Moody’s: South Africa’s Eskom Urgently Needs Turnaround Plan

JOHANNESBURG – South Africa’s state power utility Eskom urgently needs a turnaround plan as its capital structure is unsustainable, credit ratings agency Moody’s said on Tuesday in a report which sent the rand to a two-month low.

FILE PHOTO: Electricity pylons in front of the cooling towers at the Lethabo thermal power station, a coal-burning Eskom power station near Sasolburg in the northern Free State province, March 2, 2016. REUTERS/Siphiwe Sibeko/File Photo

A week ago Eskom reported a mammoth R20.7 billion ($1.39 billion) annual loss, and its outgoing chief executive said the firm needs to change its outdated business model to escape a “death spiral”.

“The company’s operational and financial performance has deteriorated, indicating the extent of the challenges facing Eskom in meeting its debt obligations absent government support,” Moody’s said in a note.

“The current capital structure is not sustainable… indicating a strong and urgent need for a longer term strategic turnaround plan.”

The rand gave up its gains against the dollar and sharply reversed course after the report was published to hit its lowest since June 7. It traded down 0.4% at 14.9725 rand per dollar by 1519 GMT.

Struggling Eskom, which supplies more than 90% of the power in South Africa, is dependent on government bailouts and deep in crisis as its sales decline while debt-servicing costs soar.

It is regularly cited by ratings agencies as one of the main threats to South Africa’s creditworthiness and economic growth.

Eskom’s financial woes stem from a steep run-up in its salary, fuel and debt-servicing costs over the past decade, and it has also been hampered by mismanagement and corruption scandals under previous executives.

Last month the government proposed an extra 59 billion rand of support for Eskom over the next two years, in addition to 230 billion rand in bailouts spread over the next decade.

Moody’s said the cash injections from the state were credit positive for Eskom but would do no more than stabilise the company’s debt burden, and a long-term solution would still be needed.

(Reporting by Alistair Smout; Editing by Jan Harvey)