Eskom to approach Treasury for balance-sheet support

Officials from power utility Eskom, the National Treasury and the Department of Public Enterprises (DPE) were likely to meet within the next two weeks to discuss possible recapitalisation options for the enterprise, in light of concerns being raised about its credit rating.

All three ratings agencies, Standard & Poor's, Moody's and Fitch have raised concern about the outlook, with Standard & Poor's having already placed the State corporation on a "negative watch". This followed on from a ‘negative outlook' warning from Fitch last year - Fitch and Moody's were likely to review their positions within the next few months.

FD Bongani Nqwababa told Engineering News on Tuesday that efforts were under way to "align diaries" and that a meeting was "imminent". Confirmation of the proposed meeting could not immediately be obtained from the National Treasury.

CASH, LOAN, OR GUARANTEE It was anticipated that any recapitalisation of Eskom could take one of three forms, including a direct cash injection; a subordinated loan; or some form of guarantee. Alternatively, a combination option could be packaged.

The utility was likely to impress upon Treasury that some form of direct support from its shareholder was now urgent if some of its key financial ratios - particularly its interest cover - were to be safeguarded, especially in light of the lower-than-requested tariff increase from the regulator.

It would also assert that such direct shareholder support was now essential for sustaining its credit standing, and would warn that if this was allowed to weaken it would not only increase its overall cost of capital, but would also limit its market access, given that many financial institutions were governed by mandates that disallowed them from lending to institutions with less than a BBB+ rating.

RATIOS UNDER STRAIN
Nqwababa insisted that its ratios would come under increasing strain over the next few years, owing to the fact that costs (associated both with its large-scale capital programme as well as surging primary energy prices) would not be fully recouped by anticipated tariff increases.

Last year, the utility approached the National Energy Regulator of South Africa (Nersa) to reopen the current three-year tariff determination, which was meant to run until the end of March next year, and submitted a request for an 19% increase in 2008/9, followed by 18% in the subsequent financial year. But on December 20, Nersa announced that it had agreed to grant an effective tariff increase of 14,2% as from April 1, 2008, and gave no indication beyond the time horizon of the current multiyear tariff determination.

Then, last week, Standard & Poor's issued a ratings update, which noted that Eskom's ‘A-' local currency and ‘BBB+' foreign currency ratings had been placed on ‘Credit Watch Negative' from ‘Stable'. The agency indicated that it required greater clarity both on government's support as the shareholder, as well as Eskom's funding plan.

SHAREHOLDER SUPPORT LIKELY TO BE REQUIRED
Nqwababa told Engineering News that the utility was in the process of reformulating its funding plan for the five-year financial period 2008/9 to 2012/13, which would be placed before its executive committee as well as the board later this month.

The review was believed to focus mainly on the capital programme, which was likely to be substantially higher than the R150-billion projected for the five-year period from 2006/7. Further, conditions within the local and offshore capital markets, which had also become less attractive, owing to the subprime-linked banking crisis in the US, would be taken into account.

For that reason, the initial so-called ‘50-50-50' funding plan, aimed at raising R50-billion from each of the domestic and offshore capital markets, while funding the balance off-balance sheet, was being reviewed.

Nqwababa refused to comment on the likely content of the new plan save to say that Eskom would probably not be as aggressive in approaching offshore markets, given the fact that prices had become increasingly unattractive once currency hedging was taken into account. And, given that the ratings agencies would frown on a package that emphasised increased levels of debt, drawing on the State, as Eskom's sole shareholder, looked increasingly inevitable.

Nqwababa revealed that it had been engaging the DPE on the matter for some time, but that it was now necessary to accelerate discussions with the National Treasury, whose approval would be required before the matter could be taken to Cabinet.

"Given the urgency of the matter, I believe we need to have this resolved within the next three months," Nqwababa said, adding that it was too early to gauge what Treasury's reaction would be. He said the fact that South Africa was running a Budget surplus at least made the conversation about support possible.
Edited by: Terence Creamer