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Eskom remains on credit watch – S&P

April 14 – Standard & Poor’s Ratings Services said today that its corporate credit and debt ratings on South Africa-based utility ESKOM Holdings Ltd. remain on CreditWatch with negative implications.

ElectricityWe placed the ratings on CreditWatch on Jan. 11, 2008, due to expectations of a material increase in ESKOM’s capital expenditure program, in light of the tightening capacity margin in South Africa, as well as significant inflationary pressures, primarily on fuel prices and capital equipment.

ESKOM has confirmed that it expects capital expenditures over the five years to 2012 to be South African rand (ZAR) 343 billion in nominal terms, compared with previous expectations of ZAR150 billion. This substantially higher amount, if funded largely with debt, would result in a material weakening of ESKOM’s credit metrics, even with a significant increase in tariffs. ESKOM is still finalizing details of the funding plan.

On Feb. 20, 2008, as part of the annual budget, the South African government announced that it was pledging ZAR60 billion to support ESKOM’s expansion program. However, the company is still in discussions with the National Treasury regarding the structure and timing of this capital support.

Furthermore, ESKOM is in ongoing discussions with the energy regulator regarding an increase in the tariff for 2008/2009 over the already approved 14.2% (nominal). A decision on the 2008/2009 tariff is planned for June 6, 2008.

"We will continue to monitor discussions between ESKOM and its stakeholders and will provide additional comment when material decisions on the funding of the capital expenditure program are made public," said Standard & Poor’s credit analyst Mark Davidson.

The ratings on ESKOM fall under our rating methodology for government-related entities. We assign a stand-alone rating of ‘BBB’, with a two-notch uplift to reflect government support.

The ‘BBB+’ foreign currency rating is capped by the foreign currency rating on the Republic of South Africa (foreign currency BBB+/Stable/A-2; local currency A+/Stable/A-1).

The ratings on ESKOM continue to reflect the company’s critical role in the development of South Africa’s economy through its successful electrification program, strong electricity demand growth, and a more supportive regulatory regime following the introduction of multiyear price reviews.

These strengths are offset by ESKOM’s substantial capital expenditure program to increase generation capacity, which will be to a large extent debt financed; an already moderately leveraged balance sheet on a gross debt basis; and the potential restructuring of the power industry in the longer term.

Press release issued by Standard & Poor, 14 April 2008