Eskom’s R50 billion funding requirements

Eskom chief executive Brian Dames says he is disappointed with the latest Standard & Poor´s credit rating, which states that the company will require additional funding of about R50 billion over the next three years.

Earlier this week, Standard & Poor’s (S&P) affirmed Eskom’s credit rating at BBB, however it downgraded the power utility’s Stand Alone Credit Profile by one notch to ‘b-‘ from ‘b’, due to the revised business risk profile from “fair” to “weak”.

At the same time, it also affirmed Eskom’s ‘zaAA/zaA-1’ long- and short-term South Africa national scale ratings.

“The downward revision of Eskom’s SACP reflects a weakening in Eskom’s credit metrics due to its largely debt-funded capital expenditure (capex) program being insufficiently covered by tariff increases, and to rising operating costs,” S&P said.

“The downward revision of the SACP also reflects our view of rising business risk for Eskom, in light of increased regulatory and operating risk, and weakened profitability owing to an unfavorable regulatory decision.”

The affirmation of the issuer credit ratings reflects S&P’s criteria on government-related entities (GREs), and the ratings group’s view that the likelihood of extraordinary state support for Eskom remains “extremely high”.

S&P said that, while the energy regulator’s decision for the third multi-year price determination (MYPD3) – which runs from 2013-2014 to 2017-2018 – will result in an average annual tariff increase of 8%, it is half the amount that Eskom requested to support its large capex program.

In addition, S&P said that Eskom faces continued cost pressures, due to construction delays and rising primary energy and labor costs.

“In our opinion, Eskom is adequately funded for the next two years. However, in the last three years of MYPD3, we believe that the company will require additional funding of about R50 billion,” the ratings group said.

“Eskom´s credit rating remains investment grade; however we are disappointed by the Stand Alone Credit Profile downgrade at this time as we continue to action our third multi-year price determination (MYPD3) response plan,” said Eskom chief, Dames.

“Eskom remains committed to an investment grade credit rating with government support as it is critical to access funding needed to invest in South Africa´s electricity infrastructure,” he said.

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Eskom’s R50 billion funding requirements