S&P Global Ratings has sustained a negative outlook on Eskom after affirming its 'BB-' sub-investment-grade rating this week, pointing to the State-owned electricity utility’s weakening liquidity position as a result of a “lower-than-expected” tariff increase for 2017/18.

On February 23, the National Energy Regulator of South Africa (Nersa) approved a 2.2% tariff increase from April 1 and, while the utility has received an extension for the tabling of the increase in Parliament, interim CEO Matshela Koko has indicated that he is not optimistic of securing a higher adjustment.

Koko points to prevailing legal uncertainty on the regulatory clearing account (RCA) mechanism as a key constraint, but also believes that Nersa’s February offer of a direct approach could be challenged in the courts. “In fact, we know for sure that we will be interdicted,” he told Engineering News Online recently.

Koko also revealed that Eskom had written to the signatories of the Government Support Framework Agreement (GSFA) to discuss a possible triggering of clauses that guarantee government support in the event that Eskom is unable to meet its obligation to buy electricity from renewable-energy independent power producers. The GFSA signatories include the National Treasury, the Department of Public Enterprises and the Department of Energy.

S&P Global Ratings says the ratings affirmation has been made despite an assessment that Eskom’s ability to service its debt in the absence of government support has weakened.

In fact, the agency said the 2.2% tariff increase for 2017/18 exposed Eskom to greater negative free cash flows than previously anticipated. “In turn, this further constrains the company's ability to service debt (principal and interest, excluding government support) over the next 12 months and will lead to higher-than-previously anticipated leverage. We have therefore revised our assessment of Eskom's liquidity position to weak from less than adequate.”

The agency said Eskom could experience negative free cash flows of between R40-billion and R55-billion during 2017/18.

Eskom, therefore, only sustained its rating on the basis of S&P Global Ratings’ view that the likelihood of Eskom receiving government support continued to be “extremely high”, owing to the utility’s integral link to government and its essential role in the economy.

It highlighted the extension of the R350-billion government guarantee framework to 2023 from 2017 as strengthening the utility’s access to funds and said the utility was likely to accelerate drawdowns under the framework.

However, S&P Global Ratings said the negative outlook reflected not only the negative outlook on the sovereign, but also uncertainty regarding the government's commitment and ability to provide timely support to Eskom for any funding shortfalls in fiscal 2018.

“The negative outlook reflects that on the sovereign and our view of uncertainty regarding the government's commitment and ability to provide timely support to Eskom for any funding shortfalls, which could be exacerbated if the outcome of the ongoing legal battle against Eskom and Nersa results in tariff growth remaining muted beyond March 31, 2018.”

Eskom’s rating could be lowered by one notch “if we were to consider that the likelihood of extraordinary government support had weakened or if we downgrade the sovereign”.

S&P Global Ratings associate director and sovereign ratings analyst Gardner Rusike told Engineering News Online recently that the agency was aware that various processes were under way to find a way to support Eskom in light of the current RCA uncertainty.

“But the reality is that Eskom is under pressure and they are requiring more support from government . . . more than what government had actually budgeted for. It is hurting Eskom for now, but it could eventually hurt government’s balance sheet,” Rusike cautioned.

Eskom CFO Anoj Singh said the company was pleased by S&P Global Ratings' affirmation of its credit ratings, adding that it was "acutely aware" of the regulatory challenges highlighted and that it was engaging Nersa on the matter. "We also strongly believe that with the company’s improving operations and financial profile, and ensuring sufficient liquidity, we will address the concerns cited by the rating agency."