Even 25% Fee Increase Won’t Lift Eskom From Junk, Moody’s Says

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A power-price increase of as much as 25 percent won’t be enough on its own to raise the credit rating of Eskom Holdings SOC Ltd., South Africa’s electricity utility, 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 by phone 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 its 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 aging fleet of plants and builds new ones. The National Energy Regulator of South Africa 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 June 29. The inflation rate was 4.6 percent in May.

Moody’s downgraded Eskom’s rating to Ba1, one notch below investment grade, on Nov. 7, a day after cutting the sovereign. Yields on Eskom’s $1.75 billion of bonds due January 2021 rose 49 basis points to 5.88 percent from Nov. 6 to June 24, compared with a 22 basis-point decline in dollar debt of emerging-market utilities, JPMorgan Chase & Co. indexes show.

Revenue Increase

Raising prices would add 20 billion rand ($1.6 billion) to 25 billion rand to Eskom’s annual revenue, less than its annual cash shortfall of 45 billion rand to 50 billion rand, Marty said.

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

Electricity prices in South Africa have almost quadrupled since 2007, when the country first had power shortages, according to data compiled by Bloomberg. Eskom’s average revenue per kilowatt-hour was 0.74 rand cents, 6 U.S. cents, in the six months ended Sept. 30. In 2013, household users in Germany paid 39 cents, Turkey 18 cents, Chile 17 cents and the U.S. 12 cents, according to the International Energy Agency.

There is 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 in a presentation Thursday.

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 must be upgraded or Eskom’s finances must “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 is seeking for the year to March, 9.6 percentage points will 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 be to pay for an increase in the environmental levy that the government is planning, but won’t apply should the state not introduce it.

Whether Eskom is granted the price increases or not, the company plans to borrow money from international capital markets this year, Acting Chief Executive Officer Brian Molefe said June 23.

Eskom will consider borrowing money outside of its usual investor base in Europe and the U.S. and will look at Islamic financing, he said.

There are “quite a number of institutions, other parts of the world, that are quite ready to get into private placements with us,” Molefe said. “We are not overly concerned about the ability to raise capital.”