Notwithstanding its recent downgrade to junk status, State-owned electricity utility Eskom is still planning to raise a whopping R66-billion in debt funding during 2015/16 to cover operational and capital expenditure (capex) shortfalls that will arise even after a government equity injection of R23-billion.

The figure does not, however, take into account any possible further increase in Eskom’s 2015/16 tariff, beyond the 12.7% already sanctioned by the National Energy Regulator of South Africa (Nersa). It also does not factor in any proceeds from the sale of core or noncore assets, or from the listing of shares in business, as flagged recently by African National Congress and government leaders as a possibility.

Eskom has made an application to Nersa for a selective reopener in an effort to secure additional resources to pay for the diesel it is burning at the open-cycle gas turbines in the Western Cape, as well as to pay for short-term power purchase programme (STPPP) contracts with private generators.

For 2015/16, it is requesting an additional R10.9-billion for diesel, which is currently capped at R1.5-billion for the year, as well as R5.3-billion to pay for the STPPP contracts.

These costs, together with a proposed 2.5% increase in the environmental levy, would raise the tariff increase for the year to 25.3%, inclusive of the 12.7% already sanctioned. But it is far from clear whether Nersa, which will hold public hearings into the merits of Eskom’s application on June 23 and 24 and will publish a determination by June 29, will concur.

Eskom’s current budget forecasts revenue for the year of R171-billion and for primary-energy costs and operating costs to come in at R98-billion and R46.5-billion respectively. Cash from operations is forecast at R27-billion, before interest (R24-billion) and loan repay- ments (R23-billion). But Eskom is planning to roll over a high proportion of the bonds that are due to mature in September in an effort to reduce immediate cash-flow pressures.

The cash shortfall before capex is currently forecast at R8.9-billion and over R70-billion once the R61-billion in 2015/16 capex is included. Group gearing is, therefore, likely to deteriorate from the current level of around 75%.

Despite this weak position and the recent downgrades, Eskom is planning to borrow R55-billion on the domestic and international capital markets, implement a R10-billion private placement and raise R1-billion from other sources. In parallel, it expects to receive the R23-billion equity injection in tranches, with the bulk of the funds likely to flow in the second half of its financial year.

Under its current funding plan for the year, besides local and international bond issuances and corporate borrowings, Eskom is also aiming to secure development finance from Europe and Asia and to tap export credit facilities.

Eskom’s leadership believes there is still appetite for its bonds, arguing that the recent negative actions by the ratings agencies were triggered primarily by concerns over governance, rather than by any material change to its underlying position, or any pullback in government support for the utility. It’s going to be interesting to see whether the leadership is correct not only on the issue of market access, but also on bond pricing.