S&P has downgraded Eskom’s credit rating, dropping it from the lowest level of junk to “highly speculative”, with a negative outlook. This rating review follows its Monday’s announcement that it was cutting SA to junk – the first rating agency to do so.

Impression: In the fifth revision of ten year development plan (TDP) which covers 2016-2025, Eskom has shared its plans of expanding and updating its transmission infrastructure which requires a CAPEX of R213 billion in total. A large portion is earmarked, R151 billion, for network strengthening (N-1 reliability) and expansion projects for the integration of already committed generation, up to IPPs Bid window 3. Of the remaining plan, the majority, R47 billion, is allocated for refurbishment and expansion for IPPs, beyond bid window 3.

A big part of this capital expenditure is to be sourced via loans, the majority of which is government guarantee through agreed Government Framework Agreement (GFA), bonds and commercial paper. Even though the government of South Africa has extended its R350 billion guarantee framework with Eskom, the recent hit on South Africa’s sovereign ratings signals a weakening of government’s ability to provide support to Eskom. In addition to this, NESRA’s (National Energy Regulator of South Africa) ruling in February, allowing Eskom a Tariff increase of only 2.2%, which was well below the requested 8%, will affect Eskom in short to medium term (1-2 years). Eskom has mentioned it might submit a new application for tariff increase, as the uncertainty in the government’s ability to support Eskom will affect Eskom’s ability to service its debt. It will most likely have to issue more bonds with its borrowing and finance costs increasing.

Eskom project pipeline in four phases by years.

Image Source: Eskom Transmission Development Plan 2016-2025

Eskom’s financial troubles will mean the T&D equipment market in South Africa will see a decline. PTR sees Eskom sticking to the first two phases of the TDP sequenced implementation, going for low hanging fruit and supporting its network as much as it can with current funding till they figure out the next steps. This translates into upgrade/maintenance work on existing substations/projects including limited transmission line work, planned for less than two year timelines. Projects at a higher risk of completion include greenfield substations and transmission line work with four to ten year timelines.

Link to news: S&P drops Eskom’s credit rating.