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Eskom announcement positive: Moody’s

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Government’s announcement on a funding package for Eskom was positive but lacked sufficient details to show how the power utility’s financial profile could be improved, ratings agency Moody’s said on Tuesday.

“We view this announcement as positive as it shows that the government is taking steps to address Eskom’s weak balance sheet,” vice president, senior analyst, Paul Marty said in a statement.

“However, more details will be needed to clarify the extent to which Eskom’s financial position can be improved permanently.”

On Sunday, government announced that Cabinet had approved a funding package to help Eskom with its R225 billion shortfall.

It said it would support Eskom’s application to the National Energy Regulator of SA (Nersa) for tariff adjustments in line with the regulatory process.

In addition, Eskom would receive funding, from leveraging non-strategic state assets, to relieve the effect on consumers and to strengthen the utility’s balance sheet.

Finance Minister Nhlanhla Nene would provide details in his budget announcements.

Eskom would raise additional debt in the region of R50bn, over and above its original plan of R200bn during the third Multi-Year Determination Period (MYPD 3).

The debt raising would be supported by the “substantial guarantee facility” from government.

Marty said Nersa, in February last year, approved an eight percent annual tariff increase for the period from April 1, 2013 to March 31, 2018 (MYPD3), significantly lower than the 16 percent requested by Eskom.

“This will translate into a revenue shortfall of R225 billion over the period, which the company is unlikely to make up solely through efficiencies,” he said.

Moody’s viewed the announcement as credit positive as it indicated government was ready to take tangible and structural steps to strengthen Eskom’s financial position.

“The proposed equity injection also reinforces our assumption of high probably of government support for Eskom under our rating methodology for government-related issuers (GRIs),” Marty said.

“Given a stand-alone credit quality commensurate with a speculative-grade profile, Eskom’s current Baa3 rating relies upon the support that we expect would be provided by the government… in a distress scenario.”

However, the announcement fell short of indicating the size and timing of the potential tariff increases and the proposed equity injection.

“Greater clarity will be needed to assess how these elements can support Eskom’s financial profile and ultimately ensure its sustainability,” he said.

“The negative outlook on the rating therefore continues to reflect Eskom’s weak standalone credit quality (as expressed by a baseline credit assessment or BCA of b1).”

The negative outlook also reflected the risk that the measures to be taken failed to address Eskom’s challenges, as well as the negative outlook on government’s rating. SAPA


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