Johannesburg - Moody's Investor Service said on Friday it believes that significant above-inflation tariff increases are likely to be necessary for a couple of years for power utility Eskom to make the transition to full cost recovery.
In the note accompanying its change in outlook on Eskom's rating from stable to negative, Moody's said the annual tariff increases of about 25% over the second multi-year price determination period (MYPD 2) from April 2010 to March 2013 should allow Eskom's financial profile to improve over time - although this will depend on the timing of the build-out and the control of costs.
It said Eskom's financial credit metrics showed an improvement at the end of its financial year in March 2011 as it benefited from the implementation of higher tariffs.
However, it cautioned that the company's metrics could weaken again in 2012 as capital expenditure ramps up in line with the company's medium-term investment plan of about R453bn over the 2012 to 2017 period.
Moody's noted that the evolution of Eskom's financial profile over the medium to longer term will be influenced by additional factors.
"The first is the increase in tariffs for the third multi-year price determination period (MYPD 3, post-2013), which has yet to be decided," it said.
It added that an additional factor is the pace, scale and funding strategy for any further, as yet uncommitted, capital expenditure in the context of the country's long-term strategic plan, which calls for significant further investment. Eskom dismisses outlook
Eskom said on Friday that while Moody's had changed the outlook on its rating to negative from stable, it believes its fundamentals continue to improve.
The change in outlook was anticipated following an announcement by Moody's earlier in the week that it had changed its outlook on SA's A3 local and foreign currency government debt ratings to negative from stable.
"Eskom's fundamentals continue to improve and we continue to progress with our committed capital expenditure programme, which will provide much-needed electricity capacity and drive growth in the economy," Eskom said.