International ratings agency Fitch reported on Thursday it had changed South African power utility Eskom’s outlook for its long-term local currency issuer default rating and national long-term rating to negative from stable.
Fitch also affirmed Eskom’s long-term local currency rating at “A”, national long-term rating at “AAA [zaf]” and national short-term rating at “F1+ [zaf]”.
“The change in outlook to negative reflects challenges related to capacity and security of supply issues for South Africa’s electricity system, and a possible sharp deterioration of the financial profile to fund system enhancement and expansion in the absence of cost-reflective tariff increases,” explained Fitch Ratings.
“Although Eskom’s credit ratios remain strong at present, with Funds From Operations adjusted leverage of about 3x in the year ending March 2007 [FY07], this will change as the company rolls out its five-year R150-billion investment programme.
“The effect of this programme on key ratios will partly depend on a number of important decisions that need to be taken, some of which are largely outside Eskom’s control. This includes a decision by the regulator on proposed adjustments to the tariff mechanism to better reflect costs, which is an issue that Eskom is actively addressing,” added the ratings agency.
Fitch said it would also monitor evidence of potential tangible support by Eskom’s shareholder, the state, throughout the investment cycle.
“This may, for example, take the shape of flexibility on dividend payments from Eskom [no dividend was paid related to results for FY06 and FY07] and capital injections.
“For the ratings to remain at their current levels, Fitch anticipates that a combination of tariff increases and tangible state support will be required. The latter is on top of intangible state support that is factored into the rating, backed by Eskom’s strategic importance to the economy and the people’s well-being, as well as the state’s instrumental role with regard to objective setting, approval of borrowing limits and major corporate activity.”
Fitch said the ratings continue to reflect Eskom’s market dominance.
“It has a generation market share of about 95% and supplies more than 40% of end-users. It also benefits from access to low-cost fuel supplies, underpinning a competitive cost structure.”
Fitch said key credit concerns include pressure on the group to deal with mounting security of supply issues.
“Eskom aims to increase reserve margins to 15% from 8% at present by investing in additional generation capacity, expanding existing plants, bringing mothballed plants back in operation, upgrading the grid, and promoting more responsible electricity usage by end-users. — I-Net Bridge