Zesa Defaults

via allAfrica.com: Zimbabwe: Zesa Defaults 15 January 2015

POWER utility, ZESA Holdings, is saddled with a staggering debt amounting to about US$800 million, with most of it now due but insufficiently covered, the Financial Gazette has established. This renders the country’s power supply position precarious, and could dent efforts to turnaround the struggling economy.

In its latest financial statements for the year to December 2013 published last week, debt for the power generation and supply group amounted to US$774,7 million. What makes it more worrying is that the group had defaulted on principal and interest repayments on all foreign loans amounting to US$750,2 million. The financial statements indicate that some of the institutions’ debts have gone for nearly two decades without being repaid and are long overdue.

What this means, according to stipulated loan agreements, is that the full amount totalling US$750,2 million is now due. The group’s current liabilities totalled US$1,1 billion, far outstripped its current assets by US$80,2 million. In the prior comparative period in 2012, the company recorded a negative working capital of US$461,2 million. This implies that the company may not be able to meet its current liabilities as they fall due. The holding company and all its subsidiaries posted negative working capital.

ZESA Holdings recorded a negative working capital amounting to US$67,4 million, while the Zimbabwe Power Company (ZPC), the Zimbabwe Electricity Transmission and Distribution Company (ZETDC), ZESA Enterprises and PowerTel Communications recorded losses of US$55,2 million, US$589 million, US$9 million and US$4,3 million respectively. This has created significant doubt about the group’s ability to continue as a going concern. Even the group’s external auditors, IBDO, have expressed concern over this material uncertainty.

ZESA, like most government entities which lag behind in their financial reporting, has not yet compiled financial statements for the year to December 31, 2014, for which most private sector companies will report by March 31, 2015. ZESA’s financial statements were signed off by the board of directors and external auditors in June 2014, but were only released last week.

The Financial Gazette is reliably informed that the debt situation could have worsened, considering that even interest on the ex-Central African Power Corporation (CAPCO) debt amounting to US$115 million is not part of the total debt reported in the review period. CAPCO was a company co-owned by Zimbabwe and Zambia during the Federation of Rhodesia and Nyasaland. The company was, however, disbanded in 1987 and was succeeded by Zambezi River Authority.

The US$115 million interest was accrued from a US$71 million debt to Zambia which included shared costs of the construction of the Kariba Dam and associated infrastructure during the tenure of CAPCO. Zimbabwe, however, last year paid off the US$71 million debt after Zambia threatened to pull out of a deal for the two southern African countries to jointly construct the massive Batoka Hydro Power Station on the Zambezi River.

The massive ZESA debt has resulted in a weak balance sheet, presenting a major challenge to the group which is unable to leverage on its balance sheet to raise funding to adequately maintain and rehabilitate its infrastructure. There is now growing concern that the debt could affect the utility’s creditworthiness, meaning that in future, with a balance sheet that includes increased payables, it may not be able to access credit.

It worsens the group’s ability to deliver efficiency as evidenced by the utility’s cost of generating electricity which ballooned to US$177,6 million in the review period compared to US$156,4 million in the prior year. The situation also presents a major challenge in that attracting funds for planned capital projects would be difficult as it portrays a low credit rating for the utility.

A stronger ZESA would help anchor confidence in Zimbabwe’s electricity industry. The situation, however, has been exacerbated by government, the utility’s sole shareholder, whose coffers are almost empty. Government has not been able to bailout ZESA to facilitate the utility’s recovery. ZESA – a strategic parastatal which government should ensure is operationally and financially sustainable – has failed to end a run of operating losses and now needs more fiscal support than previously thought.

Government had hoped that the unbundling of the group would provide an opportunity to transfer the legacy debt to government and refinance its short positions on the balance sheet. Under the terms of the proposed unbundling, the transfer could have provided “closure” on long running obligations and protected the group from current and future claims. The move would have strengthened the balance sheet of the group. ZESA Holdings has four subsidiary companies namely ZPC, an electricity generating unit, ZETDC, PowerTel and ZESA Enterprises. However, former energy and power development minister, Dzikamai Mavhaire (pictured), overturned the restructuring plan initiated by his predecessor, Elton Mangoma, when he assumed office in 2013.

Mavhaire was, however, fired in December for alleged incompetence. Among those still owed by ZESA are the International Bank for Reconstruction and Development (US$139,6 million) and the European Investment Bank -EIB- (US$59,5 million). Government has been courting the EIB for funding of several projects in the country, but sources have said any funding by the EIB would be made directly to the country’s banking sector to avoid government.

ZESA also owes the Finish Export Credit Limited US$24,2 million and Afreximbank is owed US$22,6 million. The Afreximbank loan which was used towards the refurbishment of Bulawayo Power Station has, however, been secured through the assignment of the utility’s two selected trade debtors namely Hippo Valley Estates and Murowa Diamonds. Other institutions which have not been paid their dues include Nordbanken (US$11,4 million), Lloyds Bank (US$13,1 million), ZTE Huawei (US$8,5 million), Societe Generale (US$7,9 million) and KFW IPEX Bank (US$6,3 million) and Barclays Bank (US$4 million).

On the domestic front, the utility’s biggest debt is that from the Reserve Bank of Zimbabwe which amounts to US$100,4 million. This relates to electricity import invoices for the period 2006 to 2008 that were paid by the central bank on behalf of the utility. ZESA also owes the government of Zimbabwe about US$59,2 million, an amount which is not secured, interest free and has no fixed repayment period.

Others include BanABC (US$15,4 million), Infrastructural Development Bank of Zimbabwe (US$20 million) and CBZ (US$3,5 million). The financial statements show that ZESA has narrowed its loss to US$17,3 million for the year to December 2013 compared to US$155,6 million recorded during the same period in prior year. ZESA attributed the loss largely to the level of allowances for credit losses.

Although lower than the previous year, it remained high as customers continued to face difficulties in settling their bills. The group allowed US$100,9 million for credit losses which comprised of US$44,9 million provided for during the year and US$56 million (fair value adjustment on domestic debtors). In 2012, ZESA allowed US$178,2 million for credit losses.

The group is faced with low collection rates as some customers have been failing to pay their bills resulting in the electricity debtor’s book ballooning to US$879 million from US$797,5 million in the previous year.

Due to antiquated distribution equipment, the company’s cost of distributing electricity increased to US$21,7 million from US$20,7 million in the year before. However, there is a significant improvement in electricity sales which increased to US$876 million from US$799,4 million during the prior comparative year in 2012. To ensure that the entities continue as a going concern, ZESA has implemented a prepayment system, a development could significantly resolve the problem of debtors.

Cash flows are expected to improve as cash would no longer be locked up in receivables. Government which is now faced with a huge challenge to take action that can help heal the company which faces a negative impact on operations has undertaken to advance the company with loans to recapitalise the business. ZETDC had applied for review in tariffs in 2014 to further align them to cost of operation but this has since been turned down by the regulatory authority, the Zimbabwe Energy Regulatory Authority.

The group is also working on the expansion of Kariba South Power Station and Hwange Power Station to add 300 megawatts (MW) and 600MW respectively to the national grid. The Zimbabwe and Zambia governments are also working on the Batoka Project which has an estimated combined output of 1 600MW and is being driven by the Zambezi River Authority.