Johannesburg, South Africa — ESI-AFRICA.COM — 14 November 2011 – Moody’s Investor Service has expressed the belief that significant, above-inflation tariff increases are likely to be necessary for a couple of years for South African national power utility Eskom to make the transition to full cost recovery.

In the note accompanying its change in outlook on Eskom’s rating from stable to negative, Moody’s said the annual tariff increases of about 25% over the second multi-year price determination period from April 2010 to March 2013 should allow Eskom’s financial profile to improve over time “’ although this will depend on the timing of the build-out and the control of costs.

It added that Eskom’s financial credit metrics had showed an improvement at the end of its financial year in March 2011, as it had benefited from the implementation of higher tariffs. It cautioned, however, that the company’s metrics could weaken again in 2012 as capital expenditure ramped up in line with the company’s medium-term investment plan of about R453 billion over the 2012 to 2017 period.

Moody’s noted that the evolution of Eskom’s financial profile over the medium to longer term would be influenced by additional factors. “First is the increase in tariffs for the third multi-year price determination period which has yet to be decided,” it said.

It added that an additional factor was the pace, scale and funding strategy for any further, as yet uncommitted, capital expenditure in the context of the country’s long-term strategic plan, which called for significant further investment.

Eskom said on Friday that while Moody’s had changed the outlook on its rating to negative from stable, it believed that its fundamentals continued to improve.

The change in outlook was anticipated following an announcement by Moody’s earlier in the week that it had changed its outlook on South Africa’s A3 local and foreign currency government debt ratings to negative from stable.

“Our fundamentals continue to improve and we continue to progress with our committed capital expenditure programme, which will provide much-needed electricity capacity and drive growth in the economy,” Eskom said.