Credit ratings agency S&P Global Ratings has revised its outlook on Eskom from negative to stable, following Finance Minister Tito Mboweni’s announcement of R23-billion a year in additional funding to the debt-laden State-owned electricity utility. The company also affirmed its ‘CCC+’ and ‘zaB’ subinvestment grade ratings on Eskom.

“The stable outlook on Eskom reflects our view that the government’s commitment to providing R23-billion per annum in additional funding for Eskom has reduced the potential for funding shortfalls over the coming six months and uncertainty regarding the government’s commitment and ability to provide timely support for Eskom,” S&P Global Ratings said in a research update.

The support package, which could be extended beyond the R69-billion outlined for the coming three years, was insufficient to cover Eskom’s remaining funding requirements for the financial year ending March 31, 2020.

However, the support, combined with improved access to external financing, cash-flow supportive tariffs and favourable cost trends, “could help Eskom’s sources of liquidity exceed projected uses for more than six months”.

S&P Global Ratings described the provision of financial support for Eskom as a significant departure from the National Treasury’s policy in recent years.

“We believe it hinges on government’s recognition that it needs to support restructuring of the electricity sector and reduce the immediate risks Eskom poses to the economy and public finances.”

Eskom represented about 56% of the government’s guarantees to all State-owned companies, which amounted to about R530-billion.

Eskom CFO Calib Cassim said the company was encouraged by the ratings agency’s decision to positively revise its outlook on Eskom and affirm the credit ratings.

“We view this decision as a positive reinforcement of the strides that we have made to improve Eskom’s liquidity position. The moderately improved liquidity will allow us the flexibility to focus on continuing to secure the funding required for the 2019/20 financial year and stabilise Eskom’s security of supply.”

He added that Eskom had, to date, secured 95% of its R72-billion funding requirement for 2018/19 and 35% of the company’s indicative R48-billion funding requirement for 2019/20.

The company remained “cautiously optimistic” that it would secure the full funding requirement for the current year, owing to improved market sentiment on Eskom.

The ratings agency said Eskom’s liquidity outlook would also depend on the following:

• the tariff awards by the National Energy Regulator of South Africa (Nersa) for the fourth multiyear price determination (MYPD4) application, as well as the 2017/18 regulatory clearing account applications;
• progress on resolving the issue of municipal nonpayment for electricity;
• plans for and the timing of the realisation of efficiency improvements of R20-billion by 2021/22; and
• additional capital expenditure requirements to stabilise electricity supply.

The energy regulator was expected to announce its decision on Eskom’s MYPD4 and Regulatory Clearing Account (RCA) applications on March 7.

Eskom has requested allowable revenue of R219-billion for 2019/20, rising to R252-billion in 2020/21 and R291-billion in 2021/22, which, if granted, would translate into tariff increases of 17.1% for 2019/20, 15.4% for 2020/21 and 15.5% for 2021/22.

The 2019/20 increase being sought by Eskom would be in addition to a 4.41% hike already approved for the year, which had arisen following Nersa’s adjudication, in 2018, of RCA applications for three of the five years falling within the MYPD3 period. In other words, electricity prices would be hiked by 21.5% from April 1 should Nersa approve Eskom’s full request. The regulator has traditionally refrained, however, from granting Eskom all the revenue it requested in previous submissions. In the longer term, S&P Global Ratings said its rating on Eskom might also be influenced by potential deleveraging strategies and progress towards transparent and credible reform of the utility’s business model, possibly including the functional separation of generation, transmission and distribution. “The legal or structural unbundling of Eskom’s activities will likely follow, the timing of which will probably be determined by the soon-to-be-appointed chief reorganisation officer. “An extension of the period of financial support for a further seven years might be an option, but would depend on several factors, including economic growth, tariffs and the implementation of Eskom’s strategy.”