Financing of Kusile and Medupi power plants, South Africa. A research paper prepared for BankTrack and Pacific Environment

Transcription

1 Financing of Kusile and Medupi power plants, South Africa A research paper prepared for BankTrack and Pacific Environment

2 Financing of Kusile and Medupi power plants, South Africa A research paper prepared for BankTrack and Pacific Environment 26 October 2010 Jan Willem van Gelder Petra Spaargaren Profundo Radarweg NT Amsterdam The Netherlands Tel: profundo@profundo.nl Website:

3 Contents Introduction... 1 Chapter 1 Eskom Company profile Expansion: Kusile and Medupi... 2 Chapter 2 Financing of the Medupi power plant Introduction Financing Equity Multilaterals Financial institutions Conclusion... 6 Chapter 3 Financing of the Kusile power plant Introduction Financing Multilaterals Loans from financial institutions Conclusion... 8 Chapter 4 Eskom s funding gap Finance needed Loans and bonds Multilaterals and other agencies Equity stake Appendix 1 References... 12

4 Introduction This report analyses the financing of two new coal-fired power plants which are currently being constructed by the South African electricity company Eskom: Kusile and Medupi. Chapter 1 provides a short company profile of Eskom and describes the company s plans for the Medupi and Kusile power plants, including total project cost and the time frame of the projects. Chapter 2 analyses the financing of the Medupi power plant, describing which sources of finance Eskom has secured to date for the project and how much money is still needed. In Chapter 3, a similar analysis is provided for the Kusile power plant. Chapter 4 covers the current funding gap of Eskom for both projects and assesses possible sources of finance to close this gap. A summary of the findings of this report can be found on the first pages of this report. -1-

5 Chapter 1 Eskom 1.1 Company profile Eskom is a South African state-owned electricity company that generates about 95% of the electricity consumed in South Africa and approximately 45% of the electricity consumed in the whole African continent. Eskom is headquartered in Johannesburg and has its operations spread throughout South Africa. In 2008 it also opened an office in London. At the end of March 2010, Eskom owned total assets of US$ 33.3 billion. In the year the company generated revenues of US$ 9.6 billion, resulting in profits after tax of US$ 512 million. The sales of Eskom amounted to 218,591 GWh, of which 205,364 GWh (94%) was sold in South Africa Expansion: Kusile and Medupi In the face of severe power shortages, in 2007 Eskom awarded contracts to build two identical coal-fired power plants. Known as Medupi and Kusile, each plant would have a generating gross capacity of around 4,800 MW. The combined output of the plants would represent about 25% of South Africa s power generation capacity. 2 Both plants are currently under construction. The Medupi power plant is located in Lephalale, Limpopo Province. The power plant will have six units of 794 MW each with a total installed capacity of 4,764 MW. The first unit is scheduled to be commissioned in mid-2012, with the last unit scheduled for commissioning by The coal for the power plant will be sourced from Exxaro Coal's Grootegeluk coal mine, which will increase production by 14.6 million tonnes a year to supply the new power plant, for an investment of R 9.5 billion (US$ 1.4 billion). 4 In September 2010 Eskom set the completion date for the first of Medupi's units back by three months to September 2012, and energy analysts in the private sector even fear Medupi could be completed as many as two years behind schedule. 5 The Kusile power plant is located in the proximity of Witbank, Mpumalanga province. The plant will have six units of 800 MW each with a total installed capacity of 4,800 MW. The first unit is planned for commissioning by 2013, and the other 5 units will follow with an approximate 8 months intervals, with the last unit planned to be commissioned at the end of October Table 1 presents a summary of the time-frame of both expansion projects. Table 1 Time frame of Medupi and Kusile (MW) Total Medupi 1, , ,764 Kusile 1, , ,800 Source: Eskom, Status report on capacity expansion projects, Website Eskom, Viewed in October

6 Table 2 provides an overview of the total approved project costs of Medupi and Kusile, as well as the capital expenditure until March The table shows that the Medupi power plant will cost approximately US$ 17 billion, and the Kusile power plant will cost US$ 19 billion. Until March 2010, Eskom spent US$ 4.3 billion on Medupi and US$ 2.0 billion on Kusile. This implies that the company has still to spend almost US$ 30 billion on the projects. Part of this amount will be paid by undrawn credit facilities and part will be financed by new credit facilities. Table 2 Project costs of Medupi and Kusile Total approved project costs (US$ mln) Expenditure until March 2010 (US$ mln) Medupi 16,976 4,339 Kusile 19,141 1,988 Other projects 13,732 7,057 Total 49,849 13,384 Source: Eskom, Annual Report 2010, Eskom, June The following chapters will discuss the financing of the Medupi and Kusile power plants in more detail. -3-

7 Chapter 2 Financing of the Medupi power plant 2.1 Introduction Of the Medupi and Kusile power plants, Medupi is the more advanced, both in terms of construction and in terms of finance. The approved project cost of the Medupi power plant is approximately US$ 17 billion. Figure 1 provides an image of the Medupi power plant at the start of construction (left) and almost two years later (right). Figure 1. The Medupi power plant as at June 2007 (left) and April 2009 (right) To finance the Medupi power plant, Eskom has explored a range of possibilities, including own funds, multilateral agencies, domestic and foreign financial institutions and other sources. In 2009, it was announced that the total project cost would be financed by: 7 Equity (Eskom) 53% US$ 8,997 million Multilaterals 36% US$ 6,111 million Financial institutions (including ECAs) 11% US$ 1,867 million The following paragraph will discuss these sources in more detail. 2.2 Financing Equity Around 53 per cent of the total finance for Medupi (around US$ 9 billion) is supposed to be provided by Eskom itself. 8 Eskom is government-owned, and the government of South Africa will contribute a large amount of the funding for the projects. The following finance is provided by the South African government: In 2009, the South African government committed a R 60 billion (US$ 6.2 billion) loan to Eskom. The loan would be used for the company s capital expenditure programme, and be used especially for Medupi. 9 Initially, it was anticipated that Eskom would receive R 12 billion (US$ 1.2 billion) per year for five years, but when it became clear that the Medupi power plant faced a funding shortfall, the government was expected to provide the loan over a shorter period. As the end of March 2010, two-thirds of the loan (US$ 4.1 billion) was provided

8 The South African government also provided a guarantee of R 176 billion (US$ 18.1 billion) to enable Eskom to raise debt, of which R 117 billion (US$ 12.0 billion) is currently committed. This guarantee includes existing debt issued under Eskom s DMTN programme (see below). 11 Apart from direct government support, Eskom will also use part of its own capital reserves to fund Medupi and its other expansion projects. These capital reserves are partly financed by Eskom s R 65 billion (US$ 8.9 billion) Domestic Medium Term Notes (DMTN) programme. The company s bond programme was listed with the Bond Exchange of South Africa (Besa) in March This programme includes: 12 the ES26 bond: 7.85%, maturing 2 April 2026; the ES33 bond: 7.5%, maturing 15 September 2033; two Floating Rate Notes, maturing in 2026 and Multilaterals Around 36 per cent of the total finance for Medupi (around US$ 6.1 billion) is supposed to be provided by multilaterals. 13 The following information could be found on the role of multilaterals in financing the Medupi power plant: In November 2008, Eskom secured a US$ 500 million non-sovereign loan from African Development Bank (AfDB) to support its capital expenditure programme. The proceeds of the loan were used for implementing Medupi and Kusile power plants. 14 In November 2009, it was announced that Eskom had secured a US$ 1.86 billion loan from AfDB to construct the Medupi power plant. The funding was used to fund the supply and installation of boilers and turbo-generators. 15 In April 2010 Eskom secured a US$ 3.75 billion loan from the World Bank to increase South Africa s generation capacity. Of the loan, US$ 3.05 billion was allocated for completion of Medupi. A further US$ 260 million was allocated for investments in renewal energy and US$ 485 million was set aside for investment in low carbon efficiency components, such as road-to-rail coal transportation. 16 These multilaterals have to date provided US$ 5.16 billion 1, or 30.4% of the total project costs of Medupi Financial institutions The following information could be found on the role of foreign financial institutions (including Export Credit Agencies (ECAs)) in financing the Medupi power plant: In September 2008, Eskom signed a US$ 342 million export credit deal with German government-owned development bank KfW. The 12-year loan was used to partially finance six boilers that the Hitachi Power consortium supplied for the Medupi power plant. 17 In May 2009, Eskom secured a 530 million (US$ 740 million) loan from a syndicate of European banks. The proceeds were used to fund part of the Medupi boiler contract with Hitachi for the Medupi power plant. The following banks participated in the facility: 18 BHF Bank, part of Sal. Oppenheim Group Germany 1 It is assumed that half of the November 2008 loan was directed to Medupi and half was directed to Kusile. -5-

9 BNP Paribas Calyon Credit Agricole Commerzbank HypoVereinsbank KfW Natixis Germany Germany Germany In December 2009, Eskom secured a 1,185 million (US$ 1,704 million) ECA-covered loan from French institutions to fund turbine contracts with Alstom for the Medupi and Kusile plants. The following banks participated in the loan: 19 BNP Paribas Calyon CIC Natixis Société Générale The French export credit agency COFACE was providing cover. Eskom will repay the loan within 12 years after the commissioning of the facilities. In August 2010, Eskom secured another 63.7 million (US$ 86.9 million) Export Credit Agency (ECA) covered loan from Crédit Agricole (). The loan would be used for the control and instrumentation contract supplied by Alstom to the Medupi power plant. The deal has tenor of 17 years with five years for drawdown. 20 These financial institutions together have provided US$ 2,020 million 2, or 11.9 per cent of the total project costs of Medupi. 2.3 Conclusion Table 3 demonstrates the several sources of finance which have been secured to date and the total amount of finance still needed. The table shows that Eskom has already secured US$ 13.4 billion for its Medupi project. To complete the financing cost, approximately US$ 3.6 billion is still needed. Part of this amount will probably be supplied by Eskom through its own capital reserves. In addition, Chapter 4 discusses other potential financing sources for Eskom. Table 3 Financing of Medupi Amounts provided (US$ mln) Amounts not yet secured (US$ mln) Amounts expected (US$ mln) Eskom 6, ,797 8,997 Multilaterals 5, ,111 Financial institutions 2, ,867 Total 13,380 3,596 16,976 2 It is assumed that half of the December 2009 loan was directed to Medupi and half was directed to Kusile. 3 It is assumed that the entire loan by the government of South Africa will be used to construct the Medupi power plant. -6-

10 Chapter 3 Financing of the Kusile power plant 3.1 Introduction As opposed to much lower cost estimates at the start of construction, in 2010 it was announced that the approved project costs of the Kusile power plant were approximately US$ 19 billion. The increased costs are largely due to delays and higher interest charges. 21 Figure 2 presents an image of the project site of the Kusile project at the start of construction in mid-2008 (left) and 1.5 years later (right). Figure 2. The Kusile power plant as at July 2008 (left) and January 2010 (right) To finance the Kusile power plant, Eskom has explored a range of opportunities. However, a very large amount of finance for this project has yet to be secured. This chapter summarizes the few credit facilities that have already been provided for the Kusile power plant. Chapter 4 discusses other potential financing sources to complete the power plant. 3.2 Financing Multilaterals The following information could be found on the role of multilaterals in financing the Kusile power plant: In November 2008, Eskom secured a US$ 500 million non-sovereign loan from African Development Bank (AfDB) to support its capital expenditure programme. The proceeds of the loan were used for implementing Medupi and Kusile power plants. 22 The total amount provided to the Kusile project by multilaterals to date amounts to US$ 250 million, or 1.3% of total project cost. In September 2010, AfDB president Donald Kaberuka said that the financial institution would consider further funding to Eskom, because AfDB had full confidence in the financial sustainability of Eskom Loans from financial institutions The following information could be found on the role of financial institutions in financing the Kusile power plant: -7-

11 In December 2009, Eskom secured a 705 million (US$ 1,038 million) 12-year loan from a syndicate of banks. These loans, covered by the German export credit agency Euler Hermes, were used to fund part of the foreign content of the Kusile boiler contract with Hitachi Power Europe (HPE). The loan was divided in three parts: a euro floating rate facility, a euro fixed rate facility and a South African rand floating rate facility. The following banks participated in the euro floating rate facility: 24 Bank of Tokyo-Mitsubishi UFJ Deutsche Bank HSBC KfW Japan Germany United Kingdom Germany KfW (Germany) also participated in the fixed rate facility. The following banks participated in the South African rand floating rate facility: Standard Bank Nedbank Capital Rand Merchant Bank South Africa South Africa South Africa The loans are repayable over a period of 12 years, starting six months after the commissioning of each unit of the Kusile power plant. 25 In December 2009, Eskom also secured a 1,185 million (US$ 1,704 million) ECAcovered loan from French institutions to fund turbine contracts with Alstom for the Medupi and Kusile plants. The following banks participated in the loan: 26 BNP Paribas Calyon CIC Natixis Société Générale The French export credit agency COFACE was providing cover. Eskom will repay the loan in 12 years after the commissioning of the facilities. To date, the total amount provided by financial institutions to the Kusile power plant is US$ 1,890 million, or 9.9 per cent of the total project costs. 3.3 Conclusion Table 4 provides an overview of the finance already secured for the Kusile power plant, as well as the amount needed. The table shows that Eskom has only secured US$ 2.1 billion for the Kusile power plant, and that it still needs US$ 17 billion. Part of this amount will probably be supplied by Eskom through its own capital reserves. In addition, Chapter 4 discusses other potential financing sources for Eskom. -8-

12 Table 4 Financing of Kusile Amounts provided (US$ mln) Amounts yet to be secured (US$ mln) Total project costs (US$ mln) Eskom??? Multilaterals 250?? Financial institutions 1,890?? Total project cost 2,140 17,001 19,141-9-

13 Chapter 4 Eskom s funding gap 4.1 Finance needed In its annual report of 2010, Eskom highlighted a funding shortfall of R 190 billion (US$ 25.7 billion) over the next seven years for all its capital expenditure projects. The largest part (US$ US$ 21.1 billion is needed for the Medupi and Kusile power plants. The previous chapters showed that the Kusile power plant still needs an additional US$ 17.0 billion, while the Medupi power plant still needs approximately US$ 3.6 billion in funding. Part of this funding will be supplied Eskom through its own capital reserves. Still, a very large amount of external finance will have to be raised. This chapter will look at the various options Eskom has to close its funding gap. First of all, Eskom has indicated that it wants to implement a cost savings strategy aimed at saving approximately R 20 billion (US$ 2.7 billion) over the next seven years. The savings would come mainly from implementing efficiencies in supply chain processes, streamlining the business and removing duplications. 27 Further, it must be noted that the South African government has indicated that it cannot fund any further portion of Eskom s capital expenditure programme above the R 60 billion (US$ 6.2 billion) loan it has already committed in 2009 and its loan guarantees of R 176 billion (US$ 18.1 billion). 28 Next to its internal capital reserves and indicated cost savings, Eskom therefore has three major options to address its funding gap: Attract new loans and bonds in international debt markets, with the help of the government guarantee; Attract funding from multilaterals or other agencies; Sell an equity stake in the Kusile power plant. In April 2010, Eskom appointed JP Morgan (United States) to advise on a general funding plan which could include these options. 29 The following paragraphs will discuss these options in more detail. 4.2 Loans and bonds Eskom expects to fund a significant portion of the capacity expansion programme in various debt markets, especially the international bond and loan markets. In May 2010, Eskom s finance director Paul O Flaherty said the issuance of bonds to foreign investors was expected to fund a large part of committed capital expenditure. 30 The last time that Eskom issued new bonds on the international market was in February These bonds mature in March 2013, and are rated BBB+ by Standard & Poor's, matching SA's sovereign rating. 31 Eskom is working with the South African government to use the existing unutilised government guarantee of around US$ 6.1 billion. The government guarantee strengthens Eskom s credit profile and turns it into a relatively strong investment-grade borrower. The financial institutions mentioned in the previous chapters as well as other financial institutions could become important in the future funding of especially the Kusile power plant, by providing loans or helping the company to issue bonds. -10-

14 4.3 Multilaterals and other agencies Possible sources of finance for Eskom s expansion projects are the following multilaterals and other agencies: AfDB, which has indicated in September 2010 that it considers to finance the expansion projects of Eskom further. When AfDB president Donald Kaberuka was asked if the bank would consider providing funding for Kusile, Kaberuka indicated that the bank would consider any project which is financially viable, makes economic sense and helps South Africa close the energy gap. 32 The United States Export-Import Bank is considering to finance the Kusile power plant. The bank is currently preparing for decisions regarding financing of Kusile. At the end of August 2010, the bank already unanimously approved another major coal-fired power plant, located in India. 33 In May 2010 it was announced that the Public Investment Corporation (PIC), South Africa's biggest investment fund, planned to invest up to R 9 billion (US$ 1.2 billion) in the expansion projects of Eskom. According to Chief Investment Officer Matjila, the investment had to be made in No recent information could be found on the investment. 4.4 Equity stake In its application in 2009 for electricity price increases, Eskom indicated that it considered to attract private equity funding of R 20 billion (US$ 2.7 billion) to R 40 billion (US$ 5.4 billion) from the sale of a 30% to 49% stake in Kusile power plant. 35 In April 2010, Eskom appointed Credit Suisse (Switzerland) to advise on the Kusile stake sale and JP Morgan (United States) to advise on a general funding plan. In May 2010, Eskom would embark on domestic and international roadshows to test market appetite for the equity stake. According to finance director Paul O Flaherty, the sale of a majority stake to investors would also be considered if this is necessary to attract investors. However, this would have to be approved by the board of directors of Eskom. 36 To date, no deal has been closed. -11-

15 Appendix 1 References 1 Eskom, About Eskom, Website Eskom, Viewed in October 2010; Eskom, Integrated Report 2010, Eskom, June Modern Power Systems, Medupi and Kusile: supercritical giants of South Africa, Modern Power Systems, April Eskom, Progress of constuction at Medupi power station, Website Eskom, Viewed in October Exxaro, Coal growth prospects, Website Exxaro, Viewed in October Mail & Guardian, Eskom's Medupi delays could leave consumers in the dark, Mail & Guardian, 21 September Eskom, Status report on capacity expansion projects, Website Eskom, Viewed in October AfDB, Medupi Power Project: Project appraisal report, AfDB, 14 October AfDB, Medupi Power Project: Project appraisal report, AfDB, 14 October Eskom, Annual report 2010, Eskom, June Eskom, Annual report 2010, Eskom, June Eskom, Annual report 2010, Eskom, June 2010; 25 Degrees in Africa, Eskom secures support for capital expansion, 25 Degrees in Africa, Volume 4, Journal 1 - March Eskom, Annual Report 2007, Eskom, June 2008; 25 Degrees in Africa, Eskom secures support for capital expansion, 25 Degrees in Africa, Volume 4, Journal 1 - March AfDB, Medupi Power Project: Project appraisal report, AfDB, 14 October Thomson One Database, Tearsheet , 12 November 2008; AfDB, Medupi Power Project: Project appraisal report, AfDB, 14 October AfDB, AfDB Helps South Africa Tackle Energy Crisis-Approves 1.86 Billion Loan for Medupi Power Project, AfDB, 26 November Africa Today, AfDB lends South Africa's Eskom USD 2.8bn, Africa Today, 30 November 2009; TendersInfo, South Africa: AfDB Loans Eskom R20 Billion for Medupi Project, TendersInfo, 30 November Africa Today, SA's Eskom loan to be probed by World Bank, Africa Today, 5 August Agence Presse, A German bank lends 342 mln dlrs to South Africa utility, Agence Presse, 10 September Eskom, Eskom signs an export credit agency loan for EURO 530M with 7 European banks, Eskom, 21 May Global Insight, Eskom Secures Loan from European Banks to Fund Expansion in South Africa, Global Insight, 22 May Eskom, Annual Report 2010, Eskom, June 2010; Agence Presse, S.Africa power firm gets loans from French banks, Agence Presse, 28 December Trade Finance Magazine, CA-CIB signs Eskom Medupi power deal, Trade Finance Magazine, 27 August 2010; TendersInfo, Eskom signs export credit agency loans, TendersInfo, 27 August The Star (South Africa), Eskom still requires R200bn in funds, no plan beyond 2017, The Star, 5 May

16 22 Thomson One Database, Tearsheet , 12 November 2008; AfDB, Medupi Power Project: Project appraisal report, AfDB, 14 October Africa Today, AfDB backs SA power utility and mulls further funding, Africa Today, 15 September Eskom, Eskom signs export credit agency loans for euro 705M with South African and International banks, Eskom, 11 December Eskom, Eskom signs export credit agency loans for euro 705M with South African and International banks, Eskom, 11 December Eskom, Annual Report 2010, Eskom, June 2010; Agence Presse, S.Africa power firm gets loans from French banks, Agence Presse, 28 December Khanyile, S., Eskom close to solving funds gap, BusinessReport, 3 June Yelland, C., Analysis: Even with World Bank's help, Eskom is in dire need of funds, The Daily Maverick, 18 March Theunissen, G., Eskom may sell control of Kusile plant, Business Day (South Africa), 13 May Theunissen, G., Eskom may sell control of Kusile plant, Business Day (South Africa), 13 May Thomson One Database, Tearsheet , 28 February 2006; Business Day (South Africa), Eskom may sell control of Kusile plant, Business Day (South Africa), 13 May Africa Today, AfDB backs SA power utility and mulls further funding, Africa Today, 15 September Carbon Control News, EX-IM board approves coal loan, Carbon Control News, 30 August Fin24, PIC to invest billions in Eskom, Fin24, 14 May 2010; Kew, J., Africa s Biggest Fund Manager Invests to Help Eskom (Update2), Bloomberg, 14 May Yelland, C., Analysis: Even with World Bank's help, Eskom is in dire need of funds, The Daily Maverick, 18 March Theunissen, G., Eskom may sell control of Kusile plant, Business Day (South Africa), 13 May