Rating agency Moody’s description of the recent decision to lower Eskom’s 2012/13 tariff increase by 9.9 percentage points, from 25.9% to 16%, as being “credit negative” for the utility reinforced the need for South Africa to continue its move towards cost-reflective tariff levels, the State-owned power group said on Monday.

On March 9, the National Energy Regulator of South Africa agreed with an Eskom request to moderate the increase, which would be instituted on April 1, 2012.

Moody’s said the news, while credit negative for Eskom, was “credit positive for miner AngloGold Ashanti and Gold Fields. “Our rated miners . . . are the most susceptible of the rated South African corporates to electricity tariff increases because electricity costs make up around 15% to 20% of their South African operations’ total cost structure. We believe both miners will see cost benefits of between R150-million and R200-million a year as a result of the lower-than-expected tariff increase.”

The adjustments were facilitated, in the main, through a decision by government, Eskom’s sole shareholder, to forego R8.1-billion in equity returns.

The revision would translate into a R11.2-billion reduction in the allowed revenue requirement for the year to R130.3-billion, from the R141.4-billion approved previously.

But in a credit update issued on March 19, 2012, Moody's raised concerns about the development, which government leaders and Eskom executives canvassed with investors and the ratings agencies, including Moody’s, in London during the previous week. Eskom met with Moody’s on Thursday March 15.

Moody’s said the change would place pressure on Eskom’s “already stretched" financial profile. “Debt has risen significantly year over year, with Eskom exhibiting a weak funds-from-operations-to-debt ratio although this improved to 13% in 2011 from low single digits in 2008.”

Eskom stressed that the update did not constitute a formal credit opinion and would have no effect on Eskom’s rating.

But CEO Brian Dames, who along with finance director Paul O’Flaherty and Public Enterprises Minister Malusi Gigaba, participated in the road show to the UK, indicated that the note also highlighted the need for electricity prices to continue moving up towards cost-reflective levels.

“We need certainty on a longer-term price path for electricity which will ensure that Eskom, and the electricity industry, are financially viable and sustainable,” Dames said.

It is understood that Eskom and government would like the upcoming third multi-year price determination period, beginning on April 1, 2013, to be extended beyond the prevailing three-year horizon.

The new rotation period could be between five and seven years, which Eskom believes would offer the kind of predictability that would bolster the confidence of local and international bondholders, while allowing for a greater “smoothing” of the price path.