South African power utility Eskom was making provision for an international bond issuance during the first half of 2010 as part of a planned programme to raise some R40-billion a year between 2010 and 2013 to partly cover funding shortfalls associated with its R400-billion build programme.
However, other financing opportunities were also being interrogated, owing to the fact that the utility was still forecasting a R30-billion to R80-billion “funding gap” over the next three years, notwithstanding an extensive borrowings programme and assumptions of material tariff increases.
The R40-billion-a-year borrowings plan, as well as the expectation of a R30-billion funding deficit, was itself premised on a controversial request for tariff adjustments of 45% a year over three years. But Eskom had also indicated that the figure would be closer to R80-billion should the National Energy Regulator of South Africa (Nersa) approve increases of closer to 30%.
In releasing details of its tariff application, CEO Jacob Maroga said that the utility was fully aware that a funding shortfall would persist even if the request were to be granted. But he argued that, in the context of a R400-billion build programme, a R30-billion funding gap could be managed.
In response to questions posed by Engineering News, Eskom treasury GM Caroline Henry said that, if material tariff increases were indeed confirmed, the utility would be in a good position to secure the additional finance, including equity finance. The South African government, which is Eskom’s sole share- holder, had already approved a loan injection of R60-billion and had set aside a further R176-billion in guarantees.
“The shortfall will need to be addressed by additional borrowings (if possible), efficiencies, deferments of uncommitted contracts, or possible alternative equity sources,” she explained.
Nersa would make a final tariff determi- nation for the second multiyear price determi- nation period, or MYPD 2 (running from April 1, 2010, to March 31, 2013), on February 24, following a period of public comment and hearings, which would take place early in the new year.
“We are of the opinion that a significant tariff trajectory will give investors the comfort that the company is financially sustainable, hence we may be in a position to access more funding,” Henry said, adding that the utility’s financial ratios would appear sound under the 45%-a-year scenario, with the only constraints then being “market depth and single obligor limits”.
Provision had been made for an inter- national bond issuance during the first half of 2010, with Eskom having refrained from a major international issuance during the recent credit crunch, which coincided with its own financial and credit rating uncertainties. Henry said that, while international funding remained relatively expensive, Eskom still saw it as attractive, owing to its need to limit its domestic exposure and to diversify its financing sources.
Eskom had also continued to access the international markets in recent years to ensure name recognition for the future. “At the outset of this build programme, in March 2006, Eskom issued a €500-million Eurobond, which was well received,” Henry noted.
Some R55-billion of new borrowings had already been physically drawn since the start of the programme, with R46-billion of that having been sourced locally, and a further R9,5-billion arising from international sources.
Henry said that between R12-billion and 15-billion would be sourced on the domestic capital markets yearly during the MYPD 2, while the remainder would be sourced from offshore sources, including export credit agencies (ECAs), development finance institutions (DFIs) and the international capital markets. It was possible that some of the inter- national finance might still be rand- denominated.
For the moment, ECA finance, which was linked to the physical build programme, was the domi-nant international finance feature, with agreements in place with agencies in Germany, France, Italy and the US, from where major components were being imported.
Eskom was also progressing its discussions with DFI sources, such as the World Bank and the African Development Bank, with much of the detailed due diligence required for such funding having been completed.
The spreads on Eskom’s long bonds were currently about 70 points above the ‘government curve’, with most of the current bondholders being insurance companies, pension funds and banks.
Henry told Engineering News that the recent weakness in the South African bond market could not be attributed solely to Eskom’s tariff application, with government also having significant capital-raising plans, owing to its own revenue shortfalls.
“However, increased interest rates will impact on Eskom as, due to the large funding requirement, we can’t time the market to coincide with low-interest-rate cycles,” she explained, adding that Eskom’s primary focus was on liquidity, tenor and price.