Transnet is planning to appeal this week's high court judgment awarding petrochemicals giant Sasol R6bn in damages in a battle over a crude oil pipeline.
In a blow for the state-owned rail and ports utility, the court on Monday ruled in Sasol Oil's favour, ordering Transnet to pay damages of R3.8bn and interest of R2.3bn in the dispute over tariffs for transporting crude oil via its pipeline between Durban and Sasolburg.
Transnet CEO Michelle Phillips said: “The judgment ... has enormous implications not only for the public purse but also for Transnet’s ability to discharge its obligations under the applicable legislation and its licence conditions. Transnet intends to appeal the judgment and is in the process of instructing its legal team accordingly.”
The Natref oil refinery, with a capacity of 108,500 barrels of oil per day, supplies mainly the inland market in Johannesburg and is jointly owned by Sasol and Total Energies. Both use the Transnet pipeline to transport unrefined oil from Durban to Sasolburg for refining at Natref.
In 2017 Sasol and Total Energies approached the high court, accusing Transnet of having breached its obligations to set pipeline tariffs for crude oil under a 1991 agreement concluded by the three parties.
Sasol maintained that Transnet was not entitled to increase crude oil pipeline tariffs by more than the percentage increase applied to its refined product tariffs. However, in 2008 Transnet breached this obligation and refused to apply the provisions of the variation agreement, despite objections raised by Total Energies and Sasol.
Sasol argued that as a result of the breach, Transnet overcharged Sasol Oil for the conveyance of crude oil over many years.
Transnet said the case concerned the application of an agreement that took the form of an exchange of letters concluded in 1967 between Total, Sasol and the South African government at the time, which was varied by the parties, also by way of an exchange of letters, in 1991.
It said the agreement, which has since been cancelled, stated that in calculating the tariff from Durban to the Natref refinery, the so-called “neutrality principle” would apply in terms of which Natref would neither be advantaged nor disadvantaged by its inland location.
“The judgment handed down by the high court concerns the application of the neutrality principle in the face of uncontested evidence that Total and Sasol made vast transport profits during the claim period,” said Transnet.
This judgment adds significantly to Transnet's gross borrowings of R129bn disclosed in the 2023 results. Transnet is asset-rich but cash flow poor
— Brendon Hubbard, fund manager at ClucasGray Investment Managers
Brendon Hubbard, fund manager at ClucasGray Investment Managers described the judgment as hugely damaging to Transnet, whose balance sheet is already highly leveraged.
He said the total of damages awarded was likely to be higher as the undisclosed TotalEnergies share needed to be added to Sasol's R6.2bn.
“This judgment adds significantly to Transnet's gross borrowings of R129bn disclosed in the 2023 results. Transnet is asset-rich but cash flow poor. Adding further debt to an interest bill in excess of R1.1bn per month strains the company further and the damage is largely reflected in the reduction of maintenance capex, which then lowers volumes across rail and ports. These volumes directly impact employment and tax collection from corporate South Africa; which is why the National Treasury is prioritising these reforms,” said Hubbard.
Lindani Vezi an investment analyst at Futuregrowth Asset Management said it would be a mammoth task for the Transnet team to raise debt funding, guaranteed or unguaranteed, to fund these damages.
“A shareholder equity injection or a reduction in future tariffs may be a more viable solution.”
Vezi said Transnet Pipelines has been one of the better-performing business units in the group and has managed to “cross subsidise” the underperforming units.
Transnet's turnaround plan requires substantial funding to be successfully implemented, he added.
“A ruling of this magnitude will take away funds from the already strained balance sheet. An equity injection will enable Transnet to focus on rolling out the plan rather than sourcing funding”.
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