MEDIA STATEMENT

Eskom Board is firmly behind Eskoms executive management team

Friday, 4 November 2016: The Eskom Board welcomes release of the Public Protectors
report, and the recommendation that a commission of inquiry be established to investigate
all the issues using the Public Protectors report as a starting point.
Eskom Chairman Baldwin Ngubane said board members and executives cited in the
Public Protectors report were not given an opportunity to clear their names before the
report was published, but would avail themselves should the commission of inquiry require
that.
Regarding the continued innuendo that Eskom has been giving special favours to Tegeta
Exploration and Resources, the Eskom Board stands firm by the processes undertaken by
the company to conclude extensions of its coal supply agreements with its suppliers. We
are satisfied that due process had been followed and we can be proud of the savings
achieved by the executive team to date. In the six months to 30 September 2016, Eskoms
primary energy costs were reduced by 1.5% compared to an average increase of 18%
over the past 5 years, said Ngubane.
Eskom regularly engages all its coal suppliers on the required volumes and qualities as
the demand varies from time to time and contracting relationships are concluded on sound
commercial principles and considerations.
In emergency situations, Eskom has utilised the prepayment mechanism to ensure
security of supply. Furthermore, it is important to note that prepayment is a common
commercial practice that is used widely and not unique to Eskom. The principle of
prepayment is prevalent in Eskoms cost-plus supply contracts with the large mining
houses such as Anglo American, BECSA and Exxaro. These mining houses supply
approximately 80% of Eskoms coal while Tegeta supplies less than 5% of the coal volume
required by Eskom.
The coal supply market is in need of major transformation as it has and continues to
benefit a small monopoly of companies. This phenomenon is now under review as
requested by the Minister of Public Enterprises in her recent budget speech and Eskom is
determined to ensure that emerging black miners also benefit from Eskoms buying power.
More pertinently, Eskoms supply mix changed in April 2016 leaving Eskom with a deficit
of 2.1 million tons which was required to meet the winter supply plan. Eskom approached
its existing suppliers to source additional supply to mitigate this shortfall.

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It must be noted that the 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 date of expiry was R1 132/ton.
I am advised that Tegeta now supplies Arnot at an average price of R500/ton. The unit
cost of coal supplied under this contract is at a discounted rate of 3%, resulting in a further
saving to Eskom of billions of rand and ultimately, the consumer, said Ngubane.
Tegeta was one of the suppliers able to meet Eskoms need for this additional coal supply
at the required coal quality. This company also stepped in to avert a crisis at the Hendrina
Power Station by offering to take the Optimum Coal Mine out of business rescue from
Glencore thereby saving thousands of jobs and continuing the supply to Eskom.
Eskom rejects any insinuation of favouritism towards suppliers such as Tegeta who are
willing to step in to avert the coal supply crisis and allow Eskom to keep the lights on.
The Boards position can be summarised as follows:

It is concerned at Eskom not being interviewed by the Public Protector before

releasing her report as per the agreed process established in September 2016;
It must be noted that Eskom was paying R1132/ton to Exxaro and this was on a
cost plus basis.
Tegeta supplies Arnot at an average price of R500/ton, leading to savings of over a
billion rand, leading to direct savings to Eskom customers.
Tegeta is a 51% black owned emerging miner which meets Eskoms requirements.
Eskom has no issue doing business with the company based on sound commercial
considerations.
Tegeta stepped in to avert a crisis at Hendrina Power Station by saving jobs and
continues to supply Eskom at the original contracted price.
All due process has been followed and Eskom is proud of the savings achieved by
its executives.
Prepayment is a common practice in coal purchasing and Eskom has used this
mechanism previously. In fact, the cost-plus mines have been the recipients of an
average amount of R38 billion to date this year to companies such as Anglo, BHP
Billiton and Exxarro.
Eskom firmly rejects the suggestion that Tegeta is favoured or that due process
was not followed.

Issued by: Eskom Media Desk

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+27 11 800 3304/3343/3378
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NOTES TO EDITORS
1. PRE PAYMENT FOR COAL A 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 (Pty) Ltd
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 1 March 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 full 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.

2. COAL QUALITIES AN INDUSTRY-WIDE ISSUE

Eskom continues to measure and monitor the coal qualities from all its suppliers.
Tegeta coal qualities are monitored in accordance with Eskoms Coal Quality
Management Procedure. This includes Tegeta Brakfontein Colliery and Optimum
Coal Mine. The Brakfontein colliery is dedicated to Majuba and it meets Eskoms
coal quality requirements. This coal, like any other, is periodically diverted on a

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short term basis to alternative Power Stations to meet minimum coal stock
requirements.

The Optimum Coal Mine provides two coal qualities to Eskom. The Optimum
Hendrina supply is a blended product of run-of-mine and washed product. This is
supplied under the existing Optimum-Hendrina contract that expires in 2018.

The second product from Optimum from their export mining compound. It is a
higher quality coal and this is supplied to Arnot under the current short term
agreement.

It should be noted that Eskom has a claim against Optimum for R2bn relating to
out of specification coal delivered. Eskom has vigorously pursued this claim with
the previous owners of Optimum, registered its rights with the business rescue
practitioners and also indicated its intention with the new owners of Optimum being
Tegeta that Eskom will be pursuing this claim.

3. ESKOMS 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.

ENDS

Issued by: Eskom Media Desk

Tel:
+27 11 800 3304/3343/3378
Cell:
+27 82 805 7278
Fax:
086 664 7699
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