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NamPower’s margin expected to decrease

Electricity imports in the country are expected to continue to put weight on business activities despite the positive Fitch Ratings (Johannesburg/London, dated 04 April 2014), affirming that the outlooks on the long-term ratings appear stable.
In a recent media release by Fitch Ratings it is stated that “Until the Kudu Project is commissioned around 2018, NamPower will continue to import an increasing amount of electricity to satisfy domestic demand.” Therefore Fitch expects NamPower’s operating margin to decrease due to the relatively expensive imports, compared with its own hydro power. Although the tariff regulation allows for cost pass-through, electricity imports will likely dilute the profit margin. The report stated that Fitch expects near-term material weakening in NamPower’s credit ratios due to the margin reduction and increased investments, with a recovery expected after the Kudu Power commissioning. “As a result, we believe NamPower will likely face pressure on some of its loan covenants with the Development Financial Institutions (DFIs), but we expect that DFIs will likely take a longer-term view and allow medium-term relaxation of covenants,” the report said.

It was added that the company may also invest further minority equity into a scalable private-public partnership project to provide up to 250MW of heavy fuel or gas-fired modular capacity to balance the domestic market demand and strategically support security of supply.
About if and when the Kudu project is expected to be completed, the report stated that “All the power produced by the Kudu Power Station will be sold to NamPower through a long-term Power Purchase Agreement.”
“This is expected to create a secure revenue stream sufficient to support all Kudu Power’s costs, including debt servicing, operational commitments and investor returns. NamPower will sell about half of the power on the domestic market under the existing cost pass-through regulation, with the remainder exported under long-term Power Export Agreements (PXA),” Fitch added.

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