15 January 2008 – Eskom’s credit rating is under threat after Standard & Poor (S&P) threatened to downgrade the utility last week, listing it as "credit watch with negative implications" due to delays in finalising the terms of Eskom’s capital expenditure plans.

Funding the capital expansions plans entirely through debt could weaken Eskom’s credit profile – even with the sizeable tariff increase authorised by the National Energy Regulator. The "credit watch with negative implications" listing means that it will cost more for the utility to borrow.

"Although we view implicit support for Eskom as strong … any potential capital support from government is yet to be defined and approved," said the rating agency, which believes Eskom will need more capital from its shareholder, the department of public enterprise.

Eskom announced last year that it would spend US$29 billion on capital expansion, with approximately US$14.5 billion of that being funded by debt.

Senior Fitch director, Erwin van Lumich, says: "We want to understand in detail what the likely amount is, what the money is going to be spent on and … the timeline."

Bongani-Nqwababa

Bongani Nqwababa,
Eskom’s finance director

Eskom had hoped for an 18.7% tariff increase from the Regulator, but has confirmed it is unlikely to appeal the 14% awarded. This does mean, however, that Eskom and its shareholder must now consider alternatives to address the funding shortfall. These options, according to Vimla Maistry of the department of public enterprises, include external borrowing, price increases, shareholder capital injection and government guarantees.

According to Bongani Nqwababa, Eskom’s finance director, Eskom’s reserves of between US$2.5 and US$3 billion will be depleted by the end of 2008. "We have to address their [S&P’s] concerns," he said. "Eskom and all stakeholders need to get issues resolved as soon as possible."

Any decision regarding a cash injection from the national treasury will only be approved once extensive consultation has taken place with cabinet.