Moody’s on Monday downgraded ratings for power utility Eskom as the company battles higher costs and tries to meet huge capital expenditure needs.
Eskom is to spend billions of rands to boost power capacity with demand outstripping supply, leading to costly power failures.Consumers have been asked to cut back on usage to avoid overloading the grid, while higher coal prices have put pressure on Eskom’s finances.
Moody’s said it had lowered Eskom’s local currency rating to Baa2 from A1 and cut the foreign-currency rating to Baa2 from A2. The outlook for all ratings was negative. The baseline credit assessment (BCA) increased to 13 from eight.
The four-notch local currency downgrade was blamed on a deterioration of Eskom’s stand-alone credit profile due to an aggressive capital investment programme and the negative financial impact on Eskom of tariff increases that were not as high as it had requested.
”Moody’s expects Eskom’s external borrowings to rise substantially over the next five years,” said Craig Jamieson, Moody’s lead analyst for the company.
”Credit metrics are expected to be very weak in the next few years, with financial ratios that, in isolation, would position Eskom in the speculative grade rating category for a utility with a high business risk profile.”
The downgrade may hamper efforts to finance billions of rands from capital markets to help fund the expansion, although the new ratings remain investment-grade.
The energy regulator in June agreed to an average 27,5% electricity price increase for 2008/09, about half of what Eskom had asked for.
The National Treasury, however, has budgeted R60-billion over the next three years to help Eskom pay for the R343-billion, five-year expansion programme.
Moody’s said strong government support had supported the rating.
Eskom’s grid almost collapsed in January when it could not meet demand and it shut down supply to some of the world’s biggest platinum and gold mines, boosting metals prices. Mines are still not back to full power.
Eskom said it noted the downgrade, but was disappointed that recent progress to ensure long-term financial sustainability ”was not adequate to satisfy Moody’s”.
”Although we’re deeply disappointed with the downgrade, Eskom retains its investment grade rating and will have continued access to local and global capital markets,” said Jacob Maroga, chief executive of Eskom.
Eskom supplies about 95% of South Africa’s electricity. — Reuters