Eskom’s Financial Resilience: Moody’s Upgrade with Cautionary Notes

The Big Picture

Moody’s Investors Service, in a much-anticipated move, has elevated Eskom’s credit rating. A significant relief, no doubt, but with it comes an array of observations and concerns.

A Closer Look at the Upgrade

  • The Jump: Eskom’s corporate family rating got a boost, transitioning from Caa1 to B2. This positions Eskom in the ‘speculative’ domain, slightly better than the ‘substantial risks’ zone it was previously stuck in.
  • Subtle Shifts: Alongside this, several of Eskom’s other ratings witnessed an upgrade, transforming its overall financial portfolio. Most notably, Moody’s shifted its outlook from ‘positive’ to ‘stable’.

What Fueled the Upgrade?

  • Government Backing: The Eskom Debt Relief Act, inked on 5 July 2023, was a game-changer. Following this, the power entity obtained its inaugural payment from the National Treasury a month later. Quote:“The Eskom Debt Relief Act mandates Treasury to funnel R254 billion to Eskom over time, intended for R168 billion of debt maturities and R86 billion to address interest payments.”
  • Payment Breakdown: Over the next three financial years, the treasury has earmarked substantial funds to stabilize Eskom’s operations.

Conditions and Expectations

  • Moody’s underscores conditions tied to this financial lifeline. They entail targeted capital expenditure, halting fresh borrowing, and ensuring the relief is strictly utilized for settling debt and interest.
  • Major Debt Shuffle: By 2025-26, a whopping R70 billion of Eskom’s outstanding obligations will be shifted to the National Revenue Fund.
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Concerns and Challenges Ahead

  • Operational Woes: Despite the financial buoyancy, Moody’s expressed apprehension regarding Eskom’s operational hiccups and the issue of low electricity tariffs. Their emphasis?“Eskom’s poor Energy Availability Factor has led to a heavier reliance on its diesel-fueled gas turbines. Additionally, continuous load-shedding, escalating debt arrears from municipal electricity distributors, and widespread defaulting poses challenges.”
  • Municipal Debt Cycle: With arrears reaching R63.2 billion as of August 2023, the National Treasury felt compelled to roll out a Municipal Debt Relief programme, albeit with limited success so far.

The Road Ahead: Predictions and Warnings

  • Post-Relief Scenario: Moody’s anticipates Eskom will resort to borrowing post the relief period, especially to channel funds into networks and refinance looming debts.“Without a transformative approach towards operations, debt collection, governance, and regulatory measures, Eskom’s revitalized rating might waver as we edge towards April 2026.”
  • Persisting ESG Risks: Moody’s didn’t mince words, highlighting Eskom’s pronounced ESG risks. From internal control weaknesses to a culture of non-payment and high carbon transition risk – challenges abound.

The Silver Lining

  • Moody’s stable outlook is anchored in its optimism that the debt relief will afford Eskom an opportunity to enhance its operational robustness. This belief mirrors the stability and confidence vested in the South African government.
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While Eskom’s journey is far from smooth sailing, the recent upgrade and associated government backing offer a glimmer of hope. But with Moody’s cautionary note echoing in the background, the power utility has its work cut out.