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Eskom's Billiton losses already R10.7bn

Apr 04 2013 14:41 Neville Lennox
Electricity

(File photo)

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BHP BILLITON PLC [JSE:BIL]

Last traded 325.69
Change -1.68
% Change -0.01
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Market cap 695.73bn

Last Updated: 16/09/2014 at 04:28. Prices are delayed by 15 minutes. Source: McGregor BFA

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Johannesburg – Eskom has already made a loss of R10.7bn through supplying electricity to Hillside, the bigger of the two aluminium smelters at BHP Billiton [JSE:BIL].

Hillside uses 1 200 MW, which makes it the third-biggest electricity user in the country. This usage is surpassed only by the cities of Cape Town and Durban, which each uses 1 300 MW.

Based on the formula agreed to determine the price at which Eskom had to supply electricity to the smelters, Hillside paid about 22.65c per kilowatt hour (kWh) for two-thirds of the 1 200 megawatts it uses, as opposed to R1.40/kWh charged to normal consumers.

The deal was concluded in 1992.

This loss figure comes from calculations made by Sake24, Fin24’s sister publication, to determine the impact of Eskom's contracts with BHP Billiton.

It is alarming that between R8bn and R9bn of these losses were made in the past three years. There is no doubt that the numbers will continue to grow and could threaten the existence of Eskom if something is not done, according to Sake24.

These figures come after Sake24 won a lengthy legal battle in March, in which the Court of Appeal ruled that BHP Billiton must make public the prices it pays Eskom for electricity.

An analysis of the impact the contracts had on Eskom’s financial position over the past few years leaves many questions unanswered.

Most concerning is how it was possible for the National Energy Regulator of SA (Nersa) to approve the contracts.

Nersa did not exist when the original contract was signed with BHP Billiton in 1992, but the deal was revisited in 2001 for an extension project at the smelter, with a variable rate of between 12.88c/kWh and 32c/kWh.

The lifespan of the contract was extended from 25 to 33 years in the revisited contract.

Eskom has been trying to renegotiate the contracts since 2009 but Billiton refuses to do so, saying that Eskom has to honour the original agreement.

In a letter to Business Day newspaper, BHP Billiton South Africa chairperson Xolani Mkhwanazi said the contracts were negotiated in good faith on a risk-sharing basis, and followed recognised international models.

“BHP Billiton expects our contracts to be honoured,” he said.

He also defended the contracts, saying in past years they had benefited Eskom as well. "Over the period of the contracts, BHP Billiton for many years paid above the standard electricity tariff for industry," he said.

"As a result of these contracts, Eskom has generated significant additional revenues and benefits, which have contributed to the cost of establishing the electricity generation and transmission infrastructure in South Africa."

The loss that Eskom made does not include figures from derivatives tied to the contracts.

Nersa is planning to hold a public hearing on the BHP Billiton contracts at the end of April.



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