Eskom needs power to avoid junk sta­tus

The Star Early Edition - - BUSINESS NEWS - Kevin Crow­ley

ESKOM, the pro­ducer of about 95 per­cent of South Africa’s power, would do well to read Stan­dard & Poor’s (S&P) small print after avoid­ing its sec­ond cut to junk this month.

S&P said last week when it held Eskom at its low­est in­vest­ment grade that the power sup­plier needed to cap cost in­creases at 10 per­cent a year, com­plete new power plants on time and win a 40 per­cent tar­iff in­crease from the reg­u­la­tor in the three years to 2018.

Moody’s In­vestors Ser­vice re­duced the company to junk on Novem­ber 7, a day after cut­ting the sov­er­eign.

“The im­me­di­ate risk may have been al­layed, but cer­tainly they’re not out of the woods,” Ade­naan Har­dien, the chief economist at Cadiz As­set Man­age­ment, said last week.

“The pres­sure re­mains on and we’ll have to watch over the next cou­ple of years how the fund­ing story un­folds,” Har­dien said.

South Africa’s R20 bil­lion res­cue plan an­nounced last month for the state-owned power util­ity plagued by elec­tric­ity black­outs and de­layed open­ings of two new plants, was enough to pre­serve the BBB- rat­ing, S&P said.

The company kept a neg­a­tive out­look on Eskom’s debt, sig­nalling a 30 per­cent chance of a down­grade within two years, as the power pro­ducer strug­gles to close a R225bn rev­enue short­fall in the five years through March 2018.

Yields on the util­ity’s dol­lar bonds due in Jan­uary 2021 have risen 10 ba­sis points to 5.37 per­cent this month.

Emerg­ing mar­ket util­i­ties’ dol­lar debt rose one ba­sis point to 4.70 per­cent in the pe­riod, JPMor­gan Chase in­dexes show.

A cut to junk, or non-in­vest­ment grade, would raise bor­row­ing costs for Eskom as some in­vestors are only al­lowed to buy in­vest­ment­grade bonds as stip­u­lated by their funds’ man­date.

S&P’s re­moval of the power util­ity from Cred­it­Watch was “ac­knowl­edg­ment of the qual­ity of the steps be­ing taken to re­solve the short­fall, which in­cludes the gov­ern­ment support pack­age”, the util­ity said.

S&P’s “base-case” sce­nario, needed to main­tain Eskom’s in­vest­ment-grade sta­tus, re­quires that the company’s ra­tio of funds from op­er­a­tions to debt be sus­tained at 5 per­cent un­til the year to March 2018. That ra­tio had fallen to about 3 per­cent, it said.

“We can def­i­nitely say there’s at least a one in three chance that th­ese tar­gets will not be met be­cause they rely on so many pos­i­tive de­vel­op­ments,” Mark David­son, the London-based credit an­a­lyst at S&P re­spon­si­ble for Eskom’s rat­ing, said on Thurs­day.

To meet those tar­gets, Eskom must raise debt, get its gov­ern­ment cash in­jec­tion in a timely man­ner, and com­plete its Medupi power plant, al­ready de­layed by two years, with­out fall­ing fur­ther be­hind sched­ule, David­son said.

The power util­ity would au­to­mat­i­cally be down­graded if S&P, which will re­view South Africa’s rat­ing next month, cuts the coun­try’s BBB-- as­sess­ment.

Most im­por­tantly, Eskom must win 12 per­cent an­nual tar­iff in­creases each year un­til 2018, bring­ing in R50 bil­lion, David­son said.

While the Na­tional En­ergy Reg­u­la­tor of SA has only agreed to an­nual in­creases of 8 per­cent in the last two years of that pe­riod, Eskom can ap­ply for higher raises should its costs be more than ex­pected. – Bloomberg

PHOTO: BLOOMBERG

Eskom re­tains Stan­dard & Poor’s BBB- rat­ing for the time be­ing, but the pres­sure of a down­grade to junk sta­tus re­mains as a re­sult of a R225bn rev­enue short­fall and the two-year de­lay in bring­ing the Medupi power plant on stream.

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