Govt funds helped keep Eskom liquid, committee hears

Cape Town – Government financial lifelines provided to Eskom helped improve the power utility’s financial performance, the standing committee on appropriations heard on Thursday.

Eskom executives and board member Neli Magubane updated the committee on the progress made at the power utility, following the funding it received from government for its recapitalisation and debt relief three years ago.

Martin Buys, general manager of finance, talked through the different funds the power utility received from government and the impact it had on the business.

Dating back to 2011/12, he explained that the power utility was experiencing several challenges which put pressure on the balance sheet.

Ratings downgrades had impacted funding costs and Eskom’s debt plan. There was also regulatory uncertainty related to tariffs, and the power utility was on an “unsustainable” price path.

Government stepped in by providing a government support package.

Notably in July 2015, as part of the support package, an existing subordinated loan of R60bn was converted to equity. This improved the financial position of the company and strengthened the balance sheet, but certain conditions were attached.

Then Eskom received an equity injection of R23bn from government. The amount was paid out in tranches between June 2015 and March 2016.

This was also subject to conditions being met. Eskom had to account to the Department of Public Enterprises and National Treasury on compliance of the conditions for the equity injection.

In total, R83bn in shares were issued during the 2016 financial year, Buys explained.

Comparing the financial performance of the power utility between the financial years 2014/15 and 2015/16, Eskom managed to increase its earnings before interest, taxes, depreciation, and amortisation (Ebitda) through increased revenue and cost containment.

The group also achieved an improved liquidity position as a result of the R23bn cash injection, Buys said.

Comparing the financial years 2015/16 and 2016/17, revenue increased and Ebitda and profitability improved further. Cash generated from operations also improved.

The group also reported improvements in its generation operating performance, and had a reduced reliance on open cycle gas turbines.

However, this picture changed in the 2017/18 financial year. The group struggled with the collapse of its governance, restricted access to funding due to credit downgrades weighed down its liquidity position and it received a qualified audit opinion over its irregular expenditure, Buys explained. 

Buys said Eskom is in the process of addressing matters of irregular expenditure by reviewing its open tender contracts to identify irregular expenditure, which will not be condoned.

Eskom is also working to improve its reporting of contracts and is ensuring that it is in line with compliance controls.

Magubane, who represented the board at the meeting, said the power utility faced financial challenges in 2017/18, such as “flat revenue” due to lower tariff increases granted by the energy regulator and declining sales volumes.

However, the appointment of a new board has resulted in increased confidence from investors, who are looking for the lapses in corporate governance to be corrected and for consequent management to be introduced.

Allan Gray fund manager Mark Dunley-Owen on Thursday told Fin24 that the new board at Eskom was a contributing factor in a decision to buy more Eskom bonds this year. 

"Our governance concerns about Eskom have lessened following board and management changes.

"While we still believe Eskom faces severe financial challenges, one is able to invest in government-guaranteed Eskom bonds at a materially higher yield than similar duration government bonds," he said. Government has provided guarantees to Eskom's lenders to the value of R350bn. According to Eskom this assists the power utility in accessing a wider range of lenders with more attractive pricing options.

Dunley-Owen explained from an investor's perspective it is better to buy bonds that are government guaranteed than those which are not. 

He also explained that the new board helped boost investor confidence as there is no evidence of corruption against them, as there was with the previous board. The new board also has a new mandate to reduce corruption to make the business more sustainable, he said.  

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