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Yelland: Do what Eskom says and ask questions

Jun 18 2016 07:00
Chris Yelland*

Johannesburg - After an exposé by Carte Blanche on Sunday June 12 2016 regarding a R500m plus prepayment by Eskom to the Guptas for coal, we were told by Eskom’s Khulu Phasiwe [in a tweet] that if we had any questions, we should not speculate, but to simply ask the necessary questions. So I did…

After first flatly denying that any prepayment for coal to the Guptas had ever taken place, when confronted with evidence on national TV, Eskom’s head of generation, Matshela Koko, was forced to retract his denial.

So I posed my questions to Eskom on 13 June 2016 as follows:

Please can you clarify the nature of the reported R500+ million prepayment, initially denied by Mr Koko:

- To which business entity was the prepayment made – Oakbay? Tegeta? Optimum Coal? Other?
- What date(s) was the prepayment made?
- How much was prepaid?
- How is the prepayment treated? For example, is it: A loan? Bridging finance? A capital development payment? An advance payment for coal still to be delivered? Other?
- If a loan or bridging finance, what are the terms (interest, repayment dates)?
- If a capital development payment, is it repayable and if so what are the terms (interest, repayment dates)?
- It has been reported that Eskom receives a discount on the price of coal delivered in return for the benefit of prepayment. If so, what discount?
- Does this type of prepayment require Treasury approval, and if so, was it received?
- What recourse does Eskom have if Optimum does not deliver the appropriate amount or quality of coal as scheduled against the prepayment, and is this recourse available while Optimum is still under business rescue?

While I had been hoping for short one-liners to each of my questions, the Eskom response on June 15 2016 was a long-winded attempt to justify the R500m plus prepayment.

Eskom’s response was clearly just a “copy and paste” rehash of responses to questions by others, and corporate communications that had already been issued by Eskom, after being caught out during the Carte Blanche interview the previous week.

Of course no explanation was given as to why the facts of the prepayment should have been hidden and denied by Eskom in the first place – until it was exposed by Carte Blanche.

However, one would be hard-pressed to find answers in Eskom’s response to any of the specific questions I had posed. I wonder why?

Eskom’s response:

In light of the questions posed by EE Publishers, Eskom believes it is imperative for it to outline the commercial and business rational of concluding the coal supply transaction with Tegeta Exploration and Resources and Umsimbithi Mining thereby mitigating the risk of load shedding.

Eskom's response to background to the Arnot power station coal supply

Exxaro Arnot Colliery had a contract with Eskom to supply coal to Arnot Power Station for 40 years. This contract expired in December 2015. The cost of coal at expiry was R1 132/tonne. The tonnages supplied under the contract were below contractual volumes necessitating Eskom to supplement the supply with other contracts to mitigate security of supply which was a continuous challenge.

In anticipation of the expiry of the contract, a Request for Proposal (RFP) was issued to the market in August 2015. This RFP is currently under evaluation and is expected to be awarded by September 2016.

Eskom's response to Tegeta and Umsimbithi transaction

Independent intelligence obtained of a potential protest action at Rietkuil and surrounding areas increased the security of supply risk, prompting a declaration of an emergency in December 2015.

Continued monitoring of the security of supply risk from January to March revealed the need to build up stock requirements also coincided with strike action at Umsimbithi. This placed a further strain on stock levels prompting an immediate need for additional coal.

Two suppliers, namely Umsimbithi and Tegeta, were approached to increase supply to mitigate the shortfall. Both suppliers were able to meet Eskom’s requirements for additional coal quantities at the required coal quality which resulted in approval for extension of both contracts.

Tegeta indicated that the required coal quality can only be sourced if they divert their export quality coal to supply Eskom. In addition, there was an indication that additional equipment was needed to reach the required tempo of coal delivery to Eskom that would mitigate the shortfall. These factors led Tegeta to request a prepayment from Eskom.

Umsimbithi indicated that they are able to supply additional coal with no additional resource requirements.

Eskom concluded a contract with Tegeta to supply 1 250 000 tonnes of coal from April to September 2016 and have approval to extend the contract with Umsimbithi to supply 540 000 tonnes from June to September 2016. These two contracts in our view sufficiently address the winter shortfall and security of supply risk relating to coal procurement.

The Tegeta prepayment request was considered on its merits, the current security of supply risk circumstance and previous transactions of a similar nature which is discussed below.

Additional conditions relating to the prepayment included a 3% prepayment discount on the coal price and sufficient security guarantees. The coal calorific value requirement was increased due to the prepayment request. In addition penalties are applicable in the event that Tegeta does not provide the contracted qualities.

Tegeta performance against the contract indicates that they are supplying coal with the contracted specification and are expected to deliver all tons, possibly ahead of the contract period.

These transactions have enabled Eskom to commit to no load shedding during the winter peak period which is a significant commitment to the country.

Eskom's response to repayment for coal – common practice

Prepayment is a common commercial practice that is used widely and not unique to Eskom contracts. It is used in in large projects, coal mining contracts and emergency supply contracts. The first Eskom coal emergency arose is 2008 after load shedding due to constrained coal supply conditions.

During the 2008 emergency, Eskom Board approved advance payments to the value of R400m to enable suppliers to undertake projects needed to supply coal. To this end, Eskom concluded a coal processing contract with Isambane with prepayment terms.

Three loans were granted to Isambane. Isambane was then required over a period of time to conduct beneficiation and stockpiling services. The agreement was that Isambane would perform these services and eventually pay off the prepayment.

Furthermore, a prepayment in the form of a loan was provided to Liketh in 2008 to buy equipment to process coal from Kleinkopje Pit 5 West. The loan was recovered in 12 consecutive instalments from March 1 2008.

Eskom has also entered into loan agreements to assist Rand Mines for capital expenditure. The first loan was payable over a period of 20 years until 31 December 2013. The second loan was in 1998, and it will be paid in full by December 2017. Eskom also assisted another Rand Mines operation with a loan for bridging finance. This loan is paid up.

In cost-plus mine contracts, Eskom pre-paid the mines to start up the mining operations. It subsequently pays for the operating costs and a management fee. In return Eskom receives security of supply at the right qualities and volumes.

The cost plus mines future investment/prepayment capital requirement is R38bn. The beneficiaries of the R38bn are Anglo, Exxaro and South 32 (formerly BHP Billiton). This up-front payment is in line with the agreed 40 year long term contracts.

In October 2015, Exxaro requested funding of its Matla cost-plus operation capital requirement. The estimated cost requested by Exxaro is R1.8bn for the establishment of a new mining shaft.

Eskom’s response to coal supply challenges

In general, Eskom has experienced numerous coal quality challenges with various suppliers, including long-term tied collieries. To mitigate this exposure, Eskom has, over time, improved on coal quality monitoring, assurance, and lately risk transfer. A number of changes are being considered and will be implemented for all new contracts and renegotiated for all contracts.

These changes are as follows:

- Transfer of coal quality certification and payment point to receiving point, power stations versus current quality pre-certification at the supply point by an Eskom-appointed and -managed laboratory contractor;

- Withholding of payment or coal price adjustment in the event that coal quality at the delivery point is inferior to contractual qualities; and

- Up-front payment of a quality deposit by suppliers to Eskom.

Eskom continues to engage the industry on coal quality, as well as coal pricing, in order to ensure receipt of an optimal coal product at the right price. To this end, current coal contracting discussions are aligning coal pricing and escalations in line with Nersa coal cost determinants.

Commercial decisions that consider security of supply, risks associated with coal costs, and optimal cost of coal continue to be balanced, ensuring that the optimal decisions are in the interests of Eskom and the South African consumer.

* Chris Yelland is the investigative editor of EE Publishers.

eskom  |  chris yelland  |  khulu phasiwe  |  opinion  |  energy
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