Transnet has been dealt a potentially debilitating financial blow after the high court ordered the cash-strapped freight and rail group to pay R8.5bn to energy majors Sasol and TotalEnergies in a long-running dispute about pipeline tariffs.
Transnet says it will appeal the judgment.
The legal battle was initiated by Sasol and TotalEnergies, seeking compensation from Transnet. The issue stemmed from Transnet’s breach of its obligation to set pipeline tariffs for conveyance of crude oil, as outlined in a 1991 agreement. Transnet had been overcharging Sasol’s oil division for years.
The award, one of the highest in corporate SA yet, comes at a challenging time for Transnet, which reported a R1.6bn loss in the six months ended in September 2023.
The order is likely to “derail” the positive work of the new board and management team in implementing the turnaround plan, said Lindani Vezi, an investment analyst at Futuregrowth Asset Management, one of SA’s biggest investors in state-owned companies’ bonds.
The group is in the midst of a recovery plan and needs cash and debt relief. Last year saw the departure of executives in key positions and the reconstitution of its board of directors.
The damages order, amounting to more than half of what Transnet deployed on capital spending in 2023, is likely to give finance minister Enoch Godongwana a fresh headache.
Transnet had limited capacity to absorb the financial impact of the ruling, Vezi said.
“It would be difficult to raise funding (guaranteed or unguaranteed) to fulfil the order. This further necessitates some form of equity support from the shareholder to address both the court order and rightsizing the balance sheet,” he said.
In December 2023, the Treasury provided Transnet with a R47bn bailout as part of its support and recovery plan. The amount was less than half of what Transnet had requested.
Fair costs
The dispute has its roots in 1967 when the apartheid regime sought to protect energy security amid international sanctions. Coastal refineries could not meet inland demand, prompting the government to establish an inland refinery in Sasolburg.
An agreement with TotalEnergies ensured fair transport costs for crude from the coast to the inland refinery.
In 1991 the agreement was amended, allowing Transnet to increase tariffs by no more than the weighted average cost for refined petroleum products from the coast to the inland market. But in 2008, Transnet breached this variation agreement, raising the tariff by more than 10% and again in 2011 when it hiked it by more than double, prompting Sasol and TotalEnergies to launch a legal challenge.
Judge Willem Wepener dismissed Transnet’s argument that the variation agreement became impossible to implement due to changed circumstances as a “red herring”. He emphasised that profit margins were not evident in the variation agreement.
Instead, the agreement contained a crucial clause related to the transportation of crude oil via the pipeline from Durban to Sasolburg. Wepener clarified that the comparative destination for implementing this clause would be the point where white fuel ends.
He ordered Transnet to pay Sasol a figure of R6.2bn inclusive of interest, with TotalEnergies set for a R2.3bn windfall.
Wepener further dismissed Transnet’s defence and called it a red herring that there was no published rail tariff, and the percentage increase is uncertain because of different destinations attracting different tariffs.
“There was evidence and argument challenging the base tariff used by Sasol and Total for calculating their damages.
“If the incorrect base was used by Total and Sasol, Transnet is the author and therefore due to the absence of its own information.
“It is not for Transnet to complain that there might be missing data resulting in an incorrect base tariff. It is the owner of the data which could and should have produced it to the experts to determine if there is a problem or otherwise with the base tariff,” Wepener said.
Shares in Sasol ended more than 2% higher at R134.41. With Kabelo Khumalo
Update: June 20 2024
This story has been updated throughout with new information.
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