SAUDI ELECTRICITY COMPANY
Fitch Ratings has affirmed
The Outlook is Stable.
The affirmation reflects Eskom's strong links with the government, further supported by its debt relief plan over FY24-FY26 (year-end in March). However, its Standalone Credit Profile (SCP) remain weak at 'ccc-', as poor and worsening operating performance offsets improved tariff determinations and its shareholder's announced plan to reduce debt at the company.
Liquidity remains dependent on government support and the spread of Eskom's debt relief over four years implies any material improvement in financial sustainability will take time to be visible.
Key Rating Drivers
Weak Operational Performance: Eskom's operational performance has led to ongoing load shedding. Its ageing power plants, extensive maintenance requirements and operational faults at Medupi and Kusile as well as delays in various independent power producer (IPPs) programmes have exacerbated unplanned capacity losses and could constrain revenues. Eskom's energy availability factor (EAF) has consistently declined in the last decade (58% in FY23 from 75% in FY14) and is expected to remain below 70% over medium term, which will likely also lead to higher costs due to higher usage of open-cycle gas turbines, thereby adding to margin pressure.
Strong Links with Government: Eskom's rating is notched off twice from that of the sovereign as per our Government-Related Entities (GRE) Rating Criteria to reflect the strength of the links between Eskom and the state. The strong links are underlined by the government budget providing for explicit support to Eskom to FY27 through the recently announced debt relief and through the guarantee framework agreement (GFA) under which debt instruments remain outstanding, although it is not available to issue new debt from
'Strong' Support: Fitch assesses the government's ownership and control of the company as 'Strong' and has revised its assessment of the support track record to 'Strong' from 'Moderate', following the debt relief announcement. Fitch continues to expect the government to ensure that Eskom maintains adequate liquidity to service interest and debt, given the socio-political and financial consequences for the country of a default by Eskom. This supports our top-down approach with a material rating uplift from its SCP.
Debt Relief is Positive: The government's debt relief includes new liquidity for
Vulnerable SCP: The SCP continues to reflect Eskom's poor operational performance and an unsustainable financial profile even though the debt relief is forecast to reduce debt over the next four years. However, other factors will also be critical in ensuring a material and sustained improvement of the SCP, such as supportive and cost-reflective tariff determinations as well as improvement in Eskom's operational performance. In the near term Eskom remains dependent on the government's support for it to remain solvent but we note the management's and government's intent to reduce leverage in the medium term.
Business Untenable Without Support: Eskom is taking cost-saving measures while moderating capex to conserve cash. However, current capex is not sustainable over the medium term given the poor state of Eskom's generation assets, its historically underfunded network businesses as well as the need for grid expansion to support IPP program. Therefore, continuous financial support from the government is necessary to fund the business.
Insufficient Tariff Increases: National Energy Regulator of
Upcoming Methodology to Aid Visibility: We expect NERSA to finalise the methodology for regulating Eskom's three segments - transmission, generation and distribution - as Eskom nears the unbundling of its transmission segment. While we do not expect this to significantly change the overall tariff increases granted by NERSA, it could be a step towards more transparent regulation as well as providing visibility on the sustainability of individual segments, including on the recovery of efficient costs through a regulatory clearing account.
Turnaround Plan Progressing Slowly: Eskom's plan to create separate business divisions is progressing slowly. The company expects the separation of generation, transmission and distribution entities will enable them to focus on their respective businesses, including lowering carbon intensity, as well as on financing activities such as accessing green financing. As of now, this does not involve separation of these business by their credit profile and we continue to asses Eskom's credit profile as a whole. The ongoing separation of transmission is an important step in reforming the South African electricity sector, including increased participation of IPPs.
Derivation Summary
Eskom's 'ccc-' SCP reflects its very weak liquidity, which remains highly dependent on successful implementation of its debt relief programme and higher cash generation from its operations by improving operational performance. Eskom's leverage and liquidity profile remains significantly weaker than that of peers such as
Eskom is similarly positioned to peers due to its monopolistic position in generation, transmission and distribution. It has a strong position in the domestic electricity market, together with 100% government ownership. We view Eskom's links with the government as similar to those of
For its National Scale Rating of 'A(zaf)', we analyse Eskom relative to peers on the national scale with
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Tariff increase of 18.7% in FY24, 12.7% in FY25 and 8% in FY26-FY27
Volume sold to decline 2% annually over FY23-FY27, with a progressive increase of electricity acquired from IPPs and a decrease of electricity generated by the company
Debt relief (for debt repayment and interest services) of
Capex to average about
RATING SENSITIVITIES
Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
Strengthening of Eskom's links with the sovereign under our GRE Rating Criteria
Improvement in SCP that may be driven by a material improvement in operational performance and in liquidity and access to funding (also on a non-guaranteed basis)
Positive rating action on the sovereign
Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
A significantly adverse change in Eskom's operational structure, resulting in diminishing links with the sovereign
Deterioration in liquidity and funding access due to weak operational performance (either due to declining energy availability factor or pressure on sales volumes) or delays in implementation of its debt relief
Negative rating action on the sovereign
South African sovereign sensitivities as per the rating action commentary ('Fitch Affirms South Africa at 'BB-'; Outlook Stable') published on
Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
Public Finances: Further significant increase in government debt/GDP, for example, due to a persistent failure to narrow the fiscal deficit
Macroeconomic Performance, Policies and Prospects: A further weakening of trend growth or a sustained shock that further undermines fiscal consolidation efforts and raises socio-economic pressures in the face of exceptional inequality
Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
Public Finances: Increased confidence that government debt will stabilise, for example due to signs of persistent high tax collections combined with successful expenditure control
Macroeconomic Performance, Policies and Prospects: Greater confidence in stronger growth prospects, sufficient to support fiscal consolidation and address challenges from high inequality and unemployment
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Support from Government: As at
Constrained Liquidity: In FY24, Eskom has debt maturities of
There is, however, an allowance that Eskom may continue to draw down against existing facilities with development financial institutions of
Issuer Profile
Eskom is a wholly state-owned entity and
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
Eskom's IDR is notched off from the South African sovereign rating under our GRE Criteria.
ESG Considerations
Eskom has an ESG Relevance Score of '4' for Governance Structure due to governance breaches that affected market access and contributed to a decline in liquidity, which has a negative impact on the credit profile, and is relevant to the rating in conjunction with other factors.
Eskom has an ESG Relevance Score of '4' for Financial Transparency due to qualified audit opinions for the last four financial years, and delays to the publication of one set of interim financial results, which has a negative impact on the credit profile, and is relevant to the rating in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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