Treasury division
Overview

Eskom has a funding plan in place to deliver the necessary financial resources required to undertake the current build programme up to 2017. The South African government, as shareholder, recognises Eskom’s critical role in the economy and, to ensure Eskom’s financial stability, has committed R430 billion of financial support to Eskom. This consists of:
  • R350 billion in guarantees, including an additional guarantee of R174 billion provided in October 2010 (R106 billion of the guarantees have been committed)
  • R60 billion subordinated shareholder loan received in full
  • A proposed R20 billion equity injection.

The government-approved energy pricing policy aims to achieve cost-reflective tariffs that will reflect the full economic cost of supplying electricity to customers in terms of the current multi-year price determination (MYPD 2). The current determination has one further 25% increase for 2012/13. In order to obtain a cost-reflective tariff, Eskom requires an additional two increases of 25% in addition to those allowed in the MYPD 2 before moving to an inflation-related increase. While at this stage Eskom’s numbers are premised on two 25% increases post MYPD 2, Eskom does review scenarios to ascertain the impact of a longer phase-in to a cost-reflective tariff.

Eskom has had discussions with government around the use of the guarantees based on Eskom’s objective of achieving a standalone investment grade credit rating by 2014/15. Government and Eskom agree that the guarantees are to be utilised as a safety net, and that Eskom needs to define any further utilisation of them taking into account market dynamics.

Looking ahead, funds for the next 12 to 18 months will be sourced mainly through a combination of issuing international and domestic bonds, export credit financing, development financing institutions and the domestic money market.  


Benchmarking

Eskom’s first Treasury priority is that of liquidity, which needs to be balanced with the management of interest rate, currency, counterparty/credit, and re-financing risks. Eskom benchmarks its Treasury activities, where possible, against external observable data. Funding is benchmarked to relevant peers at the time of financing, namely other utilities, relevant emerging markets and the Sovereign, taking into account the volume of funding required, capacity and tenor available in various markets, required covenants and profile of the borrowings.

 

The gap between government and Eskom bonds is linked to the overall interest rate cycle, overall demand for scarce tenors and the need to enhance the attractiveness of certain issuance points on the curve.

 

The spread between the US Treasury 10-year, Eskom US Bond and the RSA government US Bond.

 

The spread between the Eskom 2013 and South African government Eurobonds contracted over the credit crisis from 300 basis points to the current 27 basis points.