Eskom suffers another shock

electricityEskom has suffered yet another setback that could see its funding costs rise or keep taxpayers shelling out for its debts.

A surprise credit rating downgrade comes on top of higher-than-expected coal prices – which could allow the state-owned energy company to pass on its increased costs to consumers.

Credit ratings agency Moody’s downgraded Eskom’s standalone credit quality by one notch on Friday, making it more difficult for it to raise money for its future expansion plans.

Eskom has been trying to get an investment-grade standalone rating so that it can raise the billions it needs without government guarantees.

Acting chief financial officer Caroline Henry diplomatically called the downgrade “a challenge” yesterday.

It adds to other pressures Eskom is facing, which could see it approach energy regulator Nersa for a higher tariff increase.

CEO Brian Dames said recently the high coal price increases gave Eskom the right to approach Nersa for an increase.

Primary energy costs, including for coal, have rocketed 36% over the past year, Eskom’s latest set of financial results reveal. These costs have gnawed into its margins and have seen it earn less than half the profit it did the previous year.

Eskom’s new build programme, with which it aims to keep the lights on, has a capacity expansion budget of about R400-billion up to this year and is expected to grow to more than a R1-trillion by 2026.

Shaun Nel, spokesman for the Energy Intensive User Group, which represents large industrial consumers, said yesterday the downgrade “will obviously increase the cost of capital”.

Eskom has tried to get a stand-alone credit rating since 2008, but Nersa has thwarted its plans several times, most recently in February when it allowed an increase of 8% a year for the next five years although Eskom requested 16%.

The lower increase means a revenue shortfall of about R220-billion over the next five years and was cited by Moody’s as a major factor in its decision.

“This means Eskom would need to borrow more because it will not be able to generate the funds from its own revenues,” said energy analyst Chris Yelland.

The downgrade comes after management two weeks ago admitted that the first power from its Medupi power station would realistically hit the grid only in the second half of next year.

Eskom is running on a very thin reserve margin and would now likely face another winter, when consumption climbs, without Medupi’s added capacity.

According to Nel, the supply constraints have started having a serious impact on the economy.

Industrial users now consume less than they did in 2006, indicating that factories and foundries were closing, said Nel.

“Though Eskom said it would not have to go back to Nersa for two years, it seems like a foregone conclusion that it would have to,” Nel said.

Yelland does not necessarily see Eskom going to the regulator. But he thinks it could go to the government for more credit guarantees.

Outgoing chief financial officer Paul O’Flaherty said two weeks ago that Eskom would not be able to attain an investment grade standalone rating – which would allow it to raise the funds it needs at decent rates – in the “next few years”.

It would continue needing massive state support, he said.

About R250-billion still needed to be raised, O’Flaherty said.

Dames said yesterday that Eskom was “comfortable with the measures [it was] taking with the continued support of [the government]”. –