Eskom hike to have no effect on junk rating

A POWER-PRICE increase of as much as 25 percent would not be enough on its own to raise the credit rating of Eskom from junk, said Moody’s Investors Service, which cut its assessment last year.

“The question for the company is what they would do with the tariff increases,” Paul Marty, a senior credit analyst at Moody’s, said on June 21. “If it just meant it would absorb increasing costs, then it’s not going to improve their financial profile.”

Eskom, which has imposed rolling power cuts almost every two days on average this year, has asked the regulator for a fee increase of as much as 25 percent this year, saying the extra cash is needed to keep the lights on while it repairs an ageing fleet of plants and builds new ones.

The National Energy Regulator of South Africa (Nersa) has allowed the utility to raise charges by 13 percent from April 1, and is considering as much as 12 percent more. Nersa will decide on Monday. The inflation rate was 4.6 percent in May.

Moody’s downgraded Eskom’s rating to Ba1, one notch below investment grade, on November 7, a day after cutting the sovereign. Yields on Eskom’s $1.75 billion (R21.3bn) of bonds due January 2021 rose 49 basis points to 5.88 percent from November 6 to June 24, compared with a 22 basispoint decline in dollar debt of emerging market utilities.

Raising prices would add R20bn to R25bn to Eskom’s annual revenue, less than its annual cash shortfall of R45bn to R50bn, Marty said.

“The extra tariff increase would help a lot in plugging the gap but wouldn’t plug it entirely,” he said.

Electricity prices have almost quadrupled since 2007, when the country first had power shortages. Eskom’s average revenue per kilowatt-hour was 74c in the six months ended September 30.

There was no legal basis for the regulator to revisit the utility’s tariffs, the Energy Intensive Users Group, which represents 33 companies that are Eskom’s biggest customers, said yesterday.

Smaller advance

If the regulator goes ahead with assessing Eskom’s request to raise tariffs, only 2.9 percent more than the 13 percent currently granted should be allowed for the year to March, it said.

To return to investment grade, either South Africa had be upgraded or Eskom’s finances should “strengthen materially and sustainably as a result of tariff increases, improved operational efficiency and cost savings”, Marty said.

Of the 12 percent further increase Eskom was seeking for the year to March, 9.6 percentage points would be used to run emergency turbines to reduce power cuts and to buy electricity from independent producers, the utility said in a presentation to Nersa this week. The rest would pay for a planned increase in the environmental levy. – Bloomberg