Debt agencies hold out on Eskom
S&P and Moody's welcome state loan but await details before changing utility's ratings
February 22, 2008
By SAMANTHA ENSLIN-PAYNE
Durban - Rating agencies Moody's and Standard & Poor's consider the government's decision to lend Eskom R60 billion as a positive step but are maintaining their outlook on Eskom, which was downgraded recently, until further details are available.
Moody's downgraded its outlook on Eskom last year while S&P last month placed the utility on credit watch with negative implications due to concerns over Eskom's funding of new generating capacity and high primary fuel costs.
The finance minister, Trevor Manuel, said this week that the government would set aside R60 billion for Eskom, of which a third is likely to be used over the next three years.
Eskom plans to spend almost R350 billion in the next five years on new power plants, transmission and distribution.
Yesterday Konrad Reuss, managing director of S&P in South Africa, said: "We see this as a positive signal as government has recognised the need to do something about Eskom's balance sheet."
But S&P still has Eskom on a credit watch until it holds further discussion with it regarding its medium-term spending plans, the R60 billion loan and the medium-term outlook for the electricity tariffs. "Then we can make assumptions about whwaitat they can borrow," Reuss said.
Craig Jamieson, country manager for Moody's South Africa, said: "The announcement within the budget speech yesterday of monetary support for Eskom is a positive step."
In July Eskom's A1 rating was affirmed by Moody's but the baseline credit assessment (BCA), one of Moody's four rating inputs for government-related bond issuers, was increased to 8 points from 7. The BCA ranges from 1 to 21, with 1 representing the lowest credit risk. It measures the likelihood of an issuer requiring an extraordinary bailout.
This was due to cost pressure mounting from high primary fuel costs and a looming debt burden from a planned capital expenditure programme, combined with a regulatory regime that did not permit full pass-through of costs by the utility to the consumer.
In a statement issued this week, Moody's said in order to maintain Eskom's BCA at 8, it would expect to see a coherent financing plan to fund a defined future investment plan, combined with support on future tariffs from both the government and the National Energy Regulator of SA (Nersa).
It also said that Eskom's financial profile would come under pressure in the future. This would not only be from a debt-funded capital expenditure programme, but also operationally due to the increased cost of primary energy, which is currently disallowed as a pass-through cost by Nersa. Additionally, lost revenue as a result of load-shedding and unplanned shut-downs will place pressure on Eskom's operating margins and cash flows.
Moody's needed to be comfortable that all relevant stakeholders were aware of this potential for deterioration in Eskom's financial profile and that they would act in the best interests of the utility, it said.
For example, if Eskom was still required to spend R300 billion without increases to its revenue profile as permitted by Nersa, "Moody's would likely … adjust its view on Eskom's BCA accordingly."
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