Moody's recently affirmed Eskom's credit rating with a stable outlook but cautioned that the next phase of the utility's unbundling process could adversely affect its business risk profile.
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The planned separation of the National Transmission Company South Africa (NTCSA) from Eskom could weaken the power utility's financial position if not carefully managed, according to energy experts responding to concerns raised by ratings agency Moody's Ratings.
Moody's recently affirmed Eskom's credit rating with a stable outlook but cautioned that the next phase of the utility's unbundling process could adversely affect its business risk profile.
The agency said the establishment of NTCSA marks a critical step in South Africa's electricity sector reforms aimed at attracting private investment, but warned that further separation of the transmission business from Eskom would be complex and potentially damaging to the utility's financial strength.
According to Moody's, the transfer of transmission assets and associated cash flows to NTCSA could significantly impair Eskom's credit quality unless mitigating measures are put in place.
Power and energy expert Vally Padayachee, a former Eskom executive manager and former senior executive at City Power Johannesburg, said he shares the agency's concerns.
“The transition represents a substantial structural reform that, while potentially beneficial for attracting private investment, poses significant execution risks,” he said.
“The report rightly highlights that such a separation could adversely affect Eskom's business risk profile due to the potential loss of cash flows and assets, which are crucial for maintaining financial stability.”
Padayachee said Eskom and NTCSA should adopt a cautious and phased approach to the unbundling process to minimise operational disruption and financial risk.
He recommended that Eskom gradually transfer assets and responsibilities while continuously assessing the impact of each stage of the separation. He also called for comprehensive valuations of transmission assets before any transfer takes place to ensure Eskom's capital value is protected.
Continued government support will also be critical, he said, potentially through debt guarantees or transitional funding mechanisms to cushion Eskom from financial strain during the restructuring process.
Padayachee further stressed the need for a strong regulatory framework governing the separation, including clear responsibilities, governance arrangements and financial structures to protect all stakeholders, including creditors.
“This framework should outline responsibilities, governance structures, and financial arrangements post-separation,” he said.
“Ongoing government support, coupled with strategic planning and stakeholder engagement, will be critical in mitigating the risks associated with the transition and ensuring that Eskom remains a viable entity capable of fulfilling its mandate as South Africa's primary energy provider.”
Similar concerns were raised by Ruse Moleshe, managing director of RUBK, an energy and infrastructure consulting and advisory firm.
Moleshe said the creation of an independent transmission company has clear benefits, including supporting competition, attracting private investment, facilitating grid expansion and advancing electricity market reforms.
However, she questioned whether the restructuring would ultimately strengthen the electricity sector as a whole or simply transfer Eskom's strongest assets to NTCSA while leaving the remaining utility exposed to greater financial and operational risks.
Moleshe added that transmission is Eskom's strongest business from a credit perspective, benefiting from regulated revenues, predictable cash flows, and lower operational risk.
“By contrast, the residual Eskom would continue to contend with rising municipal debt, declining sales volumes, cost-recovery challenges, generation-related risks, and substantial maintenance and investment requirements,” she said.
“Against this backdrop, Moody's concern that the transfer of transmission assets and cash flows could weaken Eskom's business risk profile and impair its credit quality is well founded.
“The central issue is whether the value removed from Eskom through the transfer of transmission assets would be matched by a corresponding adjustment to its liabilities and financial obligations. If not, the result could be a structurally weaker utility,” she said.
Moleshe warned that the implications extend beyond Eskom's credit rating.
“Eskom remains the dominant supplier of electricity in South Africa and will continue to play a central role in security of supply for the foreseeable future,” she said.
“A weaker credit profile would likely increase Eskom's cost of capital and constrain its ability to fund maintenance, refurbishment, life-extension programmes, and future generation investments.”
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