Ratings agency Standard & Poor's (S&P’s) has downgraded Eskom’s standalone credit profile (SACP) to ‘b-' from 'b' and has indicated that it believes the utility will require additional funding of about R50-billion to close a gap that arose as a result of the National Energy Regulator of South Africa’s (Nersa’s) latest tariff determination.
On February 28, Nersa granted Eskom yearly increases of 8% for the third multiyear price determination (MYPD3) period from 2013/14 to 2017/18, instead of the 16% requested. This translated into allowable revenue for the period of R862-billion, rather than the nearly R1.1-trillion sought.
“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,” S&P’s said in a statement.
However, it also stressed that the additional R50-billion assumed the successfully completion by Eskom of a wide-ranging cost-cutting programme and that the utility recovered prudently incurred costs through a regulatory clearing account (RCA).
Eskom itself had calculated the five-year financial gap to be R225-billion and had indicated on several occasions that the hole could not be closed by efficiencies alone.
The utility was, therefore, undertaking a “systematic” review to deal with the shortfall, while implementing a R30-billion cost-savings plan to which it had committed in its MYPD3 application.
It would also seek to use the RCA to “claw back” some of the revenue lost through the determination – the RCA is a risk management device used to reconcile differences between actual and approved revenue during the MYPD3 period.
Eskom had also indicated that the full impact of the regulatory “disallowances” would not be experienced in the first two years, as the MYPD3 had loaded these towards the final three years of the five-year determination period.
It had also confirmed that it was in discussions with stakeholders in a bid to strengthen its credit metrics, which S&P’s indicated could include new equity-like instruments.
Meanwhile, S&P’s attributed the SACP downgrade to Eskom’s weakened credit metrics as a result of insufficient tariff increases to fund the company’s capital expenditure programme and rising operating costs.
“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,” S&P’s said in a statement.
The agency also lowered its assessment of Eskom’s business-risk profile to “weak” from “fair”, arguing that the recent price determination would further delay a transition to cost-reflective tariffs and constrain the utility’s profitability. “It also reflects our opinion of continued heightened operational risk, because South Africa's reserve margin remains tight.”
However, Eskom’s 'BBB' foreign and local currency issuer credit ratings were affirmed, as well as it ‘zaAA/zaA-1’ long- and short-term South Africa national-scale ratings.
S&P’s said the affirmation reflected the “extremely high” likelihood of “extraordinary” State support for Eskom, owing to its position as the country’s dominant electricity provider.
The utility had already benefited from a R60-billion subordinated loan and R350-billion in government guarantees.
However, a one-notch downgrade, or worse, was possible should there be a further downward revision to Eskom’s SACP, a downgrade of South Africa’s sovereign rating, or a downward revision of S&P’s assessment of the likelihood of extraordinary support to the utility.