Moody's Investor Services believes that significant above-inflation tariff increases are still likely to be necessary for a couple of years for SA power utility Eskom to make the transition to full cost recovery.
In the note accompanying its change in outlook on Eskom's rating from stable to negative, Moody's said the annual tariff increases of around 25% over the second multi-year price determination period (MYPD2) from April 2010 to March 2013 should allow Eskom's financial profile to improve over time - although this will depend on the timing of the build-out and the control of costs.
It said Eskom's financial credit metrics showed an improvement at the end of its financial year in March 2011 as it benefitted from the implementation of higher tariffs.
However, it cautioned that the company's metrics could weaken again in 2012 as capital expenditure ramps up in line with the company's medium-term investment plan of some R453 billion over the 2012 to 2017 period.
Moody's noted that the evolution of Eskom's financial profile over the medium to longer term will be influenced by additional factors.
“The first is the increase in tariffs for the third multi-year price determination period (MYPD 3, post-2013), which has yet to be decided,” it said, adding that an additional factor is the pace, scale and funding strategy for any further, as yet uncommitted, capital expenditure in the context of the country's long-term strategic plan, which calls for significant further investment. - I-Net Bridge