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Eskom looking beyond shareholder to tackle ‘unsustainable’ capital structure

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Eskom looking beyond shareholder to tackle ‘unsustainable’ capital structure

Newly appointed Eskom chairperson Jabu Mabuza and acting CEO Phakamani Hadebe speak on governance, sustainability and Eskom’s immediate liquidity challenge. Camera Work & Editing: Darlene Creamer. Recorded:30.1.2018
Acting Eskom CFO Calib Cassim indicates that Eskom may consider an appeal of the most recent tariff determination of the National Energy Regulator of South Africa. Video and video editing: Darlene Creamer. Recorded 30.1.2018

30th January 2018

By: Terence Creamer
Creamer Media Editor

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Having secured “in principle” commitments from funders to enable Eskom to meet looming debt obligations of R20-billion by the end of February, the new leadership at the power utility has started weighing various options, including asset sales, for shoring up the group’s fragile balance sheet.

Speaking at interim results, delayed owing to auditor concerns over the State-owned company’s going-concern prospects, newly appointed acting CEO Phakamani Hadebe confirmed that Eskom’s capital structure was not sustainable in its current form.

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This was supported by the fact that external auditors SizweNtsalubaGobodo raised an ‘emphasis of matter’ regarding Eskom’s going-concern position in the interim results, which follows a qualification of the group’s 2016/17 financial results, owing to inadequacies in the way Eskom reported on irregular expenditure in terms of the Public Finance Management Act (PFMA).

Hadebe said various options were now being considered to strengthen the balance sheet in the absence of any injection from its shareholder, the South African government.

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One “idea” being considered included approaches to public institutions such as the Industrial Development Corporation, the Development Bank of Southern Africa and the Public Investment Corporation with a proposal for them to convert their debt to equity.

However, new chairperson Jabu Mabuza indicated that “everything is on the table” as part of the capital-structure review, including possible asset disposals.

“We have to find money somewhere,” Mabuza said, stressing that the utility’s current debt-to-equity ratio, of above 70%, was not sustainable in the context of flat revenues and tariffs and declining sales.

Eskom reported 2% fall in revenue to R96-billion and a 1.9% fall in sales for the interim period to September 30, 2017. Its cash from operating activities slumped by 30% to R22-billion, while its earnings before interest, tax, depreciation and amortisation fell by 6.8% to R30-billion. The group reported a net profit of R6-billion, which was 34% below the R10-billion reported for the corresponding period in 2016.

Hadebe confirmed the accuracy of media reports, which revealed that Eskom was facing a near-term liquidity crunch, owing to the fact that its access to funding had been restricted as a result of ongoing governance problems and the 2016/17 audit qualification.

FUNDERS IN PLACE FOR R20BN
However, he expressed confidence that the immediate threat of default on upcoming debt payments would be averted, revealing that funders had already agreed, with certain conditions, to provide Eskom with the cash required to honour immediate commitments of R20-billion. This would be injected in two R10-billion tranches before the payments became due on February 1 and February 27 respectively.

Eskom said it could not disclose the identity of the funders until the deals had been concluded, but Hadebe hinted that the lenders were from among South Africa’s four large commercial banks, saying that, having requested a list of Eskom’s key funders “we were happy that these were people that we know”.

He said immediately after the appointment of the new board on January 20, phone calls were made to these four lenders, who all expressed support for the new leadership and said that they were willing to re-engage with Eskom, once there was evidence that corruption at the institutions was being tackled.

“The engagements on this R20-billion started . . . and we are confident that the we will have R20-billion in our hands,” Hadebe said, while stressing that firm conditions applied. These related primarily to the rectification of Eskom’s poor record of corporate governance, as well as evidence that the issues that led to the recent audit qualification were being addressed.

Acting CFO Calib Cassim said a recovery plan was in place to deal with the issues that gave rise to the qualification, which related mainly to Eskom’s reporting on irregular expenditure in terms of the PFMA. He said work was 80% complete on the 160 contracts valued at above R1-billion that were classified as irregular, as well as the 5 110 contracts under R1-billion.

Hadebe stressed that, besides dealing with the capital structure, the new leadership would prioritise reducing Eskom’s cost structure, which he described as “very high”.

TARIFF APPEAL?
However, Mabuza said there was also a need to work closely with the National Energy Regulator of South Africa (Nersa) to find a solution to the future price path. Eskom had factored in a 12% increase in the tariff for 2018/19 and attributed the delay in the presentation of its interim results partly to Nersa’s announcement in December that it had approved an increase of only 5.23%.

Cassim said the utility was “eagerly awaiting” Nersa’s reasons for decision (RfD), as it was of the opinion that it should have received a minimum increase of 9% in terms of the tariff-setting methodology.

“We would like to see how Nersa has come up with reasons for 5.23% and if we believe there’s grounds to review it, we will make that recommendation to our board. So we are eagerly awaiting Nersa’s RfD.”

However, Mabuza stressed that tariffs were not a “panacea” for all Eskom’s problems and said Eskom knew it was “pushing water uphill” when it approached the regulator, last year, for a 19.9% increase amid swirling allegations of corruption and mismanagement.

“That has been part of the problem that there is reliance on tariff [increases] and borrowings. We need to be saying: Are we producing energy in a reliable and cost-efficient way, [so] we can defend our price path.”

Nevertheless, he said he was disturbed by the fact that the relationship with Nersa was “one of acrimony” and indicated that he was keen for an improvement in the relationship.

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