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EM CEEMEA CREDIT: Eskom (ESKOM; B2/Bpos/B)

EM CEEMEA CREDIT
Bullet

Eskom (ESKOM; B2/Bpos/B)

  • We see the latest headlines as neutral to supportive for spreads. The overall picture remains constructive in spite of challenges and uncertainty. The spread differential between standalone ESKOM 8.45% and govt supported ESKOM 6.35% has compressed significantly since the summer. It currently stands @ +36bp from +100bp area back in August. Spreads have been on a tightening trajectory with ESKOM 8.45 Aug28 having reached z+270bp area (see chart below).
  • We view the latest postponement of South Africa’s National Energy Regulator (NERSA) long-awaited decision as neutral for spreads. NERSA has postponed to the end of January its pronouncement on ESKOM’s proposed increases in electricity tariffs (so called MYPD6 revenue application), which represent an important step to ensure cost reflectivity as part of Eskom’s financial recovery initiatives and return to profitability strategy. It is not the first time the deadline is extended, as delays in the public consultation process had already forced earlier postponements. Whilst uncertainty remains elevated, the delay per se does not alter the status quo.
  • We view Eskom’s latest count of 272 days without loadshedding as supportive for spreads. Eskom’s cost saving initiatives rely significantly on lower recourse to expensive diesel-operated open-cycle gas turbines (OCGTs), as well as sustainability of sales volumes. Diesel related cost savings over the period are estimated @ ZAR16bn as noted by South Africa’s Electricity and Energy Minister. For reference, OCGT related costs in FY24 amounted to ZAR33.9bn. 

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Eskom (ESKOM; B2/Bpos/B)

  • We see the latest headlines as neutral to supportive for spreads. The overall picture remains constructive in spite of challenges and uncertainty. The spread differential between standalone ESKOM 8.45% and govt supported ESKOM 6.35% has compressed significantly since the summer. It currently stands @ +36bp from +100bp area back in August. Spreads have been on a tightening trajectory with ESKOM 8.45 Aug28 having reached z+270bp area (see chart below).
  • We view the latest postponement of South Africa’s National Energy Regulator (NERSA) long-awaited decision as neutral for spreads. NERSA has postponed to the end of January its pronouncement on ESKOM’s proposed increases in electricity tariffs (so called MYPD6 revenue application), which represent an important step to ensure cost reflectivity as part of Eskom’s financial recovery initiatives and return to profitability strategy. It is not the first time the deadline is extended, as delays in the public consultation process had already forced earlier postponements. Whilst uncertainty remains elevated, the delay per se does not alter the status quo.
  • We view Eskom’s latest count of 272 days without loadshedding as supportive for spreads. Eskom’s cost saving initiatives rely significantly on lower recourse to expensive diesel-operated open-cycle gas turbines (OCGTs), as well as sustainability of sales volumes. Diesel related cost savings over the period are estimated @ ZAR16bn as noted by South Africa’s Electricity and Energy Minister. For reference, OCGT related costs in FY24 amounted to ZAR33.9bn.