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Energy: Moody's Cuts Eskom's Credit Rating as South African Utility Seeks Funds for New Power Stations


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South Africa's power utility Eskom has had its credit rating downgraded by Moody's Investors Service. This is a considerable blow to Eskom, as it is currently aiming to raise funds for an ambitious US$20-billion (150-billion-rand) build of new power plants. The Financial Times reports that Moody's cut Eskom's local-currency rating by four notches to Baa2 from A1, and its foreign-currency rating by three to Baa2 from A2. Moody's announcement follows a tour of Europe's financial centres by Eskom executives last week.

Jacob Maroga, Eskom's chief executive, was widely quoted throughout the media as saying “Although we're deeply disappointed with the downgrade, Eskom retains its investment grade rating and will have continued access to local and global capital markets”. However, South Africa's National Treasury has agreeing to bring forward the disbursement of an US$8-billion (60-billion-rand) loan. The government will now disburse the loan in three instalments: 10 billion rand in 2008–09, 30 billion rand in 2009–10), and the final 20 billion rand in 2010–11. African Energy quotes Bongani Nqwababa, Eskom's finance director, as saying “This decision of government gives recognition of the importance of maintaining Eskom's strong investment grade credit rating and is a clear indication of the shareholder's unwavering support in that regard."

One factor that was crucial in Moody's decision to downgrade Eskom's rating was the decision by the National Energy Regulator of South Africa (NERSA) not to award the utility the requested 53% increase in electricity tariffs. Instead NERSA awarded an increase in June of 13.3%, in addition to the 14.2% already approved in December 2007, resulting in a 27.5% average increase year-on-year. Reuters quoted Craig Jamieson, Moody's lead analyst on Eskom as saying "Moody's expects Eskom's external borrowings to rise substantially over the next 5 years. Credit metrics are expected to be very weak in the next few years, with financial ratios that, in isolation, would position Eskom in the speculative grade rating category for a utility with a high business risk profile".

Outlook and Implications

Eskom produces 95% of South Africa's electricity, but the government is now paying dearly for its decision to not build a new series of power stations, following the White Paper drawn up by the Energy Ministry in 1998 warning that without new capacity the country would experience power shortages from 2007. Earlier this year Public Enterprises Minister Alec Erwin called the power cuts a "national emergency" and warned that "tight supply" would remain for a further four years until new generation capacity came online. At the start of the year Eskom could not guarantee a secure supply to mining companies operating in the country. Eskom has a supply capacity of 36,000MW and ha d a reserve margin of 6% in 2007, less than half the international norm of 15% and compared with a margin of 25% in 2001.

Moody's decision to lower Eskom's ratings will cause the utility a nervous wait until Standard and Poor's and Fitch announce their decisions on the same issue. However, it should be remembered that Eskom still retains an investment grade rating and also enjoys strong government support.

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