Eskom needs government support to stabilise its debt – Moody's

A successful turnaround at debt-ridden power utility Eskom will require "significant external support," according to Moody's.

The ratings agency on Tuesday issued a report on Eskom's financial results for the 2018/19, which were released last week.

The power utility's financial performance has deteriorated, which has created challenges for Eskom in meeting its debt obligations without government support. Eskom's gross debt grew 13% to R441bn as of the end of March 2019.

"A successful turnaround of the company's business … will require significant external support - as evidenced by the recent increase in the government transfers - and clear focus on improving Eskom's operational and financial performance," said Moody's senior vice president and lead analyst for Eskom, Joanna Fic.

"Eskom's financial performance continues to be affected by the legacy of past corruption and misconduct," Fic added.

Moody's, however, acknowledges that the power utility's new management is focusing on improving corporate governance at the entity.

The financial situation is exacerbated by the power utility having to deal with low demand for electricity due to the weak economic environment and low tariffs, which have been granted by the national energy regulator, while still fulfilling its mandate of providing electricity by fighting off load shedding.

"The president and the government of South Africa have recognised that cost savings alone will not be sufficient to put Eskom on a sustainable footing," Fic said. For this reason, Treasury allocated R69bn to the power utility over the next three years and, in the near term, a special appropriations bill has been tabled by Finance Minister Tito Mboweni, providing Eskom with cash transfers totaling R59bn over 2020 and 2021.

"We view the additional cash transfers as credit positive, but the increased support has become necessary for Eskom to remain a going concern in the context of a number of negative developments affecting its cash flow generation.

"As such, we consider that the government capital transfers of R105bn over the 2020/21 period cannot do more than stabilise the company's debt burden, pending development of a longer-term solution for the company," Fic said.

The capital transfers will help alleviate Eskom's near term funding needs. But Eskom still needs to raise R20bn in external financing to cover its debt servicing obligations of R84bn this year, she said. "The current capital structure is not sustainable, absent continued government cash transfers, indicating a strong and urgent need for a longer term strategic turnaround plan."