Moody's Investors Service has warned that Eskom’s long-term corporate family rating (CFR) remained constrained due to rising costs of diesel-fired gas turbines to keep higher stages of load shedding at bay as a result of deteriorating generation capacity.
The ratings agency yesterday, however, gave the troubled state-owned power utility a boost as it upgraded Eskom’s unguaranteed ratings and changed its rating outlook from positive to stable.
It upgraded the long-term corporate family rating of Eskom to B2 from Caa1, its senior unsecured global medium-term notes to B2 from Caa2, its global medium term note programme to (P)B2 from (P)Caa2, and its zero-coupon Eurobonds to B2 from Caa1.
Moody’s said the upgrade of Eskom's CFR and unguaranteed ratings followed the signing of the Eskom Debt Relief Act in July and receipt of the first payment to Eskom from the National Treasury last month.
The Act requires Treasury to advance R78bn in the 2023-24 financial year, R66bn in 2024-25, and R40bn in 2025-26 to Eskom to fund R168bn of debt maturities and R86bn of interest payments as part of the R254bn debt relief programme.
Moody’s senior vice president for infrastructure finance Graham Taylor said the injection and debt transfer would significantly reduce risks to Eskom's liquidity over the next three years.
Taylor said this, in combination with the prohibition on most new borrowing, will cause Eskom's debt to fall from around R450bn as of March 2023 to around R300 billion by March 2026.
However, Taylor said Eskom’s long-term ratings continued to be constrained by persistently poor operational performance and tariffs that do not adequately finance the company's operating and capital expenditure.
Taylor said Eskom's tariffs under Multi-Year Price Determination 5 (MYPD5), which covers the period from 1 April 2023 to 31 March 2025, have been set based on an Energy Availability Factor (EAF) for the company's coal plants of around 65%, but actual availability in the first five months of 2023-24 has averaged 56%.
“As a result, usage of diesel-fired gas turbines, which incur significantly higher marginal production costs compared to coal plants, have been running at over 20% of their capacity, significantly above the assumption of 6% used to set Eskom's tariffs,” Taylor said.
“Load shedding has remained persistent, with the country returning to stage 6 load shedding from 4 September following the failure of several units.”
In addition, Taylor said debt arrears from municipal electricity companies have grown to R63.2bn as of August, and more than half of the country's municipalities have defaulted on their bills.
Eskom has of course warned that arrears would continue to rise if not effectively addressed.
The National Treasury has also introduced a Municipal Debt Relief programme, under which Eskom would write off uncollected debts provided municipalities agree to mechanisms that would allow their licences to be revoked for further non-payment and if they commit to installation of pre-paid meters to improve collection, setting cost-reflective municipal tariffs, and pursuing non-paying customers.
However, take-up of the programme has been limited to date and Taylor said this would have serious implications for the power utility as it might be forced to go to the market for recapitalisation.
“We expect that Eskom will need to raise debt after the end of the debt relief period, particularly to finance investments in networks and to refinance maturing debts,” he said.
“Without the benefit of a new guarantee scheme, its ability to do so on commercially acceptable terms will rely on significant improvements in its operations, debt collection, governance, and regulatory arrangements.
“Absent such improvements or alternative mechanisms to ensure access to capital, the rating is likely to come under pressure as April 2026 approaches.”