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ESKOM has finally owned up to the full liability it faces as a result of preferential deals to supply cheap power to BHP Billiton’s aluminium smelters, putting it at a stunning R11.5bn in its latest financial statements — double that stated in previous years.
In last year’s statements, Eskom put the liability from the contracts at R5.9bn. For the year ending March 2013, this has been restated as R11.5bn.
This is essentially “lost” revenue, as a result of the contracts which supply the smelters according to various formulas at less than half the cost it takes to produce the power. The Billiton contracts were kept under wraps until March, when court action by Media24 forced Eskom to reveal the true cost of the agreements.
In its latest statements, Eskom appears to be taking into account that the contracts will run even longer than initially thought, causing it to take a larger hit on its balance sheet.
The length of the contracts has been a matter of dispute between Eskom and Billiton.
“The liability is effectively an opportunity cost of supplying electricity to BHP Billiton on the current special pricing formula versus if we were to sell it at regular industrial customer tariffs,” Eskom spokesman Andrew Etzinger said last week.
The loss to Eskom resulting from the obligation was R5.9bn in the year ended March, from a profit of R334m last year, the company said in its annual report, published last week. Added to the R5.5bn carrying value of the obligation, Eskom’s potential loss on the contracts totalled R11.48bn.
“That’s the present value of the difference between what we project Billiton would pay for power and projections around what similar electricity users would pay,” Mr Etzinger said.
Asked what had caused the exposure to more than double in the past year, Eskom said its previous valuation was “for a shorter period, and when it became apparent it was unlikely Eskom would succeed in this renegotiation, it was deemed it prudent to raise the provision for the legal remaining life of the contract. That added a further five years to the provisioning, extending to 2020.”
Eskom had succeeded in renegotiating similar commodity-linked sales agreements, including one with BHP Billiton, and had anticipated success in renegotiating this last contract as well, Mr Etzinger said.
In 1992, Eskom agreed to supply electricity to Billiton’s aluminium smelters, Mozal and Hillside, at an average of 22.65c/kWh, way below the cost of production. The price is based on numerous assumptions, the main ones being the future aluminium price, the rand-dollar exchange rate and interest rates up to 2020, Mr Etzinger said.
Eskom entered into a number of agreements to supply power to electricity-intensive industries where the revenue from these contracts is based on commodity prices and exchange rates, or foreign production price indices, it said in its annual report. The remaining contractual periods are for between seven and 15 years.
Today, the contracts consume about 9% of Eskom’s output, and since 2008 the company has been struggling to meet the demand of regular customers. It has tried to cancel or renegotiate the contract with Billiton in the past but failed to reach an agreement. One reason for the breakdown in negotiations is disagreement over when the contracts would end.
Billiton has said it expects Eskom to honour the contracts.
Following the dispute, Eskom referred the matter to the National Energy Regulator of South Africa, which is investigating.
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