London, 27 January 2011 -- Moody's Investors Service has today assigned a definitive Baa2 long-term
senior unsecured rating to the USD1.75 billion 5.75%
senior unsecured notes of Eskom Holdings Ltd ("Eskom") due
2021. The rating outlook is stable.
RATINGS RATIONALE
Moody's assignment of a Baa2 rating to the notes is a result of
the direct, unconditional, unsubordinated and unsecured obligations
of the issuer.
"The Baa2 rating reflects the strategic importance of Eskom to South
Africa (rated A3) as its dominant vertically integrated utility,
but at the same time incorporates the execution risks related to a large
and prolonged programme of capital investment needed to build out essential
electricity infrastructure in South Africa," says Helen Francis,
a Moody's Vice President-Senior Credit Officer and lead analyst
for Eskom.
Eskom has suffered from a weakened financial profile in recent years,
although results for the first half of the financial year 2010/11 represent
an improvement over those of the first half of the previous year.
Additionally, a number of measures were taken in 2010 to strengthen
the company and enable it to continue its investment programme.
One such measure was an announcement by the government that it will increase
its guarantee limit for Eskom to R350 billion from R176 billion.
This, together with a proposed, but not yet sanctioned,
equity injection of R20 billion over the three years from 2011,
improves the company's overall liquidity and financing prospects.
Whilst the notes do not benefit from the government's guarantee,
the government's tangible measures of support for Eskom reflect
the company's strategic importance to South Africa's economy.
As a result, Moody's factors into Eskom's rating a high
level of potential support from the government in the event of extraordinary
need, resulting in significant uplift to Baa2 from the company's
fundamental credit assessment (from a Baseline Credit Assessment (BCA)
of 13, equivalent to Ba3 under Moody's Government Related
Issuer Methodology). The rating also incorporates a high level
of dependence.
Other measures taken in 2010 included (i) an annual increase in tariffs
of 25% over the second multi-year price determination period
(MYPD2) from March 2010-13, although tariffs are not yet
fully cost-reflective; and (ii) a more gradual phasing of
the company's capital expenditure (capex) plan, which remains
substantial.
The evolution of Eskom's financial profile over the medium to longer
term will also be influenced by: (i) tariff increases for the third
multi-year price determination period (MYPD3), post-2013,
which are yet to be decided; (ii) effective control of operating,
primary energy and foreign exchange costs; and (iii) the pace and
scale of both committed capex build-out (including the completion
of the Medupi, Kusile and Ingula plants) as well any further,
as yet uncommitted, capex, in the context of South Africa's
long-term energy plan, which requires significant further
investments.
Although the rating outlook is stable, positive pressure could be
exerted on the rating over the medium term if Eskom's financial
profile were to continue to improve on a sustainable basis. Nonetheless,
the impact on the final rating would need to be assessed in the context
of Moody's view of the level of support provided by the government
at the time, as tangible support could potentially be reduced were
the financial strength of Eskom to improve significantly.
In Moody's view, negative pressure on the rating could develop
if there were a delay in the government's implementation of agreed
measures or a failure of Eskom to achieve the required improvement in
its financial profile in the medium term (a retained cash flow (RCF)/net
debt ratio in the region of 10% or more).
Changes in the sovereign rating or Moody's view of support may also
influence the rating of Eskom.
The principal methodologies used in this rating were "Regulated
Electric and Gas Utilities Methodology", published in August
2009, and "Government-Related Issuers: Methodology
Update" published in July 2010.
Eskom is the dominant vertically integrated utility in South Africa,
generating 95% of the country's electricity and 45%
of Africa's electricity requirements. The company also owns
and operates all its transmission and distribution networks. As
at FYE March 2010, Eskom posted total revenues of R72 billion.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service information, and confidential and proprietary Moody's
Analytics information.
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on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
The rating has been disclosed to the rated entity or its designated agents
and issued with no amendment resulting from that disclosure.
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Service(s) to the rated entity or its related third parties within the
three years preceding the Credit Rating Action. Please see the
ratings disclosure page www.moodys.com/disclosures on our
website for further information.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
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and accurate based on the information that is available to it.
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used in determining ratings, further information on the meaning
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London
Helen Francis
VP - Senior Credit Officer
Infrastructure Finance
Moody's Investors Service Ltd.
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London
Monica Merli
MD - Infrastructure Finance
Infrastructure Finance
Moody's Investors Service Ltd.
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Moody's assigns Baa2 rating to Eskom's USD1.75 billion bonds; stable outlook
