ANNUAL FINANCIAL STATEMENTS 31 March 2019 CONTENTS Directors’ report: 20 Inventories 85 Nature of the business 2 21 Cash and cash equivalents 85 Overview of the year 2 22 Assets and liabilities held-for-sale 86 Operational performance 4 23 Service concession arrangements 87 Financial performance 6 24 Share capital 88 Governance and compliance 9 25 Debt securities and borrowings 88 Human resources 11 Shareholder compact performance 12 26 Embedded derivatives 90 Events after the reporting date 15 27 Payments received in advance and contract liabilities and deferred income 90 Approval 15 28 Employee benefit obligations 91 Report of the audit and risk committee 16 29 Provisions 93 Statement by company secretary 18 30 Finance lease payables 94 Independent auditor’s report to Parliament and the shareholder – Minister of Public Enterprises 31 Trade and other payables 95 on Eskom Holdings SOC Ltd and its subsidiaries 19 32 Revenue 95 Statements of financial position 26 33 Other income 95 Income statements 27 34 Primary energy 96 Statements of comprehensive income 27 35 Employee benefit expense 96 Statements of changes in equity 28 36 Impairment of assets 96 Statements of cash flows 29 37 Other expenses 97 Notes to the financial statements: 38 Depreciation and amortisation expense 97 1 General information 30 39 Net fair value and foreign exchange loss on financial 2 Summary of significant accounting policies 30 instruments 97 3 Capital management and going concern 42 40 Finance income 97 4 Critical accounting estimates and assumptions 44 41 Finance cost 98 5 Financial risk management 49 42 Income tax 98 6 Accounting classification and fair value 65 43 Cash generated from operations 99 7 Segment information 71 44 Net debt reconciliation 100 8 Property, plant and equipment 74 45 Guarantees and contingent liabilities 101 9 Intangible assets 76 46 Commitments 102 10 Future fuel supplies 76 47 Related-party transactions and balances 103 11 Investment in equity-accounted investees 77 48 Events after the reporting date 105 12 Investment in subsidiaries 77 49 Directors’ remuneration 105 13 Deferred tax 78 50 New standards and interpretations 108 14 Investments and financial trading instruments 79 51 Information required by the Public Finance 15 Loans receivable 79 Management Act 112 16 Derivatives held for risk management 80 52 Reportable irregularities 120 17 Finance lease receivables 83 53 Pro forma revaluation of property, plant and equipment (unaudited) 122 18 Payments made in advance 83 Appendix – Abbreviations, acronyms and definitions 123 19 Trade and other receivables 84 Contact details IBC The annual financial statements were prepared under the supervision of the chief financial officer (CFO), C Cassim CA(SA). The financial statements have been audited in compliance with section 30 of the Companies Act and approved by the board of directors (the board) on 18 July 2019. The audited financial statements of the group and Eskom as at and for the year ended 31 March 2019 are available for inspection at the company’s registered office and on the Eskom website at www.eskom.co.za and were published on 30 July 2019. ESKOM HOLDINGS SOC LTD | 1 DIRECTORS’ REPORT for the year ended 31 March 2019 The directors are pleased to present their report for the year ended 31 March 2019. Nature of the business Eskom is South Africa’s primary electricity supplier that generates, transmits and distributes electricity to local industrial, mining, commercial, agricultural, residential and redistributor (metropolitan and other municipalities) customers as well as to utilities and end-customers in the Southern African Development Community (SADC). Eskom also purchases electricity from independent power producers (IPPs) as well as utilities and private suppliers in the SADC region. Eskom is a state-owned enterprise with the minister of the Department of Public Enterprises (DPE) as the shareholder representative. The state is the only shareholder in Eskom. The company’s head office is in Johannesburg. The nature of the business of the significant operating subsidiaries is set out in note 12 in the annual financial statements. The business objective of these subsidiaries is mainly for the sole benefit of Eskom. Overview of the year A high-level summary of the pertinent issues that characterised the year under review is presented below. Additional information, where relevant, is contained in relevant sections of the directors’ report, annual financial statements and integrated report. The performance for the year was marked by the following key factors that had a negative impact on the business: • loadshedding in June and July 2018 due to industrial action. There was also loadshedding in November and December 2018, as well as February and March 2019, as a result of a deterioration in generating plant performance • liquidity constraints and increasing debt levels • flat sales growth • an increase in overdue debt Operational performance The coal fleet plant performance deteriorated to the extent that stage 4 rotational loadshedding had to be implemented to ensure system sustainability. A dedicated team was established to manage the performance of the coal fleet and a nine-point recovery plan, stress-tested by external parties, was developed to turn the generation performance around. The use of the generation fleet, specifically the coal fleet with an average age of 37 years, is stretched beyond its limits and exceeds international norms. Good progress was made in bringing the remaining units of the Medupi and Kusile power stations online. There are, however, some concerns about the performance of these units as defects were identified. There are solutions to some of the defects but it will take time to solve the design defects. Eskom’s engineers, with support from external expertise, are investigating options to improve the generation performance. Recovery will be made from external parties where the defects are their responsibility. Financial performance Eskom has three sources of funding namely revenue, borrowings and shareholder support. A strategic turnaround plan was approved by the board in November 2018. The plan was based on four pillars, with the assumption that these have to be effected simultaneously to address the reality of Eskom’s challenges of liquidity constraints, inadequate tariffs, deteriorating plant performance and over-reliance on debt that had an impact on Eskom’s financial and operational sustainability. The pillars are: • financial support (balance sheet optimisation) from the Government of South Africa (government) • cost curtailment • tariff increases through the National Energy Regulator of South Africa (NERSA) • functional separation of Eskom into individual entities The plan was based on the following key assumptions: • debt relief of R100 billion by November 2019 • cost curtailment initiatives producing R33 billion by 2023 • a tariff increase of 15% for 2020 and 12% per annum thereafter • ring-fencing of the business entities by 2023 There was however a negative impact on the group’s financial position as a result of the following developments that occurred since the turnaround plan had been approved: • government announced support of only R23 billion per annum for 2020 to 2022 • NERSA granted an increase of 9.41% in 2020 plus increases of 4.41%, 8.1% and 5.2% in 2020, 2021 and 2022 respectively on the regulatory clearing account (RCA) Revenue is determined through the regulatory process with NERSA where there was a net revenue shortfall of R119 billion, consisting of R102 billion over the three years of the Multi-Year Price Determination (MYPD) 4, together with the RCA decision for year two to four of the MYPD 3 period of R17 billion. NERSA allowed Eskom a return on assets of 1.5% with a weighted average cost of capital of 6.9% (pre-tax real) in the MYPD 4 revenue decision that was announced on 7 March 2019. The government support of R23 billion per annum for 2020 to 2022 was however deducted from the allowed return of 1.5%, resulting in a negative return of R9 billion per annum over the three-year period of the application. The total amount allowed for depreciation and return on assets was therefore not enough for Eskom to cover its debt commitments. These developments resulted in a total deficit of R150 billion over the 2020 to 2022 period. The situation was exacerbated by Eskom’s operational challenges, with plant performance weakening to levels below expectations, which necessitated the extensive use of the expensive open-cycle gas turbine (OCGT) generating capacity. 2 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 The Eskom Group 2020 to 2022 Corporate Plan was submitted to the shareholder on 31 March 2019 for approval. The plan sets out five proposed scenarios for a collaborative solution between Eskom and government, based on liquidity support and debt relief from government. The plan was prepared in line with the turnaround plan and was based on a preferred financial scenario that incorporated the required liquidity and balance sheet optimisation that best addressed the structural, financial and operational challenges confronting Eskom, thereby placing the business on a trajectory towards financial sustainability. The group saved R9.9 billion against a target of R10.6 billion in terms of the cost containment plan during the year, although the savings were negated by significantly higher primary energy costs as well as the above-inflation wage settlement and once-off payment to bargaining unit employees. Eskom borrowed R63.3 billion during the year with the borrowing limit reaching saturation due to Eskom’s weak balance sheet. The only option left, other than an increase in guarantees, was shareholder support. The board approached the shareholder for support and met with the Ministers of Public Enterprises and Finance on several occasions who pledged their support to Eskom. The Minister of Finance announced support of R23 billion per annum over a three-year period in the 2020 budget speech. The board approached the shareholder again once it had realised that the government support was not sufficient, considering the non- realisation of some of the four pillars in the turn-around plan. The President of South Africa announced in his State of the Nation address delivered on 20 June 2019 that government would urgently table a special appropriation bill to allocate a significant portion of the R230 billion fiscal support over the next 10 years in earlier years as Eskom was seen as vital to the economy of the country. Government announced in February 2019 that Eskom would be restructured into separate business entities. It is expected that government will appoint a chief restructuring officer soon, who will be expected to reposition Eskom financially with careful attention to the mix between revenue, debt and the cost structure of the company. The board has continued with the process to separate the business into the main line divisions in preparation for legal restructuring. The board concluded, based on the understanding by the shareholder of Eskom’s situation and the undertaking of additional support, that it had not been trading recklessly at any time during the year and that the group was a going concern. The details considered by the board when assessing the group’s ability to continue as a going concern are included in note 3.2 in the annual financial statements. It is important that strategies materialise as envisaged subsequent to the going concern assessment period for Eskom to be sustainable into the future. The impact of the economic downturn on mining operations and lower cross-border sales resulted in a flat sales growth. The financial performance was further impacted by the increase in municipal and Soweto overdue debt even though numerous interventions to recover debt were instituted that did not yield the desired results. It is critical that an amicable solution is found for this challenge through the Inter- Ministerial Task Team in collaboration with all relevant parties. Governance and compliance The initial focus of the board appointed in January 2018 was to root out financial mismanagement, malfeasance and maladministration, the elimination of which is critical to restore transparent and effective governance. The ongoing internal and external enquiries and investigations into state capture also negatively impacted on Eskom’s reputation. Significant progress was made in addressing these issues, even though the board acknowledges that there is still work to be done. The focus of the board shifted to operational sustainability improvement, the completion of Medupi and Kusile power stations, strengthening of the financial health of Eskom and reviewing the structure of the organisation. Progress was made in clearing the reportable irregularities that had previously been reported. Some irregularities will remain open until all related aspects have been concluded, such as the finalisation of court cases or conclusion of investigations by external parties. The new reportable irregularity that was raised at year end resulted from procedural non-compliance with legislative requirements. The detail relating to reportable irregularities is set out in note 52 in the annual financial statements. Good progress was made in addressing the audit qualification relating to the completeness of irregular, fruitless and wasteful expenditure and losses due to criminal conduct. Enhancements to improve the Public Finance Management Act (PFMA) reporting process were implemented. The commercial processes and related governance were also improved, with a focus on clearing the backlog relating to the commercial non-compliance issues. Approximately 20% of the irregular expenditure of R6.6 billion reported in 2019 related to new transgressions. The remainder of the reported expenditure related to open contracts that can only be closed once the relevant transgression has been condoned. There is unfortunately still work to be done to ensure an unmodified audit opinion as it is a lengthy process to address and embed a project of this nature. The external auditors also highlighted some concerns in their opinion relating to the usefulness and reliability of certain key performance indicators in the shareholder compact as well as certain targets that had not been met. They also highlighted that there were some deficiencies relating to revenue, expenditure, procurement, contract and consequence management in the group. Management is in the process of addressing these challenges. Lifestyle audits of executive senior managers were completed and are being cascaded down to lower levels in the organisation. Several employees with a conflict of interest were identified and disciplinary action was taken where necessary. Some employees resigned or relinquished their business interests as a result of the lifestyle audits. Eskom is no longer doing business with suppliers where there were non-compliances with procurement and supply chain management procedures. Monetary recovery from suppliers was instituted where relevant and R1 billion was successfully recovered during the year. The number of executive positions was reduced from 21 to nine and further optimisation of the organisational structure is planned as a first step to restructure and optimise the organisational structure. Certain key managerial appointments were also made to stabilise leadership, in particular, in the generation environment. ESKOM HOLDINGS SOC LTD | 3 DIRECTORS’ REPORT (continued) for the year ended 31 March 2019 Operational performance Loadshedding was unfortunately required on a total of 30 occasions during the past financial year. Excessive use was made of both Eskom and IPP OCGTs to avoid or minimise the impact of loadshedding. The cost of running the OCGTs is far cheaper to the country than loadshedding, even though it had a negative impact on Eskom’s liquidity. Loadshedding was implemented as follows: • from 14 to 16 June 2018 after wage negotiations broke down and some trade union members embarked on illegal industrial action. Acts of intimidation and obstruction of access for personnel and coal deliveries by road had an impact on generating operations • on 31 July 2018 because of illegal industrial action as no performance bonuses were allocated for 2018 • from 18 November to 8 December 2018 (11 days) to maintain system stability and manage emergency resources. The load shedding was caused by poor generating plant performance that resulted from significant levels of unplanned breakdown. These unplanned breakdowns resulted in full and partial load losses • from 10 to 14 February 2019 and again from 14 to 23 March 2019 to stabilise the power system due to poor generation plant availability, low diesel fuel levels at OCGT power stations and low water levels at pumped-storage stations. The situation in March 2019 was exacerbated by the loss of approximately 1 000MW of supply from Hidroeléctrica de Cahora Bassa in Mozambique due to the impact of cyclone Idai Generation recovery plan A nine-point recovery programme was developed to address the poor performance of the generation plant. A dedicated team was established to ensure the successful planning and execution of the programme. Detailed implementation plans were developed and progress is tracked and reported to management on a biweekly basis. The key scope elements of the programme and the progress on the implementation of these are as follows: • Fix new plant The new plant at Ingula, Medupi and Kusile power stations had not achieved the desired levels of performance and reliability due to a combination of plant design defects and operational and maintenance inefficiencies. Six major defects were identified at Medupi and Kusile power stations and one at Ingula power station. A plan to resolve the major plant defects and improve the inefficiencies in the operation and maintenance of the new units is being executed and has been closely monitored since December 2018. Contractors will be held accountable for plant design defects at their cost, within the provisions of the contract and defect correction period, where relevant. The implementation and testing of a solution to resolve the defects at Ingula power station commenced in June 2019 and is planned to be completed before the end of July 2019. • Fix load losses and reduce power station trips Power station unit trips remain a key area of concern as these contribute to the poor system performance. Detailed implementation plans to address issues at the four power stations with the most trips, namely Duvha, Majuba, Tutuka and Kriel, are being finalised. Trip reduction processes and procedures are also being established at Medupi and Kusile power station. The operating performance of Medupi power station is showing signs of improvement, from 19 trips in January 2019 to four in April 2019 and three in May 2019. • Fix units on long-term forced outages Plans are in place to better manage long outages to return units to service within a reasonable time frame. Major incidents result in long outages and typically require extensive repair work, with the procurement process and equipment lead times adding to the length of outages. Good progress was made during the year with the return to service of a number of units, including Duvha unit 4, Kriel unit 2, Grootvlei unit 2 and Matla unit 5, which had been on extended outages. • Fix partial losses and boiler tube leaks Good progress was made in clearing partial load losses. The successful clearing of load losses through scheduled philosophy outages depends on effective planning, outage readiness, execution of the full scope of the outage and the quality of work during execution. Although some work can be executed while units are on load, additional outages are required to sustainably address partial load losses. The granting of additional outages is a challenge while the system remains constrained. The relaunch of the tube leak reduction and management programme is a focus area. Annual boiler tube leak compliance reviews were done for Kriel, Majuba and Lethabo power stations and detailed plans will be developed based on the reviews as well as the boiler tube failure performance to address challenges. • Fix outage duration and slips Detailed mechanisms are being implemented to monitor outage readiness including focusing on spares and resource availability. Contracts are also being secured with original equipment manufacturers to improve spares availability. The post-outage unplanned capacity load factor improved in 2019 but it was still above the target of 12% and was negatively impacted by high unplanned losses incurred after the Medupi unit 6, Duvha unit 2, Tutuka unit 6 and Kriel unit 5 outages were completed. • Fix human capital The filling of critical vacancies is a key element of the recovery plan as the appointments are expected to bring some stability to the division with clear direction to employees. Mr B Nxumalo was appointed as the Group Executive (GE): generation effective 1 July 2019. A structured process to fill critical vacancies in generation is in progress. • Prepare for increased OCGT usage The average diesel stock levels were above 50% during the year, but there were instances where short-term diesel shortages prevented the use of the OCGTs. Eskom’s diesel supply logistics are not set up for excessive use and requires accurate projections to ensure timely planning and delivery of diesel. Eskom is implementing corrective action to prevent a recurrence of the diesel shortages experienced in March 2019, which partly contributed towards loadshedding. Dam levels at pump-storage stations are managed to ensure the availability of the plant when required to minimise the use of OCGTs. 4 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 • Prepare for rain Eskom has seven power stations where there is a risk that coal can get wet. The risk of wet coal is lower during the drier season in winter. A target has been set to have 14 days of the total stockholding in dry coal stock, stored in a way that it does not get wet, in case of an emergency. Three of the seven stations were below the targeted 14-day minimum dry coal stock levels at 31 March 2019. • Fix coal stockpiles The normalised coal stock levels improved significantly from 25 days in October 2018 to 36 days by 31 March 2019 (2018: 36 days). The normalised coal stock day figure is calculated by adjusting the total stock days with the stock at power stations that have not yet been fully commisioned or where certain units have been placed in cold reserve. The coal stock unfortunately remained below Eskom minimum expected levels at nine power stations, but it is anticipated that the coal stock days will be at required levels by the end of December 2019. Technical performance The energy availability factor of the generating plant decreased considerably from 78% in 2018 to 70% in the current year. The decrease was attributable to an increase in both planned and unplanned maintenance of coal-fired plant compared to the prior year. It is important to note that the energy utilisation factor (EUF), a measure of how hard a power station runs, increased significantly when compared to 2018. The high EUF was largely due to the coal-fired power stations that ran at an average EUF of 90.2% compared to 80.6% in 2018, where the EUF was greater than 90% for eight of the 15 coal-fired stations. These levels of EUF far exceed international norms and design parameters, and indicate that the power stations are being run extremely hard, which will have an impact on future reliability due to the stress placed on the plant. Particulate emissions of 0.47kg/MWhSO reflected a decline from the 2018 performance of 0.27kg/MWhSO. This was the worst performance in 20 years and was mainly caused by the emissions from the Kendal and Tutuka power stations. Water usage relating to power station operations worsened to 1.41l/kWhSO compared to 1.30l/kWhSO in 2018. Plans are in place to improve both particulate emissions and water usage. Production from Eskom generation sources decreased from 2018 because of a decline in electricity sales and an increase in production from IPPs. The production from IPPs increased by 18% from 9 584GWh in 2018 to 11 344GWh in 2019. The graph below reflects the breakdown of the group’s production sources indicating the growth in production from IPPs with a decline in production from Eskom sources. GWh 250 000 240 000 230 000 220 000 210 000 0 2015 2016 2017 2018 2019 Eskom (GWh) IPPs (GWh) Imports from SADC (GWh) The transmission network continued to perform well. The transmission system less than one minute performance was still within the target of 3.53, although the performance worsened from 2.09 in the prior year to 3.16 minutes in 2019. The performance of the distribution network was in line with that of the prior year, although there was an increase in the average interruption duration. The age of the network is a concern and significant funding will be required to improve network performance. The total technical and non-technical distribution line losses increased from 7.73% in the prior year to 8.47% in 2019. Energy theft remains a major concern with an estimated cost impact of R1.7 billion (2018: R1.4 billion) during the year. Vandalism of infrastructure often results in losses contributing to the increase in line losses. The group’s safety performance remains a concern, particularly in light of the number of fatalities and serious injuries suffered by employees, contractors and the public during the year. Unfortunately, despite the group’s commitment to safety, there were three (2018: three) employee, three (2018: 11) contractor and 22 (2018: 26) public fatalities. Capacity expansion programme The capacity expansion programme that started in 2005 to build new power stations and reinstate mothballed power stations as well as increase high-voltage transmission power lines and transformer capacity is expected to be completed by 2023. The programme aims to increase installed generation capacity by 17 384MW, transmission lines by 9 756km and transmission substation capacity by 42 470MVA. The installed generation capacity increased by 10 750MW, transmission lines by 7 848km and substation capacity by 37 440MVA at a cost of R383.4 billion excluding borrowing costs from the inception of the programme to the end of 2019. ESKOM HOLDINGS SOC LTD | 5 DIRECTORS’ REPORT (continued) for the year ended 31 March 2019 Operational performance (continued) Capacity expansion programme (continued) Unit 2 of Kusile and units 3 and 2 of Medupi power station were synchronised to the grid during the year and contributed intermittently to the national grid. It is expected that all the units of Medupi power station will be synchronised or in commercial operation by 31 December 2019 with the last unit in commercial operation by June 2020. The last unit of Kusile power station is expected to be placed in commercial operation by 2023. The total approved budget for the Medupi and Kusile projects was R145 billion and R161 billion respectively, excluding interest during construction, with the projected cost to completion at R135 billion and R156 billion respectively. During the year, 378.7km of high-voltage transmission lines and 540MVA of substation capacity were installed and commissioned. Progress was made on the electrification programme during the year with 191 585 households connected. The total number of households connected to the grid since 2013 is in excess of 1.2 million. Refer to page 108 of the integrated report for more information. Financial performance The group’s financial health has been deteriorating over the past few years and is not at an acceptable level. The financial performance of the group for the year weakened further with most of the financial ratios being worse than in 2018. The net loss after tax for the group was R20.7 billion (2018: R2.3 billion), reflecting a decline of R18.4 billion, mainly because of a decrease in earnings before interest, tax, depreciation and amortisation (EBITDA) as well as increased depreciation and net finance cost. The EBITDA of R31.5 billion in 2019 compared to R45.4 in 2018 decreased by R13.9 billion mainly as a result of increased primary energy expenditure. The graph below reflects a steady growth in the EBITDA and EBITDA margin with a decline in 2019 and a gradual decline in the net profit after tax. Rbn % 50 30 40 25 20 30 15 20 10 10 5 0 0 -10 -5 -20 -10 2015 2016 2017 2018 2019 EBITDA (Rbn) EBITDA margin (%) Net profit after tax margin (Rbn) Revenue increased by R2.5 billion from R177.4 billion in 2018 to R179.9 billion in 2019, and there was a decrease in total electricity sales volume of 208 319GWh compared to 212 190GWh in the prior year. The local electricity sales decreased by 1 064GWh and international sales by 2 807GWh mainly as a result of the impact of the economic downturn on mining operations and lower cross-border sales because of improved water levels that enabled more self-generation by international customers. Revenue was lower by R2.2 billion with a related impairment reversal of R1.3 billion because of the implementation of International Financial Reporting Standard (IFRS) 15 Revenue from contracts with customers where all revenue from customers that does not meet the collectability criteria is now recognised on a cash basis. Primary energy cost increased to R99.5 billion (2018: R85.2 billion). Coal costs increased by R4.3 billion, IPPs by R5.6 billion and international purchases by R1.0 billion. The OCGT usage increased by R3.4 billion from R0.3 billion in 2018 to R3.7 billion in 2019 as both the Eskom and IPP OCGTs were used extensively to avoid or minimise the impact of loadshedding. The IPP costs increased due to the higher production, but it remains a concern that IPP purchases were 4.8% of total generating production, while their cost represented 25% of the total primary energy cost. The headcount for employees including fixed-term contractors reduced from 48 628 in 2018 to 46 665 in 2019 through natural attrition. Employee benefit expenses increased by R3.8 billion from R29.5 billion in 2018 to R33.3 billion this year, a 12.9% increase. The increase is only 8.8% if the impact of provisions reversed in 2018 is taken into account. Depreciation increased by R6.7 billion because of the additional units at Medupi and Kusile power stations that were put into commercial operation as well as accelerated depreciation of the Komati power station as its estimated useful life changed. Net finance cost increased by R4.4 billion due to the higher debt and borrowings. The capitalisation of borrowing costs remained constant from 2018 to 2019 as more units of Medupi and Kusile power stations were placed in commercial operation. 6 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 The financial health ratios relating to the statement of financial position deteriorated, with the net debt-equity ratio at 2.8. The gross debt increased by R51.6 billion during the year and equity decreased by R17.2 billion mainly as a result of the net loss during the year. The growth in debt was the only option available to fund Eskom in 2019 as NERSA did not allow the tariffs as requested and there was no support from government. The graph below reflects the growth in gross debt and the decline in the debt-to-equity ratio. The average growth in gross debt had been 10.9% per annum since 2015. Rbn Ratio 500 4 400 3 300 2 200 1 100 0 0 2015 2016 2017 2018 2019 Gross debt (Rbn) Net debt:equity (Ratio) The net cash from operations of R32.7 billion during the year was not sufficient to service debt and fund some of the capital expenditure. While the group’s investment activities decreased as the capital expansion programme is nearing completion, cash required for servicing of debt increased substantially from R43.4 billion in 2018 to R69.4 billion in 2019. The graph below reflects the decrease in investment activities and increasing debt servicing activities over the last few years. Rbn 80 70 60 50 40 30 20 10 0 2015 2016 2017 2018 2019 Investment activities (Rbn) Debt servicing (Rbn) Eskom’s financial health deteriorated over the last few years as the return on assets did not meet the required targets (weighted average cost of capital). The growth in expenses compounded by the fact that the price of electricity is not cost-reflective. Cost savings alone will not resolve Eskom’s financial health issues and the price of electricity has to migrate towards cost-reflectivity if Eskom is to become a sustainable business. Several independent studies, including one by NERSA, indicated that the average price of electricity should be approximately 120c/kWh compared to Eskom’s current price of 90c/kWh to recover cost. ESKOM HOLDINGS SOC LTD | 7 DIRECTORS’ REPORT (continued) for the year ended 31 March 2019 Financial performance (continued) The graph below demonstrates the considerable difference between the pre-tax targeted return on assets (nominal and real) and the pre-tax actual return on assets (nominal and real). % 18 16 14 12 10 8 6 4 2 0 -2 2015 2016 2017 2018 2019 Target return on assets – real (%) Target return on assets – nominal (%) Actual return on assets – real (%) Actual return on assets - nominal (%) The total gross overdue debt was R35.7 billion of which municipalities represented 56% and Soweto 37%.The total gross municipal overdue debt increased by R6.3 billion to R19.9 billion of which the Free State owed 44%, Mpumalanga 27% and Gauteng 8%. The total gross overdue debt for Soweto increased by R1.2 billion to R13.3 billion. The graph below reflects the increase in the overdue municipal debt per province and the breakdown between the net impairment and interest and revenue not recognised since 2015. Rbn 20 15 10 5 0 2015 2016 2017 2018 2019 Interest and revenue not recognised (Rbn) Net impairment (Rbn) Freestate (Rbn) Mpumalanga (Rbn) Gauteng (Rbn) Other (Rbn) No progress was made in recovering the outstanding amounts despite several attempts that were made during the year, including court action, cut-offs and debt restructuring. Eskom is working closely with the Inter-Ministerial Task Team that was tasked to find an amicable solution to this challenge for the country. The group funded expenditure on property, plant and equipment and intangible assets for the year was R30.4 billion, of which R18.3 billion related to the construction of assets to expand the asset base and R12.1 billion was spent on refurbishing or replacing the existing asset base. The main reason for the reduction was the slowdown of construction activities at the Medupi and Kusile power stations as these projects are nearing completion. Funding Funding of R63.3 billion was raised during the year against an initial funding plan of R72.1 billion. The sustainability of Eskom’s liquidity position and medium-term ability to raise funding remains at risk. 8 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 It became evident towards the end of the financial year that there were challenges with the drawdown of secured, committed and new funding due to the uncertainty around the future restructuring of Eskom, the impact of loadshedding and ongoing concerns regarding Eskom’s financial position. Eskom had to, as a result, request advance payment of R13.5 billion of the government support in April 2019. The borrowing programme for 2020 to 2024 envisaged that Eskom would raise R207 billion from development finance institutions (DFIs), export credit agencies (ECAs), and domestic and foreign bond issuance. The funding plan for 2020 is R46.2 billion of which 58% had already been secured by June 2019. Eskom makes use of a guarantee of R350 billion from government to secure funding. The committed and drawn down funding against the guarantee at 31 March 2019 was R308.6 billion, with R41.4 billion available for further use. Economic regulation The tariff increase allowed by NERSA for 2020 equates to 13.87% when the impact of the RCA is included. The information provided by NERSA regarding the 2019 revenue decision seems to indicate that it did not consider Eskom’s sustainability which is in contravention of its mandate. Eskom lodged a high court review to set aside NERSA’s revenue decision for 2019. The board also approved a request for a review through a high court application of NERSA’s reasons for the decision on the RCA balance of R32.7 billion for year two to four of MYPD 3 which was implemented on 14 February 2019. Refer to page 85 of the integrated report for more information. Governance and compliance The board implemented measures to address issues relating to corporate governance breaches that had surfaced in the past in an effort to restore Eskom’s reputation as a trusted state-owned enterprise and place the organisation on a path towards achieving financial and operational sustainability. Eskom is co-operating with regulatory bodies and law enforcement agencies that are conducting major investigations into matters of fraud and corruption affecting the organisation. This is a lengthy process with legislative requirements that must be adhered to, as well as the resulting actions and remedial recourse to the issues. Eskom nevertheless made significant progress on addressing a number of governance issues. More than 95% of the 1 049 outstanding disciplinary cases relating to procurement breaches at April 2018 were finalised, with approximately 12% of these cases resulting in employee exits. The lifestyle audits of 365 senior Eskom employees were completed, with the objective of ensuring that senior employees comply with the highest standards of compliance, ethics and integrity and are not engaged in illicit activities in the performance of their duties. The first phase of the lifestyle audit project is approximately 98% complete with 12% of the employees assessed considered to be high risk. Information relating to the employees assessed as high risk was handed over to the Special Investigating Unit for further investigation. Remedial action was taken against 25 employees with interests in suppliers doing business with Eskom. Seven of these cases resulted in employee exits, while the remainder relinquished their business interests. These measures are a key component of the board’s plans to root out corruption and to instil a renewed culture of honesty, transparency, good governance and ethical leadership which is required to achieve the common objective of sustainability. The board remains committed to the implementation of King IV TM, together with an overall improvement in governance and ethics, to align the organisation with its stated values. The board concedes that certain of the King IV TM principles need to be effectively implemented once the governance improvement has been completed. PFMA compliance Various improvements to the PFMA reporting process were implemented during the year including enhancing the PFMA procedure to clarify roles, responsibility, accountability and recovery of monies from relevant individuals. PFMA training was provided for employees and the divisional PFMA teams were strengthened. It is expected that new instances of irregularities will be detected as the group continues with its governance clean up. New instances of non- compliances are investigated and appropriately addressed, and the related irregular expenditure is reported as required. Approximately 20% (R1.5 billion) of the irregular expenditure of R6.6 billion reported in 2019 related to new transgressions. The rest of the reported expenditure related to transgressions that had either been identified in prior periods and was continuing until the related contract was condoned (R1.7 billion) or prior year transgressions that were identified in 2019 (R3.4 billion). Transgressions can only be closed once condoned and therefore irregular expenditure will continue to be incurred on open contracts until the related transgression has been condoned. Eskom is in the process of obtaining condonations from the relevant authority including from National Treasury. Several steps were taken during the year to improve the governance and clean-up of the supply chain process. The decision-making for single-source and emergency procurement was elevated to executive management level. The approval process for condonations was enhanced, and condonations can now only be approved by divisional tender committees, the Board Investment and Finance Committee or National Treasury. An online tendering system was developed and implemented to enhance compliance and streamline the process. Suppliers can now submit tenders and supporting documentation, such as tax certificates, electronically. The clean-up process that initially focused on reviewing all contracts over R1 billion is over 90% complete and 70% of new contracts placed during the year were reviewed for compliance. Contracts were terminated or suppliers sanctioned where non-compliance with procurement and supply chain management procedures was identified, and Eskom is no longer doing business with these suppliers. The control of records in a central repository was identified as an area for improvement. Eskom is rolling out system improvements to assist with this issue. ESKOM HOLDINGS SOC LTD | 9 DIRECTORS’ REPORT (continued) for the year ended 31 March 2019 Governance and compliance (continued) PFMA compliance (continued) The interpretation of the Preferential Procurement Policy Framework Act (PPPFA), modifications and tax certificates was clarified and procedures were updated to align these with National Treasury instructions and guidelines. A dedicated team was established to manage the condonation process, provide guidance and investigate high-value transactions. Functional compliance officers were trained on conducting investigations and preparing reports for the relevant authorising committees when reviewing condonations. Disciplinary action has to be instituted before any transgression can be condoned. There was a marked improvement in the cleaning up of previously identified irregular expenditure, but additional irregular expenditure was identified and reported during the year. It is recognised that more work is required to ensure that all the challenges are addressed. The key outstanding matters include the following: • Panels of suppliers Panels are established through an open tender process to identify service providers for the same type of service and task allocation is managed through a committee to ensure fair distribution of work between suppliers. Eskom uses panels widely, especially in the distribution environment and for electrification projects, to allow for flexibility and quick decision-making. National Treasury has however introduced the concept of panels for emergency procurement only, resulting in irregular expenditure. • Broad-based black economic empowerment (B-BBEE) certificates Eskom introduced an online tendering system to enhance the process where suppliers can submit tender documents and scanned copies of original B-BBEE certificates electronically. The National Treasury guideline stipulates that certificates must be originals or original certified copies and not scanned copies, resulting in irregular expenditure. • Contracts management The process for entering into a contract was enhanced, but the group needs to improve the process to manage a contract throughout its life to avoid modifications or other irregularities. • Designated sectors The group needs to enhance its information systems so that relevant information on designated sectors is available to assist in implementing procurement legislation. • Modifications The process to manage modifications was enhanced and no new issues were identified. The opening balances of modifications have not yet been cleared due to a backlog of work. Fruitless and wasteful expenditure of R0.6 billion was reported during the year. Losses due to criminal conduct of R2.0 billion, of which R1.7 billion related to non-technical energy losses including energy theft, were reported during the year. It remains a challenge to address losses due to criminal conduct and the group continues to co-operate with all regulatory bodies and law enforcement agencies in dealing with matters of a criminal nature. Board and executive committee changes The board shall consist, in terms of the memorandum of incorporation, of a minimum of three and maximum of 15 directors, with the majority being non-executive directors. There is a need for the appointment of more directors to meet this requirement, especially taking into account the challenges that the organisation is facing. The following changes to the non-executive directors occurred during the year: Non-executive directors Comment MJ Lamberti Resigned on 6 April 2018 JM Molisane1 Resigned on 18 September 2018 J Sebulela Resigned on 19 October 2018 1. JM Molisane was employed by the DPE and was considered to be a shareholder representative and therefore not deemed independent. 10 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 The following changes to the executive committee occurred during the year: Executive committee members Comment PS Hadebe Appointed as group chief executive (GCE) on 1 June 2018 Resigned with effect 31 July 2019 C Cassim Appointed as CFO on 1 December 2018 A Etzinger Appointed as acting GE: Generation on 1 November 2018 GE: Generation position no longer part of executive committee from 1 January 2019 T Govender Resigned on 31 January 2019 NB Hewu Appointed as joint head of legal on 1 January 2019 WF Majola Retrenched on 31 December 2018 AA Masango Resigned on 16 November 2018 SJ Mthembu Appointed as joint head of legal on 1 January 2019 A Noah Retrenched on 31 December 2018 MM Ntsokolo Retrenched on 31 December 2018 JA Oberholzer Appointed as chief operating officer on 16 July 2018 HJ Steyn Acted as GE: group capital until 8 May 2018 MS Tshitangano Appointed as GM: procurement on 1 January 2019 N Zibi Acted as chief information officer until 31 December 2018 Chief information officer position no longer part of executive committee from 1 January 2019 Refer to page 61 of the integrated report for more information. Human resources The 2020 to 2023 Human Capital Plan focuses on workforce optimisation, building critical capabilities, improving staff morale and aligning transformation targets contracted with the shareholder. Workforce optimisation Several employee benefits cost-saving initiatives that take cognisance of socio-economic challenges were introduced, including identification of inefficiencies, as well as initiatives to reduce staff levels. The overall headcount decreased by 1 963 to 46 665 during the year, but staff levels remain a challenge. A moratorium is in place on all external recruitment and it is expected that the headcount will be reduced to 42 151 by 2024 through natural attrition. Building critical capabilities A recent independent skills audit indicated that most employees possessed the necessary skills and were capable of completing their job tasks. Eskom is in the process of filling 3 638 core and critical vacancies through an internal redeployment process and limited external sourcing. This will be achieved within the current financial constraints. Aligning transformation targets The group’s employment equity plan aims to achieve employment equity, assist in eliminating unfair discrimination in the workplace and achieve equitable representation of employees from designated groups. The ability to achieve the employment equity targets were impacted by limited recruitment and promotion opportunities as a result of the group’s financial constraints. The racial and gender equity at senior management level, as well as middle management and professionally qualified levels, improved during the year. The group achieved the disability equity target. It was recognised that not all the facilities catered for disabled employees and therefore their needs were addressed on an individual basis. The group remained committed to skills development despite the current financial constraints. The training spend as a percentage of gross manpower costs was 3.85% (2018: 5.21%) which translated to R1.2 billion (2018: R1.4 billion) of the gross manpower expenditure during the year. The learner pipeline was 2 988 in 2019 which was sufficient to meet the group’s future skills requirements. Refer to page 130 of the integrated report for more information. ESKOM HOLDINGS SOC LTD | 11 DIRECTORS’ REPORT (continued) for the year ended 31 March 2019 Shareholder compact performance The table below sets out Eskom’s performance measured against the shareholder compact that was reviewed by the external auditors. The external audit opinion relating to this review is detailed on page 22. All the key performance indicators (KPIs) in the compact refer to the Eskom company only, with the exception of the lost-time injury rate which is reflected for the group. The 2019 targets were revised, where applicable, in accordance with the shareholder compact addendum signed by the Minister of Public Enterprises on 1 April 2019. Actual performance against the year-end target is indicated as follows: Actual performance for the year met or exceeded the target Actual performance for the year did not meet the target Key performance indicator Ref Unit Target Actual Actual 2019 2019 2018 Focus on safety Lost-time injury rate (including occupational diseases)1 index 0.34 0.31 0.24 Improve plant operations Energy availability factor (a) % 78.00 69.95 78.00 Planned capability loss factor % 9.00 10.18 10.35 Total system minutes lost for events <1 minute minutes 3.53 3.16 2.09 System average interruption duration index (SAIDI)2 hours 38.00 38.00 34.90 System average interruption frequency index (SAIFI)2 events 19.80 14.90 17.50 Distribution total energy losses (b) % 7.45 8.47 7.73 Deliver capital expansion Generation capacity installed and commissioned (commercial operation) (c) MW 800 – 2 387 Transmission lines installed (d) km 475.00 378.70 722.30 Transmission transformer capacity installed and commissioned MVA 540 540 2 510 Reduce environmental footprint in existing fleet kg/MWh Relative particulate emissions (e) sent out 0.33 0.47 0.27 ℓ/kWh Specific water consumption (f) sent out 1.36 1.41 1.30 Implementing coal haulage and the road-to-rail migration plan Migration of coal delivery from road to rail (additional tonnage transported on rail) (g) Mt 11.50 8.20 11.59 Ensure financial sustainability Value add per full-time employee (h) R million 1.55 1.29 1.56 Cash interest cover (i) ratio 1.08 0.91 1.18 Debt/equity (including long-term provisions) ratio 3.54 3.42 2.70 Free funds from operations as % of gross debt (j) % 8.42 5.50 8.80 Free funds from operations as % of capex (k) % 92.32 74.65 76.68 EBITDA margin3 (l) % 21.38 16.26 24.48 Average debtors days (including Soweto) (m) days 78.95 82.50 71.11 Arrear debt as % of electricity revenue (n) % 2.02 4.21 2.73 Coal purchase R/ton (o) % 9.00 14.06 3.79 Socio-economic impact: human capital Training spend as % of gross employee benefit costs % 3.75 3.85 5.21 Learner intake: artisans (p) number 92 – n/a Learner intake: engineers (q) number 16 10 n/a Learner intake: technicians (r) number 11 3 n/a Learner intake: sector-specific number – 8 n/a Disability equity in total workforce % 2.50 3.22 3.13 Racial equity in senior management (black employees) (s) % 71.95 69.44 67.97 Gender equity in senior management (female employees) % 38.72 39.90 38.25 Racial equity in professionals and middle management (black employees) (t) % 78.37 76.25 75.35 Gender equity in professionals and middle management (female employees) % 37.83 38.63 38.06 12 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 Key performance indicator Ref Unit Target Actual Actual 2019 2019 2018 Socio-economic impact: economic impact Local content contracted (Eskom-wide) % 70.00 91.51 87.16 Local content contracted (new build) % 70.00 81.14 85.59 B-BBEE score (u) score 4 – 8 Percentage of B-BBEE spend (v) % of TMPS 85.00 54.41 74.24 4 Procurement spend with black-owned suppliers (w) % of TMPS 40.00 33.08 40.934 Procurement spend with black women-owned suppliers % of TMPS 12.00 12.28 15.08 4 Procurement spend with black youth-owned suppliers % of TMPS 2.00 2.10 2.58 4 Procurement spend with suppliers owned by black people with disabilities (x) % of TMPS 1.00 0.15 0.114 Procurement spend with qualifying small enterprises (y) % of TMPS 10.00 4.47 7.80 4 Procurement spend with exempted enterprises % of TMPS 10.00 13.32 9.324 Technology transfer: acquisition of intellectual property (z) R million 5.00 1.68 26.11 number Technology transfer: skills development of people 30 42 63 Socio-economic impact: corporate social investment Corporate social investment committed (aa) R million 136.00 132.40 192.00 1. The prior year comparative was restated resulting in three additional occupational disease incidents recognised as a result of subsequent incident information. 2. The prior year comparatives have been restated as SAIDI and SAIFI are reported after allowing for exclusions defined in the National Regulated Standards as adopted from 1 April 2018. 3. The prior year comparative was restated as a result of a change in methodology from net electricity revenue to total revenue per the income statement. 4. The prior year comparative total measured procurement spend excluded expenditure on IPPs. ESKOM HOLDINGS SOC LTD | 13 DIRECTORS’ REPORT (continued) for the year ended 31 March 2019 Shareholder compact performance (continued) The reasons for the targets that were not achieved are discussed below: Ref Key performance indicator Target Actual Reason 2019 2019 Improve plant operations (a) Energy availability factor 78.00 69.95 An increase in both planned and unplanned maintenance due to poor generating plant performance and having to run the power stations hard as a result of significant levels of full and partial load losses caused a low energy availability factor (b) Distribution total energy losses 7.45 8.47 There was an increase in the non-technical component of losses as a result of theft because of ghost vending, meter tampering and illegal connections across all sectors of the customer base. The technical component of losses was due to the ageing of the distribution networks which are often constrained and overloaded Deliver capital expansion (c) Generation capacity installed 800 – A strategic decision was taken to prioritise the correction of the and commissioned design defects of new build plant to ensure significant improvement in (commercial operation) plant performance, availability and reliability prior to synchronisation and commercial operation of the units (d) Transmission lines installed 475.00 378.70 Stability issues, poor contractor performance and contractor non-financial viability on certain lines had an impact on the transmission lines installed Reduce environmental footprint in existing fleet (e) Relative particulate emissions 0.33 0.47 The high emissions were mainly due to poor performance at power stations because of a lack of maintenance earlier in the year which was exacerbated by the industrial action in June 2018. There was also poor performance at four power stations due to damaged fabric filter bags which was compounded by the malfunctioning of the ash conveyance systems at two stations. Poor quality coal also had a negative impact on particulate emissions at three power stations (f) Specific water consumption 1.36 1.41 Poor water management practices at power stations as well as slow implementation of the water strategy action plans has a negative impact on the water consumption due to water leaks, water wastage through overflowing tanks, low load factors, ashing with cooling water, several unit trips, boiler filling and operational inefficiencies Implementing coal haulage and the road-to-rail migration plan (g) Migration of coal delivery 11.50 8.20 Less coal was transported by rail due to delays in concluding the from road to rail (additional Transnet Freight Rail agreement. This was exacerbated by coal mine tonnage transported on rail) production problems and community unrest as well as freight rail operations which were disrupted by cable theft and vandalism. Progress was also hampered due to delays in the commissioning of rail services and the placement of contracts for offloading services Ensure financial sustainability (h) Value add per full-time 1.55 1.29 The high primary energy costs were mainly due to the higher coal employee usage and the extensive utilisation of OCGTs and IPP peakers in an effort to respond to poor generating plant performance (i) Cash interest cover 1.08 0.91 The cash generated from operating activities was insufficient to cover the cost of servicing interest repayments as a result of the high debt and liquidity constraints (j) Free funds from operations as 8.42 5.50 The below target performance was due to increasing debt levels and % of gross debt a decrease in free funds from operations as a result of poor performance in margins and operating cash flows (k) Free funds from operations as 92.32 74.65 The free funds from operations were insufficient to cover capital % of capex expenditure, despite reductions in capital expenditure, as a result of liquidity constraints and poor operating cash flows (l) EBITDA margin 21.38 16.26 The EBITDA deteriorated due to a decline in local and international sales volumes, mainly because of loadshedding and load curtailment by key customers and additional customers who failed the collectability criteria accounted for on the cash basis There was higher use of the OCGTs and production from more expensive coal power stations was required to avoid or minimise the impact of loadshedding. The replenishment of coal stock at higher short-term prices also resulted in escalating primary energy costs and declining margins 14 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 Ref Key performance indicator Target Actual Reason 2019 2019 (m) Average debtors days 78.95 82.50 The target was not met due to an escalation in municipal debt, low (including Soweto) payments levels in Soweto and increased international debt (n) Arrear debt as % of 2.02 4.21 The target was not met due to an escalation in municipal debt, low electricity revenue payments levels in Soweto and increased international debt while revenue has stagnated. Eskom has exhausted all avenues within its control to recover outstanding municipal debt, such as interrupting supply to defaulting municipalities and installing prepaid meters in pilot project areas (o) Coal purchase R/ton 9.00 14.06 The target was exceeded due to high volumes of short- and medium- term contract coal purchased to address low coal stock levels as well as coal mine production problems at certain cost-plus mines Socio-economic impact: human capital (p) Learner intake: artisans 92 – A limited number of new learners were appointed due to the financial (q) Learner intake: engineers 16 10 constraints, resulting in the target not being achieved (r) Learner intake: technicians 11 3 (s) Racial equity in senior 71.95 69.44 management (black employees) Racial equity targets at both occupational levels were not achieved as (t) Racial equity in professionals appointments were minimised because of the financial constraints and middle management 78.37 76.25 (black employees) Socio-economic impact: economic impact (u) B-BBEE score 4 – Eskom was rated as a level 8 supplier until June 2018 when the certification expired. A new certificate is expected to be issued by the end of July 2019 however, until a new certificacte is issued, Eskom does not comply with the requirements of the B-BBEE Act (v) Percentage of B-BBEE spend 85.00 54.41 The procurement spend with these suppliers and enterprises was below (w) Procurement spend with 40.00 33.08 target due to an increase in non-compliance due to expired B-BBEE black-owned suppliers certificates and the implementation of the new B-BBEE Codes, with most suppliers rated at lower levels and the fact that most suppliers did (x) Procurement spend with 1.00 0.15 not provide the type of goods and services required by Eskom suppliers owned by black people with disabilities The overall performance of these indicators is better if the IPP expenditure is excluded from the total measured procurement spend (y) Procurement spend with 10.00 4.47 as Eskom does not control the allocation of the IPP spend as follows: qualifying small enterprises • B-BBEE 65.84% • black-owned suppliers 40.02% • black women-owned suppliers 14.86% • black youth-owned suppliers 2.54% • suppliers owned by black people with disabilities 0.18% • qualifying small enterprises 5.41% • exempted enterprises 16.12% (z) Technology transfer: 5.00 1.68 Funding constraints resulted in delays and limitation of transactions acquisition of intellectual planned for the year. In addition, a tender for the acquisition of heat property recovery steam generator design know-how lapsed and no further work will be performed to acquire this intellectual property Socio-economic impact: corporate social investment (aa) Corporate social investment 136.00 132.40 Certain projects did not materialise as planned committed Events after the reporting date Events after the reporting date are discussed in note 48. Approval The Eskom and group annual financial statements for the year ended 31 March 2019 were prepared under the supervision of the CFO C Cassim CA(SA), and approved by the board and signed on its behalf by: JA Mabuza PS Hadebe C Cassim Chairman Group chief executive Chief financial officer 18 July 2019 18 July 2019 18 July 2019 ESKOM HOLDINGS SOC LTD | 15 REPORT OF THE AUDIT AND RISK COMMITTEE Mandate and terms of reference The audit and risk committee (the committee) presents its report in terms of the requirements of the PFMA, the Companies Act (section 94(7)(f)) and in accordance with the King IV TM Report on Corporate Governance for South Africa for the financial year ended 31 March 2019. The role of the committee is defined in its mandate. It covers, among others, its statutory duties and assistance to the board with the oversight of financial and non-financial reporting and disclosure, internal control system, risk management, internal and external audit functions and combined assurance, including technology and information governance. The committee also performs the functions required by the Companies Act on behalf of the wholly-owned subsidiaries of the group, with exception of Escap SOC Ltd. Information on the membership and composition of the committee is set out in the 2019 integrated report. The committee fulfilled all its statutory duties as required by the Companies Act. The committee reports that it has adopted appropriate formal terms of reference as its audit and risk committee charter, has regulated its affairs in compliance with this charter and has discharged all its responsibilities contained therein. The group is applying a combined assurance model to ensure coordinated assurance activities. The committee oversees the assurance activities and the establishment of effective systems of internal control to provide reasonable assurance that the group’s financial and non- financial objectives are achieved and that the preparation of the group’s suite of externally published reports (as detailed in the integrated report) is in accordance with the frameworks and standards set out within those reports. Execution of functions In the conduct of its duties the committee has, inter alia, reviewed the following areas: Oversight of financial and non-financial reporting and disclosure The committee considered the annual financial statements for fair presentation with the relevant requirements of the PFMA, Companies Act and International Financial Reporting Standards (IFRS). The committee considered the key judgements, estimates and accounting for significant transactions in the annual financial statements. Where appropriate, the committee sought the input and views of the external auditors and encouraged rigorous challenging of control, accounting and disclosure matters. The committee also considered matters relating to cost savings, budgeting and forecasting, future funding and taxation. The committee continued to oversee the risk management process including the significant risks and opportunities identified with the relevant treatment strategies in place. The committee, in particular, considered the following significant matters: Significant matter Audit committee review and conclusion Going-concern The committee monitored the group’s liquidity and solvency closely because of the financial position and related assessment challenges and concluded that it was not trading recklessly at any time during the year. The committee acknowledged that Eskom cannot solve its problems alone, but needs support from the shareholder. The committee recognised that government re-confirmed its support to Eskom in the State of the Nation address delivered by the President on 20 June 2019 The committee considered the key aspects taken into account in the going-concern assessment as discussed in note 3.2 as well as scenarios that might impact the going-concern assessment. The committee critically assessed the liquidity of Eskom using the latest cash flows forecast, including servicing of debt in the next 12 months and stress- tested the forecasts using lower electricity prices, changes to capital activities and reducing costs. The committee considered Eskom’s financial ratios that reflect an overall negative trend. The committee concluded, after examining the forecast and stress-tested scenarios and considering Eskom’s ability to raise funding in the current market conditions, that the going-concern basis of accounting was appropriate only with support from government. The committee recommended the adoption of the going-concern basis of preparation by the group to the board based on the critical factors as disclosed in note 3.2 Governance There has been continuous engagement with the shareholder to address the governance framework and streamline processes. The committee acknowledged that some areas relating to compliance to applicable laws, regulations and governance protocols need to be enhanced and that the board is working on improving these processes Steps are being taken to sufficiently strengthen the technical capacity of the board. The chief executive resigned effective 31 July 2019 and the process to appoint a new chief executive is in progress. The chief financial officer was appointed in December 2018. Permanent appointments were made in certain key vacant executive positions and the process to fill the remaining vacancies is in progress The committee continued its focus on monitoring the status and action taken on addressing key matters arising from investigations, reportable irregularities and fraudulent activities. Key outstanding disciplinary hearings were finalised and matters have been escalated to the appropriate government agencies for further action where relevant. Lifestyle audits have been performed on senior management and action is being undertaken to address issues raised. Refer to the directors’ report for further information on the lifestyle audits Information required The committee placed significant focus during the year on monitoring the progress of the supply chain management by the PFMA and recovery programme to address the shortcomings in the completeness of the information required by the PFMA. the impact thereof The committee acknowledged that the roll-out and implementation of the improvements is a lengthy process which on the audit opinion is still continuing. It recognised that there was improvement in the identification, reporting and addressing of PFMA matters, even though there are still challenges that need to be addressed. Refer to the directors’ report for further information on addressing the PFMA reporting challenges 16 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 Significant matter Audit committee review and conclusion Recovery of overdue The committee considered the actions taken by Eskom to address the municipal and Soweto arrear debt, including trade receivables continued plans to roll out split metering on a prepaid basis, following the Promotion of Administrative Justice Act (arrear debt) process for disconnections and enlisting the support of government to enhance and participate in efforts to recover outstanding amounts. The committee believes that there are still major challenges with the implementation of these interventions, despite management’s continuous interventions, and it is critical that these challenges are addressed through the Inter-ministerial Task Team. The arrear debt challenge has escalated beyond Eskom’s risk appetite and tolerance levels and several efforts to secure government support have not yet yielded positive results. The committee is also monitoring adherence to recent court rulings made regarding recovery of outstanding receivables Valuation of The committee assessed the appropriateness of the cash generating units (CGUs) for the group. The committee property, plant and also considered that impairment indicators such as damaged plant and the impact of lower than expected electricity equipment and tariffs on future cash flows have been appropriately taken into account in the impairment assessment. The assessment for committee interrogated the underlying assumptions and estimates used in the calculation of the recoverable amount possible impairment of the CGUs and confirm that there is no impairment required on property, plant and equipment Valuation and The committee considered the briefings on the decommissioning and rehabilitation provisions, including the adequacy of governance framework applied, the movement in provisions over time and the key assumptions and discount rates long-term used. Detailed annual reviews are done by external experts on a rotation basis to re-assess the relevant decommissioning decommissioning and rehabilitation liabilities against the latest international practices and benchmarks as well as provisions compliance to legislation. The committee interrogated the underlying assumptions used in determining the decommissioning provisions to assess the adequacy thereof Internal control The committee monitored the effectiveness of the control environment through feedback on the results of the over financial combined assurance activities from management, assurance and forensics (internal audit) and the external auditors. reporting, including The committee scrutinised the significant risk areas and their associated remediation plans and mitigating controls information implemented, including those relating to segregation of duties, access management, security of confidential data, technology general cyber risk, information technology infrastructure, application issues and third party supplier management. The controls committee focused on specific control issues, in particular, the controls relating to PFMA reporting and investigations into fraudulent activities. The committee concluded that the internal control environment is satisfactory, even though improvement is necessary in certain areas including PFMA reporting and contract management The matters listed above are considered to be key focus areas for the committee in the next financial year and will be monitored and reported on in future. Internal control, management of risks and compliance with legal and regulatory requirements The committee considered the following: • effectiveness of internal control systems and governance processes • legal matters that could have a material impact on the group • effectiveness of the system and process of risk management including the following specific risks: – financial reporting – internal financial controls – fraud risks relating to financial reporting – information technology risks relating to financial reporting and internal control – the effectiveness of the entity’s compliance with legal and regulatory requirements Internal and external audit The committee considered the following: • audit charter, annual audit plan, independence, effectiveness, coordination with external auditors and performance of the assurance and forensic department • appointment of the external auditors in terms of the Companies Act, Johannesburg Stock Exchange (JSE) listings requirements and all other applicable legal and regulatory requirements • the quality of the external audit as well as the independence and objectivity of the external auditors including the tenure of the audit firm and the rotation of the engagement partner • external audit plan, audit budget, actual fee and terms of engagement of the external auditors including adherence to the policy of not allowing the external auditors to provide any non-audit services • accounting, sustainability and auditing concerns identified as a result of the internal and external audits, including reportable irregularities ESKOM HOLDINGS SOC LTD | 17 REPORT OF THE AUDIT AND RISK COMMITTEE (continued) Opinion The committee is of the opinion, based on the information and explanations provided by management and the assurance and forensic department during the year and at year end and discussions with the independent external auditors, that: • the expertise, resources and experience of the finance function under the leadership of the chief financial officer are adequate • the system and process of risk management is adequate even though the effectiveness thereoff needs to be improved • the compliance framework is adequate and there is continued focus on the application thereof, especially in terms of PFMA requirements and contract management • the internal accounting controls are adequate to ensure that the financial records may be relied upon for preparing the financial statements and accountability for assets and liabilities is maintained • the internal audit charter approved by the committee was adhered to • the expertise, resources and experience of the assurance and forensic department are adequate • the assurance and forensic department, under the leadership of a general manager, is operating effectively • the combined assurance model is adequate • the information contained in the integrated report is reliable and does not contradict the information in the annual financial statements • Eskom and the group have access to adequate resources, facilities and support from government to be able to continue their operations for the foreseeable future, supporting the going-concern assumption • it is satisfied with the audit quality of the external audit as well as the independence and objectivity of the external auditors having considered the matters set out in section 94(8) of the Companies Act The committee is satisfied, notwithstanding the aspects considered in relation to the annual financial statements including the PFMA reporting challenges, that nothing significant has come to the attention of the committee to indicate any material breakdown in the functioning of the controls, procedures and systems during the year under review and that the controls are still appropriate to ensure compliance with the requirements of the Companies Act, the PFMA and IFRS. Recommendation of the annual financial statements The committee has evaluated the annual financial statements of Eskom and the group for the year ended 31 March 2019 and, based on the information provided to it, considers that they comply, in all material respects, with the requirements of the Companies Act, the PFMA and IFRS. The committee concurs that the adoption of the going-concern premise in the preparation of the annual financial statements is appropriate. The committee has therefore, at its meeting held on 17 July 2019, recommended the adoption of the financial statements by the board. SN Mabaso-Koyana Chairman 18 July 2019 STATEMENT BY COMPANY SECRETARY In terms of section 88(2)(e) of the Companies Act of South Africa, I certify that the company has filed with the Companies and Intellectual Property Commission all such returns and notices in terms of this Act, and all such returns appear to be true, correct and up to date. M Tyalimpi Company secretary 18 July 2019 18 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 INDEPENDENT AUDITOR’S REPORT TO PARLIAMENT AND THE SHAREHOLDER – MINISTER OF PUBLIC ENTERPRISE ON ESKOM HOLDINGS SOC LTD AND ITS SUBSIDIARIES Report on the audit of the consolidated and separate financial statements Qualified opinion We have audited the consolidated and separate financial statements of Eskom Holdings SOC Ltd and its subsidiaries (the group) set out on pages 26 to 121, which comprise the consolidated and separate statements of financial position as at 31 March 2019 and the consolidated and separate statements of profit or loss and other comprehensive income, statements of changes in equity and statements of cash flows for the year then ended, as well as the notes to the consolidated and separate financial statements, including a summary of significant accounting policies. In our opinion, except for the possible effects of the matters described in the basis for qualified opinion section of this auditor’s report, the consolidated and separate financial statements present fairly, in all material respects, the consolidated and separate financial position of the group as at 31 March 2019, and the group’s financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standard (IFRS) and the requirements of the Companies Act of South Africa (Companies Act) and the Public Finance Management Act of South Africa (PFMA). Basis for qualified opinion Irregular expenditure The irregular expenditure includes amounts emanating from the modifications to contracts which were not conducted as required in terms of the PFMA. In addition, irregular expenditure was not always recorded at the correct amount. We were unable to determine the full extent of the understatement of the irregular expenditure disclosed in terms of section 55(2)(b)(i) of the PFMA stated at R25 659 million (2018: R21 048 million) and R17 789 million (2018: R14 839 million) in the consolidated and separate financial statements respectively, as it was impractical to do so. Fruitless and wasteful expenditure We were unable to obtain sufficient appropriate audit evidence to confirm the fruitless and wasteful expenditure included in the notes to the consolidated and separate financial statements respectively as sufficient appropriate audit evidence was not provided. We could not confirm the amounts by alternative means. Consequently, we were unable to determine whether any adjustment was necessary to fruitless and wasteful expenditure stated at R641 million (2018: R143 million) and R603 million (2018: R56 million) in the consolidated and separate financial statements respectively. Context for the opinion We conducted our audit in accordance with the International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the auditor’s responsibilities for the audit of the consolidated and separate financial statements section of this auditor’s report. We are independent of the group in accordance with section 290 and 291 of the Independent Regulatory Board for Auditors’ Code of professional conduct for Registered Auditors (Revised January 2018), parts 1 and 3 of the Independent Regulatory Board for Auditors’ Code of Professional Conduct for Registered Auditors (Revised November 2018) (together the IRBA Codes) and other independence requirements applicable to performing audits of financial statements in South Africa. We have fulfilled our other ethical responsibilities, as applicable in accordance with the IRBA Codes and in accordance with other ethical requirements applicable to performing audits in South Africa. The IRBA Codes are consistent with the corresponding sections of the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants and the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants (including International Independence Standards) respectively. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified opinion. Material uncertainty related to going concern We draw attention to the matter below. Our opinion is not modified in respect of this matter. We draw attention to note 3.2 in the consolidated and separate financial statements, which indicates that for the year ended 31 March 2019 the group incurred a loss of R20 729 million (2018: R2 337 million). The group’s current liabilities exceed its current assets by R44 057 million (2018: R20 622 million). As stated in note 3.2, the current and prior year losses, deterioration of most of the group’s financial indicators, the impact of reduced generation performance along with other matters as set forth in note 3.2, indicate that a material uncertainty exists that may cast significant doubt on the group’s ability to continue as a going concern. Emphasis of matter We draw attention to the matter below. Our opinion is not modified in respect of this matter. Material losses – electricity As disclosed in note 51.3 to the consolidated and separate financial statements, estimated non-technical revenue losses of R1 741 million (2018: R1 390 million) were incurred mainly due to meter tampering and bypasses, illegal connections to the electricity network and illegal vending of electricity. ESKOM HOLDINGS SOC LTD | 19 INDEPENDENT AUDITOR’S REPORT TO PARLIAMENT AND THE SHAREHOLDER – MINISTER OF PUBLIC ENTERPRISES ON ESKOM HOLDINGS SOC LTD AND ITS SUBSIDIARIES (continued) Report on the audit of the consolidated and separate financial statements (continued) Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance to our audit of the consolidated and separate financial statements of the group for the year ended 31 March 2019. These matters were addressed in the context of our audit of the consolidated and separate financial statements as a whole and in forming our opinion thereon. We do not provide a separate opinion on these matters. Key audit matter How the matter was addressed in the audit Valuation, allocation and accuracy and disclosure of complex financial instruments The disclosure associated with the valuation, allocation We obtained an understanding of the relevant controls in place to evaluate that and accuracy of complex financial instruments is set out correct independent market inputs are used in the valuation models. in note 6.2 to the consolidated and separate financial statements. Fair value measurement of financial instruments We applied our valuation expertise to a sample of financial instruments and significantly affects profit and loss and the presentation assessed the appropriateness of the valuation models with reference to (of financial risks) in the consolidated and separate approaches commonly used. financial statements. Valuation of certain financial instruments (such as We assessed the judgements and estimates applied by the board against our derivatives) requires greater judgement and involves understanding of current market practice and conditions. We also obtained estimation to determine the appropriate valuation independently-sourced inputs where available, which were compared against techniques to apply and to source relevant and the inputs used by the board. reliable inputs. Due to the complexity in the application of the new Where necessary, we engaged an independent actuarial specialist to evaluate IFRS 9 Financial instruments accounting standard and the work performed by the board’s expert, including: magnitude of financial instruments carried at fair value, • assessing the independence and competence of the actuarial specialist the determination of assumptions and the significant • assessing the appropriateness of the financial model utilised by the judgements applied by the board in the valuation of the board’s expert financial instruments result in the valuation, allocation, • testing the reasonableness of inputs into the financial models accuracy and presentation of financial instruments • assessing the appropriateness of the amounts recognised by comparing the considered a significant judgement area and thus a fair values to fair values generated by models commonly used in the industry key audit matter. for similar instruments We assessed key assumptions and modelling approaches in estimating credit value adjustments and debit value adjustments against current market practice. We evaluated gains or losses on significant settled deals to assess calibration of mark-to-model values, and found the board’s estimates to be within reasonable ranges. Where valuation inputs were unobservable, we used our valuation expertise to assess the reasonability of the valuation inputs based on supportable and comparable information and compared these to the board’s valuation inputs. Based on the results of our work performed, we accepted the board’s valuation inputs as falling within reasonable ranges. Completeness, occurrence, accuracy and disclosure of revenue Revenue is disclosed in note 32 to the consolidated and We assessed the judgements and estimates applied by the board against our separate financial statements. understanding of current market practice and conditions. We also obtained independently-sourced inputs where available, which were compared against The entity adopted IFRS 15 Revenue from contracts with the inputs used by the board. customers using the modified retrospective transition election with the completed contract practical expedient. We engaged an independent actuarial specialist to evaluate the work performed by the board’s expert, including: The entity has applied IFRS 15 for the first time during • assessing the independence and competence of the actuarial specialist the current financial year. The complexity involved in the • assessing the appropriateness of the financial model utilised by the interpretation of the contracts with customers and translating this into the requirements of the accounting board’s expert standard is an area of significant judgement. • testing the reasonableness of inputs into the financial models • assessing the appropriateness of the amounts recognised by comparing the Further there is a high degree of complexity involved with fair values to fair values generated by models commonly used in the industry the application of the framework prescribed by the for similar instruments standard in determining how much and when revenue is recognised. Revenue is thus a key audit matter. Based on the results of our work performed, we are satisfied that revenue is correctly accounted for. 20 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 Key audit matter How the matter was addressed in the audit Impairment assessment – property, pland and equipment The disclosure associated with the completeness, Our audit work included the following: valuation and allocation and accuracy of impairment is set • identified the Cash Generating Unit (CGU) determination in terms of out in note 36 to the consolidated and separate financial International Financial Reporting Standards statements. • obtained the discounted cash flow models underlying the recoverable amount of the CGUs as prepared by management and tested the accuracy Management conducted a major defects analysis exercise of the models and challenged the assumptions used by management for the at Medupi, Kusile and Ingula power stations to ascertain the extent of damage and repairs that would need to be discounted cash flows carried out. • assessed and tested the assumptions and methodologies applied, including the weighted average cost of capital (WACC) and other data used by The purpose of the exercise was to determine the the group financial and technical accounting implications and • engaged a valuation professional to assist us with our assessment of the treatment of the scrapping relating to the units at the reasonability of the WACC and assessed the appropriateness of the expected aforementioned power stations placed into commercial inflation rates, growth rates and the models used as well as analysing the operation by the entity. future projected cash flows used in the models to determine whether they Due to the complexity of the estimation techniques are reasonable and supportable given the current macro-economic climate used in quantifying these defects as well as the degree and expected future performance of the applicable CGUs, against external of subjectivity involved in the process, assessment of market data, historical performance and forecast and recalculating the value impairment is therefore considered to be a key audit in use of all CGUs matter. • analysed the sensitivities such as the impact on the headroom if the growth rate were decreased, or the WACC were increased. Specifically focused on the sensitivity in the available headroom for the CGUs, evaluating whether a reasonably possible change in assumptions could cause the carrying amount to exceed its recoverable amount We further engaged an independent engineering specialist to evaluate the work performed by management, including: • assessing the independence and competence of the engineering specialist • assessing the appropriateness of the model utilised by management’s expert • testing the reasonableness of inputs and assumptions used against market trends • assessing whether there are material differences of opinion between managements expert’s and auditor expert’s • resolved the differences of opinion with management and agreed on the appropriate accounting adjustments to be processed Performed detailed substantive testing on the journals processed by management as prompted by the review by the engineering specialist. Based on the results of our work performed, we accepted the board’s valuation inputs as falling within reasonable ranges. Loan covenants compliance The group is highly leveraged with total debt securities Our audit work included the following: and borrowings of R440 610 million at 31 March 2019 and Performed substantive tests of detail to confirm whether the entity had has to comply with certain financial and non-financial complied with its covenants. The procedures consisted primarily of: covenants. • inspected the terms of agreements for loans and borrowings including covenant ratios and event of default definitions. We analysed the terms of In accordance with the terms’ of agreements for loans and waivers provided by lenders to the extent applicable borrowings, the group should maintain and comply with • examined management’s calculations of covenant ratios. We checked certain financial and non-financial covenants. Analysing mathematical accuracy of covenant calculations and reconciled input data compliance with covenants is one of the matters of most significance in our audit because it may have a significant used in the calculations with data in the consolidated and separate financial impact on the going concern assumption used in the statements prepared in accordance with IFRS preparation of the consolidated and separate financial • compared the maturity classification of loans and borrowings as current statements and on the maturity classification of liabilities or non-current liabilities with the results of analysis of compliance with in the consolidated and separate statement of financial covenants on relevant loans and borrowings position. Therefore compliance with financial and non- Based on the results of our work performed, we are satisfied that the entity financial covenants is considered a key audit matter. has complied with its covenants. ESKOM HOLDINGS SOC LTD | 21 INDEPENDENT AUDITOR’S REPORT TO PARLIAMENT AND THE SHAREHOLDER – MINISTER OF PUBLIC ENTERPRISES ON ESKOM HOLDINGS SOC LTD AND ITS SUBSIDIARIES (continued) Report on the audit of the consolidated and separate financial statements (continued) Responsibilities of the accounting authority for the financial statements The board of directors, which constitutes the accounting authority, is responsible for the preparation and fair presentation of the consolidated and separate financial statements in accordance with IFRS and the requirements of the Companies Act and PFMA, and for such internal controls as the accounting authority determines are necessary to enable the preparation of consolidated and separate financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated and separate financial statements, the accounting authority is responsible for assessing the group’s ability to continue as a going concern, disclosing, as applicable, matters relating to going concern and using the going-concern basis of accounting unless the appropriate governance structure either intends to liquidate the group or to cease operations or has no realistic alternative but to do so. Auditor’s responsibilities for the audit of the consolidated and separate financial statements Our objectives are to obtain reasonable assurance about whether the consolidated and separate financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated and separate financial statements. As part of an audit in accordance with the ISAs, we exercise professional judgement and maintain professional scepticism throughout our audit of the consolidated and separate financial statements, and the procedures performed on reported performance information for selected key performance areas and on the group’s compliance with respect to the selected subject matters. We also: • identify and assess the risks of material misstatement of the consolidated and separate financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control • obtain an understanding of internal controls relevant to the audit to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the group’s internal controls • evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the accounting authority • conclude on the appropriateness of the accounting authority’s use of the going-concern basis of accounting in the preparation of the financial statements. We also conclude, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements about the material uncertainty or, if such disclosures are inadequate, to modify the opinion on the financial statements. Our conclusions are based on the information available at the date of the auditor’s report • evaluate the overall presentation, structure and content of the consolidated and separate financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation • obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group to express an opinion on the consolidated and separate financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion • communicate with the accounting authority regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal controls that we identify during our audit • confirm to the accounting authority that we have complied with relevant ethical requirements regarding independence and communicate all relationships and other matters that may reasonably be thought to have a bearing on our independence and, where applicable, related safeguards From the matters communicated to those charged with governance, we determine those matters that were of the most significance in the audit of the consolidated and separate financial statements of the current period and are therefore key audit matters. We describe these matters in this auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in this auditor’s report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest of such communication. Report on other legal and regulatory requirements In accordance with our responsibilities in terms of sections 44(2) and 44(3) of the Auditing Profession Act, we report that we have identified reportable irregularities in terms of the Auditing Profession Act. We have reported such matters to Independent Regulatory Board for Auditors. The matter pertaining to the reportable irregularity has been described in note 52 to the consolidated and separate financial statements. Report on the audit of the annual performance report Introduction and scope In accordance with the Public Audit Act of South Africa (PAA) and the general notice issued in terms thereof, we have a responsibility to report material findings on the reported performance information against predetermined objectives for selected key performance areas presented in the shareholder compact performance section of the directors’ report. We performed procedures to identify findings but not to gather evidence to express assurance. 22 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 Our procedures address the reported performance information which must be based on the approved performance planning documents of the group. We have not evaluated the completeness and appropriateness of the performance indicators included in the planning documents. Our procedures also did not extend to any disclosures or assertions relating to planned performance strategies and information in respect of future periods that may be included as part of the reported performance information. Accordingly, our findings do not extend to these matters. We evaluated the usefulness and reliability of the reported performance information in accordance with the criteria developed from the performance management and reporting framework, as defined in the general notice, for the following key performance areas presented in the shareholder compact performance section of the directors’ report of the public entity for the year ended 31 March 2019: • improve plant operations (page 12) • deliver capital expansion (page 12) • reduce environmental footprint in existing fleet (page 12) • ensure financial sustainability (page 12) • socio-economic impact: economic impact (page 13) • socio-economic impact: corporate social investment (page 13) We performed procedures to determine whether the reported performance information was properly presented and whether performance was consistent with the approved performance planning documents. We performed further procedures to determine whether the indicators and related targets were measurable and relevant, and assessed the reliability of the reported performance information to determine whether it was valid, accurate and complete. The material findings in respect of the usefulness and reliability of the selected key performance information are as follows: Socio-economic impact: economic impact Eskom did not have an adequate record keeping system to enable reliable reporting on achievement of the indicators listed below. As a result, the total B-BBEE procurement spend was not quantified and considered in the calculation of the reported achievement of each indicator. We were unable to confirm that the reported achievement of these indicators was reliable by alternative means. Consequently, we were unable to determine whether any adjustments were required to the reported achievement of the indicators listed below: Indicator description Reported achievement (% of total measurable procurement spend) Procurement spend with broad-based black economic empowerment (B-BBEE) 54.41 Procurement spend with black-owned suppliers 33.08 Procurement spend with black women-owned suppliers 12.28 Procurement spend with black youth-owned suppliers 2.10 Procurement spend with suppliers owned by black people with disabilities 0.15 Procurement spend with qualifying small enterprises 4.47 Procurement spend with exempted enterprises 13.32 Corporate social investment committed We were unable to obtain sufficient appropriate audit evidence to support the reported achievement of Corporate social investment committed. This was due to inadequate technical indicator descriptions and proper performance management systems and processes that predetermined how the achievement would be measured, monitored and reported. We were unable to confirm the reported achievement of the indicator by alternative means. Consequently, we were unable to determine whether any adjustments were required to the achievement of R132.4 million, as reported in the shareholder compact performance section of the directors’ report. Other key performance indicators We did not raise any material findings on the usefulness and reliability of the reported performance information for these key performance areas: • improve plant operations • deliver capital expansion • reduce environmental footprint in existing fleet • ensure financial sustainability Other matters We would like to draw attention to the following matter with regards to the shareholder compact performance section in the directors’ report: B-BBEE score level The group did not perform the verification of its B-BBEE score level, as disclosed in the directors’ report. Achievement of planned targets Refer to the shareholder compact performance section of the directors’ report on pages 12 and 13 for information on the achievement of planned targets for the year. This information should be considered in the context of the material findings on the usefulness and reliability of the reported performance of this report. ESKOM HOLDINGS SOC LTD | 23 INDEPENDENT AUDITOR’S REPORT TO PARLIAMENT AND THE SHAREHOLDER – MINISTER OF PUBLIC ENTERPRISES ON ESKOM HOLDINGS SOC LTD AND ITS SUBSIDIARIES (continued) Report on the audit of compliance with legislation Introduction and scope In accordance with the PAA and the general notice issued in terms thereof we have a responsibility to report material findings on the compliance of the group with specific matters in key legislation. We performed procedures to identify findings but not to gather evidence to express assurance. The material findings in respect of the compliance criteria for the applicable subject matters are as follows: Revenue management Effective and appropriate steps were not taken, in all instances, to collect all revenue due as required by section 51(1)(b)(i) of the PFMA. Expenditure management Effective and appropriate steps were not taken, in all instances, to prevent irregular expenditure, as required by section 51(1)(b)(ii) of the PFMA. As reported in the basis for the qualified opinion, the full extent of the irregular expenditure could not be quantified. The majority of the irregular expenditure disclosed in the financial statements was caused by goods or services not being procured through a procurement process which is fair, equitable, transparent and competitive as required by section 51(1)(a)(iii) of the PFMA. Effective steps were not taken, in all instances, to prevent fruitless and wasteful expenditure, as required by section 51(1)(b)(ii) of the PFMA. As reported in the basis for qualified opinion, the full extent of the fruitless and wasteful expenditure could not be quantified. The majority of the fruitless and wasteful expenditure disclosed in the financial statements was caused by the group not taking delivery of coal in terms of coal supply agreements. Procurement and contract management Sufficient appropriate audit evidence could not be obtained that all awards to suppliers on established panels were in accordance with legislative requirements as proper record keeping of such awards was not maintained. Similar limitations were also reported in the prior year. Some of the goods, works or services were not procured through a procurement process which was fair, equitable, transparent and competitive, as required by section 51(1)(a)(iii) of the PFMA. Similar non-compliance was also reported in the prior year. Some of the contracts and quotations were awarded to bidders based on preference points that were not allocated and/or calculated in accordance with the requirements of the Preferential Procurement Policy Framework Act and its regulations. Similar non-compliance was also reported in the prior year. Some of the construction contracts were awarded to contractors that were not registered with the Construction Industry Development Board (CIDB) and did not qualify for the contract in accordance with section 18(1) of the CIDB Act and CIDB regulations 17 and/or 25(7A). Similar non-compliance was also reported in the prior year. Some of the bid documentation for procurement of commodities designated for local content and production did not stipulate the minimum threshold for local production and content as required by the 2017 preferential procurement regulation 8(2). Some of the commodities designated for local content and production were procured from suppliers who did not submit a declaration on local production and content as required by the 2017 preferential procurement regulation. Consequence management We were unable to obtain sufficient appropriate audit evidence that disciplinary steps were taken against officials who had incurred irregular and fruitless and wasteful expenditure as required by section 51(1)(e)(iii) of the PFMA. This was due to investigations not being initiated as well as a failure to maintain proper and complete records as evidence to support investigations where initiated. We were unable to obtain sufficient appropriate audit evidence that allegations of financial misconduct committed by members of the accounting authority and officials were investigated as required by treasury regulation 33.1.3 and 33.1.1 respectively. This was due to a failure to maintain proper and complete records as evidence to support the investigations into allegations of financial misconduct committed by members of the accounting authority and officials. We were unable to obtain sufficient appropriate audit evidence that allegations of theft, fraud, extortion, forgery or uttering a forged document which exceeded R100 000 were reported to the SAPS, as required by section 34(1) of the Prevention and Combating of Corrupt Activities Act, (PRECCA). Governance and oversight The company secretary did not in all instances ensure that the minutes of all shareholders meetings, board meetings and the meetings of any committees of the directors, or of the company’s audit committee, were properly recorded, as required by section 88(2)(d) of the Companies Act. Other information The group’s accounting authority is responsible for the other information. The other information comprises the information included in the directors’ report, the audit and risk committee’s report and the company secretary’s certificate as required by the Companies Act. The other information does not include the consolidated and separate financial statements, the auditor’s report thereon and those selected key performance areas presented in the shareholder compact performance section of the directors’ report that have been specifically reported on in the auditor’s report. 24 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 Our opinion of the financial statements and findings on the reported performance information and compliance with legislation do not cover the other information and we do not express an audit opinion or any form of assurance conclusion thereon. In connection with our audit, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated and separate financial statements and the selected key performance areas presented in the shareholder compact performance section of the directors’ report, or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Internal control deficiencies We considered internal controls relevant to our audit of the consolidated and separate financial statements, reported performance information and compliance with applicable legislation; however, our objective was not to express any form of assurance on it. The matters reported below are limited to the significant internal control deficiencies that resulted in the basis for the qualified opinion, the findings on the shareholder compact performance section of the directors’ report and the findings on compliance with legislation included in this report. The accounting authority did not exercise adequate oversight responsibility regarding compliance with applicable legislation and related internal controls that resulted in the lack of proper procurement and contract management processes as well as effective consequence management practices. Action plans developed to address internal control deficiencies were not, in all instances, adequate. Management did not implement proper record keeping in a timely manner to ensure that complete, relevant and accurate information is accessible and available to support financial and performance reporting. Other reports We draw attention to the following engagements conducted by various parties that have or could potentially have an impact on the matters reported on the group’s financial, performance and compliance related matters. The reports noted do not form part of our opinion on the consolidated and separate financial statements or our findings on the reported performance information or compliance with legislation. Matters under investigation During the financial year under review the regulatory authorities and the accounting authority conducted investigations into alleged irregularities, fraud and corruption within the procurement environment and other areas of the entity. As at the reporting date, some of these investigations were still ongoing. As disclosed in note 51.4 to the financial statements, various matters are reported to be under investigation. Agreed-upon procedure engagements Agreed-upon procedure engagements were performed on the following: • National Treasury consolidation template that covered the period from 1 April 2018 to 31 March 2019 • Eskom’s generation, transmission and distribution activities regulatory financial report. This agreed-upon procedure is performed on behalf of NERSA Auditor tenure In terms of the IRBA rule published in Government Gazette Number 39475 dated 4 December 2015, we report that SNG Grant Thornton has been the auditor of Eskom Holdings SOC Ltd for five years. Aaron Mthimunye SizweNtsalubaGobodo Grant Thornton Director Registered auditor 26 July 2019 20 Morris East Street, Woodmead, 2191 ESKOM HOLDINGS SOC LTD | 25 STATEMENTS OF FINANCIAL POSITION at 31 March 2019 Group Company 2019 2018 2019 2018 Note Rm Rm Rm Rm Assets Non-current 685 153 658 067 685 578 658 440 Property, plant and equipment 8 651 637 630 648 652 233 631 159 Intangible assets 9 3 925 3 945 3 706 3 803 Future fuel supplies 10 6 471 7 157 6 471 7 157 Investment in equity-accounted investees 11 373 372 95 95 Investment in subsidiaries 12 – – 384 384 Deferred tax 13 17 23 – – Loans receivable 15 40 63 – – Derivatives held for risk management 16 20 582 13 705 20 582 13 705 Finance lease receivables 17 374 408 374 408 Payments made in advance 18 1 734 1 746 1 733 1 729 Current 63 994 72 123 60 709 70 531 Inventories 20 26 482 24 348 26 251 24 122 Taxation 102 149 – – Loans receivable 15 26 18 6 071 6 201 Derivatives held for risk management 16 2 080 1 873 2 080 1 875 Finance lease receivables 17 31 29 31 29 Payments made in advance 18 1 541 1 418 1 460 1 328 Trade and other receivables 19 21 976 20 125 23 137 21 429 Insurance investments 14 9 563 8 172 – – Financial trading assets 14 162 168 162 168 Cash and cash equivalents 21 2 031 15 823 1 517 15 379 Assets held-for-sale 22 8 871 8 926 – 40 Total assets 758 018 739 116 746 287 729 011 Equity Capital and reserves 153 094 170 336 138 492 158 075 Liabilities Non-current 495 194 474 353 494 267 473 788 Debt securities and borrowings 25 387 208 348 112 387 161 348 060 Embedded derivatives 26 1 365 3 434 1 365 3 434 Derivatives held for risk management 16 5 643 16 570 5 643 16 570 Deferred tax 13 8 350 15 846 7 804 15 665 Employee benefit obligations 28 13 546 13 725 13 242 13 404 Provisions 29 45 588 44 370 45 558 44 359 Finance lease payables 30 9 130 9 533 9 130 9 533 Trade and other payables 31 1 031 1 201 1 031 1 201 Payments received in advance 27 2 038 1 766 2 038 1 766 Contract liabilities and deferred income 27 21 295 19 796 21 295 19 796 Current 108 051 92 745 113 528 97 148 Debt securities and borrowings 25 53 402 40 572 57 886 44 525 Embedded derivatives 26 2 069 1 857 2 069 1 857 Derivatives held for risk management 16 1 397 4 896 1 397 4 896 Employee benefit obligations 28 3 244 3 244 2 976 2 992 Provisions 29 5 662 5 309 5 556 5 194 Finance lease payables 30 332 286 332 286 Trade and other payables 31 36 849 32 116 38 208 32 944 Payments received in advance 27 3 359 3 003 3 367 2 996 Contract liabilities and deferred income 27 1 499 1 209 1 499 1 209 Taxation – 4 – – Financial trading liabilities 14 238 249 238 249 Liabilities held-for-sale 22 1 679 1 682 – – Total liabilities 604 924 568 780 607 795 570 936 Total equity and liabilities 758 018 739 116 746 287 729 011 26 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 INCOME STATEMENTS for the year ended 31 March 2019 Group Company 2019 2018 2019 2018 Note Rm Rm Rm Rm Revenue 32 179 892 177 424 179 892 177 424 Other income 33 2 150 1 372 3 073 1 787 Primary energy 34 (99 488) (85 202) (99 488) (85 202) Employee benefit expense 35 (33 272) (29 454) (27 616) (24 455) Impairment of financial assets 36 278 (528) 260 (503) Impairment of other assets 36 153 (25) 153 (25) Other expenses 37 (18 214) (18 228) (27 019) (25 598) Profit before depreciation and amortisation expense and net fair value and foreign exchange loss (EBITDA) 31 499 45 359 29 255 43 428 Depreciation and amortisation expense 38 (29 756) (23 132) (29 662) (23 110) Net fair value and foreign exchange loss on financial instruments 39 (3 409) (1 775) (3 368) (1 875) (Loss)/profit before net finance cost (1 666) 20 452 (3 775) 18 443 Net finance cost (27 517) (23 089) (28 676) (24 199) Finance income 40 2 722 2 872 1 679 1 874 Finance cost 41 (30 239) (25 961) (30 355) (26 073) Share of profit of equity-accounted investees after tax 11 35 34 – – Loss before tax (29 148) (2 603) (32 451) (5 756) Income tax 42 8 419 266 9 262 1 148 Loss for the year 1 (20 729) (2 337) (23 189) (4 608) STATEMENTS OF COMPREHENSIVE INCOME for the year ended 31 March 2019 Group Company 2019 2018 2019 2018 Note Rm Rm Rm Rm Loss for the year 1 (20 729) (2 337) (23 189) (4 608) Other comprehensive income/(loss) 3 685 (3 269) 3 606 (3 281) Items that may be reclassified subsequently to profit or loss 2 433 (4 601) 2 383 (4 578) Available-for-sale financial assets – net change in fair value – – – (3) Cash flow hedges Changes in fair value 16 2 964 (5 700) 2 964 (5 700) Net amount transferred to profit or loss 626 346 626 346 Amortisation of effective portion of terminated cash flow hedges 39 (324) (324) (324) (324) Ineffective portion of cash flow hedges 39 950 670 950 670 Net amount transferred to initial carrying amount of hedged items (281) (1 003) (281) (1 003) Foreign currency translation differences on foreign operations 50 (25) – – Income tax thereon 42 (926) 1 781 (926) 1 782 Items that may not be reclassified subsequently to profit or loss 1 252 1 332 1 223 1 297 Re-measurement of post-employment medical benefits 28 1 737 1 850 1 698 1 802 Income tax thereon 42 (485) (518) (475) (505) Total comprehensive loss for the year1 (17 044) (5 606) (19 583) (7 889) 1. A nominal amount is attributable to the non-controlling interest in the group. The remainder is attributable to the owner of the company. ESKOM HOLDINGS SOC LTD | 27 STATEMENTS OF CHANGES IN EQUITY for the year ended 31 March 2019 Share Cash flow Available- Unrealised Foreign Accumulated Total capital hedge for-sale fair value currency profit equity reserve reserve reserve translation reserve Rm Rm Rm Rm Rm Rm Rm Group Balance at 31 March 2017 83 000 4 160 6 (11 873) (6) 100 655 175 942 Loss for the year – – – – – (2 337) (2 337) Other comprehensive (loss)/income, net of tax – (4 576) – – (25) 1 332 (3 269) Transfer between reserves – – – 1 560 – (1 560) – Balance at 31 March 2018 83 000 (416) 6 (10 313) (31) 98 090 170 336 Adoption of IFRS 9 and 151 – – (6) – – (192) (198) Classification and measurement – – (8) – – (264) (272) Income tax thereon – – 2 – – 72 74 Adjusted balance at 31 March 2018 83 000 (416) – (10 313) (31) 97 898 170 138 Loss for the year – – – – – (20 729) (20 729) Other comprehensive income, net of tax – 2 383 – – 50 1 252 3 685 Transfer between reserves – – – (3 328) – 3 328 – Balance at 31 March 2019 83 000 1 967 – (13 641) 19 81 749 153 094 Company Balance at 31 March 2017 83 000 4 160 2 (11 873) – 90 675 165 964 Loss for the year – – – – – (4 608) (4 608) Other comprehensive (loss)/income, net of tax – (4 576) (2) – – 1 297 (3 281) Transfer between reserves – – – 1 560 – (1 560) – Balance at 31 March 2018 83 000 (416) – (10 313) – 85 804 158 075 Loss for the year – – – – – (23 189) (23 189) Other comprehensive income, net of tax – 2 383 – – – 1 223 3 606 Transfer between reserves – – – (3 328) – 3 328 – Balance at 31 March 2019 83 000 1 967 – (13 641) – 67 166 138 492 Share capital Refer to note 24 for details regarding share capital. Cash flow hedge reserve The cash flow hedge reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments (forward exchange contracts and cross-currency swaps) related to hedged transactions that have not yet occurred. The cross-currency swap hedges foreign exchange rate and interest rate risk of the future interest payments and the principal repayment on bonds and loans (denominated in US dollar, euro and yen). The reserve includes an unamortised gain of R731 million (2018: R1 055 million) relating to the effective portion of terminated hedges that is amortised to the income statement over the remaining life of the underlying hedged item. Available-for-sale reserve The available-for-sale reserve comprises the cumulative net change in the fair value of available-for-sale financial assets until the investments are derecognised. Unrealised fair value reserve The cumulative net change in the fair value of financial instruments that have not been designated as cash flow hedging instruments is recognised in profit or loss. The unrealised portion of the net change in fair value is not distributable and has been reallocated from a distributable reserve (accumulated profit) to a non-distributable reserve. Foreign currency translation reserve The foreign currency translation reserve comprises exchange differences resulting from the translation of the results and financial position of foreign operations. Accumulated profit Accumulated profit is the amount of cumulative profit retained in the business after tax. No dividend has been proposed in the current or prior year. There are no restrictions on the distribution of dividends. Non-controlling interest The non-controlling interest in the group is a nominal amount. 1. Refer to note 50.3. 28 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 STATEMENTS OF CASH FLOWS for the year ended 31 March 2019 Group Company 2019 2018 2019 2018 Note Rm Rm Rm Rm Cash flows from operating activities Cash generated from operations 43 33 257 39 659 32 323 37 857 Net cash used in derivatives held for risk management (172) (1 726) (174) (1 738) Finance income received 245 393 245 393 Finance cost paid (277) (28) (276) (28) Income taxes paid (313) (724) – – Net cash from operating activities 32 740 37 574 32 118 36 484 Cash flows used in investing activities Disposals of property, plant and equipment 566 453 566 448 Acquisitions of property, plant and equipment (34 087) (49 076) (34 474) (48 988) Acquisitions of intangible assets (443) (425) (343) (424) Acquisitions of future fuel supplies (548) (1 618) (548) (1 618) Net acquisitions of insurance investments (1 356) (1 492) – – Payments made in advance (9) (40) (9) (40) Cash used in provisions (1 707) (4 788) (1 707) (4 788) Net cash used in derivatives held for risk management (166) (91) (166) (91) Net cash from/(used in) loans receivable 25 12 96 (25) Cash from finance lease receivables 29 19 29 19 Dividends received 49 37 35 27 Dividends received – investment in equity-accounted investees 11 34 26 – – Finance income received 1 411 1 486 506 534 Net cash used in investing activities (36 202) (55 497) (36 015) (54 946) Cash flows (used in)/from financing activities Debt securities and borrowings raised 44 58 914 53 234 59 364 53 761 Payments made in advance 44 (1 179) (929) (1 179) (929) Debt securities and borrowings repaid 44 (34 455) (12 548) (34 332) (12 591) Net cash from/(used in) derivatives held for risk management 44 1 219 (1 824) 1 219 (1 824) Disposals of treasury investments 44 – 6 586 – 6 586 Cash used in finance lease payables 44 (357) (246) (357) (246) Net cash from financial trading assets 44 10 1 459 10 1 459 Net cash used in financial trading liabilities 44 (29) (1 241) (29) (1 241) Finance income received 858 1 034 820 1 004 Finance cost paid (35 845) (31 909) (36 035) (32 051) Taxes paid (69) (69) (69) (69) Net cash (used in)/from financing activities (10 933) 13 547 (10 588) 13 859 Net decrease in cash and cash equivalents (14 395) (4 376) (14 485) (4 603) Cash and cash equivalents at beginning of the year 15 823 20 425 15 379 19 964 Foreign currency translation 50 (25) – – Effect of movements in exchange rates on cash held 620 10 620 10 Assets and liabilities held-for-sale (67) (211) 3 8 Cash and cash equivalents at end of the year 21 2 031 15 823 1 517 15 379 Cash flow allocation Cash flows that form part of the changes in the line items of the statement of financial position are classified into operating, investing and financing activities in a manner that is most appropriate to the group. As a result, the cash flows associated with some line items in the statement of financial position may be split into multiple cash flow activities in the statement of cash flows. These line items are: Derivatives held for risk management Derivatives held for risk management are classified as operating, investing or financing activities based on the allocation of the cash flows of the underlying hedged item. Refer to note 16. Payments made in advance Payments made in advance that relate to the raising of debt securities and borrowings are classified as financing activities. Payments related to the acquisition of property, plant and equipment and intangible assets are allocated to investing activities. All other payments made in advance are deemed operational in nature and are therefore included within operating activities. Refer to note 18. Provisions Cash flows related to provisions for environmental restoration and mine-related closure, pollution control and rehabilitation, where the cost of property, plant and equipment as well as future fuel supplies includes environmental rehabilitation costs, are classified as investing activities. All other provisions are operational in nature and are classified as operating activities. Refer to note 29. Finance income and costs Finance income and costs are allocated in line with the allocation of the related balances on which the income or cost arose. ESKOM HOLDINGS SOC LTD | 29 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2019 1. General information Eskom Holdings SOC Ltd (Eskom), a state-owned company and holding company of the group, is incorporated and domiciled in the Republic of South Africa. Eskom is a vertically integrated operation that generates, transmits and distributes electricity to local industrial, mining, commercial, agricultural, redistributors (metropolitan and other municipalities) and residential customers, and to international customers in southern Africa. Eskom also purchases electricity from IPPs and international suppliers in southern Africa. These represent the significant activities of the group. The business focus of the subsidiaries is primarily to support the electricity business. The nature of the businesses of the significant operating subsidiaries is set out in note 12. 2. Summary of significant accounting policies The principal accounting policies applied in the preparation of these separate and consolidated financial statements are set out below. 2.1 Basis of preparation and measurement Statement of compliance The consolidated financial statements of Eskom at and for the year ended 31 March 2019 comprise the company, its subsidiaries, joint ventures, associates and structured entities (together the group). The separate and consolidated financial statements have been prepared in accordance with IFRS and in the manner required by the PFMA and the Companies Act. The financial statements have been prepared on the going-concern basis and were approved for issue by the board on 18 July 2019. The group continues to apply IFRS as its reporting framework based on its assessment against the criteria set out in Directive 12 The selection of an appropriate reporting framework by public entities (effective 1 April 2018) issued by the Accounting Standards Board. The directive prescribes the criteria to be applied by a public entity in selecting and applying an appropriate reporting framework. The conclusion of the assessment is based on the fact that Eskom’s operations are commercial in nature and only an insignificant portion of its funding is acquired through government grants or other forms of financial assistance from government. The conclusion will be re-assessed as the increased support from government in the future can be regarded as a significant change in Eskom’s circumstances that could lead to a different outcome of its assessment. Basis of measurement The separate and consolidated financial statements are prepared on the historical-cost basis except for the following items which are measured at fair value: • derivatives held for risk management • embedded derivatives • certain investments and financial trading assets and liabilities Functional and presentation currency The consolidated financial statements are presented in South African Rand (rounded to the nearest million unless otherwise stated), which is the company’s functional currency and the presentation currency of the group. Changes in accounting policies and comparability The group has consistently applied the accounting policies to all periods presented in these consolidated financial statements except for new or revised statements and interpretations implemented during the year. The nature and effect of new standards and interpretations are discussed in note 50.2. 2.2 Consolidation Subsidiaries Subsidiaries are consolidated from the date on which control is transferred to the group until the date that control ceases. Investments in subsidiaries are accounted for at cost less impairment losses in the separate financial statements of the company. When the group ceases to have control of an entity, it derecognises the assets and liabilities of the subsidiary and any components of equity. Any resulting gain or loss is recognised in profit or loss. The accounting policies of the subsidiaries have been adjusted, where necessary, to ensure consistency with the policies adopted by the group. Investment in equity-accounted investees Investments in equity-accounted investees (associates and joint ventures) are accounted for at cost less impairment losses in the separate financial statements of the company and on the equity method of accounting in the financial statements of the group. The group’s share of post-acquisition profits or losses of these investments is recognised in profit or loss within share of profit of equity- accounted investees, and its share of post-acquisition movements in other comprehensive income is recognised directly in other comprehensive income. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. Accounting policies of associates and joint ventures have been adjusted where necessary to ensure consistency with the policies adopted by the group. If the financial statements of the associate or joint venture are prepared as of a different date to that of the group (maximum of three months difference), adjustments are made to the group financial statements for significant transactions and events that occur between the date of the financial statements of the associate or joint venture and the date of the financial statements of the group. 30 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 2.3 Foreign currency translation Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss, except when recognised in other comprehensive income for qualifying cash flow hedges. Changes in the fair value of monetary securities denominated in foreign currency classified as fair value through other comprehensive income (previously available-for-sale) are analysed between translation differences resulting from changes in the amortised cost of the security, and other changes in the carrying amount of the security. Translation differences relating to changes in the amortised cost are recognised in profit or loss and other changes in the carrying amount are recognised in other comprehensive income within fair value through other comprehensive income (previously available-for-sale) financial assets. Non-monetary items are measured at historical cost. Foreign loans are initially recognised at the exchange rate prevailing at transaction date and are translated at spot rate at every reporting date. Foreign exchange gains and losses that relate to financial assets and liabilities at amortised cost are presented in profit or loss within net fair value and foreign exchange gain/loss on financial instruments. Foreign operations The assets and liabilities of foreign operations (including fair value adjustments arising on acquisition) are translated to rand at the prevailing exchange rates at the reporting date. The income and expenses of foreign operations are translated to rands at the average exchange rate. Foreign currency differences arising as a result of these transactions are recognised in other comprehensive income within the foreign currency translation reserve. 2.4 Property, plant and equipment Property, plant and equipment is stated at cost less accumulated depreciation and impairment losses. Cost includes environmental rehabilitation costs, borrowing costs and transfers from equity of any gains or losses on qualifying cash flow hedges of foreign currency transactions. Work under construction includes the cost of materials and direct labour and any other directly attributable costs incurred in bringing an item of property, plant and equipment to its present location and condition. Significant parts of an item of property, plant and equipment that have different useful lives are accounted for as separate items (major components). Spare parts classified as strategic and critical spares are recognised as property, plant and equipment and are only capable of operating in the manner intended by management when they are installed. Items of property, plant and equipment transferred from customers are initially recognised at fair value in accordance with International Accounting Standard (IAS) 16 Property, plant and equipment and any related revenue is recognised in accordance with IFRS 15 (previously IAS 18 Revenue) within revenue. Subsequent costs are capitalised only when it is probable that future economic benefits associated with the item will flow to the group and the cost of the item can be measured reliably. When part of an asset is being replaced, the carrying amount of the replaced part is derecognised. Repairs and maintenance are charged to profit or loss during the financial period incurred. Land and spare parts are not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate cost over the estimated useful lives (limited to residual values), as follows: Years Buildings and facilities 10 to 40 Plant • Generating 3 to 80 • Transmitting 5 to 40 • Distributing 10 to 35 • Other 3 to 40 Equipment and vehicles 1 to 15 The depreciation method, residual values and useful lives of assets are reviewed, and adjusted if appropriate, at each reporting date. The estimation of the useful lives of property, plant and equipment is based on historical performance as well as expectations about future use and therefore requires a degree of judgement. Gains or losses on disposal of an item of property, plant and equipment are recognised in profit or loss within other income or other expenses. Projects in works under construction that have been discontinued are written off and included in other expenses. 2.5 Intangible assets Research and development Research expenditure is recognised as an expense as incurred. Development expenditure (relating to the design and testing of new or improved products) is capitalised only if the expenditure can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable and the group intends to and has sufficient resources to complete development and to use or sell the asset. Otherwise, it is recognised in profit or loss within other expenses. Subsequent to initial recognition, development expenditure is measured at cost less accumulated amortisation and any accumulated impairment losses. ESKOM HOLDINGS SOC LTD | 31 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 2. Summary of significant accounting policies (continued) 2.5 Intangible assets (continued) Development costs previously recognised as an expense are not recognised as an asset in a subsequent period. Development costs previously capitalised that have been discontinued are written off and included in other expenses. Capitalised development costs are amortised from the point at which the asset is ready for use on a straight-line basis over its useful life. Subsequent to initial recognition, the capitalised development costs are measured at cost less accumulated amortisation and impairment losses. Rights Rights consist mainly of servitudes and rights of way under power lines. A servitude right is granted to Eskom for an indefinite period (useful life) and is therefore not amortised. Computer software Computer software and licences acquired have a finite useful life and are measured at cost less accumulated amortisation and any accumulated impairment losses. If software is integral to the functionality of related equipment, it is capitalised as part of the equipment. Costs associated with maintaining computer software programs are recognised as an expense as incurred. Amortisation is calculated using the straight-line method to allocate costs over their estimated useful lives of between two and five years. Amortisation methods and useful lives of assets are reviewed at each reporting date and adjusted if appropriate. Concession assets Concession assets consist of the right to charge for the usage of the infrastructure under service concession arrangements. The capital expenditure incurred in respect of the service concession arrangements (fair value at initial recognition), including borrowing costs on qualifying capital expenditures, is capitalised (refer to note 2.7) and amortised over the estimated useful life of the concession asset, which is the concession period during which it is available for use (refer to note 23). Subsequent to initial recognition, the concession assets are measured at cost less accumulated amortisation and impairment losses. 2.6 Impairment of non-financial assets The carrying amounts of non-financial assets within the scope of IAS 36 Impairment of assets are reviewed at each reporting date to determine whether there is any indication of impairment. These assets are also reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable or if there are indicators of impairment. Assets that have an indefinite useful life (rights) are tested annually for impairment. Assets are grouped at the lowest levels for which there are separately identifiable cash flows (CGU) that are largely independent of cash inflows when assessing for impairment. Eskom Holdings SOC Ltd is regarded as a CGU as it is a vertically integrated regulated business with no active market. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. Value in use is based on the estimated future cash flows, discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. Non-financial assets that were subject to impairment are reviewed for possible reversal of the impairment at each reporting date. Impairment losses or reversals are recognised in profit or loss within impairment of other assets. 2.7 Capitalisation of borrowing costs Borrowing costs attributable to the construction of qualifying assets are capitalised as part of the cost of these assets over the period of construction, until the asset is substantially ready for its intended use. Borrowing costs for qualifying assets financed by specific borrowings are capitalised using either the specific borrowing rate or the actual interest expense incurred. Borrowing costs for qualifying assets that are not financed by specific borrowings are capitalised at the weighted average of the borrowing costs (capitalisation rate) using the borrowings applicable to the entities in the group. 2.8 Leases Finance leases – where the group is the lessee Finance lease payables comprise mainly of arrangements that contain finance leases in terms of IFRIC 4 Determining whether an arrangement contains a lease. The leased assets include plant, mining assets and equipment and vehicles. Finance leases are capitalised on commencement of the lease at the lower of the fair value of the leased asset and the present value of the minimum lease payments. The finance cost is charged to profit or loss over the lease period to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Property, plant and equipment acquired under finance leases are depreciated over the shorter of the useful life of the asset and the lease term. Finance lease payables are derecognised in accordance with the derecognition requirements for financial liabilities. Finance leases – where the group is the lessor Finance lease receivables mainly comprise premium power supply equipment contracts. The present value of the lease payments is recognised as a receivable when property, plant and equipment are leased out under a finance lease. The difference between the gross receivable and the present value of the receivable is disclosed as unearned finance income within finance lease receivables. Lease income is recognised over the term of the lease using the net investment method, which reflects a constant periodic rate of return. Finance lease receivables are assessed for impairment and derecognised in accordance with the requirements for financial assets. 32 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 Operating leases Leases where substantially all of the risks and rewards of ownership are not transferred are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to profit or loss within other expenses on a straight-line basis over the period of the lease. Payments received under operating leases are recognised in profit or loss within other income on a straight-line basis over the period of the lease. 2.9 Payments made in advance Securing debt raised Payments are made in advance to lenders for the commitment and issuing fees incurred in raising debt. Environmental rehabilitation trust fund Contributions are made by Eskom to environmental rehabilitation trust funds that were established to fund the financial obligation in respect of the rehabilitation of certain coal mines from which Eskom sources its coal for the generation of electricity. The trust funds are controlled by third parties and will be solely used for the environmental rehabilitation of the relevant coal mines. The contributions made to the trust funds have been recognised separately from the environmental rehabilitation provision in accordance with the requirements of IFRIC 5 Rights to interests arising from decommissioning, restoration and environmental rehabilitation funds. Other Other payments made in advance comprise mainly payments made to suppliers to reserve manufacturing capacity for the future construction of assets. These amounts will be used as partial settlement towards the future amounts payable to the suppliers. There is no contractual right to receive a refund in cash or another financial instrument from the suppliers. In the event of default or non- performance, there are performance bonds in place that can be used to recover outstanding payments in advance. 2.10 Financial instruments 2.10.1 Financial assets (excluding derivatives) Classification Current year (in terms of IFRS 9) The appropriate classification of a financial asset is determined on acquisition of the financial asset and is based on: • whether or not the contractual terms of the financial asset gives rise to contractual cash flows that are solely payments of principal and interest; and • the objective of the business model in which the financial asset is held at a portfolio level that best reflects the way the business is managed Financial assets are not reclassified subsequent to their initial recognition unless the group changes its business model for managing financial assets, in which case all affected financial assets are reclassified on the first day of the first reporting period following the change in the business model. The group may irrevocably designate a financial asset on initial recognition that otherwise meets the requirements to be measured at amortised cost or at fair value through other comprehensive income as at fair value through profit or loss if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise. The group may also irrevocably elect on initial recognition of an equity investment that is not held for trading to present subsequent changes in the investment’s fair value in other comprehensive income. This election is made on an investment-by-investment basis. The group did not designate any financial assets at fair value through profit or loss and has not elected to present equity investments at fair value through other comprehensive income. Financial assets are classified into the following categories: Amortised cost A financial asset is measured at amortised cost if it meets both of the following conditions and is not designated as at fair value through profit or loss: • its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding; and • it is held within a business model whose objective is to hold assets to collect contractual cash flows Fair value through other comprehensive income A financial asset is measured at fair value through other comprehensive income if it meets both of the following conditions and is not designated as at fair value through profit or loss: • its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding; and • it is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets Fair value through profit or loss All financial assets not classified as measured at amortised cost or fair value through other comprehensive income are measured at fair value through profit or loss. Comparative year (in terms of IAS 39) Comparative year classifications are disclosed in terms of IAS 39. Financial assets were classified as held-for-trading, loans and receivables or available-for-sale. ESKOM HOLDINGS SOC LTD | 33 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 2. Summary of significant accounting policies (continued) 2.10 Financial instruments (continued) 2.10.1 Financial assets (excluding derivatives) (continued) Measurement Initial recognition Financial assets are initially measured at fair value on the date of commitment to purchase (trade date). The transaction price is generally the best indicator of fair value. If a contract with a customer has a significant financing component, the related financial asset is initially measured at the transaction price excluding the time value of money. Where the fair value of a financial asset is different to the transaction price, a day-one gain or loss may arise. If the fair value has been determined based on market-observable data the whole day-one gain or loss is recognised immediately in profit or loss. If the fair value has not been based on market-observable data the day-one gain or loss is deferred in the statement of financial position and amortised over the term of the instrument in profit or loss. Any directly attributable transaction costs are included in the initial measurement of financial assets except for financial assets at fair value through profit or loss where directly attributable transaction costs are recognised in profit or loss. After initial recognition Amortised cost (previously loans and receivables) Financial assets at amortised cost are measured at amortised cost after initial recognition using the effective interest rate method less any accumulated impairment losses. Interest income, foreign exchange gains and losses and impairments are recognised in profit or loss. Loss allowances for financial assets measured at amortised cost are deducted from the gross carrying amount of the assets. Fair value through other comprehensive income (previously available-for-sale) Financial assets at fair value through other comprehensive income are measured at fair value after initial recognition. Interest income calculated using the effective interest method, foreign exchange gains and losses and impairments are recognised in profit or loss. Other net gains and losses are recognised in other comprehensive income. The loss allowance for financial assets at fair value through other comprehensive income is recognised in profit or loss. Fair value through profit or loss (previously held-for-trading) Financial assets at fair value through profit or loss are measured at fair value after initial recognition. Changes in the fair value after initial recognition (including any interest or dividend income) are recognised in profit or loss. Analysis of current and comparative year classification and measurement The accounting classification of financial assets in terms of IAS 39 and IFRS 9 is provided in the table below. Refer to note 50 for more information regarding the adoption of IFRS 9. Instrument IAS 39 classification IFRS 9 Reason for classification in terms of IFRS 9 and measurement classification Loans receivable, Loans and receivables Amortised cost It was assessed that these balances are managed in terms finance lease receivables (amortised cost) of the IFRS 9 held-to-collect business model and have and trade and other met the strictly solely payments of principal and interest receivables (SPPI) criterion Investments and financial trading assets • Negotiable Available-for-sale (fair Amortised cost It was assessed that these balances are managed in terms certificates of deposit value through other of the IFRS 9 held-to-collect business model and have met comprehensive income) the SPPI criterion • Repurchase Held-for-trading (fair Amortised cost It was assessed that these balances are managed in terms agreement value through profit or of the IFRS 9 held-to-collect business model and have met loss) the SPPI criterion • Listed shares Held-for-trading (fair Fair value through It was assessed that these balances are not managed on a value through profit profit or loss held-to-collect and/or for sale business model and the or loss) default classification is therefore fair value through profit or loss • Government bonds Held-for-trading (fair Fair value through It was assessed that these balances are not managed on a value through profit profit or loss held-to-collect and/or for sale business model and the or loss) default classification is therefore fair value through profit or loss Impairment Current year (in terms of IFRS 9) Loss allowances are recognised for expected credit losses on financial assets measured at amortised cost or fair value through other comprehensive income. Loss allowances are calculated using the general or simplified approach. 34 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 The general approach requires impairment to be measured using a 12-month or lifetime expected credit loss. The lifetime expected credit loss method will be used if, after initial recognition, there is a significant increase in the credit risk of a financial asset or if it becomes credit-impaired. The simplified approach requires impairment to be measured using a lifetime expected credit loss. The simplified approach is applied to trade and other receivables. The maximum period considered when estimating expected credit losses is the maximum contractual period over which the group is exposed to credit risk. 12-month expected credit losses are the portion of the expected credit loss resulting from default events that are possible within 12 months after reporting date (or a shorter period if the expected life of the instrument is less than 12 months). Lifetime expected credit losses are the expected credit losses that result from all possible default events over the expected life of financial instrument. Expected credit losses are probability-weighted estimates of credit losses. Credit losses are measured as the difference between the cash flows due in accordance with the contract and the cash flows expected to be received discounted at the effective interest rate of the financial asset. All financial assets subject to impairment are monitored to assess whether they have been subject to a significant increase in credit risk after initial recognition. There will be a significant increase in credit risk when: • payments are more than 30 days past due, or • a significant qualitative event has occurred Where it is assessed that a counterparty’s credit risk has increased significantly from its initial low risk designation, the related asset is moved from stage 1 to stage 2. No significant increases in credit risk were observed in the 2019 financial year. An assessment is performed at each reporting date to determine whether financial assets subject to impairment are credit-impaired. A financial asset is credit-impaired when there is observable evidence that one or more event has occurred that has had a detrimental impact on the estimated future cash flows expected to flow from the asset such as: • significant financial difficulty of the borrower, issuer or customer • a breach of contract such as a default (where the counterpart is unlikely to pay its obligations) or being more than 90 days past due • restructuring of a loan or advance on terms that the group would not otherwise consider • it is probable that the borrower or customer will enter bankruptcy or other financial reorganisation • the disappearance of an active market for a security because of financial difficulties Where the counterparty is assessed to be credit-impaired the related asset is disclosed in stage 3. Expected credit loss models and methods Instrument Criteria used for assessment of expected credit loss measurement 12-month expected credit loss Lifetime expected credit loss Stage 1 Stage 2 Stage 3 Low credit risk Not credit-impaired or significant Credit impaired or default increase in credit risk Trade and other Not applicable (simplified approach Elected to measure loss allowances at Financial asset more than receivables applied so use lifetime expected credit an amount equal to the lifetime 90 days past due loss) expected credit losses Finance lease, Credit risk is assessed as low (where Financial asset more than 30 days Financial asset more than loans receivable the credit risk rating assigned is past due 90 days past due and financial equivalent to the globally undersdood guarantees definition of investment grade) Investments and Credit risk is assessed as low (where Significant increase in credit risk since There is objective financial trading the credit risk rating assigned is initial recognition but there is no evidence that the assets and cash equivalent to the globally undersdood objective evidence of loss (ie the counterparty is unlikely to and cash definition of investment grade) counterparty is still considered likely pay its obligations equivalents to pay its obligations) Prior year (in terms of IAS 39) Loans and receivables were assessed at the reporting date for indicators of impairment to determine whether there was any objective evidence of impairment. Individually significant financial assets were tested for impairment on an individual basis. The remaining financial assets were assessed collectively in groups that share similar credit risk characteristics. An impairment loss was calculated as the difference between the carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate. Where an asset has been impaired, the carrying amount of the asset was reduced through an allowance account. The allowance for impairment represented the group’s estimate of incurred losses. The allowance consisted of a specific loss component that related to individual exposures, and a collective loss component established for groups of similar receivables in respect of losses that have been incurred but not yet identified. Loans and receivables that would otherwise have been impaired but were renegotiated were initially accounted for as impaired receivables immediately after having been renegotiated. Once a payment history in terms of the renegotiated agreement was established, the same impairment assessment as applicable to receivables that had not been renegotiated was applied to assess whether the receivable should be impaired or not. Impairment losses were recognised in profit or loss. An impairment loss was reversed if it could be related objectively to an event occurring after the impairment loss was recognised. ESKOM HOLDINGS SOC LTD | 35 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 2. Summary of significant accounting policies (continued) 2.10 Financial instruments (continued) 2.10.1 Financial assets (excluding derivatives) (continued) Derecognition Financial assets are derecognised when the right to receive cash flows from the assets has expired or substantially all the risks and rewards of ownership have transferred from the group. Realised gains or losses on derecognition are determined using the last-in-first- out (LIFO) method. Gains and losses, including those accumulated in other comprehensive income, are recognised in profit or loss. The gross carrying amount of a financial asset is written off when the group has no reasonable expectation of recovering a financial asset. 2.10.2 Financial liabilities (excluding derivatives) Classification Financial liability classifications in terms of IAS 39 and IFRS 9 have not changed. Financial liability balances have been classified as either amortised cost or other liabilities. Measurement Initial recognition Financial liabilities are measured at fair value on the date of commitment (trade date). Where financial liabilities are carried at amortised cost, transaction costs are included in the value of the financial liability. Where financial liabilities are carried at fair value through profit or loss, transaction costs are recognised in profit or loss. Fees paid on the establishment of loan facilities are recorded as a payment made in advance where it is probable that some or all of the facility will be drawn down. Refer to note 2.9. The fees paid are recognised as transaction costs upon drawdown and then amortised to profit or loss within finance costs from the date of first drawdown to final maturity of each facility. After initial recognition Current year (in terms of IFRS 9) Financial liabilities at amortised cost are measured at amortised cost using the effective interest method. Financial liabilities classified as at fair value through profit or loss are measured at fair value. The group did not designate any financial liabilities at fair value through profit or loss. Prior year (in terms of IAS 39) Financial liabilities at amortised cost were measured at amortised cost using the effective interest method. Financial liabilities classified as held-for-trading were measured at fair value. The group did not designate any financial liabilities at fair value through profit or loss. Derecognition Financial liabilities are derecognised when the obligation expires, is discharged or cancelled, or there is a substantial modification to the terms of the liability. Realised gains and losses are determined using the LIFO method. 2.10.3 Derivatives held for risk management Classification and measurement Derivatives held for risk management are classified as at fair value through profit or loss (in the comparative year they were classified as held-for-trading), unless they meet the criteria for and have been designated as cash flow hedges. They are measured at fair value. Instrument IAS 39 classification and IFRS 9 Reason for classification in terms of IFRS 9 measurement classification Derivatives held for risk Held-for-trading (fair value Fair value It was assessed that these balances are not management (unless they through profit or loss) through profit managed on a held-to-collect and/or for sale meet the criteria for and or loss business model and the default classification is have been designated as therefore fair value through profit or loss cash flow hedges) The classification of cash flow hedges has not changed from IAS 39 to IFRS 9. Economic hedges Certain derivative instruments do not qualify for cash flow hedge accounting but are used for economic hedging. Changes in the fair value of these derivative instruments (realised and unrealised gains or losses) are recognised in profit or loss within net fair value and foreign exchange gain/loss on financial instruments. Cash flow hedges The relationship between hedging instruments and hedged items as well as risk management objectives and the strategy for undertaking various hedging transactions are documented at the inception of a transaction. The group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. It is expected that the values of the hedging instrument and the hedged item will move in opposite directions as a result of the hedged risks (foreign exchange and interest rate risks). The hedge ratio is based on a hedging instrument with the same notional amount in currency terms as the hedged item or portion thereof designated for hedge accounting. This results in a hedge ratio of 1:1 or 100%. 36 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 Significant day-one gains and losses are deferred in the statement of financial position (derivatives held for risk management) and amortised on a straight-line basis over the term of the hedging instrument to profit or loss. Unamortised day-one gains and losses will be written off to profit or loss should the related financial instrument be derecognised (extinguished) before maturity date. Day-one gains and losses on hedging instruments are predominantly a function of the inclusion of credit, liquidity and other risks in the terms of the trading instrument. These risks are not included in the determination of a hypothetical derivative used to measure fair value movements in a hedged item and are therefore excluded from any hedge accounting relationships. The effective realised and unrealised portion of the changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income within the cash flow hedge reserve. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss within net fair value and foreign exchange gain/loss on financial instruments. Cumulative gains or losses existing in other comprehensive income where the hedged item is a non-financial asset are included in the initial carrying amount of the asset when the forecast transaction results in the recognition of a non-financial asset. Gains and losses recognised in the cash flow hedge reserve in other comprehensive income will affect profit or loss in the periods during which the relevant non-financial assets are expensed to profit or loss. Cumulative gains or losses existing in other comprehensive income where the hedged item is a financial liability are taken to profit or loss within finance cost or net fair value and foreign exchange gain/loss on financial instruments when the cash flows occur on the hedged financial liability. When a hedging instrument expires, is sold or a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in other comprehensive income until the forecast transaction occurs. If a forecast transaction is still expected to occur, the cumulative gains or losses in other comprehensive income are reclassified from equity to profit or loss in the same periods during which the hedged forecast cash flows affect profit or loss. If a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in other comprehensive income is immediately transferred to profit or loss within net fair value and foreign exchange gain/loss on financial instruments. Sources of ineffectiveness include the following: • period mismatches between the hedging instrument and hedged item • the fair value of the hedging instrument at the hedge relationship designation date (if not zero) • the fair value or cash flow of the hedged item and hedging instrument are dependent on different variables 2.10.4 Embedded derivatives Eskom entered into a number of agreements to supply electricity to electricity-intensive businesses where the revenue from these contracts is linked to commodity prices and foreign currency rates or foreign producer price indices that give rise to embedded derivatives. Embedded derivatives that are not separated from the host contract are effectively accounted for as part of the hybrid instrument. Non-option based derivatives are separated on terms that result in a fair value of zero at the date of inception. Option-based derivatives are separated on the terms stated in the contracts and will not necessarily have a fair value equal to zero at the initial recognition of the embedded derivative resulting in day-one gains or losses. These day-one gains or losses are recognised over the period of the agreement. The fair value will depend on the strike price at inception. The determination of the host contract of an electricity contract (which includes an embedded derivative) is based on the standard electricity tariff specified in the contract and where no standard tariff is specified, the tariff that would best fit the profile of such a customer. The changes in fair value of embedded derivatives are recognised in profit or loss within net fair value and foreign exchange gain/loss on financial instruments. The impact of the fair value gains or losses is taken into account in the calculation of current and deferred taxation. 2.10.5 Repurchase and resale agreements Repurchase agreements are included in financial trading liabilities or financial trading assets dependent on whether securities are bought or sold. Agreements to resell securities are recorded as repurchase agreements and included in financial trading assets when the securities are bought for market-making activities. The difference between the sale and repurchase price or purchase and resale price is treated as interest accrued over the life of the repurchase or resale agreement using the effective-yield method. 2.10.6 Financial guarantees Financial guarantees are contracts that require the group to make specified payments to reimburse the holder for a loss that it incurs because a specified debtor fails to make payment when it is due in accordance with the terms of a debt instrument. Current year (in terms of IFRS 9) Financial guarantees issued are initially measured at fair value and subsequently measured at the loss allowance calculated in accordance with IFRS 9. Prior year (in terms of IAS 39) Financial guarantees were measured at fair value at initial recognition. This was calculated by reference to discounted future cash flows adjusted according to the probability of occurrence of the trigger event. The provided portion of the guarantee was disclosed as an expense and a liability. The unprovided portion was disclosed as a contingent liability. After initial recognition guarantees were measured at the higher of the amortised cost (of the original fair value amount) and the present value of any expected payment (when a payment under the guarantee has become probable). ESKOM HOLDINGS SOC LTD | 37 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 2. Summary of significant accounting policies (continued) 2.11 Future fuel supplies Coal The right to future coal supplies from coal mines is measured at cost. Cost includes payments made to coal suppliers for mine establishment and related equipment in terms of cost-plus agreements. The cost also includes the initial estimate of environmental rehabilitation of the mine as well as changes in the estimated timing or amount of outflow of resources or changes in the discount rate. The cost is amortised to coal inventory over the lesser of the life of the agreement or the underlying assets. Nuclear Expenditure incurred to obtain, convert, enrich and fabricate fuel assemblies is stated at cost in future fuel supplies. The fuel assemblies are transferred to inventory when they are received. Costs include the transfer from equity of any gains or losses on qualifying cash flow hedges relating to purchases of raw materials, fabrication and enrichment. 2.12 Inventories Coal, liquid fuel, maintenance spares and consumables Inventories are stated at the lower of cost and net realisable value. Cost is determined on the weighted average basis and includes expenditure incurred in acquiring inventories and other costs in bringing inventory to its present location and condition as well as the cost of ongoing programmes to rehabilitate the environment and other closure cost for active mines that is charged to profit or loss within primary energy as the coal is consumed. Nuclear fuel Nuclear fuel consists of enriched and fabricated fuel assemblies and fuel in reactors. Nuclear fuel is stated at the lower of cost and net realisable value. Cost is determined on the first-in-first-out basis and includes cost for the management of fuel assemblies that are written off on a straight-line basis to profit or loss within primary energy over the estimated useful life of the fuel in the reactor. 2.13 Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares, net of any tax effects, are recognised as a deduction from equity. 2.14 Income tax Income tax expense is recognised in profit or loss except to the extent that it relates to items recognised in other comprehensive income or equity, in which case it is recognised on that basis. 2.15 Deferred tax Deferred tax is recognised on temporary differences arising between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is determined using tax rates (and laws) enacted or substantively enacted at the reporting date and that are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled. Deferred tax assets are reviewed at each reporting date and derecognised if it is no longer probable that the related tax benefits will be realised. The measurement of deferred tax reflects the tax consequences that would follow from the manner in which the group expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities. Deferred tax is not recognised for: • temporary differences on the initial recognition of assets or liabilities in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss • temporary differences relating to investments in subsidiaries and associates to the extent that the group is able to control the timing of the reversal of the temporary differences and it is probable that they will not reverse in the foreseeable future Deferred tax assets are recognised for unused tax losses, unused tax credits and deductible temporary differences to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred tax is also recognised in respect of temporary differences arising on the assets and provisions created in respect of decommissioning and nuclear waste management and closure, pollution control and rehabilitation. Future taxable profits are determined based on business plans for legal entities in the group. 2.16 Payments received in advance, contract liabilities and deferred income Customer connections Customer connections arise when customers make a contribution to Eskom to construct regular distribution and transmission assets or when the constructed assets are transferred to Eskom to connect customers to the electricity network. Contributions are made in advance, in terms of a financing agreement or the completed assets are transferred to Eskom. Customer connections received in advance are initially recognised as payments received in advance. The related customer connections that arise when customers transferred distribution and transmission assets to Eskom to connect to the electricity network are accounted for when the customer hands over the completed assets to Eskom. Connections for electricity customers that were connected after 1 April 2018 (transition date to IFRS 15) When the connection provides the customer with a material right, the connection is allocated to deferred income (contract liabilities) when the customer is connected to the electricity network. The deferred income is recognised in profit or loss within revenue on a straight-line basis over the estimated customer relationship period as the connection provides the customer with a material right of renewal that extends the revenue recognition period beyond the initial contractual period. When the connection does not provide the electricity customer with a material right, the connection is recognised in full in profit or loss within revenue when the customer is connected to the electricity network. 38 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 Connections for electricity customers that were connected after 30 June 2009 but before 1 April 2018 Connections were recognised in profit or loss when the customer was connected to the electricity network in terms of IFRIC 18 Transfers of assets from customers. Connections for electricity customers that were connected before 30 June 2009 Connections were allocated to deferred income when the customer was connected to the electricity network. The deferred income is recognised in profit or loss within revenue on a straight-line basis over the expected useful lives of the related assets. Refer to note 2.19 for revenue recognition of connections. Grants Government grants for electrification are initially recognised in payments received in advance and allocated to deferred income when the related asset has been connected to the electricity network. The deferred income is recognised in profit or loss within depreciation and amortisation expense on a straight-line basis over the expected useful lives of the related assets. 2.17 Employee benefit obligations Post-employment medical benefits The liability for post-employment medical benefits is the present value of the obligation determined by using government bonds which have maturities similar to the liability. The post-employment medical benefits plan is unfunded. Provision is made by accounting for the estimated cost over the expected period to retirement of the employees. The cost to the employer, in the form of employer contributions, is determined by using the projected unit credit method, with actuarial valuations being carried out at reporting date. Actuarial gains or losses are recognised in other comprehensive income within re-measurements of post-employment medical benefits. Interest expense and other expenses related to these benefits are recognised in profit or loss. The entitlement to these benefits is usually conditional on the employee remaining in-service up to retirement. All employees qualify for post-employment medical benefits, except for new employees appointed on or after 1 June 2003 at a managerial level. The group accounts for its post-employment medical benefits obligation as a defined benefit plan in line with IAS 19 Employee benefits. A curtailment will occur when the group significantly reduces the number of employees covered by a termination plan. Curtailment gains and losses are accounted for as past service costs, which are recognised in profit or loss immediately in the period when the termination plan is amended. If the benefits are changed or curtailed, the resulting change in benefits that relates to past service or the gain or loss on curtailment is recognised immediately in profit or loss. The group recognises gains or losses on the settlement of a defined benefit plan when the settlement occurs. A settlement occurs when payments are made to employees to eliminate any further liabilities. Occasional and service leave The liability for occasional and service leave is of a long-term nature in terms of IAS 19 Employee benefits as it is not expected to be settled wholly within 12 months after the reporting period but there is no unconditional right to defer settlement for at least 12 months after the reporting period. The full provision is therefore presented as current in the statement of financial position. An actuarial valuation is performed on an annual basis for the occasional and service leave liability. The accrued liability is determined by valuing all future leave expected to be taken and payments expected to be made in respect of benefits up to the valuation date. Allowance is made for the assumed benefit options employees will exercise, as well as salary increases and investment returns up to the date the benefit is received. All actuarial gains or losses and past service costs are recognised in profit or loss within employee benefit expense. The present value of the benefit is determined by using government bonds which have maturities similar to the liability. Annual and performance bonus The annual and performance bonus is a short-term employee benefit which is expensed as the related services are provided. A liability is recognised for the amount expected to be paid if the group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. A liability for annual bonuses is accrued on a proportionate basis as services are rendered. A liability for performance bonus is raised on the estimated amount payable in terms of the incentive scheme which is based on the business and employees’ performance in the applicable year. Pension benefits Pension benefits are provided for employees through the Eskom Pension and Provident Fund (EPPF). Contributions to the fund are based on a percentage of pensionable emoluments and are expensed in the period in which they have been incurred. The group accounts for its pension obligations as a defined contribution plan in line with IAS 19 Employee benefits. Additional disclosure relating to the pension benefits have been included in note 28.4 to enable users of financial statements to understand the impact of the particular transaction. Termination benefits A liability and expense for termination benefits is recognised by the group when the group can no longer withdraw the offer of those benefits. ESKOM HOLDINGS SOC LTD | 39 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 2. Summary of significant accounting policies (continued) 2.18 Provisions Provisions are recognised when the group has a present legal or constructive obligation as a result of a past event, when it is probable that an outflow of resources will be required to settle the obligation and when the amount can be reliably estimated. Provisions are not recognised for future operating losses. The valuation of long-term provisions requires a degree of judgement regarding the future cash flows and the timing thereof. Provisions are determined by discounting the expected future cash flows using a pre-tax discount rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. The increase in the provision due to the passage of time is recognised as finance costs. The initial cost of a provision is capitalised against the cost of the related asset if it meets the requirements for capitalisation. Changes in the liability for capitalised provisions are added to, or deducted from, the cost of the related asset. Any amount exceeding the cost of the related asset is allocated to profit or loss. The main categories of provisions include the following: Power station-related environmental restoration – nuclear plant and other generating plant The provision includes the estimated decommissioning cost of nuclear and other generation plant. The estimated cost of decommissioning at the end of the productive life of plant is based on engineering and technical estimates and reports from independent experts. The initial cost of the provision is capitalised against property, plant and equipment. A provision is also raised for the management of fuel assemblies and radioactive waste which is recognised and measured based on the latest available cost information and spent fuel management methodologies. The costing and methodologies are revised on a regular basis to ensure alignment with the requirements of the National Nuclear Regulator of South Africa. The cost for the fuel assemblies is included in the cost of inventory while the fuel is in the reactor. The cost relating to radioactive waste is charged to profit or loss within primary energy. Mine-related closure, pollution control and rehabilitation The provision includes the estimated cost of physical, biophysical and social closure and environmental rehabilitation of the mine where a legal or constructive obligation exists. The initial cost of the provision is capitalised against future fuel. The cost of ongoing closure and rehabilitation programmes for active mines is charged to inventory and subsequently to profit or loss within primary energy as the coal is consumed, while the cost relating to defunct mines is charged directly to profit or loss. Coal-related obligations A provision is raised for coal-related obligations which arise out of contractual obligations as a result of delays in commissioning of the related power stations which is recognised and measured based on the best estimate of the expenditure that would be required to settle the present obligation at the end of the reporting period and is charged to profit or loss within primary energy. Other Other provisions include provisions made for contractual obligations to maintain and restore the infrastructure under service concession arrangements, onerous contracts, compensation events and guarantees. Other provisions are raised based on contractual obligations and are recognised and measured based on the best estimate of the expenditure that would be required to settle the present obligation at the end of the reporting period and are charged to profit or loss within other expenses. 2.19 Revenue from contracts with customers Eskom’s main revenue activity is the sale of electricity which is recognised when electricity is consumed by the user. The subsidiaries support this main activity but are not considered to be part of the main revenue activity as their operations include providing home loans, insurance, maintenance and construction services. Revenue is recognised when a customer obtains control of the goods or services being supplied. The amount of revenue recognised is measured based on the consideration specified in a contract with a customer and excludes amounts collected on behalf of third parties. The group’s principal revenue generating activities are as follows: Revenue Nature and timing of Revenue recognition in terms Revenue recognition in terms of IFRS 15 activity satisfaction of performance of IAS 18 obligation, including significant payment terms Electricity Performance obligation is Revenue was recognised No change compared to IAS 18. Revenue is sales settled when electricity is when electricity was recognised at a point in time when electricity is supplied to the customer. consumed by the customer consumed by the costomer (ie when control is Most customers pay for transferred). Revenue is measured based on the electricity after consumption Where it was assessed that consideration specified in a contract with a there was a high probability and have between 15 and 45 customer and excludes amounts collected on behalf that the economic benefits days to pay. Some customers of third parties related to sales would not prepay for electricity materialise, such sales were Customers that fail the collectability criterion are not recognised accounted for on the cash basis (ie revenue will be recognised only when cash is received) 40 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 Revenue Nature and timing of Revenue recognition in terms Revenue recognition in terms of IFRS 15 activity satisfaction of performance of IAS 18 obligation, including significant payment terms Connections Connections arise when Connections that were No change. The deferred income is recognised in customers make a completed before 30 June 2009 profit or loss within revenue on a straight-line basis contribution to Eskom to were allocated to deferred over the expected useful life of the related assets construct regular income when the customer was distribution and transmission connected to the electricity assets or when the network. The deferred income constructed assets are is recognised in profit or loss transferred to Eskom to within revenue on a straight-line connect customers to the basis over the expected useful electricity network life of the related assets Connections arise from Connections that were Connections that were completed from 1 April 2018 contracts with customers completed after 30 June 2009 are recognised as follows: who will also become were recognised as revenue • connections relating to electricity purchasing electricity purchasing when the customer was customers where there is a material right are customers once they are connected to the electricity allocated to deferred income when the customer is connected and those who network in terms of IFRIC 18 connected to the electricity network. The deferred will not purchase electricity Transfers of assets from income is recognised in profit or loss within revenue (eg property developers) customers on a straight-line basis over the estimated customer relationship period of 25 years. Refer to note 27 for the contract liabilities of connections recognised on a straight-line basis • connections relating to electricity purchasing customers where there is not a material right are recognised as revenue over the initial contract term • connections relating to non-electricity purchasing customers are recognised as revenue at a point in time when the customer is connected to the electricity network Other Ad hoc requests for Recognised when the service No change. Revenue is recognised at a point in time electricity related services is completed when the service is completed that are distinct from the sale of electricity or the connection of customers to the grid The assessment to defer revenue for connection charges from electricity customers required judgement because of divergent international treatments based on contract and operational differences. Changes to the recognition of customer connections is not expected based on the current information available. The assessment of whether or not a connection charge is a material right or not in terms of IFRS 15 requires judgement of what constitutes a material right from the perspective of the customer and results in different accounting treatments as discussed above. 2.20 Finance income Finance income comprises interest receivable on loans, trade receivables, finance lease receivables and income from financial market investments. Finance income is calculated by applying the effective interest rate method to the gross carrying amount of non-credit impaired financial assets (ie at the amortised cost of the financial asset before adjusting for any expected credit loss allowance). Finance income on credit-impaired financial assets is calculated by applying the effective interest rate to the amortised cost of the credit-impaired financial assets (ie the gross carrying amount less the allowance for expected credit losses). Interest income is recognised as it accrues using the effective interest method in profit or loss. 2.21 Finance cost Finance cost comprises interest and fees payable on debt securities and borrowings and finance lease payables, interest resulting from derivatives held for risk management and interest from the unwinding of discount on liabilities. Borrowing costs which are not capitalised are recognised in profit or loss. Refer to note 2.7. 2.22 Assets and liabilities held-for-sale Assets and liabilities (or disposal groups) which meet the definition of held-for-sale under IFRS 5 Non-current assets held-for-sale and discontinued operations are stated at the lower of their carrying amount and fair value less costs to sell if their carrying amount will be recovered principally through a sale transaction. 2.23 Net debt Gross debt is the aggregate of debt securities and borrowings and finance lease payables. Net debt is calculated by adjusting gross debt for related payments made in advance, derivatives held for risk management, financial trading instruments and cash and cash equivalents. ESKOM HOLDINGS SOC LTD | 41 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 3. Capital management and going concern 3.1 Capital management The objective of capital management is to ensure that the group is sustainable over the long term. The government, as the sole shareholder, and the board have the responsibility to ensure that the group is adequately capitalised and that the business is attractive to investors. The group’s funding consists of equity investments by the shareholder, funds generated from operations and funds borrowed on local and foreign debt markets with strong government support. There were no changes to the group’s approach to capital management during the financial year. The following capital reserves are managed: Group Company 2019 2018 2019 2018 Note Rm Rm Rm Rm Share capital 24 83 000 83 000 83 000 83 000 Accumulated profit 81 749 98 090 67 166 85 804 Net debt 44 430 820 386 671 435 771 391 016 595 569 567 761 585 937 559 820 Facilities available – debt securities and borrowings1 58 732 31 352 58 732 31 352 (a) Share capital There have been no changes in share capital in the current financial year. (b) Accumulated profit Revenue E skom analyses the Integrated Resource Plan (which forecasts the growth in long-term electricity demand) and evaluates the alternative options to meet and manage forecast demand. This information impacts the planning process and informs the revenue applications made to NERSA for tariff increases that will allow Eskom to be financially sustainable. Refer to the economic regulation section in the directors’ report for more information on electricity tariffs. Operating cost The group continues to pursue cost saving opportunities to assist in ensuring financial sustainability. The following income statement measures are monitored by management: Group Company 2019 2018 2019 2018 % % % % EBITDA margin 17.51 25.57 16.26 24.48 Net profit margin (11.52) (1.32) (12.89) (2.60) (c) Net debt Group Company 2019 2018 2019 2018 Rm Rm Rm Rm Funding spent 105 644 98 920 105 562 98 584 Debt repayment and net finance costs 69 442 43 423 69 547 43 638 Investment funding requirements 36 202 55 497 36 015 54 946 Funding raised 105 644 98 920 105 562 98 584 Cash from operations 32 740 37 574 32 118 36 484 Financing activities 58 509 56 970 58 959 57 497 Utilisation of cash resources 14 395 4 376 14 485 4 603 1. Facilities in foreign currency are converted to rand at mid-spot rate at reporting date. Refer to note 5.3. 42 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 The following ratios play an important role in the credit ratings given to Eskom which in turn influences the cost of funding. Eskom’s credit rating is affected by its own financial position as well as the credit rating of the sovereign: Group Company Unit 2019 2018 2019 2018 Net debt: equity Ratio 2.81 2.27 3.15 2.47 Net debt: EBITDA Ratio 13.68 8.52 14.90 9.00 Net debt service cover Ratio 0.47 0.87 0.46 0.84 Free funds from operations: net debt % 6.74 10.35 14.52 6.27 Eskom’s credit ratings at 31 March were as follows: Rating Outlook 2019 2018 2019 2018 Standard and Poor’s Foreign currency CCC+ BB- Negative Negative Local currency CCC+ BB- Negative Negative Moody’s Foreign currency B2 Ba1 Negative Negative Local currency B2 Ba1 Negative Negative Fitch Ratings Foreign currency – – Negative Negative Local currency BB- BBB Negative Negative Net debt is sourced globally to ensure the lowest cost of funding. Where funds are received and have not yet been spent, they are invested to provide the maximum possible return while ensuring minimal capital risk and matching the maturity term requirements of the spending of the amount. Additionally, market-making activities are undertaken to reduce the cost of bonds. Net debt is managed via the continuous monitoring of current and potential debt funding arrangements to achieve the most favourable terms possible. These terms and costs are heavily dependent on Eskom’s credit rating. Eskom is focusing on alleviating the rating agencies’ concerns regarding the high leveraged financial profile, inadequate electricity price path and funding requirements of Eskom. Refer to note 44 for a reconciliation of the movements and analysis of the composition of net debt. 3.2 Going concern The board made an assessment of the ability of the group to continue as a going concern in the foreseeable future. The board: • recognised that Eskom is facing various legacy challenges that resulted from mismanagement and corruption in the past. Significant progress has been in cleaning-up irregularities and improving processes, but it is taking time to identify all issues and take appropriate corrective action and consequence management • noted that there is a need to secure funding of R46 billion in 2020 (58% of the funding for 2020 has already been secured by the end of June 2019) • considered the impact of the current economic climate and the sovereign’s credit ratings on Eskom’s ability to raise funds • reviewed the performance of the group for the period ended 31 March 2019 including the net loss after tax of R20 729 million and the net current liabilities of R44 057 million • noted the further deterioration of most of the group’s financial indicators • considered the impact of the cash flow forecast for the 24 months ending 31 March 2021 and the projected net loss for 2020 • considered that Eskom is in a debt reliant liquidity situation that resulted from low tariffs, stagnant and contracting sales volumes, increased costs and the capital programme to increase and replace generating and transmitting capacity • considered the impact of reduced generation performance and the continuous increase in overdue electricity receivables including the impact of non-recoverability of long outstanding electricity receivables • considered the impact of the apparent deduction of the R23 billion per annum support from government over the next three years in the NERSA MYPD 4 tariff determination ESKOM HOLDINGS SOC LTD | 43 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 3. Capital management and going concern (continued) 3.2 Going concern (continued) The challenges that the group is facing are being addressed by the following mitigation strategies and actions: • continuous engagement is taking place with the shareholder and National Treasury to ensure that the challenges that impact the group’s going-concern status are addressed satisfactorily within a reasonable timeframe • Government continues to support Eskom to operate as a going concern given the strategic role that Eskom plays in pursuit of government objectives. Government support of R23 billion per year for the next three years has been announced in the 2019 budget by the Minister of Finance of which R13.5 billion has been provided in April 2019 • the President announced in the State of the Nation address delivered on 20 June 2019 that government will urgently table a special appropriation bill before the Medium Term Budget Policy Statement to allocate a significant portion of the R230 billion fiscal support over the next 10 years in earlier years as Eskom is seen as vital to the economy of the country • the President announced in the State of the Nation Address in February 2019 a plan to reform the electricity sector. The separation of Eskom into three independent entities under Eskom Holdings is at the core of this plan, with the immediate priority to establish a transmission company • the board continued with the process to separate the business into the main line divisions in preparation of legal restructuring. It is expected that government will appoint a chief restructuring officer soon, who will be expected to reposition Eskom financially with careful attention to the mix between revenue, debt and the cost structure of the company • Eskom lodged court proceedings against NERSA around the determination of the 5.23% tariff increase awarded for the 2019 financial year • the group’s cost structures and capital programme are continuously being reviewed to extract cost savings and improve cash flows • the group’s generation capacity is being managed as a key focus area to ensure appropriate steps are being taken to manage the performance challenges • there is continued focus on implementing relevant strategies in an effort to recover overdue trade receivables through the inter- ministerial task team • the group will not embark on any further generation expansion activities in the foreseeable future after the completion of the Kusile power station project • funding options, with the support of National Treasury, are being pursued to implement the group’s borrowing programme • there is continued focus on the supply chain recovery programme to address the shortcomings relating to the completeness of the irregular expenditure, fruitless and wasteful expenditure and losses due to criminal conduct reporting process in terms of the PFMA (resulted in the qualified audit opinion) and the clean-up of the related challenges in the commercial environment The board considered the risks relating to the group’s going-concern status and is satisfied that the risks will be satisfactorily addressed with the mitigation strategies in place. The board continues to manage these strategies as a priority as it is important that they materialise as envisaged. Tough and painful decisions will have to be made by Eskom, the shareholder and NERSA for the strategy to succeed. The board therefore concluded that it is satisfied that the group has access to adequate resources and facilities to be able to continue its operations for the foreseeable future as a going concern. 4. Critical accounting estimates and assumptions The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. The methods and types of assumptions used in preparing the sensitivity analyses did not change compared to the previous period other than those set out in 4.7 and 4.8 which arose from the implementation of IFRS 9 and 15. Sensitivity analyses are calculated based on a change in a single assumption keeping all other assumptions constant. In practice, this is unlikely to occur and changes in some assumptions may be correlated. 4.1 Embedded derivatives Eskom entered into a number of agreements to supply electricity to electricity-intensive businesses where the revenue from these contracts is linked to commodity prices and foreign currency rates or foreign producer price indices that give rise to embedded derivatives. The embedded derivatives consist of the following categories: • commodity and/or foreign currency • United States producer price and foreign currency Valuation Valuation techniques are used to determine the fair value as there is no active market for embedded derivatives. The fair value is determined by fair valuing the whole agreement and deducting from it the fair value of the host agreement. The valuation methods include the use of swaps (where the electricity tariff is swapped for a commodity in a foreign currency) and options (where the electricity tariff or other revenue is based on an embedded derivative floor or cap on foreign consumer or producer price indices or interest rates and a closed form analytic solution is used to produce various cap and floor strike prices). A forward electricity price curve is used to value the host agreement and the derivative agreement is valued by using market forecasts of future commodity prices, foreign currency rand exchange rates, interest rate differentials, forecast sales volumes, and production price and liquidity. The forward curves used are based on Eskom’s financial years. The forecast cash flow is determined and then discounted at the relevant interest rate curve. The net present value of the cash flows is then converted at the rand/foreign currency spot rate to the reporting currency. The fair value of the embedded derivative is adjusted, where applicable, to take into account the inherent uncertainty relating to the future cash flows of embedded derivatives such as liquidity, model risk and other economic factors. The important assumptions are obtained either with reference to the contractual provisions of the relevant agreements or from independent market sources where appropriate. The only significant unobservable input is the United States producer price index (PPI). 44 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 Valuation assumptions Forecast sales volumes are based on the most likely future sales volumes based on past trends and taking into account future production plans in consultation with industry specific experts and key customer executives. The following valuation assumptions were used for the valuation of embedded derivatives and are regarded as the best estimates by the board: 2019 Year ended 31 March Input Unit 2019 2020 2021 2022 2023 2024 Aluminium USD per ton 1 886 1 969 2 048 2 120 2 189 2 256 Volatility Year-on-year (ratio) 0.19 0.19 0.19 0.19 0.19 0.19 Rand interest rates Continuous actual/365 days (%) 6.75 7.93 7.06 7.16 7.24 7.38 Dollar interest rates Annual actual/365 days (%) 2.52 2.75 2.39 2.32 2.29 2.30 United States PPI Year-on-year (%) (1.00) 1.86 1.80 2.28 1.26 1.89 Rand/USD Rand per USD 14.48 15.25 15.89 16.74 17.65 18.67 Electricity price increase Year-on-year (%) 5.23 13.87 7.81 5.05 8.00 8.00 2018 Input Unit 2018 2019 2020 2021 2022 2023 Aluminium USD per ton 2 008 2 037 2 071 2 097 2 122 2 154 Volatility Year-on-year (ratio) 0.16 0.16 0.16 0.16 0.16 0.16 Rand interest rates Continuous actual/365 days (%) 6.76 7.46 6.71 6.84 6.99 7.12 Dollar interest rates Annual actual/365 days (%) 2.09 2.67 2.59 2.67 2.71 2.73 United States PPI Year-on-year (%) 3.66 1.89 2.07 1.85 1.89 2.06 Rand/USD Rand per USD 11.88 12.46 12.90 13.46 14.09 14.79 Electricity price increase Year-on-year (%) 2.20 5.23 8.00 8.00 8.00 8.00 Sensitivity analysis The effect on profit/loss before tax of an increase or decrease in the assumptions is: Group and company Change in 2019 2018 assumption increase decrease increase decrease Input Unit Rm Rm Rm Rm Aluminium price USD per ton 1% 32 (32) 47 (47) Electricity tariffs Rand per kWh 1% (17) 17 (69) 68 United States PPI Index 1% 86 (90) 110 (120) Rand interest rates Continuous actual/365 days (%) 100 basis points 154 (171) 262 (294) Dollar interest rates Annual actual/365 days (%) 100 basis points (117) 115 (183) 176 Rand/USD Rand per USD 1% 53 (48) 77 (68) 4.2 Post-employment medical benefits The group recognises a liability for post-employment medical benefits to qualifying retirees. The post-employment medical benefits plan is unfunded. Valuation The estimated present value of the anticipated expenditure for both in-service and retired members is actuarially valued using the projected unit credit method. This method treats the accrued service liability separately from the current cost liability. The accrued service liability (on the valuation assumptions) is based on the completed service to the valuation date and the current cost liability is the cost of providing the benefit over the next year. Valuation assumptions The principal actuarial assumptions used were: Group Company Unit 2019 2018 2019 2018 Discount rate % 11.0 10.5 11.0 10.5 Medical aid inflation % 8.4 8.6 8.4 8.6 Male longevity years 14.42 14.42 14.42 14.42 Female longevity years 20.82 20.82 20.82 20.82 Weighted average duration years 18.70 19.30 18.80 19.50 ESKOM HOLDINGS SOC LTD | 45 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 4. Critical accounting estimates and assumptions (continued) 4.2 Post-employment medical benefits (continued) Sensitivity analysis The effect of an increase or decrease in the assumptions is: Group Company Change in 2019 2019 2018 2018 2019 2019 2018 2018 assumption increase decrease increase decrease increase decrease increase decrease Rm Rm Rm Rm Rm Rm Rm Rm Effect on aggregate current service cost and finance cost Discount rate 1% (277) 356 (193) 243 (273) 350 (190) 240 Medical aid inflation 1% 356 (281) 411 (322) 350 (276) 405 (316) Future mortality 1 year 50 (50) 56 (56) 49 (49) 55 (55) Effect on post- employment medical benefits obligation Discount rate 1% (1 736) 2 176 (1 854) 2 348 (1 700) 2 133 (1 815) 2 300 Medical aid inflation 1% 2 169 (1 755) 2 326 (1 865) 2 126 (1 719) 2 279 (1 827) Future mortality 1 year 362 (363) 385 (385) 354 (355) 376 (376) 4.3 Occasional and service leave The group recognises a liability for occasional and service leave. Valuation An actuarial valuation is done on an annual basis for occasional and service leave. The accrued liability is determined by valuing all future leave expected to be taken and payments to be made in respect of benefits up to the valuation date. The present value of the benefits is determined by using the yield of long-dated corporate bonds (or government bonds where high quality corporate bonds are not available). Valuation assumptions The principal actuarial assumptions used were: Group and company 2019 2018 % % Discount rate 11.0 10.5 General price inflation 6.4 6.6 Salary increases 7.9 8.1 Leave usage 4.0 4.0 Assumptions regarding future mortality have been based on published mortality tables and statistics derived from experience. For details regarding current longevities underlying the values of the occasional and service leave obligation at the reporting date refer to note 4.2. Sensitivity analysis Based on current experience, 4% (2018: 4%) of the leave is utilised. If the rate at which leave is taken is 8% (2018: 8%), then the liability will increase by R68 million (2018: R70 million). The carrying amount of the occasional and service leave liability for the group is R1 348 million (2018: R1 411 million) and R1 266 million (2018: R1 332 million) for the company. 46 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 4.4 Power station-related environmental restoration and mine-related closure, pollution control and rehabilitation Valuation These provisions are determined by discounting the current estimated future decommissioning and rehabilitation costs. Valuation assumptions The real discount rate used for these provisions was 3.4% (2018: 3.3%) for the group and company. Estimated payment dates The estimated payment dates of the costs are: Group and company 2019 2018 Nuclear plant 2026 – 2041 2026 – 2041 Coal and pumped storage plants 2024 – 2098 2024 – 2098 Spent nuclear fuel 2020 – 2125 2019 – 2125 Mine-related closure, pollution control and rehabilitation 2020 – 2077 2019 – 2076 Sensitivity analysis The carrying amount of the decommissioning, mine closure and rehabilitation provision would be an estimated R6 610 million (2018: R5 929 million) lower had the real discount rate used in the calculation of the provision increased by 1% and R8 857 million (2018: R8 020 million) higher had the real discount rate decreased by 1%. 4.5 Coal-related obligations Provision is made for coal-related obligations which arise out of contractual obligations as a result of delays in commissioning of the related power stations. Valuation These provisions are determined by taking consideration of the anticipated commissioning dates, future coal prices, coal utilisation and coal stock-piles. Valuation assumptions The discount rate used for these provisions was 9.1% (2018: 8.6%) for the group and company. Estimated payment dates Payments are expected to occur until 2020 (2018: 2023). Sensitivity analysis The carrying amount of the coal-related obligations would be an estimated R194 million (2018: R202 million) lower had the anticipated commissioning dates been one month earlier than estimated and R107 million (2018: R520 million) higher had the anticipated commissioning dates been one month later than estimated. 4.6 Revenue from contracts with customers Customer connections Connection charges are charged to customers in exchange for connection to Eskom’s electricity network. This connection enables Eskom to sell electricity to these customers over the estimated customer relationship period. The customer relationship period refers to the period the customer remains a purchaser of electricity from Eskom at a given point of supply. A period of 25 years was determined after considering, inter alia, assumptions about the life-cycle of the distribution network used to supply electricity to customers. Collectability of amounts receivable Revenue may only be recognised if it is believed at the time of sale that the revenue is likely to be recovered from the customer. This recoverability requirement is not considered to have been met in contracts with customers who have a poor payments history and for which Eskom does not have the ability to manage the credit risk due to external facts and circumstances (for example socio-economic or political reasons). Eskom accounts for revenue from these contracts on a cash (rather than accrual) basis. Where the recoverability requirement is met, revenue is recognised on an accrual basis. The risk of non-collection is reflected in the expected credit loss as an impairment expense rather than an adjustment to the revenue recognised. ESKOM HOLDINGS SOC LTD | 47 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 4. Critical accounting estimates and assumptions (continued) 4.7 Expected credit loss on financial assets The expected credit loss on financial assets is calculated using the following formula: Expected credit loss = Exposure x Probability of default x Loss given default x Expected lifetime The exposure is the amount outstanding less any collateral. The probability of default measures the likelihood that the amount outstanding will become more than 90 days past due. The loss given default measures the expected credit loss in the event that the outstanding amount becomes more than 90 days past due. The financial assets that are subject to IFRS 9 impairment are stratified using factors such as the balance type, credit risk rating, existence and type of collateral, remaining term to maturity, delinquency status and geographical location. The following details are applicable to the models used for the various financial asset balances: Financial asset Model details International Expected credit losses were calculated using a benchmark approach that assigns a probability of default to a electricity receivables client based on the size and country in which the client operates. The benchmark levels are based on a study performed by the Bank of International Settlements (BIS) and external agency benchmark data. Credit ratings were assigned to these categories which were then used to determine the probability of default. These probabilities of default are considered to represent a long-run average over an economic cycle. The through- the-cycle probability of default was used to estimate the expected credit loss due to the lack of data showing a relationship between the probability of default and macro-economic factors across the various jurisdictions. It is expected that international electricity receivables will behave in a cyclical manner similar to local electricity receivables and therefore no forward-looking adjustments were made. The loss given default was aligned to the corporate loss given default based on the South African Reserve Bank (SARB) requirements Local large and small Expected credit losses were calculated using a provision matrix which utilises a transition approach. The power user probability of default relevant to balances with similar characteristics was determined by analysing their electricity receivables most recent historical loss rates. Default probabilities are not thought to be sensitive to changes in the (excluding South African macro-economic factors such as gross domestic product (GDP) and unemployment rates due municipalities) to their short-term nature and therefore no forward-looking adjustment was made. The loss given default was calculated using the long-run average recovery rates Municipality Expected credit losses were calculated using a scorecard approach. Key financial ratios were calculated electricity receivables based on the latest signed municipality annual financial statements. Default probabilities are not believed to be sensitive to changes in the South African macro-economic factors such as GDP and unemployment rates due to their short-term nature and therefore no forward-looking adjustment was made. The loss given defaults are based on the long-run average recovery rates Intercompany trade The estimates of the probability of default were based on the external rating of Eskom Holdings SOC Ltd and other receivables mapped to an internal rating scale. These probabilities of default are considered to represent a long-run and intercompany average over an economic cycle. Probability of default data for listed corporates shows that default rates loans receivable are sensitive to changes in South African GDP and therefore a forward-looking adjustment factor was calculated using a macro-economic forecast. The probability of default was not adjusted as the forward- looking adjustment factor was not material. The loss given default was aligned to the corporate loss given default based on the SARB requirements Other receivables, Expected credit losses were calculated using a benchmark approach that assigns a probability of default to finance lease a client based on the size and country in which the client operates. The benchmark levels are based on a receivables and loans study performed by the BIS and external agency benchmark data. Credit ratings were assigned to these receivable categories which were then used to determine the probability of default. These probabilities of default are considered to represent a long-run average over an economic cycle. Probability of default data for listed corporates shows that default rates are sensitive to changes in South African GDP and therefore a forward- looking adjustment factor was calculated using a macro-economic forecast. The probability of default was not adjusted as the forward-looking adjustment factor was not material. The loss given default was aligned to the corporate loss given default based on the SARB requirements Investments, financial The estimates of the probability of default were based on the external credit ratings of the counterparts trading assets and using an external rating scale mapped to an internal rating scale. These probabilities of default are considered financial guarantees to represent a long-run average over an economic cycle. Probability of default data for listed corporates shows that default rates are sensitive to changes in South African GDP and therefore a forward-looking adjustment factor was calculated using a macro-economic forecast. The probability of default was not adjusted as the forward-looking adjustment factor was not material. The loss given default was aligned to the corporate loss given default based on the SARB requirements 48 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 5. Financial risk management The group’s integrated risk and resilience management process enables management to assess and respond to all material risks that may affect the achievement of organisational objectives. The group maintains an integrated risk and resilience management framework comprising governance structures, management policies and guidance standards with a focus on risk and resilience assessments, treatment plans, monitoring and reporting. The management of financial risks, as defined by IFRS 7 Financial instruments: disclosures, falls within these overarching structures, policies and standards. Management of financial risks is delegated by the board to the audit and risk committee. Day-to-day management of financial risks is carried out in the area in which the risks arise. Risk assessments, treatment plans and monitoring measures are reported to the audit and risk committee on a quarterly basis. The group’s exposure to risk, its objectives, policies and processes for managing the risk and the methods used to measure it have been consistently applied in the years presented. The group has exposure to the following risks as a result of its financial instruments: • credit risk – the risk of financial loss to the group if a customer or other counterparty to a financial instrument fails to meet its contractual obligations • market risk – the risk that the fair value or future cash flows of financial instruments will fluctuate because of changes in foreign exchange rates, commodity prices, interest rates and equity prices • liquidity risk – the risk that the group will not have sufficient financial resources to meet its obligations when they fall due, or will have to do so at excessive cost 5.1 Credit risk The carrying amounts of financial assets represent the maximum credit exposure except for cash and cash equivalents. The group’s maximum exposure as a result of financial guarantees issued is disclosed in note 45.1. 5.1.1 Derivatives held for risk management, financial trading assets and cash and cash equivalents The asset and liability committee (Alco) manages credit risk arising from the treasury department’s activities in the financial markets with the objective of maximising the rate of return on investments while not exceeding approved levels of credit risk exposure. It is chaired by the chief financial officer and reports on a quarterly basis to Exco and the audit and risk committee. The committee’s terms of reference are maintained and approved by the chief financial officer. They are aligned to the Exco credit risk governance standards and are supplemented by appropriate policies and procedures. Specific activities undertaken by the Alco include the following: • assessing the credit quality of counterparties and approving credit limits based on this assessment • monitoring the adherence to credit limits • approving methodologies for the management of counterparty exposure • ensuring that, where applicable, transactions with counterparties are supported by trading agreements • facilitating and managing the issuing of financial guarantees by the group To assist the Alco to discharge its mandate, the portfolio assessment section within the treasury function provides it with regular feedback on all treasury credit risk-related matters. The management of credit risk is governed by the following policies: • trading in financial instruments is only conducted with selected counterparties after credit limits have been authorised • only financial institutions and/or counterparties with an independent minimum rating of A1 are accepted for investments. If there are no independent ratings, the credit quality of the counterparty is assessed, taking into account its financial position, past experience and other factors • all exposures are based on mark-to-market values. Transaction or close-out netting takes place in accordance with the terms and conditions of the underlying trading agreements • minimum credit-rating requirements for financial institutions are maintained to assess the risk categories by rating class and to ascertain the probability of default inherent in each rating class • approved concentration risk parameters and collateral management procedures are in place. Concentration of credit risk is managed by setting credit risk limits at a counterparty-specific level. Concentration credit risk limits are used as second tier limits in relation to counterparty credit limits. Counterparty-specific exposure is monitored against a set concentration of credit risk limits in relation to the total credit risk exposure to all counterparties Risk is measured by determining a default probability per counterparty using default probabilities assessed by rating agencies for various types of credit ratings. These default probabilities are then applied to the market value of the investment placed to determine the capital at risk. The treasury division’s policies and practices are designed to preserve the independence and integrity of decision-making and ensure credit risks are accurately assessed, properly approved, continually monitored and actively managed. The following are monitored and reported on: • aggregate credit risk exposure • limits utilisation including any breaches • hold-limit exceptions • risk profile changes • risk concentrations ESKOM HOLDINGS SOC LTD | 49 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 5. Financial risk management (continued) 5.1 Credit risk (continued) 5.1.1 Derivatives held for risk management, financial trading assets and cash and cash equivalents (continued) Where the credit risk of a particular counterparty has increased, a reassessment of the valuation of the instrument is made. In making this assessment, the counterparty is assessed for the following factors: • significance of financial difficulty • probability of bankruptcy • probability of breach of contract (a) Impairment analysis 2019 2018 Not Subject to Total Total subject to impairment impairment Stage 1 Rm Rm Rm Rm Group Derivatives held for risk management BBB- to AAA 22 662 – 22 662 15 578 Financial trading assets BBB- to AAA 103 59 162 168 Cash and cash equivalents – 2 031 2 031 15 823 BBB- to AAA – 2 026 2 026 15 747 Unrated – 5 5 76 Company Derivatives held for risk management BBB- to AAA 22 662 – 22 662 15 578 Financial trading assets BBB- to AAA 103 59 162 168 Cash and cash equivalents – 1 517 1 517 15 379 BBB- to AAA – 1 512 1 512 15 375 Unrated – 5 5 4 The impairments calculated for financial trading assets and cash and cash equivalents are immaterial. The gross amount approximates the carrying value. 5.1.2 Trade and other receivables Trade receivables Credit risk attributable to trade receivables is assessed taking into account the following counterparty characteristics: • geographic location of the customer (both internationally and within South Africa) • size of demand (large or small power user) • receivable ageing profile • security held (deposits and guarantees) • payment history A large number of the residential customers are on a prepaid basis thereby eliminating credit risk relating to these customers. The group has well-established credit control procedures for conventional customers that monitor activity on customer accounts and allow for remedial action should the customer not comply with payment terms. These procedures include an internal collection process, follow up with the customer either telephonically or in person, negotiations of mutually acceptable payment arrangements and the issue of a notice of disconnection of supply and letters of demand. Non-payment can result in disconnection of supply and the customer’s account being closed. A legal collection process is pursued after disconnection. The following strategies are currently in operation in high risk areas of non-paying customers with varying levels of success: • contacting the customer • disconnections • conversion to prepayment • use of debt collectors • payment arrangements • focus on early identification and letters of demand • increased security deposits and guarantees • efficient internal process, for example system automation of credit and collections such as automated notices and letters of demand • adverse listing of defaulting customers Progress on the collection process is reviewed on a regular basis and if it is evident that the amount will not be recovered, it is recommended for writeoff in terms of the group policy and delegation of authority. The process of recovery continues unless it is confirmed that there is no prospect of recovery or the costs of such action will exceed the benefits to be derived. Amounts written off are determined after taking into account the value of the security held. 50 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 The main classes of trade receivables are: International customers Electricity supply agreements are entered into with key international customers who comprise utility companies, governments of neighbouring countries and sundry large power users. Their payment terms are between 10 and 45 days. Impairment is assessed based on the country-specific risk. International customers are not required to provide upfront security however if they default, new payment arrangements are negotiated, or supply is curtailed. Certain international customers may be required to pay upfront when their credit risk profile has changed. Local large power users Local large power users comprise South African redistributors (metropolitan and municipalities), commercial, industrial and mining customers usually with supplies above 100kVA. Payment terms are individually negotiated and are normally at a maximum of 15 days, except for certain bulk redistributing municipalities which are at a maximum of 30 days. Municipalities are required to provide security for all new supplies or where they request an upgrade of existing supply points. Where a large power user has an acceptable credit rating from an approved rating agency, the provision of security is amended based on the type of risk as defined in the revenue security policy. Certain municipalities continued to fall into arrears during the course of the financial year. Monitoring of these municipality payment levels continues to receive ongoing management attention and remains a high priority focus area. Interventions pursued included entering into special payment arrangements and following the Promotion of Administrative Justice Act for disconnections. Eskom continues to work closely with the Department of Co-operative Governance and Traditional Affairs and other government departments as well as relevant stakeholders to resolve the systemic challenges which have given rise to municipalities’ arrear debt. Other interventions include considering: • restricting supply to non-paying municipalities if set maximum demand levels are exceeded • interrupting electricity supply to the non-paying municipalities where no recovery plan could be presented and agreed upon between Eskom and the municipalities • installation of split metering technology with protective steel enclosures Local small power users Local small power users comprise local customers that have a supply of 100kVA or less in size. Payment terms for small power customers is 30 days. New customers are required to provide security equivalent to between one and three months’ consumption at the commencement of the supply agreement. The level of security is reviewed if a customer defaults on their payment obligation or requires additional electricity supply capacity. In these instances, additional security is required to cover between one and three months of recent consumption before supply will commence. All new customers will preferably be on prepayment terms. Soweto receivables are an identified high credit risk area subject to specific credit risk management. The collection of revenue from customers in Soweto remains a challenge. The enhancement of credit control strategies and monitoring of payment levels in this area continue to receive management attention. The payment levels expressed as a percentage of billed revenue (excluding interest) for the year was 13% (2018: 15%). The residential revenue management strategy, which includes Soweto, continues to be implemented. The strategy entails implementation of split metering technology, conversion of meters to prepayment and stepping up disconnections for customers to improve payment levels. Other receivables Other receivables comprise mainly reinsurance receivables relating to insurance claims made and sundry receivables. There are no significant balances with specific repayment terms. No security is held in respect of these balances and no interest has been charged on overdue balances. ESKOM HOLDINGS SOC LTD | 51 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 5. Financial risk management (continued) 5.1 Credit risk (continued) 5.1.2 Trade and other receivables (continued) Impairment analysis 2019 Stage 2 Stage 3 Total Gross Allowance Carrying Gross Allowance Carrying Gross Allowance Carrying for value for value for value impairment impairment impairment Rm Rm Rm Rm Rm Rm Rm Rm Rm Trade receivables Group and company International 943 (9) 934 810 (702) 108 1 753 (711) 1 042 B- to BB+ 843 (7) 836 388 (280) 108 1 231 (287) 944 Below B- 100 (2) 98 422 (422) – 522 (424) 98 Local large power users – municipalities 7 474 (478) 6 996 4 397 (2 528) 1 869 11 871 (3 006) 8 865 BBB- to AAA 2 717 –1 2 717 – – – 2 717 – 2 717 B- to BB+ 3 281 (111) 3 170 3 – 3 3 284 (111) 3 173 Below B- 1 476 (367) 1 109 4 394 (2 528) 1 866 5 870 (2 895) 2 975 Local large power users – other 7 185 (30) 7 155 294 (222) 72 7 479 (252) 7 227 0 – 30 days 6 998 (7) 6 991 – – – 6 998 (7) 6 991 30 – 90 days 187 (23) 164 – – – 187 (23) 164 More than 90 days – – – 294 (222) 72 294 (222) 72 Local small power users – Soweto 12 – 12 4 256 (3 473) 783 4 268 (3 473) 795 0 – 30 days 3 – 3 – – – 3 – 3 30 – 90 days 9 – 9 – – – 9 – 9 More than 90 days – – – 4 256 (3 473) 783 4 256 (3 473) 783 Local small power users – other 1 877 (83) 1 794 853 (664) 189 2 730 (747) 1 983 0 – 30 days 1 604 (25) 1 579 – – – 1 604 (25) 1 579 30 – 90 days 273 (58) 215 – – – 273 (58) 215 More than 90 days – – – 853 (664) 189 853 (664) 189 17 491 (600) 16 891 10 610 (7 589) 3 021 28 101 (8 189) 19 912 Trade and other receivables Group 19 513 (615) 18 898 10 788 (7 763) 3 025 30 301 (8 378) 21 923 Trade receivables 17 491 (600) 16 891 10 610 (7 589) 3 021 28 101 (8 189) 19 912 Other receivables (B- to BB+) 2 022 (15) 2 007 178 (174) 4 2 200 (189) 2 011 Company 20 756 (643) 20 113 10 764 (7 740) 3 024 31 520 (8 383) 23 137 Trade receivables 17 491 (600) 16 891 10 610 (7 589) 3 021 28 101 (8 189) 19 912 Other receivables (B- to BB+) 3 265 (43) 3 222 154 (151) 3 3 419 (194) 3 225 1. No impairment raised due to the existence of adequate security. 52 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 2018 Carrying Not impaired1 Impaired amount Not Days past due Not Days past due past 0 – 15 16 – 45 46 – 75 >75 past 0 – 15 16 – 45 46 – 75 >75 due due Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm Group and company Individually assessed for impairment International 1 893 769 – – – – 205 185 145 180 409 Gross 1 918 769 – – – – 205 185 145 180 434 Impairment (25) – – – – – – – – – (25) Local large power users – municipalities 7 838 5 024 4 1 – – 1 101 1 71 43 1 593 Gross 11 937 5 024 4 1 – – 1 177 12 262 97 5 360 Impairment (4 099) – – – – – (76) (11) (191) (54) (3 767) Local large power users – other 7 051 6 811 88 46 13 34 11 3 17 5 23 Gross 7 158 6 811 88 46 13 34 20 9 27 9 101 Impairment (107) – – – – – (9) (6) (10) (4) (78) Not Days past due past due 0-30 31-60 >60 Rm Rm Rm Rm Collectively assessed for impairment Local small power users – Soweto 752 30 8 8 706 Gross 4 305 59 34 37 4 175 Impairment (3 553) (29) (26) (29) (3 469) Local small power users – other 1 805 1 485 162 41 117 Gross 2 445 1 537 211 76 621 Impairment (640) (52) (49) (35) (504) 19 339 1. Receivables past due but not impaired are receivables where contractual payment terms are past due but the group believes that impairment is not required on the basis of the level of security or collateral available and the stage of collection of amounts owed to the group. ESKOM HOLDINGS SOC LTD | 53 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 5. Financial risk management (continued) 5.1 Credit risk (continued) 5.1.2 Trade and other receivables (continued) Reconciliation of movements in allowance for impairment 2019 Group Company Stage 2 Stage 3 Total Stage 2 Stage 3 Total Note Rm Rm Rm Rm Rm Rm Balance at beginning of the year 628 8 001 8 629 627 7 993 8 620 Raised/(reversed) to the income statement 36 69 (378) (309) 111 (406) (295) Reversed on payment of opening balance (77) (2 478) (2 555) (77) (2 478) (2 555) Remeasurement of opening balances held at year end 12 65 77 12 65 77 Raised on new balances 134 2 035 2 169 176 2 007 2 183 Transfer of balances between stage 2 and 3 (72) 72 – (84) 84 – Finance income on stage 3 balances – 153 153 – 153 153 Writeoffs (10) (85) (95) (11) (84) (95) Balance at end of the year 19 615 7 763 8 378 643 7 740 8 383 2018 Group Company Note Rm Rm Balance at beginning of the year 8 747 8 729 Impairment 36 517 510 Writeoffs (635) (619) Balance at end of the year 19 8 629 8 620 Security Security is held for trade receivables consisting of guarantees and deposits. Certain guarantees that were past their original due dates were renegotiated. Where renegotiated terms are not met, the original payment terms are reapplied. Details regarding security held and renegotiated amounts are analysed below: Group and company 2019 2018 Fair value of security held Security Rene- Fair value of security held Security Rene- Credit Not Total called gotiated Impaired Not Total called gotiated impaired credit upon balances recei- impaired upon balances recei- impaired vables recei- vables recei- vables vables Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm International – 5 5 – – – 1 1 – – Local large power users 162 10 072 10 234 21 2 738 200 6 931 7 131 18 4 863 Municipalities 109 489 598 2 2 724 181 346 527 1 4 847 Other 53 9 583 9 636 19 14 19 6 585 6 604 17 16 Local small power users 90 2 154 2 244 38 57 76 2 011 2 087 52 51 Soweto – 13 13 – 1 13 – 13 – 1 Other 90 2 141 2 231 38 56 63 2 011 2 074 52 50 252 12 231 12 483 59 2 795 276 8 943 9 219 70 4 914 54 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 5.1.3 Insurance investments Escap SOC Ltd (Escap) invests in listed shares and negotiable certificates of deposit (NCD) to satisfy its capital adequacy requirements in line with insurance regulations in South Africa. The listed shares do not expose the group to credit risk. Investments in NCDs are made with banks with an investment-grade credit rating. Impairment analysis 2019 2018 Not Subject to impairment Total subject to Stage 1 impairment Gross Gross Allowance Carrying Gross Allowance Carrying Carrying for value for value value impairment impairment Rm Rm Rm Rm Rm Rm Rm Rm Group BBB- to AAA – 7 951 (5) 7 946 7 951 (5) 7 946 6 839 Not subject to credit risk 1 617 – – – 1 617 – 1 617 1 333 1 617 7 951 (5) 7 946 9 568 (5) 9 563 8 172 There are no material movements in the allowance for impairment. 5.1.4 Finance lease receivables The supply of electricity to customers may be in the form of either a standard or premium power supply. A standard power supply is the least life-cycle cost technically acceptable solution as defined in the South African Grid Code and the Distribution Network Code whereas with a premium supply the customer’s connection requirement exceeds the specifications of a standard supply. This is achieved through the installation of premium supply equipment for which the customer is required to pay a connection charge. Connection charges for premium supply contracts were repayable on a monthly basis over a maximum period of 25 years. This payment option is no longer available for new premium supplies as the connection charges are payable upfront. The standard payment terms for trade receivables are also applied to the premium supply equipment connection charge customers. The credit risk exposure resulting from premium supply contracts is managed by monitoring payment levels of the customer’s trade receivable balance. There were no significant overdue or distressed balances relating to finance lease receivables in the current or previous financial year. Security in the form of bank guarantees is required from customers before the asset is constructed and is in place for a maximum period of 14 years to cover irrecoverable costs in the event of early termination of the supply contract. In addition, the premium supply equipment serves as security for the outstanding finance lease receivable balance. Impairment analysis Group and company 2019 2018 Stage 1 Gross Allowance Carrying Carrying for value value impairment Rm Rm Rm Rm BBB- to AAA – – – 27 B- to BB+ 408 (3) 405 2 Unrated – – – 408 408 (3) 405 437 There are no material movements in the allowance for impairment. ESKOM HOLDINGS SOC LTD | 55 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 5. Financial risk management (continued) 5.1 Credit risk (continued) 5.1.5 Loans receivable Alco manages credit risk arising from loans receivable from subsidiaries with the objective of reducing costs on Eskom Group consolidated liability. The credit risk exposure to Eskom Finance Company (EFC) is capped based on limits set by Alco and credit risk exposure to employees is mitigated by property values through mortgage contracts with access to payroll for qualifying employees. Impairment analysis Group Company 2019 2018 2019 2018 Stage 1 Stage 1 Gross Allowance Carrying Carrying Gross Allowance Carrying Carrying for value value for value value impairment impairment Rm Rm Rm Rm Rm Rm Rm Rm BBB- to AAA – – – 81 – – – 6 201 B- to BB+ 67 (1) 66 – 6 111 (40) 6 071 – 67 (1) 66 81 6 111 (40) 6 071 6 201 There are no material movements in the allowance for impairment. 5.2 Market risk A significant part of market risk encountered by the group arises from financial instruments that are managed centrally within the treasury division of the group or from contracts containing embedded derivatives. The objective of the group’s market risk management framework is to protect and enhance the statement of financial position and profit or loss by managing and controlling market risk exposures and to optimise the funding of business operations and facilitate capital expansion. The basis for calculating risk and sensitivity measures are consistent with the prior year. Sensitivity analyses assume that only the input being analysed changes with all other variables remaining constant. Financial instruments mainly managed by the treasury division The treasury division is responsible for managing market risk within the risk management framework approved by Exco and the board. The overall authority for the management of market risks within the treasury division is vested in Alco. Measurement and reporting occurs on a daily and/or monthly basis and is performed by an independent section within the treasury division. Financial derivatives are used to manage market risk. Financial instruments managed by various divisions and subsidiaries Market risk arises mainly from changes in foreign exchange rates and, to a limited extent, from changes in commodity prices and equity prices. The divisions and subsidiaries are responsible for identifying the exposure arising from these risks. They liaise with the centralised treasury division to hedge (economic and cash flow hedges) these exposures appropriately on their behalf. Embedded derivatives Eskom entered into a number of agreements to supply electricity to electricity-intensive industries where the revenue from these contracts is based on commodity prices and foreign currency rates or foreign production price indices. This gives rise to embedded derivatives that require separation as a result of the different characteristics of the embedded derivative and the host contract. The remaining contractual periods are between two and 10 years. The valuation methods and inputs are discussed in the accounting policies (refer to note 2.10.4) and the valuation assumptions and sensitivities are disclosed under critical accounting estimates and assumptions (refer to note 4.1). Risks arising from these contracts are discussed under the relevant risk areas as follows: • currency risk (refer to note 5.2.1) • commodity risk (refer to note 5.2.2) • interest rate risk (refer to note 5.2.3) • other price risk (refer to note 5.2.5) Electricity contracts that contain embedded derivatives are considered for economic hedging. Hedging in respect of commodity risk and foreign currency exposure resulting from these embedded derivatives takes place on a short-term basis in terms of the SARB regulations. 56 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 5.2.1 Currency risk Currency risk arises primarily from purchasing imported goods and services directly from overseas or indirectly via local suppliers, foreign sales and foreign borrowings. The group is exposed to foreign exchange risk arising from future commercial transactions and recognised assets and liabilities that are denominated in a currency other than the functional currency of the group. All transactions in excess of R150 000 are hedged (ie economic or cash flow hedges). Currency exposure is identified by the business and hedged and managed by the central treasury division. Hedging instruments consist principally of forward exchange contracts, most of which have a maturity of less than one year from the reporting date, but which are rolled over at maturity when necessary. The group also uses cross-currency swaps. The hedging instrument is entered into once the exposure is firm and ascertainable. The major exposure to foreign currency risk at 31 March, based on notional amounts, was: EUR USD GBP JPY SEK CHF CAD NOK m m m m m m m m 2019 Group Liabilities Debt securities and borrowings (2 444) (9 669) – (4 972) – – – – Trade and other payables (36) (7) (1) – (20) – – (2) Gross statement of financial position exposure (2 480) (9 676) (1) (4 972) (20) – – (2) Estimated forecast purchases1 (522) (104) (16) (285) (118) – (1) (4) Gross exposure (3 002) (9 780) (17) (5 257) (138) – (1) (6) Derivatives held for risk management 2 3 001 9 778 17 5 257 136 – 1 5 Net exposure (1) (2) – – (2) – – (1) Company Liabilities Debt securities and borrowings (2 444) (9 669) – (4 972) – – – – Trade and other payables (36) (7) (1) – (20) – – (2) Gross statement of financial position exposure (2 480) (9 676) (1) (4 972) (20) – – (2) Estimated forecast purchases1 (520) (104) (15) (285) (118) – (1) (4) Gross exposure (3 000) (9 780) (16) (5 257) (138) – (1) (6) Derivatives held for risk management 2 2 999 9 778 16 5 257 136 – 1 5 Net exposure (1) (2) – – (2) – – (1) 2018 Group Liabilities Debt securities and borrowings (2 681) (7 556) – (7 465) – – – – Trade and other payables (76) (10) (2) – (27) – – – Gross statement of financial position exposure (2 757) (7 566) (2) (7 465) (27) – – – Estimated forecast purchases1 (702) (143) (6) (609) (175) (1) (1) (1) Gross exposure (3 459) (7 709) (8) (8 074) (202) (1) (1) (1) Derivatives held for risk management 2 3 457 7 700 8 8 071 190 1 1 1 Net exposure (2) (9) – (3) (12) – – – Company Liabilities Debt securities and borrowings (2 681) (7 556) – (7 465) – – – – Trade and other payables (76) (10) (2) – (27) – – – Gross statement of financial position exposure (2 757) (7 566) (2) (7 465) (27) – – – Estimated forecast purchases1 (699) (143) (5) (609) (175) (1) (1) (1) Gross exposure (3 456) (7 709) (7) (8 074) (202) (1) (1) (1) Derivatives held for risk management 2 3 454 7 699 7 8 071 190 1 1 1 Net exposure (2) (10) – (3) (12) – – – 1. Represents future purchases contracted for. 2. Includes notional value and accrued interest. ESKOM HOLDINGS SOC LTD | 57 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 5. Financial risk management (continued) 5.2 Market risk (continued) 5.2.1 Currency risk (continued) The following significant exchange rates applied for the group and company during the year: One unit of the selected currency R1.00 to the selected currency to the rand Annual average Reporting date Annual average Reporting date mid-spot rate mid-spot rate 2019 2018 2019 2018 2019 2018 2019 2018 EUR 15.92 15.21 16.26 14.64 0.06 0.07 0.06 0.07 USD 13.76 13.00 14.48 11.88 0.07 0.08 0.07 0.08 GBP 18.05 17.23 18.93 16.69 0.06 0.06 0.05 0.06 CHF 13.89 13.39 14.55 12.44 0.07 0.07 0.07 0.08 JPY 0.12 0.12 0.13 0.11 8.33 8.33 7.69 9.09 SEK 1.53 1.56 1.56 1.42 0.65 0.64 0.64 0.70 CAD 10.49 10.14 10.83 9.20 0.10 0.10 0.09 0.11 AUD 10.03 10.05 10.27 9.12 0.10 0.10 0.10 0.11 NOK 1.65 1.60 1.68 1.51 0.61 0.63 0.60 0.66 Sensitivity analysis Group and company 2019 2018 1% 1% 1% 1% increase decrease increase decrease Rm Rm Rm Rm Profit/(loss) before tax Rand/EUR exposure 46 (46) 56 (56) Rand/USD exposure 47 (42) 73 (64) Rand/other currency 13 (13) (2) 2 Equity Rand/EUR exposure 66 (66) 77 (77) Rand/USD exposure 166 (166) 93 (93) Rand/other currency 2 (2) 2 (2) 5.2.2 Commodity risk The group is exposed to commodity risk where commodities are either used directly (eg coal or liquid fuels) or indirectly as a component of plant, equipment or inventory (eg aluminium, copper or steel). The revenue from certain negotiated pricing arrangements is linked to commodity prices. The exposures are hedged economically by means of futures and/or options. Economic hedging is applied where it is practical (a relevant hedging instrument exists) based on the most optimal economic solution and in compliance with the SARB requirements. The underlying exposure to commodity price risk could result in embedded derivatives. Where the embedded derivatives are closely related to the host contracts, the embedded derivatives are not accounted for separately. Where the embedded derivatives are not closely related to the host contracts, the contracts have been valued and accounted for separately. The periods of the hedging instrument and that of the hedged item are not the same because of SARB regulations that limit the number of years which can be hedged. The negotiated pricing arrangements gave rise to commodity-linked (aluminium) embedded derivatives. Refer to note 4.1. 5.2.3 Interest rate risk Interest rate risk is the risk that the group’s financial position may be adversely affected as a result of changes in interest rate levels, yield curves and spreads. The group’s interest rate risk arises mainly from debt securities, borrowings and derivatives held for risk management. Borrowings and debt securities issued and derivatives held for risk management at variable rates expose the group to cash flow interest rate risk. Borrowings and debt securities issued at fixed rates expose the group to fair value interest rate risk. The group’s policy is to restrict the maximum effective portion of the external debt (excluding the trading portfolio which is managed within the constraints of the risk management framework) exposed to an interest rate reset within the next 12-month period to 40%. Refer to note 25 for the group’s quantitative exposure to interest rate risk. 58 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 Sensitivity analysis The group analyses its interest rate exposure on a dynamic basis by conducting a sensitivity analysis. This involves determining the impact on profit or loss of defined interest rate shifts. For each simulation, the same interest rate shift is used for all currencies. The sensitivity analysis for interest rate risk excludes borrowing costs capitalised in terms of the group’s accounting policy. The simulation is performed on a monthly basis to verify that the maximum loss potential is within the limit set by management. The results of the simulation are included in the table below. Group Company 2019 2018 2019 2018 +100 basis -100 basis +100 basis -100 basis +100 basis -100 basis +100 basis -100 basis points points points points points points points points Rm Rm Rm Rm Rm Rm Rm Rm Profit/(loss) before tax Rand interest rates 295 (334) 421 (463) 275 (313) 389 (430) EUR interest rates (108) 63 (48) 49 (108) 63 (48) 49 USD interest rates (404) 421 (259) 258 (404) 421 (315) 316 Other currency interest rates (1) 1 (2) 2 (1) 1 (2) 2 Equity Rand interest rates 4 629 (4 302) 3 342 (3 540) 4 629 (4 302) 3 342 (3 540) EUR interest rates (1 138) 1 226 (1 098) 1 193 (1 138) 1 226 (1 098) 1 193 USD interest rates (4 976) 4 715 (2 837) 3 006 (4 976) 4 715 (2 837) 3 006 Other currency interest rates (7) 7 (18) 10 (7) 7 (18) 10 Fixed and floating rate debt Group and company 2019 2018 fixed floating fixed floating % % % % Proportion of fixed versus floating rate debt at 31 March 73 27 72 28 5.2.4 Equity price risk Equity price risk arises from investments listed on the JSE. Changes in the fair value of equity securities held by the group will fluctuate because of changes in market prices, caused by factors specific to the individual equity issuer, or factors affecting all similar equity securities traded on the market. The investment policy is approved by the Escap board and monitored by the Escap audit and risk committees. Exposure to market risk is limited through diversification and by applying strict investment criteria. The carrying value of investments made per sector is as follows: Group 2019 2018 Rm portfolio Rm portfolio % % Banks, financial services and insurance 421 26 387 29 Basic materials and resources 293 18 171 13 Consumer goods and services 734 45 541 41 Other 169 11 234 17 1 617 100 1 333 100 A 1% increase or decrease in share prices would have increased/decreased profit or loss before tax by R16 million (2018: R13 million). There will be no impact on equity. ESKOM HOLDINGS SOC LTD | 59 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 5. Financial risk management (continued) 5.2 Market risk (continued) 5.2.5 Other price risk Inflation price risk arises from embedded derivatives as discussed under note 4.1. The risk arises from movements in the electricity tariffs and the United States PPI. Refer to note 26 for the group’s quantitative exposure to other price risk. Sensitivity analysis Group and company 2019 2018 1% 1% 1% 1% increase decrease increase decrease Rm Rm Rm Rm Profit/(loss) before tax Electricity tariffs (17) 17 (69) 68 United States PPI 86 (90) 110 (120) 5.3 Liquidity risk Liquidity risk can arise from mismatches in the timing of cash flows from revenue with capital and operational outflows. Funding risk arises when the necessary liquidity to fund illiquid asset positions, such as building new electricity capacity, cannot be obtained at the expected terms and when required. The objective of the group’s liquidity and funding management is to ensure that all foreseeable operational, capital expansion and loan commitment expenditure can be met under both normal and stressed conditions. The group has adopted an overall statement of financial position approach, which consolidates all sources and uses of liquidity, while aiming to maintain a balance between liquidity, profitability and interest rate considerations. The management of group liquidity and funding risk is centralised in the treasury department in accordance with practices and limits set by the Exco and the board. The group’s liquidity and funding management process includes: • projecting cash flows and considering the cash required by the group and optimising the short-term liquidity as well as the long- term funding • monitoring financial position liquidity ratios • maintaining a diverse range of funding sources with adequate back-up facilities • managing the concentration and profile of debt maturities • actively managing the funding risk by evaluating optimal entry points into the various markets per the official borrowing programme • maintaining liquidity and funding contingency plans Eskom has an established corporate governance structure and process for managing the risks regarding guarantees and contingent liabilities. All significant guarantees issued by Eskom are approved by the board, and are managed on an ongoing basis by the treasury department and by the Exco and audit and risk committee of the board. Refer to note 45. The guarantees are administratively managed by the treasury department. Updated guarantee schedules are compiled every month, taking cognisance of any changed risk factors, and are submitted to each of the committees for consideration and action, if necessary. Risk factors and assumptions affecting probability calculations are reassessed twice a year and presented to the above committees. Eskom’s guarantees are diverse and unlinked, such that a trigger event for any one guarantee is unlikely to precipitate a trigger event in respect of other guarantees. Given that there would be forewarning of payments required in terms of the other guarantees, and considering the amounts of the guarantees, it is expected that Eskom will be able to raise the required liquidity to effect any required payments. 5.3.1 Key liquidity indicators Group Company Unit 2019 2018 2019 2018 Weighted average term to maturity of debt securities and borrowings years 6.85 7.31 6.85 7.31 Working capital ratio 1.02 1.05 1.01 1.06 Cash interest cover ratio 0.94 1.22 0.91 1.18 Net debt service cover ratio 0.47 0.87 0.46 0.84 Liquid assets Rm 2 031 15 823 1 517 15 379 Management has set a minimum weighted average term to maturity for debt securities and borrowings of five years. The term limits are independently monitored and reported to Alco on a monthly basis and to Exco and the audit and risk committee on a quarterly basis. The cash interest cover and debt service cover ratios measure the ability to fund debt costs via cash from operations. Management has targeted 3.5 for cash interest cover and 1.5 for debt service cover. Liquid assets are investments identified as having the potential to be quickly converted into cash. These are made up of the investing portfolio of investment in securities as well as cash and cash equivalents. 60 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 5.3.2 Primary sources of funding and unused facilities The primary sources to meet Eskom’s liquidity requirements are cash generated from operations, cash inflows from maturing financial assets purchased, funds committed by government, signed and committed export credit agencies and development funding institution facilities, as well as local and foreign debt issued in the market. To supplement these liquidity sources under stress conditions, undrawn loans, commercial paper facilities and unutilised government guarantees are in place as indicated in the table. All figures are quoted in notional amounts. Group and company ZAR EUR USD 2019 2018 2019 2018 2019 2018 m m m m m m Facilities available Export credit agencies – – 353 387 9 17 Crédit Agricole Corporate and Investment Bank – Coface – – 44 44 – – Banque Nationale de Paris Paribas – Coface – – 201 201 – – Kreditanstalt für Wiederaufbau – Hermes – – 108 141 – – Deutsche Bank – Hermes – – – 1 – – Export-Import Bank of the United States – – – – 9 17 Development financing institutions 129 843 112 315 3 516 1 686 World Bank – – – – 693 713 African Development Bank 129 129 112 143 – – Clean technology fund – African Development Bank – – – – 58 58 Clean technology fund – World Bank – – – – 215 215 European Investment Bank – – – 75 – – Kreditanstalt für Wiederaufbau – – – – 100 100 Agence Française de Développement – 714 – 97 – – China Development Bank – – – – 2 450 600 129 843 465 702 3 525 1 703 Funds received during the year Export credit agencies – – 34 128 8 178 Banque Nationale de Paris Paribas – Coface – – – 30 – – Kreditanstalt für Wiederaufbau – Hermes – – 33 93 – – Deutsche Bank – Hermes – – 1 5 – – Export-Import Bank of the United States – – – – 8 178 Development financing institutions 714 3 918 106 69 670 1 071 World Bank1 – – – – 20 171 African Development Bank 2 – 3 175 31 69 – – European Investment Bank – – 75 – – – Agence Française de Développement3 714 743 – – – – China Development Bank4 – – – – 650 900 714 3 918 140 197 678 1 249 1. All funds received were reimbursements on payments made by Eskom to various suppliers for goods and services supplied for the construction of the Medupi power station, Sere wind farm and Majuba rail projects. 2. All funds received were reimbursements on payments made by Eskom to various suppliers for goods and services supplied for the Medupi boilers and turbines and Sere wind farm projects. 3. Funds received were for the Sere wind farm project. 4. Funds received were for the Medupi and Kusile power stations. ESKOM HOLDINGS SOC LTD | 61 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 5. Financial risk management (continued) 5.3 Liquidity risk (continued) 5.3.2 Primary sources of funding and unused facilities (continued) Government guarantees available Group and company 2019 2018 Domestic General Total Domestic General Total multi-term multi-term note note programme programme Rm Rm Rm Rm Rm Rm Opening balance 11 916 77 474 89 390 38 774 95 993 134 767 Facility granted 150 000 200 000 350 000 150 000 200 000 350 000 Accumulated amounts used (138 084) (122 526) (260 610) (111 226) (104 007) (215 233) Restatement – – – – 3 734 3 734 Restated opening balance 11 916 77 474 89 390 38 774 99 727 138 501 Facility swap (15 000) 15 000 – – – – Used during the year (10 754) (60 789) (71 543) (26 858) (22 253) (49 111) Original (10 754) (60 789) (71 543) (26 858) (22 824) (49 682) Restatement – – – – 571 571 Repaid during the year 23 532 – 23 532 – – – Closing balance 9 694 31 685 41 379 11 916 77 474 89 390 Facility granted 135 000 215 000 350 000 150 000 200 000 350 000 Accumulated amounts used (125 306) (183 315) (308 621) (138 084) (122 526) (260 610) The 2018 balances were restated as the usage of government guarantees denominated in foreign currency is now measured at the rand exchange rate applicable at the date the funding was secured (in line with a National Treasury instruction). As a result, subsequent changes in exchange rates will not alter the amount of government guarantees available to Eskom. The carrying value of government guaranteed debt securities and borrowings at 31 March 2019 was R276 billion (2018: R243 billion). 5.3.3 Contractual cash flows The tables on the following pages indicate the contractual undiscounted cash flows of the group’s financial assets and liabilities on the basis of their earliest possible contractual maturity. The undiscounted cash flows in respect of the group’s financial assets are presented net of impairment losses and include estimates where there are no contractual repayment terms or the receivable is past due. The cash flows of the group’s financial liabilities are indicated on a gross undiscounted basis. The cash flows for derivatives held for risk management are presented on a net basis in line with the classification in the statement of financial position. Contractual cash flows are a function of forward exchange rates and forward interest rates and are a point in time calculation that are impacted by market conditions at that time. The table contains only cash flows relating to financial instruments and financial guarantees. It does not include future cash flows expected from the normal course of business and related commodity-linked pricing agreements. 62 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 Carrying amount Cash flows Non- Current Total Nominal 0–3 4 – 12 1–5 >5 current inflow/ months months years years outflow Note Rm Rm Rm Rm Rm Rm Rm Rm 2019 Group Financial assets Loans receivable 15 40 26 66 67 7 19 41 – Derivatives held for risk management 16 20 582 2 080 22 662 37 730 598 1 511 13 415 22 206 Finance lease receivables 17 374 31 405 672 20 59 286 307 Trade and other receivables 19 – 21 923 21 923 21 857 20 393 1 464 – – Insurance investments 14 – 9 563 9 563 9 567 4 012 5 555 – – Financial trading assets1 14 – 162 162 227 63 5 38 121 Cash and cash equivalents 21 – 2 031 2 031 2 031 2 031 – – – 20 996 35 816 56 812 72 151 27 124 8 613 13 780 22 634 Financial liabilities Debt securities and borrowings 25 387 208 53 402 440 610 844 848 11 149 70 455 244 780 518 464 Derivatives held for risk management 16 5 643 1 397 7 040 9 173 590 5 613 6 887 (3 917) Finance lease payables 30 9 130 332 9 462 20 118 430 1 299 6 876 11 513 Trade and other payables 31 1 031 35 754 36 785 36 761 28 019 7 687 1 055 – Financial trading liabilities1 14 – 238 238 272 182 7 83 – 403 012 91 123 494 135 911 172 40 370 85 061 259 681 526 060 Company Financial assets Loans receivable 15 – 6 071 6 071 6 244 2 729 3 515 – – Derivatives held for risk management 16 20 582 2 080 22 662 37 730 598 1 511 13 415 22 206 Finance lease receivables 17 374 31 405 672 20 59 286 307 Trade and other receivables 19 – 23 137 23 137 23 065 21 844 1 221 – – Financial trading assets1 14 – 162 162 227 63 5 38 121 Cash and cash equivalents 21 – 1 517 1 517 1 517 1 517 – – – 20 956 32 998 53 954 69 455 26 771 6 311 13 739 22 634 Financial liabilities Debt securities and borrowings 25 387 161 57 886 445 047 849 386 13 972 72 216 244 734 518 464 Derivatives held for risk management 16 5 643 1 397 7 040 9 173 590 5 613 6 887 (3 917) Finance lease payables 30 9 130 332 9 462 20 118 430 1 299 6 876 11 513 Trade and other payables 31 1 031 37 186 38 217 38 239 31 205 5 979 1 055 – Financial trading liabilities1 14 – 238 238 272 182 7 83 – Financial guarantees 45 – 3 3 3 3 – – – 402 965 97 042 500 007 917 191 46 382 85 114 259 635 526 060 1. The contractual cash flows for financial trading assets and liabilities have been disclosed based on the contractual maturity of the instrument. However, as some of these instruments are held at fair value through profit or loss, they may be sold or settled prior to contractual maturity. ESKOM HOLDINGS SOC LTD | 63 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 5. Financial risk management (continued) 5.3 Liquidity risk (continued) 5.3.3 Contractual cash flows (continued) Carrying amount Cash flows Non- Current Total Nominal 0–3 4 – 12 1–5 >5 current inflow/ months months years years outflow Note Rm Rm Rm Rm Rm Rm Rm Rm 2018 Group Financial assets Loans receivable 15 63 18 81 82 5 14 63 – Derivatives held for risk management 16 13 705 1 873 15 578 14 918 176 1 248 6 743 6 751 Finance lease receivables 17 408 29 437 751 20 60 302 369 Trade and other receivables 19 – 20 082 20 082 20 081 18 089 1 992 – – Insurance investments 14 – 8 172 8 172 8 172 2 296 5 876 – – Financial trading assets1 14 – 168 168 275 16 16 53 190 Cash and cash equivalents 21 – 15 823 15 823 15 823 15 823 – – – 14 176 46 165 60 341 60 102 36 425 9 206 7 161 7 310 Financial liabilities Debt securities and borrowings 25 348 112 40 572 388 684 723 625 10 834 50 751 219 130 442 910 Derivatives held for risk management 16 16 570 4 896 21 466 21 215 2 837 6 433 15 882 (3 937) Finance lease payables 30 9 533 286 9 819 28 782 523 1 579 8 618 18 062 Trade and other payables 31 1 201 31 230 32 431 32 434 23 414 7 814 1 206 – Financial trading liabilities1 14 – 249 249 254 240 1 9 4 Financial guarantees 45 – 1 1 54 54 – – – 375 416 77 234 452 650 806 364 37 902 66 578 244 845 457 039 Company Financial assets Loans receivable 15 – 6 201 6 201 6 334 2 759 3 575 – – Derivatives held for risk management 16 13 705 1 875 15 580 14 921 177 1 250 6 743 6 751 Finance lease receivables 17 408 29 437 751 20 60 302 369 Trade and other receivables 19 – 21 429 21 429 21 429 20 035 1 394 – – Financial trading assets1 14 – 168 168 275 16 16 53 190 Cash and cash equivalents 21 – 15 379 15 379 15 379 15 379 – – – 14 113 45 081 59 194 59 089 38 386 6 295 7 098 7 310 Financial liabilities Debt securities and borrowings 25 348 060 44 525 392 585 727 594 13 776 51 829 219 079 442 910 Derivatives held for risk management 16 16 570 4 896 21 466 21 215 2 837 6 433 15 882 (3 937) Finance lease payables 30 9 533 286 9 819 28 782 523 1 579 8 618 18 062 Trade and other payables 31 1 201 32 115 33 316 33 318 25 793 6 317 1 208 – Financial trading liabilities1 14 – 249 249 254 240 1 9 4 Financial guarantees 45 – 2 2 1 123 1 123 – – – 375 364 82 073 457 437 812 286 44 292 66 159 244 796 457 039 1. The contractual cash flows for financial trading assets and liabilities have been disclosed based on the contractual maturity of the instrument. However, as some of these instruments are held-for-trading, they may be sold or settled prior to contractual maturity. 64 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 6. Accounting classification and fair value 6.1 Accounting classification Group Company Fair Amort- Other Total Fair Amort- Other Total value ised assets value ised assets through cost and through cost and profit liabilities profit liabilities or loss or loss Note Rm Rm Rm Rm Rm Rm Rm Rm 2019 Financial assets Loans receivable 15 – 66 – 66 – 6 071 – 6 071 Derivatives held for risk management 16 1 378 – 21 284 22 662 1 378 – 21 284 22 662 Foreign exchange contracts 1 281 – 20 1 301 1 281 – 20 1 301 Cross-currency swaps 49 – 21 264 21 313 49 – 21 264 21 313 Credit default swaps 9 – – 9 9 – – 9 Inflation linked swaps 39 – – 39 39 – – 39 Finance lease receivables 17 – – 405 405 – – 405 405 Trade and other receivables 19 – 21 923 – 21 923 – 23 137 – 23 137 Insurance investments 14 1 617 7 946 – 9 563 – – – – Negotiable certificates of deposit – 7 946 – 7 946 – – – – Listed shares 1 617 – – 1 617 – – – – Financial trading assets 14 103 59 – 162 103 59 – 162 Repurchase agreements – 59 – 59 – 59 – 59 Government bonds 103 – – 103 103 – – 103 Cash and cash equivalents 21 – 2 031 – 2 031 – 1 517 – 1 517 Bank balances – 2 018 – 2 018 – 1 504 – 1 504 Unsettled deals – 13 – 13 – 13 – 13 3 098 32 025 21 689 56 812 1 481 30 784 21 689 53 954 Financial liabilities Debt securities and borrowings 25 – 440 610 – 440 610 – 445 047 – 445 047 Eskom bonds – 152 283 – 152 283 – 152 283 – 152 283 Commercial paper – 1 105 – 1 105 – 3 714 – 3 714 Eurorand zero coupon bonds – 4 399 – 4 399 – 4 399 – 4 399 Foreign bonds – 79 963 – 79 963 – 79 963 – 79 963 Development financing institutions – 135 661 – 135 661 – 135 661 – 135 661 Export credit facilities – 31 782 – 31 782 – 31 782 – 31 782 Floating rate notes – 4 047 – 4 047 – 4 047 – 4 047 Other loans – 31 370 – 31 370 – 33 198 – 33 198 Embedded derivatives 26 – – 3 434 3 434 – – 3 434 3 434 Derivatives held for risk management 16 1 139 – 5 901 7 040 1 139 – 5 901 7 040 Foreign exchange contracts 471 – 88 559 471 – 88 559 Cross-currency swaps 322 – 5 813 6 135 322 – 5 813 6 135 Credit default swaps 305 – – 305 305 – – 305 Inflation linked swaps 41 – – 41 41 – – 41 Finance lease payables 30 – – 9 462 9 462 – – 9 462 9 462 Trade and other payables 31 – 36 785 – 36 785 – 38 217 – 38 217 Financial trading liabilities 14 238 – – 238 238 – – 238 Short-sold government bonds 57 – – 57 57 – – 57 Repurchase agreements 181 – – 181 181 – – 181 1 377 477 395 18 797 497 569 1 377 483 264 18 797 503 438 ESKOM HOLDINGS SOC LTD | 65 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 6. Accounting classification and fair value (continued) 6.1 Accounting classification (continued) Held-for- Loans and Available- Liabilities Other Total trading receivables for-sale at assets and amortised liabilities cost Note Rm Rm Rm Rm Rm Rm 2018 Group Financial assets Loans receivable 15 – 81 – – – 81 Derivatives held for risk management 16 245 – – – 15 333 15 578 Foreign exchange contracts 152 – – – 36 188 Cross-currency swaps 61 – – – 15 297 15 358 Commodity forwards 17 – – – – 17 Credit default swaps 15 – – – – 15 Finance lease receivables 17 – – – – 437 437 Trade and other receivables 19 – 20 082 – – – 20 082 Insurance investments 14 1 333 – 6 839 – – 8 172 Negotiable certificates of deposit – – 6 839 – – 6 839 Listed shares 1 333 – – – – 1 333 Financial trading assets 14 168 – – – – 168 Repurchase agreements 9 – – – – 9 Government bonds 159 – – – – 159 Cash and cash equivalents 21 – 15 823 – – – 15 823 Bank balances – 15 778 – – – 15 778 Unsettled deals – 45 – – – 45 1 746 35 986 6 839 – 15 770 60 341 Financial liabilities Debt securities and borrowings 25 – – – 388 684 – 388 684 Eskom bonds – – – 146 172 – 146 172 Commercial paper – – – 2 275 – 2 275 Eurorand zero coupon bonds – – – 5 711 – 5 711 Foreign bonds – – – 47 608 – 47 608 Development financing institutions – – – 119 854 – 119 854 Export credit facilities – – – 31 735 – 31 735 Floating rate notes – – – 2 005 – 2 005 Other loans – – – 33 324 – 33 324 Embedded derivatives 26 – – – – 5 291 5 291 Derivatives held for risk management 16 3 593 – – – 17 873 21 466 Foreign exchange contracts 2 643 – – – 638 3 281 Cross-currency swaps 858 – – – 17 235 18 093 Credit default swaps 92 – – – – 92 Finance lease payables 30 – – – – 9 819 9 819 Trade and other payables 31 – – – 32 431 – 32 431 Financial trading liabilities 14 249 – – – – 249 Short-sold government bonds 8 – – – – 8 Repurchase agreements 241 – – – – 241 3 842 – – 421 115 32 983 457 940 66 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 Held-for- Loans and Available- Liabilities Other Total trading receivables for-sale at assets and amortised liabilities cost Note Rm Rm Rm Rm Rm Rm 2018 Company Financial assets Loans receivable 15 – 6 201 – – – 6 201 Derivatives held for risk management 16 247 – – – 15 333 15 580 Foreign exchange contracts 154 – – – 36 190 Cross-currency swaps 61 – – – 15 297 15 358 Commodity forwards 17 – – – – 17 Credit default swaps 15 – – – – 15 Finance lease receivables 17 – – – – 437 437 Trade and other receivables 19 – 21 429 – – – 21 429 Financial trading assets 14 168 – – – – 168 Repurchase agreements 9 – – – – 9 Government bonds 159 – – – – 159 Cash and cash equivalents 21 – 15 379 – – – 15 379 Bank balances – 15 334 – – – 15 334 Unsettled deals – 45 – – – 45 415 43 009 – – 15 770 59 194 Financial liabilities Debt securities and borrowings 25 – – – 392 585 – 392 585 Eskom bonds – – – 146 172 – 146 172 Commercial paper – – – 4 423 – 4 423 Eurorand zero coupon bonds – – – 5 711 – 5 711 Foreign bonds – – – 47 608 – 47 608 Development financing institutions – – – 119 854 – 119 854 Export credit facilities – – – 31 735 – 31 735 Floating rate notes – – – 2 005 – 2 005 Other loans – – – 35 077 – 35 077 Embedded derivatives 26 – – – – 5 291 5 291 Derivatives held for risk management 16 3 593 – – – 17 873 21 466 Foreign exchange contracts 2 643 – – – 638 3 281 Cross-currency swaps 858 – – – 17 235 18 093 Credit default swaps 92 – – – – 92 Finance lease payables 30 – – – – 9 819 9 819 Trade and other payables 31 – – – 33 316 – 33 316 Financial trading liabilities 14 249 – – – – 249 Short-sold government bonds 8 – – – – 8 Repurchase agreements 241 – – – – 241 3 842 – – 425 901 32 983 462 726 ESKOM HOLDINGS SOC LTD | 67 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 6. Accounting classification and fair value (continued) 6.2 Fair value Valuation processes The group has a control framework in place for the measurement of fair values. It includes a valuation team that ultimately reports to the chief financial officer and has overall responsibility for all significant fair value measurements. The valuation team regularly reviews significant unobservable inputs and valuation adjustments. Where third-party information, such as broker quotes or pricing services, is used to measure fair value, this information is assessed as to whether it provides adequate support for the accounting treatment applied including the level of the fair value hierarchy assigned to it. Principal markets The group is involved in various principal markets because of the unique funding activities undertaken where the fair value is determined by each participant in the different principal markets. The principal markets include: • capital and money markets • development financing institutions • export credit agencies Fair value hierarchy Fair value measurements are categorised into the different levels in the fair value hierarchy based on the inputs to the valuation techniques used. There were no changes in the valuation techniques applied. The hierarchy levels are defined as follows: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: Inputs other than quoted prices included within level 1 that are observable, either directly (ie as prices) or indirectly (ie derived from prices). Level 3: Unobservable inputs. There were no transfers between level 1, 2 or 3 of the fair value hierarchy during the year. The group recognises transfers between levels of the fair value hierarchy at the end of the reporting period during which the transfers have occurred. The group’s policy for determining when transfers between levels in the hierarchy have occurred includes monitoring of the following factors: • changes in market and trading activity (eg significant increases/decreases in activity) • changes in inputs used in valuation techniques (eg inputs becoming/ceasing to be observable in the market) Valuation techniques Financial instrument Valuation technique Level 1: Quoted prices (unadjusted) in active markets Financial trading assets (government bonds) and insurance Quoted bid price in active markets. A market is regarded as active investments (listed shares) when it is a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis Financial trading liabilities (short-sold government bonds) Quoted bid price in active markets. A market is regarded as active when it is a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis Level 2: Inputs other than quoted prices included within level 1 that are observable Loans receivable, insurance investments (negotiable A discounted cash flow technique is used which uses expected cash certificates of deposit), debt securities and borrowings, flows and a market-related discount rate finance lease receivables and payables and financial trading assets and liabilities (repurchase agreement assets and liabilities) Derivatives held for risk management Valuation determined with reference to broker quotes as well as use of discounted cash flow and option pricing models. Broker quotes are tested for reasonableness by discounting expected future cash flows using a market interest rate for a similar instrument at the measurement date Valuations of cross-currency swaps include the credit risk of Eskom (known as debit value adjustment) and counterparties (known as credit value adjustment) where appropriate. A stochastic modelling approach is followed where the expected future exposure to credit risk for Eskom and its counterparties (considering default probabilities and recovery rates derived from market data) is modelled Trade and other receivables and payables and cash and Fair values have not been disclosed for financial instruments where cash equivalents the carrying amounts are a reasonable approximation of fair value Level 3: Unobservable inputs Embedded derivative liabilities Fair valued using unobservable inputs. Refer to note 26 for a movement reconciliation and to note 4.1 for information regarding the valuation techniques and assumptions used 68 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 The fair value hierarchy of financial instruments is as follows: 2019 2018 Measured Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 at fair value Rm Rm Rm Rm Rm Rm Group Financial assets Loans receivable No – 108 – – 81 – Derivatives held for risk management – 22 662 – – 15 578 – Foreign exchange contracts Yes – 1 301 – – 188 – Cross-currency swaps Yes – 21 313 – – 15 358 – Commodity forwards Yes – – – – 17 – Credit default swaps Yes – 9 – – 15 – Inflation linked swaps Yes – 39 – – – – Finance lease receivables No – 405 – – 437 – Insurance investments 1 617 7 950 – 1 333 6 839 – Negotiable certificates of deposit No/Yes1 – 7 950 – – 6 839 – Listed shares Yes 1 617 – – 1 333 – – Financial trading assets 103 59 – 159 9 – Repurchase agreements No/Yes1 – 59 – – 9 – Government bonds Yes 103 – – 159 – – Financial liabilities Debt securities and borrowings – 412 399 – – 377 893 – Eskom bonds No – 140 909 – – 141 978 – Commercial paper No – 1 108 – – 2 280 – Eurorand zero coupon bonds No – 3 717 – – 5 504 – Foreign bonds No – 80 023 – – 48 475 – Development financing institutions No – 118 351 – – 111 248 – Export credit facilities No – 32 373 – – 32 465 – Floating rate notes No – 4 239 – – 2 153 – Other loans No – 31 679 – – 33 790 – Embedded derivatives Yes – – 3 434 – – 5 291 Derivatives held for risk management – 7 040 – – 21 466 – Foreign exchange contracts Yes – 559 – – 3 281 – Cross-currency swaps Yes – 6 135 – – 18 093 – Credit default swaps Yes – 305 – – 92 – Inflation linked swaps Yes – 41 – – – – Finance lease payables No – 10 541 – – 11 428 – Financial trading liabilities 57 181 – 8 241 – Short-sold government bonds Yes 57 – – 8 – – Repurchase agreements Yes – 181 – – 241 – 1. Carried at amortised cost in terms of IFRS 9 in 2019 and at fair value in terms of IAS 39 in 2018. ESKOM HOLDINGS SOC LTD | 69 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 6. Accounting classification and fair value (continued) 6.2 Fair value (continued) 2019 2018 Measured Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 at fair value Rm Rm Rm Rm Rm Rm Company Financial assets Loans receivable No – 6 111 – – 6 201 – Derivatives held for risk management – 22 662 – – 15 580 – Foreign exchange contracts Yes – 1 301 – – 190 – Cross-currency swaps Yes – 21 313 – – 15 358 – Commodity forwards Yes – – – – 17 – Credit default swaps Yes – 9 – – 15 – Inflation linked swaps Yes – 39 – – – – Finance lease receivables No – 405 – – 437 – Financial trading assets 103 59 – 159 9 – Repurchase agreements No/Yes1 – 59 – – 9 – Government bonds Yes 103 – – 159 – – Financial liabilities Debt securities and borrowings – 416 846 – – 381 800 – Eskom bonds No – 140 909 – – 141 978 – Commercial paper No – 3 726 – – 4 433 – Eurorand zero coupon bonds No – 3 717 – – 5 504 – Foreign bonds No – 80 023 – – 48 475 – Development financing institutions No – 118 351 – – 111 248 – Export credit facilities No – 32 373 – – 32 465 – Floating rate notes No – 4 239 – – 2 153 – Other loans No – 33 508 – – 35 544 – Embedded derivatives Yes – – 3 434 – – 5 291 Derivatives held for risk management – 7 040 – – 21 466 – Foreign exchange contracts Yes – 559 – – 3 281 – Cross-currency swaps Yes – 6 135 – – 18 093 – Credit default swaps Yes – 305 – – 92 – Inflation linked swaps Yes – 41 – – – – Finance lease payables No – 10 541 – – 11 428 – Financial trading liabilities 57 181 – 8 241 – Short-sold government bonds Yes 57 – – 8 – – Repurchase agreements Yes – 181 – – 241 – 1. Carried at amortised cost in terms of IFRS 9 in 2019 and at fair value in terms of IAS 39 in 2018. 70 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 7. Segment information Management has determined the reportable segments based on the reports regularly provided, reviewed and used by Exco to make strategic decisions and assess performance of the segments. Exco assesses the performance of the operating segments based on a measure of profit or loss consistent with that of the financial statements. The amounts provided to Exco with respect to total assets and liabilities are measured in terms of IFRS. These assets and liabilities are allocated based on the operation of the segment and the physical location of the assets. The operations in each of the group’s reportable segments are as follows: Segment Operations Generation Consists of the generation and primary energy functions. These functions procure primary energy and generate electricity for sale Transmission Consists of the transmission grids and the integrated demand management function. These functions operate and maintain the transmission network for transmitting electricity and also sell bulk electricity to international customers Distribution Distribution consists of nine provincial operating units. These units provide, operate and maintain the distribution network for distributing electricity Energy purchases/sales Consists of the southern African energy and energy planning and market development segments. They both deal with decisions involving energy purchases and sales to southern Africa and would be influenced by the same sales demand trends. Their activities include systems operations, purchase or sale of electricity from or to southern African countries, purchase of electricity from IPPs and wholesale energy for the purposes of energy trading Group customer services Group customer services consists of the customer service function that sells electricity to local large power users (including municipalities) and local small power users Group capital Group capital is responsible for the planning, development and monitoring of all capital projects and the execution of significant capital projects All other segments Relates to operating segments which are below the quantitative thresholds for determining a reportable segment in terms of IFRS 8 Operating segments which includes the group’s subsidiaries as well as all service and strategic functions which do not qualify as a reportable segment in terms of IFRS 8 The revenue earned by subsidiaries is presented in the segment note in line with what has been reported in the respective subsidiary financial statements. Inter-segment revenue and purchases of electricity are allocated between Generation, Transmission, Distribution, Energy purchases/sales and Group customer services segments based on cost recovery plus a uniform return on assets. Net finance costs are allocated to segments based on relative funding requirements. ESKOM HOLDINGS SOC LTD | 71 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 7. Segment information (continued) The segment information provided to Exco for the reportable segments is as follows: Gene- Trans- Distri- Energy Group Group All other Reallo- Group ration mission bution purchases/ customer capital segments cation and sales services inter- segment tran- sactions Rm Rm Rm Rm Rm Rm Rm Rm Rm 2019 External revenue – 215 2 118 8 171 169 388 – 1 377 (1 377) 179 892 Inter-segment revenue/ recoveries 125 449 3 548 16 905 21 855 (167 417) (133) 11 252 (11 459) – Total revenue 125 449 3 763 19 023 30 026 1 971 (133) 12 629 (12 836) 179 892 Other income 747 187 335 – 88 496 1 717 (1 420) 2 150 Primary energy (70 793) – – (28 681) (11) (3) – – (99 488) Employee benefit expense (9 843) (1 812) (9 208) (57) (1 728) (767) (9 857) – (33 272) Impairment of financial assets – 22 (15) (689) 992 (16) (173) 157 278 Impairment of other assets – raised (11) – (4) – – – – – (15) Impairment of other assets – reversed 107 – 39 – – 22 – – 168 Other expenses (21 408) (1 574) (7 641) (14) (1 423) 222 (1 891) 15 515 (18 214) Profit/(loss) before depreciation and amortisation expense and net fair value and foreign exchange (loss)/gain (EBITDA) 24 248 586 2 529 585 (111) (179) 2 425 1 416 31 499 Depreciation and amortisation expense (22 064) (2 122) (3 652) (638) (4) (100) (1 395) 219 (29 756) Net fair value and foreign exchange (loss)/gain on financial instruments (5 733) 881 59 1 1 847 (797) 339 (6) (3 409) (Loss)/profit before net finance (cost)/income (3 549) (655) (1 064) (52) 1 732 (1 076) 1 369 1 629 (1 666) Net finance (cost)/income (20 405) (3 371) (2 632) (1 295) (103) (127) 163 253 (27 517) Finance income 1 24 34 104 246 3 2 212 98 2 722 Finance cost (20 406) (3 395) (2 666) (1 399) (349) (130) (2 049) 155 (30 239) Share of profit of equity-accounted investees – – – – – – 35 – 35 (Loss)/profit before tax (23 954) (4 026) (3 696) (1 347) 1 629 (1 203) 1 567 1 882 (29 148) Income tax – – – – – – 8 837 (418) 8 419 (Loss)/profit for the year (23 954) (4 026) (3 696) (1 347) 1 629 (1 203) 10 404 1 464 (20 729) Other information Segment assets 310 101 54 751 90 205 9 247 19 094 227 054 59 186 (20 864) 748 774 Investment in equity- accounted investees – – – – – – 373 – 373 Assets held-for-sale – – – – – – 8 871 – 8 871 Total assets 310 101 54 751 90 205 9 247 19 094 227 054 68 430 (20 864) 758 018 Total liabilities 64 667 1 800 31 825 14 339 13 273 11 939 488 352 (21 271) 604 924 Additions to property, plant and equipment and intangible assets 8 454 1 109 6 883 1 18 18 266 496 (529) 34 698 72 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 Gene- Trans- Distri- Energy Group Group All other Reallo- Group ration mission bution purchases/ customer capital segments cation and sales services inter- segment tran- sactions Rm Rm Rm Rm Rm Rm Rm Rm Rm 2018 External revenue – 252 1 993 9 480 165 699 – 1 473 (1 473) 177 424 Inter-segment revenue/ recoveries 118 250 8 513 21 510 13 504 (161 471) (107) 11 994 (12 193) – Total revenue 118 250 8 765 23 503 22 984 4 228 (107) 13 467 (13 666) 177 424 Other income 751 95 387 – 116 294 571 (842) 1 372 Primary energy (62 957) – – (22 085) (160) – – – (85 202) Employee benefit expense (9 222) (1 667) (8 627) (60) (1 586) (1 084) (7 208) – (29 454) Impairment of financial assets (138) (5) – 96 (463) (1) (17) – (528) Impairment of other assets – raised (63) – (1) – – – – – (64) Impairment of other assets – reversed 3 – 36 – – – – – 39 Other expenses (18 511) (2 052) (8 123) (13) (1 706) 807 (2 925) 14 295 (18 228) Profit/(loss) before depreciation and amortisation expense and net fair value and foreign exchange gain/(loss) (EBITDA) 28 113 5 136 7 175 922 429 (91) 3 888 (213) 45 359 Depreciation and amortisation expense (15 908) (1 982) (3 510) (638) (5) (103) (1 202) 216 (23 132) Net fair value and foreign exchange gain/(loss) on financial instruments 1 712 (807) 122 – 139 (3 290) 351 (2) (1 775) Profit/(loss) before net finance (cost)/income 13 917 2 347 3 787 284 563 (3 484) 3 037 1 20 452 Net finance (cost)/income (16 986) (2 920) (2 159) (1 672) 65 398 (63) 248 (23 089) Finance income 286 58 151 85 377 392 1 431 92 2 872 Finance cost (17 272) (2 978) (2 310) (1 757) (312) 6 (1 494) 156 (25 961) Share of profit of equity-accounted investees – – – – – – 34 – 34 (Loss)/profit before tax (3 069) (573) 1 628 (1 388) 628 (3 086) 3 008 249 (2 603) Income tax – – – – – – 343 (77) 266 (Loss)/profit for the year (3 069) (573) 1 628 (1 388) 628 (3 086) 3 351 172 (2 337) Other information Segment assets 319 432 52 570 86 049 10 523 17 590 199 479 65 703 (21 528) 729 818 Investment in equity- accounted investees – – – – – – 372 – 372 Assets held-for-sale – – – – – 40 8 886 – 8 926 Total assets 319 432 52 570 86 049 10 523 17 590 199 519 74 961 (21 528) 739 116 Total liabilities 59 164 1 538 30 058 13 681 14 272 11 987 458 628 (20 548) 568 780 Additions to property, plant and equipment and intangible assets 10 600 1 008 8 774 – 28 28 211 1 743 (371) 49 993 ESKOM HOLDINGS SOC LTD | 73 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 7. Segment information (continued) Group Revenue Non-current assets 2019 2018 2019 2018 Geographical information Rm Rm Rm Rm South Africa 171 651 167 894 663 923 643 731 Foreign countries 8 241 9 530 217 137 179 892 177 424 664 140 643 868 The group’s reportable segments operate mainly in South Africa, which is Eskom’s country of domicile. Revenue is allocated based on the country in which the customer is located after eliminating inter-segment transactions. There is no significant revenue derived from a single external customer by any of the reportable segments. Non-current assets disclosed for geographical information comprise non-current assets other than deferred tax assets and financial instruments. 8. Property, plant and equipment 2019 2018 Land, Plant Equip- Work Total Total buildings Gene- Trans- Distri- Spares ment under and rating mitting buting and and cons- facilities other vehicles truction Note Rm Rm Rm Rm Rm Rm Rm Rm Rm Group Carrying value at beginning of the year 8 155 278 364 40 502 71 176 14 005 6 798 211 648 630 648 588 867 Cost 10 032 363 883 56 839 115 768 15 587 17 411 213 579 793 099 730 491 Accumulated depreciation and impairment losses (1 877) (85 519) (16 337) (44 592) (1 582) (10 613) (1 931) (162 451) (141 624) Adoption of IFRS 151 – – – – – – 51 51 – Additions 30 414 70 191 2 322 512 30 716 34 255 49 568 Transfers of assets from customers – – – 1 454 – – – 1 454 737 Commissioning of assets constructed 443 9 181 3 969 6 158 (2 297) 303 (17 757) – – Basis adjustment – cash flow hedge reserve – – – – – – (281) (281) (617) Finance cost capitalised 41 – – – – – – 15 378 15 378 15 547 Provisions capitalised 29 – (297) – – – – 1 626 1 329 881 Transfers from assets held-for-sale 37 – – – – – – 37 22 Disposals and writeoffs (5) (197) (183) (16) (8) (50) (416) (875) (601) Depreciation (139) (22 354) (1 995) (4 640) (93) (1 306) – (30 527) (23 737) Net impairment 36 – – – – – 21 147 168 (19) Carrying value at end of the year 8 521 265 111 42 363 74 323 13 929 6 278 241 112 651 637 630 648 Cost 10 532 369 144 60 599 123 542 15 589 17 897 242 645 839 948 793 099 Accumulated depreciation and impairment losses (2 011) (104 033) (18 236) (49 219) (1 660) (11 619) (1 533) (188 311) (162 451) 1. Refer to note 50.3. 74 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 2019 2018 Land, Plant Equip- Work Total Total buildings Gene- Trans- Distri- Spares ment under and rating mitting buting and and cons- facilities other vehicles truction Note Rm Rm Rm Rm Rm Rm Rm Rm Rm Company Carrying value at beginning of the year 8 004 279 105 40 626 71 395 14 005 5 167 212 857 631 159 589 479 Cost 9 802 365 415 56 978 116 058 15 587 14 391 214 788 793 019 730 642 Accumulated depreciation and impairment losses (1 798) (86 310) (16 352) (44 663) (1 582) (9 224) (1 931) (161 860) (141 163) Additions 29 414 70 191 2 322 498 31 118 34 642 49 462 Transfers of assets from customers – – – 1 454 – – – 1 454 737 Commissioning of assets constructed 403 9 324 3 981 6 173 (2 297) 221 (17 805) – – Basis adjustment – cash flow hedge reserve – – – – – – (281) (281) (617) Finance cost capitalised 41 – – – – – – 15 378 15 378 15 547 Provisions capitalised 29 – (297) – – – – 1 626 1 329 881 Transfers from assets held-for-sale 37 – – – – – – 37 22 Disposals and writeoffs (5) (197) (183) (16) (8) (50) (738) (1 197) (595) Depreciation (138) (22 554) (2 001) (4 655) (93) (1 015) – (30 456) (23 738) Net impairment 36 – – – – – 21 147 168 (19) Carrying value at end of the year 8 330 265 795 42 493 74 542 13 929 4 842 242 302 652 233 631 159 Cost 10 261 370 746 60 750 123 841 15 589 14 784 243 835 839 806 793 019 Accumulated depreciation and impairment losses (1 931) (104 951) (18 257) (49 299) (1 660) (9 942) (1 533) (187 573) (161 860) Group Company 2019 2018 2019 2018 Note Rm Rm Rm Rm Carrying value of leased assets 7 841 8 495 7 841 8 495 Generating plant 7 718 8 356 7 718 8 356 Spares and other plant 123 139 123 139 The total depreciation charge for property, plant and equipment is disclosed in profit or loss in the following categories: 30 527 23 737 30 456 23 738 Depreciation and amortisation expense 38 30 511 23 721 30 440 23 722 Primary energy 16 16 16 16 Group and company 2019 2018 % % Average rates of finance cost capitalised to qualifying assets: General borrowings 9.43 9.26 Specific borrowings 9.24 9.16 ESKOM HOLDINGS SOC LTD | 75 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 9. Intangible assets 2019 2018 Rights Computer Concession Total Total software assets Note Rm Rm Rm Rm Rm Group Carrying value at beginning of the year 2 881 927 137 3 945 3 981 Cost 3 101 7 089 247 10 437 10 258 Accumulated amortisation and impairment losses (220) (6 162) (110) (6 492) (6 277) Additions and transfers 120 223 100 443 425 Writeoffs – (9) – (9) – Amortisation 38 – (434) (20) (454) (461) Carrying value at end of the year 3 001 707 217 3 925 3 945 Cost 3 221 7 286 364 10 871 10 437 Accumulated amortisation and impairment losses (220) (6 579) (147) (6 946) (6 492) Company Carrying value at beginning of the year 2 881 922 – 3 803 3 817 Cost 3 101 6 759 – 9 860 9 669 Accumulated amortisation and impairment losses (220) (5 837) – (6 057) (5 852) Additions and transfers 120 223 – 343 424 Writeoffs – (9) – (9) – Amortisation 38 – (431) – (431) (438) Carrying value at end of the year 3 001 705 – 3 706 3 803 Cost 3 221 6 956 – 10 177 9 860 Accumulated amortisation and impairment losses (220) (6 251) – (6 471) (6 057) 10. Future fuel supplies Group and company 2019 2018 Coal Nuclear Total Total Note Rm Rm Rm Rm Carrying value at beginning of the year 6 821 336 7 157 8 190 Net additions 229 319 548 1 618 Provisions capitalised 29 475 – 475 51 Basis adjustment – cash flow hedge reserve – – – (386) Transfer to inventories 20 (1 700) (9) (1 709) (2 316) Carrying value at end of the year 5 825 646 6 471 7 157 76 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 11. Investment in equity-accounted investees Group Company 2019 2018 2019 2018 Rm Rm Rm Rm Balance at beginning of the year 372 364 95 95 Share of profit after tax 35 34 – – Dividends received (34) (26) – – Balance at end of the year 373 372 95 95 The group’s investments in joint ventures and associates are not individually material. The group’s share of the results of its significant joint ventures, all of which are unlisted, is as follows: Name Main business Country of Interest 2019 2018 incorporation held Group Company Group Company Share of Investment Share of Investment profit/(loss) at cost profit/(loss) at cost after tax after tax for the year for the year % Rm Rm Rm Rm Directly held Motraco – Mozambique Electricity Transmission Company SARL1 transmission Mozambique 33 47 95 32 95 Indirectly held Trans Africa Projects Engineering (Pty) Ltd services South Africa 50 (12) 2 35 34 The share capital of the group’s investment in joint ventures comprises ordinary shares. The joint ventures are structured as separate vehicles and the group has a residual interest in the net assets. The relevant activities are jointly controlled in accordance with the agreements under which the entities are established. The joint arrangements have therefore been classified as joint ventures. 12. Investment in subsidiaries 2019 and 2018 Name Main business Country of Interest Investment incorporation held at cost % Rm Directly held Escap SOC Ltd Insurance South Africa 100 380 Eskom Development Foundation NPC Corporate social investment South Africa 100 – Eskom Enterprises SOC Ltd Non-regulated electricity supply industry South Africa 100 –2 activities in South Africa and electricity supply and related services outside South Africa Eskom Finance Company SOC Ltd3 Finance (employee housing loans) South Africa 100 –2 PN Energy Services SOC Ltd Not trading South Africa 100 4 384 Indirectly held Eskom Rotek Industries SOC Ltd Construction and abnormal load South Africa 100 transportation Eskom Uganda Ltd1 Operations management Uganda 100 Golang Coal SOC Ltd Coal exports South Africa 67 Nqaba Finance 1 (RF) Ltd3 Residential backed mortgage securities South Africa 100 Pebble Bed Modular Reactor SOC Ltd Reactor driven generation project South Africa 100 South Dunes Coal Terminal SOC Ltd Coal exports South Africa 69 All subsidiaries continue to be accounted for as previously assessed as there has not been any change in the outcome of the control assessment. The group does not have any subsidiaries with a material non-controlling interest. 1. Year end is 31 December. 2. Nominal 3. Eskom Finance Company SOC Ltd and its subsidiary Nqaba Finance 1 (RF) Ltd (a securitisation vehicle) have been classified as held-for-sale. Refer to note 22. ESKOM HOLDINGS SOC LTD | 77 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 13. Deferred tax Group Company 2019 2018 2019 2018 Note Rm Rm Rm Rm 13.1 Deferred tax assets Balance at beginning of the year 23 50 – – Recognised in profit or loss 42 (2) (28) – – Assets and liabilities held-for-sale (4) 1 – – Balance at end of the year 17 23 – – Comprising 17 23 – – Provisions 16 22 – – Payments received in advance 1 1 – – 13.2 Deferred tax liabilities Balance at beginning of the year 15 846 18 067 15 665 18 090 Adoption of IFRS 9 50.3 (74) – – – Recognised in profit or loss 42 (8 833) (958) (9 262) (1 148) Recognised in other comprehensive income 42 1 411 (1 263) 1 401 (1 277) Balance at end of the year 8 350 15 846 7 804 15 665 Comprising 8 350 15 846 7 804 15 665 Property, plant and equipment 82 768 74 695 82 024 74 376 Provisions (26 505) (23 776) (26 287) (23 599) Tax losses (45 441) (30 558) (45 428) (30 558) Embedded derivative liabilities (962) (1 482) (962) (1 482) Insurance investments 31 47 – – Cash flow hedges 808 (118) 812 (115) Payments received in advance (3 428) (3 556) (3 428) (3 556) Employee benefit obligations 1 079 594 1 073 599 Unused tax losses available for offset against future taxable income 162 289 109 136 162 243 109 136 78 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 14. Investments and financial trading instruments Portfolio Managed by Purpose Insurance Escap To maintain adequate ring-fenced capital reserves to meet statutory solvency requirements Financial trading Treasury To reduce the funding cost of the company 14.1 Insurance investments Group 2019 2018 Gross Allowance Carrying Total for value impairment Rm Rm Rm Rm Negotiable certificates of deposit 7 951 (5) 7 946 6 839 Listed shares 1 617 – 1 617 1 333 9 568 (5) 9 563 8 172 14.2 Financial trading instruments Group and company 2019 2018 Assets Liabilities Net asset/ Assets Liabilities Net asset/ (liability) (liability) Rm Rm Rm Rm Rm Rm Repurchase agreements 59 181 (122) 9 241 (232) Eskom bonds – 91 (91) – 124 (124) Government bonds 59 90 (31) 9 117 (108) Government bonds 103 57 46 159 8 151 162 238 (76) 168 249 (81) Financial trading assets – collateral held Eskom purchased both Eskom and government bonds from approved counterparties and has committed to resell these back to the counterparties in the following financial year. Although Eskom has legal title to the bonds at year end, they have not been recognised in the statement of financial position as a result of the commitment to resell. The total receivable is secured by bonds of an equivalent fair value. The difference between the purchase and resale price is treated as interest accrued over the life of the agreement using the effective-yield method. Financial trading liabilities – encumbered assets Eskom concluded sale and repurchase transactions of both Eskom and government bonds with approved counterparties. The group enters into transactions whereby it transfers assets recognised in its statement of financial position, but retains either all or substantially all of the risks and rewards of the transferred assets or a portion of them. The transferred assets are not derecognised if all or substantially all risks and rewards are retained. The difference between the sale and repurchase price is treated as interest accrued over the life of the agreement using the effective-yield method. 15. Loans receivable Group Company 2019 2018 2019 2018 Gross Allowance Carrying Carrying Gross Allowance Carrying Carrying for value value for value value impairment impairment Rm Rm Rm Rm Rm Rm Rm Rm Loans to subsidiaries – – – – 6 111 (40) 6 071 6 201 Other 67 (1) 66 81 – – – – 67 (1) 66 81 6 111 (40) 6 071 6 201 Maturity analysis 67 (1) 66 81 6 111 (40) 6 071 6 201 Non-current 41 (1) 40 63 – – – – Current 26 – 26 18 6 111 (40) 6 071 6 201 ESKOM HOLDINGS SOC LTD | 79 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 16. Derivatives held for risk management 2019 2018 Foreign Cross- Commo- Credit Inflation- Total Total exchange currency dity default linked contracts swaps forwards swaps swaps Note Rm Rm Rm Rm Rm Rm Rm Group Net (liability)/asset at beginning of the year (3 093) (2 735) 17 (77) – (5 888) 7 275 Net fair value gain/(loss) 3 480 19 300 (18) (219) (41) 22 502 (16 814) Income statement 39 2 985 16 831 (18) (219) (41) 19 538 (11 114) Statement of comprehensive income 495 2 469 – – – 2 964 (5 700) Finance cost accrued – (150) – – 39 (111) 10 Cash paid/(received) 355 (1 237) 1 – – (881) 3 641 Net asset/(liability) at end of the year 742 15 178 – (296) (2) 15 622 (5 888) Hedge exposure covered 742 15 178 – (296) (2) 15 622 (5 888) Debt securities and borrowings 809 15 178 – (296) (2) 15 689 (5 060) Other (67) – – – – (67) (828) Assets Economic hedging 1 281 49 – 9 39 1 378 245 Cash flow hedging 20 21 264 – – – 21 284 15 333 1 301 21 313 – 9 39 22 662 15 578 Maturity analysis 1 301 21 313 – 9 39 22 662 15 578 Non-current – 20 582 – – – 20 582 13 705 Current 1 301 731 – 9 39 2 080 1 873 Liabilities Economic hedging 471 322 – 305 41 1 139 3 593 Cash flow hedging 88 5 813 – – – 5 901 17 873 559 6 135 – 305 41 7 040 21 466 Maturity analysis 559 6 135 – 305 41 7 040 21 466 Non-current – 5 297 – 305 41 5 643 16 570 Current 559 838 – – – 1 397 4 896 Notional amount m m m m m m m EUR 1 595 1 396 – – – 2 991 3 450 USD 2 427 7 291 – – – 9 718 7 9511 GBP 17 – – – – 17 8 JPY 285 4 944 – – – 5 229 8 027 SEK 136 – – – – 136 190 CHF – – – – – – 1 CAD 1 – – – – 1 1 NOK 5 – – – – 5 1 ZAR – – 161 3 972 1 000 5 133 4 336 1. Includes forward starting cross-currency swaps of USD300 million. 80 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 2019 2018 Foreign Cross- Commo- Credit Inflation- Total Total exchange currency dity default linked contracts swaps forwards swaps swaps Note Rm Rm Rm Rm Rm Rm Rm Company Net (liability)/asset at beginning of the year (3 091) (2 735) 17 (77) – (5 886) 7 263 Net fair value gain/(loss) 3 476 19 300 (18) (219) (41) 22 498 (16 812) Income statement 39 2 981 16 831 (18) (219) (41) 19 534 (11 112) Statement of comprehensive income 495 2 469 – – – 2 964 (5 700) Finance cost accrued – (150) – – 39 (111) 10 Cash paid/(received) 357 (1 237) 1 – – (879) 3 653 Net asset/(liability) at end of the year 742 15 178 – (296) (2) 15 622 (5 886) Hedge exposure covered 742 15 178 – (296) (2) 15 622 (5 886) Debt securities and borrowings 809 15 178 – (296) (2) 15 689 (5 060) Other (67) – – – – (67) (826) Assets Economic hedging 1 281 49 – 9 39 1 378 247 Cash flow hedging 20 21 264 – – – 21 284 15 333 1 301 21 313 – 9 39 22 662 15 580 Maturity analysis 1 301 21 313 – 9 39 22 662 15 580 Non-current – 20 582 – – – 20 582 13 705 Current 1 301 731 – 9 39 2 080 1 875 Liabilities Economic hedging 471 322 – 305 41 1 139 3 593 Cash flow hedging 88 5 813 – – – 5 901 17 873 559 6 135 – 305 41 7 040 21 466 Maturity analysis 559 6 135 – 305 41 7 040 21 466 Non-current – 5 297 – 305 41 5 643 16 570 Current 559 838 – – – 1 397 4 896 Notional amount m m m m m m m EUR 1 593 1 396 – – – 2 989 3 446 USD 2 427 7 291 – – – 9 718 7 9501 GBP 16 – – – – 16 7 JPY 285 4 944 – – – 5 229 8 027 SEK 136 – – – – 136 190 CHF – – – – – – 1 CAD 1 – – – – 1 1 NOK 5 – – – – 5 1 ZAR – – 161 3 972 1 000 5 133 4 336 The hedging practices and accounting treatment are disclosed in note 2.10.3 in the accounting policies. The derivative instruments used to hedge the various financial risks are set out as follows: Derivative instrument Financial risk hedged Exposure Foreign exchange contracts Market (currency) Electricity generation activity purchases and loans denominated in foreign currencies Cross-currency swaps Market (currency and Foreign fixed rate bonds and other foreign fixed or floating borrowings interest rate) Commodity forwards Market (commodity) Electricity sales in terms of agreements where the sales price is influenced by the market price for aluminium Credit default swaps Credit Event of default by Eskom on debt securities and borrowings Inflation-linked swaps Market (interest rate) Finance cost that are dependent on current interest rates 1. Includes forward starting cross-currency swaps of USD300 million. ESKOM HOLDINGS SOC LTD | 81 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 16. Derivatives held for risk management (continued) Cash flow hedges Contractual cash flows are a function of foreign exchange and interest rates and are a point in time calculation that are impacted by market conditions at that time. This may result in future contractual cash outflows or inflows even though the fair value of the derivative may be reflected as an asset or liability. The periods in which the cash flows of derivatives designated as cash flow hedges are expected to occur are: Group and company Carrying Undiscounted 0–3 4 – 12 1–5 >5 amount cash flows months months years years Rm Rm Rm Rm Rm Rm 2019 Foreign exchange contracts Assets 20 27 16 11 – – Liabilities (88) (73) (10) (63) – – Cross-currency swaps Assets 21 264 35 081 (71) 551 13 404 21 197 Liabilities (5 813) (7 557) (216) (5 228) (6 622) 4 509 15 383 27 478 (281) (4 729) 6 782 25 706 2018 Foreign exchange contracts Assets 36 38 24 14 – – Liabilities (638) (625) (163) (462) – – Cross-currency swaps Assets 15 297 14 528 (26) 1 098 6 705 6 751 Liabilities (17 235) (17 163) (295) (5 528) (15 417) 4 077 (2 540) (3 222) (460) (4 878) (8 712) 10 828 The periods in which the cash flows associated with derivatives are expected to impact profit or loss are: Group and company Carrying Undiscounted 0–3 4 – 12 1– 5 >5 amount cash flows months months years years Rm Rm Rm Rm Rm Rm 2019 Foreign exchange contracts Assets 20 8 558 16 11 276 8 255 Liabilities (88) (73) (10) (63) – – Cross-currency swaps Assets 21 264 35 081 (71) 551 13 404 21 197 Liabilities (5 813) (7 557) (216) (5 228) (6 622) 4 509 15 383 36 009 (281) (4 729) 7 058 33 961 2018 Foreign exchange contracts Assets 36 8 790 24 14 282 8 470 Liabilities (638) (625) (163) (462) – – Cross-currency swaps Assets 15 297 14 528 (26) 1 098 6 705 6 751 Liabilities (17 235) (17 163) (295) (5 528) (15 417) 4 077 (2 540) 5 530 (460) (4 878) (8 430) 19 298 Ineffective cash flow hedges During the year a loss of R950 million (2018: R670 million) was recognised in profit or loss as ineffectiveness arising from cash flow hedges (refer to note 39). There were no transactions, in the current or comparative financial years, for which cash flow hedge accounting had to be ceased as a result of highly probable cash flows no longer being expected to occur. 82 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 Day-one gain/loss The group recognises a day-one gain/loss on initial recognition of cross-currency swaps held as hedging instruments where applicable. Group and company Rm Loss at 31 March 2017 (727) Day-one loss recognised (95) Amortised to profit or loss 115 Loss at 31 March 2018 (707) Day-one loss recognised (580) Amortised to profit or loss 141 Loss at 31 March 2019 (1 146) 17. Finance lease receivables Group and company 2019 2018 Gross Unearned Allowance Carrying Gross Unearned Carrying receivables finance for value receivables finance value income impairment income Rm Rm Rm Rm Rm Rm Rm Non-current 593 (216) (3) 374 671 (263) 408 Between one and five years 286 (145) (1) 140 302 (163) 139 After five years 307 (71) (2) 234 369 (100) 269 Current Within one year 79 (48) – 31 80 (51) 29 672 (264) (3) 405 751 (314) 437 The average implicit interest rate for the group and company was 13% (2018: 13%). 18. Payments made in advance 2019 2018 Securing Environ- Other Total Total debt raised mental rehabilitation trust fund Rm Rm Rm Rm Rm Group Balance at beginning of the year 1 150 882 1 132 3 164 4 029 Payments made 1 179 – 146 1 325 1 314 Expense recognised (81) – (249) (330) (380) Transferred to the statement of financial position (640) – (244) (884) (1 799) Balance at end of the year 1 608 882 785 3 275 3 164 Maturity analysis 1 608 882 785 3 275 3 164 Non-current 668 882 184 1 734 1 746 Current 940 – 601 1 541 1 418 Company Balance at beginning of the year 1 150 882 1 025 3 057 3 814 Payments made 1 179 – 143 1 322 1 298 Expense recognised (81) – (221) (302) (274) Transferred to the statement of financial position (640) – (244) (884) (1 781) Balance at end of the year 1 608 882 703 3 193 3 057 Maturity analysis 1 608 882 703 3 193 3 057 Non-current 668 882 183 1 733 1 729 Current 940 – 520 1 460 1 328 ESKOM HOLDINGS SOC LTD | 83 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 19. Trade and other receivables 2019 2018 Receivable Amounts Allowance Carrying Receivable Amounts Allowance Carrying before not for value before not for value collect- meeting impairment collect- meeting impairment ability collect- ability collect adjust- ability adjust- ability ments criteria1 ments criteria1 Rm Rm Rm Rm Rm Rm Rm Rm Group Financial instruments Trade receivables International 1 753 – (711) 1 042 1 918 – (25) 1 893 Local large power users 35 223 (15 873) (3 258) 16 092 27 219 (8 124) (4 206) 14 889 Municipalities 27 744 (15 873) (3 006) 8 865 20 061 (8 124) (4 099) 7 838 Other 7 479 – (252) 7 227 7 158 – (107) 7 051 Local small power users 16 291 (9 293) (4 220) 2 778 14 910 (8 160) (4 193) 2 557 Soweto 13 561 (9 293) (3 473) 795 12 442 (8 137) (3 553) 752 Other 2 730 – (747) 1 983 2 468 (23) (640) 1 805 53 267 (25 166) (8 189) 19 912 44 047 (16 284) (8 424) 19 339 Other receivables 2 200 – (189) 2 011 948 – (205) 743 55 467 (25 166) (8 378) 21 923 44 995 (16 284) (8 629) 20 082 Non-financial instruments VAT 53 – – 53 43 – – 43 55 520 (25 166) (8 378) 21 976 45 038 (16 284) (8 629) 20 125 Company Trade receivables International 1 753 – (711) 1 042 1 918 – (25) 1 893 Local large power users 35 223 (15 873) (3 258) 16 092 27 219 (8 124) (4 206) 14 889 Municipalities 27 744 (15 873) (3 006) 8 865 20 061 (8 124) (4 099) 7 838 Other 7 479 – (252) 7 227 7 158 – (107) 7 051 Local small power users 16 291 (9 293) (4 220) 2 778 14 910 (8 160) (4 193) 2 557 Soweto 13 561 (9 293) (3 473) 795 12 442 (8 137) (3 553) 752 Other 2 730 – (747) 1 983 2 468 (23) (640) 1 805 53 267 (25 166) (8 189) 19 912 44 047 (16 284) (8 424) 19 339 Other receivables 3 419 – (194) 3 225 2 286 – (196) 2 090 56 686 (25 166) (8 383) 23 137 46 333 (16 284) (8 620) 21 429 Group and company 2019 2018 Note Rm Rm Reconciliation of movements in amounts not meeting collectability criteria Balance at beginning of the year 16 284 10 937 Revenue not recognised 32 8 914 3 635 Finance income not recognised 40 2 593 2 137 Cash basis revenue recognised 32 (2 472) (358) Writeoffs (153) (67) Balance at end of the year 25 166 16 284 Refer to note 5.1.2 for a reconciliation of the movements in allowance for impairment. 1. Refer to note 2.19. 84 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 20. Inventories 2019 2018 Coal and Nuclear Maintenance Total Total liquid fuel spares and fuel consumables Note Rm Rm Rm Rm Rm Group Carrying value at beginning of the year 10 815 2 517 11 016 24 348 22 359 Adoption of IFRS 151 – – (315) (315) – Changes in working capital (188) (763) 1 523 572 (579) Transfer from future fuel supplies 10 1 700 9 – 1 709 2 316 Provisions capitalised 29 10 173 – 183 258 Net impairment loss 36 – – (15) (15) (6) 12 337 1 936 12 209 26 482 24 348 Company Carrying value at beginning of the year 10 815 2 517 10 790 24 122 22 156 Changes in working capital (188) (763) 1 203 252 (602) Transfer from future fuel supplies 10 1 700 9 – 1 709 2 316 Provisions capitalised 29 10 173 – 183 258 Net impairment loss 36 – – (15) (15) (6) 12 337 1 936 11 978 26 251 24 122 21. Cash and cash equivalents Group Company 2019 2018 2019 2018 Rm Rm Rm Rm Bank balances 2 018 15 778 1 504 15 334 Unsettled deals 13 45 13 45 2 031 15 823 1 517 15 379 1. Refer to note 50.3. ESKOM HOLDINGS SOC LTD | 85 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 22. Assets and liabilities held-for-sale 2019 2018 Eskom Inter- Total Total Finance company Company transactions Rm Rm Rm Rm Statements of financial position Group Assets Non-current 8 586 – 8 586 8 625 Property, plant and equipment – – – 40 Loans receivable 8 566 – 8 566 8 569 Trade and other receivables 3 – 3 3 Deferred tax 17 – 17 13 Current 339 (54) 285 301 Loans receivable 186 – 186 190 Taxation 1 – 1 12 Trade and other receivables 3 – 3 5 Cash and cash equivalents 149 (54) 95 94 Total assets 8 925 (54) 8 871 8 926 Liabilities Non-current Debt securities and borrowings 1 426 – 1 426 843 Current 6 368 (6 115) 253 839 Debt securities and borrowings 6 361 (6 112) 249 832 Trade and other payables 7 (3) 4 7 Total liabilities 7 794 (6 115) 1 679 1 682 Company Assets Non-current Property, plant and equipment – – – 40 Eskom Finance Company SOC Ltd (EFC) The disposal of the assets and liabilities of EFC was not concluded at 31 March 2019. The disposal process followed during the year did not solicit interest from buyers that either had the necessary expertise to originate loans and manage a loan book, or could acquire and manage the loan book in terms of Eskom’s requirements or had sufficient financial reserves to purchase the company. Eskom reviewed the process followed to understand the reasons behind the lack of interest and, based on the findings, are now following a different process with requirements that should result in interest from credible parties. Eskom remains committed to the disposal of EFC as one of its options to address its liquidity challenges. The revised disposal strategy is expected to result in a successful disposal process and is estimated to be completed by the end of 31 March 2020. Eskom residential properties Certain residential properties that were regarded as surplus to the group’s operational needs were presented as held-for-sale in 2018 in line with the decision by the shareholder to dispose of non-core assets. Although Eskom’s intention to sell these properties remains unchanged, it was assessed that the properties not yet sold no longer meet the classification as held-for-sale in terms of IFRS 5 and have consequently been transferred back to property, plant and equipment. 86 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 23. Service concession arrangements The group operates a service concession for the generation and transmission of electricity through its operations in Uganda. Eskom Uganda Ltd (Eskom Uganda) entered into an operation and maintenance agreement with Uganda Electricity Generation Company Ltd (UEGCL) in 2002, which is linked to a power purchase agreement concluded with Uganda Electricity Transmission Company Ltd (UETCL). In terms of the agreements, Eskom Uganda operates and maintains two hydro-electric power stations in Uganda, from which it supplies electricity to UETCL. The dams, powerhouses, related switchyard facilities, high voltage substations, land and movable property together constitute the ‘energy assets’ in terms of the agreement. The concession period is 20 years (ending in December 2023). Eskom Uganda is entitled to receive revenue from UETCL, based on electricity supplied at tariffs regulated by the Electricity Regulatory Authority of Uganda. It also receives a fee to cover it for investment in additional energy assets where required. This has been recognised as an intangible asset. The plant remains the property of and will revert to UEGCL at the end of the concession period. At that point Eskom Uganda will have no further obligation in respect of the plant. 2019 2018 Rm Rm Summarised statements of financial position Assets Intangible assets 217 137 Taxation 10 1 Inventories 28 23 Payments made in advance 1 1 Trade and other receivables 56 43 Cash and cash equivalents 111 72 423 277 Liabilities Debt securities and borrowings 14 14 Deferred tax 13 13 Provisions 12 11 Employee benefit obligations 4 4 Trade and other payables 94 24 137 66 Summarised income statements Revenue 205 219 Profit for the year before tax 50 63 Taxation (21) (18) Profit for the year after tax 29 45 The above transactions and balances are included in the respective line items in the statements of financial position and income statements. ESKOM HOLDINGS SOC LTD | 87 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 24. Share capital Group and company 2019 2018 Shares Shares Authorised ordinary shares 100 000 000 000 100 000 000 000 Issued ordinary shares 83 000 000 001 83 000 000 001 The unissued share capital is under the control of the Government of the Republic of South Africa, represented by the DPE, as the sole shareholder. 25. Debt securities and borrowings Group Company 2019 2018 2019 2018 Rm Rm Rm Rm Eskom bonds 152 283 146 172 152 283 146 172 Commercial paper 1 105 2 275 3 714 4 423 Eurorand zero coupon bonds 4 399 5 711 4 399 5 711 Foreign bonds 79 963 47 608 79 963 47 608 Development financing institutions 135 661 119 854 135 661 119 854 Export credit facilities 31 782 31 735 31 782 31 735 Floating rate notes 4 047 2 005 4 047 2 005 Other loans 31 370 33 324 33 198 35 077 440 610 388 684 445 047 392 585 Maturity analysis 440 610 388 684 445 047 392 585 Non-current 387 208 348 112 387 161 348 060 Current 53 402 40 572 57 886 44 525 Group Company Currency Security Interest Nominal Maturity Carrying value Carrying value number rate date 2019 2018 2019 2018 2019 2018 2019 2018 % % m m Rm Rm Rm Rm Eskom bonds 152 283 146 172 152 283 146 172 ZAR ES181 – 9.38 – 2 339 Apr 18 – 2 436 – 2 436 ZAR ECN20 10.01 10.01 5 000 5 000 Mar 20 5 009 4 993 5 009 4 993 ZAR E1702 10.13 10.13 8 792 8 798 Aug 21 9 324 9 560 9 324 9 560 ZAR ECN22 10.17 10.17 5 000 5 000 Mar 22 4 972 4 958 4 972 4 958 ZAR ES231 9.39 9.41 17 927 16 904 Jan 23 18 598 17 597 18 598 17 597 ZAR ECN24 10.37 10.37 5 000 5 000 Mar 24 4 945 4 933 4 945 4 933 ZAR ES261 9.27 9.22 28 851 26 198 Apr 26 27 917 25 226 27 917 25 226 ZAR EL281 2.55 2.55 7 563 5 718 May 28 7 692 5 946 7 692 5 946 ZAR EL291 1.90 1.90 5 167 4 911 Nov 29 5 250 5 000 5 250 5 000 ZAR EL301 2.30 2.30 4 861 4 641 Jul 30 4 887 4 667 4 887 4 667 ZAR EL311 2.10 2.10 5 180 4 934 Jun 31 5 184 4 936 5 184 4 936 ZAR ECN32 2.95 2.95 5 951 5 696 Mar 32 5 964 5 708 5 964 5 708 ZAR ES331 9.18 9.12 33 904 32 533 Sep 33 29 569 28 374 29 569 28 374 ZAR EL361 2.25 2.25 4 613 4 411 Jan 36 4 646 4 444 4 646 4 444 ZAR EL371 2.25 2.25 4 684 4 483 Jan 37 4 631 4 428 4 631 4 428 ZAR ES421 10.03 9.99 15 201 14 359 Apr 42 13 695 12 966 13 695 12 966 Commercial paper 1 105 2 275 3 714 4 423 ZAR n/a – 7.70 – 1 705 Nov 183 – 1 667 – 1 667 ZAR ESNOICP1 8.07 7.73 1 130 625 Sep 19 1 105 608 1 105 608 ZAR n/a4 8.09 7.74 2 709 2 215 Feb 203 – – 2 609 2 148 Eurorand zero coupon bonds2 4 399 5 711 4 399 5 711 ZAR n/a – 13.93 – 2 000 Dec 18 – 1 811 – 1 811 ZAR n/a 13.33 13.33 8 000 8 000 Aug 27 2 800 2 471 2 800 2 471 ZAR n/a 11.89 11.89 7 500 7 500 Dec 32 1 599 1 429 1 599 1 429 88 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 Group Company Currency Security Interest Nominal Maturity Carrying value Carrying value number rate date 2019 2018 2019 2018 2019 2018 2019 2018 % % m m Rm Rm Rm Rm Foreign bonds 79 963 47 608 79 963 47 608 USD n/a 5.75 5.75 1 750 1 750 Jan 21 25 541 20 920 25 541 20 920 USD n/a 6.75 6.75 1 000 1 000 Aug 23 14 541 11 949 14 541 11 949 USD n/a 7.13 7.13 1 250 1 250 Feb 25 18 030 14 739 18 030 14 739 USD n/a 8.45 – 500 – Aug 28 7 298 – 7 298 – USD n/a1 6.35 – 1 000 – Aug 28 14 553 – 14 553 – Development financing institutions3 135 661 119 854 135 661 119 854 USD n/a1 4.67 3.96 500 500 Dec 19 7 242 5 915 7 242 5 915 USD n/a1 5.71 4.87 965 965 Jul 21 13 937 11 317 13 937 11 317 ZAR n/a1 8.50 8.48 1 267 1 400 Aug 28 1 284 1 419 1 284 1 419 USD n/a1 3.96 3.12 184 203 Aug 28 2 679 2 425 2 679 2 425 EUR n/a1 – 2.11 – 3 Dec 28 – 44 – 44 EUR n/a1 – – 603 630 Aug 29 9 811 9 216 9 811 9 216 ZAR n/a1 7.77 7.69 7 369 8 071 Aug 29 7 462 8 171 7 462 8 171 ZAR n/a1 10.10 10.10 3 935 3 935 Sep 29 3 929 3 928 3 929 3 928 ZAR n/a 10.37 10.37 15 000 15 000 Jan 31 15 259 15 252 15 259 15 252 EUR n/a1 1.50 1.50 470 470 Mar 31 7 268 6 568 7 268 6 568 USD n/a1 2.69 2.55 8 8 Aug 31 110 98 110 98 ZAR n/a 7.55 7.53 1 193 1 287 Mar 32 1 197 1 291 1 197 1 291 USD n/a1 4.84 4.52 1 550 900 Sep 33 22 278 10 673 22 278 10 673 USD n/a1 5.71 4.87 9 10 Aug 36 127 108 127 108 ZAR n/a1 11.15 11.13 4 998 5 292 Aug 36 4 995 5 288 4 995 5 288 USD n/a1 3.29 2.03 184 171 May 38 2 700 2 034 2 700 2 034 ZAR n/a1 9.16 9.16 30 011 31 554 May 38 31 151 32 741 31 151 32 741 ZAR n/a1 10.18 10.05 3 039 2 387 Nov 40 3 114 2 447 3 114 2 447 USD n/a1 0.25 0.25 35 35 May 51 506 416 506 416 USD n/a1 0.25 0.25 42 42 Aug 51 612 503 612 503 Export credit facilities3 31 782 31 735 31 782 31 735 JPY n/a 1.58 1.58 4 944 7 418 May 22 644 823 644 823 EUR n/a 0.89 0.78 50 69 Sep 23 775 964 775 964 EUR n/a 0.66 0.62 9 11 Jul 24 142 151 142 151 EUR n/a 4.73 4.73 723 839 Jan 27 11 153 11 545 11 153 11 545 EUR n/a 2.49 2.50 575 645 Jul 27 8 771 8 811 8 771 8 811 ZAR n/a 9.35 9.63 1 765 1 947 Jul 27 1 640 1 811 1 640 1 811 USD n/a 2.32 2.32 641 689 Mar 31 8 657 7 630 8 657 7 630 Floating rate notes ZAR n/a1 7.16 9.88 4 000 2 000 Apr 21 4 047 2 005 4 047 2 005 Other loans 31 370 33 324 33 198 35 077 ZAR n/a 13.25 – 3 000 – Apr 19 3 003 – 3 003 – ZAR n/a1 9.35 9.13 15 000 20 000 Feb 20 15 096 20 047 15 096 20 047 ZAR n/a 9.90 9.88 1 000 1 000 Aug 23 1 015 1 015 1 015 1 015 ZAR n/a 10.39 10.36 3 650 3 650 Mar 24 3 658 3 658 3 658 3 658 ZAR n/a 12.80 12.80 1 500 1 500 Oct 24 1 588 1 588 1 588 1 588 ZAR n/a 11.27 11.42 6 850 6 850 Feb 25 6 963 6 965 6 963 6 965 On ZAR n/a4 6.76 6.95 1 875 1 804 demand – – 1 875 1 804 On ZAR n/a – – 47 51 demand 47 51 – – 440 610 388 684 445 047 392 585 1. Government guaranteed. 2. Holders have a right to first charge against revenue and assets of Eskom in terms of section 7 of the Eskom Conversion Act. 3. Latest in a range of maturity dates is indicated for these instruments. 4. Includes, inter alia, instruments issued to subsidiaries. ESKOM HOLDINGS SOC LTD | 89 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 26. Embedded derivatives 2019 2018 Commodity United Total Total and/or States PPI foreign and foreign currency currency Rm Rm Rm Rm Group and company Liability at beginning of the year 4 633 658 5 291 5 414 Net fair value gain (1 625) (232) (1 857) (123) Liability at end of the year 3 008 426 3 434 5 291 Maturity analysis 3 008 426 3 434 5 291 Non-current 945 420 1 365 3 434 Current 2 063 6 2 069 1 857 27. Payments received in advance and contract liabilities and deferred income 2019 2018 Customer Government Other Total Total connections grant Note Rm Rm Rm Rm Rm 27.1 Payments received in advance Group Balance at beginning of the year 3 289 1 002 478 4 769 5 531 Payments received 1 433 2 886 390 4 709 4 006 Transfers to contract liabilities and deferred income 27.2 (193) (2 790) – (2 983) (3 375) Income recognised (861) (3) (234) (1 098) (1 393) Balance at end of the year 3 668 1 095 634 5 397 4 769 Maturity analysis 3 668 1 095 634 5 397 4 769 Non-current 1 909 – 129 2 038 1 766 Current 1 759 1 095 505 3 359 3 003 Company Balance at beginning of the year 3 289 1 002 471 4 762 5 525 Payments received 1 433 2 886 405 4 724 3 999 Transfers to contract liabilities and deferred income 27.2 (193) (2 790) – (2 983) (3 375) Income recognised (861) (3) (234) (1 098) (1 387) Balance at end of the year 3 668 1 095 642 5 405 4 762 Maturity analysis 3 668 1 095 642 5 405 4 762 Non-current 1 909 – 129 2 038 1 766 Current 1 759 1 095 513 3 367 2 996 27.2 Contract liabilities and deferred income Group and company Balance at beginning of the year 2 416 18 589 – 21 005 18 843 Transfers of property, plant and equipment from customers 187 – – 187 – Transfers from payments received in advance 27.1 193 2 790 – 2 983 3 375 Income recognised 38 (172) (1 209) – (1 381) (1 213) Balance at end of the year 2 624 20 170 – 22 794 21 005 Maturity analysis 2 624 20 170 – 22 794 21 005 Non-current 2 417 18 878 – 21 295 19 796 Current 207 1 292 – 1 499 1 209 90 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 28. Employee benefit obligations 2019 2018 Post- Leave Bonus Total Total employment medical benefits Note Rm Rm Rm Rm Rm Group Balance at beginning of the year 14 243 2 266 460 16 969 21 138 Raised to income statement 617 859 433 1 909 233 Reversed to other comprehensive income (1 737) – – (1 737) (1 850) Finance cost 41 1 533 – – 1 533 1 677 Cash paid (522) (938) (424) (1 884) (4 229) Balance at end of the year 14 134 2 187 469 16 790 16 969 Maturity analysis 14 134 2 187 469 16 790 16 969 Non-current 13 546 – – 13 546 13 725 Current 588 2 187 469 3 244 3 244 Company Balance at beginning of the year 13 911 2 083 402 16 396 20 306 Raised to income statement 609 809 378 1 796 164 Reversed to other comprehensive income (1 698) – – (1 698) (1 802) Finance cost 41 1 498 – – 1 498 1 637 Cash paid (510) (892) (372) (1 774) (3 909) Balance at end of the year 13 810 2 000 408 16 218 16 396 Maturity analysis 13 810 2 000 408 16 218 16 396 Non-current 13 242 – – 13 242 13 404 Current 568 2 000 408 2 976 2 992 28.1 Post-employment medical benefits Group Company 2019 2018 2019 2018 Rm Rm Rm Rm The group has anticipated expenditure in terms of continued contributions to medical aid subscriptions in respect of qualifying employees who retire. Amounts recognised in profit or loss: Employee benefit expense 617 656 609 646 Finance cost 1 533 1 644 1 498 1 605 Amounts recognised in other comprehensive income: Remeasurements of post-employment medical benefits (actuarial gain) (1 737) (1 850) (1 698) (1 802) Financial assumptions (1 469) (1 323) (1 440) (1 297) Experience adjustments (268) (527) (258) (505) Measurement of post-employment medical benefits and key actuarial assumptions The estimated present value of the anticipated expenditure for both in-service and retired members was calculated by independent actuaries. The group expects to pay R588 million and the company R568 million in contributions to this plan in the 2020 financial year. Expected maturity analysis of undiscounted post-employment medical benefits: Within one year 588 518 568 507 Between one and two years 637 567 621 552 Between two and five years 2 499 2 247 2 436 2 190 After five years 194 188 189 607 191 638 187 773 197 912 192 939 195 263 191 022 ESKOM HOLDINGS SOC LTD | 91 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 28. Employee benefit obligations (continued) 28.1 Post-employment medical benefits (continued) Risks The medical aid benefits are administered by funds that are legally separated from the group. The boards of the funds are required by law to act in the best interest of the plan participants and are responsible for setting policies including investment, contribution and indexation of the funds. These funds expose the group to a number of risks, the most significant of which are: • changes in bonds’ yields: a decrease in corporate bond yields will increase plan liabilities • inflation risk: the post-employment obligations are linked to inflation and higher inflation will lead to higher liabilities (although, in most cases, caps on the level of inflationary increases are in place to protect the plan against extreme inflation) • life expectancy: the majority of the plans’ obligations are to provide benefits for the life of the member and therefore increases in life expectancy will result in an increase in the plans’ liabilities The expected current service cost for the 2020 financial year is estimated at R405 million for the group and R400 million for the company. Refer to note 4.2 for the sensitivity analysis and principal actuarial assumptions used. 28.2 Leave The group recognises a liability for annual, occasional and service leave. Refer to note 4.3. 28.3 Bonus The bonus consists of the annual bonus that equals one month’s salary for employees on Tuned Assessment of Skills and Knowledge grading levels 1 to 13. Employees on grading levels 14 to 26 can choose to spread their bonus amount over the year or take it as a thirteenth cheque. 28.4 Pension benefits The EPPF is registered in terms of the Pension Funds Act. The assets of the fund are legally separated from the group. All employees are members of the fund. Contributions comprise 20.8% of pensionable emoluments of which members pay 7.3%. The trustees of the EPPF are required by law to act in the best interests of the plan participants. The net benefit asset at the reporting date is not accounted for in the financial statements. The rules of the EPPF state that any deficit on the valuation of the fund will be funded by increases in future contributions or reductions in benefits. If there is a substantial surplus on the valuation of the fund, future contributions may be decreased or benefits may be improved as determined by the trustees of the fund. The fund was valued actuarially on the IAS 19 Employee benefits basis on 31 March 2019 (previous valuation at 31 March 2018). The actuarial present value of retirement benefits at 31 March 2019 was R108 264 million (2018: R113 164 million), while the fair value of the fund’s assets was R142 518 million (2018: R135 327 million). Principal actuarial valuation assumptions Group and company 2019 2018 % % Long-term investment return before tax 11.00 10.50 Future general salary increases 7.90 8.10 Future pension increases (inflation) 6.40 6.60 Assumptions regarding future mortality have been based on published mortality tables and statistics derived from experience. For details regarding current longevities underlying the values of the pension benefit obligation at the reporting date refer to note 4.2. 92 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 29. Provisions 2019 2018 Power station-related Mine-related Coal- Other Total Total environmental closure, related restoration1 pollution obligations2 Nuclear Other control and plant generating rehabilitation1 plant Note Rm Rm Rm Rm Rm Rm Rm Group Balance at beginning of the year 15 928 13 375 12 737 3 398 4 241 49 679 53 078 Charged to income statement 420 91 39 (2 458) 409 (1 499) (2 259) Raised 534 147 149 – 772 1 602 1 823 Reversed – (13) (77) (2 429) (358) (2 877) (4 564) Change in discount rate (114) (43) (33) (29) (5) (224) 482 Capitalised to property, plant and equipment 8 (75) (222) – – 1 626 1 329 881 Raised – 14 – – 6 851 6 865 5 296 Reversed – (127) – – (5 225) (5 352) (4 693) Change in discount rate (75) (109) – – – (184) 278 Capitalised to future fuel supplies 10 – – 475 – – 475 51 Raised – – 1 318 – – 1 318 39 Reversed – – (782) – – (782) (7) Change in discount rate – – (61) – – (61) 19 Capitalised to inventories 20 173 – 10 – – 183 258 Raised 173 – 67 – – 240 277 Reversed – – (57) – – (57) (19) Finance cost 41 1 494 1 216 965 230 35 3 940 4 095 Cash paid (143) – (320) (846) (1 548) (2 857) (6 425) Balance at end of the year 17 797 14 460 13 906 324 4 763 51 250 49 679 Maturity analysis 17 797 14 460 13 906 324 4 763 51 250 49 679 Non-current 17 590 14 460 13 192 – 346 45 588 44 370 Current 207 – 714 324 4 417 5 662 5 309 1. Refer to note 4.4 for critical accounting estimates and assumptions. 2. Refer to note 4.5 for critical accounting estimates and assumptions. ESKOM HOLDINGS SOC LTD | 93 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 29. Provisions (continued) 2019 2018 Power station-related Mine-related Coal- Other Total Total environmental closure, related restoration1 pollution obligations2 Nuclear Other control and plant generating rehabilitation1 plant Note Rm Rm Rm Rm Rm Rm Rm Company Balance at beginning of the year 15 928 13 375 12 737 3 398 4 115 49 553 52 481 Charged to income statement 420 91 39 (2 458) 399 (1 509) (1 813) Raised 534 147 149 – 705 1 535 1 784 Reversed – (13) (77) (2 429) (301) (2 820) (4 079) Change in discount rate (114) (43) (33) (29) (5) (224) 482 Capitalised to property, plant and equipment 8 (75) (222) – – 1 626 1 329 881 Raised – 14 – – 6 851 6 865 5 296 Reversed – (127) – – (5 225) (5 352) (4 693) Change in discount rate (75) (109) – – – (184) 278 Capitalised to future fuel supplies 10 – – 475 – – 475 51 Raised – – 1 318 – – 1 318 39 Reversed – – (782) – – (782) (7) Change in discount rate – – (61) – – (61) 19 Capitalised to inventories 20 173 – 10 – – 183 258 Raised 173 – 67 – – 240 277 Reversed – – (57) – – (57) (19) Finance cost 41 1 494 1 216 965 230 35 3 940 4 095 Cash paid (143) – (320) (846) (1 548) (2 857) (6 400) Balance at end of the year 17 797 14 460 13 906 324 4 627 51 114 49 553 Maturity analysis 17 797 14 460 13 906 324 4 627 51 114 49 553 Non-current 17 590 14 460 13 192 – 316 45 558 44 359 Current 207 – 714 324 4 311 5 556 5 194 30. Finance lease payables 2019 2018 Gross Future Carrying Gross Future Carrying payables finance value payables finance value charges charges Rm Rm Rm Rm Rm Rm Group and company Non-current 18 389 (9 259) 9 130 26 680 (17 147) 9 533 Between one and five years 6 876 (4 969) 1 907 8 618 (6 964) 1 654 After five years 11 513 (4 290) 7 223 18 062 (10 183) 7 879 Current Within one year 1 729 (1 397) 332 2 102 (1 816) 286 20 118 (10 656) 9 462 28 782 (18 963) 9 819 The average implicit interest rate for the group and company was 15% (2018:15%). The lease payables are payable on a monthly basis over a maximum period of 15 years. 1. Refer to note 4.4 for critical accounting estimates and assumptions. 2. Refer to note 4.5 for critical accounting estimates and assumptions. 94 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 Group Company 2019 2018 2019 2018 Note Rm Rm Rm Rm 31. Trade and other payables Financial instruments 36 785 32 431 38 217 33 316 Trade and other payables 23 621 20 065 24 094 20 774 Accruals 8 507 8 194 9 466 8 370 Deposits 4 657 4 172 4 657 4 172 Non-financial instruments VAT 1 095 886 1 022 829 37 880 33 317 39 239 34 145 Maturity analysis 37 880 33 317 39 239 34 145 Non-current 1 031 1 201 1 031 1 201 Current 36 849 32 116 38 208 32 944 32. Revenue Redistributors1 71 265 70 234 71 265 70 234 Invoiced to customers 77 231 72 935 77 231 72 935 Amounts not meeting collectability criteria 19 (8 438) (3 059) (8 438) (3 059) Recognised on a cash received basis 19 2 472 358 2 472 358 Residential 5 490 5 435 5 490 5 435 Invoiced to customers 5 966 6 011 5 966 6 011 Amounts not meeting collectability criteria 19 (476) (576) (476) (576) Industrial 36 168 33 996 36 168 33 996 Mining 26 550 26 277 26 550 26 277 Commercial 12 385 11 726 12 385 11 726 Agricultural 8 682 8 154 8 682 8 154 International 8 241 9 530 8 241 9 530 Rail 3 119 3 151 3 119 3 151 Public lighting 160 179 160 179 Post-paid electricity sales 172 060 168 682 172 060 168 682 Prepaid electricity sales 8 645 8 395 8 645 8 395 Total electricity sales 180 705 177 077 180 705 177 077 Connections 2 300 900 2 300 900 Other 280 1 619 280 1 619 Gross revenue 183 285 179 596 183 285 179 596 Capitalised to property, plant and equipment (3 393) (2 172) (3 393) (2 172) 179 892 177 424 179 892 177 424 Sales of electricity to local customers are included in the group customer services operating segment. International sales are included in the energy purchases/sales segment. Other revenue consists of reconnection fees and ad hoc sundry revenue. Connections occur mainly within the transmission and distribution operating segments. Refer to note 50 for details regarding the adoption of IFRS 15. 33. Other income Insurance proceeds 24 – 1 189 674 Services income 284 290 – – Management fee income – – 131 110 Operating lease income 360 336 257 244 Dividend income 49 37 35 27 Other 1 4332 709 1 4612 732 2 150 1 372 3 073 1 787 1. Represents metropolitan and municipal customers. 2. Includes R902 million recovery from a supplier. ESKOM HOLDINGS SOC LTD | 95 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 Group Company 2019 2018 2019 2018 Note Rm Rm Rm Rm 34. Primary energy Own generation costs 70 796 62 957 70 796 62 957 Generation costs 62 991 54 896 62 991 54 896 Environmental levy 47 7 805 8 061 7 805 8 061 International electricity purchases 3 740 2 768 3 740 2 768 Independent power producers 24 952 19 317 24 952 19 317 Other – 160 – 160 99 488 85 202 99 488 85 202 Generation costs relate to the cost of coal (including logistics), uranium, water and liquid fuels that are used in the generation of electricity. Eskom uses a combination of short-, medium- and long- term agreements with suppliers for coal purchases and long-term agreements with the Department of Water Affairs to reimburse the department for the cost incurred in supplying water to Eskom. 35. Employee benefit expense Salaries 24 850 23 180 22 415 20 999 Overtime 2 237 2 069 1 815 1 696 Annual bonus 1 370 1 179 1 199 1 028 Post-employment medical benefits 617 656 609 646 Leave 859 833 809 773 Performance bonus – (439) – (426) Pension benefits 2 421 1 348 2 192 1 172 Direct costs of employment 32 354 28 826 29 039 25 888 Direct training and development 116 155 91 121 Temporary and contract staff costs 2 831 2 806 695 855 Other staff costs 1 357 868 1 177 792 Gross employee benefit expense 36 658 32 655 31 002 27 656 Capitalised to property, plant and equipment (3 386) (3 201) (3 386) (3 201) 33 272 29 454 27 616 24 455 36. Impairment of assets 36.1 Financial assets Loans receivable 31 18 40 – Finance lease receivables 3 – 3 – Trade and other receivables 19 (309) 517 (295) 510 Insurance investments 5 – – – (270) 535 (252) 510 Bad debts recovered – trade and other receivables (8) (7) (8) (7) (278) 528 (260) 503 36.2 Other assets Raised 15 64 15 64 Property, plant and equipment 8 – 58 – 58 Inventories 20 15 6 15 6 Reversed Property, plant and equipment 8 (168) (39) (168) (39) (153) 25 (153) 25 96 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 Group Company 2019 2018 2019 2018 Note Rm Rm Rm Rm 37. Other expenses Managerial, technical and other fees 743 709 709 651 Operating lease expense 1 277 1 040 680 357 Auditors’ remuneration1 156 149 144 136 Net loss on disposal of property, plant and equipment and intangible assets 318 148 640 147 Repairs and maintenance, transport and other expenses 15 720 16 182 24 846 24 307 18 214 18 228 27 019 25 598 38. Depreciation and amortisation expense Depreciation of property, plant and equipment 8 30 511 23 721 30 440 23 722 Amortisation of intangible assets 9 454 461 431 438 Contract liabilities and deferred income recognised (government grant) 27.2 (1 209) (1 050) (1 209) (1 050) 29 756 23 132 29 662 23 110 39. Net fair value and foreign exchange loss on financial instruments Gain/(loss) on instruments carried at fair value 21 335 (10 855) 21 377 (10 962) Financial trading assets 4 80 4 80 Financial trading liabilities (18) (53) (18) (53) Insurance investments (46) 109 – – Derivatives held for risk management 16 19 538 (11 114) 19 534 (11 112) Embedded derivatives 1 857 123 1 857 123 (Loss)/gain on foreign currency translation of instruments carried at amortised cost (24 118) 9 426 (24 119) 9 433 Trade and other receivables 3 (5) – (5) Cash and cash equivalents 620 10 620 10 Trade and other payables (119) (114) (117) (107) Debt securities and borrowings (24 622) 9 535 (24 622) 9 535 Amounts recycled from cash flow hedge reserve (626) (346) (626) (346) Amortisation of effective portion of terminated cash flow hedges 324 324 324 324 Ineffective portion of cash flow hedges (950) (670) (950) (670) (3 409) (1 775) (3 368) (1 875) 40. Finance income Treasury investments – 199 – 199 Financial trading assets 3 – 3 – Insurance investments 601 571 – – Loans receivable 865 865 461 468 Finance lease receivables 51 56 51 56 Trade and other receivables 347 461 347 461 Invoiced to customers 2 940 2 598 2 940 2 598 Amounts not meeting collectability criteria 19 (2 593) (2 137) (2 593) (2 137) Cash and cash equivalents 855 720 817 690 2 722 2 872 1 679 1 874 1. There were no non-audit services rendered by the group’s statutory auditors. ESKOM HOLDINGS SOC LTD | 97 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 Group Company 2019 2018 2019 2018 Note Rm Rm Rm Rm 41. Finance cost Debt securities and borrowings 31 845 27 577 31 997 27 729 Eskom bonds 12 895 12 154 12 895 12 154 Promissory notes – 19 – 19 Commercial paper 263 502 299 532 Eurorand zero coupon bonds 689 661 689 661 Foreign bonds 4 538 3 389 4 538 3 389 Development financing institutions 8 825 7 533 8 825 7 533 Export credit facilities 1 647 1 673 1 647 1 673 Floating rate notes 373 5 373 5 Other loans 2 615 1 641 2 731 1 763 Derivatives held for risk management 6 218 5 947 6 218 5 947 Employee benefit obligations 28 1 533 1 677 1 498 1 637 Provisions 29 3 940 4 095 3 940 4 095 Finance lease payables 1 444 1 835 1 444 1 835 Trade and other payables 637 377 636 377 Gross finance cost 45 617 41 508 45 733 41 620 Capitalised to property, plant and equipment 8 (15 378) (15 547) (15 378) (15 547) 30 239 25 961 30 355 26 073 42. Income tax Recognised in profit or loss Current tax 412 664 – – Deferred tax 13 (8 831) (930) (9 262) (1 148) Reversal of temporary differences 6 052 14 645 5 608 14 427 Tax losses (14 883) (15 575) (14 870) (15 575) (8 419) (266) (9 262) (1 148) Reconciliation between standard and effective tax rate: R million Taxation income at standard rate (8 161) (729) (9 086) (1 612) Non-taxable income1 (484) (185) (458) (170) Expenses not deductible for tax purposes2 226 648 282 634 Taxation income per the income statement (8 419) (266) (9 262) (1 148) % Taxation income at standard rate 28.00 28.00 28.00 28.00 Non-taxable income1 1.66 7.11 1.41 2.95 Expenses not deductible for tax purposes2 (0.78) (24.89) (0.87) (11.01) Taxation income per the income statement 28.88 10.22 28.54 19.94 1. Non-taxable income in 2019 includes a recovery from a supplier with a tax impact of R253 million. 2. Non-deductible expenditure in 2018 includes amounts under investigation with a tax impact of R392 million. 98 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 2019 2018 Before Tax Net Before Tax Net tax of tax tax of tax Rm Rm Rm Rm Rm Rm Recognised in other comprehensive income Group Cash flow hedges 3 309 (926) 2 383 (6 357) 1 781 (4 576) Net change in fair value 2 964 (830) 2 134 (5 700) 1 596 (4 104) Net amount transferred to profit or loss 626 (175) 451 346 (96) 250 Net amount transferred to initial carrying amount of hedged items (281) 79 (202) (1 003) 281 (722) Foreign currency translation differences 50 – 50 (25) – (25) Re-measurement of post-employment medical benefits 1 737 (485) 1 252 1 850 (518) 1 332 5 096 (1 411) 3 685 (4 532) 1 263 (3 269) Company Available-for-sale financial assets Net change in fair value – – – (3) 1 (2) Cash flow hedges 3 309 (926) 2 383 (6 357) 1 781 (4 576) Changes in fair value 2 964 (830) 2 134 (5 700) 1 596 (4 104) Net amount transferred to profit or loss 626 (175) 451 346 (96) 250 Net amount transferred to initial carrying amount of hedged items (281) 79 (202) (1 003) 281 (722) Re-measurement of post-employment medical benefits 1 698 (475) 1 223 1 802 (505) 1 297 5 007 (1 401) 3 606 (4 558) 1 277 (3 281) 43. Cash generated from operations Group Company 2019 2018 2019 2018 Rm Rm Rm Rm Loss before tax (29 148) (2 603) (32 451) (5 756) Adjustments for: 58 712 44 710 59 974 46 193 Depreciation and amortisation expense 29 756 23 132 29 662 23 110 Depreciation expense – primary energy 16 16 16 16 Impairment of financial and other assets (excluding bad debts recovered) (423) 560 (405) 535 Net fair value loss on financial instruments 3 409 1 775 3 368 1 875 Net loss on disposal of property, plant and equipment 318 148 640 147 Transfer of assets from non-electricity purchasing customers (1 267) (737) (1 267) (737) Dividend income (49) (37) (35) (27) Increase in employee benefit obligations 1 909 233 1 796 164 Decrease in provisions (1 499) (2 259) (1 509) (1 813) Decrease in contract liabilities and deferred income (172) (163) (172) (163) Payments made in advance recognised in profit or loss 330 380 302 274 Payments received in advance recognised in profit or loss (1 098) (1 393) (1 098) (1 387) Finance income (2 722) (2 872) (1 679) (1 874) Finance cost 30 239 25 961 30 355 26 073 Share of profit of equity-accounted investees (35) (34) – – 29 564 42 107 27 523 40 437 Changes in working capital: 3 693 (2 448) 4 800 (2 580) Payments made in advance (137) (345) (134) (329) (Decrease)/increase in inventories (496) 747 (176) 770 Increase in trade and other receivables (1 437) (944) (1 311) (969) Increase/(decrease) in trade and other payables 4 088 (46) 4 621 (530) Expenditure incurred on employee benefit obligations (1 884) (4 229) (1 774) (3 909) Expenditure incurred on provisions (1 150) (1 637) (1 150) (1 612) Payments received in advance 4 709 4 006 4 724 3 999 33 257 39 659 32 323 37 857 ESKOM HOLDINGS SOC LTD | 99 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 44. Net debt reconciliation Debt Finance Treasury Financial Financial Derivatives Payments Cash Net securities lease investments trading trading held for risk made in and cash debt and payables2 assets3 liabilities management4 3 advance equivalents6 5 borrowings 1 Rm Rm Rm Rm Rm Rm Rm Rm Rm Group Balance at 1 April 2017 355 300 10 065 (6 704) (1 730) 1 620 (9 188) (1 379) (20 425) 327 559 Net cash increase/ (decrease) 40 686 (246) 6 586 1 459 (1 241) (1 824) (929) 4 376 48 867 Net fair value and foreign exchange (gains)/losses (9 535) – 3 (80) 53 16 082 – (10) 6 513 Foreign currency translation – – – – – – – 25 25 Assets and liabilities held-for-sale – – – – – – – 211 211 Other movements 2 233 – 115 183 (183) (10) 1 158 – 3 496 Balance at 31 March 2018 388 684 9 819 – (168) 249 5 060 (1 150) (15 823) 386 671 Net cash increase/ (decrease) 24 459 (357) – 10 (29) 1 219 (1 179) 14 395 38 518 Net fair value and foreign exchange losses/(gains) 24 622 – – (4) 18 (22 121) – (620) 1 895 Foreign currency translation – – – – – – – (50) (50) Assets and liabilities held-for-sale – – – – – – – 67 67 Other movements 2 845 – – – – 153 721 – 3 719 Balance at 31 March 2019 440 610 9 462 – (162) 238 (15 689) (1 608) (2 031) 430 820 Company Balance at 1 April 2017 358 707 10 065 (6 704) (1 730) 1 620 (9 188) (1 379) (19 964) 331 427 Net cash increase/ (decrease) 41 170 (246) 6 586 1 459 (1 241) (1 824) (929) 4 603 49 578 Net fair value and foreign exchange (gains)/losses (9 535) – 3 (80) 53 16 082 – (10) 6 513 Other movements 2 243 – 115 183 (183) (10) 1 158 (8) 3 498 Balance at 31 March 2018 392 585 9 819 – (168) 249 5 060 (1 150) (15 379) 391 016 Net cash increase/ (decrease) 25 032 (357) – 10 (29) 1 219 (1 179) 14 485 39 181 Net fair value and foreign exchange losses/(gains) 24 622 – – (4) 18 (22 121) – (620) 1 895 Assets and liabilities held-for-sale – – – – – – – (3) (3) Other movements 2 808 – – – – 153 721 – 3 682 Balance at 31 March 2019 445 047 9 462 – (162) 238 (15 689) (1 608) (1 517) 435 771 1. Refer to note 25. 2. Refer to note 30. 3. Refer to note 14.2. 4. Refer to note 16 (hedge exposure covering debt securities and borrowings). 5. Refer to note 18 (securing debt raised). 6. Refer to note 21. 100 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 45. Guarantees and contingent liabilities Group Company Unit 2019 2018 2019 2018 45.1 Financial guarantees Long-term debt raised by Motraco Motraco, a private joint venture company between Eskom, Electricidade de Mocambique and Swaziland Electricity Board, owns transmission lines connecting the South African, Mozambican and Swaziland national grids to establish a secure source of electrical power for the Mozal aluminium smelter in Maputo, Mozambique. Motraco has raised debt as part of these operations maturing on 30 April 2019. Eskom has guaranteed a portion of this debt. The guarantees would be triggered if Motraco was unable to meet its obligations in terms of the long-term debt agreement. The risk of default resulting from the political risk in Mozambique is mitigated through a guarantee arranged with an established international insurance company, which specialises in facilitating investments in high risk, low income countries. Guarantee issued USDm 2 5 2 5 Default probability % 1.05 1.05 1.05 1.05 Guaranteed contract value Rm 22 54 22 54 Financial guarantee Rm – 1 – 1 There was a contingent liability of R53 million for group and company in 2018. The default probability trend into the future is seen to be positive, and changes in variables will not have a significant impact on profit or loss. No payments have been made in terms of these guarantees since their inception in 1999. EFC loans to group employees EFC has granted loans (secured by mortgage bonds on the properties) to qualifying employees of the group. Eskom has issued guarantees to EFC to the extent to which the loan values of employees exceed the current value of the mortgage security. Historically EFC has absorbed any losses incurred and has not called up any guarantee payments. Eskom’s guarantee exposure is therefore governed by the default probability of EFC, which is influenced by the risk of significant fluctuations in interest rates that might cause employees to default on their repayments. The risk adjusted credit exposure of EFC is calculated by applying a rating agency’s annual default probabilities. Guarantee issued/contract value Rm – – 1 032 1 069 Default probability % – – 0.29 0.13 Financial guarantee Rm – – 3 1 There was a contingent liability of R1 068 million in the company in 2018. Changes in variables will not have a significant impact on profit or loss. Summary of financial guarantees Total guaranteed contract value Rm 22 54 1 054 1 123 Total financial guarantee Rm – 1 3 2 45.2 Other guarantees Guarantees to South African Revenue Services (SARS) for customs duty Customs duty and import VAT are normally due upon declaration of imported goods at the port of entry (harbour or airport). SARS allows Eskom up to a maximum of 37 days after declaration date before the customs duty and import VAT must be settled on the deferment account. SARS requires Eskom to provide a bank guarantee to secure the debt when it becomes due. All conditions of the deferral of the customs duty and import VAT have been met. The total amount disclosed as a contingent liability amounted to Rm 156 156 156 156 Eskom Pension and Provident Fund (EPPF) Eskom has indemnified the EPPF against any loss resulting from negligence, dishonesty or fraud by the fund’s officers or trustees. 45.3 Other contingent liabilities Legal claims Legal claims are in process against Eskom as a result of disputes with various parties. On the basis of the evidence available it appears that no obligation is present. The claims are disclosed as a contingent liability and amounted to Rm 106 15 106 15 ESKOM HOLDINGS SOC LTD | 101 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 46. Commitments Group Company 2019 2018 2019 2018 Rm Rm Rm Rm 46.1 Capital expenditure Contracted capital expenditure 35 535 46 298 35 515 46 269 Within one year 15 691 20 925 15 671 20 896 One and five years 19 773 25 373 19 773 25 373 After five years 71 – 71 – Capital expenditure excludes finance costs capitalised and foreign currency fluctuations. The capital expenditure will be financed through debt with government support and internally generated funds. The capital programme will be reviewed and reprioritised by management in line with the funds available. 46.2 Operating leases As lessee The future minimum lease payments payable under non-cancellable operating leases are: 176 158 176 158 Within one year 91 78 91 78 One to five years 85 80 85 80 As lessor The future minimum lease payments receivable under non-cancellable operating leases are: 6 55 6 55 Within one year 3 52 3 52 One to five years 3 3 3 3 102 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 47. Related-party transactions and balances The group is wholly owned by the government represented by the DPE. Eskom (and its subsidiaries) are classified as schedule 2 public entities in terms of the PFMA. Eskom is part of the national sphere of government and its related parties in that sphere include national departments (including the shareholder), constitutional institutions and public entities (schedule 1, 2 and 3). A list of related parties is provided by National Treasury on its website www.treasury.gov.za. Related parties also include subsidiaries, associates and joint ventures of the group and post-retirement benefit plans for the benefit of employees. It also includes key management personnel of Eskom or its shareholder and close family members of these related parties. Key management personnel for Eskom include the group’s board of directors and the Exco. Disclosure of related-party transactions with key management personnel is included in note 49. The following transactions were carried out with related parties: Group Company 2019 2018 2019 2018 Note Rm Rm Rm Rm Transactions Sales of goods and services1 11 797 11 227 13 112 12 074 National departments 1 148 1 181 1 148 1 181 Public entities 6 937 6 525 6 868 6 501 Subsidiaries, associates and joint ventures 3 712 3 521 5 096 4 392 Government grant funding received for electrification National departments 2 841 3 399 2 841 3 399 Purchases of goods and services 1 8 608 7 648 19 524 18 964 Constitutional institutions 8 8 8 8 National departments 1 671 1 738 1 671 1 738 Public entities 4 337 3 537 3 818 2 879 Subsidiaries, associates and joint ventures 171 211 11 835 12 361 Eskom Pension and Provident Fund 2 421 2 154 2 192 1 978 Net fair value (loss)/gain on derivatives held for risk management Subsidiaries, associates and joint ventures – – (4) 2 Finance income 142 367 603 835 National departments 9 93 9 93 Public entities 133 274 133 274 Subsidiaries, associates and joint ventures – – 461 468 Finance cost 2 7 856 8 197 8 159 8 498 National departments 8 9 8 9 Public entities 7 682 8 024 7 682 8 024 Subsidiaries, associates and joint ventures – – 303 301 Eskom Pension and Provident Fund 166 164 166 164 Dividend income Subsidiaries, associates and joint ventures 34 26 34 26 Lease income 62 60 66 64 Public entities 62 60 62 60 Subsidiaries, associates and joint ventures – – 4 4 Lease expenses 7 20 10 23 National departments – 12 – 12 Public entities 7 8 7 8 Subsidiaries, associates and joint ventures – – 3 3 Environmental levy Public entities 34 7 805 8 061 7 805 8 061 1. Goods and services are bought and sold to related parties at an arm’s length basis at market-related prices. 2. Bonds are bearer instruments and it is therefore unknown if the initial counterparty still holds the bonds. Transactions in the secondary market where Eskom is not the counterparty are therefore excluded. ESKOM HOLDINGS SOC LTD | 103 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 47. Related-party transactions and balances (continued) Group Company 2019 2018 2019 2018 Note Rm Rm Rm Rm Outstanding balances (due by related parties) Receivables and amounts owed by related parties 2 236 1 191 3 530 2 568 National departments 100 140 100 140 Public entities 1 808 737 1 650 515 Subsidiaries, associates and joint ventures 328 314 1 780 1 913 Payments made in advance Public entities 8 – 8 – Loans receivable Subsidiaries, associates and joint ventures1 – – 6 111 6 201 Derivative assets held for risk management Subsidiaries, associates and joint ventures – – – 2 Indirect transactions – assets at nominal value National departments 103 139 103 139 Total due by related parties 2 347 1 330 9 752 8 910 Cash and cash equivalents Public entities – 10 061 – 10 061 Outstanding balances (due to related parties) Debt securities and borrowings 122 657 122 310 127 141 126 263 National departments 17 17 17 17 Public entities 119 789 119 567 119 789 119 567 Subsidiaries, associates and joint ventures2 – – 4 484 3 953 Eskom Pension and Provident Fund 2 851 2 726 2 851 2 726 Payables3 and amounts owed to related parties 3 537 2 914 5 861 4 863 Constitutional institutions 6 – 6 – National departments 405 491 405 491 Public entities 2 939 2 203 2 804 2 145 Subsidiaries, associates and joint ventures 8 45 2 467 2 052 Eskom Pension and Provident Fund 179 175 179 175 Payments received in advance 1 041 1 298 1 057 1 298 National departments 1 041 988 1 041 988 Public entities – 310 – 310 Subsidiaries, associates and joint ventures – – 16 – Indirect transactions – liabilities at nominal value National departments 57 9 57 9 Total due to related parties 127 292 126 531 134 116 132 433 Guarantees Refer to note 5.3.2 for details of guarantees received and used. Guarantees issued contract value 178 210 1 210 1 279 National departments 45.2 156 156 156 156 Subsidiaries, associates and joint ventures 45.1 22 54 1 054 1 123 Commitments Eskom does not have any material commitments with its related parties. 1. The effective interest rate on the loans to subsidiaries is 7.74% (2018: 7.55%). 2. Refer to note 25 for effective interest rate and maturity date relating to intercompany instruments. 3. Purchase transactions with related parties are on an arm’s length basis with payment terms of 30 days from invoice date. 104 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 48. Events after the reporting date The group chief executive resigned effective 31 July 2019. Eskom received R5 billion on 2 April 2019 and R8.5 billion on 29 April 2019 as part of the support from government. The President announced in the State of the Nation address delivered on 20 June 2019 that government will urgently table a special appropriation bill to allocate a significant portion of the R230 billion fiscal support that Eskom requires over the next 10 years in earlier years as Eskom is seen as vital to the economy of the country. 49. Directors’ remuneration The background to directors’ remuneration and an overview of the main provisions of the remuneration policy is included in the remuneration and benefits section in the integrated report. The details of the board (governing body) and executive management remuneration are included in this note. The details regarding the appointments, resignations and other changes in roles of directors during the year are included in the directors’ report. The total remuneration earned (single total figure of remuneration) reflects earnings attributable to the performance delivered during the year, while the total cash value reflects the earnings received by each incumbent during the year. The cash value is calculated by removing the value earned but not settled in the current year while the cash value earned but not settled from the prior year that was subsequently settled during the year is added back. 49.1 Executive directors and group executives The remuneration of the group chief executive and the chief financial officer (executive directors) and Exco members (group executives) are disclosed below. Eskom’s prescribed officers are the group executives. The group chief executive and the chief financial officer have fixed term contracts. The group executives have permanent contracts based on Eskom’s standard conditions of service. NB Hewu and SJ Mthembu were appointed on standard full-time contracts. The emoluments for the executives of the group were as follows: Name Salaries Notice Other Total Prior year Total cash payment payments remuneration cash value value of earned earned paid remuneration R’000 R’000 R’000 R’000 R’000 R’000 2019 Executive directors 11 651 – 210 11 861 – 11 861 PS Hadebe 8 521 – 94 8 615 – 8 615 C Cassim 3 130 – 116 3 246 – 3 246 Group executives 24 490 18 743 763 43 996 – 43 996 JA Oberholzer 3 900 – 53 3 953 – 3 953 A Etzinger 399 – 12 411 – 411 T Govender 3 297 939 94 4 330 – 4 330 NB Hewu 850 – – 850 – 850 WF Majola 1 882 3 849 117 5 848 – 5 848 AA Masango 2 271 1 223 54 3 548 – 3 548 SJ Mthembu 850 – – 850 – 850 A Noah 2 541 6 372 120 9 033 – 9 033 MM Ntsokolo 2 912 6 360 139 9 411 – 9 411 EM Pule 3 339 – 133 3 472 – 3 472 HJ Steyn 290 – 13 303 – 303 MS Tshitangano 580 – 10 590 – 590 N Zibi 1 379 – 18 1 397 – 1 397 36 141 18 743 973 55 857 – 55 857 ESKOM HOLDINGS SOC LTD | 105 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 49. Directors’ remuneration (continued) 49.1 Executive directors and group executives (continued) Name Salaries Notice Other Total Prior year Total cash payment payments remuneration cash value value of earned earned paid remuneration R’000 R’000 R’000 R’000 R’000 R’000 2018 Executive directors 7 461 2 564 907 10 932 3 989 14 921 PS Hadebe 1 649 – 4 1 653 – 1 653 C Cassim 1 649 – 84 1 733 – 1 733 B Molefe – – – – 2 110 2 110 A Singh 4 163 2 564 819 7 546 1 879 9 425 Group executives 32 719 – 2 488 35 207 16 409 51 616 JA Dladla 1 070 – 151 1 221 – 1 221 T Govender 3 956 – 128 4 084 2 731 6 815 P Govender 2 445 – 511 2 956 – 2 956 MM Koko 3 714 – 346 4 060 2 623 6 683 WF Majola 2 509 – 85 2 594 – 2 594 S Maritz 3 061 – 464 3 525 1 569 5 094 AA Masango 3 617 – 126 3 743 2 138 5 881 A Noah 3 388 – 94 3 482 2 428 5 910 MM Ntsokolo 3 883 – 378 4 261 2 878 7 139 EM Pule 3 339 – 98 3 437 2 042 5 479 MP Sebola 591 – 69 660 – 660 HJ Steyn 456 – 29 485 – 485 N Zibi 690 – 9 699 – 699 40 180 2 564 3 395 46 139 20 398 66 537 Salaries Salaries consist of a guaranteed package that includes Eskom’s medical and pension fund contributions. No fees were paid to executives who serve on the boards of Eskom subsidiaries. Short-term bonus If applicable, a short-term incentive bonus is paid after year end. No short-term bonuses were awarded in the year. PS Hadebe decided to forgo any payment relating to performance incentive conditions attached to his appointment that vested during the 2019 financial year in light of Eskom’s financial situation. Long-term bonus If applicable, a long-term incentive bonus is paid after year end in cash and consists of the vested amount in a reporting period. The long-term bonus is based on units that are awarded in terms of the long-term incentive scheme to reward performance in line with performance conditions and targets over a three-year performance period. The number of units that vest may differ from the number awarded depending on the achievement of performance conditions. The scheme requires that the employee remains in Eskom’s employment throughout the vesting period. These units are not in the scope of IFRS 2 Share-based payment as the performance award is not linked to a share or a share price. Awards vested Name Vested on 31 March 2019 Vested on 31 March 2018 Awarded Payable Awarded Paid units R’000 units R’000 T Govender – – 2 574 094 – AA Masango – – 1 624 104 – A Noah 2 684 480 – 2 556 648 – MM Ntsokolo 3 076 945 – 2 930 405 – EM Pule 2 646 000 – 1 791 402 – 8 407 425 – 11 476 653 – Bonus units awarded on 1 April 2016 vested on 31 March 2019 with a vesting rate over the three-year period of 38.07% payable at R1.27 per unit. The board applied its discretion and resolved that the awards vested at 0% due to the current financial constraints Eskom finds itself in. Bonus units awarded on 1 April 2015 vested on 31 March 2018 with a vesting rate over the three-year period of 38.73% payable at R1.26 per unit. The board applied its discretion and resolved that the awards vested at 0% due to the current financial constraints Eskom finds itself in. 106 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 Awards to vest No performance awards were issued for the 1 April 2017 and 2018 cycles (that would have vested on 31 March 2020 and 31 March 2021 respectively) due to Eskom’s current financial constraints. Long-term bonus provision movement reconciliation 2019 2018 R’000 R’000 Balance at beginning of the year 5 451 26 348 Service cost accrued 1 744 6 040 Effect of changes in rates of vesting including board’s discretionary adjustments (4 868) (6 630) Forfeited (2 327) (12 749) Settled – (7 558) Balance at end of the year – 5 451 Notice payment Payments in terms of contractual agreements 18 743 2 564 Other payments Other payments consist of accumulated leave paid out on resignation and fees related to telephone costs, security services and operating vehicle expenditure. 973 3 395 Housing loans C Cassim 3 094 2 955 AA Masango – 495 HJ Steyn 1 699 1 565 A Etzinger 74 – 4 867 5 015 Home loan balances are disclosed when an individual is in the role of an executive director and group executive (even if they were only in that capacity for a portion of the year). The interest rate on the loans from EFC at 31 March 2019 was 8.50% (2018: 8.50%). The loans are repayable over a maximum period of 30 years. The terms and conditions applicable to ex-employees are applied on resignation. 49.2 Non-executive directors Non-executive directors receive a fixed fee and are reimbursed for out-of-pocket expenses incurred in fulfilling their duties. Their emoluments were as follows: 2019 2018 R’000 R’000 JA Mabuza (Chairman) 1 599 – RDB Crompton 524 101 RSN Dabengwa 489 95 SD Dingaan – 464 S Gounden – 460 ZW Khoza – 941 VJ Klein – 120 M Lamberti1 (110) 110 GM Leonardi – 452 SN Mabaso-Koyana 607 115 C Mabude – 232 NVB Magubane 489 95 MW Makgoba 717 233 BCE Makhubela 489 543 B Mavuso 593 112 PE Molokwane 578 640 TH Mongalo 593 196 P Naidoo – 759 BS Ngubane – 257 J Sebulela 289 101 6 857 6 026 1. Fees earned repaid to Eskom on 16 April 2018. ESKOM HOLDINGS SOC LTD | 107 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 50. New standards and interpretations 50.1 Standards, interpretations and amendments to published standards that are not yet effective The following new standards, interpretations and amendments to existing standards have been published that are applicable for future accounting periods that have not been adopted early by the group. These standards and interpretations will be applied in the first year that they are applicable to Eskom. Topic Summary of requirements Impact IFRIC 23 IFRIC 23 clarifies that where it is unclear how tax law applies to a Impact not material. The group is already Uncertainty over particular transaction or circumstance, an entity will have to assess accounting for uncertainty over income tax income tax whether it is probable that the tax authority will accept the entity’s treatments in accordance with the guidance treatments chosen tax treatment. Where it is probable that the tax authority (1 January 2019) may not accept the chosen tax treatment, disclosure about judgements made, assumptions and other estimates used; and the potential impact of uncertainties that are not reflected may be required. The interpretation also requires the entity to reassess the judgements and estimates applied if the facts and circumstances change IFRS 16 Leases IFRS 16 replaces IAS 17 Leases, IFRIC 4 Determining whether an The group has evaluated the detailed (1 January 2019) arrangement contains a lease, SIC-15 Operating leases – incentives requirements of the standard to assess the and SIC-27 Evaluating the substance of transactions involving the impact on the financial statements. An legal form of a lease assessment process has been followed to identify all potential leases to ascertain whether the contracts fall within the scope of IFRS 16 Leases. All existing leases are also being reviewed and will be assessed on an individual basis Lessee accounting IFRS 16 introduces a single, on-balance sheet lease accounting The group expects to apply the modified model for lessees. A lessee is required to recognise a right-of-use retrospective approach on adoption of IFRS 16 asset representing its right to use the underlying leased asset and and, as a result, comparative information will a lease liability representing its obligation to make lease payments. not be restated There are recognition exemptions for short-term leases and leases of low-value items The group expects to apply the following practical expedients: A lessee measures right-of-use assets similarly to other non- • the present value of the remaining lease financial assets (such as property, plant and equipment) and lease payments would be based on a single liabilities similarly to other financial liabilities. As a consequence, a discount rate on implementation date lessee recognises depreciation on the right-of-use asset and interest • existing leases with a remaining period of on the lease liability and also classifies cash repayments of the lease 12 months will be reported as short-term liability into principal and interest portions and presents them in leases the statement of cash flows applying IAS 7 Statement of cash flows • the underlying assets would not be Assets and liabilities arising from a lease are initially measured on accounted for as a right-of-use asset for low a present value basis. The measurement includes non-cancellable value leases lease payments (including inflation-linked payments), and also includes payments to be made in optional periods if the lessee is Rental of property is currently being treated reasonably certain to exercise an option to extend the lease, or as operational expenditure and it is expected not to exercise an option to terminate the lease that right-of-use assets and lease liabilities will arise on implementation of IFRS 16 Lessees will need to apply judgement in deciding on the information to disclose to meet the objective of providing a The right-of-use asset for all existing finance basis for users of financial statements to assess the effect that leases will be measured using the carrying leases have on the financial position, financial performance and amount of the finance lease asset and liability cash flows of the lessee under IAS 17 Leases IFRS 16 can be applied using either a retrospective approach or It is likely that the current classification of a modified retrospective approach with optional practical leases in terms of IFRIC 4 Determining when an expedients for lessees. The lessee will have to apply any arrangement contains a lease will not be elections consistently to all of its leases recognised as leases in terms of IFRS 16. The When applying the modified retrospective approach to leases group is currently quantifying the impact of a previously classified as operating leases under IAS 17, the lessee possible re-classification can elect, on a lease-by-lease basis, whether to apply a number of practical expedients on transition Lessor accounting IFRS 16 substantially carries forward the lessor accounting All current contracts have been reviewed and requirements in IAS 17. Accordingly, a lessor continues to the group does not foresee any changes in the classify its leases as operating or finance leases and to account current application to lessor accounting under for those two types of leases differently the new standard IFRS 16 also requires enhanced disclosures to be provided about a lessor’s risk exposure, particularly to residual value risk 108 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 Topic Summary of requirements Impact Annual The annual improvements deal with additional guidance for Impact not material. There are currently no improvements applying the acquisition method to particular types of business business combinations, joint operations or 2017 combinations (IFRS 3 Business combinations), accounting for dividends payable (1 January 2019) acquisitions of interests in joint operations (IFRS 11 Joint arrangements), income tax consequences of payments on The additional guidance on borrowing costs financial instruments classified as equity (IAS 12 Income taxes), eligible for capitalisation will be applied and borrowing costs eligible for capitalisation (IAS 23 Borrowing prospectively from 1 April 2019. The impact is costs) not expected to be significant Prepayment The amendment allows that financial assets containing Impact not material. There are currently no features with prepayment features with negative compensation can now be financial assets with prepayment features negative measured at amortised cost or at fair value through other compensation comprehensive income (FVOCI) if they meet the relevant – amendments requirements of IFRS 9 to IFRS 9 (1 January 2019) Plan amendments, The amendment to IAS 19 clarifies current service and net Impact not material. There is currently no curtailment or interest in the accounting for defined benefit plans amendment, curtailment or settlement of a settlement defined benefit plan – amendments to IAS 19 (1 January 2019) Amendments to The main changes to the principles in the framework have The group is currently in the process of references to implications for how and when assets and liabilities are evaluating the detailed requirements of the Conceptual recognised and derecognised in the financial statements. It is improvements to assess the impact on the Framework in expected that inconsistencies between accounting policies and financial statements IFRS standards the new guidance will be rare effective (1 January 2020) Definition of a The amendments provide more guidance on the definition of a Impact not material. There are currently no business business. The effect of these changes is that the new definition business combinations – amendments of a business is narrower. This could result in fewer business to IFRS 3 combinations being recognised (1 January 2020) Definition of The definition of ‘material’ has been refined and practical The adoption of the updated definition and material guidance on applying the concept of materiality has been issued practical guidance is not expected to result in – amendments any significant changes based on how to IAS 1 and The revised definition of material is: ‘Information is material if materiality has been applied in the current IAS 8 omitting, misstating or obscuring it could reasonably be annual financial statements (1 January 2020) expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity’ ESKOM HOLDINGS SOC LTD | 109 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 50. New standards and interpretations (continued) 50.2 Standards, interpretations and amendments to published standards that are effective and applicable to the group The group has adopted the following new standards, interpretations and amendments to existing standards for the first time for the financial year ended 31 March 2019. The nature and effect of the changes are as follows: Topic Summary of requirements Impact IFRS 15 Revenue Eskom has applied IFRS 15 (replacing IAS 18 Revenue, IAS 11 The group disclosed in its interim results that from contracts with Construction contracts and related interpretations) from the impact of adopting IFRS 15 did not result in customers 1 April 2018. It establishes a comprehensive framework for an adjustment to retained earnings due to the (1 January 2018) determining whether, how much and when revenue is recognised application of the practical expedient available for completed contracts. Based on new IFRS 15 requires revenue to be recognised when a customer information on the impact of IFRS 15, cost in obtains control of the goods or services being supplied. The terms of IAS 11 stage of completion in a amount of revenue recognised is measured based on the subsidiary were released on incomplete consideration specified in a contract with a customer and construction contracts on transition. This excludes amounts collected on behalf of third parties resulted in a reduction in retained earnings at Eskom has adopted IFRS 15 using the modified retrospective 1 April 2018 of R262 million with a transition election (with the completed contract practical corresponding reduction in inventory of expedient). Under the modified retrospective method: R315 million and an increase in property, plant • the comparative period data is presented, as previously and equipment of R52 million. The disclosure reported under IAS 18, IAS 11 and related interpretations presented in the interim results will be • IFRS 15 has been applied to new and existing contracts that corrected for the comparative information in were not completed at the date of initial adoption the next interim results • the cumulative adjustment was recognised in retained If Eskom did not apply the practical expedient earnings as at 1 April 2018 for contracts which were available for completed contracts, there considered not completed as defined as at 31 March 2018 would have been a further reduction in retained earnings at 1 April 2018 with a corresponding reduction in trade receivables due to the application of the collectability criterion, as well as an increase in deferred income due to the deferral of customer connections received When compared to the line items that have been presented for 2019, had IAS 18 been applied then revenue (note 32) would have been R2.2 billion higher with a related impairment of R1.3 billion because certain contracts failed the collectability criterion to qualify as an identified contract in terms of IFRS 15. Revenue would also have been R370 million higher and contract liabilities (note 27) R370 million lower because of the change in accounting for customer connections received for connections completed after 1 April 2018. The connections were recognised as revenue in terms of IAS 18 when the customer was connected to the electricity network. The connections are now deferred in terms of IFRS 15 as contract liabilities and recognised in revenue on a straight-line basis over the estimated customer relationship period of 25 years. The tax impact of these items would have resulted in additional tax of R355 million with an overall increase in net profit of R914 million IFRS 9 Financial Eskom has applied IFRS 9 which replaces IAS 39 Financial The group has adopted the consequential instruments instruments: recognition and measurement from 1 April 2018. amendments to IAS 1 Presentation of financial (1 January 2018) IFRS 9 sets out requirements for recognising and measuring statements as a result of the adoption of IFRS 9 financial assets, financial liabilities and some contracts to buy or which requires impairment of financial assets to sell non-financial items be presented separately in the statement of profit or loss (previously included under net impairment loss). The consequential amendments to IFRS 7 Financial instruments: disclosures were applied in 2019 (no change to comparative information). 110 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 Topic Summary of requirements Impact IFRS 9 Financial Classification and measurement of financial assets instruments IFRS 9 contains a new classification and measurement approach Financial assets are measured based on their (1 January 2018) for financial assets that reflects the business model in which IFRS 9 measurement classification (superseding assets are managed and their cash flow characteristics. IFRS 9 the IAS 39 classification). The classification is includes three principal classification categories for financial based on the business model in which the assets namely measured at amortised cost, fair value through financial assets are managed and their profit or loss and fair value through other comprehensive contractual cash flow characteristics. Refer to income. The standard eliminates the existing IAS 39 categories note 2.10 for details of the changes in the of held-to-maturity, loans and receivables and available-for-sale classification Derivatives embedded in contracts where the host is a financial The impact of the initial adoption of IFRS 9 at asset in the scope of the standard are never separated. The hybrid 1 April 2018 was as follows: financial instrument as a whole is assessed for classification • the impact on finance income as a result of the reclassification of repurchase agreements from fair value through profit or loss to amortised cost was immaterial • the changes in the classification of the negotiable certificate of deposits which were accounted for at available-for-sale (fair value through other comprehensive income) in terms of IAS 39 to amortised cost in terms of IFRS 9 resulted in a reduction of R8 million in the asset, R6 million in retained earnings and R2 million in deferred tax liability Impairment of contract and financial assets IAS 39’s incurred loss model is replaced in IFRS 9 with an The impact of the IFRS 9 impairment expected credit loss model. The expected credit loss model requirements at 1 April 2018 was not material. applies to financial assets measured at amortised cost and is a Refer to note 4.7 for more information about probability-weighted estimate of credit losses. Credit losses in the expected credit losses on financial assets. terms of IFRS 9 are likely to be recognised earlier than previously in terms of IAS 39 The new impairment model will apply to financial assets measured at amortised cost or fair value through other comprehensive income, except for investments in equity instruments and contract assets Classification of financial liabilities IFRS 9 largely retains the existing requirements in IAS 39 for the The group has not designated any financial classification of financial liabilities liabilities at fair value through profit or loss and All fair value changes of financial liabilities designated as at fair value there was therefore no impact on the group through profit or loss are recognised in profit or loss under IAS 39, whereas under IFRS 9 these fair value changes are generally presented as follows: • the change in the fair value that is attributable to changes in the credit risk of the liability is presented in other comprehensive income • the remaining change in the fair value is presented in profit or loss Transition Changes in accounting policies resulting from the adoption of The group applied the IFRS 9 exemption to not IFRS 9 will generally be applied retrospectively, except as restate the comparative information for the described below comparative period ending 31 March 2018 with respect to classification and measurement including impairment. IFRS 9 has therefore been applied from 1 April 2018 Hedge accounting The hedge accounting requirements in IFRS 9 are generally The group has elected as its accounting policy, applied prospectively, with limited exceptions. In particular, based on the choice presented in IFRS 9, to comparative information may need to be restated for the cost defer the adoption of the IFRS 9 general hedge of hedge accounting that is applied retrospectively accounting model. The group continues to apply the hedge accounting requirements in IAS 39 to all of its hedging relationships. The disclosure requirements relating to hedge accounting as presented in IFRS 9 have been implemented ESKOM HOLDINGS SOC LTD | 111 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 50. New standards and interpretations (continued) 50.2 Standards, interpretations and amendments to published standards that are effective and applicable to the group (continued) Topic Summary of requirements Impact Amendments to This amendment provides for a temporary exemption from Impact not material. The group did not apply IFRS 4 applying IFRS 9 for a reporting company with predominantly insurance the temporary exemption for its insurance IFRS 9 with IFRS 4 activities as the different effective dates of IFRS 9 and the new subsidiary Insurance Contracts insurance contracts standard could have a significant impact on (1 January 2018) insurers IFRIC 22 Foreign IFRIC 22 clarifies that the transaction date for the purpose of Impact not material. The group applied this currency determining the exchange rate to be used on initial recognition interpretation prospectively from 1 April 2018 transactions and of the related asset, expense or income (or part of it) is the advance date on which an entity initially recognises the non-monetary consideration asset or liability arising from the payment or receipt of advance (1 January 2018) consideration An entity can apply this interpretation either retrospectively or prospectively on initial adoption 50.3 Impact on the statement of financial position at initial adoption of IFRS 9 and 15 (1 April 2019) Group Before Impact of implementation of: After implementation IFRS 9 IFRS 15 Total implementation Rm Rm Rm Rm Rm Statement of financial position Assets (8) (264) (272) Property, plant and equipment 630 648 – 51 51 630 699 Inventories 24 348 – (315) (315) 24 033 Insurance investments 8 172 (8) – (8) 8 164 Equity (6) (192) (198) Available-for-sale reserve 6 (6) – (6) – Accumulated profit 98 090 – (192) (192) 97 898 Liabilities Deferred tax 15 846 (2) (72) (74) 15 772 There was no impact on the company’s statement of financial position on the initial adoption of IFRS 9 and 15. 51. Information required by the Public Finance Management Act Section 55(2)(b)(i) of the PFMA requires that the particulars of any irregular expenditure, fruitless and wasteful expenditure as well as material losses due to criminal conduct be disclosed in the annual financial statements. Any losses that individually or collectively (where items are closely related) exceed R25 million in terms of the significance and materiality framework, as agreed with the shareholder, have to be reported. 51.1 Irregular expenditure Irregular expenditure is defined as expenditure, other than unauthorised expenditure, incurred in contravention of or that is not in accordance with a requirement of any applicable legislation. The scope includes transgressions of any laws and regulations as well as internal policies and procedures regardless of whether or not the expenditure was justified from a business perspective, value was received, the breaches were deliberate or accidental, or the breaches happened unknowingly or in good faith. Irregular expenditure is incurred when the related transaction is recognised in terms of IFRS. The irregular expenditure is removed from the note when it is either condoned by the relevant authority or recovered. 112 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 Balance at Expenditure Condoned Recovered Balance beginning at end of of the year the year Note Rm Rm Rm Rm Rm 2019 Group PFMA 14 369 4 364 – – 18 733 Use of sole source (a) 4 997 2 174 – – 7 171 Tender processes not adhered to (b) 500 149 – – 649 Incorrect classification as emergency procurement (c) 254 69 – – 323 Tender process not followed and insufficient delegation of authority (d) 2 070 – – – 2 070 Modifications exceeding allowed amounts (e) 6 548 1 972 – – 8 520 PPPFA 4 107 224 (144) – 4 187 Incorrect tender process applied (f) 912 22 (144) – 790 Tax clearance certificates (g) 3 195 202 – – 3 397 CIDB regulations Contracts awarded without following CIDB requirements (h) 574 797 – – 1 371 National Treasury instructions Contracts not in accordance with National Treasury guidelines (i) 1 398 – – (902) 496 Internal processes and rules Internal processes not adhered to (j) 551 1 208 (951) – 808 Various commercial requirements Breach of more than one commercial requirement (k) 41 23 – – 64 Other 8 2 (10) – – 21 048 6 618 (1 105) (902) 25 659 Company PFMA 9 334 2 383 – – 11 717 Use of sole source (a) 247 253 – – 500 Tender processes not adhered to (b) 311 108 – – 419 Incorrect classification as emergency procurement (c) 203 50 – – 253 Tender process not followed and insufficient delegation of authority (d) 2 070 – – – 2 070 Modifications exceeding allowed amounts (e) 6 503 1 972 – – 8 475 PPPFA 3 376 194 – – 3 570 Incorrect tender process applied (f) 609 2 – – 611 Tax clearance certificates (g) 2 767 192 – – 2 959 CIDB regulations Contracts awarded without following CIDB requirements (h) 571 797 – – 1 368 National Treasury instructions Contracts not in accordance with National Treasury guidelines (i) 1 398 – – (902) 496 Internal processes and rules Internal processes not adhered to (j) 111 1 125 (662) – 574 Various commercial requirements Breach of more than one commercial requirement (k) 41 23 – – 64 Other 8 2 (10) – – 14 839 4 524 (672) (902) 17 789 ESKOM HOLDINGS SOC LTD | 113 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 51. Information required by the Public Finance Management Act (continued) 51.1 Irregular expenditure (continued) Balance Expenditure Condoned Recovered Balance at beginning at end of of the year the year Note Rm Rm Rm Rm Rm 2018 Group PFMA 2 340 12 137 (108) – 14 369 Use of sole source (a) 401 4 9571 – – 4 997 Tender processes not adhered to (b) 207 2931 – – 500 Incorrect classification as emergency procurement (c) 8 354 (108)1 – 254 Tender process not followed and insufficient delegation of authority (d) 2 070 – – – 2 070 Modifications exceeding allowed amounts (e) 15 1 6 533 1 – – 6 548 PPPFA 280 4 421 (594) – 4 107 Incorrect tender process applied (f) 244 1 1 262 1 (594) 1 – 912 Tax clearance certificates (g) 36 3 1591 – – 3 195 CIDB regulations Contracts awarded without following CIDB requirements (h) 2 5721 – – 574 National Treasury instructions Contracts not in accordance with National Treasury guidelines (i) – 1 398 – – 1 398 Internal processes and rules Internal processes not adhered to (j) 4601 7201 (629) – 551 Various commercial requirements Breach of more than one commercial requirement (k) – 411 – – 41 Other – 8 – – 8 3 082 19 297 (1 331) – 21 048 Company PFMA 2 308 7 030 (4) – 9 334 Use of sole source (a) 27 220 – – 247 Tender processes not adhered to (b) 207 104 – – 311 Incorrect classification as emergency procurement (c) 4 203 (4) – 203 Tender process not followed and insufficient delegation of authority (d) 2 070 – – – 2 070 Modifications exceeding allowed amounts (e) – 6 503 – – 6 503 PPPFA 130 3 840 (594) – 3 376 Incorrect tender process applied (f) 941 1 109 (594) – 609 Tax clearance certificates (g) 36 2 7311 – – 2 767 CIDB regulations Contracts awarded without following CIDB requirements (h) 2 5691 – – 571 National Treasury instructions Contracts not in accordance with National Treasury guidelines (i) – 1 398 – – 1 398 Internal processes and rules Internal processes not adhered to (j) 53 352 (294) – 111 Various commercial requirements Breach of more than one commercial requirement (k) – 41 – – 41 Other – 8 – – 8 2 493 13 238 (892) – 14 839 1. Prior period corrected with updated numbers identified during the group’s clean-up exercise. 114 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 Expenditure analysis 2019 2018 Current Prior Total Total year years Note Rm Rm Rm Rm Group PFMA 2 249 2 115 4 364 12 137 Use of sole source (a) 2 146 28 2 174 4 9571 Tender processes not adhered to (b) 41 108 149 2931 Incorrect classification as emergency procurement (c) 62 7 69 354 Modifications exceeding allowed amounts (e) – 1 972 1 972 6 5331 PPPFA 34 190 224 4 421 Incorrect tender process applied (f) 20 2 22 1 2621 Tax clearance certificates (g) 14 188 202 3 1591 CIDB regulations Contracts awarded without following CIDB requirements (h) 6 791 797 5721 National Treasury instructions Contracts not in accordance with National Treasury guidelines (i) – – – 1 398 Internal processes and rules Internal processes not adhered to (j) 936 272 1 208 7201 Various commercial requirements Breach of more than one commercial requirement (k) – 23 23 411 Other 2 – 2 8 3 227 3 391 6 618 19 297 Company PFMA 268 2 115 2 383 7 030 Use of sole source (a) 225 28 253 220 Tender processes not adhered to (b) – 108 108 104 Incorrect classification as emergency procurement (c) 43 7 50 203 Modifications exceeding allowed amounts (e) – 1 972 1 972 6 503 PPPFA 4 190 194 3 840 Incorrect tender process applied (f) – 2 2 1 109 Tax clearance certificates (g) 4 188 192 2 7311 CIDB regulations Contracts awarded without following CIDB requirements (h) 6 791 797 5691 National Treasury instructions Contracts not in accordance with National Treasury guidelines (i) – – – 1 398 Internal processes and rules Internal processes not adhered to (j) 853 272 1 125 352 Various commercial requirements Breach of more than one commercial requirement (k) – 23 23 41 Other 2 – 2 8 1 133 3 391 4 524 13 238 1. Prior period corrected with updated numbers identified during the group’s clean up exercise. ESKOM HOLDINGS SOC LTD | 115 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 51. Information required by the Public Finance Management Act (continued) 51.1 Irregular expenditure (continued) (a) Use of sole source State-owned entities are required to procure goods and services in a manner that is fair, equitable, transparent, competitive and cost-effective. Expenditure was incurred on awards which did not follow proper tender processes where awards were incorrectly allocated to predetermined suppliers. These incidents and all similar transactions incurred during the year have been investigated. Internal procedures have been enhanced and system controls implemented to flag the transactions when they occur. Condonations have been approved internally and have been submitted to National Treasury for approval. (b) Tender processes not adhered to Transgressions where the approved tender processes were not followed reduced significantly. Various initiatives were implemented to address the shortcomings as follows: • the importance of adherence to the supply chain policies and procedure was reinforced • updated guidelines and checklists were communicated to employees • awareness roadshows were conducted for the sourcing teams • document management and compliance is a key deliverable of an individual’s performance measurement • dedicated function established to monitor and ensure compliance • system improvements to enhance contract workflow approval and tagging of emergency transactions for better monitoring • continued implementation of the new document management system (open text) that allows easy access to all supporting contract documentation (c) Incorrect classification as emergency procurement Irregular expenditure was incurred where emergency purchases did not meet the National Treasury requirements for emergency procurement. Identified weaknesses were addressed by raising the approval level for emergency procurement to group executive level. This resulted in a significant reduction in the number of emergency procurement transactions since October 2017. Appropriate action has been taken against implicated individuals where the related investigations were completed. The group is engaging National Treasury to confirm the threshold of when emergency procurement transgressions have to be condoned by National Treasury. (d) Tender process not followed and insufficient delegation of authority The group is still engaged in civil and criminal action relating to contracts that were placed without proper delegation of authority in prior years. This matter can only be removed from the register of irregular expenditure in terms of the National Treasury Irregular Expenditure Framework after the civil and criminal processes have been completed. (e) Modifications exceeding allowed amounts Any modification to an original contract where the value of the modification is more than 20% or R20 million for construction- related goods, works or services and 15% or R15 million for all other goods or services has to be approved by National Treasury effective from 1 May 2016. The group did not initially comply with the National Treasury instruction and an estimated amount of irregular expenditure was reported in 2018. The full population is currently being reviewed to determine the irregular expenditure incurred. The scope of the review has been further extended to investigate unauthorised modifications on task orders. The group’s procurement procedure has been aligned to the National Treasury instruction to ensure compliance going forward. (f) Incorrect tender process applied The Preferential Procurement Policy Framework Act (PPPFA), effective 7 December 2012, requires that the preferential points calculation is determined inclusive of VAT. Certain procurement was incorrectly done where the preferential points calculation, which is based on the applicable quotation or contract value, was determined exclusive of VAT. The group’s procurement procedure has been amended in line with the PPPFA requirements. Awareness sessions and training has been provided to relevant employees. Transactions incurred between 2013 and 2015 have been revisited to quantify irregular expenditure. The irregular expenditure identified has been submitted for condonation to National Treasury for approval, despite impracticalities in obtaining all source documents such as system and storage limitations. Condonation approval has been received from National Treasury for 2016 and 2017. The opening balance disclosed in 2018 has increased by R12 million as a result of the clean-up exercise. (g) Tax clearance certificates The PPPFA regulations require that tenders may only be awarded to a person whose tax matters have been declared to be in order by SARS. The group did not always received tax clearance for foreign suppliers. SARS has since created a mechanism whereby a supplier’s tax status can be confirmed. Internal processes were enhanced and all new contracts are reviewed for compliance prior to concluding the contract. All awards have been reviewed and an application for condonation has been submitted to National Treasury for transgressions in 2016 and 2017. The group engaged SARS and affected suppliers to assess their tax compliance for the period December 2012 to March 2015. It was determined impractical to fully quantify the extent of further non-compliance and any associated irregular expenditure because of the nature of the exercise and the reliance on third-party information. Expenditure disclosed in 2018 has reduced by R9 million as a result of the clean-up exercise. (h) Contracts awarded without following CIDB requirements The group did not comply with the CIDB regulation regarding the advertising of tenders, grading of contractors and publishing of awards. Eskom engaged with CIDB and National Treasury to address the non-compliance. Controls have been enhanced to prevent future non- compliances. Application for condonation will be made to National Treasury including evidence of relevant consequence management against implicated individuals. Expenditure disclosed in 2018 has reduced by R20 million as a result of management reviews. 116 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 (i) Contracts not in accordance with National Treasury guidelines Eskom entered into consulting contracts on a risk-based remuneration model without obtaining prior approval from National Treasury. Eskom is pursuing recovery of an amount of R1 398 million paid to a supplier and its subcontractor as settlement when the contract was terminated, of which R902 million and interest of R99 million has been recovered to date. A review application has been made to the court. Criminal charges have been laid against the implicated individuals. The matter is being investigated by the Directorate for Priority Crime Investigation (Hawks). Eskom instituted civil procedures to recover the remaining amount of R496 million. The Pretoria High Court ruled in Eskom’s favour on 18 June 2019 and ordered the sub-contractor to repay the amount due with costs. (j) Internal processes not adhered to Irregular expenditure was incurred as a result of non-adherence to internal procurement processes and employees contravening the Eskom Delegation of Authority. Significant progress has been made to close these matters with the majority being resolved or condoned. (k) Breach of more than one commercial requirement Investigations identified transgressions of more than one legislative requirement as well as Eskom procurement policy and procedures. Condonation will be requested from National Treasury, where applicable, and improvements made to processes to address each of the breaches. 51.2 Fruitless and wasteful expenditure Fruitless and wasteful expenditure is expenditure made in vain that could have been avoided had reasonable care been exercised. Fruitless and wasteful expenditure is reported in the annual financial statements when it is confirmed. Balance Expenditure Recovered Removed Balance at beginning at end of of the year1 the year Rm Rm Rm Rm Rm 2019 Group Project management – 53 – (46) 7 Procurement and contract management 7 21 – (19) 9 Revenue management – 4 – (4) – Interest and penalties – 31 – (18) 13 Other 1 532 – (10) 523 8 641 – (97) 552 Company Project management – 48 – (41) 7 Procurement and contract management 7 3 – (2) 8 Revenue management – 4 – (4) – Interest and penalties – 19 – (5) 14 Other 1 529 – (7) 523 8 603 – (59) 552 2018 Group Project management – 104 – (104) – Procurement and contract management – 8 – (1) 7 Non-adherence to procedures – 13 – (13) – Other – 18 – (17) 1 – 143 – (135) 8 Company Project management – 20 – (20) – Procurement and contract management – 7 – – 7 Non-adherence to procedures – 13 – (13) – Other – 16 – (15) 1 – 56 – (48) 8 1. No opening balances were previously maintained prior to 1 April 2017. ESKOM HOLDINGS SOC LTD | 117 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 51. Information required by the Public Finance Management Act (continued) 51.2 Fruitless and wasteful expenditure (continued) Expenditure analysis 2019 2018 Current Prior Total Total year years Rm Rm Rm Rm Group Project management 43 10 53 104 Procurement and contract management 4 17 21 8 Non-adherence to procedures – – – 13 Revenue management 3 1 4 – Interest and penalties 7 24 31 – Other 526 6 532 18 583 58 641 143 Company Project management 39 9 48 20 Procurement and contract management 3 – 3 7 Non-adherence to procedures – – – 13 Revenue management 3 1 4 – Interest and penalties 7 12 19 – Other 524 5 529 16 576 27 603 56 Other fruitless and wasteful expenditure includes R522 million paid to a coal supplier in terms of a take or pay agreement as Eskom did not take delivery of coal as it did not have a contract in place for the transportation of the coal to the Medupi power station. The processes for reporting and disclosing of fruitless and wasteful expenditure have been enhanced to address shortcomings in line with the National Treasury guideline on fruitless and wasteful expenditure. Enhancements include improved recording and monitoring with emphasis on the recovery of fruitless and wasteful expenditure incurred. An occurrence of fruitless and wasteful expenditure may not be removed from the register unless it is clearly documented that appropriate preventive and corrective measures have been instituted as far as possible, including civil recovery. The group experienced 215 (2018: 242) incidents of fruitless and wasteful expenditure during the reporting period. Management continues to institute preventive and corrective measures, including disciplinary action, as considered appropriate. 51.3 Criminal conduct Material losses caused by criminal conduct and any disciplinary, civil or criminal action taken in respect of such losses are reported in terms of materiality framework. Group Company 2019 2018 2019 2018 Note Rm Rm Rm Rm Theft of conductors, cabling and related equipment (a) 105 46 104 46 Fraud (b) 51 49 29 45 Estimated non-technical revenue losses (c) 1 741 1 390 1 741 1 390 Other crimes (d) 80 351 79 351 1 977 1 520 1 953 1 516 (a) Theft of conductors, cabling and related equipment The group experienced 5 150 (2018: 5 152 ) incidents relating to theft of conductor, cabling and related equipment during the year. Actions to combat these losses are managed in collaboration with other affected state-owned companies and the South African Police Service. The combined effort resulted in 119 (2018: 216) arrests and R2 million (2018: R3 million) worth of stolen material was recovered. (b) Fraud Material incidents (greater than R25 million) An employee colluded with a supplier to defraud the company of an amount of R28 million. Forty four invoices were paid with no services rendered. Both the employee and the supplier have admitted to the scam. The supplier has paid back R3 million. Eskom has instituted legal proceedings to recover the outstanding amount. A criminal case has also been registered. Immaterial incidents (less than R25 million) Eskom concluded 19 (2018: 37) investigations into fraud during the year totalling R23 million. The internal control measures in the affected and similar areas have been reviewed and enhanced. Disciplinary, criminal and civil proceedings have been instituted against those involved. 118 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 (c) Estimated non-technical revenue losses Non-technical losses arise mainly from meter tampering and bypasses, illegal connections to the electricity network and illegal vending of electricity. The management of non-technical losses focuses on ensuring that all energy supplied is accounted for, energy supplied and not invoiced is identified, lost revenue calculated and any lost revenue stemming from energy losses recovered. Eskom invoiced R449 million (2018: R368 million) of revenue relating to these losses during the year, of which R117 million has been received during the year. Interventions to reduce non-technical energy losses include: • reconciliation of the energy delivered and energy sold (ie energy accounting) at various levels of the network to prioritise high loss feeders for normalisation • revenue risk analysis to identify metering installations with a high revenue risk • auditing and repairing of faulty customer meter installations • disconnection of illegal connections, meter tampers and imposition of penalties (remedial fees) • correction of process non-adherence and data anomalies • estimation and recovery of revenue for historical unaccounted energy where tampered, faulty or missing metering installations were encountered in the conventional customer base • systemisation of various elements of the loss management process to improve efficiencies (ie implementation of advanced analytics in identifying revenue risk, automation of revenue risk case management, energy balancing and rollout of tools for lost revenue estimation) • implementation of audit, advisory, training, standardisation, automation and benchmarking support • customer education, social mobilisation and partnership campaigns to change behaviour • customer education campaigns to drive behaviour change (d) Other crimes Material incidents (greater than R25 million) An oil leak occurred at the Tutuka Power Station that caused major damage to a unit. The leak is not seen as a technical failure and a case of malicious damage to property has been reported to the police. The matter is being investigated. Immaterial incidents (less than R25 million) The group experienced 1 838 (2018: 1 949) incidents of other criminal related conduct during the year. All instances were reported to Eskom’s security and, where appropriate, the police. During the year, 62 suspects were arrested. 51.4 Matters under investigation Matters under investigation include the following: • various non-compliances to PFMA section 51(1)(a)(iii) regarding the principles of fair, equitible, transparent, competitive and cost- effective procurement including inappropriate: – use of sole sources and emergencies – modifications to contracts – application of the Preferential Procurement Regulations (designated sectors, thresholds and tax non-compliance) – inappropriate application of CIDB Act • various non-adherence to internal policies and procedures including breaches of delegation of authority • possible undue influence where employees have a conflict of interest • potential losses due to a lack of reasonable care in project and contract management • interest and penalties being levied against Eskom due to instances of late payment of suppliers • challenges around the use and monitoring of panel contracts including the fairness and equitability of work allocated to suppliers • various other instances of non-adherence to internal policies and procedures resulting in losses Relevant disclosure will be made in a subsequent financial year should any losses or expenditure incurred prove to be irregular, fruitless and wasteful or due to criminal conduct. ESKOM HOLDINGS SOC LTD | 119 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 52. Reportable irregularities The external auditors raised certain reportable irregularities in terms of section 45 of the Auditing Profession Act in prior periods. Progress was made in clearing these reportable irregularities, but some will stay open until finalisation of court cases or conclusion of investigations by external parties. The table below reflects the status of the reportable irregularities at 31 March 2019. The discussion focused on items that were open at the previous year end. Description Action Status Reportable irregularities – 31 March 2017 • there were allegations that an early • the former GCE appealed the High Court decision to the • open, retirement agreement between Eskom and Supreme Court of Appeal. The Supreme Court of Appeal pending the the former GCE (B Molefe) was irregular dismissed his appeal in April 2019. He subsequently outcome of appealed the matter to the Constitutional Court the appeal • the Eskom Pension and Provident Fund issued a letter of demand to the former GCE in April 2019 for payment of the amounts ordered by the High Court • the Hawks are currently investigating the matter Reportable irregularities – 30 September 2017 • a parliamentary inquiry was held into • Eskom investigated and action was taken, including • open, perceived maladministration, governance relevant reporting where appropriate, against those pending and procurement issues at Eskom. Certain implicated in the parliamentary inquiry finalisation representations made by previous and • some of the implicated employees resigned or their and current directors and officials indicated that employment was terminated conclusion there could have been a breach of fiduciary • criminal charges were lodged against relevant employees by the duties in terms of the requirements of the • the final report on the inquiry was adopted by the Zondo Companies Act Portfolio Committee on Public Enterprises on Commission 28 November 2018 • the findings of the report, which were not conclusive, have been analysed. The report recommended that the findings and evidence be submitted to the Judicial Commission of Inquiry into Allegations of State Capture (Zondo Commission) for further investigation • the Zondo Commission is ongoing and Eskom is participating in this process • Eskom procured the services of McKinsey • executives and senior management resigned • closed, through its sole source supplier process and, • criminal charges were lodged against relevant employees McKinsey as a result, a competitive bidding process was • the business relationship with McKinsey and Trillian was • open, Trillian not followed terminated – pending • in addition, the subcontracting of Trillian • information was provided to the Hawks for investigation completion Management Consultancy (Trillian) by • McKinsey repaid R902 million plus interest of R99 million of the McKinsey did not follow the procurement during the year recovery process • The High Court ruled against Trillion on 18 June 2019 and process • a further issue relating to this matter ordered it to repay R595 million to Eskom was raised on 31 March 2018 where the former chief procurement officer (CPO) (E Mabelane), former GE: group capital (A Masango), former acting GE: group capital (P Govender) and former CS (S Daniels) approved payments to Trillian without the existence of a contract thereby breaching their fiduciary duties • the former CFO (A Singh) approved a • the former CFO resigned • open, guarantee on behalf of Eskom to Tegeta • the guarantee was not called on and expired on pending Exploration and Resources (Pty) Ltd in 31 March 2017 recovery of December 2015 in contravention of the • guarantee fees were incurred and reported as fruitless guarantee PFMA without proper delegation of authority and wasteful expenditure in terms of the PFMA fees • the cost incurred will be recovered from the former CFO • certain services provided by Cliffe Dekker • the former CS was dismissed • closed Hofmeyr (CDH) to the former company • the business relationship with CDH was terminated secretary (CS) (S Daniels) were questionable • all legal matters handled by CDH were formally handed in terms of Eskom rules over to Eskom • a letter was sent to the Law Society of South Africa regarding the conduct of CDH 120 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 Description Action Status • minutes of the board and its sub-committees • improvements in the minute approval process were • closed were not timeously approved implemented • improvements in the tracking and monitoring of the status of board decisions have been implemented • Eskom did not timeously update directors’ • the changes were lodged with and updated by the CIPC • closed records with the Companies and Intellectual • quarterly reviews of CIPC and company statutory Property Commission (CIPC) records were implemented to ensure compliance with the Companies Act Reportable irregularities – 31 March 2018 • there were allegations that the former • the former CFO and interim GCE resigned • open, CFO (A Singh) and former interim GCE • the agreement was not binding as the required formal awaiting (S Maritz) breached their fiduciary duties by approval from the DPE and National Treasury was not conclusion contractually and financially binding Eskom to obtained of Zondo a facilitation fee with Huarong Asset Financing • there was no financial loss to Eskom Commission • it was communicated to Huarong that Eskom would not honour any agreement as it is considered not binding • the matter was discussed at the Zondo Commission • there were allegations that the CPO (J Pillay) • the CPO and two employees resigned • closed and other senior officials in procurement • the investigation was finalised and no significant matter were involved in acts of misconduct involving was found against the CPO and supplier EOH Holdings Ltd • there were allegations that Eskom incorrectly • the GE: security resigned • open, procured services from Bizz Tracers (Pty) Ltd • the investigation into the matter was finalised and the pending through the sole source supplier process findings from the investigation are being actioned addressing of • subsequent to 31 March 2018, further • letters of demand were issued to relevant suppliers for findings and suppliers were identified where services recovery of monies paid finalisation were incorrectly procured through the sole of recovery source supplier process process • it was alleged that the former CS • the former CS was dismissed and the former interim • closed (S Daniels) and the former interim GCE GCE resigned (MM Koko) distributed confidential Eskom • the investigation into the matter was finalised and it documentation to a third party was confirmed that the former interim GCE distributed confidential Eskom information to third parties • the matter was handed over to the Special Investigating Unit which will lay criminal charges against the former interim GCE Reportable irregularities – 30 September 2018 • a member of the board and Audit and Risk • the board member resigned • closed committee (J Sebulela) did not declare a • the tender process was withdrawn conflict of interest and did not recuse himself • the board deliberated on the matter and took appropriate from deliberations involving the supplier action in terms of its responsibility (EOH) • the Minister of the DPE was formally informed of the matter in January 2019 as well as its responsibility to close out the matter in terms of the Companies Act (contravention in terms of section 50(3)(a) and (b) of Companies Act) • legal fees were paid on behalf of certain • the former board members resigned • open, former board members that were not directly • it was confirmed that legal fees had been paid on behalf of pending related to their roles as directors of Eskom BS Ngubane, MV Pamensky and DV Naidoo finalisation • letters of demand and summons were issued to former of recovery board members for recovery of fees paid process Reportable irregularities – 31 March 2019 • there was non-compliance in terms of the • condonation of the late submission was requested from • open, B-BBEE Act as Eskom’s compliance report the B-BBEE commissioner pending and annual financial statements were not • the relevant submissions were made as required confirmation submitted timeously as required • procedures have been put in place to ensure that the of exemption relevant submissions will be submitted timeously • Eskom did not apply the relevant code of • the findings issued by the B-BBEE commissioner on the • open, good practice in terms of the B-BBEE Act non-compliance to the code of good practice are being pending when evaluating a request for proposal addressed addressing and the award made to Dongfang Electrical findings Corporation Limited of non- compliance ESKOM HOLDINGS SOC LTD | 121 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2019 53. Pro forma revaluation of property, plant and equipment (unaudited) The group currently accounts for its property, plant and equipment using the cost model under IAS 16 Property, plant and equipment. The cost model requires that property, plant and equipment should be measured at cost (including borrowing cost capitalised in respect of qualifying assets), less accumulated depreciation and impairment. However, the cost model does not reflect the true economic value of the group’s property, plant and equipment and the basis on which our tariff is calculated by NERSA. Therefore, a summary has been provided below reflecting what the impact on the financial statements would be if the group’s property, plant and equipment was measured using the depreciated replacement cost (DRC) model. Borrowing costs were not included in the carrying amount of property, plant and equipment when determining the increase or decrease in the revaluation surplus and have therefore been expensed. The fair values determined using the DRC model were reviewed for possible impairment loss in order to determine whether or not the net future cash inflows related to the use of property, plant and equipment are less than the calculated fair value of property, plant and equipment. The fair values disclosed below are net of the adjustment made for the tariff shortfall in the first few years of R566 billion (2018: R393 billion). This shortfall is expected to be eliminated once the electricity price determined in terms of the regulatory methodology, which is based on the depreciated replacement values, is cost reflective. 2019 2018 Historical Adjustments After Historical Adjustments After cost revaluation cost revaluation Rm Rm Rm Rm Rm Rm Summarised group statements of financial position Assets Property, plant and equipment 651 637 54 308 705 945 630 648 232 435 863 083 Other assets 106 381 – 106 381 108 468 – 108 468 758 018 54 308 812 326 739 116 232 435 971 551 Equity and liabilities Total equity 153 094 39 102 192 196 170 336 167 353 337 689 Deferred tax 8 350 15 206 23 556 15 846 65 082 80 928 Other liabilities 596 574 – 596 574 552 934 – 552 934 758 018 54 308 812 326 739 116 232 435 971 551 Summarised group income statements Profit before depreciation and amortisation expense, impairment of other assets and other expenses 46 151 – 46 151 61 837 – 61 837 Depreciation and amortisation expense (29 756) (731) (30 487) (23 132) (4 033) (27 165) Impairment of other assets 153 (168) (15) (25) 19 (6) Other expenses (18 214) (102) (18 316) (18 228) (219) (18 447) (Loss)/profit before net finance cost (1 666) (1 001) (2 667) 20 452 (4 233) 16 219 Net finance cost (27 517) (15 378) (42 895) (23 089) (15 547) (38 636) Share of profit of equity-accounted investees, net of tax 35 – 35 34 – 34 Loss before tax (29 148) (16 379) (45 527) (2 603) (19 780) (22 383) Income tax 8 419 4 586 13 005 266 5 539 5 805 Loss for the year (20 729) (11 793) (32 522) (2 337) (14 241) (16 578) Summarised group statements of comprehensive income Loss for the year (20 729) (11 793) (32 522) (2 337) (14 241) (16 578) Other comprehensive income/(loss) 3 685 (116 458) (112 773) (3 269) 126 336 123 067 Revaluation reserve (reversed)/raised – (161 748) (161 748) – 175 467 175 467 Other items of other comprehensive loss 5 096 – 5 096 (4 532) – (4 532) Income tax thereon (1 411) 45 290 43 879 1 263 (49 131) (47 868) Total comprehensive (loss)/income for the year (17 044) (128 251) (145 295) (5 606) 112 095 106 489 122 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 APPENDIX – ACRONYMS, ABBREVIATIONS AND DEFINITIONS Accounting, audit and other financial terms CGU Cash Generating Unit DRC Depreciated Replacement Cost EBITDA Earnings Before Interest, Tax, Depreciation and Amortisation GDP Gross Domestic Product IAS International Accounting Standard/(s) IFRIC International Financial Reporting Interpretations Committee IFRS International Financial Reporting Standard/(s) IRBA International Regulatory Board for Auditors IAS International Standards on Auditing JSE Johannesburg Stock Exchange LIFO Last-In-First-Out PPI Producer Price Index R Rand Rm Rand millions SIC Standing Interpretations Committee of the International Accounting Standards Committee SPPI Solely Payments of Principal and Interest VAT Value Added Tax WACC Weighted Average Cost of Capital Currencies AUD Australian Dollar CAD Canadian Dollar CHF Swiss Franc EUR Euro GBP Pound Sterling (United Kingdom) JPY Japanese Yen NOK Norwegian Krone SEK Swedish Krona USD United States Dollar ZAR South African Rand Entities company Eskom Holdings SOC Ltd EFC Eskom Finance Company SOC Ltd EPPF Eskom Pension and Provident Fund Escap Escap SOC Ltd Eskom Eskom Holdings SOC Ltd Eskom Uganda Eskom Uganda Ltd group Eskom Holdings SOC Ltd and its subsidiaries Motraco Mozambique Transmission Company SARL Nqaba Nqaba Finance 1 (RF) Ltd UEGCL Uganda Electricity Generation Company Ltd UETCL Uganda Electricity Transmission Company Ltd Legislation Companies Act Companies Act, No.71 of 2008 PAA Public Audit Act, No. 25 of 2004 PFMA Public Finance Management Act, No. 1 of 1999 PPPFA Preferential Procurement Policy Framework Act, No. 5 of 2000 ESKOM HOLDINGS SOC LTD | 123 APPENDIX – ACRONYMS, ABBREVIATIONS AND DEFINITIONS continued Measures GWh Gigawatt hour kg Kilogram km Kilometre kWh Kilowatt hour kWhSO Kilowatt hour Sent Out ℓ Litre Mt Million tons MVA Mega volt ampere MW Megawatt MWh Megawatt hour MWhSO Megawatt hour Sent Out Other Alco Asset and Liability Committee Board Board of directors B-BBEE Broad-Based Black Economic Empowerment CA(SA) Chartered Accountant of South Africa CFO Chief Financial Officer CIDB Construction Industry Development Board DPE Department of Public Enterprises EUF Energy Utilisation Factor Exco Executive Management Committee GCE Group Chief Executive GE Group Executive IPP Independent Power Producer MYPD Multi-Year Price Determination NCD Negotiable Certificates of Deposit NERSA National Energy Regulator of South Africa OCGT Open Cycle Gas Turbine RCA Regulatory Clearing Account SADC Southern African Development Community SARB South African Reserve Bank SARS South African Revenue Services TMPS Total Measured Procurement Spend Definitions Cash interest cover ratio Net cash flows from operating activities divided by the aggregate of interest paid and received from financing activities EBITDA Revenue plus other income minus primary energy, employee benefit expense, impairment of financial assets, impairment of other assets and other expenses EBITDA margin EBITDA divided by revenue Free funds from operations Net cash flows from operating activities minus cash flows from changes in working capital Liquid assets Treasury investments plus cash and cash equivalents Net debt Debt securities and borrowings plus finance lease payables minus treasury investments minus financial trading assets plus financial trading liabilities plus derivative liabilities held for risk management (used to hedge other items of net debt) minus derivative assets held for risk management (used to hedge other items of net debt) minus payments made in advance (used to secure borrowings raised) minus cash and cash equivalents Net debt service cover Net cash flows from operating activities divided by the aggregate of debt repaid and interest paid and received from financing activities Net profit margin Net profit divided by revenue Working capital current assets Inventories plus payments made in advance (current portion) plus trade and other receivables (current portion) plus taxation asset Working capital current liabilities Trade and other payables (current portion) plus payments received in advance (current portion) plus provisions (current portion) plus employee benefit obligations (current portion) plus taxation liability Working capital ratio Working capital current assets divided by working capital current liabilities Refer to the integrated report for definitions relating to the shareholder compact key performance indicators on page 156. 124 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2019 CONTACT DETAILS Telephone numbers Websites and email addresses Eskom head office +27 11 800 8111 Eskom website www.eskom.co.za Contact@eskom.co.za Eskom Media Desk +27 11 800 3304 Eskom Media Desk MediaDesk@eskom.co.za +27 11 800 3309 +27 11 800 3343 +27 11 800 3378 Investor Relations +27 11 800 2775 Investor Relations InvestorRelations@eskom.co.za Whistle-blowing hotline 0800 112 722 Forensic investigations Investigate@eskom.co.za Eskom Development Foundation +27 11 800 8111 Eskom Development Foundation www.eskom.co.za/csi CSI@eskom.co.za National call centre 08600 ESKOM or Promotion of Access to PAIA@eskom.co.za 08600 37566 Information Act requests Customer SMS line 35328 Customer Service CSOnline@eskom.co.za Facebook EskomSouthAfrica Feedback on our report IRfeedback@eskom.co.za Twitter Eskom_SA MyEskom app Physical address Postal address Eskom Megawatt Park PO Box 1091 2 Maxwell Drive Johannesburg Sunninghill 2000 Sandton 2157 Group company secretary Company registration number Office of the Company Secretary Eskom Holdings SOC Ltd PO Box 1091 2002/015527/30 Johannesburg 2000 JOINT VENTURE [0004] www.eskom.co.za