Investors punish Eskom for delays

Eskom’s bonds are being punished for its delay in starting a coal power plant, forcing the company to lean on South Africa’s credit support to meet its funding needs.

The extra yield investors demand to hold Eskom’s $1.75 billion (R17.8bn) of bonds due January 2021 rather than similar-maturity treasuries widened 18 basis points on Monday to 359 after Eskom delayed the start up of its Medupi plant, which will be the world’s fourth-biggest coal-fired power facility, to the second half of 2014 from later this year. The spread has widened 112 basis points this year, compared with a 17 basis-point increase in the average spread of companies in the JPMorgan Chase CEMBI utilities index.

Eskom, which generates about 95 percent of South Africa’s power, is spending $50bn revamping old plants and building new ones to avoid repeating the 2008 crisis that forced mines owned by companies including Anglo American to stop production for five days and caused several months of scheduled blackouts in cities.

While Eskom’s bonds are guaranteed by the government, strikes, construction delays and power shortages are weighing on the company’s ability to raise funds on its own.

“The delay in Medupi coming online will affect their credit profile,” said Roelof Steenekamp, the head of European corporate research at Fitch Ratings.

“If it wasn’t for the support and the guarantees they were getting from the state, on a standalone basis Eskom would not be investment grade.”

Expanding ouput

Medupi, along with the Kusile coal-fired facility and Ingula hydropower plant that are also being built, would add 10 896 megawatts to South Africa’s national grid, expanding Eskom’s production by more than 25 percent, the company said on Monday.

The projects have been stalled by labour disruptions and equipment malfunctions. Stockpiling of coal for Medupi stopped in March after workers at Exxaro Resources, an Eskom contractor, went on strike. A month later Eskom said Hitachi Kaefer would test and repair about 9 000 faulty welds on a boiler at the project.

Construction at Kusile, in Mpumalanga province, was disrupted in April because of a labour dispute.

“It’s not good news to wait another six months, it does add to Eskom’s costs and it does mean that payback is delayed,” said Mike Schussler, the chief economist at Economists.co.za.

“For the country that’s not good news because the government is guaranteeing that debt,” he added.

The risk of South Africa’s credit rating being downgraded next year has risen to about 70 percent from 65 percent following the power plant delays, according to Schussler. That was due to the extra costs combined with an increased chance of power shortages restraining economic growth, he said.

Eskom will attempt to “claw back” as much money as possible from contractors responsible for the delays, the utility’s finance director, Paul O’Flaherty, told reporters on Monday. More than 80 percent of the required funding had been secured for the three projects, Eskom said.

The delays would not force Eskom to raise more money to complete Medupi despite the higher costs associated with the project, Steenekamp said.

But Kusile, which will be the world’s third-biggest coal-fired plant when completed, would “probably” need additional finance, he said.

Eskom had a national long-term rating of AA+ and local currency rating BBB+, in line with the South African government, Steenekamp said.

South Africa’s power demand has threatened to eclipse Eskom’s capability, especially during the winter months.

Peak demand came within 0.1 percent of its 35 780MW capacity on June 10, the utility said at the time.

The delays came amid an “already tight system,” the Public Enterprises Department said in a statement yesterday.

Public Enterprises Minister Malusi Gigaba had asked Eskom to produce plans to ensure the country’s electricity supply was maintained, it said.

Running thin

The National Energy Regulator of SA gave Eskom permission in February to raise annual prices by an average 8 percent, half the increase the utility applied for. Eskom expects to earn R862bn over the next five years.

Electricity tariffs would not be increased further as a result of the overruns, the utility said on Monday.

Eskom is also being squeezed by low power output, crimping revenue, and higher costs caused by a weaker rand. The currency has dropped 17 percent against the dollar this year, the worst of 16 major currencies tracked by Bloomberg.

“Energy reserves are already running very thin, they are trying to manage demand, so they won’t be able to sell that power,” Steenekamp said.

“We’ve seen the rand weaken, so any imported materials such as machinery, boilers and some steel will be coming at a higher cost.”

The rand rose 0.3 percent to R10.1400 a dollar by 8.36am yesterday. The yield on the benchmark government rand bond due December 2026 fell two basis points to 8.10 percent, while yields on Eskom’s 2021 dollar-denominated bond climbed by one basis point to 5.98 percent.

Power delays due to problems with infrastructure is one of the biggest issues affecting South Africa’s economy at present, according to Schussler.

“It’s a never-ending story,” he said. –

Kevin Crowley and Paul Burkhardt - Bloomberg