Electricity discount to aluminium producers ‘unsustainable' – Eskom

JOHANNESBURG (miningweekly.com) – The discounting of electricity prices to aluminium producers was unsustainable and needed to be limited or removed, South Africa's Eskom said on Thursday. Presenting a record loss of R9,7-billion in its 2009 financial year to end March, the State-owned electricity utility said that the valuation of aluminium contracts with embedded derivatives had resulted in accounting losses of R9,5-billion. Before fair value loss on embedded derivatives, its operating loss for the year was considerably lower, at R3,1-billion. Eskom would be engaging its commodity-linked customers, with a view to achieving more equitable pricing, chairperson Bobby Godsell told Mining Weekly Online. "Eskom values all of its customers, including customers with commodity-linked contracts. Also, as South African citizens, we would rather they were here doing business than not. "It is so, that these contracts were concluded a long time ago, under very different circumstances. These customers have long-term as well as short-term interests, and we will simply sit down with them and explain why these contracts are problematic, not only in price, but also because of the accounting uncertainty that they impose, that makes proper strategic management of resources very difficult. "We will look at both the form and the content of the contracts and I would hope that we could come to a good long-term basis of doing business," Godsell told Mining Weekly Online. Eskom said that it had a number of commodity-linked pricing contracts with the aluminium producers at discounted prices, and also linked the electricity prices to commodity prices and exchange rates. "Correcting embedded derivatives is a big issue. Going forward, we want to limit or remove this exposure to commodity-linked prices. Both the accounting treatment and just the exposure to commodity prices in terms of revenue and the differential between the commodity-linked electricity price and the standard electricity price is becoming an issue," Eskom CEO Jacob Maroga told Mining Weekly Online. Sales of electricity decreased by 2,4% to 214 850 GWh, and R5,9-billion was spent on maintenance. Eskom made 112 965 new electrification connections in the year, when its operational cash flow totaled R11,7-billion and its capital expenditure R47-billion. Eskom employs 37 857 and has a total of 4,3-million customers. Its normal capacity is 44 193 MW and net maximum capacity is 40 503 MW. On its R9,7-billion loss, Godsell said: "The scale of Eskom's financial losses incurred is clearly unsustainable."