When Eskom published a JSE stock exchange announcement in early July it warned its bondholders that there could be more bad news relating to irregularities when it released its financial results for the year ended 31 March. These would be along with a disclosure on the quantum of the uncovered reportable irregularities and irregular expenditure would be published with the release of the company’s annual financial statements. The presentation of the utility’s results on 23 July revealed that the situation has grown worse, not better, with auditors raising doubt about the utility’s going-concern status.
The company came dangerously close to having its bonds suspended by the JSE and to defaulting on debt and other obligations when the release of its interim financial statements for the six months to the end of September 2017 was delayed in January this year. After Eskom secured commitments of support from certain banks, its auditors issued an unqualified review but with an “emphasis of matter” on its ability to continue as a going concern for the next year to 18 months. Eskom’s liquid assets dwindled to R9-billion at the end of September from R30-billion the year before as a result of flat revenue caused by falling sales and lower-than-anticipated tariff increases.
The new chairman of Eskom, Jabu Mabuza, recognised at the time that the overriding problem at Eskom — apart from governance — was the company’s R360-billion debt burden. At the end of September 2017, its gearing ratio (debt to equity) had risen to 72%. Mabuza said that Eskom’s debt levels were simply “unsustainable”. Eskom needs R72-billion of funding until the end of 2019, including the refinancing of a R20-billion loan obtained with a government guarantee.
The latest announcement by Eskom raises serious concerns. In early July, Eskom spokesman Khulu Phasiwe had explained that as part of the JSE debt listing requirements, Eskom had to inform bondholders about the looming disclosure of irregularities because its bonds were listed on the bourse. Is there more bad news coming? Eskom’s auditors qualified its results for the year ended 31 March 2017 because they could not express an opinion on the completeness of the irregular expenditure reported. Its auditors, SizweNtsalubaGobodo, have flagged both the going-concern status and irregular expenditure of R19.6bn, resulting in a qualified audit.
The Eskom announcements have been made against the background of finance minister Nhlanhla Nene daring Eskom unions to table proposals on how the fiscus can foot the bill for wage increases when they meet with him. This was after the National Union of Mineworkers, Solidarity and the National Union of Metalworkers of South Africa had sought intervention from Nene and public enterprises minister Pravin Gordhan after they failed to reach an agreement on wage increase with Eskom earlier this week.
Nene commented during an investor road show in the UK in June that there was no money to bail out Eskom to help the entity with the salary hikes. Speaking during the World Economic Forum roundtable, Nene said Eskom posed a serious challenge to attracting investment in South Africa. Former finance minister Gordhan warned earlier this year that major international investors refused to buy bonds from Eskom because of bad governance and rampant corruption. Goldman Sachs said in September 2017 that Eskom is the biggest single risk to South Africa’s economy.
Eskom depends on government support to service its R368-billion of debt. Eskom needs R72-billion of funding until the end of 2019, including the refinancing of a R20-billion loan obtained with a government guarantee, according to a March report published by Moody’s Investor Services. An Eskom default on its debt would be catastrophic for the South African economy as it would trigger cross defaults of all government debt.
Developments over the next quarter will be keenly watched by international and South African investors alike.
Published: BusinessTech, Die Burger, Beeld