Treasury will not cover Eskom’s nuclear plans

The Treasury has made it clear that Eskom’s existing R350bn guarantee facility cannot be stretched to cover a new nuclear-build programme.

But it has confirmed that the facility, whose March 2017 expiry date prompted rating agency S&P Global to downgrade Eskom’s rating deep into junk territory last week, will be extended to cover the much-delayed new power stations Eskom is already building.

S&P downgraded Eskom’s rating from an already sub-investment grade BB+ to just BB, citing the utility’s dispute with the regulator over electricity tariffs as well as the expiry of the guarantee line in March 2017.

The downgrade came ahead of S&P’s scheduled update of SA’s sovereign rating on Friday, raising fresh fears in the market it might presage a downgrade.

However, S&P analyst Mashiyane Mabunda said this week the agency had been required to review Eskom by the end of November, in line with European and SA rules.

RMB analyst Elena Ilkova cautioned, however, that another downgrade to Eskom’s rating was "not out of the question" if S&P downgraded the government’s sovereign rating.

The government provided a total of R350bn of guarantees to Eskom in 2009 and 2011 to close a funding gap that put in question Eskom’s ability to complete its new Medupi, Kusile and Ingula power stations.

Treasury said the guarantee facility was originally provided to Eskom to support the financing of the new build programme, in other words, to enable the completion of the power stations.

At the time when the facility was provided, it was anticipated that the power stations would be completed in 2017, Treasury said, and hence the guarantee availability period was set to expire in line with the expected completion date.

But the programme is running many years late and as a consequence of the delays, the availability of the guarantee facility will be extended. The process was already under way, Treasury said, as Eskom had submitted a formal application to the government.

This was in line with the extension of the loan being used to finance Medupi, which had already been approved by the World Bank, with support from the government, it said.

S&P said last week although Eskom had initiated a process to extend the guarantee line, there was "still no decision by the government to extend the line until completion of Eskom’s capital spending programme (anticipated in 2023)".

"We think this raises potential risks to the likelihood of extraordinary government support to Eskom," S&P said.

However, Treasury director-general Lungisa Fuzile said this week: "The discussions that are under way between Eskom and the National Treasury will certainly lead to the necessary extension until the relevant build programme is completed."

Eskom has drawn down only R176bn of the guarantees. Fuzile said all of the debt instruments would remain guaranteed through maturity and Eskom could still use the guarantees to support any borrowing for the programme that was included at the time of the application.

That did not include nuclear. "The R350bn was never given for nuclear," Fuzile said. "If Eskom were to want to use the guarantee for anything other than what was in the build programme they would have to come and negotiate with us."

Eskom has reiterated it wants to start soon on a nuclear-build programme analysts expect would cost anything up to R1-trillion, and the funding of which would require extensive government guarantees.

But Finance Minister Pravin Gordhan has made it clear he would not approve anything SA could not afford.

Civil action group Outa described the S&P downgrade as "yet another vote of no confidence in Eskom’s financials and governance".