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Johannesburg – Global ratings agency S&P has affirmed its rating of Eskom’s long-term, credit rating at a notch above highly speculative.

In a statement issued on Tuesday, the agency affirmed Eskom at BB- and noted the outlook was negative.

It explains, although it believes Eskom’s liquidity position and ability to service debt without government support has weakened because Eskom achieved lower-than expected tariff gains, it sees government support for the utility as high.

In February, National Energy Regulator of South Africa (Nersa) authorised Eskom to raise tariffs by 2.2 percent in the 2017/18 financial year.

At the time, Nersa chairperson Jacob Modise said Eskom's full year revenue of R205 214 million for the 2017/18 financial year will now result in a percentage increase of 2.2 percent as determined in the Multi-Year Price Determination (MYPD3) decision.

In the MYPD3 decision, Nersa approved an eight percent average increase per annum for a period of five years, starting from the April 1, 2013 to the March 31, 2018.

Read also: Nersa keeps Eskom in check

S&P adds, while government's recent extension of Eskom’s R350 billion guarantee framework enhances Eskom’s access to funds, this is offset by Nersa’s decision.

S&P had expected an 8 percent increase.

“This further constrains the company's ability to service debt (principal and interest, excluding government support) over the next 12 months and will lead to higher-than-previously anticipated leverage. We have therefore revised our assessment of Eskom’s liquidity position to weak from less than adequate. “

S&P adds the uncertainty in the regulatory framework could weigh on its assumptions of a future tariff increase beyond fiscal 2018. “This also introduces risk to Eskom’s financial risk profile and liquidity beyond the next 12 months.”

In addition, says S&P, anticipated capital expenditure of between R55 billion and R65 billion could see Eskom experiencing negative free cash flows of between R40 billion and R55 billion.

This, it says, will increase Eskom’s reliance on debt funding.

S&P says it would consider revising the outlook to stable if it revised our outlook on the sovereign to stable, if pressure on Eskom’s future liquidity position eased, and if government funding for Eskom’s continuing large negative free cash flow was forthcoming.