Credit rating agency Moody’s has maintained its rating of Eskom at Caa1 with a negative outlook, warning that the power utility continues to be in a precarious position despite prolonged financial support.
Eskom has been a major beneficiary of government support having received equity injections of almost R137 billion over the last three years. These government equity injections have been significant in absolute and relative terms and the primary driver behind a reduction in Eskom’s debt, Moody’s said.
“However, they have not been able – on their own – to substantially and sustainably transform Eskom’s financial profile in the context of its high debt burden and continued challenges to its operating performance.
“These include poor performance of the power generation fleet as reflected in frequent load shedding and energy availability factor of below 60% in the last quarter of 2021, high and rising overdue debt from municipalities, and tariffs that do not allow for a full recovery of costs.”
Government is committed to providing further support to Eskom of R88 billion over the four years to March 2026. However, Moody’s said it is uncertain how much this will move the needle for the power utility.
In effect, by 2026, the government would have thrown R225 billion at Eskom over seven years, with no guarantees that South Africa’s energy situation would improve.
“Further equity injections will help the company’s liquidity and evidence continued strong support from the government, but the positive impact on Eskom may be limited in the context of the latest regulatory determination, high commodity price environment, and a risk of a further increase in bad debt from the municipalities,” Moody’s said.
“In this regard, Moody’s notes that a debt solution remains a possibility and the outcome of ongoing work could be announced within this financial year. However, at this stage, it is unclear what, if any, form of debt relief will be implemented.”
In line with the government’s roadmap for Eskom, published in October 2019, Eskom is pursuing a corporate unbundling with the aim of splitting its activities into three separate companies for transmission, distribution and generation under a holding company.
The unbundling of the transmission business is the first step in the Roadmap, and Eskom aims to complete the process by end of June, subject to necessary regulatory clearance and legal and commercial consent.
“The transmission unbundling brings execution risks and requires some, but not all, creditors’ consent based on the contractual terms of Eskom’s financing agreements.
“Eskom has noted that it is committed to the fair treatment of all of its creditors, and Moody’s understands that the company is in discussions with its financial creditors and other stakeholders with a view to implementing the transmission unbundling.
“How the credit position of existing creditors may be preserved remains uncertain, in the context of continuing operational challenges and absent a plan to address the company’s long-term financial stability,” Moody’s said.