Eskom escapes Moody’s ratings downgrade

Cape Town - Moody’s Investors Service (Moody’s) on Monday gave Eskom a reprieve by confirming its Ba1 senior unsecured and (P)Ba1 senior unsecured MTN ratings. The rating agency has simultaneously assigned to Eskom a national scale rating of A2.za. The outlook on both ratings is negative. 

The power utility was placed on review for a potential downgrade in September over funding challenges.

"The rating confirmation reflects Eskom's ongoing access to funding, which is supported by the government's Guarantee Framework Agreement, as evidenced by the signature in October 2016 of a $500m credit facility with China Development Bank."

Moody's said Eskom has now completed 86% of its funding for 2016/17, although only 28% of the company's funding for 2017/18 has been achieved so far.

Moody's also positively views the stabilisation of Eskom's operational performance, with plant availability increasing to 78% in September 2016 from 71% in September 2015. This resulted in the absence of load-shedding for more than a year.

"Improved plant reliability combined with cost containment measures, notably in respect of primary energy costs, have boosted Eskom's EBITDA, which rose by 23% to R31.5bn in the six months to 30 September 2016. In addition, Eskom has made progress on the delivery of its capital programme, with close to 1 GW of new capacity relative to three units of the Ingula pumped storage scheme since the beginning of the year."

Moody's said these recent developments partly mitigate ongoing market concerns regarding governance, which have been heightened by the state capture report from the Office of the Public Protector, implicating Eskom.

Separately, uncertainties around Eskom's future financial trajectory remain, given pending tariff decisions, said Moody's.

Eskom and the National Energy Regulator of South Africa (NERSA) appealed against a ruling by the North Gauteng High Court that NERSA should review its latest electricity tariff decision.

Moody's said if Eskom were unable to recover past shortfalls under the Regulatory Clearing Account (RCA) mechanism, it would further depress Eskom's credit metrics, which are already very weak owing to tariffs that are not cost-reflective, persistently high operating costs, rising financing costs, and a large investment programme.

Moody's said Eskom's Ba1 rating relies on the support that it considers would be provided by the government of South Africa in a distress scenario.

It added that upward rating pressure is unlikely, given the current negative outlook.

The outlook could be changed to stable if Moody's were to change the outlook on the government's Baa2 rating to stable from negative; and the Guarantee Framework Agreement were to be extended.

Conversely, Eskom's ratings could be downgraded if Moody's were to downgrade the government's rating; Moody's assessment of high government support for the company were to change; Eskom's liquidity profile were to deteriorate significantly; or over the longer term, the government failed to improve Eskom's liquidity and financial profile and ultimately ensure its sustainability.

Eskom chief financial officer Anoj Singh said the power utility is encouraged by Moody’s ratings decision.

"We view this action as evidence that we have made major strides in ensuring a secure electricity supply and in improving the company’s financial profile; thereby enabling us to continue with timeously executing the required funding for the completion of the current build programme,” he said.

Last week, S&P Global Ratings lowered Eskom’s long-term corporate credit rating to 'BB' from 'BB+', citing financial risks. 

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