Eskom runs out of cash as loan facilities dry up

Power transmission lines to the mines on the Copperbelt Province of Zambia

Eskom is in a precarious financial position and desperately trying to avoid a liquidity crisis that may render it unable to pay staff salaries and suppliers by January. The utility confirmed on Monday it had 20 times less cash than it needs to continue funding operations, and has written to the public enterprises minister alerting her of the impending calamity.

By the end of January, the utility will run on a cash deficit of R5bn. This eventuality will come even as Eskom expects to successfully drawdown R3.8bn from existing credit facilities during the next few weeks.

Business Day can also reveal that the race to stave off insolvency began in earnest in July, when Eskom held meetings with its shareholder minister and the finance minister.

On July 26, Eskom chairman Zethembe Khoza met with Public Enterprises Minister Lynne Brown and Finance Minister Malusi Gigaba, requesting they expedite Eskom’s access to cash and help find solutions to the looming liquidity crisis. This was 10 days after Khoza had publicly denied there was any risk of shortage working capital.

In a follow-up letter dated August 28, Khoza again wrote to the ministers: “The purpose of this letter is to highlight the liquidity risks at Eskom and the mitigating actions in place to address these concerns.”

If Eskom is not able to raise enough cash, its going concern status would be in jeopardy as early as late November, when it is expected to publish its interim financial results to September, said Khoza.

In July, the Sunday Times revealed the utility would run out of cash within three months as it had fallen below the R20bn liquidity buffer, a position Eskom denied as misleading at the time.

The last time Eskom ran out of cash to pay suppliers and staff salaries, in September 2015, it turned to the government for an R83bn bailout — R23bn in cash and the balance a write-off of R60bn debt owed to the government. At that time Eskom had less than R20bn cash.

However, Eskom has now informed Brown, asking for her intervention to fast-track access to cash from previously agreed funding facilities. Without immediate access to cash, Eskom will become insolvent by December.

“Yes, Eskom does have a big problem in our financial position. It’s part of our normal reporting processes to inform the minister whenever we have a major reportable issue,” said spokesman Khulu Phasiwe. “Our target is a liquidity buffer of about R20bn working capital, and that has not been met. We have in the bank slightly more than R1.2bn.”

On Monday news organisations Fin24 and EE Publishers revealed the existence of an internal report that painted the gloomy picture. To keep Eskom running, the utility requires at the very least R8bn cash every month.

“The report is very current because it mentions in the past tense dates in the middle of October. It must have been prepared at the end of October,” said Chris Yelland, managing director of EE Publishers. Phasiwe confirmed the veracity of the report.

In the letter, Khoza said the risks faced by the utility were compounded by the Development Bank of Southern Africa’s (DBSA) demands for Eskom to repay its R15bn bond as it had fallen short of some of its debt covenants, including a failure to maintain a clean audit outcome. In the year ended March, the utility received a qualified audit as a result of a R3.6bn irregular and wasteful expenditure bill.

DBSA was later persuaded to waive the requirement of a clean audit as a condition of its investing in Eskom, but did succeed in pressurising the utility to put chief financial officer Anoj Singh on suspension for his role in the financial mismanagement.

A lender recalling its loan would trigger all the other bond investors to follow suit as the “cross default clause” in the utility’s debt programme allows all investors to immediately recall their debts. Eskom has outstanding debt of more than R471bn, most of it guaranteed by the government and owed mainly to funders outside SA.

Khoza said it was also a “longer-term risk given the uncertainty of the outcome of the 2018-19 tariff application currently before Nersa [National Energy Regulator of SA]”.

Eskom has asked Nersa for an interim increase in electricity prices of 19.9% through the revenue clearing account mechanism. It aims to raise at least R63bn in revenue through the short-term tariff increase.

Phasiwe admitted the utility is “not where we should be as a company, which is worrying”.

He said the utility was having problems accessing previously agreed loan facilities due to continuing allegations about massive corruption and lack of good corporate governance. “Our funders have asked us to sort out our corporate governance, and that has made it difficult to access funding.”

Asked what Eskom was doing to raise the desperately needed cash, Phasiwe said the details would be aired in the interim results, expected to be published before the end of November.

Source: Business Day Live