Eskom May Sell Control of Biggest Power Project, Offer International Bonds

Eskom Holdings Ltd., Africa’s biggest power company, may sell a majority stake in its largest power plant project and issue international bonds by August as it seeks funding for expansion needed to avoid blackouts.

South Africa’s state-owned utility may be prepared to cede control of its planned $19 billion Kusile coal-fired plant near Witbank, east of Johannesburg, if a majority stake is necessary to attract investors, Finance Director Paul O’Flaherty said in an interview from his Johannesburg office yesterday. It also may offer bonds to foreign investors to fund a “large part” of the 90 billion rand ($12 billion) Eskom needs to cover committed capital expenditure, said O’Flaherty.

Eskom, which supplies 95 percent of South Africa’s electricity, faces a 190 billion-rand funding shortfall over the next seven years as it develops power plants to avoid a repeat of outages that shut mines and factories for five days in 2008. Eskom said in January it was seeking to sell as much as 49 percent of Kusile for an estimated 40 billion rand and four months later said the cost of the project had risen 78 percent from original estimates to 142 billion rand because of increased borrowing costs and construction delays.

“We are looking particularly for an equity partner for Kusile” and plan to begin meeting potential investors in the “next month,” said O’Flaherty. “International bonds are definitely part of that solution” for covering the funding gap, he said.

Expensive Technology

Eskom plans to approach international power producers and miners as potential investors in the 4,800 megawatt Kusile plant, O’Flaherty said. AngloGold Ashanti Ltd., Africa’s biggest gold producer, said in January that Eskom would probably need to sell an entire power plant to attract investors.

“A possible sale of a major energy asset would be very good news for the risk profile of Eskom, which faces huge borrowing costs,” said Luis Costa, an emerging-markets strategist at Citigroup Inc. in London. “Any form of privatization would be looked at favorably by the market.”

The company may struggle to find buyers for the plant because it uses more expensive technology than competitors, according to Cornelis van der Waal, an energy analyst at Frost & Sullivan said by phone from Cape Town.

“It’s a world-class plant, but it’s the Rolls Royce of power stations, which doesn’t necessarily mean that it’s the most efficient way to generate power,” van der Waal said. “It would be difficult to sell a majority stake in Kusile as no one was involved in the design of the plant.”

Board Permission

Eskom would need permission from its board to sell a controlling stake as it currently has approval to offer a minority holding only, O’Flaherty said.

“We are strongly opposed to selling any part of Eskom, which we would regard as privatization through the backdoor,” said Frans Baleni, the general-secretary of the National Union of Mineworkers, which represents about half of Eskom’s workers. “No private investor is going to buy a power station unless they have a controlling stake. Private companies will also push for higher tariffs to make more profit.”

JPMorgan Chase & Co. is advising Eskom on its funding options and Credit Suisse Group AG is helping with the sale of a stake in Kusile. Eskom may issue bonds before the start of the U.S. and European summer vacation period, O’Flaherty said.

Government Guarantees

Eskom has government guarantees to cover about 60 billion rand of new international bonds left from an initial 176 billion rand agreed by the government last November, he said.

The company’s 500 million-euro ($637 million) 4 percent bonds due March 2013 are rated BBB+ by Standard & Poor’s, matching South Africa’s sovereign rating. The yield on the Eskom bonds has dropped to 4.05 percent from 11.5 percent at the end of 2008, compared with a yield of 3 percent on same-maturity government bonds in euros.

A possible sale in Eskom’s Kusile stations would “definitely” enhance the appeal of any foreign currency debt issues, as it would boost the company’s balance sheet and reduce its overall borrowing requirements, said Citigroup’s Costa.

“Depending on the pricing there would be appetite in the market to absorb the bonds,” should a part of the Kusile station be sold, said Costa.

Eskom would likely offer a higher yield than on South Africa’s government debt, said Caroline Henry, head of the company’s treasury in Johannesburg.

‘No-Brainer’

“There would be excellent pickup” on the yield, said Henry. “It’s a no-brainer” for investors, she said.

Eskom won approval from regulators in February to raise power prices by 24.8 percent for the year from April and by 25.8 percent next year and then 25.9 percent. The company will seek approval for additional tariff increases of 25 percent in 2014 and 2015, O’Flaherty said.

Further increases of that magnitude wouldn’t have been necessary had Eskom’s initial request for a 35 percent price rise for the next three years been approved, according to O’Flaherty.

“The primary thing that any investor is going to look at is the right sized tariff,” said O’Flaherty. “Any investor is going to look for a return. We are not there yet; we are not there in three years.”

To contact the reporter on this story: Garth Theunissen in Johannesburg gtheunissen@bloomberg.net

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