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S&P reviews Eskom ratings

7 February 2003 – Standard & Poor’s Ratings Services said Thursday it affirmed its ‘A-‘ local currency and ‘BBB-‘ foreign currency long-term corporate credit ratings on the South African electricity utility Eskom Holdings Ltd. following a review. At the same time, the outlook on the local currency corporate credit rating was revised to positive. The outlook on the foreign currency rating remains positive.

The ratings on Eskom reflect its critical role in South Africa’s national Reconstruction and Development Program through its successful electrification program. They also factor in the government’s intention to remain supportive of Eskom’s credit quality, improvements in efficiency, and a more supportive regulatory regime. These strengths are offset by a relatively weak financial structure, longer-term exposure to the restructuring of the electricity industry, and the company’s more aggressive development of foreign and unregulated activities through its Eskom Enterprises subsidiary.

Eskom’s revenues are exposed to changes in tariff policy, and ongoing above-inflation rises in tariffs could be affected by changes in the political climate. A further risk is the expected restructuring of the electricity industry to consolidate the municipally owned distribution companies with Eskom’s own distribution business.

Eskom has a good operational record, runs its power plants efficiently, and produces energy at very low costs. It has some exposure to large customers in cyclical industries, however, and its financial profile suffers from a relatively high debt burden, although this is gradually improving. Ongoing capital expenditure is expected to be self-funded from internally generated funds, with sufficient surplus cash remaining for the early redemption of debt, further helped by the capping of non-core investment levels.

“The positive local currency outlook reflects the expectation that in the medium term Eskom will improve its financial profile while maintaining its dominant position in electricity generation and transmission activities,” said Standard & Poor’s Infrastructure Finance credit analyst Paul Lund. “A future improvement in the rating will be reliant, however, on a continuing demonstration of regulatory and state support, as well as an improvement in the sovereign rating. In the longer-term, the ratings could be affected by corporate restructuring and the potential spin-off of Eskom’s distribution business.”