Moody’s approves of Eskom’s 15% tariff hike application

Eskom’s application for a 15% tariff hike in each of the next three years is credit positive and will allow the power utility to address rising operating costs and its capital expenditure programme, which includes the completion of coal-fired power stations and new investments, according to Moody’s Investor Services.
Eskom asked to the National Energy Regulator of South Africa (Nersa) in September for a 15% annual increase to electricity tariffs, starting from the next financial year, until 2022.
In a research note on Tuesday, the ratings agency said the proposed tariff increase would be "very large" in relation to expected inflation of around 5% -5.5% per annum, and Nersa has declined Eskom’s applications in the past for steep hikes to electricity prices.
"While approved tariff increases between 2009 and 2017 were above the prevailing rate of inflation, they were much lower than Eskom requested," the report read.
Moody’s has the state owned enterprise (SOE) on a B2 credit rating, which is sub-investment grade or junk status, with a negative outlook.
Higher costs
Moody’s said Eskom's debt which exceeds R350bn has risen sharply in recent years because of low tariff increases, a large capital expenditure programme, cost overruns and rising interest costs.
"A recovery in Eskom's financial metrics will depend on the extent to which its revenue is allowed to increase and its costs are contained," added Helen Francis, Moody’s Vice President, Senior Credit Officer.
According to Francis, higher costs are mainly being driven by renewable energy under the Independent Power Producer Programme (IPP).and increasing coal costs are also a factor as the supply of coal close to power stations is dwindling.
The parastal announced on Friday that it would transport 1.4 million tons of coal by train per year from Medupi in Limpopo to 10 power stations in Mpumalanga affected by coal stockpile shortages.
Eskom implemented emergency stage one load-shedding on Sunday before it was suspended at 7pm due to planned maintenance at power plants and unplanned outages. 
Find alternative solutions
Moody’s said the power utility’s financial profile was very stretched, and if Nersa approves tariffs lower than 15%, Eskom would need to reduce its operating costs, capital expenditure or find alternative solutions.
Commenting on Eskom’s staff compliment which the World Bank believes is bloated, Moody’s said the new tariff application assumes a 10% reduction in staffing levels, from 38 830 in 2018-19 to 35 000 in 2021-22, and this issue is likely to be in "political focus" in the coming months.
"Eskom expects employee costs to rise by less than inflation on average over the period. However, costs per employee are set to rise, which is likely to reflect recent above-inflation wage increases agreed with unions this year," Francis said. 
Eskom said on Friday that a Section 189 retrenchment process was underway for senior executives in the F-Band of employees, due to a new executive structure.
The deadline to send written comments to Nersa about the 15% proposed electricity tariff hike is 30 November. Public hearings will be held by the energy regulator between 14 January and 1 February 2019. Tariff decisions will be implemented from 1 April 2019 for domestic and commercial customers, and from 1 July 2019 for municipal customers.

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