds, despite the scandals and governance crisis around the company.

He believes the bond market could deliver up to R19.78bn in funding to bring Eskom to its financing target. But he said that going forward, the state enterprise would rely significantly on developmental financial institutions such as the China Development Bank.

"We'll rely on them for around 45% to 50% for our finance needs," he said. He added that Eskom expects 10% of its funds to be raised from international bond markets. 

If Eskom receives another bailout, it will be the second in only two years after it received a R23bn government bailout in 2015 to fix rolling blackouts that were plaguing South Africa at that stage.

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nersa  |  eskom  |  lynne brown  |  financial results

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