South Africa LNG import project structure appeals to lenders

South Africa has structured its new gas-to-power requirements in a lender-friendly manner, paving the way for more investment in the country’s LNG imports, bankers told ICIS.

“The risk of South African utility Eskom defaulting on its payments is ring-fenced by the power purchase agreement,” said a project finance banker. “Everyone is satisfied that a default cannot happen with this structure.”

However, the project comes with other risks. Investing in South African Rand means that the project financing could appeal better to local banks rather than international lenders, possibly limiting choice for financing future LNG import projects.

For more on South Africa’s plans to import LNG see the ICIS Fact Box .

Sovereign guarantee and Eskom

Earlier this month South Africa issued its LNG-to-Power Independent Power Producers Procurement Programme (IPPPP). This could lead to the first LNG imports into South Africa if the process is successful.

Obstacles to financing include the poor financial performance of sole buyer Eskom but also how the ownership of power stations, regasification assets and LNG sales is structured.

“Someone has to guarantee the power stations’ offtake in order to finance [the project],” said an energy market analyst speaking with ICIS.

A sovereign guarantee is one way of ensuring that Eskom will pay. According to the IPPPP document, South Africa’s Department of Energy (DoE) has an implementation agreement with Eskom “providing support in the event that Eskom is unable to fulfil its payment obligations to the successful bidder.”

However, South Africa’s credit rating is set at BBB-/Baa2 by ratings agencies Standard & Poor’s and Moody’s both with a negative outlook.

“The sovereign guarantee is good. The question is how important is this sovereign rating to bankers?”, said the analyst.

Passing the costs to the consumer

The answer is not very important, according to a project financing banker.

“The sovereign guarantee is not where we look,” said a project finance banker talking to ICIS. “Our issue is repayment, and the power purchase agreement (PPA) is structured in such a way that a sovereign guarantee will never be called.”

According to the structure of the PPA, Eskom is allowed to add any additional costs from the PPA onto what it charges the consumer. South Africa’s energy regulator NERSA has approved this PPA.

“This means that the money needed to pay the PPA will not sit on Eskom’s balance sheet. It will be separate from the money needed to run Eskom, and it will be charged instead to the consumer,” said the banking source.

“A consumer cashflow underpinning the PPA removes the risk that Eskom won’t pay.”

Long-term LNG purchases

“South Africa has [in the past] fallen short of agreeing to pay a commercial price for LNG,” said Claudio Steuer, director of SyEnergy, a UK-based energy consultancy.

This unwillingness to enter a long-term contract is a factor delaying LNG imports until now.

However, under the proposed procurement plan, Eskom will be responsible for buying only the megawatt hours from the power plants.

Meanwhile, the winning bidder will take on the risk associated with the plant construction, the regasification infrastructure and the LNG supply.

This structure means South Africa will not directly enter into a long-term LNG supply contract.

“The South Africa case has stood up so far,” said the banking source.

Currency risk

From a bank lending perspective, local South African banks are well-placed to take currency risk and jurisdiction risk on the IPPPP.

For international banks, equity return in Rand poses currency risk.

“Foreign investors would need to convert a 20-year PPA into Rand. Unless they borrow or swap this at the outset they are taking on currency risk on the equity,” pointed out the project finance banker.

Rand risk could restrict the available pool of capital in the long-term. “For the first couple of gas-to-power projects it should be ok to get financing.”

“After that, it may be good for the DoE to have some kind of fund to provide liquidity if the oil prices in dollars spikes or the Rand plummets,” said the project finance banker. josie.shillito@icis.com