The bond market is pricing Eskom risk at its best level yet. At least that is what we must conclude from the relative yield of Eskom’s guaranteed bonds vs nonguaranteed bonds.
The guaranteed bonds have the full government balance sheet behind them, while the nonguaranteed ones have recourse only to Eskom’s balance sheet. Bloomberg data shows the difference between the two yields has fallen to just 37 basis points, from post-Covid highs of more than 450 basis points in mid-2022.
That is a signal that the market perceives a dramatic turnaround taking place at Eskom. And a big turnaround it would have to be from the most recent Eskom results announced in December — several months after deadline and riddled with serious irregularities.
The financial year to March 2024 had 329 days of load-shedding, the most yet, and a loss before tax of R25.5bn. Among the myriad issues of corruption, the utility is dealing with a syndicate that was producing fake prepaid electricity tokens. Eskom doesn’t know how many have been created and therefore what its future liability for these looks like. A huge clean-up job is also still under way to deal with corruption in procurement.
But the performance of the business since the current board took control in October 2022 under chair Mteto Nyati is winning over the sceptics. All new leadership teams tend to make the situation they take on seem as bad as possible, with big bath accounting to set a low baseline. But Eskom’s baseline could hardly have been worse. The strategy of deliberately accepting load-shedding to get on top of the maintenance backlogs in 2023 contributed to the poor performance of 2024, but provided a clean slate for the management team under CEO Dan Marokane.
The turnaround since has been impressive. In December the utility forecast it would make an after-tax profit of more than R10bn in the 2025 financial year, the first profit in almost 10 years. We’ve had no load-shedding since the current financial year began. A process is under way to consider Eskom’s 36% increased tariff request, which is likely to result in an escalation of some proportion of that. Looking at production levels though, Eskom can start thinking about focusing on sales volume rather than price as a solution to its revenue objectives.
Load-shedding is almost certainly over, with the excess production margin growing, especially since the return to service of Koeberg’s second reactor last month. Last week capacity was several gigawatts greater than demand. It is starting to look as though Eskom needs to encourage higher electricity consumption to start to boost revenue. That is not something you would have said for at least the past 15 years.
With Kusile unit six due to come on stream next month, adding 720MW, and Medupi unit four the month after with 800MW, the excess production margin will be substantial. Eskom is running below its own estimates of unplanned outages. This excess means the utility doesn’t have to run its open-cycle gas turbines, which last year consumed R34bn in diesel to reduce load-shedding at the margin. Excess production also means Eskom can get on with the process of retiring its oldest and least efficient fleet.
Eskom’s balance sheet is also slowly being repaired through the government equity injections, but big challenges remain. The biggest problem is municipal debt arrears, which risks upsetting the whole apple cart. Despite concerted efforts by the National Treasury, the numbers just keep getting worse. For the 2024 financial year Eskom was owed R74.4bn, but that has since ballooned to R95bn. The problem used to be focused on financially distressed municipalities, but it is increasingly including large metros.
A programme in 2023 from the Treasury that encouraged municipalities to improve their performance in return for debt relief has had limited success. The issue is deeply complex — linked to the constitutional structure of municipal powers and the formulas for funding. It is also deeply politically uncomfortable to cut municipalities off, as Eskom has started threatening to do.
The improvements have been achieved while Eskom has been restructuring to create a competitive electricity market. This splits Eskom into different units, including an independent grid operator that can invest in grid capacity and buy from multiple electricity producers in a competitive market. The municipal debt situation has to be considered in this context. Eskom cannot become the supplier of last resort in a competitive market, left only with the least creditworthy customers. That would render it uncompetitive in the market.
While the resolution of municipal arrears must be part of the wider local government performance programme, Eskom’s future has to be decoupled from municipal performance. In a competitive market, well-performing municipalities will be able to buy from lower-cost providers, leaving Eskom in a spiral of weak customers undermining is balance sheet.
• Stuart Theobald is chair of research-led consultancy Krutham.
This article first appeared in Business Day.
