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Rating Action:

Moody's assigns (P)Baa2 rating to Eskom's USD bonds

11 Jan 2011

London, 11 January 2011 -- Moody's Investors Service has today assigned a provisional (P)Baa2 long-term senior unsecured rating to the proposed issuance of a benchmark USD bond offering (the "notes") of Eskom Holdings Ltd ("Eskom"). The rating outlook is stable. The size, maturity and completion of the notes remain subject to market conditions.

RATINGS RATIONALE

Moody's assignment of a (P)Baa2 rating to the notes is a result of the direct, unconditional, unsubordinated and unsecured obligations of the issuer. Moody's issues provisional ratings in advance of the final sale of securities and these ratings reflect the rating agency's preliminary credit opinion regarding the transaction only. Upon a conclusive review of the final documentation, Moody's will endeavour to assign a definitive rating to the notes. A definitive rating may differ from a provisional rating.

"The (P)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 intermediate 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 rating Eskom are "Regulated Electric and Gas Utilities Methodology", published in August 2009, and "Government Related Issuer Methodology", updated 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.

Moody's Investors Service considers the quality of information available 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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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 a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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London
Helen Francis
VP - Senior Credit Officer
Infrastructure Finance
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Monica Merli
MD - Infrastructure Finance
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Investors Service Ltd.
One Canada Square
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JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's assigns (P)Baa2 rating to Eskom's USD bonds
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