Fitch Affirms Eskom; Changes National Rating Outlook to Stable
Fitch Ratings-London/Johannesburg-10 June 2009: Fitch Ratings has today affirmed Eskom Holding Ltd's (Eskom) Long-term local currency Issuer Default Rating (IDR) at 'A', National Long-term rating at 'AAA(zaf)' and National Short-term rating at 'F1+(zaf)'. The Outlook on the Long-term IDR is Negative. The Outlook on the National Long-term rating has been revised to Stable from Negative.
The change in the National rating Outlook reflects Fitch's full alignment of Eskom's ratings with the Republic of South Africa's ratings (Long-term local currency IDR 'A' and Foreign Currency IDR 'BBB+, both with a Negative Outlook) in accordance with Fitch's parent/subsidiary methodology (see the criteria report entitled, 'Parent and Subsidiary Rating Linkage', available on www.fitchratings.com). While challenges regarding the implementation and funding of its vast capex programme - which was a key driver for the change in Outlook to Negative in August 2007 - remain, recent signs of explicit and implicit government support have provided Fitch with comfort that the government will support any funding gaps that may occur. This factor should also be viewed together with signs of enhanced coordination among key stakeholders, including the government and the National Energy Regulator of South Africa, Nersa, in the past year.
"State support reflects Eskom's importance to the country's energy needs. Explicit financial support is evident in the form of a flexible dividend policy, the approval in 2008 of a ZAR60bn subordinated loan and the government's recent decision to guarantee up to ZAR176bn of Eskom's existing and future debt," says Erwin van Lumich, Deputy Head of Fitch's Energy, Utilities and Regulation team for the EMEA region. "Implicit support is reflected in the administration's influence in objective-setting, in the appointment of senior managers and the overseeing of Eskom's investments."
Any sovereign rating action would result in the same rating action on Eskom, provided that all support-driven factors remain unchanged.
Eskom's standalone credit profile is non-investment grade on the international rating scale as pressure on its credit ratios is expected to intensify from the company's ZAR385bn five-year investment plan. The degree of credit ratio deterioration and the group's financial sustainability will depend on a combination of tariff increases, further government contributions, demand and the effectiveness of efficiency measures. While its profitability has historically been supported by access to low-cost fuel supplies, earnings in the financial year ended March 2008 (FY08) and FY09 (unaudited) were negatively affected by commodity price volatility, tight reserve margins which forced the company to operate its plants at a utilisation rate above the optimal level, non-cost reflective tariffs and fair value losses on derivatives. Fitch-adjusted gross leverage deteriorated to 6x at FYE08, from 3.6x in the prior year.
An approved cumulative average tariff increase of 27.5% since December 2007 is an indication of Nersa's commitment to achieve cost-reflective tariffs. However, the increase was well below the company's proposed increase. Fitch takes a positive view of Nersa's recent approval of revised rules for the second multi-year price determination (MYPD2), including the endorsement of a risk-sharing mechanism for primary energy cost variances, but will closely monitor the tariff path as this will be crucial for the company's future profitability.
In its ongoing analysis, Fitch will also focus on details of the guarantee structure and will assess the position of holders of non-guaranteed debt versus that of guaranteed debt. Eskom's stated intention is not to prejudice holders of non-guaranteed debt.
Government-owned Eskom is South Africa's dominant electricity utility with a generation market share of more than 95% and it supplies more than 40% of end-users.
Contacts: Erwin van Lumich, Barcelona, Tel: +34 93 323 8403; Andrew Steel, London, +44 (0)20 7682 7486; Roelof Steenekamp, Johannesburg, +27 11 380 0903.
Media Relations: Peter Fitzpatrick, London, Tel: + 44 (0)20 7417 4364, Email: peter.fitzpatrick@fitchratings.com.
Note to Editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(zaf)' for National ratings in South Africa. Specific letter grades are not therefore internationally comparable.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
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