Shift performance, grow sustainably Annual Financial Statements for the year ended 31 March 2012 Section contents Currency of financial statements 1 Note Statement of responsibilities and approval 2 6 Property, plant and equipment 59 Report of the audit and risk committee 3 7 Intangible assets 62 Statement by company secretary 3 8 Investments in equity-accounted investees 62 Independent auditors' report to Parliament and 4 9 Investment in subsidiaries 64 the shareholder 10 Financial instruments with group companies 66 Directors' report 6 11 Future fuel supplies 67 Statements of financial position 12 12 Deferred tax 67 Income statements 13 13 Financial instruments 68 Statements of comprehensive income 13 14 Embedded derivative liabilities 78 Statements of changes in equity 14 15 Derivatives held for risk management 79 Statements of cash flows 16 16 Finance lease receivables 81 Notes to the consolidated financial statements: 18 17 Payments made in advance 82 Note 18 Trade and other receivables 83 1 General information 18 19 Inventories 83 2 Summary of significant accounting policies: 18 20 Service concession arrangements 84 2.1 Basis of preparation and measurement 18 21 Share capital 85 2.2 Consolidation 20 22 Non-current assets and liabilities held-for-sale 85 2.3 Segment reporting 21 23 Deferred income 87 2.4 Foreign currency translation 21 24 Employee benefit obligations 88 2.5 Property, plant and equipment 21 25 Provisions 92 2.6 Intangible assets 22 26 Finance lease liabilities 93 2.7 Impairment of non-financial assets 22 27 Trade and other payables 93 2.8 Capitalisation of borrowing costs 23 28 Payments received in advance 93 2.9 Service concession arrangements 23 29 Revenue 93 2.10 Leases 23 30 Employee benefit expense 94 2.11 Financial instruments 24 31 Depreciation and amortisation expense 94 2.12 Inventories 27 32 Net impairment loss 94 2.13 Future fuel supplies 28 33 Other operating expenses 94 2.14 Share capital 28 34 Other income 94 2.15 Equity reserve 28 35 Net fair value loss on financial instruments, 95 2.16 Income tax 28 excluding embedded derivatives 2.17 Deferred tax 28 36 Finance income 95 2.18 Payments received in advance 28 37 Finance cost 95 2.19 Deferred income 28 38 Income tax 96 2.20 Reinsurance contracts 28 39 Cash generated from operations 97 2.21 Employee benefits 29 40 Guarantees and contingent liabilities 98 2.22 Provisions 29 41 Commitments 100 2.23 Revenue recognition 30 42 Related-party transactions 100 2.24 Finance income 30 43 Events after the reporting date 102 2.25 Finance cost 30 44 Restatement of comparatives and changes in 103 2.26 Dividend income 30 accounting policies 2.27 Dividend distribution 30 45 Directors' remuneration 106 2.28 Non-current assets and liabilities held-for-sale 30 46 Pro-forma revaluation of property, plant and 110 2.29 Related-party transactions 30 equipment 2.30 Transfers of assets from customers 30 3 Financial risk management: 31 The audited group annual financial statements and the annual financial statements of Eskom Holdings SOC Limited (Eskom) 3.1 Credit risk 31 have been prepared under the supervision of the finance 3.2 Market risk 41 director, PS O’Flaherty CA(SA). 3.3 Liquidity risk 48 3.4 Capital management 52 The audited annual financial statements of the group and 4 Critical accounting estimates and judgements 54 Eskom as at and for the year ended 31 March 2012 are available for inspection at the company’s registered office and 5 Segment information 56 on the Eskom website at www.eskom.co.za. Eskom Holdings SOC Limited Annual Financial Statements 2012 Currency of financial statements The financial statements are expressed in South African rand (R), which is the functional currency of the group and company. The following are approximate values of R1.00 to the selected currencies and one unit of the selected currencies to the rand: R1.00 to the selected One unit of the selected currency currency to the rand March March March March 2012 2011 2012 2011 EUR 0.10 0.10 10.25 9.61 USD 0.13 0.15 7.68 6.78 GBP 0.08 0.09 12.27 10.87 CHF 0.12 0.13 8.51 7.41 JPY 11.11 12.50 0.09 0.08 SEK 0.86 0.93 1.16 1.08 CAD 0.13 0.14 7.70 6.98 AUD 0.13 0.14 7.96 7.00 NOK 0.74 0.81 1.35 1.23 Currency Abbreviation Currency Abbreviation Euro EUR Swedish krona SEK United States dollar USD Canadian dollar CAD Pound sterling (United Kingdom) GBP Australian dollar AUD Swiss franc CHF Norwegian krone NOK Japanese yen JPY Eskom Holdings SOC Limited Annual Financial Statements 2012 01 Statement of responsibilities and approval The Public Finance Management Act requires the directors to Based on the information and explanations given by management, ensure that Eskom Holdings SOC Limited (Eskom) and its the internal audit function and discussions held with the independent subsidiaries (the group) keep full and proper records of their external auditors, the directors are of the opinion that the internal financial affairs. The financial statements should fairly present the accounting controls are adequate to ensure that the financial state of affairs of Eskom and the group, its financial results, its records may be relied upon for preparing the financial statements, performance against predetermined objectives for the year and its and that accountability for assets and liabilities is maintained. financial position at the end of the year in terms of International Financial Reporting Standards. The audit and risk committee has reviewed the effectiveness of Eskom and the group’s internal controls and considers the systems To enable the directors to meet the above mentioned appropriate for the effective operation of Eskom and the group. responsibilities, the Eskom board of directors sets standards and The committee has evaluated Eskom and the group’s annual management implements systems of internal control. The controls financial statements and has recommended their approval to the are designed to provide cost-effective assurance that assets are board. The audit and risk committee’s approval is set out on page 3. safeguarded, and that liabilities and working capital are efficiently managed. Policies, procedures, structures and approval frameworks Nothing significant has come to the attention of the directors to provide direction, accountability and division of responsibilities, and indicate that any material breakdown has occurred in the contain self-monitoring mechanisms.The controls throughout Eskom functioning of these controls, procedures and systems during the and the group focus on those critical risk areas identified by year under review. operational risk management and confirmed by executive management. Both management and the internal audit department In the opinion of the directors, based on the information available closely monitor the controls, and actions are taken to correct to date, the financial statements fairly present the financial position deficiencies as they are identified. of Eskom and the group at 31 March 2012 and the results of its operations and cash flow information for the year then ended. The financial statements are the responsibility of the directors. The external auditors are responsible for independently auditing the The Eskom and group annual financial statements for the year financial statements in accordance with International Standards of ended 31 March 2012 have been prepared under the supervision Auditing and the Public Audit Act, 25 of 2004. of the finance director, PS O’Flaherty CA(SA), and approved by the board of directors and signed on its behalf on 31 May 2012 by: The directors have made an assessment of the ability of Eskom and the group to continue as a going concern in the foreseeable future and are satisfied that Eskom and the group have access to adequate resources and facilities to be able to continue operations for the foreseeable future. Accordingly the board have continued to adopt the going-concern basis in preparing the financial statements. ZA Tsotsi BA Dames PS O’Flaherty Chairman Chief executive Finance director The financial statements of Eskom and the group have been 31 May 2012 31 May 2012 31 May 2012 prepared in terms of International Financial Reporting Standards, the Companies Act of South Africa, 71 of 2008, as amended, and the Public Finance Management Act, 1 of 1999, as amended. These financial statements are based on appropriate accounting policies, supported by reasonable and prudent judgements and estimates and are prepared on the going-concern basis. 02 Eskom Holdings SOC Limited Annual Financial Statements 2012 Report of the audit and risk committee Report in terms of the Public Finance The audit and risk committee is of the opinion, based on Management Act, 1 of 1999 the information and explanations given by management and the The audit and risk committee reports that it has adopted assurance and forensic department and discussions with appropriate formal terms of reference as its audit and risk the independent external auditors that: committee charter, has regulated its affairs in compliance with this • the expertise, resources and experience of the finance function charter, and has discharged all of its responsibilities contained are adequate therein. • the system and process of risk management and compliance processes are adequate In the conduct of its duties, the audit and risk committee has, inter • the internal accounting controls are adequate to ensure that the alia, reviewed the following: financial records may be relied upon for preparing the financial statements, and accountability for assets and liabilities is • Finance function maintained –– the expertise, resources and experience of the finance • the information contained in the integrated report and the function divisional report on the Eskom website is reliable and does not contradict the financial information in the integrated report or • Internal control, management of risks and compliance with the annual financial statements legal and regulatory provisions • the effectiveness of the assurance and forensic department is –– the effectiveness of the internal control systems adequate and the internal audit charter was approved by the –– all factors and risks that may impact on the integrity of the audit and risk committee integrated report • having considered the matters set out in section 94(8) of the –– the effectiveness of the system and process of risk management Companies Act of South Africa, 71 of 2008, as amended, and is including the following specific risks: satisfied with the independence and objectivity of the external º financial reporting auditors º internal financial controls º fraud risks relating to financial reporting Nothing significant has come to the attention of the audit and risk º information technology risks relating to financial reporting committee to indicate that any material breakdown in the º the effectiveness of the entity’s compliance with legal and functioning of these controls, procedures and systems has occurred regulatory provisions during the year under review. • Financial and sustainability information provided The audit and risk committee has evaluated the financial statements –– the adequacy, reliability and accuracy of financial information of Eskom Holdings SOC Limited and the group for the year ended provided by management 31 March 2012 and based on the information provided to the –– the disclosure of sustainability issues in the integrated report audit and risk committee, considers that they comply, in all material to ensure that it is reliable and it does not conflict with the respects, with the requirements of the International Financial financial information Reporting Standards, the Companies Act of South Africa, 71 of 2008, as amended, and the Public Finance Management Act, 1 of • Internal and external audit 1999, as amended. The audit and risk committee concurs with the –– the effectiveness of the assurance and forensic department board of directors and management that the adoption of the (internal audit) going-concern premise in the preparation of the financial –– the activities of the assurance and forensic department, statements is appropriate. The audit and risk committee has including its annual work programme, coordination with the therefore, at their meeting held on 30 May 2012, recommended external auditors, the reports of significant investigations and the adoption of the financial statements by the board of directors. the responses of management to specific recommendations –– the independence and objectivity of the external auditors –– accounting and auditing concerns identified as a result of internal and external audits, including reportable irregularities In line with the principles of combined assurance as outlined in the C Mabude King III report on corporate governance, Eskom has developed a Chairman combined assurance model and is in the process of implementing 31 May 2012 the model to ensure a coordinated approach to assurance activities. Statement by company secretary In terms of section 88(2)(e) of the Companies Act, 71 of 2008, as amended, 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. B Mbomvu Company secretary 31 May 2012 Eskom Holdings SOC Limited Annual Financial Statements 2012 03 Independent auditors’ report to Parliament and the shareholder – Minister of Public Enterprises Report on the annual financial statements Opinion We have audited the group annual financial statements and annual In our opinion, these financial statements present fairly, in all financial statements of Eskom Holdings SOC Limited (Eskom) material respects, the consolidated and separate financial position which comprise the consolidated and separate statements of of Eskom Holdings SOC Limited at 31 March 2012 and its financial position at 31 March 2012, the consolidated and separate consolidated and separate financial performance and cash flows for statements of comprehensive income, changes in equity and cash the year then ended in accordance with International Financial flows for the year then ended, and the notes to the financial Reporting Standards, the requirements of the Public Finance statements which contain a summary of significant accounting Management Act of South Africa and in the manner required by policies and other explanatory information as set out on pages the Companies Act of South Africa. 12 to 110. Other reports required by the Companies Act Directors’ responsibility for the annual financial statements As part of our audit of the financial statements for the year ended The board of directors, which constitute the accounting authority, 31 March 2012, we have read the report of the audit and risk is responsible for the preparation and fair presentation of these committee, the statement by company secretary and the directors’ financial statements in accordance with International Financial report for the purpose of identifying whether there are material Reporting Standards, the requirements of the Public Finance inconsistencies between these reports and the audited financial Management Act of South Africa, 1 of 1999, as amended and the statements. These reports are the responsibility of the respective Companies Act of South Africa, 71 of 2008, as amended, and for preparers. Based on reading these reports we have not identified such internal control as the directors determined is necessary to material inconsistencies between these reports and the audited enable the preparation of financial statements that are free from financial statements. However, we have not audited these reports material misstatement, whether due to fraud or error. and accordingly do not express an opinion on these reports. Auditors’ responsibility for the annual financial statements PAA Requirements Our responsibility is to express an opinion on these financial In accordance with the PAA of South Africa, and the General statements based on our audit. We conducted our audit in Notice issued in terms thereof, we report the following findings accordance with the Public Audit Act (PAA), 25 of 2004, of South relevant to performance against predetermined objectives, Africa, the General Notice issued in terms thereof and International compliance with laws and regulations and internal control, but not Standards on Auditing. Those standards require that we comply for the purpose of expressing an opinion. with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free Predetermined objectives from material misstatement. We performed procedures to obtain evidence about the usefulness and reliability of the information in the shareholder compact An audit involves performing procedures to obtain audit evidence included in the directors’ report as set out on pages 6 to 7 of the about the amounts and disclosures in the financial statements. The annual financial statements, and reported thereon to the board of procedures selected depend on the auditors’ judgement, including directors. the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk The reported performance against predetermined objectives was assessments, the auditors consider internal controls relevant to the evaluated against the overall criteria of usefulness and reliability.The entity’s preparation and fair presentation of the financial statements usefulness of information in the annual performance report relates in order to design audit procedures that are appropriate in the to whether it is presented in accordance with the National circumstances, but not for the purpose of expressing an opinion on Treasury’s annual reporting principles and whether the reported the effectiveness of the entity’s internal controls. An audit also performance is consistent with the objectives. The usefulness of includes evaluating the appropriateness of accounting policies used information further relates to whether indicators and targets are and the reasonableness of accounting estimates made by measurable (ie well defined, verifiable, specific, measurable and management, as well as evaluating the overall presentation of the time bound) and relevant as required by the National Treasury financial statements. Framework for managing programme performance information. We believe that the audit evidence we have obtained is sufficient The reliability of the information in respect of the selected and appropriate to provide a basis for our audit opinion. objectives is assessed to determine whether it adequately reflects the facts (ie whether it is valid, accurate and complete). 04 Eskom Holdings SOC Limited Annual Financial Statements 2012 Independent auditors’ report to Parliament and the shareholder – Minister of Public Enterprises continued There were no material findings on the shareholder compact concerning the usefulness and reliability of the information. Compliance with laws and regulations We performed procedures to obtain evidence that the entity has complied with applicable laws and regulations regarding financial matters, financial management and other related matters. We did not identify any instances of material non-compliance with specific matters in key applicable laws and regulations as set out in the General Notice issued in terms of the PAA. Internal control We considered internal control relevant to our audit of the financial statements, shareholder compact and compliance with laws and regulations. We did not identify any deficiencies in internal control that we considered sufficiently significant for inclusion in this report. Other matters Investigations in progress and completed During the financial year under review the group initiated investigations into alleged irregularities and fraud within the procurement and asset management environments. No material findings were identified relating to those investigations completed during the year. At the reporting date, certain investigations are still ongoing. KPMG Inc SizweNtsalubaGobodo Inc Registered auditor Registered auditor Per AH Jaffer Per JE Strauss Chartered Accountant (SA) Chartered Accountant (SA) Registered auditor Registered auditor Director Director 31 May 2012 31 May 2012 85 Empire Road 20A Morris Street East Parktown Woodmead 2193 2191 Eskom Holdings SOC Limited Annual Financial Statements 2012 05 Directors’ report The directors are pleased to present their report for the year While most of Eskom’s business is within South Africa, the ending 31 March 2012. company also buys and sells electricity in the SADC region. Eskom’s involvement in African markets beyond South Africa is currently Principal activities, state of affairs and primarily limited to projects that have a direct impact on ensuring business review a secure supply of electricity for South Africa itself. Eskom Holdings SOC Limited (Eskom) is South Africa’s primary electricity supplier. The company, which is wholly owned by the Eskom Enterprises has two material operating subsidiaries, Rotek South African government, generates, transmits and distributes Industries SOC Limited and Roshcon SOC Limited and also has an electricity to industrial, mining, commercial, agricultural and interest in electricity operation and maintenance concessions in residential customers, and to municipalities, which in turn Mali, Senegal, Mauritania and Uganda. redistribute electricity to businesses and households. Performance in terms of the shareholder compact Eskom has its head office in Johannesburg, with satellite operations Each year Eskom, in consultation with the Minister of Public across South Africa. It maintains a small office in London, primarily Enterprises, agrees on its performance objectives, measures and for quality control of the equipment being manufactured for the indicators in line with the Public Finance Management Act of South capital expansion programme. Eskom has several subsidiaries: Africa, 1 of 1999, as amended. Annual targets are annexed to a list of principles agreed to by Eskom and its shareholder (the • The Eskom Enterprises SOC Limited group (Eskom Enterprises) provides lifecycle support and plant maintenance, network shareholder compact) and regular reports are provided. protection and support for the capital expansion programme for all Eskom Holdings SOC Limited divisions. Below is an overview of performance against the key performance indicators in Eskom’s shareholder compact with government, which • Escap SOC Limited, Eskom’s wholly owned captive insurance company, manages and insures Eskom’s business risk. is reported at an Eskom company level. Eskom has met its entire shareholder compact KPIs. • Eskom Finance Company SOC Limited grants home loans to Eskom employees. • The Eskom Development Foundation NPC is a wholly owned non-profit company that manages Eskom’s corporate social investment. Shareholder compact performance 2010 – 2012 Key performance area Key performance indicator Target Actual Actual Actual (company level) 2012 2012 2011 2010 Generation capacity (MW) ● 385 535 315 452 Ensuring adequate future Transmission lines (km) ● 606 631 443 600 electricity Transmission capacity installed (MVA) ● 500 2 525 5 940 1 630 Management of the national supply/ No load- No load- No load- No load- ● demand constraints shedding shedding shedding shedding Ensuring reliable electricity Demand-side management energy ● supply efficiency (GWh) 1 051 1 422 1 339 n/a Internal energy efficiency ● (GWh) 25.50 44.96 26.20 n/a Water usage (l/kWh sent out) ● ≤1.35 1.34 1.35 1.34 Cost of electricity1 (R/MWh) ● 387.02 374.19 296.36 255.09 Business sustainability Debt: equity ● ≤2.60 1.69 1.66 1.68 Interest cover ● ≥1.0 3.27 1.40 0.77 Local content in new build contracts ● placed (%) 52 77.2 79.7 73.9 Supporting the developmental objectives Total learners in the system (engineers) ● 1 800 2 273 1 335 955 of South Africa Total learners in the system (technicians) ● 700 844 692 681 Total learners in the system (artisans) ● 2 350 2 598 2 213 2 144 Pursuing private-sector Set up a ring-fenced systems and market Completed ● participation operator division within Eskom by year-end Completed n/a n/a 1. Excludes depreciation and amortisation 06 Eskom Holdings SOC Limited Annual Financial Statements 2012 Directors’ report continued The reasons for the significant variances between the actual final year of the MYPD 2 increase cycle and Eskom is conscious compared to the targeted KPI performance for the year are as of the impact of the price increases on both the consumer and follows: its own ability to recover costs. In response to the President’s call in his State of the Nation address for tariffs that support Ensuring adequate future electricity economic growth and job creation, and after robust evaluation • Generation capacity installed: Eskom requested that NERSA revise the 2012/13 increase –– The commissioning of Arnot unit 5 and Camden unit 6 were downwards from 25.9% to 16% for the period from 1 April 2012 brought forward to reduce the risk of loadshedding and to to 31 March 2013. Eskom is in the process of reviewing a number create opportunities for maintenance in Generation of scenarios to ascertain the potential effects of a longer phase-in –– Komati unit 4 experienced a turbine failure in the previous to a cost-reflective tariff. year. This unit was commissioned in the current year, but this was not included in the target for the current year Special pricing agreements (SPAs) have linked the price of • Transmission capacity: electricity to commodity prices, which has resulted in embedded –– Additional capacity to strengthen the north western grid was derivatives in the financial statements. The forward electricity price commissioned earlier than planned after a management curve used to value the embedded derivatives at 31 March 2012 decision to bring it forward was based on the current MYPD 2 approved tariff for 2012/13 of 16%, and a forward tariff path for the next five years (2013/14 to Ensuring reliable electricity supply 2017/18) that ultimately achieves cost-reflective tariffs. A sensitivity • Demand-side management energy efficiency and internal energy: analysis for the embedded derivatives appears in note 3.2 to the –– The targets were exceeded as a result of the increased focus annual financial statements on page 41. on demand reduction to reduce the risk of load shedding and to create opportunities to do maintenance in Generation The primary energy costs for the year amounted to R46.3 billion (2011: R35.8 billion). The costs include the environmental levy of Business sustainability R6.2 billion paid to the government (2011: R5.0 billion). The cost of • Debt:equity: primary energy as a percentage of electricity revenue was 41.0% –– The raising of funding was slowed down due to the delay in (2011: 39.6%). the expenditure on the capacity expansion programme • Interest cover: Group gross employee costs (before capitalisation) for the year to –– The credit that resulted from the remeasurement of the 31 March 2012 amounted to R24.4 billion (2011: R20.4 billion). shareholder loan improved the interest cover Company gross employee costs for the same period amounted to R22.0 billion (2011: R19.0 billion). Group and company employee Supporting the development objectives of South Africa costs of R4.2 billion were capitalised to capital projects during the • Local content: year (2011: R3.7 billion). –– The focus on the alignment to the Government’s National Growth Path, including revising the minimum targets for local Group annual arrear bad debt was 0.53% of the external revenue content in the Eskom tender requirements, resulted in the for the year to 31 March 2012 (2011: 0.75%). The residential debt exceeded performance against the target in Soweto continues to grow. Electricity debtors increased from • Learners: R11.5 billion at 31 March 2011 to R14.6 billion at 31 March 2012. –– Eskom embarked on an aggressive recruitment drive to The allowance for impairment for trade and other receivables increase the technical resource skills pool increased from R2.9 billion to R3.3 billion over the same period. State of affairs and business overview Other group operating expenses for the year to 31 March 2012, Results of operations which amounted to R15.2 billion (2011: R12.1 billion), consist The operating profit for the year for the Eskom group, before net primarily of repairs and maintenance and are monitored closely for fair value gains and losses and net finance costs, was R23.7 billion both the group and company. (2011: R18.8 billion) and R20.7 billion (2011: R17.2 billion) for the company. After capitalising borrowing costs and including unwinding of interest on provisions, together with the remeasurement adjustment The net profit for the year for the Eskom group was R13.2 billion on the shareholder loan, the net finance charges for the group and (2011: R8.4 billion). The net profit for the year for the company company for the year to 31 March 2012 was R4.0 billion (2011: was R12.7 billion (2011: R8.0 billion). R4.7 billion). Gross finance income for the year to 31 March 2012 was R3.5 billion (2011: R2.4 billion) for the group and R3.6 billion Group revenue for the year to 31 March 2012 was R114.8 billion (2011: R2.4 billion) for the company. (2011: R91.4 billion), while company revenue was R113.5 billion (2011: R90.9 billion). Included in electricity revenue is the Gross finance cost, which is stated net of the remeasurement of environmental levy of R4.3 billion (2011: R4.3 billion) charged to the government loan, for the group for the year to 31 March 2012 customers. was R12.5 billion (2011: R15.8 billion). The borrowing costs capitalised for the group was R5.0 billion for the year (2011: The sales of 224 785 GWh of electricity for the year represents an R8.6 billion). Unwinding of interest for the group amounted to increase of 0.2% compared to the previous year (2011: R2.0 billion (2011: R1.7 billion). 224 446 GWh). Significant progress has been made in funding the capital expansion The government-approved energy pricing policy aims to achieve programme and Eskom is in a healthy funding and liquidity position. cost-reflective tariffs that will reflect the full economic cost of The latest projections indicate that Eskom has sufficient cash from supplying electricity to customers. South Africa is entering the cash on hand, investments, net operational cash flows and current Eskom Holdings SOC Limited Annual Financial Statements 2012 07 Directors’ report continued secured facilities available to fund the business for at least the next Employee information 18 months, excluding funds from new facilities under negotiation. The Eskom group had a staff complement of 43 473 (2011: 41 778) and 40 802 (2011: 39 034) were employed by the Eskom must raise funding to pursue its committed capital company. Training has always been a major focus area and this expansion programme and improve and refurbish its current past year R1.4 billion (2011: R998 million) was spent on training operations. Total capital expenditure will be funded from operating and developing staff. The staff turnover during the year was cash flows and debt financing (raised locally and internationally). An again low at 3.7% (2011: 3.6%), but with the capital expansion amount of R63.4 billion (2011: R55.5 billion) was spent on capital programme underway, Eskom faces a number of skills-related expenditure, including borrowing cost capitalised, during the year challenges. and is disclosed in note 6 and 7 to the annual financial statements. Transformation Events subsequent to reporting date Eskom implemented an employment-equity plan supported by a The board of directors is currently in the process of developing a long-term target-setting strategy (Equity 2020) to drive its project plan and strategy for the disposal of Eskom Finance Company transformational agenda for the three financial years leading up to SOC Limited, a wholly owned subsidiary, in terms of a directive from the 2013 year end. The employment-equity plan seeks to create a the shareholder which was obtained after 31 March 2012. workplace and workforce profile that is diverse and inclusive, and to ensure that diversity becomes the Eskom way. Subsidiaries, associated and joint venture companies The investment of Eskom in subsidiaries, associate and joint venture In November 2010 Eskom participated in the Department of companies is disclosed in notes 8 and 9 in the annual financial Labour’s director-general review process. In February 2012 the statements. department confirmed that Eskom has the necessary transformation interventions in place. Pebble Bed Modular Reactor SOC Limited (PBMR) was previously not consolidated as it was not considered to be controlled by Eskom currently has 1 032 (2011: 1 012) employees with Eskom Enterprises in terms of the shareholder’s co-operation recognised disabilities, as per the Employment Equity Act of South agreement. However, with effect from 1 April 2011, Eskom Africa, 55 of 1998. Eskom continues to strive for a fair representation Enterprises obtained control over PBMR due to the termination of of people with disabilities. the cooperation agreement and consequently consolidated PBMR as per IAS 27 Consolidated and separate financial statements. The Safety acquisition of PBMR is considered to be a business combination As is noted in the table on the next page, despite the reduction in between entities under common control.Therefore all of the assets the overall number of fatalities from 2009 to 2012, which includes and liabilities have been recognised at their book values at the date a reduction in the number of contractor fatalities for the period of acquisition and the excess of the purchase consideration over 2009 to 2011, there has been a dramatic increase in employee the net assets of PBMR has been recognised directly in equity. fatalities during this financial year. The progressive lost-time injury rate (LTIR) is a proportional representation of the occurrence of Research and development activities lost-time injuries over 12 months.The actual LTIR performance was Eskom’s vision is to have a world-class research and innovation facility 0.41 per 200 000 man-hours worked against a target of 0.40 for staffed with globally respected researchers verified by international 2012 (2011: 0.47). benchmarking and peer review and enabled by increasing investment in people, laboratories and equipment. Research, testing and product Leadership acknowledged that a step change is needed in eliminating development are distinct mandates but with a common human and incidents.This resulted in the introduction of zero harm as a value and financial resource base. The research and technology function the launch of the zero harm campaign throughout the organisation. focuses on immediate challenges and provides solutions to some This is aimed at building a strong foundation for the elimination of strategic sustainability challenges. health and safety incidents within Eskom. Eskom leadership remains committed to achieving this goal of zero harm by improving the It also aims to ensure that Eskom makes the best use of current working environment, creating a healthier and safer culture for its and emerging technologies to improve performance at existing employees, suppliers and members of the public. The safety facilities and infuse the capital expansion projects with excellence expectations for the company entail a simple set of non-negotiable in engineering design. The research expenditure for the year to policies, principles, and standards set to achieve zero harm to all as a 31 March 2012 was R188 million (2011: R199 million). way of life and for each staff member to make it personal. 08 Eskom Holdings SOC Limited Annual Financial Statements 2012 Directors’ report continued Safety performance 2010 – 2012 Actual Actual Actual Unit of measure 2012 2011 2010 Employee safety Total fatalities number 13 7 2 Electrical contact fatalities number 4 3 0 Vehicle accident fatalities number 4 0 2 Other fatalities number 5 4 0 Lost-time incident rate, including occupational diseases index 0.41 0.47 0.54 Contractor safety Total contractor fatalities number 12 18 15 Electrical contact fatalities number 1 1 1 Vehicle accident fatalities number 5 10 6 Other fatalities number 6 7 8 Environmental issues capacity expansion projects) were employed from the local Environmental controls and oversight mechanisms are in place districts surrounding the projects. through the environmental management systems to ensure controls over those activities that have the potential to impact the environment Eskom B-BBEE attributable spend performance and ensure informed decision making through the obtaining of Target Actual Actual Actual environmental approvals and permits for proposed projects. 2012 2012 2011 2010 Through focused attention to the Eskom drive to achieve zero Attributable environmental incidents, environmental legal contraventions have spend (%) 60.0 73.2 52.3 28.6 reduced from last year, with the majority of contraventions still Black-women-owned related to emissions and water-management challenges on site. businesses as % of There were 50 environmental legal violations during the current attributable spend 8.0 3.3 4.3 12.1 year, down from 63 in 2011. There were two project specific activities that commenced before receiving the required The attributable spend target is in line with the Codes of Good environmental authorisation, resulting in administrative fines of Practice that prescribe a minimum of 50% for the first five years R1.1 million (2011: R0.4 million). that the codes are in effect. The 73.2% achieved indicates that Eskom has met and exceeded its B-BBEE target for the year. Going Corporate social investment forward, strategies are to be put in place to improve the Eskom recognises the need to align its corporate social investment performance of black-women-owned businesses, in particular. (CSI) activities to that of its business strategies and the communities where Eskom operates. As a corporate citizen Eskom’s CSI Introduction of amended Companies Act initiatives are aimed to contribute to the wellbeing of communities; In terms of the new Companies Act of South Africa, 71 of 2008 as but also towards skills development, education and enterprise amended, which came into operation on 1 May 2011, Eskom development and in turn promoting jobs, alleviating poverty and Holdings Limited changed its name to Eskom Holdings SOC improving employability. An amount of R87.9 million (2011: R62.3 Limited as of that date. million) was spent on CSI initiatives during the year. Eskom policy is not to make donations to any political parties. Eskom has amended its memorandum of incorporation in line with the Companies Act and has submitted it to the Minister of Public Supply development and localisation performance Enterprises for comment. It is envisaged that the memorandum of Local supplier development aims to enhance efforts in local incorporation will be approved by the shareholder in 2012. supplier development and localisation. Share capital and shareholder During 2012, Eskom’s total procurement spend was R156 billion The Government of the Republic of South Africa is the sole (2011: R115 billion). This has, in particular, resulted in the need for shareholder of Eskom Holdings SOC Limited. The shareholder’s a project sourcing excellence in support of the capital expansion representative is the Minister of Public Enterprises, Malusi Gigaba. programme. The impetus is to drive down operating unit costs, Eskom currently has 1 ordinary share of R1 issued. allowing cash to be freed up to drive other initiatives. Dividends Eskom’s capital expansion programme continues to support No dividend was declared during the current and prior year, and affirmative procurement and industrialisation. The annual target is none is proposed, after taking into account the resource impact of 52% local content in capital expansion contracts as set out in the the capital expansion programme, and the current capital structure. shareholder compact. For 2012, committed local content spend in capital expansion projects was R5.0 billion, equivalent to 77.2% of Going concern R6.7 billion total contracted value. The board has given particular attention to the assessment of the going concern of the group and is of the view that the group has Since the inception of the capacity expansion programme in 2005 access to adequate resources to continue in operational existence to the end of March 2012, some 28 616 (2011: 21 477) jobs have for the foreseeable future and to complete its current committed been created as a direct result of the build projects. A total of capital expansion programme through until 2018. 13 954 (2011: 11 519) people (49% of the total jobs created in Eskom Holdings SOC Limited Annual Financial Statements 2012 09 Directors’ report continued Directors Auditors The board currently consists of 12 non-executive directors and The statutory auditors for the forthcoming financial year will two executive directors (the chief executive and the finance be appointed at the annual general meeting scheduled for director). 14 June 2012. Mr Zola Tsotsi, a non-executive director was appointed as the Eskom’s policy is to not use the external auditors for non-audit chairman of Eskom in June 2011. services. In exceptional cases where the external auditors are to be used for non-audit services, the prior approval of the audit and In addition, eight new non-executive directors were appointed to risk committee must be obtained. the board during the financial year and nine non-executive directors retired including Mr Mpho Makwana (former chairman). Internal control and risk management An effective internal control framework is the responsibility of the The existing directors are: board. The audit and risk committee reviews the effectiveness of Details Date appointed the system and process of risk management including the following specific risks: Non-executive directors • financial reporting Zola Tsotsi (65) (chairman) June 2011 • internal financial controls Bernie Fanaroff (64) April 2010 • fraud risks relating to financial reporting • information technology risks relating to financial reporting Queendy Gungubele (53) August 2011 Neo Lesela (42) June 2011 In line with the principles of combined assurance as outlined in the King III report on corporate governance Eskom has developed a Bejabulile Luthuli (39) August 2011 combined assurance model and is in the process of implementing Collins Matjila (50) June 2011 the model to ensure a coordinated approach to assurance activities. Yasmin Masithela (38) June 2011 Chwayita Mabude (42) June 2011 For more information refer to the statement from the audit and Boni Mehlomakulu (39) April 2011 risk committee on page 3. Mafika Mkwanazi (58) June 2010 Effective compliance framework and processes Phenyane Sedibe (42) June 2011 Eskom is applying a combined assurance model to ensure Lily Zondo (43) August 2011 coordinated assurance activities.The board audit and risk committee oversees assurance activities. The committee also oversees the Executive directors establishment of effective systems of internal control to provide reasonable assurance that Eskom’s financial and non-financial Brian Dames (46) (chief executive) June 2010 objectives are achieved. Paul O’Flaherty (49) (finance director) January 2010 During 2012, Eskom implemented the compliance management The following directors retired on 27 June 2011: charter and the compliance strategic framework, approved by the • Mpho Makwana (chairman) board in 2010. Legislation pertaining to Eskom was reviewed • Zee Cele and governance, management and reporting capability created • Daniel Dube to enhance Eskom’s capacity to manage compliance. Baseline • Lars Josefsson principles have been established and Eskom will develop the • Hee-Beom Lee necessary supportive capacity in the coming year. • Wendy Lucas-Bull • John Mirenge Management of energy losses • Jacob Modise Energy losses reflect the difference between the quantity of energy • Uhuru Zikalala sent out from the power stations and the quantity sold to the various customers at the end of the value chain. Losses are Remuneration categorised as technical or non-technical in nature. The remuneration of the directors and the executives, who were members of the executive committee (Exco) during the financial Total losses were: year, is disclosed in note 45 to the annual financial statements, on Target Actual Actual page 106. Eskom seeks to ensure that its directors and officers are Energy losses 2012 2012 2011 appropriately qualified and trained for their role on the board and its committees. In terms of Eskom’s ethics policy, all interests in Distribution loss (%) ≤6.07 6.32 5.68 contracts have to be declared upfront. Transmission loss (%) ≤3.40 3.08 3.27 Eskom loss (%) ≤8.75 8.65 8.25 The board of directors is accountable for the organisation’s ethics management programme. Eskom has a code of ethics, supplementary code procedure and conflict of interest policy in place which is revised regularly. Directors declare their interests in accordance with these interests annually. Company secretary The details of the company secretary and her declaration in terms of section 88(2)(e) of the Companies Act are disclosed in her statement on page 3. 10 Eskom Holdings SOC Limited Annual Financial Statements 2012 Directors’ report continued Information required by the Public Finance Management has controls in place within each operating unit to Management Act report on and monitor this type of expenditure on a monthly basis. Performance management of Eskom subsidiaries This information is considered monthly and presented to the Exco The performance of Eskom’s wholly owned operating subsidiaries and quarterly to the audit and risk committee for review. is managed and monitored regularly through shareholder compacts Management believes, based on the controls in place that the with Eskom and annual business plans and budgets that are information reported is materially complete. approved by the respective boards of directors of the subsidiaries. Criminal conduct At the end of the 2012 financial year, shareholder compacts were Conductor theft in place for all South African based subsidiaries that traded Losses due to conductor theft (including theft of copper, throughout the year (except for PBMR which has been exempted cable, transformers and tower-related structures) totalled from this requirement). The performance of foreign subsidiaries is R63.3 million (2011: R38.7 million), and involved 9 584 incidents managed through the monitoring of the respective entities’ board (2011: 4 933 incidents). Actions to combat these losses are approved business plans taking into account the country specific managed by the Eskom Network Equipment Crime Committee in legislation. collaboration with affected state owned enterprises and the South African Police Services. The combined effort resulted in The performance results of all operating subsidiaries are reported 386 arrests (2011: 412 arrests). Stolen material worth R8.8 million monthly to, and reviewed by Eskom’s Exco. A centralised proactive (2011: R4.7 million) was recovered. and coordinated approach under the accountability of the divisional executive: Regulation and Governance is currently being Strike damage – Kusile power station implemented which will facilitate timeous approval of shareholder On 15 May 2011 external contractors embarked on an illegal compacts and ongoing monitoring thereof. strike at Kusile power station. The resulting financial damage due to theft and vandalism at Roshcon, a subsidiary of Eskom Enterprises, Losses through criminal conduct and irregular or fruitless is estimated at R17.7 million. The matter has been reported to the and wasteful expenditure South African Police Services and is currently under investigation. In terms of the materiality framework agreed with the shareholder, any losses due to criminal conduct or irregular or fruitless and Fraud wasteful expenditure, that individually (or collectively where items In 2012 Eskom management proactively initiated investigations into are closely related) exceed R10 million must be reported. alleged irregularities and fraud within the procurement and asset management. No material findings were noted in 2012. Irregular or fruitless and wasteful expenditure PN Energy Services SOC Limited (PNES) During the reporting period no significant incidents of fraud PNES is a wholly owned subsidiary of Eskom. The operations of occurred. Eskom concluded three investigations into fraud the company were closed down in 2010, and it did not operate in (2011: 12 investigations) involving an amount of R2.7 million the 2011 and 2012 financial years. (2011: R3.1 million). The existing internal control measures in the affected areas as well as similar areas have been reviewed and On 21 May 2010, the board of PNES confirmed that it was enhanced. Disciplinary, criminal as well as civil proceedings have investigating potential irregular and fruitless and wasteful been instituted against those involved. expenditure suffered by the company during the 2009 and 2010 financial years. PNES subsequently reported an amount of Tabling of the Eskom Holdings SOC Limited annual financial R58.7 million as irregular expenditure in its 2010 annual financial statement in Parliament statements. This amount relates to irregular contracts entered into The group annual financial statements of Eskom Holdings SOC with a third party. Included in this amount is fruitless and wasteful Limited for the year ended 31 March 2011 were approved by the expenditure of R17 million incurred due to additional costs arising board of directors on 31 May 2011, and were tabled in parliament from the irregular contracts. The legality of two contracts was on 27 July 2011. challenged in court. On 11 May 2011 the court found that both agreements were void ab initio. Eskom is considering further action against all the parties involved. Incidents of fruitless and wasteful expenditure below the materiality threshold The aggregate of other fruitless and wasteful expenditure which individually (or collectively where items are closely related) were below the materiality threshold, was R20.1 million (2011: R26.9 million) comprising 246 incidents (2011: 301 incidents) of which five incidents account for R6 million. In all instances management has instituted preventive and corrective measures as considered appropriate, including disciplinary action. Eskom Holdings SOC Limited Annual Financial Statements 2012 11 Statements of financial position at 31 March 2012 Group Company Restated1 Restated Restated1 Restated 2012 2011 2010 2012 2011 2010 Note Rm Rm Rm Rm Rm Rm Assets Non-current assets 318 877 265 183 203 162 312 941 260 277 199 723 Property, plant and equipment 6 290 661 236 724 187 905 290 613 236 217 187 008 Intangible assets 7 1 548 1 377 1 305 1 348 1 303 1 177 Investments in equity-accounted investees 8 261 220 196 95 95 95 Investment in subsidiaries 9 – – – 2 337 2 337 2 341 Future fuel supplies 11 5 452 4 089 3 768 5 452 4 089 3 768 Deferred tax assets 12 43 59 79 – – – Investment in securities 13 8 749 13 259 1 923 8 749 13 259 1 923 Loans receivable 13 7 435 5 958 4 579 – – – Derivatives held for risk management 13, 15 1 780 6 – 1 780 6 – Finance lease receivables 13, 16 555 570 532 555 570 532 Payments made in advance 17 2 060 2 396 2 856 1 984 2 387 2 856 Trade and other receivables 13,18 333 525 19 28 14 23 Current assets 63 050 62 258 42 953 62 921 60 914 41 622 Financial instruments with group companies 13, 10 – – – 5 208 3 806 2 461 Inventories 19 9 930 8 904 7 378 9 799 8 809 7 287 Taxation 43 59 88 – – – Investment in securities 13 12 281 24 546 2 148 9 854 22 310 1 035 Loans receivable 13 79 100 655 – – 549 Embedded derivative assets 13 – – 110 – – 110 Derivatives held for risk management 13,15 362 116 112 362 116 112 Finance lease receivables 13, 16 15 15 13 15 15 13 Payments made in advance 17 1 531 1 651 1 413 1 559 1 627 1 384 Trade and other receivables 13, 18 14 313 10 953 9 391 13 327 9 568 8 247 Financial trading assets 13 5 046 3 827 6 104 4 402 3 197 5 553 Cash and cash equivalents 13 19 450 12 087 15 541 18 395 11 466 14 871 Non-current assets held-for-sale 22 438 704 20 – – – Total assets 382 365 328 145 246 135 375 862 321 191 241 345 Equity Capital and reserves attributable to owner of the company 103 103 87 259 70 222 98 953 83 787 67 119 Liabilities Non-current liabilities 222 672 195 841 132 311 219 899 194 066 130 180 Debt securities issued 13 90 732 84 396 59 322 89 388 84 031 58 538 Borrowings 13 76 983 63 380 34 628 76 603 62 940 34 153 Embedded derivative liabilities 13, 14 4 639 5 357 4 583 4 639 5 357 4 583 Derivatives held for risk management 13, 15 1 273 4 576 3 626 1 273 4 576 3 626 Deferred tax liabilities 12 13 807 7 931 5 262 13 449 7 503 4 834 Deferred income 23 9 612 8 395 7 036 9 612 8 395 7 036 Employee benefit obligations 24 8 560 7 748 7 380 8 364 7 547 7 189 Provisions 25 12 740 10 343 7 713 12 638 10 307 7 464 Finance lease liabilities 13, 26 511 521 632 826 865 965 Trade and other payables 13, 27 1 971 1 508 1 134 1 263 859 797 Payments received in advance 28 1 844 1 686 995 1 844 1 686 995 Current liabilities 56 115 44 185 43 602 57 010 43 338 44 046 Financial instruments with group companies 13, 10 – – – 1 305 1 462 1 897 Debt securities issued 13 7 170 2 880 2 880 6 842 1 574 2 141 Borrowings 13 7 682 9 654 9 143 7 593 9 571 9 094 Embedded derivative liabilities 13, 14 900 516 139 899 515 138 Derivatives held for risk management 13, 15 3 590 1 404 4 644 3 590 1 404 4 644 Deferred income 23 657 638 342 657 638 342 Employee benefit obligations 24 3 054 2 623 2 397 2 861 2 488 2 265 Provisions 25 4 078 2 553 630 3 701 2 091 126 Finance lease liabilities 13, 26 10 8 52 51 37 74 Trade and other payables 13, 27 23 487 18 384 15 913 24 038 18 042 16 000 Payments received in advance 28 2 653 1 221 1 883 2 642 1 212 1 802 Taxation 3 – 66 – – 10 Financial trading liabilities 13 2 831 4 304 5 513 2 831 4 304 5 513 Non-current liabilities held-for-sale 22 475 860 – – – – Total liabilities 279 262 240 886 175 913 276 909 237 404 174 226 Total equity and liabilities 382 365 328 145 246 135 375 862 321 191 241 345 1. Refer to note 44. 12 Eskom Holdings SOC Limited Annual Financial Statements 2012 Income statements for the year ended 31 March 2012 Group Company Restated1 Restated1 2012 2011 2012 2011 Note Rm Rm Rm Rm Continuing operations Revenue 29 114 760 91 447 113 537 90 873 Primary energy2 (46 314) (35 795) (46 314) (35 795) Employee benefit expense 30 (20 132) (16 695) (17 722) (15 360) Depreciation and amortisation expense 31 (8 801) (7 219) (8 681) (7 059) Net impairment loss 32 (620) (788) (593) (734) Other operating expenses 33 (15 209) (12 070) (19 484) (14 628) Operating profit before net fair value gain/(loss) and net finance cost 23 684 18 880 20 743 17 297 Other income 34 699 587 2 990 1 688 Net fair value loss on financial instruments, excluding embedded derivatives 35 (2 388) (1 816) (2 390) (1 887) Net fair value gain/(loss) on embedded derivatives 334 (1 261) 334 (1 261) Operating profit before net finance cost 22 329 16 390 21 677 15 837 Net finance cost (3 963) (4 741) (3 911) (4 770) Finance income 36 3 536 2 436 3 564 2 425 Finance cost 37 (7 499) (7 177) (7 475) (7 195) Share of profit of equity-accounted investees, net of tax 8 41 24 – – Profit before tax 18 407 11 673 17 766 11 067 Income tax 38 (5 156) (3 261) (5 030) (3 116) Profit for the year from continuing operations 13 251 8 412 12 736 7 951 Discontinued operations Loss for the year from discontinued operations 22 (3) (56) – – Profit for the year 13 248 8 356 12 736 7 951 Attributable to: Owner of the company 13 248 8 356 12 736 7 951 Non-controlling interest3 – – – – 13 248 8 356 12 736 7 951 Statements of comprehensive income for the year ended 31 March 2012 Group Company 2012 2011 2012 2011 Note Rm Rm Rm Rm Profit for the year 13 248 8 356 12 736 7 951 Other comprehensive income/(loss) 2 502 (2) 2 430 34 Available-for-sale financial assets – net change in fair value 231 (40) 233 (36) Cash flow hedges Effective portion of changes in fair value 3 552 (1 031) 3 552 (1 031) Changes in fair value 3 538 (1 025) 3 538 (1 025)  Ineffective portion of changes in fair value reclassified to profit or loss 14 (6) 14 (6) Net amount transferred to initial carrying amount of hedged items (459) 246 (459) 246 Foreign currency translation differences for foreign operations 74 (33) – – Net actuarial gain on post-retirement medical aid benefits 24 20 408 20 408 Income tax on other comprehensive income/(loss) 38 (916) 448 (916) 447 Total comprehensive income for the year 15 750 8 354 15 166 7 985 Total comprehensive income for the year attributable to: Owner of the company 15 750 8 354 15 166 7 985 Non-controlling interest3 – – – – 15 750 8 354 15 166 7 985 1. Refer to note 44. 2. Primary energy relates primarily to the acquisition of coal, uranium, water, gas and diesel that are used in the generation of electricity together with the environmental levy. 3. Nominal amount. Eskom Holdings SOC Limited Annual Financial Statements 2012 13 Statements of changes in equity for the year ended 31 March 2012 Attributable to owner of the company Share Equity Cash Available- Unreal- Insur- Foreign Accu- Total Non- Total capital1 reserve2 flow for-sale ised ance currency mulated control- equity hedge reserve4 fair reserve6 trans- profit8 ling reserve3 value lation interest1 reserve5 reserve7 Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm Group Balance at 31 March 2010 – 21 837 (750) (153) (1 084) 55 25 50 292 70 222 – 70 222 Prior year restatement9 – – 494 – – – – (494) – – – Restated balance at 31 March 2010 – 21 837 (256) (153) (1 084) 55 25 49 798 70 222 – 70 222 Profit for the year – – – – – – – 8 356 8 356 – 8 356 Other comprehensive (loss)/ income, net of tax – – (233) (29) – – (33) 293 (2) – (2) Available-for-sale financial assets Net change in fair value – – – (29) – – – – (29) – (29) Cash flow hedges Effective portion of changes in fair value – – (410) – – – – – (410) – (410) Net amount transferred to initial carrying amount of hedged items – – 177 – – – – – 177 – 177 Foreign currency translation differences on foreign operations – – – – – – (33) – (33) – (33) Net actuarial loss on post- retirement medical benefits – – – – – – – 293 293 – 293 Subordinated loan from shareholder – 8 683 – – – – – – 8 683 – 8 683 Transfer between reserves – – 2 364 (193) 55 – (228) – – – Restated balance at 31 March 2011 – 30 520 (487) 182 (1 277) 110 (8) 58 219 87 259 – 87 259 Profit for the year – – – – – – – 13 248 13 248 – 13 248 Other comprehensive income, net of tax – – 2 248 166 – – 74 14 2 502 – 2 502 Available-for-sale financial assets Net change in fair value – – – 166 – – – – 166 – 166 Cash flow hedges Effective portion of changes in fair value – – 2 578 – – – – – 2 578 – 2 578 Net amount transferred to initial carrying amount of hedged items – – (330) – – – – – (330) – (330) Foreign currency translation differences on foreign operations – – – – – – 74 – 74 – 74 Net actuarial gain on post- retirement medical benefits – – – – – – – 14 14 – 14 Common control transaction10 – – – – – – – 94 94 – 94 Transfer between reserves – – (49) (58) (974) (20) – 1 101 – – – Balance at 31 March 2012 – 30 520 1 712 290 (2 251) 90 66 72 676 103 103 – 103 103 1. Nominal amount. 2.  The equity reserve comprises the day-one gain on initial recognition of the subordinated loan from the shareholder (refer to note 13.6). 3. The cash flow hedge reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments (comprising forward exchange contracts, interest rate swaps and cross-currency swaps) related to hedged transactions that have not yet occurred. The cross-currency swaps hedge foreign exchange rate risk of the future interest payments and the principal repayment on fixed rate bonds and loans (denominated in US dollar, euro and yen). 4. 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. 5. 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. 6. The insurance reserve is a contingency reserve created in terms of the Short-term Insurance Act, 53 of 1998. 7. The foreign currency translation reserve comprises exchange differences resulting from the translation of the results and financial position of foreign operations. 8. Accumulated profit is the amount of cumulative profit retained in the business after tax. 9. Refer to note 44. 10. Refer to note 9. 14 Eskom Holdings SOC Limited Annual Financial Statements 2012 Statements of changes in equity continued for the year ended 31 March 2012 Attributable to owner of the company Share Equity Cash Available- Unreal- Accumu- Total capital1 reserve2 flow for-sale ised lated hedge reserve4 fair value profit6 reserve3 reserve5 Rm Rm Rm Rm Rm Rm Rm Company Balance at 31 March 2010 – 21 837 (748) (159) (1 083) 47 272 67 119 Prior year restatement7 – – 494 – – (494) – Restated balance at 31 March 2010 – 21 837 (254) (159) (1 083) 46 778 67 119 Profit for the year – – – – – 7 951 7 951 Other comprehensive (loss)/income, net of tax – – (233) (26) – 293 34 Available-for-sale financial assets Net change in fair value – – – (26) – – (26) Cash flow hedges Effective portion of changes in fair value – – (410) – – – (410) Net amount transferred to initial carrying amount of hedged items – – 177 – – – 177 Net actuarial loss on post-retirement medical benefits – – – – – 293 293 Subordinated loan from shareholder – 8 683 – – – – 8 683 Transfer between reserves – – – 366 (194) (172) – Restated balance at 31 March 2011 – 30 520 (487) 181 (1 277) 54 850 83 787 Profit for the year – – – – – 12 736 12 736 Other comprehensive income, net of tax – – 2 248 168 – 14 2 430 Available-for-sale financial assets Net change in fair value – – – 168 – – 168 Cash flow hedges Effective portion of changes in fair value – – 2 578 – – – 2 578 Net amount transferred to initial carrying amount of hedged items – – (330) – – – (330) Net actuarial gain on post-retirement medical benefits – – – – – 14 14 Transfer between reserves – – (49) (58) (974) 1 081 – Balance at 31 March 2012 – 30 520 1 712 291 (2 251) 68 681 98 953 Dividends proposed No dividend has been proposed in the current or prior year. 1. Nominal amount. 2.  The equity reserve comprises the day-one gain on initial recognition of the subordinated loan from the shareholder (refer to note 13.6). 3. The cash flow hedge reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments (comprising forward exchange contracts, interest rate swaps and cross-currency swaps) related to hedged transactions that have not yet occurred. The cross-currency swaps hedge foreign exchange rate risk of the future interest payments and the principal repayment on fixed rate bonds and loans (denominated in US dollar, euro and yen). 4. 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. 5. 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. 6. Accumulated profit is the amount of cumulative profit retained in the business after tax. 7. Refer to note 44. Eskom Holdings SOC Limited Annual Financial Statements 2012 15 Statements of cash flows for the year ended 31 March 2012 Group Company Restated1 Restated1 2012 2011 2012 2011 Note Rm Rm Rm Rm Cash flows from operating activities Cash generated from operations 39 38 669 28 645 38 550 27 847 Net cash flows (used in)/from financial trading assets (1 353) 2 925 (1 340) 2 929 Net cash flows from/(used in) financial trading liabilities 1 612 (1 456) 1 612 (1 456) Net cash flows used in current derivatives held for risk management (280) (7 212) (280) (7 212) Net cash flows from/(used in) non-current assets held-for-sale 22 42 (4) – – Income taxes paid (161) (151) – – Net cash from operating activities 38 529 22 747 38 542 22 108 Cash flows used in investing activities Proceeds from disposal of property, plant and equipment 351 135 312 144 Acquisitions of property, plant and equipment (56 920) (43 975) (57 222) (44 098) Acquisitions of intangible assets (524) (350) (378) (374) Expenditure on future fuel supplies (2 043) (1 079) (2 043) (1 079) Decrease/(increase) in non-current trade and other receivables 188 (509) (18) 6 Increase in non-current loans receivable (1 477) (1 469) – – Decrease/(increase) in finance lease receivables 39 (20) 39 (20) Net cash flows from non-current assets and liabilities held-for-sale 22 – (10) – – Dividends received 30 26 13 15 Increase in non-current trade and other payables 343 793 284 485 Net cash used in investing activities (60 013) (46 458) (59 013) (44 921) Cash flows from financing activities Debt raised 22 308 69 191 22 342 61 534 Debt securities issued 7 111 26 144 7 111 26 144 Subordinated loan from shareholder2 – 20 000 – 20 000 Borrowings 15 197 23 047 15 231 15 390 Debt repaid (5 769) (9 189) (5 716) (1 648) Debt securities issued (2 268) (641) (2 268) (778) Borrowings (3 501) (8 548) (3 448) (870) Net cash flows from financial instruments with group companies – – (1 560) (1 771) Net cash flows from non-current assets held-for-sale 22 20 43 – – Decrease/(increase) in investment in securities 17 497 (33 693) 17 645 (32 564) Decrease in finance lease liabilities (46) (17) (76) (41) Net cash flows used in non-current derivatives held for risk management – (89) – (89) Interest received 3 211 2 353 3 291 2 331 Interest paid (8 501) (8 269) (8 526) (8 344) Net cash from financing activities 28 720 20 330 27 400 19 408 Net increase/(decrease) in cash and cash equivalents 7 236 (3 381) 6 929 (3 405) Cash and cash equivalents at beginning of the year 12 087 15 541 11 466 14 871 Cash and cash equivalents resulting from common control transaction 9 127 – – – Cash and cash equivalents at beginning of the year attributable to non-current assets held-for-sale – (73) – – Cash and cash equivalents at end of the year 13 19 450 12 087 18 395 11 466 1. Refer to note 44. 2. Includes nil (2011: R11 317 million) which is included in borrowings (refer to note 13.6). The remainder of the balance is recognised in equity. 16 Eskom Holdings SOC Limited Annual Financial Statements 2012 Statements of cash flows continued for the year ended 31 March 2012 Group Company Restated1 Restated1 2012 2011 2012 2011 Note Rm Rm Rm Rm Reconciliation of net cash flow to movement in net debt Net increase in debt securities issued 4 843 25 503 4 843 25 366 Net increase in borrowings 11 696 34 499 11 783 34 520 Net cash flows from financial instruments with group companies – – (1 560) (1 771) Decrease/(increase) in investment in securities 17 497 (33 693) 17 645 (32 564) (Increase)/decrease in loans receivable (1 468) (826) – 549 Decrease in finance lease liabilities (46) (17) (76) (41) Net cash flows used in derivatives held for risk management (280) (7 301) (280) (7 301) Net debt raised 32 242 18 165 32 355 18 758 Portion on subordinated loan from shareholder allocated to equity – (8 683) – (8 683) Non-cash flow movements 2 189 7 842 2 200 7 836 Cash and cash equivalents resulting from common control transaction (127) – – – Cash and cash equivalents at beginning of the year attributable to non-current assets held-for-sale – 73 – – Net (increase)/decrease in cash and cash equivalents for the year (7 236) 3 381 (6 929) 3 405 Movement in net debt for the year 27 068 20 778 27 626 21 316 Net debt at beginning of the year 110 747 89 969 115 497 94 181 Net debt at end of the year 137 815 110 747 143 123 115 497 Analysis of net debt Debt securities issued 13 97 902 87 276 96 230 85 605 Borrowings 13 84 665 73 034 84 196 72 511 Finance lease liabilities 13, 26 521 529 877 902 Financial instruments with group companies 13, 10 – – (3 903) (2 344) Derivatives held for risk management 13, 15 2 721 5 858 2 721 5 858 185 809 166 697 180 121 162 532 Cash and cash equivalents 13 (19 450) (12 087) (18 395) (11 466) Investment in securities 13 (21 030) (37 805) (18 603) (35 569) Loans receivable 13 (7 514) (6 058) – – Net debt at end of the year 137 815 110 747 143 123 115 497 1. Refer to note 44. Eskom Holdings SOC Limited Annual Financial Statements 2012 17 Notes to the consolidated financial statements for the year ended 31 March 2012 1. General information Standards, interpretations and amendments to published Eskom Holdings SOC Limited (Eskom), a public company standards that are not yet effective and holding company of the group, is incorporated and The following new standards, amendments and domiciled in the Republic of South Africa. Eskom is a interpretations to existing standards have been published vertically integrated operation that generates, transmits that are applicable for future accounting periods but have and distributes electricity to industrial, mining, commercial, not been adopted early by the group: agricultural, redistributors (ie municipalities), and residential customers and to international customers in southern IAS 1 Presentation of financial statements (effective Africa. The nature of the businesses of the significant 1 July 2012) (amended) operating subsidiaries is set out in note 9. The amendment to IAS 1 requires that the entity should present items of other comprehensive income that may be 2. Summary of significant accounting policies reclassified to profit or loss separately from those that The principal accounting policies applied in the preparation would never be reclassified to profit or loss.The related tax of these separate and consolidated financial statements are effects for these subcategories should be shown separately. set out below. These policies have been consistently The amendment results in a change in presentation and applied to all years presented, unless otherwise stated. will have no impact on the recognition or measurement of items in the financial statements. It is applicable 2.1 Basis of preparation and measurement retrospectively. The group is still determining the impact of Statement of compliance the amendment on the presentation of the relevant items The consolidated financial statements of Eskom at and for in the financial statements. the year ended 31 March 2012 comprise the company and its subsidiaries (together referred to as the group) and the IAS 12 Income taxes (effective 1 January 2012) group’s interest in associates and joint ventures. The (amended) separate and consolidated financial statements have been The amendment to IAS 12 introduces a rebuttable prepared in accordance with International Financial presumption that an investment property measured at fair Reporting Standards (IFRS) and in the manner required by value will be recovered in its entirety through its sale. The the Public Finance Management Act, I of 1999, as amended, amendment is not expected to have an impact on the and the Companies Act of South Africa, 71 of 2008, as group’s financial statements. amended. IAS 19 Employee benefits (effective 1 January 2013) Basis of measurement (amended) The separate and consolidated financial statements are The amendment to IAS 19 requires a change to the prepared on the historical cost basis except for the accounting for current and future obligations resulting from following financial instruments which are measured at fair the provision of defined benefit plans. The group is still value: determining the impact of the standard on the financial • embedded derivative assets and liabilities statements. • financial instruments classified under held-for-trading • financial instruments classified under available-for-sale IAS 27 Separate financial statements (effective 1 January 2013) (revised) • post-retirement medical benefits IAS 27 was revised and it supersedes the previous IAS 27 The preparation of financial statements in conformity with (2008). The revised IAS 27 carries forward the existing IFRS requires management to make judgements, estimates accounting and disclosure requirements for separate and assumptions that affect the application of accounting financial statements, with minor clarifications. The adoption policies and the reported amounts of assets, liabilities, of the revised IAS 27 is not expected to have a significant income and expenses. Actual results may differ from these impact on the company’s financial statements. estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting IAS 28 Investments in associates and joint ventures estimates are recognised in the period in which the (effective 1 January 2013) estimates are revised. The areas involving a higher degree IAS 28 was revised and it supersedes the previous IAS 28 of judgement or complexity, or areas where assumptions (2008). The revised IAS 28 carries forward the existing and estimates are significant to the consolidated financial accounting and disclosure requirements with limited statements, are disclosed in note 4. amendments. The adoption of the revised IAS 28 is not expected to have a significant impact on the group’s Functional and presentation currency financial statements. Items included in the financial statements of each of the group’s entities are measured using the currency of the IAS 32 Financial instruments: presentation primary economic environment in which the entity (effective 1 January 2014) operates (functional currency). The consolidated financial The amendments to IAS 32 were issued to address statements are presented in South African rand (rounded inconsistencies in current practice when applying the to the nearest million unless otherwise stated), which is the offsetting criteria in IAS 32 Financial instruments: presentation. group and company’s functional and presentation currency. The amendments clarify the meaning of currently has a legally enforceable right of set-off; and that some gross Changes in accounting policies and comparability settlement systems may be considered equivalent to net The group has adopted certain new standards, amendments settlement. The group is still determining the impact of the and interpretations to existing standards which were standard on the financial statements. effective for the group for the financial year beginning on or after 1 April 2011. The effects of adopting these standards are discussed in note 44. 18 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 2. Summary of significant accounting policies IFRS 12 Disclosures of interests in other entities (continued) (effective 1 January 2013) 2.1 Basis of preparation and measurement (continued) IFRS 12 is a new and comprehensive standard on disclosure requirements for all forms of interests in other IFRS 7 Financial instruments: disclosure entities, including joint arrangements, associates, special (effective 1 January 2013) purpose vehicles and other off balance sheet vehicles. The The amendments to IFRS 7 require additional disclosure adoption of the new standard will increase the level of on transfer transactions of financial assets, including the disclosure provided for the entity’s interests in subsidiaries, possible effects of any residual risks that the transferring joint arrangements, associates and structured entities. The entity retains. The amendment also requires additional group is still determining the impact of the standard on the disclosures if a disproportionate amount of transfer financial statements. transactions are undertaken around the end of a reporting period. The amendment will not have an impact on the IFRS 13 Fair value measurement (effective 1 January 2013) group’s financial statements. IFRS 13 introduces a single source of guidance on fair value measurement for both financial and non-financial assets IFRS 9 Financial instruments (effective 1 January 2015) and liabilities by defining fair value, establishing a framework IFRS 9 addresses the initial measurement and classification for measuring fair value and setting out disclosure of financial assets and financial liabilities, and replaces the requirements for fair value measurements. The group is still relevant sections of IAS 39 Financial instruments: Recognition determining the impact of the standard on the financial and measurement. IFRS 9 retains but simplifies the mixed statements. measurement model and establishes two primary measurement categories for financial assets: amortised IFRIC 20 Stripping costs in the production phase of cost and fair value. The basis of classification depends on a surface mine (effective 1 January 2013) the entity’s business model and the contractual cash flow IFRIC 20 considers when and how to account separately characteristics of the financial asset. Under IFRS 9, the for the benefits arising from the stripping activity in surface classification and measurement requirements for financial mining operations, as well as how to measure these liabilities are the same as per IAS 39, except for two benefits both initially and subsequently. IFRIC 20 only deals aspects. The first aspect relates to fair value changes for with waste removal costs that are incurred in surface financial liabilities (other than financial guarantees and loan mining activity during the production phase of the mine commitments) designated at fair value through profit or (production stripping costs). The interpretation is not loss, that are attributable to the changes in the credit risk expected to have an impact on the group’s financial of the liability. The second aspect relates to derivative statements. liabilities that are linked to and must be settled by delivery of an unquoted equity instrument whose fair value cannot Standards, interpretations and amendments to published be reliably measured. The group is still determining the standards that are effective and applicable to the group: impact of the standard on the financial statements. The following standards, interpretations and amendments were effective and applicable to the group for the year IFRS 9 has also been amended to include the derecognition ended 31 March 2012, but had no impact on the financial requirements from IAS 39. These requirements have statements: remained unchanged but additional disclosure requirements relating to the disclosure of transfers of financial assets IFRIC 14 The limit on a defined benefit asset, minimum have been included in IFRS 7 (refer above). funding requirements and their interaction (effective 1 January 2011) (amended) IFRS 10 Consolidated financial statements (effective The amendment applies in the limited circumstances when 1 January 2013) an entity is subject to minimum funding requirements and IFRS 10 is a new standard that replaces the consolidation makes an early payment of contributions to cover those requirements in SIC-12 Consolidation – Special Purpose requirements. The amendment permits such an entity to entities and IAS 27 Consolidated and separate financial treat the benefit of such an early payment as an asset on statements. The standard builds on existing principles by the basis that the entity has a future economic benefit. The identifying the concept of control as the determining factor amendment had no impact on the group’s financial as to whether or not an entity should be included within statements. the consolidated financial statements of the parent company and provide additional guidance to assist in the IFRIC 19 Extinguishing financial liabilities with equity determination of control where this is difficult to assess. instruments (effective 1 July 2010) The group is still determining the impact of the standard IFRIC 19 provides guidance on how to account for the on the financial statements. extinguishment of a financial liability by the issue of equity instruments. The interpretation clarifies the requirements IFRS 11 Joint arrangements (effective 1 January 2013) of IFRS when an entity renegotiates the terms of a financial IFRS 11 is a new standard that deals with the accounting liability with its creditor and the creditor agrees to accept for joint arrangements and focuses on the rights and the entity’s shares or other equity instruments to settle the obligations of the arrangements, rather than its legal form. financial liability fully or partially. The interpretation did The standard requires a single method for accounting for not have an impact on the group’s financial statements. interests in jointly controlled entities. IFRS 11 has superseded IAS 31 Interests in joint ventures which has been The following standards, interpretations and amendments withdrawn. The group is still determining the impact of the were effective and applicable to the group for the year standard on the financial statements. ended 31 March 2012 and had an impact on the financial statements: • IAS 24 Related party disclosures (refer to note 44). Eskom Holdings SOC Limited Annual Financial Statements 2012 19 Notes to the consolidated financial statements continued for the year ended 31 March 2012 2. Summary of significant accounting policies The company also accounts for common control (continued) transactions in the separate financial statements using the 2.2 Consolidation book value basis of accounting. In applying the book value Investment in subsidiaries basis, the acquirer recognises the cost of its investment at Subsidiaries are all entities (including special-purpose the carrying amount of the investment recognised in the entities) over which the group has the power to govern separate financial statements of the transferring entity. Any the financial and operating policies to obtain benefits from difference between the consideration paid and the cost of the activities of the entity. The existence and effect of investment acquired is recognised directly in equity. potential voting rights that are currently exercisable or convertible are considered when assessing whether the Investments in equity-accounted investees group controls another entity. Subsidiaries are consolidated Associates are all entities over which the group has from the date on which control is transferred to the group. significant influence but no control over the financial and They are deconsolidated from the date that control ceases. operating policies, generally linked to a shareholding of between 20% and 50% of the voting rights. Investments in subsidiaries are accounted for at cost less impairment losses in the separate financial statements of Joint ventures are contractual arrangements whereby two the company. or more parties undertake an economic activity that is subject to joint control. Business combinations The group uses the acquisition method of accounting to Investments in associates and joint ventures are accounted account for business combinations. The consideration for at cost less impairment losses in the separate financial transferred for the acquisition of a subsidiary is the fair statements of the company. These investments are values of the assets transferred, the liabilities incurred and accounted for using the equity method of accounting and the equity interests issued by the group. The consideration are initially recognised at cost in the financial statements of transferred includes the fair value of any asset or liability the group. The group’s investment in associates and joint resulting from a contingent consideration arrangement. ventures includes goodwill (net of any accumulated Acquisition-related costs are expensed as incurred. impairment loss) identified on acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured The group’s share of its associates’ and joint ventures’ post- initially at their fair values at the acquisition date. On an acquisition profits or losses is recognised in profit or loss acquisition-by-acquisition basis, the group recognises any within share of profit of equity-accounted investees, and non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of its share of post-acquisition movements in other the acquiree’s net assets. comprehensive income is recognised directly in other comprehensive income. The cumulative post-acquisition The excess of the consideration transferred, the amount of movements are adjusted against the carrying amount of any non-controlling interest in the acquiree and the the investment. When the group’s share of losses in an acquisition-date fair value of any previous equity interest in associate or joint venture equals or exceeds its interest in the acquiree over the fair value of the group’s share of the the associate or joint venture, including any other unsecured identifiable net assets acquired is recorded as goodwill. If receivables, the group does not recognise further losses, this is less than the fair value of the net assets of the unless it has incurred obligations or made payments on subsidiary acquired in the case of a bargain purchase, the behalf of the associate or joint venture. difference is recognised directly in profit or loss. Unrealised gains on transactions between the group and its Intercompany transactions, balances and unrealised gains on associates or joint ventures are eliminated to the extent of transactions between group companies are eliminated. the group’s interest in the associates or joint ventures. Unrealised losses are also eliminated, but are considered an Unrealised losses are also eliminated, but are considered an impairment indicator of the asset transferred. Accounting impairment indicator of the asset transferred. Accounting policies of subsidiaries have been adjusted where necessary, policies of associates or joint ventures have been adjusted to ensure consistency with the policies adopted by the group. where necessary to ensure consistency with the policies adopted by the group. Transactions with non-controlling interests The group treats transactions with non-controlling interests If the financial statements of the associate or joint venture as transactions with equity owners of the group. For are prepared as of a different date to that of the group, purchases from non-controlling interests, the difference adjustments are made to the financial statements of the between any consideration paid and the relevant share associate or joint venture for significant transactions and acquired of the carrying value of net assets of the subsidiary events that occur between the date of the financial is recorded in equity. Gains or losses on disposals to non- statements of the associate or joint venture and the date of controlling interests are also recorded in equity. the financial statements of the group to enable the financial statements of the associate or joint venture to be used for Common control transactions the equity accounting of the associate or joint venture. The The group accounts for common control transactions in maximum time period between the date of the financial the consolidated financial statements using the book value statements of the associate or joint venture and the date of (predecessor) basis of accounting. In applying the book financial statements of the group is three months. value basis, the acquirer in a common control transaction recognises the assets and liabilities acquired using the book values in the financial statements of the relevant entity. Any difference between the consideration paid and the book values of the assets and liabilities acquired is recognised directly in equity. 20 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 2. Summary of significant accounting policies 2.5 Property, plant and equipment (continued) Land and buildings comprise mainly office, power station, 2.3 Segment reporting substation, workshop and related buildings. Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating Property, plant and equipment is stated at cost less decision-maker. The chief operating decision-maker, who is accumulated depreciation and impairment losses. Cost responsible for allocating resources and assessing includes: performance of the operating segments, has been identified • any costs directly attributable to bringing the asset to the as the group executive committee (Exco). location and condition necessary for it to be capable of operating in the manner intended by management An operating segment is a component of the group that • the initial estimate of the costs of dismantling and engages in business activities from which it may earn removing the item and restoring the site on which it is revenues and incur expenses, including revenues and located, the obligation for which an entity incurs either expenses that relate to transactions with any of the group’s when the item is acquired or as a consequence of having other components. An operating segment’s results are used the item during a particular period for purposes reviewed regularly by Exco to make decisions about other than to produce inventories during that period resources to be allocated to the segment and assess • borrowing costs (refer to note 2.8) performance, and for which discrete financial information is available. Cost may also include transfers from equity of any gains or losses on qualifying cash flow hedges of foreign currency 2.4 Foreign currency translation purchases of property, plant and equipment. Transactions and balances Foreign currency transactions are translated into the Subsequent costs are included in the asset’s carrying functional currency using the exchange rates prevailing at amount or recognised as a separate asset, as appropriate, the dates of the transactions. Foreign exchange gains and only when it is probable that future economic benefits losses resulting from the settlement of such transactions associated with the item will flow to the group and the and from the translation at year end exchange rates of cost of the item can be measured reliably. When part monetary assets and liabilities denominated in foreign of an asset is being replaced, the carrying amount of the currencies are recognised in profit or loss, except when replaced part is derecognised. Repairs and maintenance recognised in other comprehensive income for qualifying are charged to profit or loss during the financial period in cash flow hedges. which they are incurred. Changes in the fair value of monetary securities denominated in foreign currency classified as available-for- Works under construction are stated at cost which sale are analysed between translation differences resulting includes cost of materials and direct labour and any directly from changes in the amortised cost of the security, and attributable costs incurred in bringing it to its present other changes in the carrying amount of the security. location and condition. Materials used in the construction Translation differences relating to changes in the amortised of property, plant and equipment are stated at weighted cost are recognised in profit or loss and other changes in average cost. the carrying amount are recognised in other comprehensive income within available-for-sale financial assets. Land is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate their Translation differences on non-monetary financial assets cost to their residual values over their estimated useful and liabilities, such as equities held at fair value through lives, as follows: profit or loss, are recognised in profit or loss as part of the Years fair value gain or loss. Translation differences on non- monetary financial assets, such as equities classified as Buildings and facilities 10 to 40 available-for-sale, are recognised in other comprehensive Plant income within available-for-sale financial assets. –– Generation 6 to 80 –– Transmission 5 to 40 Foreign loans are initially recognised at the exchange rate –– Distribution 10 to 35 prevailing at transaction date and are translated at spot –– Test, telecommunication and other plant 3 to 20 rate at every reporting date. Foreign exchange gains and Equipment and vehicles 1 to 10 losses that relate to loans and receivables, debt securities issued and borrowings are presented in profit or loss within The depreciation method, residual values and useful lives of net fair value gain/loss on financial instruments, excluding assets are reviewed, and adjusted if appropriate, at each embedded derivatives. reporting date. Foreign operations Where parts of an item of property, plant and equipment The assets and liabilities of foreign operations, including have different useful lives, they are accounted for as goodwill and fair value adjustments arising on acquisition, separate items (major components) of property, plant and are translated to rand at exchange rates at the reporting equipment. date. The income and expenses of foreign operations, excluding foreign operations in hyperinflationar y Gains or losses on disposals are determined by comparing economies, are translated to rands at the average exchange proceeds with the carrying amount. These gains or losses rate. The group does not have any foreign operations in are included in profit or loss within other income or other hyperinflationary economies. operating expenses. Foreign currency differences arising as a result of the above are recognised in other comprehensive income within the foreign currency translation reserve. Eskom Holdings SOC Limited Annual Financial Statements 2012 21 Notes to the consolidated financial statements continued for the year ended 31 March 2012 2. Summary of significant accounting policies Concession assets (continued) Concession assets consists of rights to charge for the usage 2.6 Intangible assets of the infrastructure under service concession arrangements Goodwill (refer to note 20). Concession assets are capitalised on the Goodwill represents the excess of the cost of an acquisition basis of the cost of capital expenditure incurred in respect over the fair value of the group’s share of the net of service concession arrangements (which is the fair value identifiable assets of the acquired subsidiary/associate/joint at initial recognition), including borrowing costs on venture at the date of acquisition. Goodwill on acquisition qualifying capital expenditures. Subsequent to initial of subsidiaries is included in intangible assets. Goodwill on recognition, the concession assets are measured at cost acquisition of associates and joint ventures is included in less accumulated amortisation and impairment losses. investments in equity-accounted investees and is tested for Concession assets are amortised over their estimated impairment as part of the overall balance. Separately useful life, which is the concession period during which recognised goodwill is tested annually for impairment and they are available for use. carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains or Intangible assets arising from a service concession losses on the disposal of an entity include the carrying arrangement are included within intangible assets under amount of goodwill relating to the entity sold. concession assets. Goodwill is allocated to cash-generating units for the Research and development purpose of impairment testing. The allocation is made to Research expenditure is recognised as an expense as those cash-generating units or groups of cash-generating incurred. Costs incurred on development projects (relating units that are expected to benefit from the business to the design and testing of new or improved products) combination in which the goodwill arose. The group are recognised as intangible assets when all of the following allocates goodwill to each business segment in each criteria are fulfilled: country in which it operates. • it is technically feasible to complete the intangible asset so that it will be available for use or sale Licences • management intends to complete the intangible asset Licences are shown at historical cost. Licences have a finite and use or sell it useful life and are carried at cost less accumulated • there is an ability to use or sell the intangible asset amortisation and impairment losses. Amortisation is • it can be demonstrated how the intangible asset will calculated using the straight-line method over a period of generate probable future economic benefits two to five years in order to allocate the cost of licences • adequate technical, financial and other resources to over their estimated useful life. complete the development and to use or sell the intangible asset are available Computer software • the expenditure attributable to the intangible asset Acquired computer software is capitalised on the basis of during its development can be measured reliably the costs incurred to acquire and bring to use the specific software. Amortisation is calculated using the straight-line Research and other development expenditure that do not method over a period of two to five years in order to meet these criteria is recognised in profit or loss within allocate the cost of computer software over their estimated other operating expenses. Development costs previously useful life. If software is integral to the functionality of recognised as an expense are not recognised as an asset in related equipment, then it is capitalised as part of the a subsequent period. Capitalised development costs are equipment. recorded as intangible assets and amortised from the point at which the asset is ready for use on a straight-line basis Costs that are directly associated with the development of over its useful life. identifiable and unique software products controlled by the group, and that will probably generate economic 2.7 Impairment of non-financial assets benefits exceeding costs beyond one year are recognised The carrying amounts of the group’s non-financial assets, as intangible assets and amortised as above. Costs include other than inventories, deferred tax assets and tax assets, employee costs incurred as a result of developing software, are reviewed at each reporting date to determine whether borrowing costs if relevant (refer to note 2.8) and an there is any indication of impairment. Assets that have an appropriate por tion of relevant overheads. Costs indefinite useful life, for example land, are not subject to associated with maintaining computer software amortisation or depreciation and are tested annually for programmes are recognised as an expense as incurred. impairment. Assets that are subject to amortisation or depreciation are reviewed for impairment whenever Rights events or changes in circumstances indicate that the Rights consist mainly of servitudes and rights of way under carrying amount may not be recoverable. An impairment power lines. Rights are not amortised as they have an loss is recognised for the amount by which the asset’s indefinite useful life. A servitude right is granted to Eskom carrying amount exceeds its recoverable amount. The for an indefinite period.The life of the servitude will remain recoverable amount is the higher of an asset’s fair value less in force as long as the transmission or distribution line is costs to sell and value in use. For the purposes of assessing used to transmit electricity. impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash- A servitude will only become impaired if the line to which generating units). Non-financial assets other than goodwill the servitude is linked is derecognised. In practice, a that were subject to impairment are reviewed for possible derecognised line will be refurbished or replaced by a new reversal of the impairment at each reporting date. line. The likelihood of the impairment of a servitude right is Impairment (loss)/reversal is recognised in profit or loss remote. within net impairment (loss)/reversal. 22 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 2. Summary of significant accounting policies Finance leases – where the group is the lessee (continued) The group leases certain property, plant and equipment. 2.8 Capitalisation of borrowing costs Leases of property, plant and equipment where the group Borrowing costs attributable to the construction of has substantially all the risks and rewards of ownership are qualifying assets are capitalised as part of the cost of these classified as finance leases. Finance leases are capitalised at assets over the period of construction to the extent that the lease’s commencement at the lower of the fair value of the assets are financed by borrowings. The capitalisation the leased asset and the present value of the minimum lease payments. rate applied is the weighted average of the borrowing costs applicable to the borrowings of the entities in the group unless an asset is financed by a specific loan, in which Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the case the specific rate is used. finance balance outstanding. The corresponding rental obligations, net of finance charges, are included in other 2.9 Service concession arrangements short-term and other long-term payables. The interest A service concession arrangement is an arrangement element of the finance cost is charged to profit or loss involving an operator constructing and/or upgrading, within finance cost over the lease period so as to produce operating and maintaining infrastructure used to provide a a constant periodic rate of interest on the remaining public service for a specified period of time. The operator balance of the liability for each period. The property, plant is paid for its services over the period of the arrangement. and equipment acquired under finance leases are The arrangement is governed by a contract that sets out depreciated or amortised over the shorter of the useful life performance standards, mechanisms for adjusting prices of the asset and the lease term. and arrangements for arbitrating disputes. The grantor (the party that grants the service arrangement) controls the Finance lease liabilities are derecognised in accordance infrastructure, and the operator is required to return to with the derecognition requirements for financial liabilities the grantor the infrastructure at the end of the arrangement. (refer to note 2.11). Derivatives embedded in leases are accounted for in accordance with the requirements for Financial asset embedded derivatives (refer to note 2.11). The group recognises a financial asset arising from a service concession arrangement to the extent that it has Cost plus coal contracts are treated as finance leases an unconditional right to receive cash or another financial where the group is the lessee. asset from or at the direction of the grantor, for the construction, upgrade or operation services of concession Finance leases – where the group is the lessor assets. Financial assets recognised as a result of the service When property, plant and equipment are leased out under concession arrangement are measured at fair value upon a finance lease, the present value of the lease payments is initial recognition. Subsequent to initial recognition, the recognised as a receivable. The difference between the financial asset is accounted for in accordance with IAS 39 gross receivable and the present value of the receivable is Financial instruments: Recognition and measurement (refer to disclosed as unearned finance income within finance lease receivables. note 2.11). Lease income is recognised over the term of the lease Financial assets arising from a service concession using the net investment method, which reflects a constant arrangement are included within trade and other receivables periodic rate of return. under other receivables (refer to note 18). Finance lease receivables are assessed for impairment and Construction or upgrade services derecognised in accordance with the requirements for The group accounts for revenue and costs relating to financial assets (refer to note 2.11). Derivatives embedded construction or upgrade services in accordance with in leases are accounted for in accordance with the IAS 11 Construction contracts. requirements for embedded derivatives (refer to note 2.11). Operation services Premium power supplies are treated as finance leases The group accounts for revenue relating to operation where the group is the lessor. services in accordance with IAS 18 Revenue. Fair value Contractual obligations to maintain and restore the The fair value of finance lease receivables and finance lease infrastructure liabilities is determined by discounting the future cash flows The group accounts for the contractual obligations to with respect to the finance lease at the interest rate maintain or restore the infrastructure in accordance with implicit in the lease. IAS 37 Provisions, contingent liabilities and contingent assets. The provision to restore the infrastructure is included Operating leases within provisions. Leases where substantially all of the risks and rewards of ownership are not transferred to the group are classified 2.10 Leases as operating leases. Payments made under operating leases A lease is an agreement whereby the lessor conveys to the (net of any incentives received from the lessor) are lessee, in return for a payment, or series of payments, the charged to profit or loss within other operating expenses on right to use an asset for an agreed period of time. An a straight-line basis over the period of the lease. assessment is made as to whether the arrangement is dependent on the use of a specific asset and the Leases where substantially all of the risks and rewards of arrangement conveys the right to use an asset to ownership are not transferred to the lessee (ie the group determine if an arrangement contains a lease. is the lessor) are classified as operating leases. 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. Eskom Holdings SOC Limited Annual Financial Statements 2012 23 Notes to the consolidated financial statements continued for the year ended 31 March 2012 2. Summary of significant accounting policies Financial assets at fair value through profit or loss (held-for- (continued) trading) 2.11 Financial instruments An instrument is classified at fair value through profit or 2.11.1 Non-derivative financial instruments loss if it is held-for-trading or is designated as such upon Recognition, measurement and derecognition of initial recognition. An instrument may only be designated at financial assets fair value through profit or loss when certain criteria are met.The group has elected not to designate financial assets Non-derivative financial assets comprise investment in at fair value through profit or loss. securities, financial instruments with group companies, financial trading assets, loans receivable, trade and other receivables, A financial asset is classified as held-for-trading if it is: finance lease receivables and cash and cash equivalents. • acquired for the purpose of selling it in the short term • part of a portfolio of identified financial instruments that Cash and cash equivalents comprise balances with local and is managed together and for which there is evidence of international banks, monies in call accounts, short-term assets a recent pattern of short-term profit taking and money market assets with an original maturity of less • a derivative instrument than 90 days. Bank overdrafts are shown within borrowings in current liabilities on the statement of financial position. Subsequent to initial recognition, changes in the fair value of these financial assets are recognised in profit or loss All non-derivative financial assets are recognised on the within net fair value gain/(loss) on financial instruments, date of commitment to purchase (trade date). Financial excluding embedded derivatives. assets are derecognised when the rights to receive cash flows from the investments have expired or the group has Loans and receivables transferred substantially all the risks and rewards of The trade and other receivables of the group are classified as ownership. Realised gains or losses on derecognition are loans and receivables. Loans and receivables are non- determined using the first in first out (FIFO) method. derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than: Non-derivative financial assets plus any directly attributable • those that management intends to sell immediately or in transaction costs are recognised initially at fair value. Directly the short term, which are classified as held-for-trading attributable transaction costs related to financial assets at fair • those that upon initial recognition are designated as value through profit or loss are recognised in profit or loss available-for-sale on initial recognition when incurred. Subsequent to initial • those for which the group may not recover substantially recognition, non-derivative financial assets are measured all of its initial investment, other than because of credit per asset category (as stated below). The appropriate deterioration, which shall be classified as available-for- classification of the financial asset is determined at the time sale of commitment to acquire the financial asset. Subsequent to initial recognition, loans and receivables are When entering into a transaction, the financial instrument measured at amortised cost using the effective interest is recognised initially at the transaction price which is the method, less any accumulated impairment losses. best indicator of fair value. Where fair value of the financial instrument is different from the transaction price a day-one Available-for-sale assets gain or loss may arise. The day-one gain or loss is Available-for-sale financial assets are those assets that are immediately recognised in profit or loss (except for designated as such or do not qualify to be classified as fair embedded derivatives and the subordinated loan from value through profit or loss, held-to-maturity or loans and shareholder) within net fair value gain/(loss) on financial receivables. instruments, excluding embedded derivatives, provided that the fair value has been determined based on market- Subsequent to initial recognition, available-for-sale financial observable data. assets are measured at fair value and changes therein, other than impairment losses and foreign exchange gains and Held-to-maturity investments losses (for monetary items), are recognised in other comprehensive income within available-for-sale financial Held-to-maturity investments are non-derivative financial assets. When the asset is derecognised, the cumulative gain assets with fixed or determinable payments and fixed or loss in equity is transferred to profit or loss. maturity that management has both the ability and intent to hold to maturity. Impairment losses on available-for-sale financial assets are recognised by reclassifying the losses accumulated in the Subsequent to initial recognition, held-to-maturity fair value reserve in equity, to profit or loss. The cumulative investments are measured at amortised cost using the loss that is reclassified from equity to profit or loss is the effective interest method, less any accumulated impairment difference between the acquisition cost, net of any principal losses. repayment and amortisation, and the current fair value, less any impairment loss recognised previously in profit or loss. The amortised cost of a financial asset is the amount at Changes in impairment provisions attributable to which the financial asset is measured at initial recognition application of the effective interest method are reflected as minus principal payments, plus or minus the cumulative a component of interest income. If, in a subsequent period, amortisation using the effective interest method and minus the fair value of an impaired available-for-sale debt security any reduction for impairment or uncollectibility. increases and the increase can be related objectively to an event occurring after the impairment loss was recognised The effective interest rate is the rate that discounts the in profit or loss, then the impairment loss is reversed, with estimated future cash receipts of the financial asset exactly the amount of the reversal recognised in profit or loss. to its net carrying amount. However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognised in other comprehensive income. 24 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 2. Summary of significant accounting policies loss. Directly attributable transaction costs related to liabilities (continued) recognised at fair value through profit or loss are recognised 2.11 Financial instruments (continued) in profit or loss on initial recognition when incurred. 2.11.1 Non-derivative financial instruments (continued) Subsequent to initial recognition, non-derivative financial Recognition, measurement and derecognition of financial liabilities are measured at amortised cost or fair value as per assets (continued) the relevant liability category (as described below). Fair value All non-derivative financial liabilities are recognised on the The fair values of trading assets, available-for-sale assets and date of commitment (trade date) and are derecognised assets carried at amortised cost are based on quoted bid when the obligation expires, is discharged or cancelled, or prices. For assets that are not quoted in an active market, there is a substantial modification to the terms of the valuation techniques are used. Where pricing models are liability. Realised gains and losses are determined using the used, inputs are based on market-related measures at the FIFO method. reporting date. Where discounted cash flow techniques are used, estimated future cash flows are based on Financial liabilities at fair value through profit or loss (held-for- management’s best estimates and the discount rate is a trading) market-related rate for a financial asset with similar terms An instrument is classified at fair value through profit or and conditions at the reporting date. loss if it is held-for-trading or is designated as such upon initial recognition. An instrument may only be designated at The fair value of trade and other receivables is estimated fair value through profit or loss when certain criteria are as the present value of future cash flows, discounted at the met. The group has not elected to designate financial market rate of interest at the reporting date. liabilities at fair value through profit or loss. Impairment (held-to-maturity investments, loans and A financial liability is classified as held-for-trading if it is: receivables) • incurred principally for the purpose of selling or A review for impairment indicators is carried out at each repurchasing it in the near term financial year end to determine whether there is any • part of a portfolio of identified financial instruments that objective evidence that a financial asset not carried at fair is managed together and for which there is evidence of value through profit or loss is impaired. A financial asset is a recent pattern of short-term profit taking, or considered to be impaired if objective evidence indicates • a derivative instrument that one or more events have had a negative effect on the estimated future cash flows of that asset. In the case of Subsequent to initial recognition, financial liabilities at fair equity securities classified as available-for-sale, a significant value through profit or loss continue to be measured at fair or prolonged decline in the fair value of the security below value. its cost or adverse changes in the technological, market, Financial liabilities at amortised cost economic environment in which the entity operates are Financial liabilities that are not held-for-trading are classified considered to be indicators that the securities are impaired. as financial liabilities at amortised cost. Debt securities issued, including foreign loans, that are not held-for-trading An impairment loss in respect of a financial asset measured are classified as held at amortised cost. Subsequent to at amortised cost is calculated as the difference between initial recognition, these liabilities are measured at amortised its carrying amount and the present value of the estimated cost using the effective interest method. The trade and future cash flows discounted at the original effective other payables of the group are classified as financial interest rate. liabilities at amortised cost. Individually significant financial assets are tested for Fair value impairment on an individual basis. The remaining financial The fair value of financial trading liabilities is based on assets are assessed collectively in groups that share similar quoted offer prices. For liabilities that are not quoted in an credit risk characteristics. active market, valuation techniques are used. Where pricing models are used, inputs are based on market- All impairment losses are recognised in profit or loss within related measures at the reporting date. Where discounted net impairment (loss)/reversal. cash flow techniques are used, estimated future cash flows are based on management’s best estimates and the An impairment loss is reversed if the reversal can be discount rate is a market-related rate for a financial liability related objectively to an event occurring after the with similar terms and conditions at the reporting date. impairment loss was recognised. For financial assets carried at amortised cost and available-for-sale financial assets that Market-making are debt securities, the reversal is recognised in profit or Eskom partakes in market-making activities in a bid to loss within net impairment (loss)/reversal. reduce the funding cost of the company. Most investors place a premium on the liquidity of bonds and are Where an asset has been impaired, the carrying amount of therefore prepared to accept a lower yield (relative to the asset is reduced through an allowance account. alternative bonds) to invest in bonds where the issue sizes are large and deemed to be liquid. Eskom bonds used for Recognition, measurement and derecognition of financial market-making are accounted for as financial liabilities at liabilities amortised cost. Non-derivative financial liabilities comprise debt securities issued, borrowings, financial instruments with group companies, The risks of market-making include the anticipated loss on financial trading liabilities, finance lease liabilities and trade turnover, typically the bid/offer spread thereon, which is and other payables. partially mitigated through repurchase agreement opportunities. In addition there is the potential negative Non-derivative financial liabilities are recognised initially at impact on liquidity which Eskom believes is limited due to fair value plus any directly attributable transaction costs the strategy of holding sufficient liquidity buffers as well as except for financial liabilities at fair value through profit or a portfolio of liquid government bonds. Eskom Holdings SOC Limited Annual Financial Statements 2012 25 Notes to the consolidated financial statements continued for the year ended 31 March 2012 2. Summary of significant accounting policies The group applies only cash flow hedge accounting. (continued) 2.11 Financial instruments (continued) The group documents, at the inception of the transaction, 2.11.2 Financial guarantees the relationship between hedging instruments and hedged Recognition items, as well as its risk management objectives and Financial guarantees are contracts that require the group strategy for undertaking various hedging transactions. The to make specified payments to reimburse the holder for a group also documents its assessment, both at hedge loss that may occur because a specified counterparty fails inception and on an ongoing basis, of whether the to make payment when due in accordance with the terms derivatives that are used in hedging transactions are highly of a debt instrument. effective in offsetting changes in fair values or cash flows of hedged items. Financial guarantee liabilities are initially recognised at fair value, and the initial fair value is amortised over the life of Movements on the hedging reserve are shown in other the financial guarantee. The guarantee liability is comprehensive income within cash flow hedges. The full fair subsequently carried at the higher of this amortised cost value of a hedging derivative is classified as a non-current and the present value of any expected payment (when a asset or liability when the remaining period of the hedged payment under the guarantee has become probable). item is more than 12 months; it is classified as a current Financial guarantees are included within other liabilities. asset or liability when the remaining period of the hedged item is less than 12 months. Trading derivatives are Fair value classified as current assets or liabilities. Financial guarantees are valued initially by taking into account discounted future cash flows adjusted according Cash flow hedges to the probability of occurrence of the trigger event. The Insignificant day-one profits and losses are expensed in resultant guarantee is raised as a liability, with the costs profit and loss while significant day-one profits and losses being charged to profit or loss. The unprovided portion is are deferred in the statement of financial position disclosed as a contingent liability. As a result of using (derivatives held for risk management) and then amortised discounted cash flows, interest rate risk may arise due to over the term of the hedging instrument in profit and loss. the possibility of the actual yields on assets being different Day-one profits and losses on hedging instruments are from the rates assumed in the discounting process. predominantly a function of the inclusion of credit, liquidity and basis risk in the terms of the trading instrument. These 2.11.3 Derivative financial instruments and hedging activities risks are not included in the determination of a hypothetical Recognition derivative used to measure fair value movements in a A derivative is a financial instrument whose value changes hedged item and are therefore excluded from any hedge in response to an underlying variable, requires little or no accounting relationships. The effective portion of the initial investment and is settled at a future date. All changes in the fair value of derivatives that are designated derivatives are classified as held-for-trading instruments, and qualify as cash flow hedges is recognised in other unless they meet the criteria for hedge accounting and comprehensive income within cash flow hedges. The gain or have been designated for purposes of applying hedge loss relating to the ineffective portion and the forward accounting. Derivatives are initially recognised at fair value points portion which is not designated (as part of the and remeasured subsequently at fair value. Fair values are hedge) is recognised immediately in profit or loss within obtained from quoted market prices, discounted cash flow net fair value gain/(loss) on financial instruments, excluding models and options pricing models which consider current embedded derivatives. market and contractual prices for the underlying instruments as well as the time value of money. When the forecast transaction occurs, any cumulative gain or loss existing in other comprehensive income at that All derivative instruments of the group are included in the time is included in the initial cost or other carrying amount statement of financial position as derivatives held for risk of the asset or liability. management. Realised and unrealised gains or losses for derivatives used for economic hedging are recognised in When a hedging instrument expires, is sold or a hedge no profit or loss within net fair value gain/(loss) on financial longer meets the criteria for hedge accounting, any instruments, excluding embedded derivatives. Realised and cumulative gain or loss existing in equity at that time unrealised gains or losses for derivatives used for cash flow remains in other comprehensive income until the forecast hedging are recognised in other comprehensive income transaction occurs. When a forecast transaction is no within cash flow hedges. longer expected to occur, the cumulative gain or loss that was reported in other comprehensive income is Hedge accounting immediately transferred to profit or loss within net fair The method of recognising the resulting gain or loss on the value gain/(loss) on financial instruments, excluding embedded derivative depends on whether the derivative is designated derivatives. as a hedging instrument, and if so, the nature of the item being hedged. Derivatives can be designated as: Economic hedging • hedges of the fair value of recognised liabilities and Certain derivative instruments do not qualify for hedge assets (fair value hedge) accounting and are used for economic hedging. Changes in • hedges of a particular risk associated with a recognised the fair value of these derivative instruments are recognised liability, asset or a highly probable forecast transaction in profit or loss within net fair value gain/(loss) on financial (cash flow hedge) instruments, excluding embedded derivatives. • hedges of a net investment in a foreign operation (net investment hedge). 26 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 2. Summary of significant accounting policies The valuation at initial recognition is adjusted for cash flows (continued) since inception. The value of the embedded derivatives 2.11 Financial instruments (continued) which involve a foreign currency is first determined by 2.11.4 Repurchase and resale agreements calculating the future cash flows and then discounting the Securities sold subject to repurchase agreements are cash flows by using the relevant interest rate curve and disclosed in the financial statements as financial assets. The only then is the net present value of the cash flows liability to the counterparty is recorded as repurchase converted at the relevant rand/foreign currency spot rate agreements and is included in financial trading liabilities. to the reporting currency. Securities purchased under agreements to resell are The fair value of the embedded derivative is determined recorded as repurchase agreements and are included in on the basis of its terms and conditions. If this is not financial trading assets or in investments in securities. possible, then the value of the embedded derivative is determined by fair valuing the whole contract and The difference between the sale and repurchase price or deducting from it the fair value of the host contract. purchase and resale price is treated as interest accrued over the life of the repurchase or resale agreement using Where there is no active market for the embedded the effective-yield method. derivatives, valuation techniques are used to ascertain their fair values. Financial models are developed incorporating 2.11.5 Embedded derivatives valuation methods, formulae and assumptions.The valuation Recognition methods include: An embedded derivative is a component of a hybrid • swaps: electricity tariff is swapped for a commodity in a (combined) instrument that also includes a non-derivative foreign currency host contract, with the effect that some of the cash flows • forwards: electricity tariff or other revenue or expenditure of the combined instrument vary in a way similar to those is based on a foreign currency of a standalone derivative. An embedded derivative causes • options: electricity tariff or other revenue is based on an some or all of the cash flows that otherwise would be embedded derivative floor or cap on foreign consumer required by the contract to be modified according to a or production price indices or interest rates. The Monte specified interest rate, financial instrument price, commodity Carlo simulation technique is used to produce various price, foreign exchange rate, index of prices or rates, or cap and floor strike prices other variable. The hybrid contract is the entire contract and the host contract is the main body of the contract The fair value of embedded derivatives is adjusted, where excluding the embedded derivative. applicable, to take into account the inherent uncertainty relating to the future cash flows of embedded derivatives An embedded derivative is separated from the host such as liquidity, model risk and other economic factors. contract and accounted for as a derivative if: • the economic characteristics and risks of the embedded The more important assumptions, which include the derivative are not closely related to the economic following, are obtained either with reference to the characteristics and risks of the host contract contractual provisions of the relevant contracts or from • a separate instrument with the same terms as the independent market sources where appropriate: embedded derivative would meet the definition of a • spot and forward commodity prices derivative and • spot and forward foreign currency exchange rates • the combined instrument is not measured at fair value • spot and forward interest rates with changes in fair value recognised in profit or loss • forecast sales volumes • spot and forward consumer and foreign production The determination of the host contract of an electricity price indices contract (which includes an embedded derivative) is based on the standard electricity tariff specified in the contract • spot and forward electricity prices and where no standard tariff is specified, the tariff that • liquidity, model risk and other economic factors would normally apply to such a customer. 2.12 Inventories Fair value Coal, maintenance spares and consumables Embedded derivatives are disclosed separately from Inventories are stated at the lower of cost and net derivatives held for risk management. The changes in fair realisable value. Cost is determined on the weighted value are included in net fair value gain/(loss) on embedded average basis and includes expenditure incurred in acquiring derivatives in profit or loss.The impact of the fair value gains inventories, production and conversion costs and other or losses is taken into account in the calculation of current costs incurred in bringing inventory to present location and and deferred taxation. condition. Embedded derivatives that are not separated are effectively Nuclear fuel accounted for as part of the hybrid instrument. Nuclear fuel is stated at the lower of cost and net realisable value. Cost is determined on the FIFO basis. Nuclear fuel Non-option based derivatives are separated on terms that consists of raw materials, fabricated fuel assemblies and fuel result in a fair value at the date of inception of zero. in reactors. Option-based derivatives are separated on the terms stated in the contracts and will not necessarily have a fair Net realisable value is the estimated selling price in the value equal to zero at the initial recognition of the ordinary course of business, less applicable variable selling embedded derivative resulting in day-one gains. These day- expenses. Costs of inventories include the transfer from one gains or losses are spread equally over the period of equity of any gains/losses on qualifying cash flow hedges the agreement. The fair value will depend on the strike relating to purchases of raw materials. price at inception. Eskom Holdings SOC Limited Annual Financial Statements 2012 27 Notes to the consolidated financial statements continued for the year ended 31 March 2012 2. Summary of significant accounting policies Deferred tax assets are recognised to the extent that it is (continued) probable that future taxable profit will be available against 2.13 Future fuel supplies which the temporary differences can be utilised. Deferred Coal tax assets are reviewed at each reporting date and Non-refundable advances to suppliers, together with related reversed if it is no longer probable that the related tax borrowing costs thereon, are deferred in the statement of benefits will be realised. financial position within future fuel supplies and amortised against the cost of coal supplied on the basis of the Deferred tax is provided on temporary differences arising estimated life of the asset procured by the suppliers. on investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is Repayable advances to suppliers are capitalised, and the controlled by the group and it is probable that the related interest earned is credited to profit or loss within temporary difference will not reverse in the foreseeable finance income and the refunds are repaid in terms of the future. agreements. 2.18 Payments received in advance Nuclear Payments received in advance consist mainly of upfront Fuel assemblies in the process of fabrication are stated at capital contributions for the construction of assets and cost within future fuel supplies, which includes the non- funding for electrification. Upfront capital contributions are refundable advance payments made in terms of the agreement. Hedge accounting is applied to foreign recognised in profit or loss within other revenue, excluding exchange contracts entered into with respect to the electricity revenue when the customer is connected to the purchase of nuclear fuel, with the effective portion being electricity network. capitalised during the fabrication period. Advance payments in terms of agreements are capitalised. 2.19 Deferred income Grants 2.14 Share capital Government grants received relating to the creation of Ordinary shares are classified as equity. electrification assets are included in non-current liabilities as deferred income and are credited to profit or loss within 2.15 Equity reserve depreciation and amortisation expense on a straight-line The subordinated loan from the shareholder is held at basis over the expected useful lives of the related assets. amortised cost. The market value of the loan at inception is calculated for each tranche utilising the expected cash Government grants which become receivable as flows which are discounted at market rates to determine compensation for expenses or losses already incurred, or the effective interest rates. The effective interest rates for for the purpose of giving immediate financial support to each tranche remain constant over the life of the loan the entity with no future related costs, are recognised in tranche. The future cash flows are reassessed annually and profit or loss within other income for the period in which the loans are remeasured at each reporting period. they become receivable. Although the loan is interest bearing, the interest payment terms could potentially be favourable and are dependent Capital contributions received from customers on the liquidity and gearing of Eskom. The change in the loan value with respect to interest amortised and the Contributions paid in advance by electricity customers remeasurement is reflected in the profit and loss in finance relating to the construction of regular distribution and cost and is eligible for capitalisation as borrowing costs. transmission assets (with a standard supply) are credited to profit and loss within other revenue, excluding electricity 2.16 Income tax revenue when the customer is connected to the electricity Income tax expense comprises current and deferred tax. network (refer to note 2.18). Income tax expense is recognised in profit or loss except to the extent that it relates to items recognised in other 2.20 Reinsurance contracts comprehensive income, in which case it is recognised in Escap SOC Limited (Escap), a wholly owned subsidiary of other comprehensive income. Eskom, acts as the primary insurer for the group. Escap only self-insures the group up to agreed limits by risk category, Current tax is expected tax payable on taxable income for whereafter the risks are covered by the reinsurance market. the year, using tax rates (and laws) enacted or substantively enacted at the reporting date, and any adjustment to tax Contracts are entered into with reinsurers, under which payable in respect of previous years. the group is compensated for losses on one or more contracts issued by it and that meet the classification 2.17 Deferred tax requirements for insurance contracts. The benefits to Deferred tax is recognised, using the statement of financial which Escap is entitled under its reinsurance contracts held position method, on temporary differences arising between are recognised as reinsurance assets in the statement of the tax bases of assets and liabilities and their carrying financial position. Amounts recoverable are dependent on amounts in the statement of financial position. Deferred the expected claims and benefits arising under the related tax is not accounted for if it arises from initial recognition reinsured insurance contracts. Amounts due from or due of an asset or liability in a transaction other than a business to reinsurers are measured consistently with the amounts combination that at the time of the transaction, affects associated with the reinsured insurance contracts and in neither accounting nor taxable profit or loss. However, deferred tax is provided in respect of the temporary accordance with the terms of each reinsurance contract. differences arising on the assets and provisions created in Reinsurance liabilities are primarily premiums payable for respect of decommissioning and nuclear waste management reinsurance contracts and are recognised as an expense and closure, pollution control and rehabilitation. Deferred when due. Reinsurance assets and liabilities are recognised tax is determined using tax rates (and laws) enacted or initially at fair value and subsequently measured at substantively enacted at the reporting date and that are amortised cost using the effective interest method, less expected to apply when the related deferred tax asset is provision for impairment. realised or the deferred tax liability is settled. 28 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 2. Summary of significant accounting policies Provisions are determined by discounting the expected (continued) future cash flows using a pre-tax discount rate that reflects 2.21 Employee benefit obligations current market assessments of the time value of money Annual and performance bonus and, where appropriate, the risks specific to the liability. The The group recognises a liability for annual and performance increase in the provision due to the passage of time is bonuses. A liability for annual bonuses is accrued on a recognised as finance cost. proportionate basis as services are rendered. A liability for performance bonus is raised on the estimated amount The provisions below are restated on an annual basis to payable in terms of the incentive scheme which is based on reflect changes in measurement that result from changes in the business and employee’s performance in the applicable the estimated timing or amount of the outflow of year. resources embodying economic benefits required to settle the obligation, or a change in discount rate, which shall be Leave accounted for as follows: The group recognises a liability for occasional and service • changes in the liability shall be added to, or deducted leave as the leave is of a long-term nature. An actuarial from, the cost of the related asset in the current period valuation is performed on an annual basis for occasional • the amount deducted from the cost of the asset shall and service leave. The accrued liabilities are determined by not exceed its carrying amount. The excess shall be valuing all future leave expected to be taken and payments recognised in profit or loss expected to be made in respect of benefits up to the • any additions to the cost of an asset shall be reviewed in valuation date. Allowance has been made in the calculations terms of the normal impairment principles for the assumed benefit options employees will exercise, as well as salary increases and investment returns up to the Decommissioning and nuclear waste management date the benefit is received. All actuarial gains or losses and Nuclear and other generation plant past service costs are recognised immediately in profit or A provision is raised for the estimated decommissioning loss within employee benefit expense. The present values of cost of nuclear and other generation plant and capitalised the benefit are determined by using the yield of long-dated to the cost of nuclear or other generation plant when it is corporate bonds (or government bonds where high- commissioned. The estimated cost of decommissioning at quality corporate bonds are not available). the end of the productive life of plant is based on engineering estimates and reports from independent Pension benefits experts. Decommissioning costs capitalised to the cost of Retirement benefits are provided for employees through nuclear or other generation plant is written off on a the Eskom Pension and Provident Fund. Contributions to straight-line basis over the estimated useful life of the plant. the fund are based on a percentage of pensionable emoluments and are expensed in the period in which they Spent nuclear fuel are incurred. The group accounts for its pension obligations A provision is raised for the management of spent nuclear as a defined contribution plan in line with IAS 19 Employee fuel assemblies and radioactive waste. The charge to profit benefits. or loss is based on the latest available cost information and is included in primary energy. Post-retirement medical benefits The liability for post-retirement medical aid is the present Closure, pollution control and rehabilitation value of the obligation by using long-dated corporate Expenditure on property, plant and equipment for pollution bonds (or government bonds where high-quality corporate control is capitalised and depreciated over the useful lives bonds are not available) which have maturities similar to of the assets. The cost of current ongoing programmes to the liability. Provision is made by accounting, through profit prevent and control pollution and to rehabilitate the or loss, for the estimated cost over the expected period to environment is charged to profit or loss within primary retirement of the employees. The cost to the employer, in energy as incurred, unless a present legal or constructive the form of employer contributions, is determined by using obligation exists to recognise such expenditure, in which the projected unit credit method, with actuarial valuations case a provision is created based on the best estimates being carried out at reporting date. Actuarial gains or available. losses are recognised in other comprehensive income within net actuarial gain or loss on post-retirement medical A provision is raised for the estimated cost of closure, benefits immediately. No deferred recognition mechanism pollution control and rehabilitation during and at the end is applied. of the life of the mines where a legal or constructive obligation exists to pay coal suppliers. Closure, pollution The entitlement to these benefits is usually conditional on control and rehabilitation costs capitalised are written off the employee remaining in service up to retirement. All over the estimated useful life of the power station. employees qualify for post-retirement medical aid, except for new employees appointed on or after 1 June 2003 at a Service concession arrangements managerial level.The group accounts for its post-retirement A provision is raised for contractual obligations to maintain medical aid obligations as a defined benefit plan in line with and restore the infrastructure (refer to note 2.9). These IAS 19 Employee benefits. contractual obligations to maintain or restore infrastructure, except for any upgrade element, are recognised and 2.22 Provisions measured at the best estimate of the expenditure that Provisions are recognised when the group has a present would be required to settle the present obligation at the legal or constructive obligation as a result of a past event, end of the reporting period. 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. Eskom Holdings SOC Limited Annual Financial Statements 2012 29 Notes to the consolidated financial statements continued for the year ended 31 March 2012 2. Summary of significant accounting policies Service concession arrangements (continued) Revenue relating to construction or upgrade services 2.23 Revenue recognition under a service concession arrangement (refer to note 2.9) Revenue comprises the fair value of the consideration is recognised based on the stage of completion of the received or receivable for the sale of goods and services in work performed, consistent with the group’s accounting the ordinary course of the group’s activities. Revenue is policy on recognising revenue on construction contracts. shown, net of value added tax, estimated returns, rebates and discounts, but includes the 2.5c/kWh (2011: 2c/kWh) Operation or service revenue is recognised in the period environmental levy. in which the services are provided by the group. When the group provides more than one service in a service The group recognises revenue when the amount of concession arrangement the consideration received is revenue can be reliably measured, it is probable that future allocated by reference to the relative fair values of the economic benefits will flow to the entity and specific services delivered. criteria have been met for each of the group’s activities as described below. The amount of revenue is not considered 2.24 Finance income to be reliably measured until all contingencies relating to Finance income comprises interest receivable on loans, the sale have been resolved. The group bases its estimates advances, trade receivables, finance lease receivables and on historical results, taking into consideration the type of income from financial market investments. Interest income customer, the type of transaction and the specifics of each is recognised as it accrues in profit or loss, using the arrangement. effective interest method. Revenue is recognised as follows: 2.25 Finance cost Finance cost comprises interest payable on borrowings and Sale of goods interest resulting from the unwinding of discount on Sale of goods is recognised when significant risks and liabilities. Borrowing costs which are not capitalised (refer rewards of ownership have passed and the collectibility of to note 2.8) are recognised in profit or loss. the related receivable is reasonably assured. 2.26 Dividend income Electricity revenue is recognised when electricity is Dividend income is recognised when the right to receive consumed by the user. payment is established. Sale of services 2.27 Dividend distribution Sale of services is recognised in the reporting period in Dividend distribution to the shareholder is recognised as a which the services are rendered, by reference to the stage liability in the financial statements of the group in the of completion of the specific transaction assessed on the period in which the dividends are approved by the board basis of the actual service provided as a proportion of the of directors (in terms of the directive of the shareholder). total services to be provided. 2.28 Non-current assets and liabilities held-for-sale Other revenue Assets and liabilities which meet the definition of held-for- Other revenue is recognised when the significant risks and sale and discontinued operation under IFRS 5 Non-current rewards of ownership are transferred to the buyer and the assets held-for-sale and discontinued operations, except for amount of revenue can be measured reliably. assets excluded from the scope of IFRS 5 for measurement purposes, are stated at the lower of their carrying amount Construction contracts and fair value less costs to sell if their carrying amount is Contract revenue includes the initial amount agreed in the recovered principally through a sale transaction rather than contract plus any variations in contract work to the extent through continuing use. that it is probable that they will result in revenue and can be measured reliably. As soon as the outcome of a 2.29 Related-party transactions construction contract can be estimated reliably, contract IAS 24 Related party disclosures provides government- revenue is recognised in profit or loss within other revenue, related entities an exemption which eliminates the excluding electricity revenue in proportion to the stage of requirements to disclose information that is costly to completion of the contract. gather and of less value to users. The group applies the exemption in respect of its relationship with government- The stage of completion is assessed by reference to the related entities at national and local levels of government contract costs incurred to the reporting date as a (refer to note 42). percentage of total estimated costs for each contract. When an outcome of a construction contract cannot be 2.30 Transfers of assets from customers estimated reliably, contract revenue is recognised only to If an item of property, plant and equipment is received the extent of contract costs incurred that are likely to be from customers, an assessment is made as to whether that recoverable. An expected loss on a contract is recognised item of property, plant and equipment can be recognised immediately in profit or loss. in accordance with IAS 16 Property, plant and equipment. Any related revenue is recognised in accordance with IAS 18 Revenue. 30 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 3. Financial risk management 3.1.1 Management of credit risk The group has an integrated risk management framework. Financial instruments managed by the treasury function The group’s approach to risk management is based on risk Credit risk arises from cash and cash equivalents, investment governance structures, risk management policies, risk in securities, derivatives held for risk management, financial identification, measurement and reporting. Three types of trading assets and deposits made with counterparties. risks are reported as part of the risk profile, namely Processes are in place to identify, measure, monitor, control operational, strategic and business continuity risks. and report credit risk. The objective of Eskom’s credit risk Operational risks are events, hazards, variances or management framework is firstly to protect cash and opportunities which could influence the achievement of investments and, secondly to project and maximise the Eskom’s compliance and operational objectives. For Eskom, rate of return of financial market investments. a strategic risk is a significant unexpected or unpredictable change or outcome beyond what was factored into the Responsibility and governance organisation’s strategy and business model which could The treasury credit risk committee, a subcommittee of the have an impact on the group’s performance. Business audit and risk committee, manages counterparty credit risk continuity risks are those events, hazards, variances and which arises from the treasury activities in the financial opportunities which could influence the continuity of markets. This committee is chaired by the finance director Eskom. The financial risks, as defined by IFRS 7 Financial and reports on a quarterly basis to Exco and the audit and instruments: disclosures, and the management thereof, form risk committee. The activities of the committee are guided part of this key risk area. by the terms of reference that are updated and approved by the audit and risk committee. The board of directors (the board) has delegated the management of enterprise-wide risk to the audit and risk The terms of reference set out the minimum acceptable management committee which operates through various standards to be adhered to by those responsible for credit- subcommittees. One of the committee’s objectives is to related transactions within the treasury department. The ensure that the group is not unduly exposed to financial terms of reference are aligned to the Exco credit risk risks. Most of the financial risks arising from financial governance standards and are supplemented by appropriate instruments are managed in the centralised treasury policies and procedures. function of the group, except for instruments such as trade and finance lease receivables and trade and finance lease The treasury credit risk committee: payables which are managed by the other divisions and • assesses the credit quality of counterparties and types of subsidiaries. instruments used • approves credit limits with such counterparties The group’s exposure to risk, its objectives, policies and • facilitates and manages the issuing of financial guarantees processes for managing the risk and the methods used to by the group measure it have been consistently applied in the years • ensures that transactions with counterparties are presented, unless otherwise stated. supported by trading agreements, where applicable • approves methodologies used for the management of The exposure of the centralised treasury function to the counterparty exposure major financial risks is unique to its activities and therefore different to those of the divisions and subsidiaries within The senior credit risk advisor in the risk assessment division the Eskom group. A distinction is therefore made between provides feedback on all treasury credit risk-related the treasury department and other divisions and matters to the treasury management, finance director, subsidiaries in the group in respect of financial risk Exco, treasury credit risk committee and audit and risk management where relevant. committee. The group has exposure to the following risks as a result The management of credit risk is governed by the of its financial instruments: following policies: • credit risk (refer to note 3.1) • trading in financial instruments is conducted and entered • market risk (refer to note 3.2) into with selected counterparties after credit limits have • liquidity risk (refer to note 3.3) been authorised. Individual risk limits are set based on internal and external ratings in line with limits set by the 3.1 Credit risk board. All credit limits are approved by the treasury Credit risk is the risk of financial loss to the group if a credit risk committee. The use of credit limits is regularly customer or other counterparty (including government monitored and financial institutions) to a financial instrument fails to • only banks and financial institutions with an independent meet its contractual obligations. Credit risk arises primarily minimum rating of A1 are accepted. If there are no from the sale of electricity and related services in the independent ratings, the credit quality of the counterparty ordinary course of business and financial instruments is assessed, taking into account its financial position, past managed in the centralised treasury activities. Credit risk experience and other factors includes counterparty risk and delivery or settlement risk. • all exposures are mark-to-market. Transaction or close- out netting takes place in accordance with the terms and Counterparty risk is the risk that a counterparty is unable conditions of the underlying trading agreements to meet its financial and/or contractual obligations during • minimum credit-rating requirements for financial the period of a transaction. Delivery or settlement risk is institutions are maintained to assess the risk categories the risk that a counterparty does not deliver on its by rating class and to ascertain the probability of default contractual commitment on maturity date (including the inherent in each rating class settlement of money and delivery of securities). • approved concentration risk parameters and collateral management procedures are in place Eskom Holdings SOC Limited Annual Financial Statements 2012 31 Notes to the consolidated financial statements continued for the year ended 31 March 2012 3. Financial risk management (continued) the value of three months’ estimated consumption. Existing 3.1 Credit risk (continued) customers are required to provide security to the value of 3.1.1 Management of credit risk (continued) three months’ consumption if they default on their Responsibility and governance (continued) payment terms. Concentration of credit risk is managed by setting credit risk Non-key customers (other than large power users and limits at a counterparty-specific level. Concentration credit small power users) are required to provide security risk limits are used as second tier limits in relation to equivalent to between one to three months’ consumption counterparty credit limits. Counterparty-specific exposure is at the commencement of the supply agreement. The level monitored against a set concentration of credit risk limits in of security is reviewed when a customer defaults on their relation to the total credit risk exposure to all counterparties. payment obligation or requires additional electricity supply capacity in which case they are required to either provide Credit risk measurement, monitoring and reporting security or increase their existing security to an amount Risk is measured by determining a default probability per equivalent to between one to three months’ of recent counterparty (using default probabilities assessed by rating consumption before supply will commence. Redistributors agents for various type of credit ratings) which is then are not required to provide any security and are currently applied to the market value of the investment placed to determine the capital at risk. re-evaluated based on their payment history to determine if any security is necessary. Eskom is currently considering a municipal strategy to manage any associated risk The treasury department’s policies and practices are designed to preserve the independence and integrity of exposure. decision-making and ensure credit risks are accurately assessed, properly approved, continually monitored and Payment terms vary between customer classes as follows: actively managed. • Key international customers: 10 to 45 days • Key and other large power users: individually negotiated Aggregate credit exposure, hold-limit exceptions and risk up to a maximum of 15 days profile changes are reported to Exco and the audit and risk • Small power users: 30 days committee on a quarterly basis. There is regular detailed reporting of limits utilisation, limit breaches and customer Interest is charged at market-related rates on balances in concentrations to ensure these are appropriately managed arrears. and monitored. The group has well-established credit control procedures Impairment assessments are performed to evaluate the that monitor activity on customer accounts and allow for credit risk exposure. The assessments focus on the remedial action should the customer not comply with following areas: payment terms. These procedures include an internal • significant financial difficulty of the issuer or counterparty collection process, follow up with the customer either • high probability of bankruptcy telephonically or in person, negotiations of mutually • breach of contract acceptable payment arrangements and the issue of a notice of disconnection of supply and letters of demand. Financial instruments managed by other divisions and Non-payment will result in disconnection of supply and the subsidiaries customer’s account being closed. The legal collection (a) Trade receivables (electricity) process is pursued thereafter. Eskom supplies electricity to customers in its licensed areas of supply. A large number of the residential customers are The decision to impair overdue amounts is assessed on the on a prepaid basis. probability of recovery based on the customer’s credit risk profile. Eskom’s exposure to credit risk is influenced by the individual characteristics of each customer. In monitoring Progress on the collection process is reviewed on a regular credit risk, customers are grouped according to their credit characteristics, including whether they are large or small basis and if it is evident that the amount will not be power users, geographic location, ageing profile, security recovered, it is recommended for write-off in terms of the (deposits and guarantees) held and payment history. Eskom policy and delegation of authority. The process of recovery continues unless it is confirmed that there is no The main classes of electricity receivables are international, prospect of recovery or the costs of such action will local large and local small power users. exceed the benefits to be derived. Amounts written off are determined after taking into account the value of the Electricity supply agreements are entered into with key security held. international customers who comprise utility companies and governments of neighbouring countries. These The total cumulative allowance for impairment for customers are not required to provide any security unless electricity receivables at 31 March 2012 was R3 346 million they default on their payment terms. (2011: R2 855 million) (refer to note 3.1.2(a)). A substantial portion relates to outstanding debt in problematic areas. Key large power users comprise mainly South African The collection of revenue from small power users in commercial, industrial and mining customers and Soweto remains a challenge. The enhancement of credit redistributors. Some key large power users are not control strategies and monitoring of payment levels in this required to provide any security if they have an acceptable area continue to receive management attention. The credit rating from an approved rating agency. New payment levels from these customers, expressed as a customers are required to provide security equivalent to percentage of billed revenue, was 27% (2011: 22%). 32 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 3. Financial risk management (continued) of the supply contract. Premium supply customers have 3.1 Credit risk (continued) maintained a good payment history with Eskom over the 3.1.1 Management of credit risk (continued) years. The standard payment terms are also applicable to Financial instruments managed by other divisions and the connection charge relating to the premium supply subsidiaries (continued) equipment which is billed monthly to the customer. (a) Trade receivables (electricity) (continued) The following strategies are currently in operation and are (e) Reinsurers largely successful in other high-risk areas of non-paying The creditworthiness of reinsurers is regularly assessed by customers. These include: the Escap SOC Limited (Escap) risk management • disconnections committee, especially prior to finalisation of any contract. • conversion to prepayment Minimum credit ratings and credit limits per counterparty • increased internal debt management capacity are set. The major reinsurers used during the financial year • use of debt collectors had market security ratings of A- or higher (based on • payment arrangements Standard and Poor’s ratings). There were no write-offs • focus on early identification and letters of demand during the current and prior financial years. Management is • increased securities confident that the group’s exposure in respect of the • efficient internal process, for example system automation possibility of default by its reinsurers remains minimal. of credit and collections such as automated notices and letters of demand (f) Loans receivable Home and personal loans are made available to employees Certain redistributors have fallen into arrears during the in the Eskom group via the Eskom Finance Company SOC course of the financial year. Some have subsequently either Limited (EFC) group. Credit risk policies are in place which settled or made significant payments towards their arrear require various criteria to be met prior to the approval of debt. Monitoring of these redistribution payment levels a loan. These criteria include the valuation of property, continues to receive ongoing management attention and remains a high priority focus area. affordability and credit history of the employee. (b) Other trade receivables The amounts advanced are secured by first mortgages Eskom Enterprises SOC Limited provides plant lifecycle over the property purchased and are repayable over an support, plant maintenance work, network protection and average period of up to 27 years (2011: 27 years). The risk measurement mainly to Eskom.The group’s credit exposure of default by the employee is reduced as the monthly in respect of other trade receivables is therefore considered instalments are deducted from the employee’s salary. to be insignificant. Employees who are no longer in the employ of the group are required to settle their home loans with EFC within (c) Other receivables 90 days of leaving the group’s service. Loans are not Other receivables include recoverable work, employee extended where the purchase price of the property debtors, inter-group balances (company only), reinsurance exceeds its open market value. The weighted average loan and sundry receivables. amount as a percentage of the total home loan book at 31 March 2012 was 0.01% (2011: 0.01%). Recoverable work is mainly project work carried out by Eskom on behalf of external parties. The projects include In the event of default, the debtor is notified verbally and repairing damaged power lines, moving of power lines or in writing. If payment has not been received for a period underground cables and engineering-related work. exceeding three months, a process to foreclose on the loan is initiated and the property is sold by public auction (d) Finance lease receivables or repossessed. Should the property be sold by public Finance lease receivables mainly comprise premium power auction, a reserve value is set that takes into account the supply contracts. The supply of electricity to customers may value of the property, arrear rates and taxes, legal costs and be in the form of either standard or premium power supply. commissions payable. If the reserve value is not achieved, the property is repossessed and is held for resale. A standard supply is the least-cost technically acceptable solution as defined in the Distribution Network Code whereas the premium power supply is where the EFC entered into a securitisation arrangement with Nqaba customer’s requirement exceeds the specifications of a Finance 1 (Pty) Limited (Nqaba), a special-purpose entity. standard supply. Premium supply customers may already The securitising of the home loan book converted the loan have a standard supply from Eskom but wish to reserve assets into marketable securities traded on the Bond dedicated additional equipment to provide a backup Exchange of South Africa. The special-purpose entity is supply. This is achieved through the installation of dedicated consolidated in the annual financial statements of the EFC premium supply equipment for which the customer is group. EFC is the preferential shareholder of Nqaba which required to pay the full capital costs. entitles it to all the residual profits (residual cash after priority payments). Connection charges for premium supply contracts can be repayable on a monthly basis over a maximum period of EFC provides a first-loss credit enhancement loan equal to 25 years. 14.87% of the notes in issue. At 31 March 2012 the loan was R290 million (2011: R290 million). As servicer The credit risk exposure resulting from premium supply of Nqaba, EFC earns a servicing fee equal to 0.15% (2011: contracts is managed in a similar manner as for the 0.15%) of the quarterly outstanding loan book balance. standard supply contracts. Security is required from At the end of the financial year, the net asset value of customers for premium supply assets which covers Nqaba was R22 million (2011: R20 million). irrecoverable costs in the event of the early termination Eskom Holdings SOC Limited Annual Financial Statements 2012 33 Notes to the consolidated financial statements continued for the year ended 31 March 2012 3. Financial risk management (continued) 3.1 Credit risk (continued) 3.1.2 Credit exposure The carrying amount of financial assets represents the maximum credit exposure at the reporting date (refer to note 13). The following table represents an analysis per credit rating level (as determined by rating agencies) of the credit risk of financial assets, as indicated. Investment Financial Cash Derivatives Finance in trading and cash held for risk lease securities assets equivalents management receivables Rm Rm Rm Rm Rm 2012 Group AAA 8 885 1 755 17 – – AA+ 338 363 – 485 4 AA 3 199 102 – 1 017 – AA- 4 298 779 8 43 – A+ 609 – – 236 – A1+ 2 427 124 16 179 264 – A1 – 768 2 478 97 – A2 1 274 61 – – 2 A3 – 17 – – – BBB- – – – – 5 Unrated – 1 077 7681 – 559 21 030 5 046 19 450 2 142 570 Company AAA 8 885 1 755 17 – – AA+ 338 363 – 485 4 AA 3 199 102 – 1 017 – AA- 4 298 779 8 43 – A+ 609 – – 236 – A1+ – 41 15 309 264 – A1 – 528 2 328 97 – A2 1 274 – – – 2 BBB- – – – – 5 Unrated – 834 7331 – 559 18 603 4 402 18 395 2 142 570 2011 Group AAA 13 427 2 223 – – – AA+ – – – – 4 AA- – – – – 1 A+ – – – – 23 A1+ 23 722 762 10 471 108 – A1 656 265 1 549 14 4 A2 – 81 – – – BBB- – 24 – – – Unrated – 472 67 – 553 37 805 3 827 12 087 122 585 Company AAA 13 427 2 223 – – – AA+ – – – – 4 AA- – – – – 1 A+ – – – – 23 A1+ 21 486 657 9 939 108 – A1 656 146 1 507 14 4 Unrated – 171 20 – 553 35 569 3 197 11 466 122 585 No credit limits were exceeded during the reporting period, nor does management expect any losses from non-performance by these counterparties. 1. Includes transactions with brokers who are unrated. 34 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 3. Financial risk management (continued) 3.1 Credit risk (continued) 3.1.2 Credit exposure (continued) Group Company 2012 2011 2012 2011 Note Rm Rm Rm Rm The maximum exposure to credit risk for trade and other receivables per class was: Electricity receivables 11 339 8 746 11 339 8 746 –– International 584 399 584 399 –– Local large power users 8 652 7 064 8 652 7 064 –– Local small power users 2 098 1 272 2 098 1 272 –– Service delivery framework1 5 11 5 11 Other trade receivables 206 301 – – –– International 4 9 – – –– Local 202 292 – – Other receivables 2 821 2 326 1 869 734 –– Recoverable work 96 56 96 56 –– Employee receivables 43 40 43 40 –– Intercompany receivables – – 585 472 –– Reinsurance receivables 586 377 – – –– Concession receivables 34 11 – – –– Sundry receivables 2 062 1 842 1 145 166 Total trade and other receivables 18 14 366 11 373 13 208 9 480 The analysis per credit rating level of the credit risk of trade and other receivables was: AAA 58 – – – AA 168 209 – – AA- 66 623 – 397 A+ 154 125 – 1 A1+ 2 000 1 521 1 571 904 A1 251 204 132 204 A2 273 97 273 97 A3 70 81 70 81 BBB- – 11 – 11 Unrated 11 326 8 502 11 162 7 785 14 366 11 373 13 208 9 480 The maximum exposure to credit risk for loans receivable was: 13 7 514 6 058 – – The maximum exposure to credit risk for non- current assets held-for-sale was: Trade and other receivables 22 249 618 1. Negotiated agreement with stakeholders in residential areas which is a specific initiative aimed at resolving the non-payment of accounts. Eskom Holdings SOC Limited Annual Financial Statements 2012 35 Notes to the consolidated financial statements continued for the year ended 31 March 2012 3. Financial risk management (continued) 3.1 Credit risk (continued) 3.1.2 Credit exposure (continued) (a) Electricity receivables Group and company Carrying Not impaired1 Impaired2 amount Days past due Days past due Not Not past past due 0-15 16-45 46-75 >75 due 0-15 16-45 46-75 >75 2012 Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm Individually assessed for impairment International 584 574 9 1 – – – – – – – Gross 584 574 9 1 – – – – – – – Impairment – – – – – – – – – – – Local large power users 8 652 7 878 196 216 65 158 72 – 3 3 61 Gross 9 371 7 878 196 216 65 158 145 15 18 21 659 Impairment (719) – – – – – (73) (15) (15) (18) (598) Not Days past due past due 0-30 31-60 >60 Rm Rm Rm Rm Collectively assessed for impairment Local small power users 2 098 1 202 151 83 662 Gross 4 447 1 252 223 161 2 811 Impairment (2 349) (50) (72) (78) (2 149) Service delivery framework 5 – – – 5 Gross 201 1 1 1 198 Impairment (196) (1) (1) (1) (193) Total carrying amount 11 339 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. 2. Impaired receivables are receivables for which the group determines that it is probable that it will be unable to collect all amounts due in accordance with the contractual payment terms. 36 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 3. Financial risk management (continued) 3.1 Credit risk (continued) 3.1.2 Credit exposure (continued) (a) Electricity receivables (continued) Group and company Carrying Not impaired1 Impaired2 amount Not Days past due Not Days past due past past due due 0-15 16-45 46-75 >75 0-15 16-45 46-75 >75 2011 Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm Individually assessed for impairment International 399 346 6 16 1 29 – – 1 – – Gross 403 346 6 16 1 29 – – 1 1 3 Impairment (4) – – – – – – – – (1) (3) Local large power users 7 064 6 803 77 75 44 39 1 1 2 1 21 Gross 7 761 6 803 77 75 44 39 28 9 41 17 628 Impairment (697) – – – – – (27) (8) (39) (16) (607) Not Days past due past due 0-30 31-60 >60 Rm Rm Rm Rm Collectively assessed for impairment Local small power users 1 272 615 142 247 268 Gross 3 139 681 203 314 1 941 Impairment (1 867) (66) (61) (67) (1 673) Service delivery framework 11 1 1 – 9 Gross 238 2 2 2 232 Impairment (227) (1) (1) (2) (223) Total carrying amount 8 746 Electricity receivables include an amount of R111 million (2011: R81 million) relating to receivables that were renegotiated3. These electricity receivables would have been past due had their terms not been renegotiated. Interest is accrued on all arrear debts and R233 million (2011: R298 million) was credited to profit or loss within finance income. 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. 2. Impaired receivables are receivables for which the group determines that it is probable that it will be unable to collect all amounts due in accordance with the contractual payment terms. 3. Receivables with renegotiated terms are receivables that have been restructured due to the deterioration in the customer’s financial position and where the group has made concessions that it would not otherwise consider. Eskom Holdings SOC Limited Annual Financial Statements 2012 37 Notes to the consolidated financial statements continued for the year ended 31 March 2012 3. Financial risk management (continued) 3.1 Credit risk (continued) 3.1.2 Credit exposure (continued) (b) Other trade receivables Group Carrying Not Not impaired Not Impaired amount past Days past due past Days past due due 0-30 31-60 61-90 >90 due 0-30 31-60 61-90 >90 2012 Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm Individually assessed for impairment International 4 – 3 – – 1 – – – – – Gross 4 – 3 – – 1 – – – – – Impairment – – – – – – – – – – – Local 202 148 25 14 6 9 – – – – – Gross 227 148 25 14 6 9 – – – – 25 Impairment (25) – – – – – – – – – (25) Total carrying amount 206 2011 International 9 7 2 – – – – – – – – Gross 9 7 2 – – – – – – – – Impairment – – – – – – – – – – – Local 292 181 24 26 7 54 – – – – – Gross 309 181 24 26 7 54 – – 2 2 13 Impairment (17) – – – – – – – (2) (2) (13) Total carrying amount 301 (c) Other receivables Other receivables comprise mainly of receivables for which there are no specific repayment terms. Group Company 2012 2011 2012 2011 Rm Rm Rm Rm Recoverable work 96 56 96 56 Gross 96 56 96 56 Impairment – – – – Employee receivables 43 40 43 40 Gross 43 41 43 41 Impairment – (1) – (1) Intercompany receivables – – 585 472 Gross – – 585 472 Impairment – – – – Reinsurance receivables 586 377 – – Gross 586 377 – – Impairment – – – – Concession receivables 34 11 – – Gross 34 11 – – Impairment – – – – Sundry receivables 2 062 1 842 1 145 166 Gross 2 119 1 884 1 200 206 Impairment (57) (42) (55) (40) Total carrying amount 2 821 2 326 1 869 734 Long outstanding debt or amounts handed over to debt collectors were considered for impairment per class of sundry and employee receivables. 38 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 3. Financial risk management (continued) 3.1 Credit risk (continued) 3.1.2 Credit exposure (continued) (d) Loans receivable Group and company Carrying Not Days past due amount past due 0-30 31-60 >60 Rm Rm Rm Rm Rm 2012 Collectively assessed for impairment Loans receivable 7 514 7 398 31 21 64 Home loans 6 858 6 737 31 22 68 Loan to Richards Bay Coal Terminal 373 373 – – – Other 308 298 1 – 9 Impairment (25) (10) (1) (1) (13) Total carrying amount 7 514 2011 Collectively assessed for impairment Loans receivable 6 058 5 961 22 14 61 Home loans 5 357 5 258 23 14 62 Loan to Richards Bay Coal Terminal 445 445 – – – Other 276 265 – 1 10 Impairment (20) (7) (1) (1) (11) Total carrying amount 6 058 Loans receivable include an amount of R63 million (2011: R47 million) relating to receivables that were renegotiated. These loans receivable would have been past due had their terms not been renegotiated. (e) Non-current assets held-for-sale Group Carrying Not Days past due amount past due 0-30 31-60 >60 Rm Rm Rm Rm Rm 2012 Individually assessed for impairment Trade and other receivables 249 249 – – – Gross 249 249 – – – Impairment – – – – – Total carrying amount 249 2011 Trade and other receivables 618 618 – – – Gross 719 719 – – – Impairment (101) (101) – – – Total carrying amount 618 Eskom Holdings SOC Limited Annual Financial Statements 2012 39 Notes to the consolidated financial statements continued for the year ended 31 March 2012 3. Financial risk management (continued) 3.1 Credit risk (continued) 3.1.2 Credit exposure (continued) Group Company 2012 2011 2012 2011 Note Rm Rm Rm Rm (f) Security relating to amounts receivable The security held against trade and other receivables for the group companies comprises guarantees and deposits. The estimate of the fair value of the security held is: Electricity receivables 4 286 3 123 4 286 3 123 Local large power users 3 088 2 198 3 088 2 198 Local small power users 1 196 921 1 196 921 Service delivery framework 2 4 2 4 The total amount of the security above includes R3 074 million (2011: R2 184 million) relating to electricity receivables (international and large power users) which were not impaired. Loans receivable secured by mortgage bonds 6 841 5 344 (g) Allowance for impairment The movement in the allowance for impairment in respect of trade and other receivables during the year was: Balance at beginning of the year 2 855 2 379 2 836 2 364 Impairment loss recognised (net of reversals) 32 613 687 604 682 Write offs (122) (211) (121) (210) Balance at end of the year 3 346 2 855 3 319 2 836 Comprising: Electricity receivables 3 264 2 795 3 264 2 795 Other trade receivables 25 17 – – Other receivables 57 43 55 41 3 346 2 855 3 319 2 836 Eskom establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables. This allowance consists of a specific loss component that relates to individual exposures, and a collective loss component established for groups of similar customers in respect of losses that have been incurred but not yet identified. (h) Financial guarantees issued The group’s maximum exposure as a result of financial guarantees issued was R160 million (2011: R156 million) and R1 070 million (2011: R637 million) for the company (refer to note 40.1 for more information on financial guarantees issued). 40 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 3. Financial risk management (continued) 3.2 Market risk Market risk is 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. A significant part of the market risk encountered arises from financial instruments that are managed centrally within the treasury function of the group or from contracts containing embedded derivatives. The objective of the group’s market risk management policy 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. Financial instruments managed by the treasury function The treasury department 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 department is vested in the asset and liability committee (Alco) and the credit risk committee. Measurement and reporting occurs on a daily and/or monthly basis and is performed by an independent section within the treasury department. Financial derivatives are used to manage market risk. Financial instruments managed by other 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 function 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 (mainly USD) 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 vary over various periods up to a maximum of 16 years. The contracts are currently being renegotiated. The net impact on profit or loss of changes in the fair value of the embedded derivatives for the group and company is a fair value gain of R334 million (2011: R1 261 million loss). At 31 March 2012, the embedded derivative liabilities were R5 539 million (2011: R5 873 million) for the group and R5 538 million (2011: R5 872 million) for the company. The valuation methods and inputs are discussed in the accounting policies (refer to note 2.11.5, page 27) and the valuation assumptions are disclosed under critical accounting estimates and judgements (refer to note 4, page 54). Risks arising from these contracts are discussed under the relevant risk areas as follows: • currency risk (refer to note 3.2.1, page 42) • commodity risk (refer to note 3.2.2, page 44) • interest rate risk (refer to note 3.2.3, page 45) • other price risk (refer to note 3.2.5, page 47). 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 up to a maximum of five years. The South African Reserve Bank currently allows Eskom to hedge commodity price risk up to a maximum of five years with a foreign or local party. Loans receivable Market risks in respect of loans receivable arise from changes in interest rates and market prices. Market risk is monitored and analysed through the treasury department and reported to the EFC finance committee. A strategy aimed at protecting the EFC group from changes in market risk that may have a negative impact on earnings has been implemented. Funds to finance operations are raised over the short term, usually for periods of three to six months, but not exceeding one year. This enables the pricing of assets to be matched with changes in the pricing of liabilities. The cost of funding is based on prevailing conditions in the South African money market. Rates charged on outstanding loan receivables are based on movements in the South African Reserve Bank repurchase rate. Eskom Holdings SOC Limited Annual Financial Statements 2012 41 Notes to the consolidated financial statements continued for the year ended 31 March 2012 3. Financial risk management (continued) 3.2 Market risk (continued) 3.2.1 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 R50 000 are hedged (ie economic or cash flow hedges). Currency exposure is identified by the business and hedged by the central treasury department. All hedging activities are conducted and managed by the treasury department. 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 (in million): 2012 EUR USD GBP JPY SEK AUD CHF CAD NOK Group Assets Trade and other receivables – – – – – – – – – Liabilities Debt securities issued (501) (1 753) – – – – – – – Borrowings (1 559) (1 071) – (13 100) – – – – – Trade and other payables (128) (52) (4) (772) (94) (2) (3) (3) (1) Gross statement of financial position exposure (2 188) (2 876) (4) (13 872) (94) (2) (3) (3) (1) Estimated forecast purchases1 (1 985) (289) (24) (5 948) (78) (2) (4) (5) (5) Coupon payments (2) (2) – – – – – – – Gross exposure (4 175) (3 167) (28) (19 820) (172) (4) (7) (8) (6) Derivatives held for risk management 4 173 3 166 28 19 820 162 2 8 8 5 Net exposure (2)2 (1)2 – – (10)3 (2)3 12 – (1) Company Assets Trade and other receivables – – – – – – – – – Liabilities Debt securities issued (501) (1 753) – – – – – – – Borrowings (1 559) (1 071) – (13 100) – – – – – Trade and other payables (126) (51) (4) (772) (94) (2) (3) (3) (1) Gross statement of financial position exposure (2 186) (2 875) (4) (13 872) (94) (2) (3) (3) (1) Estimated forecast purchases1 (1 985) (289) (24) (5 948) (78) (2) (4) (5) (5) Coupon payments (2) (2) – – – – – – – Gross exposure (4 173) (3 166) (28) (19 820) (172) (4) (7) (8) (6) Derivatives held for risk management 4 173 3 166 28 19 820 162 2 8 8 5 Group exposures covered by company (2) (1) – – – – – – – Net exposure (2)2 (1)2 – – (10)3 (2)3 12 – (1)2 Group and company Derivatives held for risk management – rand equivalent 42 766 24 317 344 1 848 188 16 68 62 7 1. Represents future purchases contracted for. 2. Transactions less than R50 000 that are not required to be hedged. 3. Cover relating to net exposure was taken out after year end. 42 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 3. Financial risk management (continued) 3.2 Market risk (continued) 3.2.1 Currency risk (continued) 2011 EUR USD GBP JPY SEK AUD CHF CAD NOK Group Assets Trade and other receivables – 1 – – – – – – – Liabilities Debt securities issued (501) (1 752) – – – – – – – Borrowings (814) (663) – (11 400) – – – – – Trade and other payables (64) (16) (3) (265) (71) (2) (2) – (1) Gross statement of financial position exposure (1 379) (2 430) (3) (11 665) (71) (2) (2) – (1) Estimated forecast purchases1 (2 301) (407) (35) (6 743) (139) (4) (23) (7) (5) Coupon payments (184) (17) – (48) – – – – – Gross exposure (3 864) (2 854) (38) (18 456) (210) (6) (25) (7) (6) Derivatives held for risk management 3 858 2 850 38 18 456 204 4 25 7 2 Net exposure (6)2 (4)3 – – (6)3 (2)3 – – (4)3 Company Assets Trade and other receivables – 1 – – – – – – – Liabilities Debt securities issued (501) (1 752) – – – – – – – Borrowings (814) (663) – (11 400) – – – – – Trade and other payables (60) (15) (3) (265) (70) (1) (1) – (1) Gross statement of financial position exposure (1 375) (2 429) (3) (11 665) (70) (1) (1) – (1) Estimated forecast purchases1 (2 301) (407) (35) (6 743) (139) (4) (23) (7) (5) Coupon payments (184) (17) – (48) – – – – — Gross exposure (3 860) (2 853) (38) (18 456) (209) (5) (24) (7) (6) Derivatives held for risk management 3 858 2 850 38 18 456 204 4 25 7 2 Group exposures covered by company (4) (1) – – – – – – – Net exposure (6)2 (4)3 – – (5)3 (1)3 13 – (4)3 Group and company Derivatives held for risk management – rand equivalent 37 068 19 309 421 1 505 219 29 182 61 2 The following significant exchange rates were applied during the year (rand values for 1 unit of selected currencies): Average rate Reporting date mid-spot rate 2012 2011 2012 2011 EUR 10.26 9.50 10.25 9.61 USD 7.42 7.17 7.68 6.78 GBP 11.87 11.14 12.27 10.87 CHF 8.46 7.14 8.51 7.41 JPY 0.09 0.08 0.09 0.08 SEK 1.14 1.03 1.16 1.08 CAD 7.47 7.03 7.70 6.98 AUD 7.79 6.78 7.96 7.00 NOK 1.33 1.20 1.35 1.23 1. Represents future purchases contracted for. 2. Over/under hedging may result from changes in future interest to be paid. 3. Transactions less than R50 000 that are not required to be hedged. Eskom Holdings SOC Limited Annual Financial Statements 2012 43 Notes to the consolidated financial statements continued for the year ended 31 March 2012 3. Financial risk management (continued) 3.2 Market risk (continued) 3.2.1 Currency risk (continued) Sensitivity analysis The group is mainly exposed to euros and United States dollars. The sensitivity analysis has been performed on the same basis as the prior year. The analysis assumes that all other variables, in particular interest rates, remain constant and are: Group and company 2012 2012 2011 2011 1% 1% 1% 1% increase decrease increase decrease Rm Rm Rm Rm Profit/(loss), excluding embedded derivatives Total exposure 233 (233) 58 (58) Rand/euro exposure 134 (134) 18 (18) Rand/USD exposure 96 (96) 36 (36) Rand/other currency 3 (3) 4 (4) Equity, excluding embedded derivatives Total exposure 111 (111) 245 (245) Rand/euro exposure 98 (98) 215 (215) Rand/USD exposure 6 (6) 18 (18) Rand/other currency 7 (7) 12 (12) Profit/(loss) – embedded derivatives1 Rand/USD exposure (57) 65 104 (109) 3.2.2 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). Although the revenue from certain special pricing arrangements is linked to commodity prices, one contract is in the process of being renegotiated. 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 South African Reserve Bank 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. At year end only the special pricing arrangements gave rise to commodity-linked (aluminium) embedded derivatives (refer to note 3.2 on page 41). Commodities used directly Eskom purchases coal that is used in the generation of electricity from mines and is exposed to price and supply risks. Eskom has entered into long-term supply agreements with mines to ensure continuous supply of coal. In the fixed price contracts the price escalation is fixed, whereas Eskom pays for all the operational costs of the collieries where the contracts are on a cost-plus basis. The contracts are monitored closely and managed to ensure costs are maintained within acceptable levels. All production requirements above those of the long-term contracts are supplied via short- to medium-term contracts which usually have a transport element included in the purchase price. There is also price risk exposure in the long-term primary energy water supply agreements entered into with the Department of Water Affairs (DWA) where Eskom pays for a portion of the operational costs incurred by DWA on certain of the water schemes. Eskom is exposed to price risk on the diesel that is used for the generation of electricity at its open-cycle gas turbine power stations. The price of diesel is a function of the crude oil price and USD exchange rates. 1. Impact on profit or loss is before calibration adjustments. 44 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 3. Financial risk management (continued) 3.2 Market risk (continued) 3.2.2 Commodity risk (continued) Commodities used indirectly The exposure where commodities formed a part of plant, equipment or inventory is relatively small at year end. Eskom hedges all its base metal exposures (aluminium, copper, zinc and nickel) during the year via commodity forwards (refer to note 15). Eskom currently does not hedge its exposure to steel as no economic viable hedging instruments exist. The group’s quantitative exposure to commodity risk is as follows: Group and company 2012 2012 2012 2012 2011 2011 2011 2011 Gross Hedged Net Gross Hedged Net exposure exposure exposure exposure Tons Rm Rm Rm Tons Rm Rm Rm Copper 608 35 35 – 1 350 26 26 – Nickel 26 5 5 – 52 8 8 – Zinc 841 23 23 – 7 153 158 158 – 63 63 – 192 192 – Sensitivity analysis From a commodity perspective the group is exposed mainly to changes in the aluminium price. The sensitivity analysis has been performed on the same basis as the prior year. The analysis assumes that all other variables remain constant and the possible impact on profit or loss is: Group and company 2012 2012 2011 2011 1% 1% 1% 1% increase decrease increase decrease Rm Rm Rm Rm Profit/(loss), excluding embedded derivatives Commodity forwards – – 1 (1) Profit/(loss), including embedded derivatives1 Aluminium price (51) 51 76 (76) The periods of the hedging instrument and that of the hedged item are not the same because of South African Reserve Bank regulations that limit the number of years which can be hedged. 3.2.3 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 borrowings, debt securities and forward exchange contracts. Borrowings and debt securities issued 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 treasury policy and control manual) exposed to an interest rate reset within the next 12 month period to 40%. Refer to note 13.5 and 13.6 for the group’s quantitative exposure to interest rate risk. 1. Impact on profit or loss is before calibration adjustments. Eskom Holdings SOC Limited Annual Financial Statements 2012 45 Notes to the consolidated financial statements continued for the year ended 31 March 2012 3. Financial risk management (continued) 3.2 Market risk (continued) 3.2.3 Interest rate risk (continued) 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 assumes that all other variables, in particular foreign exchange rates, remain constant. The calculation excludes borrowing costs capitalised in terms of the group’s accounting policy. The analysis relates to variable-rate instruments and has been performed on the same basis as the prior year. 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. The South African rand and the United States dollar interest rates are used in determining the fair value of embedded derivatives. The sensitivity analysis below indicates the impact on profit or loss if these rates change. The sensitivity analysis assumes that all other variables remain constant and has been prepared on the same basis as for the prior year. Group Company 2012 2012 2011 2011 2012 2012 2011 2011 +100 –100 +100 –100 +100 –100 +100 –100 basis basis basis basis basis basis basis basis points points points points points points points points Rm Rm Rm Rm Rm Rm Rm Rm Profit/(loss), excluding embedded derivatives Total exposure (82) 101 186 (208) (102) 121 166 (188) Rand interest rates 201 (204) 240 (263) 181 (184) 220 (243) EUR interest rates (88) 89 (30) 30 (88) 89 (30) 30 USD interest rates (194) 215 (23) 24 (194) 215 (23) 24 Other currency interest rates (1) 1 (1) 1 (1) 1 (1) 1 Profit/(loss), including embedded derivatives1 Rand interest rates 144 (159) 652 (570) 144 (159) 652 (570) USD interest rates (83) 84 (376) 379 (83) 84 (376) 379 Equity Total exposure (126) 121 (232) 217 (126) 121 (232) 217 Rand interest rates 1 348 (1 481) 1 031 (1 156) 1 348 (1 481) 1 031 (1 156) EUR interest rates (224) 236 (193) 197 (224) 236 (193) 197 USD interest rates (1 196) 1 308 (1 021) 1 124 (1 196) 1 308 (1 021) 1 124 Other currency interest rates (54) 58 (49) 52 (54) 58 (49) 52 The group has elected not to hedge interest rate risk and there would therefore be no impact on equity. 1. Impact on profit or loss is before calibration adjustments. 46 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 3. Financial risk management (continued) 3.2 Market risk (continued) 3.2.3 Interest rate risk (continued) Fixed and floating rate debt The fixed and floating rate debt percentages at 31 March were: Group and company 2012 2012 2011 2011 Fixed Floating Fixed Floating % % % % Continuing operations 87 13 90 10 3.2.4 Equity price risk Equity price risk arises from listed shares invested in by Escap. 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. All the equity investments are listed on the JSE Limited (JSE). A 1% decrease in the equity portfolio at the reporting date would have increased profit or loss by R4.6 million (2011: R4.5 million) after tax. An equal change in the opposite direction would have decreased profit or loss by R4.6 million (2011: R4.5 million). There will be no impact on equity. The analysis assumes that all other variables remain constant and is performed on the same basis as for the prior year. Movements of financial assets and equity prices are monitored on a monthly basis and equity price changes assessed against the JSE Shareholder Weighted Index as a benchmark. 3.2.5 Other price risk Inflation price risk arises from embedded derivatives as discussed under note 3.2 on page 41. The risk arises from movements in the electricity tariffs, the United States production price index (PPI) and the South African consumer price index (CPI). Refer to note 14 for the group’s quantitative exposure to other price risk. The following is the sensitivity analysis of the change in the value of the embedded derivatives (relating to customised pricing agreements) as a result of changes in electricity tariffs, the South African CPI or the United States PPI. This analysis has been performed on the same basis as the prior year. The analysis assumes that all other variables remain constant and the possible impact on profit or loss is: Group and company 2012 2012 2011 2011 1% 1% 1% 1% increase decrease increase decrease Rm Rm Rm Rm Profit/(loss), including embedded derivatives1 Electricity tariffs (1 019) 968 (106) 106 South African CPI 239 (244) (314) 303 United States PPI 22 49 93 (97) 1. Impact on profit or loss is before calibration adjustments. Eskom Holdings SOC Limited Annual Financial Statements 2012 47 Notes to the consolidated financial statements continued for the year ended 31 March 2012 3. Financial risk management (continued) 3.3 Liquidity risk Liquidity risk is 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. This risk can arise from mismatches in the timing of cash flows from revenue and 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 consolidated 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 funding plan • maintaining liquidity and funding contingency plans Eskom has an established corporate governance structure and process for managing the risks regarding guarantees and contingent liabilities (refer to note 40). All significant guarantees issued by Eskom are approved by the board, and are managed on an ongoing basis through the quarterly meetings of the treasury credit committee, and by the Exco and audit and risk committee of the board. 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. 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, as well as local and foreign debt issued in the market. To supplement these liquidity sources under stress conditions, overdraft facilities (for which there was no requirement to use), undrawn loans, financing and guarantee facilities are in place as indicated below. Group and company 2012 2011 Currency m m Japan Bank for International Cooperation Untied facility JPY 9 749 12 600 Tied facility JPY 30 000 30 000 European Investment Bank EUR – 41 General banking facilities ZAR 500 500 African Development Bank loan facility EUR 873 889 African Development Bank loan facility ZAR 5 315 7 154 Export Credit Agency floating rate facility EUR 629 830 Export Credit Agency fixed rate facility EUR 625 1 126 World Bank USD 2 972 3 379 Development Bank of Southern Africa ZAR 12 000 14 000 Government guarantees (uncommitted) ZAR 196 389 244 300 Government guarantees (remaining on domestic multi-term note programme)1 ZAR 34 632 4 336 Renewables and clean technology fund USD 615 – Renewables and clean technology fund EUR 100 – Ex-Im US USD 800 – 1. Amount included in the government guarantee – (uncommitted) of R196 389 million (2011: R244 300 million). 48 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 3. Financial risk management (continued) 3.3 Liquidity risk (continued) Group and company 2012 2011 Currency m m Funds received from development financing institutions World Bank1 USD 407 371 African Development Bank1 EUR 16 41 African Development Bank1 ZAR 1 839 3 476 Development Bank of Southern Africa2 ZAR 2 000 1 000 European Investment Bank3 ZAR 440 425 Key indicators used for liquidity management Duration Management has set minimum duration limits to help optimise returns for the group on its debt portfolio. Group policy is to ensure that the external debt portfolio (excluding the trade portfolio) has a minimum duration of five years, should it exceed R10 billion. The duration 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 duration (a weighted average term to maturity measure based on future cash flows) of the debt (including the shareholder loan) measured at fair value at 31 March was: Group and company 2012 2011 Years Years Continuing operations 5.99 6.33 Liquid assets Liquid assets are investments identified as having the potential to be quickly converted into cash. These investments include the instruments as disclosed in cash and cash equivalents and investment in securities (refer to note 13.1 and 13.2). The liquid assets were: Group Company 2012 2011 2012 2011 Rm Rm Rm Rm Continuing operations 40 480 49 892 36 998 47 035 Capital expenditure ratio The capital expenditure ratio4 measures whether there are liquid funds available to invest in capital expenditure. The capital expenditure ratio for the period was: Group Company 2012 2011 2012 2011 % % % % Continuing operations 67 64 67 62 1. All funds received were reimbursements on payments made by Eskom to the various suppliers for goods and services supplied for the construction of the Medupi power station. 2. Funds received were used for bridging finance for the capital expansion programme. 3. Funds received were used for the construction of the 765kV Zeus to Omega scheme transmission lines. 4. The ratio is calculated as cash generated from operations divided by capital expenditure (excluding finance cost capitalised) on property, plant and equipment and intangible assets. Eskom Holdings SOC Limited Annual Financial Statements 2012 49 Notes to the consolidated financial statements continued for the year ended 31 March 2012 3. Financial risk management (continued) 3.3 Liquidity risk (continued) Contractual cash flows The table below indicates the contractual undiscounted cash flows of the group’s financial assets and liabilities (refer to note 13) 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 are presented as gross inflows and outflows even though physically they are settled simultaneously. Contractual cash flows are a function of forward exchange rates and forward interest rates and is a point in time calculation that is 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. Carrying amount Cash flows Non- Current Total Nominal 0 to 3 4 to 12 1 to 5 More current inflow or months months years than outflow 5 years 2012 Rm Rm Rm Rm Rm Rm Rm Rm Group Financial assets Investment in securities 8 749 12 281 21 030 27 981 12 698 5 642 9 641 – Loans receivable 7 435 79 7 514 17 204 230 680 3 218 13 076 Derivatives held for risk management 1 780 362 2 142 (6 237) 163 241 2 320 (8 961) Finance lease receivables 555 15 570 1 343 22 66 345 910 Trade and other receivables 333 14 313 14 646 14 651 13 300 1 017 334 – Financial trading assets1 – 5 046 5 046 5 646 2 622 839 1 649 536 Cash and cash equivalents – 19 450 19 450 19 450 19 450 – – – 18 852 51 546 70 398 80 038 48 485 8 485 17 507 5 561 Financial liabilities Debt securities issued 90 732 7 170 97 902 203 250 1 376 11 753 40 367 149 754 Borrowings 41 070 7 682 48 752 103 359 8 723 6 149 18 513 69 974 Subordinated loan from shareholder 35 913 – 35 913 175 112 – – 5 293 169 819 Derivatives held for risk management 1 273 3 590 4 863 5 184 702 3 912 1 319 (749) Finance lease liabilities 511 10 521 1 569 25 78 404 1 062 Trade and other payables 1 971 23 487 25 458 25 974 20 120 3 371 2 417 66 Financial trading liabilities1 – 2 831 2 831 3 112 1 634 539 169 770 Financial guarantees – 1 1 160 160 – – – 171 470 44 771 216 241 517 720 32 740 25 802 68 482 390 696 Company Financial assets Financial instruments with group companies – 5 208 5 208 5 290 2 546 2 744 – – Investment in securities 8 749 9 854 18 603 25 554 11 098 4 815 9 641 – Derivatives held for risk management 1 780 362 2 142 (6 237) 163 241 2 320 (8 961) Finance lease receivables 555 15 570 1 343 22 66 345 910 Trade and other receivables 28 13 327 13 355 13 357 12 674 654 29 – Financial trading assets1 – 4 402 4 402 5 001 1 977 839 1 649 536 Cash and cash equivalents – 18 395 18 395 18 395 18 395 – – – 11 112 51 563 62 675 62 703 46 875 9 359 13 984 (7 515) Financial liabilities Financial instruments with group companies – 1 305 1 305 1 305 1 305 – – – Debt securities issued 89 388 6 842 96 230 201 578 1 048 11 753 39 159 149 618 Borrowings 40 690 7 593 48 283 102 800 8 694 6 060 18 072 69 974 Subordinated loan from shareholder 35 913 – 35 913 175 112 – – 5 293 169 819 Derivatives held for risk management 1 273 3 590 4 863 5 184 702 3 912 1 319 (749) Finance lease liabilities 826 51 877 2 059 44 131 697 1 187 Trade and other payables 1 263 24 038 25 301 25 812 21 448 2 590 1 708 66 Financial trading liabilities1 – 2 831 2 831 3 112 1 634 539 169 770 Financial guarantees – 1 1 1 070 1 070 – – – 169 353 46 251 215 604 518 032 35 945 24 985 66 417 390 685 1. The contractual cash flows for financial trading assets and liabilities have been disclosed based on the contractual maturity of the instrument. However, as these instruments are held for trading they may be sold or settled prior to contractual maturity. 50 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 3. Financial risk management (continued) 3.3 Liquidity risk (continued) Contractual cash flows (continued) Carrying amount Cash flows Non- Current Total Nominal 0 to 3 4 to 12 1 to 5 More current inflow or months months years than outflow 5 years 2011 Rm Rm Rm Rm Rm Rm Rm Rm Group Financial assets Investment in securities 13 259 24 546 37 805 42 203 9 650 16 635 15 918 – Loans receivable 5 958 100 6 058 9 524 139 374 1 841 7 170 Derivatives held for risk management 6 116 122 19 12 – 7 – Finance lease receivables 570 15 585 1 432 21 69 349 993 Trade and other receivables 525 10 953 11 478 11 480 9 702 1 251 526 1 Financial trading assets1 – 3 827 3 827 4 738 1 570 269 2 806 93 Cash and cash equivalents – 12 087 12 087 12 087 12 087 – – – 20 318 51 644 71 962 81 483 33 181 18 598 21 447 8 257 Financial liabilities Debt securities issued 84 396 2 880 87 276 191 807 1 808 6 210 41 458 142 331 Borrowings 25 449 9 654 35 103 67 689 2 413 8 364 12 034 44 878 Subordinated loan from shareholder 37 931 – 37 931 146 266 – – 5 293 140 973 Derivatives held for risk management 4 576 1 404 5 980 4 503 541 2 796 5 954 (4 788) Finance lease liabilities 521 8 529 1 699 45 86 381 1 187 Trade and other payables 1 508 18 384 19 892 20 216 14 785 3 606 1 623 202 Financial trading liabilities1 – 4 304 4 304 7 479 1 185 360 3 261 2 673 Financial guarantees – 1 1 156 156 – – – 154 381 36 635 191 016 439 815 20 933 21 422 70 004 327 456 Company Financial assets Financial instruments with group companies – 3 806 3 806 3 852 2 316 1 536 – – Investment in securities 13 259 22 310 35 569 39 967 8 879 15 170 15 918 – Derivatives held for risk management 6 116 122 19 12 – 7 – Finance lease receivables 570 15 585 1 432 21 69 349 993 Trade and other receivables 14 9 568 9 582 9 583 8 961 607 14 1 Financial trading assets1 – 3 197 3 197 4 108 940 269 2 806 93 Cash and cash equivalents – 11 466 11 466 11 466 11 466 – – – 13 849 50 478 64 327 70 427 32 595 17 651 19 094 1 087 Financial liabilities Financial instruments with group companies – 1 462 1 462 1 483 690 793 – – Debt securities issued 84 031 1 574 85 605 190 136 900 5 812 41 229 142 195 Borrowings 25 009 9 571 34 580 67 115 2 380 8 271 11 585 44 879 Subordinated loan from shareholder 37 931 – 37 931 146 266 – – 5 293 140 973 Derivatives held for risk management 4 576 1 404 5 980 4 503 541 2 796 5 954 (4 788) Finance lease liabilities 865 37 902 2 348 67 150 729 1 402 Trade and other payables 859 18 042 18 901 19 221 15 699 2 345 975 202 Financial trading liabilities1 – 4 304 4 304 7 479 1 185 360 3 261 2 673 Financial guarantees – 2 2 637 637 – – – 153 271 36 396 189 667 439 188 22 099 20 527 69 026 327 536 1. The contractual cash flows for financial trading assets and liabilities have been disclosed based on the contractual maturity of the instrument. However, as these instruments are held for trading they may be sold or settled prior to contractual maturity. Eskom Holdings SOC Limited Annual Financial Statements 2012 51 Notes to the consolidated financial statements continued for the year ended 31 March 2012 3. Financial risk management (continued) 3.3 Liquidity risk (continued) Non-current assets held-for-sale Carrying amount Cash flows Non- Current Nominal 0 to 3 4 to 12 1 to 5 More current inflow or months months years than outflow 5 years Group Rm Rm Rm Rm Rm Rm Rm 2012 Financial assets – 374 374 374 – – – Trade and other receivables – 249 249 249 – – – Cash and cash equivalents – 125 125 125 – – – Financial liabilities Trade and other payables – 274 274 274 – – – 2011 Financial assets – 681 681 63 618 – – Trade and other receivables – 618 618 – 618 – – Cash and cash equivalents – 63 63 63 – – – Financial liabilities Trade and other payables – 732 732 – 732 – – 3.4 Capital management Eskom manages accumulated profit and the hedging, fair value, equity and insurance reserves as capital. The equity reserve comprises the day-one gains that result from the initial recognition of the subordinated loan tranches received from the shareholder. The day-one gains are included in equity as it is considered to be a contribution from the shareholder (refer to note 13.6). Eskom is obliged to pay interest on the loan when the solvency and debt leverage conditions per the agreement are satisfied. Future projections result in the day-one gains. The table below shows the amounts of the reserves which Eskom manages as capital: Group Company 2012 2011 2012 2011 Rm Rm Rm Rm Accumulated profit 72 676 58 219 68 681 54 850 Cash flow hedge reserve 1 712 (487) 1 712 (487) Unrealised fair value reserve (2 251) (1 277) (2 251) (1 277) Equity reserve 30 520 30 520 30 520 30 520 Insurance reserve 90 110 – – 102 747 87 085 98 662 83 606 The objective of capital management is to ensure that Eskom is sustainable over the long term. There were no changes to Eskom’s approach to capital management during the financial year. The major items that impact the equity of Eskom include: • the revenue received from electricity sales (which is a function of price and sales volumes) • the cost of funding the current business • the cost of operating the electricity business • the cost of expanding the business to ensure that capacity growth is in line with electricity sales demand (funding and additional depreciation) • taxation • dividends Eskom uses the Integrated Strategic Electricity Planning process which forecasts the growth in electricity demand for the long term and evaluates the alternative means to meet and manage that demand. This information flows into the planning process. The planning process will determine a forward electricity price curve which will be an indication of the size of the price increases which Eskom requires to be sustainable over the long term. The tariff increases for the electricity business are subject to the process laid down by the National Energy Regulator of South Africa (Nersa). The current regulatory framework applicable to Eskom is a multi-year, incentive-based method of adjusting electricity prices. 52 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 3. Financial risk management (continued) 3.4 Capital management (continued) The electricity business is currently in a major expansion phase and there is agreement with the government that the committed capital expansion programme continues. The funding related to new generating, transmitting and other capacity is envisaged to be obtained from cash generated by the business, shareholder support and funds borrowed on the local and foreign debt markets.The adequacy of price increases allowed by the regulator and the level and timing of shareholder support are key factors in the sustainability of Eskom. Eskom believes that a capacity expansion beyond the Kusile project would need to be carried out in a prefunded/project finance type manner in order to ensure the stability of Eskom’s statement of financial position. The government as the sole shareholder and the board have the responsibility to ensure that the group is adequately capitalised to ensure continuity of supply and that the business is attractive to investors to enable Eskom to fund the capital expansion programme. Eskom has targeted achieving investment grade ratings on a standalone basis over the next six years, and is monitoring the relevant performance ratios as part of its financial policy. The free funds from operations to total debt and total debt to earnings before interest, tax, depreciation and amortisation (EBITDA) ratios play an important role in the credit ratings given to Eskom which in turn influences the cost of funding. The following ratios are closely managed: Group Unit 2012 2011 EBITDA Rm 31 130 23 609 Free funds from operations (FFO) Rm 30 483 16 953 Interest cover ratio 3.35 1.45 Electricity revenue per kWh c/kWh 50.27 40.27 Electricity operating costs per kWh (including depreciation and amortisation) c/kWh 41.28 32.78 FFO as percentage of gross debt % 15.15 9.51 Gross debt/EBITDA % 6.46 7.55 Debt: equity including long-term provisions ratio 1.64 1.61 Working capital ratio 0.76 0.85 Credit ratings: Company 2012 2011 Company (including government uplift) Rating Outlook Rating Outlook Standard and Poor’s Foreign currency BBB+ Negative BBB+ Stable Local currency BBB+ Negative BBB+ Stable Moody’s Foreign currency Baa2 Negative Baa2 Stable Local currency Baa2 Negative Baa2 Stable FitchRatings National long-term (zaf) AAA Stable AAA Stable National short-term (zaf) F1+ Stable F1+ Stable Eskom Holdings SOC Limited Annual Financial Statements 2012 53 Notes to the consolidated financial statements continued for the year ended 31 March 2012 4. Critical accounting estimates and judgements Estimates and judgements are evaluated continually and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. 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. Revisions to accounting estimates are recognised in the period in which they are revised and future periods they affect. (a) Embedded derivatives Eskom has entered into a number of agreements to supply electricity to electricity-intensive industries where the revenue from these contracts is linked to commodity prices and foreign currency rates or foreign production price indices that give rise to embedded derivatives. The embedded derivatives have been divided into three categories: • commodity and/or foreign currency derivatives • foreign currency or interest rate derivatives • production price and foreign currency derivatives Valuation The fair value of embedded derivatives is determined by using a forward electricity price curve to value the host contract and the derivative contract is valued by using Eskom’s estimate of future commodity prices, foreign currencies rand exchange rate, production price and interest rate differential. Valuation assumptions The electricity price curve used to value embedded derivatives at 31 March 2012 is based on the current MYPD 2 approved tariff for 2012/13 of 16%, and a forward tariff path for the next five years (2013/14 to 2017/18) that ultimately achieves cost reflective tariffs. The contracted electricity price used to value embedded derivatives is based on a combination of the factors in the table below over the contracted period. Forecast sales volumes are based on the most likely future sales volumes which have been back-tested against historic volumes. The fair value of embedded derivatives takes into account the inherent uncertainty relating to the future cash flows of embedded derivatives, such as liquidity, model risk and other economic factors. The negotiations regarding the outstanding commodity-linked contract is continuing. The following valuation assumptions for the future electricity price curve discussed above for the valuation of embedded derivatives were used and are regarded as the best estimates by the board: 2012 Year ended 31 March Input Unit 2012 1 2013 1 20141 20151 20161 20171 Aluminium USD per ton 2 094 2 207 2 298 2 380 2 444 2 503 Rand/USD USD per rand 0.25 0.25 0.25 0.25 0.25 0.25 Rand interest rates Continuous actual/365 days (%) 5.25 6.10 5.98 6.36 6.62 6.91 Dollar interest rates Annual actual/360 days (%) 0.19 0.94 0.58 0.75 0.99 1.26 United States PPI Year-on-year (%) (5.92) (6.05) 2.48 (11.06) (7.44) (9.64) South African CPI Year-on-year (%) 11.16 4.31 2.42 6.81 7.18 7.50 2011 Year ended 31 March Input Unit 2011 1 2012 1 20131 20141 20151 20161 Aluminium USD per ton 2 598 2 716 2 779 2 830 2 869 2 903 Rand/USD USD per rand 0.15 0.15 0.15 0.15 0.15 0.15 Rand interest rates Continuous actual/365 days (%) 5.42 6.14 6.70 7.35 7.76 8.01 Dollar interest rates Annual actual/360 days (%) 0.20 0.96 0.95 1.50 2.01 2.45 United States PPI Year-on-year (%) 6.01 7.01 2.44 2.36 2.34 1.69 South African CPI Year-on-year (%) 6.40 7.78 6.94 5.99 6.75 6.74 Sensitivity analysis The approximate change in the value of embedded derivatives if one of the inputs is changed is disclosed in note 3.2 Financial risk management – market risk on page 41. The carrying amount of the embedded derivative liabilities for the group is R5 539 million (2011: R5 873 million) and R5 538 million (2011: R5 872 million) for the company. Refer to note 14. 1. Forward curve based on financial years. 54 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 4. Critical accounting estimates and judgements (continued) (b) Post-retirement medical benefits The group recognises a liability for post-retirement medical benefits to qualifying retirees. The post-retirement 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 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. The current cost is the cost of providing the benefit over the next year. Valuation assumptions The principal actuarial assumptions used were: Group and company 2012 2011 Discount rate (%) 9.1 9. 5 Medical aid inflation (%) 7.6 8. 0 Mortality table Adjusted PA(90) Per tables rated down experience by two years analysis Sensitivity analysis The effect of an increase of one percentage point and the effect of a decrease of one percentage point in the assumed medical inflation rate is as follows: Group Company 2012 2012 2011 2011 2012 2012 2011 2011 1% 1% 1% 1% 1% 1% 1% 1% increase decrease increase decrease increase decrease increase decrease Rm Rm Rm Rm Rm Rm Rm Rm Effect on aggregate current service cost and interest cost 205 (160) 190 (150) 201 (157) 187 (147) Effect on post-retirement medical obligation 1 441 (1 150) 1 272 (1 017) 1 412 (1 126) 1 272 (1 017) The carrying amount of the post-retirement medical benefits liability for the group is R8 333 million (2011: R7 542 million) and R8 151 million (2011: R7 374 million) for the company. Refer to note 24.1. (c) Occasional and service leave The group recognises a liability for occasional and service leave as the leave is of a long-term nature. 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 2012 2011 % % Discount rate 9.1 9.5 General price inflation 5.6 6.0 Salary increases 7.1 7.5 Leave usage 4.0 5.0 The assumptions made in respect of resignation, death and retirement rates are the same as for the post-retirement medical aid liability. Sensitivity analysis Based on current experience, only 4% (2011: 5%) of the leave is utilised. If the rate at which leave is taken is 8% (2011: 10%), then the liability will increase by R47 million (2011: R42 million). The carrying amount of the occasional and service leave liability for the group is R981 million (2011: R860 million) and R921 million (2011: R811 million) for the company. Refer to note 24.3. Eskom Holdings SOC Limited Annual Financial Statements 2012 55 Notes to the consolidated financial statements continued for the year ended 31 March 2012 4. Critical accounting estimates and judgements (continued) (d) Decommissioning, mine closure and rehabilitation Nuclear and other generation plant, and spent nuclear fuel Provision is made for the estimated decommissioning cost of nuclear and other generation plant and for the management of nuclear fuel assemblies and radioactive waste. Closure, pollution control and rehabilitation Provision is made for the estimated cost of closure, pollution control, rehabilitation and mine employee benefits at the end of the life of the mines, where a constructive and contractual obligation exists to pay coal suppliers. Valuation The provision is determined by discounting the estimated decommissioning and nuclear spent fuel management costs. Valuation assumptions The discount rate used for nuclear plant, coal plants, spent fuel and closure, pollution control and rehabilitation was 5.3% (2011: 5.7% ) for the group and company. Estimated payment dates The estimated payment dates of the costs are: Group and company 2012 2011 Nuclear plant 2025 – 2039 2025 – 2039 Coal and pumped storage plants 2013 – 2113 2022 – 2113 Spent nuclear fuel 2012 – 2104 2011 – 2104 Closure, pollution control and rehabilitation 2016 – 2073 2011 – 2073 Sensitivity analysis The carrying amount of the provision would be an estimated R3 030 million (2011: R2 200 million) higher had the 5.3% (2011: 5.7%) real discount rate used in the calculation of the provision decreased by 1% and R2 369 million (2011: R1 720 million) lower had the 5.3% (2011: 5.7%) real discount rate increased by 1%. The carrying amount of the power station-related environmental restoration provision (nuclear and other) for group and company is R10 159 million (2011: R8 337 million). The carrying amount of the mine-related closure, pollution control and rehabilitation provision for group and company is R2 476 million (2011: R2 037 million). Refer to note 25. (e) Equity portion on subordinated loan from shareholder The value of the equity portion of the loan from the shareholder is the difference between the amount advanced and the calculated loan value on the day the tranches are drawn down. The loan value is calculated using Eskom’s long-term financial plan to forecast the leverage ratio and the interest cover to determine in which years interest will be payable over the period of the loan. These expected interest flows and the capital redemptions are discounted at the effective rate which was calculated at the inception of each tranche received to determine the loan amounts. Once the equity portion of a tranche is recorded it does not change. 5. Segment information Management has determined the reportable segments, as described below, based on the reports regularly provided, reviewed and used by the executive management committee (Exco) to make strategic decisions and assess performance of the segments. The reportable segments have been aligned with Eskom’s new operating structure. The prior year segment report has been restated in line with the new structure. The following summary describes the operations in each of the group’s reportable segments: 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, systems operations and the South African Energy (international buyer).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. Customer services Customer services consists of the customer service and integrated demand management functions and sells electricity to local key large, redistributors, large and small customers. Group capital Group capital is responsible for the planning, development and monitoring of all capital projects and the execution of capacity expansion 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. These include the group’s subsidiaries. Corporate and other Relates to all service and strategic functions which do not qualify as a reportable segment in terms of IFRS 8 Operating segments. 56 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 5. Segment information (continued) The segment information provided to Exco for the reportable segments for the year ended 31 March 2012 is as follows: Gener- Trans- Distri- Custo- Group All Corpo- Inter- Group ation mission bution mer capital other rate segment- services segments and trans- other actions 2012 Rm Rm Rm Rm Rm Rm Rm Rm Rm Continuing operations External revenue – 4 873 354 108 260 – 1 273 – – 114 760 Inter-segment revenue/ recoveries 72 705 7 061 21 858 (101 783) – 6 914 123 (6 878) – Total revenue 72 705 11 934 22 212 6 477 – 8 187 123 (6 878) 114 760 Primary energy (38 708) (5 057) – (2 200) (349) – – – (46 314) Employee benefit expense (5 861) (1 245) (5 551) (1 284) (260) (2 411) (3 520) – (20 132) Depreciation and amortisation expense (4 837) (800) (2 215) (17) (115) (224) (698) 105 (8 801) Net impairment (loss)/ reversal (5) 3 (5) (587) 1 (27) – – (620) Other operating expenses (11 162) (2 059) (8 518) (1 285) (209) (4 937) 3 836 9 125 (15 209) Operating profit/(loss) before net fair value (loss)/ gain and net finance cost 12 132 2 776 5 923 1 104 (932) 588 (259) 2 352 23 684 Other income 1 456 344 277 313 132 272 467 (2 562) 699 Net fair value (loss)/gain on financial instruments, excluding embedded derivatives (1 814) (73) (16) 21 (980) 4 470 – (2 388) Net fair value gain on embedded derivatives – – – 334 – – – – 334 Operating profit/(loss) before net finance cost 11 774 3 047 6 184 1 772 (1 780) 864 678 (210) 22 329 Net finance cost (2 783) (363) (196) 133 (28) (51) (675) – (3 963) Finance income 25 14 136 213 – 369 3 176 (397) 3 536 Finance cost (2 808) (377) (332) (80) (28) (420) (3 851) 397 (7 499) Share of profit of equity- accounted investees – – – – – 6 35 – 41 Profit before tax 8 991 2 684 5 988 1 905 (1 808) 819 38 (210) 18 407 Income tax – – – – – (184) (5 031) 59 (5 156) Profit/(loss) for the year from continuing operations 8 991 2 684 5 988 1 905 (1 808) 635 (4 993) (151) 13 251 Discontinued operations Loss for the year from discontinued operations – – – – – (3) – – (3) Profit/(loss) for the year 8 991 2 684 5 988 1 905 (1 808) 632 (4 993) (151) 13 248 Other information Segment assets 90 095 24 042 49 934 183 841 144 877 19 284 238 841 (369 248) 381 666 Investments in equity- accounted investees – – – – – 25 95 141 261 Non-current assets held- for-sale – – – – – 438 – – 438 Total assets 90 095 24 042 49 934 183 841 144 877 19 747 238 936 (369 107) 382 365 Segment liabilities 48 462 5 849 246 906 10 697 148 005 13 394 210 218 (404 269) 279 262 Capital expenditure (including borrowing costs capitalised) 13 253 4 969 8 805 76 34 853 450 1 490 (542) 63 354 Eskom Holdings SOC Limited Annual Financial Statements 2012 57 Notes to the consolidated financial statements continued for the year ended 31 March 2012 5. Segment information (continued) Segment information for the year ended 31 March 2011 Gener- Trans- Distri- Custo- Group All Cor- Inter- Group ation mission bution mer capital other porate segment- services segments and trans- other actions 2011 Rm Rm Rm Rm Rm Rm Rm Rm Rm Continuing operations External revenue – 4 125 192 86 454 – 676 – – 91 447 Inter-segment revenue/ recoveries 60 180 4 318 19 126 (83 519) – 6 833 – (6 938) – Total revenue 60 180 8 443 19 318 2 935 – 7 509 – (6 938) 91 447 Primary energy (32 531) (3 042) – (222) – – – – (35 795) Employee benefit expense (5 401) (1 044) (4 955) (1 124) (784) (1 334) (2 053) – (16 695) Depreciation and amortisation expense (3 751) (733) (2 296) (15) (136) (206) (130) 48 (7 219) Net impairment (loss)/ reversal (74) 11 4 (669) – (58) (2) – (788) Other operating expenses (8 738) (1 354) (6 526) (440) 239 (5 484) 2 428 7 805 (12 070) Operating profit/(loss) before net fair value (loss)/ gain and net finance cost 9 685 2 281 5 545 465 (681) 427 243 915 18 880 Other income 265 93 218 52 682 129 135 (987) 587 Net fair value (loss)/gain on financial instruments, excluding embedded derivatives (369) 56 (193) 173 (2 873) 70 1 320 – (1 816) Net fair value loss on embedded derivatives – – – (1 261) – – – – (1 261) Operating profit/(loss) before net finance cost 9 581 2 430 5 570 (571) (2 872) 626 1 698 (72) 16 390 Net finance cost (4 070) (353) (330) 29 (176) 27 132 – (4 741) Finance income 32 28 292 54 1 387 2 019 (377) 2 436 Finance cost (4 102) (381) (622) (25) (177) (360) (1 887) 377 (7 177) Share of profit of equity- accounted investees – – – – – – 24 – 24 Profit/(loss) before tax 5 511 2 077 5 240 (542) (3 048) 653 1 854 (72) 11 673 Income tax – – – – – (164) (3 117) 20 (3 261) Profit/(loss) for the year from continuing operations 5 511 2 077 5 240 (542) (3 048) 489 (1 263) (52) 8 412 Discontinued operations Loss for the year from discontinued operations – – – – – (56) – – (56) Profit/(loss) for the year 5 511 2 077 5 240 (542) (3 048) 433 (1 263) (52) 8 356 Other information Segment assets 78 685 19 445 44 428 162 508 110 151 17 226 212 015 (317 237) 327 221 Investments in equity- accounted investees – – – – – 19 95 106 220 Non-current assets held- for-sale – – – – – 704 – – 704 Total assets 78 685 19 445 44 428 162 508 110 151 17 949 212 110 (317 131) 328 145 Segment liabilities 51 146 4 382 182 168 8 420 113 701 12 330 183 735 (314 996) 240 886 Capital expenditure (including borrowing costs capitalised) 6 512 1 831 8 026 4 38 120 275 1 142 (453) 55 457 Inter-segment purchases and revenue of electricity are allocated between the Generation, Transmission, Distribution and Customer Services segments based on cost recovery plus return on assets. Exco assesses the performance of the operating segments based on a measure of profit or loss consistent with that of the financial statements. 58 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 5. Segment information (continued) The amounts provided to Exco with respect to total assets and liabilities are measured in terms of the IFRS. These assets and liabilities are allocated based on the operation of the segment and the physical location of the assets. Group Revenues Non-current assets 2012 2011 2012 2011 Geographical information Rm Rm Rm Rm South Africa 109 705 87 199 299 910 244 755 Foreign countries 5 055 4 248 72 51 114 760 91 447 299 982 244 806 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 intersegment transactions. There are no significant revenues 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. Group Company Cost Accumu- Carrying Cost Accumu- Carrying lated value lated value depre- depre- ciation ciation and and impair- impair- ment ment losses losses 2012 Rm Rm Rm Rm Rm Rm 6. Property, plant and equipment Owned assets Land 1 371 – 1 371 1 343 – 1 343 Buildings and facilities 4 445 (1 131) 3 314 4 294 (1 069) 3 225 Plant – Generation 107 747 (40 752) 66 995 107 938 (40 899) 67 039 – Transmission 23 522 (7 680) 15 842 23 529 (7 681) 15 848 – Distribution 61 780 (23 528) 38 252 61 818 (23 531) 38 287   Regular distribution 44 156 (14 983) 29 173 44 192 (14 986) 29 206   Electrification 17 624 (8 545) 9 079 17 626 (8 545) 9 081 – Test, telecommunication and other plant 1 797 (1 116) 681 496 (436) 60 Equipment and vehicles 10 117 (5 419) 4 698 8 076 (4 563) 3 513 Total in commission 210 779 (79 626) 131 153 207 494 (78 179) 129 315 Works under construction 158 340 (39) 158 301 159 712 – 159 712 Construction materials 984 (1) 983 984 (1) 983 370 103 (79 666) 290 437 368 190 (78 180) 290 010 Leased assets 657 (433) 224 1 034 (431) 603 Mining assets 573 (350) 223 573 (350) 223 Plant 29 (29) – 55 (29) 26 Equipment and vehicles 55 (54) 1 406 (52) 354 370 760 (80 099) 290 661 369 224 (78 611) 290 613 Eskom Holdings SOC Limited Annual Financial Statements 2012 59 Notes to the consolidated financial statements continued for the year ended 31 March 2012 Group Company Cost Accumu- Carrying Cost Accumu- Carrying lated value lated value depre- depre- ciation ciation and and impair- impair- ment ment losses losses 2011 Rm Rm Rm Rm Rm Rm 6. Property, plant and equipment (continued) Owned assets Land 1 154 – 1 154 1 126 – 1 126 Buildings and facilities 5 205 (1 589) 3 616 5 067 (1 533) 3 534 Plant – Generation 96 997 (36 001) 60 996 97 078 (36 043) 61 035 – Transmission 19 917 (7 064) 12 853 19 922 (7 065) 12 857 – Distribution 55 960 (21 237) 34 723 55 975 (21 239) 34 736   Regular distribution 39 771 (13 345) 26 426 39 786 (13 347) 26 439   Electrification 16 189 (7 892) 8 297 16 189 (7 892) 8 297 – Test, telecommunication and other plant 1 822 (1 066) 756 504 (393) 111 Equipment and vehicles 9 516 (4 834) 4 682 7 572 (4 168) 3 404 Total in commission 190 571 (71 791) 118 780 187 244 (70 441) 116 803 Works under construction 117 110 (93) 117 017 118 153 (55) 118 098 Construction materials 692 (2) 690 692 (2) 690 308 373 (71 886) 236 487 306 089 (70 498) 235 591 Leased assets 576 (339) 237 1 024 (398) 626 Mining assets 573 (337) 236 573 (337) 236 Plant – – – 43 (26) 17 Equipment and vehicles 3 (2) 1 408 (35) 373 308 949 (72 225) 236 724 307 113 (70 896) 236 217 Reconciliation of Carrying Additions Transfer Change Disposals Impair- Reversal Depre- Carrying movements value and to non- in ment of ciation value beginning transfers1 current discount losses impair- end of of year assets rate of ment year held-for- decom- losses sale mission- ing provision and cost estimate 2012 Rm Rm Rm Rm Rm Rm Rm Rm Rm Group Owned assets Land 1 154 218 – – (1) – – – 1 371 Buildings and facilities 3 616 90 – – (174) (1) – (217) 3 314 Plant 109 328 19 811 – 364 (109) – – (7 624) 121 770 Equipment and vehicles 4 682 1 117 (38) – (53) (5) – (1 005) 4 698 Works under construction 117 017 41 301 – – (17) – – – 158 301 Construction materials 690 293 – – – – – – 983 236 487 62 830 (38) 364 (354) (6) – (8 846) 290 437 Leased assets 237 – – – – – – (13) 224 Mining assets 236 – – – – – – (13) 223 Plant – – – – – – – – – Equipment and vehicles 1 – – – – – – – 1 Total property, plant and equipment 236 724 62 830 (38) 364 (354) (6) – (8 859) 290 661 1. Included in additions and transfers are borrowing costs capitalised of R4 999 million (2011: R8 589 million) for the group and company. 60 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 Carrying Additions Transfer Change Disposals Impair- Reversal Depre- Carrying value and to non- in ment of ciation value beginning transfers1 current discount losses impair- end of of year assets rate of ment year held-for- decom- losses sale mission- ing provision and cost estimate 2012 Rm Rm Rm Rm Rm Rm Rm Rm Rm 6. Property, plant and equipment (continued) Reconciliation of movements (continued) Company Owned assets Land 1 126 218 – – (1) – – – 1 343 Buildings and facilities 3 534 75 – – (174) – – (210) 3 225 Plant 108 739 19 868 – 364 (61) – – (7 676) 121 234 Equipment and vehicles 3 404 990 – – (44) – – (837) 3 513 Works under construction 118 098 41 614 – – – – – – 159 712 Construction materials 690 293 – – – – – – 983 235 591 63 058 – 364 (280) _ – (8 723) 290 010 Leased assets 626 13 – – – – – (36) 603 Mining assets 236 – – – – – – (13) 223 Plant 17 11 – – – – – (2) 26 Equipment and vehicles 373 2 – – – – – (21) 354 Total property, plant and equipment 236 217 63 071 – 364 (280) – – (8 759) 290 613 Group Company 2012 2011 2012 2011 Note Rm Rm Rm Rm Borrowing costs on general borrowings are capitalised at an average rate of 9.84% (2011: 9.83%). Borrowing costs on funds borrowed specifically for the purpose of obtaining a qualifying asset are capitalised at the actual rate obtained for the specific funds borrowed. The average specific rate for the year was 4.48% (2011: 10.17%). This rate includes the effect of the capitalisation of the gain of R5 472 million (2011: loss of R2 481 million) on the remeasurement of the subordinated loan from the shareholder. The amounts capitalised during the year were 37 4 999 8 589 4 999 8 589 Details of land and buildings are available for examination at the registered offices of the respective businesses. The total depreciation charge for property, plant and equipment is disclosed in profit or loss in the following categories: 8 859 7 304 8 759 7 168 Depreciation and amortisation expense 31 8 846 7 290 8 746 7 154 Primary energy 13 14 13 14 1. Included in additions and transfers are borrowing costs capitalised of R4 999 million (2011: R8 589 million) for the group and company. Eskom Holdings SOC Limited Annual Financial Statements 2012 61 Notes to the consolidated financial statements continued for the year ended 31 March 2012 Group Company Cost Accumulated Carrying Cost Accumulated Carrying amortisation value amortisation value and and impairment impairment losses losses Rm Rm Rm Rm Rm Rm 7. Intangible assets 2012 Rights 1 106 (221) 885 1 104 (220) 884 Computer software 3 225 (2 634) 591 2 932 (2 468) 464 Concession assets 101 (29) 72 – – – Total 4 432 (2 884) 1 548 4 036 (2 688) 1 348 2011 Rights 954 (221) 733 953 (221) 732 Computer software 2 649 (2 056) 593 2 538 (1 967) 571 Concession assets 70 (19) 51 – – – Total 3 673 (2 296) 1 377 3 491 (2 188) 1 303 Reconciliation of movements Carrying Additions Amortisation Disposals Carrying value and value end beginning transfers of year of year Rm Rm Rm Rm Rm 2012 Group Rights 733 153 (1) – 885 Computer software 593 344 (346) – 591 Concession assets 51 27 (6) – 72 Total 1 377 524 (353) – 1 548 Company Rights 732 153 (1) – 884 Computer software 571 225 (332) – 464 Total 1 303 378 (333) – 1 348 Amortisation of intangible assets of R353 million (2011: R272 million) for the group and of R333 million (2011: R248 million) for the company is included within depreciation and amortisation expense (refer to note 31) in profit or loss. Group Company 2012 2011 2012 2011 Note Rm Rm Rm Rm 8. Investments in equity-accounted investees Investment in associates 8.1 – – – – Investment in joint ventures 8.2 261 220 95 95 261 220 95 95 8.1 Investment in associates Investment – – – – Directors’ valuation – – – – Uitenhage Electricity Supply Company (Pty) Limited has ceased trading in 2008 and is in the process of being wound up and Western Power Corridor Company (Pty) Limited is dormant. 62 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 Group Company 2012 2011 2012 2011 Rm Rm Rm Rm 8. Investments in equity-accounted investees (continued) 8.2 Investment in joint ventures Balance at beginning of year 220 196 95 95 Share of profit1 41 24 – – Balance at end of year 261 220 95 95 Directors’ valuation 322 350 298 331 Investments are accounted for at cost in the company. The share of profits since acquisition is accounted for in the group. The group’s share of the results of its principal joint ventures, all of which are unlisted, and its share of the assets (including goodwill) and liabilities are: Name Main business Country of Interest Non- Current Non- Current Profit Invest- Indebt- incorporation held current assets current liabili- after ment edness assets liabili- ties tax at cost ties % Rm Rm Rm Rm Rm Rm Rm Group 2012 Directly held Motraco – Mozambique Transmission Company Electricity SARL2 transmission Mozambique 33 296 130 77 81 35 95 – Indirectly held Trans Africa Projects (Pty) Engineering Limited2 services South Africa 50 2 55 – 37 6 – – 298 185 77 118 41 95 – 2011 Directly held Motraco – Mozambique Transmission Company Electricity SARL2 transmission Mozambique 33 232 123 119 90 24 95 – Indirectly held Trans Africa Projects (Pty) Engineering Limited2 services South Africa 50 2 43 – 29 – – – 234 166 119 119 24 95 – Trans Africa Projects Limited (Mauritius) is dormant. 1. Share of profit is after tax. 2. Year end is 31 December. Eskom Holdings SOC Limited Annual Financial Statements 2012 63 Notes to the consolidated financial statements continued for the year ended 31 March 2012 Group Company 2012 2011 2012 2011 Rm Rm Rm Rm 9. Investment in subsidiaries Shares at cost 384 384 Indebtedness 1 953 1 953 Total interest in subsidiaries 2 337 2 337 Directors’ valuation 6 356 5 560 Aggregate attributable after tax profits of subsidiary companies 630 439 Aggregate attributable after tax losses of subsidiary companies (1) (1) Financial instruments with subsidiaries are disclosed in note 10. Name Main business Country of Issued/ Interest Invest- Indebted- incorporation stated held ment at ness share cost capital R % Rm Rm 2012 Directly held Eskom Finance Finance (employee housing South Africa 4 000 100 1 – Company SOC Limited loans) Escap SOC Limited Insurance South Africa 379 500 000 100 380 – Eskom Enterprises Non-regulated electricity South Africa 99 000 100 1 1 9532 SOC Limited supply industry activities and electricity supply and related services outside South Africa PN Energy Services Maintenance of electrical and South Africa 1 500 000 100 4 – SOC Limited3 telecommunication distribution network Indirectly held Golang Coal SOC Coal exports South Africa 1 000 67 – – Limited Eskom Energie Energy supply Mali 1 000 100 – – Manantali SA4, 5, 6 Eskom Uganda Operations management Uganda 100 100 – – Limited4, 5 Pebble Bed Modular Reactor driven generation South Africa 100 100 – – Reactor SOC Limited project Rotek Industries SOC Maintenance and services South Africa 4 000 100 – – Limited Rosherville Properties Properties South Africa 1 100 – – SOC Limited Roshcon SOC Limited7 Construction and abnormal South Africa 1 100 – – load transportation South Dunes Coal Coal exports South Africa 4 000 50 – – Terminal (Pty) Limited 384 1 953 1. Nominal. 2. The equity loan to Eskom Enterprises SOC Limited is interest free. 3. The activities of PN Energy Services SOC Limited have been integrated into Eskom. The company did not trade during the 2011 or 2012 financial years. 4. Issued/stated capital in foreign currency. 5. Year end is 31 December. 6. Classified as non-current assets held-for-sale (refer to note 22). 7. The subsidiaries of Roshcon SOC Limited have not been disclosed as they are dormant and are in the process of being deregistered. 64 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 9. Investment in subsidiaries (continued) Name Main business Country of Issued/ Interest Invest- Indebted- incorporation stated held ment at ness share cost capital R % Rm Rm 2011 Directly held Eskom Finance Finance (employee South Africa 4 000 100 1 – Company SOC housing loans) Limited Escap SOC Limited Insurance South Africa 379 500 000 100 380 – Eskom Enterprises Non-regulated electricity South Africa 99 000 100 1 1 9532 SOC Limited supply industry activities and electricity supply and related services outside South Africa PN Energy Services Maintenance of electrical and South Africa 1 500 000 100 4 – SOC Limited3 telecommunication distribution network Indirectly held Golang Coal SOC Coal exports South Africa 1 000 67 – – Limited Eskom Energie Energy supply Mali 1 000 100 – – Manantali SA4, 5, 6 Eskom Uganda Operations management Uganda 100 100 – – Limited4, 5 Pebble Bed Modular Reactor driven generation South Africa 100 100 – – Reactor SOC Limited project Rotek Industries SOC Maintenance and services South Africa 4 000 100 – – Limited Rosherville Properties Properties South Africa 1 100 – – SOC Limited Roshcon SOC Limited7 Construction South Africa 1 100 – – South Dunes Coal Coal exports South Africa 4 000 50 – – Terminal (Pty) Limited Airborne Laser Aerial surveying technologies South Africa 1 100 – – Solutions (Pty) Limited8 384 1 953 Pebble Bed Modular Reactor SOC Limited (PBMR) This subsidiary was previously not consolidated as it was not considered to be controlled by Eskom Enterprises in terms of the shareholder’s co-operation agreement. However, with effect from 1 April 2011, Eskom Enterprises obtained control over PBMR due to the termination of the agreement and consequently consolidated PBMR as per IAS 27 Consolidated and separate financial statements. The acquisition of PBMR is considered to be a business combination between entities under common control. Therefore all of the assets and liabilities have been recognised at their book values at the date of acquisition and the excess of the purchase consideration over the net assets of PBMR has been recognised directly in equity. At acquisition, R127 million was added to the group’s cash and cash equivalents representing the cash reserves of PBMR at this date. No cash was paid as it was a common control transaction. 1. Nominal. 2. The equity loan to Eskom Enterprises SOC Limited is interest free. 3. The activities of PN Energy Services SOC Limited are being integrated into Eskom. The company did not trade during the 2011 financial year. 4. Issued/stated capital in foreign currency. 5. Year end is 31 December. 6. Classified as non-current assets held-for-sale (refer to note 22). 7. The subsidiaries of Roshcon SOC Limited have not been disclosed as they are dormant and in the process of being deregistered. 8. This company has been deregistered. Eskom Holdings SOC Limited Annual Financial Statements 2012 65 Notes to the consolidated financial statements continued for the year ended 31 March 2012 9. Investment in subsidiaries (continued) The net asset value of PBMR on 1 April 2011 was as follows: Group 2012 2011 Rm Rm Trade and other receivables 26 – Cash and cash equivalents 127 – Trade and other payables (6) – Provisions (53) – 94 – Financial instruments with subsidiaries are disclosed in note 10. The following subsidiaries are dormant: • The Natal Navigation Collieries and Estate Company SOC Limited • Eskom Enterprises Global West Africa • Technology Services International SOC Limited (the company is in the process of being deregistered). 10. Financial instruments with group companies Eskom Eskom Escap Carrying Fair Finance Enterprises value value Company Rm Rm Rm Rm Rm 2012 Financial assets Loans and receivables Loan to subsidiaries 5 208 – – 5 208 5 208 Maturity analysis 5 208 – – 5 208 5 208 Non-current – – – – – Current 5 208 – – 5 208 5 208 Financial liabilities Liabilities at amortised cost Loan from subsidiaries 30 1 275 – 1 305 1 305 Maturity analysis 30 1 275 – 1 305 1 305 Non-current – – – – – Current 30 1 275 – 1 305 1 305 2011 Financial assets Loans and receivables Loan to subsidiaries 3 805 1 – 3 806 3 806 Maturity analysis 3 805 1 – 3 806 3 806 Non-current – – – – – Current 3 805 1 – 3 806 3 806 Financial liabilities Liabilities at amortised cost Borrowings 52 1 357 53 1 462 1 462 Commercial paper – – 53 53 53 Loan from subsidiaries 52 1 357 – 1 409 1 409 Maturity analysis 52 1 357 53 1 462 1 462 Non-current – – – – – Current 52 1 357 53 1 462 1 462 The loan to and from subsidiaries is payable on demand. The effective interest rate on the loan to EFC is 5.81% (2011: 5.77%). The effective interest rate on commercial paper is nil (2011: 6.89%). Commercial paper is payable within 12 months. The above balances exclude trade and other receivables and payables balances between Eskom and group companies. These balances are disclosed as part of trade and other receivables and trade and other payables. 66 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 Group and Company 2012 2011 Coal Nuclear Total Total Rm Rm Rm Rm 11. Future fuel supplies Balance at beginning of year 3 703 386 4 089 3 768 Net additions 1 362 681 2 043 1 079 Change in discount rate of decommissioning provision and cost estimate 158 – 158 156 Transfer from equity – (67) (67) (61) Amortised and written off during the year1 – (2) (2) (10) Transfer to inventories (203) (566) (769) (843) 5 020 432 5 452 4 089 Group Company 2012 2011 2012 2011 Rm Rm Rm Rm 12. Deferred tax Deferred tax assets Balance at beginning of year 59 79 – – Transfer from profit or loss 38 (16) (20) – – 43 59 – – Comprising 43 59 – – Property, plant and equipment (34) (26) – – Provisions 77 85 – – Deferred tax liabilities Balance at beginning of year 7 931 5 262 7 503 4 834 Transfer from profit or loss 38 4 960 3 117 5 030 3 116 Transfer from/(to) statement of comprehensive income 916 (448) 916 (447) 13 807 7 931 13 449 7 503 Comprising 13 807 7 931 13 449 7 503 Property, plant and equipment 25 063 21 359 24 594 20 846 Inventories 901 174 901 174 Provisions (7 657) (6 481) (7 548) (6 400) Tax losses (312) (2 525) (308) (2 515) Embedded derivative liabilities (1 550) (1 645) (1 550) (1 645) Available-for-sale financial assets 112 47 113 47 Cash flow hedges 642 (201) 642 (201) Payments received in advance (3 392) (2 797) (3 392) (2 797) Other – – (3) (6) Unused tax losses available for offset against future taxable income 1 307 9 347 1 100 8 982 A deferred tax asset amounting to R195 million (2011: R329 million) relating to unused tax losses has not been recognised as it is uncertain whether future taxable profits will be available against which the unused tax losses can be used. 1. Amortisation and write offs of future fuel is included in profit or loss within primary energy. Eskom Holdings SOC Limited Annual Financial Statements 2012 67 Notes to the consolidated financial statements continued for the year ended 31 March 2012 13. Financial instruments Accounting classifications and fair values The classification of each class of financial assets and liabilities, and their fair values are: Held- Loans Available- Liabilities Other Total Fair for- and for- at assets carrying value trading receiv- sale amortised and amount ables cost liabilities 2012 Note Rm Rm Rm Rm Rm Rm Rm Group Financial assets Non-current 1 7 768 8 749 – 2 334 18 852 18 852 Investment in securities 13.2 – – 8 749 – – 8 749 8 749 Loans receivable 13.3 – 7 435 – – – 7 435 7 435 Derivatives held for risk management 15 1 – – – 1 779 1 780 1 780 Finance lease receivables1 16 – – – – 555 555 555 Trade and other receivables1 18 – 333 – – – 333 333 Current 5 769 33 360 12 281 – 136 51 546 51 546 Investment in securities 13.2 – – 12 281 – – 12 281 12 281 Loans receivable 13.3 – 79 – – – 79 79 Derivatives held for risk management 15 241 – – – 121 362 362 Finance lease receivables1 16 – – – – 15 15 15 Trade and other receivables1 18 – 14 313 – – – 14 313 14 313 Financial trading assets 13.4 5 046 – – – – 5 046 5 046 Cash and cash equivalents 13.1 482 18 968 – – – 19 450 19 450 Total financial assets 5 770 41 128 21 030 – 2 470 70 398 70 398 Financial liabilities Non-current 684 – – 169 686 5 739 176 109 185 841 Debt securities issued 13.5 – – – 90 732 – 90 732 95 039 Borrowings 13.6 – – – 76 983 – 76 983 82 408 Embedded derivative liabilities 14 – – – – 4 639 4 639 4 639 Derivatives held for risk management 15 684 – – – 589 1 273 1 273 Finance lease liabilities1 26 – – – – 511 511 511 Trade and other payables1 27 – – – 1 971 – 1 971 1 971 Current 3 592 – – 38 339 3 739 45 670 45 718 Debt securities issued 13.5 – – – 7 170 – 7 170 7 216 Borrowings 13.6 – – – 7 682 – 7 682 7 684 Embedded derivative liabilities 14 – – – – 900 900 900 Derivatives held for risk management 15 761 – – – 2 829 3 590 3 590 Finance lease liabilities1 26 – – – – 10 10 10 Trade and other payables1 27 – – – 23 487 – 23 487 23 487 Financial trading liabilities 13.4 2 831 – – – – 2 831 2 831 Total financial liabilities 4 276 – – 208 025 9 478 221 779 231 559 1. The carrying amounts of these financial instruments approximate their fair values. The effect of discounting is not expected to be material. 68 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 13. Financial instruments (continued) Accounting classifications and fair values (continued) Held- Loans Available- Liabilities Other Total Fair for- and for- at assets carrying value trading receiv- sale amortised and amount ables cost liabilities 2012 Note Rm Rm Rm Rm Rm Rm Rm Company Financial assets Non-current 1 28 8 749 – 2 334 11 112 11 112 Investment in securities 13.2 – – 8 749 – – 8 749 8 749 Derivatives held for risk management 15 1 – – – 1 779 1 780 1 780 Finance lease receivables1 16 – – – – 555 555 555 Trade and other receivables1 18 – 28 – – – 28 28 Current 5 125 36 448 9 854 – 136 51 563 51 563 Financial instruments with group companies 10 – 5 208 – – – 5 208 5 208 Investment in securities 13.2 – – 9 854 – – 9 854 9 854 Derivatives held for risk management 15 241 – – – 121 362 362 Finance lease receivables1 16 – – – – 15 15 15 Trade and other receivables1 18 – 13 327 – – – 13 327 13 327 Financial trading assets 13.4 4 402 – – – – 4 402 4 402 Cash and cash equivalents 13.1 482 17 913 – – – 18 395 18 395 Total financial assets 5 126 36 476 18 603 – 2 470 62 675 62 675 Financial liabilities Non-current 684 – – 167 254 6 054 173 992 183 722 Debt securities issued 13.5 – – – 89 388 – 89 388 93 693 Borrowings 13.6 – – – 76 603 – 76 603 82 028 Embedded derivative liabilities 14 – – – – 4 639 4 639 4 639 Derivatives held for risk management 15 684 – – – 589 1 273 1 273 Finance lease liabilities1 26 – – – – 826 826 826 Trade and other payables1 27 – – – 1 263 – 1 263 1 263 Current 3 592 – – 39 778 3 779 47 149 47 198 Financial instruments with group companies 10 – – – 1 305 – 1 305 1 305 Debt securities issued 13.5 – – – 6 842 – 6 842 6 889 Borrowings 13.6 – – – 7 593 – 7 593 7 595 Embedded derivative liabilities 14 – – – – 899 899 899 Derivatives held for risk management 15 761 – – – 2 829 3 590 3 590 Finance lease liabilities1 26 – – – – 51 51 51 Trade and other payables1 27 – – – 24 038 – 24 038 24 038 Financial trading liabilities 13.4 2 831 – – – – 2 831 2 831 Total financial liabilities 4 276 – – 207 032 9 833 221 141 230 920 1. The carrying amounts of these financial instruments approximate their fair values. The effect of discounting is not expected to be material. Eskom Holdings SOC Limited Annual Financial Statements 2012 69 Notes to the consolidated financial statements continued for the year ended 31 March 2012 13. Financial instruments (continued) Accounting classifications and fair values (continued) Held- Loans Available- Liabilities Other Total Fair for- and for- at assets carrying value trading receiv- sale amortised and amount ables cost liabilities 2011 Note Rm Rm Rm Rm Rm Rm Rm Group Financial assets Non-current 6 6 483 13 259 – 570 20 318 20 318 Investment in securities 13.2 – – 13 259 – – 13 259 13 259 Loans receivable 13.3 – 5 958 – – – 5 958 5 958 Derivatives held for risk management 15 6 – – – – 6 6 Finance lease receivables 16 – – – – 570 570 570 Trade and other receivables1 18 – 525 – – – 525 525 Current 4 133 22 868 24 546 – 97 51 644 51 644 Investment in securities 13.2 – – 24 546 – – 24 546 24 546 Loans receivable 13.3 – 100 – – – 100 100 Derivatives held for risk management 15 34 – – – 82 116 116 Finance lease receivables1 16 – – – – 15 15 15 Trade and other receivables1 18 – 10 953 – – – 10 953 10 953 Financial trading assets 13.4 3 827 – – – – 3 827 3 827 Cash and cash equivalents 13.1 272 11 815 – – – 12 087 12 087 Total financial assets 4 139 29 351 37 805 – 667 71 962 71 962 Financial liabilities Non-current 911 – – 149 284 9 543 159 738 162 805 Debt securities issued 13.5 – – – 84 396 – 84 396 85 111 Borrowings 13.6 – – – 63 380 – 63 380 65 732 Embedded derivative liabilities 14 – – – – 5 357 5 357 5 357 Derivatives held for risk management 15 911 – – – 3 665 4 576 4 576 Finance lease liabilities1 26 – – – – 521 521 521 Trade and other payables1 27 – – – 1 508 – 1 508 1 508 Current 4 867 – – 30 918 1 365 37 150 37 220 Debt securities issued 13.5 – – – 2 880 – 2 880 2 886 Borrowings 13.6 – – – 9 654 – 9 654 9 718 Embedded derivative liabilities 14 – – – – 516 516 516 Derivatives held for risk management 15 563 – – – 841 1 404 1 404 Finance lease liabilities1 26 – – – – 8 8 8 Trade and other payables1 27 – – – 18 384 – 18 384 18 384 Financial trading liabilities 13.4 4 304 – – – – 4 304 4 304 Total financial liabilities 5 778 – – 180 202 10 908 196 888 200 025 1. The carrying amounts of these financial instruments approximate their fair values. The effect of discounting is not expected to be material. 70 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 13. Financial instruments (continued) Accounting classifications and fair values (continued) Held- Loans Available- Liabilities Other Total Fair for- and for- at assets carrying value trading receiv- sale amortised and amount ables cost liabilities 2011 Note Rm Rm Rm Rm Rm Rm Rm Company Financial assets Non-current 6 14 13 259 – 570 13 849 13 849 Investment in securities 13.2 – – 13 259 – – 13 259 13 259 Derivatives held for risk management 15 6 – – – – 6 6 Finance lease receivables 16 – – – – 570 570 570 Trade and other receivables 18 – 14 – – – 14 14 Current 3 503 24 568 22 310 – 97 50 478 50 478 Financial instruments with group companies 10 – 3 806 – – – 3 806 3 806 Investment in securities 13.2 – – 22 310 – – 22 310 22 310 Derivatives held for risk management 15 34 – – – 82 116 116 Finance lease receivables1 16 – – – – 15 15 15 Trade and other receivables1 18 – 9 568 – – – 9 568 9 568 Financial trading assets 13.4 3 197 – – – – 3 197 3 197 Cash and cash equivalents 13.1 272 11 194 – – – 11 466 11 466 Total financial assets 3 509 24 582 35 569 – 667 64 327 64 327 Financial liabilities Non-current 911 – – 147 830 9 887 158 628 161 695 Debt securities issued 13.5 – – – 84 031 – 84 031 84 746 Borrowings 13.6 – – – 62 940 – 62 940 65 292 Embedded derivative liabilities 14 – – – – 5 357 5 357 5 357 Derivatives held for risk management 15 911 – – – 3 665 4 576 4 576 Finance lease liabilities 26 – – – – 865 865 865 Trade and other payables 27 – – – 859 – 859 859 Current 4 867 – – 30 649 1 393 36 909 36 979 Financial instruments with group companies 10 – – – 1 462 – 1 462 1 462 Debt securities issued 13.5 – – – 1 574 – 1 574 1 580 Borrowings 13.6 – – – 9 571 – 9 571 9 635 Embedded derivative liabilities 14 – – – – 515 515 515 Derivatives held for risk management 15 563 – – – 841 1 404 1 404 Finance lease liabilities1 26 – – – – 37 37 37 Trade and other payables1 27 – – – 18 042 – 18 042 18 042 Financial trading liabilities 13.4 4 304 – – – – 4 304 4 304 Total financial liabilities 5 778 – – 178 479 11 280 195 537 198 674 1. The carrying amounts of these financial instruments approximate their fair values. The effect of discounting is not expected to be material. Eskom Holdings SOC Limited Annual Financial Statements 2012 71 Notes to the consolidated financial statements continued for the year ended 31 March 2012 Group Company 2012 2012 2011 2011 2012 2012 2011 2011 Carrying Fair Carrying Fair Carrying Fair Carrying Fair value value value value value value value value Rm Rm Rm Rm Rm Rm Rm Rm 13. Financial instruments (continued) 13.1 Cash and cash equivalents Bank balances 13 608 13 608 9 436 9 436 12 554 12 554 8 815 8 815 Unsettled deals 521 521 272 272 521 521 272 272 Fixed deposits 4 559 4 559 2 308 2 308 4 558 4 558 2 308 2 308 Negotiable certificates of deposit 132 132 71 71 132 132 71 71 Promissory notes 80 80 – – 80 80 – – Gilt carries 550 550 – – 550 550 – – 19 450 19 450 12 087 12 087 18 395 18 395 11 466 11 466 Made up as follows: 19 450 19 450 12 087 12 087 18 395 18 395 11 466 11 466 Held-for-trading 482 492 272 272 482 482 272 272 Loans and receivables 18 968 18 968 11 815 11 815 17 913 17 913 11 194 11 194 13.2 Investment in securities Available-for-sale 21 030 21 030 37 805 37 805 18 603 18 603 35 569 35 569 Government bonds 8 885 8 885 13 427 13 427 8 885 8 885 13 427 13 427 Negotiable certificates of deposits 2 921 2 921 13 204 13 204 516 516 10 968 10 968 Gilt carries – – 2 205 2 205 – – 2 205 2 205 Commercial paper 98 98 2 715 2 715 98 98 2 715 2 715 Treasury bills – – 6 254 6 254 – – 6 254 6 254 Fixed deposits 9 104 9 104 – – 9 104 9 104 – – Other 22 22 – – – – – – Maturity analysis 21 030 21 030 37 805 37 805 18 603 18 603 35 569 35 569 Non-current 8 749 8 749 13 259 13 259 8 749 8 749 13 259 13 259 Current 12 281 12 281 24 546 24 546 9 854 9 854 22 310 22 310 Encumbered assets Eskom has concluded sale and repurchase transactions of commercial paper, comprising Eskom bonds and government bonds, with approved counterparties. The group enters into transactions whereby it transferred assets recognised on 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. If all or substantially all risks and rewards are retained, then the transferred assets are not derecognised. Transfers of assets with retention of all or substantially all risks and rewards include, for example, securities lending and repurchase transactions. At year end, Eskom has sold, and is committed to repurchase commercial paper after year end with a fair value of R1 040 million (2011: R2 218 million). Of this amount, R1 015 million (2011: R2 112 million) relates to government securities and R25 million (2011: R106 million) to Eskom bonds. No impairment loss was recognised on investment in securities. 72 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 Group Company 2012 2012 2011 2011 2012 2012 2011 2011 Carrying Fair Carrying Fair Carrying Fair Carrying Fair value value value value value value value value Rm Rm Rm Rm Rm Rm Rm Rm 13. Financial instruments (continued) 13.3 Loans receivable Loans and receivables 7 514 7 514 6 058 6 058 – – – – Secured by mortgages 6 833 6 833 5 347 5 347 – – – – Loan to Richards Bay Coal Terminal 373 373 445 445 – – – – Other 308 308 266 266 – – – – Maturity analysis 7 514 7 514 6 058 6 058 – – – – Non-current 7 435 7 435 5 958 5 958 – – – – Current 79 79 100 100 – – – – 13.4 Financial trading assets and liabilities Financial trading assets Negotiable certificates of deposits 1 244 1 244 519 519 1 244 1 244 519 519 Repurchase agreements 1 403 1 403 455 455 1 403 1 403 455 455 Listed shares 644 644 630 630 – – – – Government bonds 1 755 1 755 2 223 2 223 1 755 1 755 2 223 2 223 5 046 5 046 3 827 3 827 4 402 4 402 3 197 3 197 Financial trading liabilities Eskom bonds – – 3 135 3 135 – – 3 135 3 135 Short-sold government bonds 597 597 – – 597 597 – – Commercial paper issued 1 181 1 181 505 505 1 181 1 181 505 505 Repurchase agreements 837 837 371 371 837 837 371 371 Unsettled deals 216 216 293 293 216 216 293 293 2 831 2 831 4 304 4 304 2 831 2 831 4 304 4 304 13.5 Debt securities issued 97 902 102 255 87 276 87 997 96 230 100 582 85 605 86 326 Eskom bonds 74 807 77 525 66 339 65 911 74 807 77 524 66 339 65 911 Promissory notes 124 161 185 230 124 161 185 230 Commercial paper 1 672 1 672 1 671 1 671 – – – – Eurorand zero coupon bonds 2 722 3 452 2 406 3 149 2 722 3 452 2 406 3 149 Foreign bonds 18 577 19 445 16 675 17 036 18 577 19 445 16 675 17 036 Maturity analysis 97 902 102 255 87 276 87 997 96 230 100 582 85 605 86 326 Non-current 90 732 95 039 84 396 85 111 89 388 93 693 84 031 84 746 Current 7 170 7 216 2 880 2 886 6 842 6 889 1 574 1 580 Eskom Holdings SOC Limited Annual Financial Statements 2012 73 Notes to the consolidated financial statements continued for the year ended 31 March 2012 13. Financial instruments (continued) 13.5 Debt securities issued (continued) Group Company Currency Security Interest rate Nominal Maturity Carrying value Carrying value number 2012 2011 2012 2011 date 2012 2011 2012 2011 % % m m Rm Rm Rm Rm Eskom bonds 73 153 65 033 74 807 66 339 74 807 66 339 ZAR EL151 3.00 3.00 5 000 5 000 Jun 15 5 742 5 391 5 742 5 391 ZAR ES151 7.80 7.78 4 652 4 275 Aug 15 4 677 4 298 4 677 4 298 ZAR ES181 9.19 9.46 9 834 6 827 Apr 18 10 272 7 051 10 272 7 051 ZAR E1703 10.07 9.57 11 586 11 608 Aug 202 13 950 14 100 13 950 14 100 ZAR ES231 9.40 9.45 11 863 10 080 Jan 23 12 567 10 649 12 567 10 649 ZAR ES261 9.10 9.49 16 015 13 786 Apr 26 15 076 12 941 15 076 12 941 ZAR ES331 8.77 9.35 14 203 13 457 Sep 33 12 523 11 909 12 523 11 909 Promissory notes 230 320 124 185 124 185 ZAR PN043 – 16.03 – 90 Feb 12 – 79 – 79 ZAR PN053 16.10 16.10 60 60 Feb 13 53 45 53 45 ZAR PN063 16.13 16.13 60 60 Feb 14 45 38 45 38 ZAR PN073 15.34 15.34 20 20 Aug 20 6 5 6 5 ZAR PN083 15.08 15.08 20 20 Aug 21 5 5 5 5 ZAR PN093 14.80 14.80 35 35 Aug 22 8 7 8 7 ZAR PN103 14.61 14.61 35 35 Aug 23 7 6 7 6 Commercial paper 1 670 1 670 1 672 1 671 – – ZAR n/a – 6.61 – 907 May 11 – 907 – – ZAR n/a – 7.24 – 398 Nov 11 – 398 – – ZAR n/a 6.25 6.89 318 30 May 12 318 30 – – ZAR n/a 6.58 7.74 600 199 May 13 600 199 – – ZAR n/a 6.70 – 384 – May 14 384 – – – ZAR n/a 6.99 – 231 – May 16 231 – – – ZAR n/a 10.47 10.18 131 131 May 20 133 131 – – ZAR n/a 8.85 8.85 6 5 May 20 6 6 – – Eurorand zero coupon bonds3 17 500 17 500 2 722 2 406 2 722 2 406 ZAR n/a 13.93 13.92 2 000 2 000 Dec 18 829 727 829 727 ZAR n/a 13.33 13.35 8 000 8 000 Aug 27 1 165 1 028 1 165 1 028 ZAR n/a 11.89 11.88 7 500 7 500 Dec 32 728 651 728 651 Foreign bonds 2 250 2 250 18 577 16 675 18 577 16 675 EUR n/a 4.00 4.00 500 500 Mar 13 5 134 4 810 5 134 4 810 USD n/a 5.75 5.75 1 750 1 750 Jan 21 13 443 11 865 13 443 11 865 Total 97 902 87 276 96 230 85 605 1. Government guaranteed. 2. Latest in a range of maturity dates is indicated for this instrument. 3. Secured by Eskom’s assets (section 7 of Eskom Conversion Act, 13 of 2001). 74 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 2012 2012 2011 2011 2012 2012 2011 2011 Carrying Fair Carrying Fair Carrying Fair Carrying Fair value value value value value value value value Rm Rm Rm Rm Rm Rm Rm Rm 13. Financial instruments (continued) 13.6 Borrowings 84 665 90 092 73 034 75 450 84 196 89 623 72 511 74 927 Development financing institutions 18 039 18 743 11 835 12 360 18 039 18 743 11 835 12 360 Export credit facilities 16 842 20 799 8 788 10 229 16 842 20 799 8 788 10 229 Floating rate notes 3 827 4 114 3 828 4 105 3 827 4 114 3 828 4 105 Commercial paper 6 457 6 459 9 117 9 181 6 457 6 459 9 117 9 181 Subordinated loan from shareholder 35 913 35 913 37 931 37 931 35 913 35 913 37 931 37 931 Development Bank of Southern Africa 3 118 3 595 1 012 1 121 3 118 3 595 1 012 1 121 Rand loans 469 469 523 523 – – – – Maturity analysis 84 665 90 092 73 034 75 450 84 196 89 623 72 511 74 927 Non-current 76 983 82 408 63 380 65 732 76 603 82 028 62 940 65 292 Current 7 682 7 684 9 654 9 718 7 593 7 595 9 571 9 635 Group Company Currency Interest rate Nominal Maturity Carrying value Carrying value 2012 2011 2012 2011 date 2012 2011 2012 2011 % % m m Rm Rm Rm Rm Development financing institutions2 10 290 7 588 18 039 11 835 18 039 11 835 USD 1.93 1.60 291 291 Aug 28 2 233 1 980 2 233 1 980 ZAR 6.95 6.93 2 000 2 000 Aug 28 2 023 2 021 2 023 2 021 EUR 1.81 1.71 57 41 Aug 291 581 398 581 398 ZAR 5.77 5.74 5 315 3 476 Aug 291 5 366 3 508 5 366 3 508 ZAR 6.00 5.98 1 849 1 409 Mar 32 1 854 1 413 1 854 1 413 USD 0.91 0.73 778 371 May 381 5 982 2 515 5 982 2 515 Export credit facilities2 15 914 13 086 16 842 8 788 16 842 8 788 JPY 1.32 1.38 13 076 11 390 May 22 1 222 933 1 222 933 EUR 2.14 1.53 116 87 Feb 24 1 163 807 1 163 807 EUR 2.30 – 13 – Jul 24 133 – 133 – EUR 5.14 5.14 687 152 Jan 27 6 537 1 424 6 537 1 424 EUR 3.60 3.46 681 531 Jul 27 6 528 4 673 6 528 4 673 ZAR 7.74 7.84 1 341 926 Jul 27 1 259 951 1 259 951 Floating rate notes1 3 800 3 800 3 827 3 828 3 827 3 828 ZAR 6.28 6.26 1 800 1 800 Aug 26 1 813 1 813 1 813 1 813 ZAR 6.45 6.43 2 000 2 000 Aug 33 2 014 2 015 2 014 2 015 Commercial paper2 ZAR 5.75 6.49 6 618 9 393 Mar 13 6 457 9 117 6 457 9 117 Subordinated loan from shareholder 60 000 60 000 35 913 37 931 35 913 37 931 ZAR 7.52 7.52 5 000 5 000 Dec 38 3 234 3 297 3 234 3 297 ZAR 8.95 8.95 5 000 5 000 Mar 39 3 086 3 275 3 086 3 275 ZAR 9.43 9.43 7 500 7 500 Jun 39 4 382 4 701 4 382 4 701 ZAR 9.15 9.15 7 500 7 500 Sep 39 4 481 4 756 4 481 4 756 ZAR 9.57 9.57 7 500 7 500 Dec 39 4 359 4 674 4 359 4 674 ZAR 9.52 9.52 7 500 7 500 Mar 40 4 420 4 721 4 420 4 721 ZAR 9.54 9.54 5 000 5 000 Jun 40 2 984 3 182 2 984 3 182 ZAR 8.58 8.58 5 000 5 000 Sep 40 3 097 3 195 3 097 3 195 ZAR 9.03 9.03 5 000 5 000 Dec 40 2 994 3 091 2 994 3 091 ZAR 9.81 9.81 5 000 5 000 Mar 41 2 876 3 039 2 876 3 039 Development Bank of Southern Africa 3 000 1 000 3 118 1 012 3 118 1 012 ZAR 10.13 10.13 1 000 1 000 Oct 21 1 043 1 012 1 043 1 012 ZAR 10.22 – 1 000 – Oct 21 1 043 – 1 043 – ZAR 9.59 – 1 000 – Oct 21 1 032 – 1 032 – Rand loans 469 523 469 523 – – ZAR 8.00 7.58 371 401 Jun 16 371 401 – – ZAR – – 98 122 – 98 122 – – Total 84 665 73 034 84 196 72 511 1. Government guaranteed. 2. Latest in a range of maturity dates is indicated for these instruments. Eskom Holdings SOC Limited Annual Financial Statements 2012 75 Notes to the consolidated financial statements continued for the year ended 31 March 2012 13. Financial instruments (continued) 13.6 Borrowings (continued) Subordinated loan from shareholder The subordinated loan from the shareholder of R60 billion has been fully drawn down in 2011. Eskom is obliged to pay interest on the loan when Eskom is solvent and the debt leverage conditions per the agreement are satisfied. The interest on the subordinated loan is not cumulative. The loan has been classified as a financial liability in accordance with IAS 32 Financial instruments: Presentation and has been measured at amortised cost. The loan was initially measured at fair value and the difference between the fair valued amount and the advanced amount accounted for under borrowings gave rise to a day-one gain. This day-one gain is disclosed in equity, under equity reserve (refer page 14). 13.7 Collateral obtained Eskom has called upon security deposits and guarantees from customers who have defaulted on their accounts. The carrying amount of the security deposits and guarantees which were called upon is R62 million (2011: R58 million) for the group and R56 million (2011: R54 million) for the company. 13.8 Collateral held Eskom has concluded the purchase of commercial paper (Eskom and government bonds) from approved counterparties and has committed to sell this commercial paper back to the counterparties in the following financial year. Although Eskom has legal title to the commercial paper at year end, it has not been recognised on the statement of financial position as a result of the commitment to resell. This has also resulted in the recognition of a receivable with a fair value of R2 138 million (2011: R2 295 million) recorded in financial trading assets and cash and cash equivalents (depending on original maturity) at year end. Of this amount, R713 million (2011: R1 742 million) relates to government securities and R1 424 million (2011: R553 million) to Eskom bonds. The total receivable is secured by commercial paper of an equivalent fair value. 13.9 Collateral placed In terms of the credit support annexure of the International Securities Market Association/International Swap and Derivative Association (ISMA/ISDA) agreements, Eskom placed nil (2011: nil) reflected in available-for-sale assets as collateral as a result of changes in the market value of the financial instruments traded in the market. 13.10 Fair value hierarchy The table below analyses financial instruments carried at fair value. The different levels have been identified 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 for the asset or liability, either directly (ie as prices) or indirectly (ie derived from prices). Level 3: inputs for the financial asset or financial liability that are not based on observable market data (unobservable inputs). Level 1 Level 2 Level 3 Total Note Rm Rm Rm Rm 2012 Group Investment in securities classified as available-for-sale 13.2 8 885 12 145 – 21 030 Derivatives held for risk management (assets) 15 – 2 142 – 2 142 Financial trading assets 13.4 2 400 2 646 – 5 046 11 285 16 933 – 28 218 Embedded derivative liabilities 14 – – 5 539 5 539 Derivatives held for risk management (liabilities) 15 – 4 863 – 4 863 Financial trading liabilities 13.4 597 2 234 – 2 831 597 7 097 5 539 13 233 Company Investment in securities classified as available-for-sale 13.2 8 885 9 718 – 18 603 Derivatives held for risk management (assets) 15 – 2 142 – 2 142 Financial trading assets 13.4 1 755 2 647 – 4 402 10 640 14 507 – 25 147 Embedded derivative liabilities 14 – – 5 538 5 538 Derivatives held for risk management (liabilities) 15 – 4 863 – 4 863 Financial trading liabilities 13.4 597 2 234 – 2 831 597 7 097 5 538 13 232 76 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 Level 1 Level 2 Level 3 Total Note Rm Rm Rm Rm 13. Financial instruments (continued) 13.10 Fair value hierarchy (continued) 2011 Group Investment in securities classified as available-for-sale 13.2 13 427 24 378 – 37 805 Derivatives held for risk management (assets) 15 – 122 – 122 Financial trading assets 13.4 2 853 974 – 3 827 16 280 25 474 – 41 754 Embedded derivative liabilities 14 – – 5 873 5 873 Derivatives held for risk management (liabilities) 15 – 5 980 – 5 980 Financial trading liabilities 13.4 3 135 1 169 – 4 304 3 135 7 149 5 873 16 157 Company Investment in securities classified as available-for-sale 13.2 13 427 22 142 – 35 569 Derivatives held for risk management (assets) 15 – 122 – 122 Financial trading assets 13.4 2 223 974 – 3 197 15 650 23 238 – 38 888 Embedded derivative liabilities 14 – – 5 872 5 872 Derivatives held for risk management (liabilities) 15 – 5 980 – 5 980 Financial trading liabilities 13.4 3 135 1 169 – 4 304 3 135 7 149 5 872 16 156 There have been no transfers between the fair value hierarchy levels (2011 no transfers). A reconciliation has been performed for fair value measurements in level 3 of the fair value hierarchy as follows: Group Company 2012 2011 2012 2011 Rm Rm Rm Rm Embedded derivative assets Carrying value beginning of the year – 110 – 110 Net fair value loss on embedded derivatives1 – (110) – (110) Carrying value at end of the year – – – – Embedded derivative liabilities Carrying value beginning of the year 5 873 4 722 5 872 4 721 Net fair value (profit)/loss on embedded derivatives1 (334) 1 151 (334) 1 151 Carrying value at end of the year 5 539 5 873 5 538 5 872 Refer to note 3.2 for a sensitivity analysis disclosing the effect of fair value changes that would result if one or more of the inputs were to change. 1. Included within net fair value loss on embedded derivatives in profit or loss. Eskom Holdings SOC Limited Annual Financial Statements 2012 77 Notes to the consolidated financial statements continued for the year ended 31 March 2012 13. Financial instruments (continued) 13.11 Day-one loss Where applicable, the group recognises a day-one loss on initial recognition of financial instruments accounted for as cash flow hedges (refer to note 2.11.3). The amounts relating to the day-one loss from the cross-currency swaps and interest rate swaps (refer to note 15) accounted for by the group in derivatives held for risk management, are outlined below: Group and company 2012 2011 Rm Rm Balance at beginning of the year 267 – Day-one loss recognised during the year 272 271 Amortised to profit or loss (214) (4) Balance at end of the year 325 267 Current Non-current Total Total liabilities liabilities non-current liabilities 1 year 1 to 5 years After 5 years Rm Rm Rm Rm Rm 14. Embedded derivative liabilities 2012 Group Commodity and/or foreign currency 860 2 688 – 2 688 3 548 Foreign currency or interest rate 1 – – – 1 PPI and foreign currency 39 276 1 675 1 951 1 990 900 2 964 1 675 4 639 5 539 Company Commodity and/or foreign currency 860 2 688 – 2 688 3 548 PPI and foreign currency 39 276 1 675 1 951 1 990 899 2 964 1 675 4 639 5 538 2011 Group Commodity and/or foreign currency 453 4 206 – 4 206 4 659 Foreign currency or interest rate 1 – – – 1 PPI and foreign currency 62 242 909 1 151 1 213 516 4 448 909 5 357 5 873 Company Commodity and/or foreign currency 453 4 206 – 4 206 4 659 PPI and foreign currency 62 242 909 1 151 1 213 515 4 448 909 5 357 5 872 78 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 15. Derivatives held for risk management Group and company 2012 2011 Assets Liabilities Notional Assets Liabilities Notional amount amount Rm Rm Rm Rm Rm Rm Derivatives held for economic hedging 242 1 445 29 767 40 1 474 18 525 Foreign exchange derivatives 216 1 433 28 490 26 1 433 18 180 Foreign exchange contracts 216 724 25 700 26 503 15 390 Cross-currency swaps – 709 2 790 – 930 2 790 Interest rate derivatives – – 730 – – – Forward rate agreements – – 730 – – – Commodity derivatives 26 12 547 14 41 345 Commodity forwards 26 12 547 14 41 345 Derivatives held for cash flow hedging 1 900 3 418 47 933 82 4 506 49 709 Foreign exchange contracts 121 686 19 400 82 612 24 171 Interest rate swaps – 483 3 800 – 230 3 800 Cross-currency swaps 1 779 2 249 24 733 – 3 664 21 738 Total derivatives held for risk management 2 142 4 863 122 5 980 Maturity analysis 2 142 4 863 122 5 980 Derivatives held for economic hedging 242 1 445 40 1 474 Non-current 1 684 6 911 Current 241 761 34 563 Derivatives held for cash flow hedging 1 900 3 418 82 4 506 Non-current 1 779 589 – 3 665 Current 121 2 829 82 841 The hedging practices and accounting treatment are disclosed in note 2.11.3 in the accounting policies (refer page 26). The group uses forward exchange contracts, cross-currency swaps and interest rate swaps for cash flow hedging. Only the changes in cash flows attributable to movements in the spot exchange rates are hedged. • Foreign exchange contracts: used to hedge the changes in the cash flows resulting from the purchase of services and goods denominated mainly in US dollars, euro and yen • Cross-currency swaps: used to hedge the currency risk arising from the fixed rate bonds (denominated in US dollar, euro and yen) issued by the group • Interest rate swaps: used to hedge the interest expense variability of the issued floating rate notes During the year a R14 million loss (2011: R6 million gain) was recognised in profit or loss as ineffectiveness arising from cash flow hedges. There were no transactions for which cash flow hedge accounting had to be ceased in the current or comparative financial years as a result of highly probable cash flows no longer being expected to occur. Eskom Holdings SOC Limited Annual Financial Statements 2012 79 Notes to the consolidated financial statements continued for the year ended 31 March 2012 15. Derivatives held for risk management (continued) Cash flow hedges The periods in which the cash flows of derivatives designated as cash flow hedges are expected to occur are: Carrying Undis- 0 to 3 4 to 12 1 to 5 More than amount counted months months years 5 years cash flows Rm Rm Rm Rm Rm Rm 2012 Group and company Forward exchange contracts Assets 121 79 24 55 – – Liabilities (686) (1 026) (120) (906) – – Interest rate swaps Liabilities (483) (770) (31) (81) (281) (377) Cross-currency swaps Assets 1 779 6 642 – – (2 319) 8 961 Liabilities (2 249) (2 804) (76) (2 947) (407) 626 (1 518) 2 121 (203) (3 879) (3 007) 9 210 2011 Group and company Forward exchange contracts Assets 82 (4 277) (382) (3 895) – – Liabilities (612) (19 895) (3 164) (16 731) – – Interest rate swaps Liabilities (230) (463) (31) (82) (70) (280) Cross-currency swaps Liabilities (3 664) (2 376) (87) (1 479) (5 878) 5 068 (4 424) (27 011) (3 664) (22 187) (5 948) 4 788 Contractual cash flows are a function of forward exchange rates and forward interest rates and is a point in time calculation that is 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. 80 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 15. Derivatives held for risk management (continued) Gains or losses recognised in the hedging reserve in equity are first recognised in the initial cost carrying amount of the asset or liability when the forecast transaction results in the recognition of a non-financial asset or non-financial liability. Therefore, gains and losses recognised in the hedging reserve in equity will affect profit or loss in the periods during which the relevant non- financial assets are depreciated or finance cost is recognised for the relevant financial liability. The periods in which the cash flows associated with derivatives are expected to impact profit or loss are: Carrying Undis- 0 to 3 4 to 12 1 to 5 More than amount counted months months years 5 years cash flows Rm Rm Rm Rm Rm Rm 2012 Group and company Forward exchange contracts Assets 121 79 24 55 – – Liabilities (686) 443 (120) (906) 81 1 388 Interest rate swaps Liabilities (483) (770) (31) (81) (281) (377) Cross-currency swaps Assets 1 779 6 642 – – (2 319) 8 961 Liabilities (2 249) (2 804) (76) (2 947) (407) 626 (1 518) 3 590 (203) (3 879) (2 926) 10 598 2011 Group and company Forward exchange contracts Assets 82 (4 277) (382) (3 895) – – Liabilities (652) (19 935) (3 164) (16 740) (9) (22) Interest rate swaps Liabilities (230) (463) (31) (82) (70) (280) Cross-currency swaps Liabilities (3 664) (2 376) (87) (1 479) (5 878) 5 068 (4 464) (27 051) (3 664) (22 196) (5 957) 4 766 Group Company 2012 2011 2012 2011 Rm Rm Rm Rm 16. Finance lease receivables Gross receivables 1 343 1 432 1 343 1 432 Unearned finance income (773) (847) (773) (847) Present value of minimum lease payments 570 585 570 585 Maturity analysis of gross receivables from finance leases Due within one year 88 90 88 90 Due between one and five years 345 349 345 349 Due after five years 910 993 910 993 1 343 1 432 1 343 1 432 Future finance charges (773) (847) (773) (847) 570 585 570 585 Maturity analysis of net investment in finance leases Non-current 555 570 555 570 Due between one and five years 78 72 78 72 Due after five years 477 498 477 498 Current Due within one year 15 15 15 15 570 585 570 585 The finance lease receivables are raised in terms of IFRIC 4 Determining whether an arrangement contains a lease. Average implicit rate (%) 13 13 13 13 Eskom Holdings SOC Limited Annual Financial Statements 2012 81 Notes to the consolidated financial statements continued for the year ended 31 March 2012 2012 2011 Payments Environ- Total Total to suppliers mental rehabili- tation trust fund Rm Rm Rm Rm 17. Payments made in advance Group Balance at beginning of the year 3 973 74 4 047 4 269 Transfer to profit or loss (208) – (208) (296) Transfer to the statement of financial position (2 363) – (2 363) (3 438) Payments during the year 2 097 18 2 115 3 512 3 499 92 3 591 4 047 Maturity analysis 3 499 92 3 591 4 047 Non-current 1 968 92 2 060 2 396 Current 1 531 – 1 531 1 651 Company Balance at beginning of the year 3 940 74 4 014 4 240 Transfer to profit or loss (207) – (207) (296) Transfer to the statement of financial position (2 363) – (2 363) (3 438) Payments during the year 2 081 18 2 099 3 508 3 451 92 3 543 4 014 Maturity analysis 3 451 92 3 543 4 014 Non-current 1 892 92 1 984 2 387 Current 1 559 – 1 559 1 627 Payments made in advance Payments made in advance to suppliers are primarily to reserve manufacturing capacity for the future construction of assets and for future goods and services. 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. Environmental rehabilitation trust fund Payments made in advance also include contributions made by Eskom to an environmental rehabilitation trust fund. The fund was established to fund Eskom’s financial obligation in respect of the rehabilitation of certain coal mines from which Eskom sources its coal for the generation of electricity. Eskom’s access to the fund assets is restricted as the Department of Energy will only release the funds once a mine closure certificate is obtained. 82 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 Group Company 2012 2011 2012 2011 Note Rm Rm Rm Rm 18. Trade and other receivables Financial instruments 3.1.2 14 366 11 373 13 208 9 480 Trade receivables 14 834 11 859 14 603 11 541 Other receivables 2 878 2 369 1 924 775 Allowance for impairment of trade and other receivables 3.1.2(g) (3 346) (2 855) (3 319) (2 836) Non-financial instruments Value added tax receivable 280 105 147 102 Total trade and other receivables 14 646 11 478 13 355 9 582 Maturity analysis 14 646 11 478 13 355 9 582 Non-current 333 525 28 14 Current 14 313 10 953 13 327 9 568 19. Inventories Coal 3 798 3 709 3 798 3 709 Nuclear fuel 1 217 1 029 1 217 1 029 Maintenance spares and consumables 4 915 4 166 4 784 4 071 9 930 8 904 9 799 8 809 The group and company reversed R1 million of a previous inventory writedown (2011: R7 million). The amount reversed has been included in net impairment loss in profit or loss (refer to note 32). Eskom Holdings SOC Limited Annual Financial Statements 2012 83 Notes to the consolidated financial statements continued for the year ended 31 March 2012 20. Service concession arrangements The Eskom group operates two service concessions for the generation and/or transmission of electricity, through its operations in Mali and Uganda. Mali Eskom Energie Manantali (EEM) entered into an operation and maintenance agreement with La Société de Gestion de L’Energie de Manantali (SOGEM) in 2001 to operate and maintain a 200MW hydro-electricity facility in Mali and supply power to the national electrical companies in Mali, Senegal and Mauritania. The dam, hydro-electric generating plant and eastern and western transmission networks together constitute the energy assets in terms of the agreement.The concession period is 15 years (ending December 2017). EEM is responsible for the day-to-day maintenance, repairs and replacement of the energy assets. During the current financial year, the settlement agreement with SOGEM was extended to 31 July 2012. Under the addendum to the settlement agreement, SOGEM will continue to find a new operator for the concession, and EEM will exit the arrangement. Based on the above, it is management’s determination that the assets of EEM continue to constitute non-current assets held-for- sale in terms of IFRS 5, and therefore the operation has been classified as a discontinued operation. Refer to note 22. Due to a coup in Mali over the reporting period, the auditors could not express an opinion on the results of EEM for the current year end. The reported results are based on management’s best estimate and are not considered to be material for the group. Uganda Eskom Uganda Limited (Eskom Uganda) entered into an operation and maintenance agreement with Uganda Electricity Generation Company Limited (UEGCL) in 2002, which is linked to a power purchase agreement concluded with Uganda Electricity Transmission Company Limited (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 substation, land and movable property together constitute the ‘energy assets’ in terms of the agreement. The concession period is 20 years (ends 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 UEGCL and will revert to UEGCL at the end of the concession period. At that point Eskom Uganda will have no further obligations in respect of the plant. 2012 2011 Continuing Discontinued Continuing Discontinued operation operation operation operation Eskom Eskom Eskom Eskom Uganda Manantali Uganda Manantali Rm Rm Rm Rm Income statements Revenue 133 87 121 112 Profit/(loss) for the year before tax 11 (3) 9 (56) Income tax (3) – (1) – Profit/(loss)for the year after tax 8 (3) 8 (56) Statement of financial position Property, plant and equipment 72 3 – – Intangible assets – – 51 – Inventories 17 7 14 4 Trade and other receivables1 34 249 11 618 Cash and cash equivalents 26 125 36 63 Total assets 149 384 112 685 Provisions 11 201 8 128 Borrowings 19 – 16 – Trade and other payables1 28 274 14 732 Other liabilities 1 – 6 – Total liabilities 59 475 44 860 1. Includes concession debtors of nil (2011: R618 million) which relates to amounts to be collected by EEM on behalf of SOGEM which will settle the outstanding amount included in trade and other payables. 84 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 Group Company 2012 2011 2012 2011 R R R R 21. Share capital Authorised 1 000 ordinary shares of R1 each 1 000 1 000 1 000 1 000 Issued 1 ordinary share of R1 1 1 1 1 In terms of the memorandum and articles of association, the unissued share capital is under the control of the Government of the Republic of South Africa, represented by the Department of Public Enterprises, as the sole shareholder. 22. Non-current assets and liabilities held-for-sale A discontinued operation is a component which has been disposed of or is classified as held-for-sale as it is intended to be sold and it represents a separate major line of business or geographical area of operations. Indirectly held subsidiary – Eskom Energie Manantali (EEM) During the current financial year, the settlement agreement with SOGEM was extended to 31 July 2012. Under the addendum to the settlement agreement, SOGEM will continue to find a new operator for the concession, and EEM will exit the arrangement. Based on the above, it is management’s determination that the assets of EEM continue to constitute non-current assets held-for- sale in terms of IFRS 5. Due to a coup in Mali over the reporting period, the auditors could not express an opinion on the results of EEM for the current year end. The reported results are based on management’s best estimate and are not considered to be material for the group. Details regarding EEM can be found under service concession arrangements. Refer to note 20. A consolidated analysis of the results of these discontinued operations, and the result recognised on the remeasurement of assets is: 2012 2011 Roshcon Aviation Eskom Total Total assets assets Manantali Rm Rm Rm Rm Rm Income statements Revenue – – 87 87 112 Employee benefit expense – – (37) (37) (28) Net impairment loss – – (20) (20) (106) Depreciation and amortisation expense – – (9) (9) (4) Other operating expenses – – (44) (44) (17) Operating loss before net fair value loss and net finance income/(cost) – – (23) (23) (43) Other income – – 13 13 – Net fair value loss on financial instruments, excluding embedded derivatives – – – – (10) Operating loss before net finance income/(cost) – – (10) (10) (53) Finance income – – 7 7 – Finance cost – – – – (3) Loss before tax – – (3) (3) (56) Income tax – – – – – Loss for the year from discontinued operations – – (3) (3) (56) Eskom Holdings SOC Limited Annual Financial Statements 2012 85 Notes to the consolidated financial statements continued for the year ended 31 March 2012 2012 2011 Roshcon Aviation Eskom Total Total assets1 assets Manantali Rm Rm Rm Rm Rm 22. Non-current assets and liabilities held-for-sale (continued) Statements of cash flows Operating cash flows – – 42 42 (4) Investing cash flows – – – – (10) Financing cash flows – – 20 20 43 Total cash flows – – 62 62 29 Statements of financial position Assets Non-current assets Property, plant and equipment 38 16 3 57 19 Current assets – – 381 381 685 Trade and other receivables – – 249 249 618 Inventories – – 7 7 4 Cash and cash equivalents – – 125 125 63 Total assets 38 16 384 438 704 Liabilities Current liabilities – – 475 475 860 Trade and other payables – – 274 274 732 Provisions – – 201 201 128 Total liabilities – – 475 475 860 Accounting classifications and fair values The classification of each class of financial assets and liabilities for all discontinued operations, and their fair values are: Held- Held- Loans Available- Liabilities Other Total Fair for- to- and for-sale at assets carrying value trading maturity receivables amortised and amount cost liabilities Rm Rm Rm Rm Rm Rm Rm Rm 2012 Financial assets – – 374 – – – 374 374 Trade and other receivables – – 249 – – – 249 249 Cash and cash equivalents – – 125 – – – 125 125 Financial liabilities Trade and other payables – – – – 274 – 274 274 2011 Financial assets – – 681 – – – 681 681 Trade and other receivables – – 618 – – – 618 618 Cash and cash equivalents – – 63 – – – 63 63 Financial liabilities Trade and other payables – – – – 732 – 732 732 1. This relates to yellow plant assets which will no longer be required as no new large construction contracts will be entered into. 86 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 Group and company 2012 2011 Govern- Capital Total Total ment contribu- grant tions received from customers Rm Rm Rm Rm 23. Deferred income Group and company Balance at beginning of the year 6 496 2 537 9 033 7 378 Additions and transfers 1 571 186 1 757 2 106 Income recognised (398) (123) (521) (451) Balance at end of the year 7 669 2 600 10 269 9 033 Maturity analysis 7 669 2 600 10 269 9 033 Non-current 7 126 2 486 9 612 8 395 Current 543 114 657 638 Group and company 2012 2011 Note Rm Rm The total income for the group and company of R521 million (2011: R451 million) is disclosed in profit or loss in the following categories: Depreciation and amortisation expense 31 (398) (343) Other revenue (123) (108) (521) (451) Government grant The government’s transitional electrification programmes are managed by Eskom on behalf of the Department of Energy (DoE). The funding for the electrification of homes is provided by the DoE. Eskom retains ownership of and responsibility for the electrification assets created upon conclusion of the agreement. Capital contributions received from customers Contributions relating to the construction of electricity network assets were paid in advance by electricity customers. Eskom Holdings SOC Limited Annual Financial Statements 2012 87 Notes to the consolidated financial statements continued for the year ended 31 March 2012 2012 2011 Post- Gratuities Leave Annual Total Total retire- and ment perfor- medical mance benefits bonus Rm Rm Rm Rm Rm Rm 24. Employee benefit obligations Group Balance at beginning of the year 7 542 9 1 336 1 484 10 371 9 777 Total expense charged to profit or loss and other comprehensive income 1 025 3 552 2 073 3 653 2 650 Provision used (234) (2) (340) (1 834) (2 410) (2 056) Balance at end of the year 8 333 10 1 548 1 723 11 614 10 371 Maturity analysis 8 333 10 1 548 1 723 11 614 10 371 Non-current 8 068 10 482 – 8 560 7 748 Current 265 – 1 066 1 723 3 054 2 623 Company Balance at beginning of the year 7 374 – 1 249 1 412 10 035 9 454 Total expense charged to profit or loss and other comprehensive income 1 008 – 513 1 992 3 513 2 554 Provision used (231) – (329) (1 763) (2 323) (1 973) Balance at end of the year 8 151 – 1 433 1 641 11 225 10 035 Maturity analysis 8 151 – 1 433 1 641 11 225 10 035 Non-current 7 891 – 473 – 8 364 7 547 Current 260 – 960 1 641 2 861 2 488 The total charge in profit or loss and other comprehensive income is disclosed in the following categories: Group Company 2012 2011 2012 2011 Note Rm Rm Rm Rm Post-retirement medical benefits 24.1 1 025 570 1 008 550 Gratuities 24.2 3 1 – – Leave 24.3 552 425 513 419 Annual and performance bonus 24.4 2 073 1 646 1 992 1 585 Pension benefits 24.5 1 551 1 330 1 465 1 245 5 204 3 972 4 978 3 799 88 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 Group Company 2012 2011 2012 2011 Note Rm Rm Rm Rm 24. Employee benefit obligations (continued) 24.1 Post-retirement medical benefits The group has anticipated expenditure in terms of continued contributions to medical aid subscriptions in respect of qualifying employees who retire. The estimated present value of the anticipated expenditure for both in-service and retired members was calculated by independent actuaries. The amounts recognised in profit or loss and other comprehensive income are: Current service cost 329 352 327 332 Finance cost 716 626 701 626 Net actuarial gain recognised for the year (20) (408) (20) (408) 1 025 570 1 008 550 The charge is disclosed in profit or loss in the following categories: Employee benefit expense 30 329 352 327 332 Finance cost 37 716 626 701 626 The actuarial gain is disclosed in other comprehensive income in the following category: Net actuarial gain recognised for the year (20) (408) (20) (408) 1 025 570 1 008 550 Cumulative net actuarial gain recognised in other comprehensive income (107) (87) (107) (87) 2012 2011 2010 2009 2008 Rm Rm Rm Rm Rm Group Present value of unfunded obligations 8 333 7 542 7 190 6 238 5 262 Gain/(loss) experience adjustment 240 (24) (284) (47) (100) Company Present value of unfunded obligations 8 151 7 374 7 033 6 103 5 447 Gain/(loss) experience adjustment 240 (24) (284) (47) (100) The expected current service cost for the 2013 financial year end is estimated at R414 million for group and R409 million for company. Refer to note 4(b) for the sensitivity analysis and principal actuarial assumptions used. Eskom Holdings SOC Limited Annual Financial Statements 2012 89 Notes to the consolidated financial statements continued for the year ended 31 March 2012 Group Company 2012 2011 2012 2011 Note Rm Rm Rm Rm 24. Employee benefit obligations (continued) 24.2 Gratuities The estimated cost of gratuities is accounted for over the potential working life of the qualifying employees based on the assessment by independent actuaries, which takes into account the probability of employees remaining in the applicable group company’s employment. The total charge is disclosed in profit or loss in the following category: Employee benefit expense 30 3 1 – – 24.3 Leave The group recognises a liability for occasional and service leave as the leave is of a long-term nature (refer to note 4c). The total charge is disclosed in profit or loss in the following category: Employee benefit expense 30 552 425 513 419 24.4 Annual and performance bonus The annual bonus equals one month’s salary for employees on Tuned Assessment of Skills and Knowledge (TASK) grading levels 1 to 13. Employees on TASK grading levels 14 to 26 can choose to spread their bonus amount over the year or take it as a 13th cheque. The performance bonus is based on the performance of the company and employees. The total charge is disclosed in profit or loss in the following category: Employee benefit expense 30 2 073 1 646 1 992 1 585 90 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 Group Company 2012 2011 2012 2011 Note Rm Rm Rm Rm 24. Employee benefit obligations (continued) 24.5 Pension benefits The amounts recognised in profit or loss are: Contributions 30 1 551 1 330 1 465 1 245 The total charge is included in employee benefit expense in profit or loss. The net benefit asset at the reporting date is not accounted for in the financial statements.The rules of the Eskom Pension and Provident Fund 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 Eskom Pension and Provident Fund is registered in terms of the Pension Funds Act, 1956 as amended. All employees are members of the fund. Contributions comprise 20.8% of pensionable emoluments of which members pay 7.3%. The assets of the fund are held separately from those of the group in respect of funds under the control of the trustees. The fund was actuarially valued on the IAS 19 Employee benefits basis on 31 March 2012 (previous valuation at 31 March 2011). The actuarial present value of retirement benefits at 31 March 2012 was R63 561 million (2011: R59 191 million), while the fair value of the fund’s assets was R75 536 million (2011: R66 861 million). The principal actuarial assumptions used were: Long-term investment return before tax (%) 9.10 9.50 9.10 9.50 Future general salary increases (%) 7.10 7.50 7.10 7.50 Future pension increases (inflation) (%) 5.60 6.00 5.60 6.00 In-service mortality Adjusted Per Adjusted Per PA(90) experience PA(90) experience tables rated analysis tables rated analysis down by down by two years two years Pensioner mortality Adjusted Per Adjusted Per PA(90) experience PA(90) experience tables rated analysis tables rated analysis down by down by one year one year Eskom Holdings SOC Limited Annual Financial Statements 2012 91 Notes to the consolidated financial statements continued for the year ended 31 March 2012 2012 2011 Power Power Mine- Other 4 Total Total station- station- related related related closure, environ- environ- pollution mental mental control restoration restoration and – nuclear – other rehabilita- plant1 generating tion3 plant2 Note Rm Rm Rm Rm Rm Rm 25. Provisions Group Balance at beginning of the year 4 470 3 867 2 037 2 522 12 896 8 343 Provision raised for the year 156 418 229 1 633 2 436 3 522 Raised to the income statement – 199 2 1 633 1 834 1 940 Capitalised to property, plant and equipment 145 219 – – 364 1 361 Capitalised to inventory 11 – 69 – 80 65 Capitalised to future fuel – – 158 – 158 156 Finance cost 802 446 210 – 1 458 1 340 Unwinding of discount 37 538 446 205 – 1 189 1 012 Change in discount rate applied to provision 37 264 – 5 – 269 328 Transfer to non-current assets held-for-sale – – – – – (253) Transfer on common control transaction – – – 53 53 – Provisions used – – – (25) (25) (56) Balance at end of the year 5 428 4 731 2 476 4 183 16 818 12 896 Maturity analysis 5 428 4 731 2 476 4 183 16 818 12 896 Non-current 5 428 4 731 2 476 105 12 740 10 343 Current – – – 4 078 4 078 2 553 Company Balance at beginning of the year 4 470 3 867 2 037 2 024 12 398 7 590 Provision raised for the year 156 418 229 1 696 2 499 3 490 Raised to the income statement – 199 2 1 696 1 897 1 908 Capitalised to property, plant and equipment 145 219 – – 364 1 361 Capitalised to inventory 11 – 69 – 80 65 Capitalised to future fuel – – 158 – 158 156 Finance cost 802 446 210 – 1 458 1 340 Unwinding of discount 37 538 446 205 – 1 189 1 012 Change in discount rate applied to provision 37 264 – 5 – 269 328 Provisions used – – – (16) (16) (22) Balance at end of the year 5 428 4 731 2 476 3 704 16 339 12 398 Maturity analysis 5 428 4 731 2 476 3 704 16 339 12 398 Non-current 5 428 4 731 2 476 3 12 638 10 307 Current – – – 3 701 3 701 2 091 1. Provision is made for the estimated decommissioning cost of nuclear plant and for the management of nuclear fuel assemblies and radioactive waste (refer to note 4d). 2. Provision is made for the estimated decommissioning cost of all other generating plant (refer to note 4d). 3. Provision is made for the estimated cost of closure, pollution control, rehabilitation and mine employee benefits at the end of the life of the mines, where a constructive and contractual obligation exists to pay coal suppliers (refer to note 4d). 4. Includes provision made for contractual obligations to maintain and restore the infrastructure under service concession arrangements, onerous contracts, compensation events and guarantees. 92 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 Group Company 2012 2011 2012 2011 Rm Rm Rm Rm 26. Finance lease liabilities Gross finance lease liabilities to subsidiaries – – 491 652 Other gross finance lease liabilities 1 569 1 699 1 568 1 696 Gross finance lease liabilities 1 569 1 699 2 059 2 348 Future finance charges on finance leases (1 048) (1 170) (1 182) (1 446) Present value of finance lease liabilities 521 529 877 902 Maturity analysis of gross lease liability Due within one year 103 131 175 217 Due between one and five years 404 381 697 729 Due after five years 1 062 1 187 1 187 1 402 1 569 1 699 2 059 2 348 Future finance charges (1 048) (1 170) (1 182) (1 446) 521 529 877 902 Maturity analysis of net lease liability Non-current 511 521 826 865 Due between one and five years 54 47 258 222 Due after five years 457 474 568 643 Current Due within one year 10 8 51 37 521 529 877 902 The finance lease liabilities are raised in terms of IFRIC 4 Determining whether an arrangement contains a lease. Average implicit interest rate or incremental borrowing rate (%) 18 18 18 18 27. Trade and other payables Trade and other payables 16 246 15 696 16 151 15 186 Accruals 7 603 2 851 7 541 2 370 Deposits 1 609 1 345 1 609 1 345 25 458 19 892 25 301 18 901 Maturity analysis 25 458 19 892 25 301 18 901 Non-current 1 971 1 508 1 263 859 Current 23 487 18 384 24 038 18 042 Non-current trade and other payables consist mainly of retention payables that are payable after 12 months. 28. Payments received in advance Upfront capital contributions 3 441 1 900 3 441 1 900 Grant funding 296 280 296 280 Other 760 727 749 718 4 497 2 907 4 486 2 898 Maturity analysis 4 497 2 907 4 486 2 898 Non-current 1 844 1 686 1 844 1 686 Current 2 653 1 221 2 642 1 212 Payments received in advance are allocated to deferred income when the related assets have been placed in commercial operation (refer to note 2.18). 29. Revenue Electricity revenue 112 999 90 375 112 999 90 375 Other revenue, excluding electricity revenue 1 761 1 072 538 498 114 760 91 447 113 537 90 873 Eskom Holdings SOC Limited Annual Financial Statements 2012 93 Notes to the consolidated financial statements continued for the year ended 31 March 2012 Group Company 2012 2011 2012 2011 Note Rm Rm Rm Rm 30. Employee benefit expense Salaries and other staff costs 16 953 14 880 15 640 13 738 Post-retirement medical aid benefits 24.1 329 352 327 332 Gratuities 24.2 3 1 – – Leave 24.3 552 425 513 419 Annual and performance bonus 24.4 2 073 1 646 1 992 1 585 Pension benefits 24.5 1 551 1 330 1 465 1 245 Direct training and development 295 241 284 226 Temporary and contract staff costs 2 606 1 505 1 730 1 500 24 362 20 380 21 951 19 045 Employee benefit expense capitalised to property, plant and equipment (4 230) (3 685) (4 229) (3 685) 20 132 16 695 17 722 15 360 31. Depreciation and amortisation expense Depreciation of property, plant and equipment 6 8 846 7 290 8 746 7 154 Amortisation of intangible assets 7 353 272 333 248 Deferred income recognised (government grant on electrification) 23 (398) (343) (398) (343) 8 801 7 219 8 681 7 059 32. Net impairment loss Impairment 633 809 606 755 Property, plant and equipment 6 6 118 – 71 Inventories 2 2 2 2 Loans receivable 12 2 – – Trade and other receivables (net of reversals) 3.1.2 (g) 613 687 604 682 Reversal (1) (11) (1) (11) Property, plant and equipment 6 – (4) – (4) Inventories 19 (1) (7) (1) (7) Bad debts recovered (12) (10) (12) (10) 620 788 593 734 33. Other operating expenses Managerial, technical and other fees 2 289 2 561 2 274 2 488 Research and development 188 199 188 199 Operating lease expense 804 321 362 261 Auditors’ remuneration1 103 86 83 67 Net loss on disposal of property, plant and equipment 3 – – – Repairs and maintenance, transport and other expenses 11 822 8 903 16 577 11 613 15 209 12 070 19 484 14 628 34. Other income Insurance proceeds – – 1 384 449 Management fee income 3 – 725 635 Government grant 107 1 107 1 Net surplus on disposal of property, plant and equipment – 52 32 68 Operating lease income 160 199 172 207 Dividend income 30 26 13 15 Sale of scrap 118 111 118 111 Other income 281 198 439 202 699 587 2 990 1 688 1. There were no non-audit services rendered by the group’s statutory auditors. 94 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 Group Company 2012 2011 2012 2011 Note Rm Rm Rm Rm 35. Net fair value loss on financial instruments, excluding embedded derivatives Gain on financial trading assets held-for-trading (138) (655) (137) (580) Gain on financial trading liabilities held-for-trading – (46) – (46) Loss on financial trading assets held-for-trading 76 7 76 7 Loss on financial trading liabilities held-for-trading 87 293 87 293 Net (gain)/loss on derivatives held for risk management1 (1 052) 2 934 (1 052) 2 932 Net loss/(gain) on other financial assets held-for- trading 1 (14) 1 (14) Net loss/(gain) on financial liabilities measured at amortised cost 3 400 (697) 3 400 (699) Ineffective portion of changes in fair value of cash flow hedges 14 (6) 14 (6) Net loss on financial instruments with group companies – – 1 – 2 388 1 816 2 390 1 887 36. Finance income Loans and receivables 1 807 1 493 1 743 1 445 Available-for-sale financial assets 1 667 871 1 500 702 Interest received from subsidiaries – – 259 206 Interest earned on finance lease receivables 62 72 62 72 3 536 2 436 3 564 2 425 37. Finance cost Debt securities issued 8 030 6 048 7 987 6 048 Borrowings 348 6 545 245 6 383 Interest expense 2 367 1 816 2 264 1 654 Subordinated loan from shareholder 3 453 2 248 3 453 2 248 Remeasurement of shareholder loan (5 472) 2 481 (5 472) 2 481 Derivatives held for risk management Interest rate and cross-currency swaps 1 733 1 041 1 733 1 041 Borrowing costs capitalised to property, plant and equipment 6 (4 999) (8 589) (4 999) (8 589) Unwinding of discount 2 025 1 710 2 010 1 710 Post-retirement medical benefit 24.2 716 626 701 626 Provisions 25 1 189 1 012 1 189 1 012 Trade and other payables 120 72 120 72 Change in discount rate of provisions 25 269 328 269 328 Interest paid to subsidiaries – – 81 119 Interest paid on finance lease liabilities 93 94 149 155 7 499 7 177 7 475 7 195 1. Includes forward exchange contract premium of R2 230 million (2011: R2 257 million) for the company. Eskom Holdings SOC Limited Annual Financial Statements 2012 95 Notes to the consolidated financial statements continued for the year ended 31 March 2012 Group Company 2012 2011 2012 2011 Note Rm Rm Rm Rm 38. Income tax Current tax 179 124 – – Secondary tax on companies 1 – – – Deferred tax 12 4 976 3 137 5 030 3 116 Reversal of temporary differences 2 763 1 688 2 823 1 662 Tax losses 2 213 1 449 2 207 1 454 Total income tax in profit or loss 5 156 3 261 5 030 3 116 2012 2011 Before tax Tax Net of tax Before tax Tax Net of tax Rm Rm Rm Rm Rm Rm Income tax recognised in other comprehensive income Group Available-for-sale financial assets 231 (65) 166 (40) 11 (29) Cash flow hedges 3 093 (845) 2 248 (785) 552 (233) Effective portion of changes in fair value 3 552 (974) 2 578 (1 031) 621 (410) Net amount transferred to initial carrying amount of hedged items (459) 129 (330) 246 (69) 177 Foreign currency translation differences 74 – 74 (33) – (33) Net actuarial loss on post- retirement medical aid benefits 20 (6) 14 408 (115) 293 3 418 (916) 2 502 (450) 448 (2) Company Available-for-sale financial assets 233 (65) 168 (36) 10 (26) Cash flow hedges 3 093 (845) 2 248 (785) 552 (233) Effective portion of changes in fair value 3 552 (974) 2 578 (1 031) 621 (410) Net amount transferred to initial carrying amount of hedged items (459) 129 (330) 246 (69) 177 Net actuarial loss on post- retirement medical aid benefits 20 (6) 14 408 (115) 293 3 346 (916) 2 430 (413) 447 34 Group Company 2012 2011 2012 2011 % % % % Reconciliation of effective tax rate Taxation as a percentage of profit before tax 28.00 27.93 28.31 28.15 Taxation effect of: – – – – Exempt income 0.36 0.07 0.10 0.12 Expenses not deductible for tax purposes (0.48) (0.98) (0.41) (0.64) Other 0.12 0.98 – 0.37 Standard tax rate 28.00 28.00 28.00 28.00 96 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 Group Company 2012 2011 2012 2011 Rm Rm Rm Rm 39. Cash generated from operations Profit before tax 18 407 11 673 17 766 11 067 Adjustments for: 19 911 19 265 19 820 19 215 Depreciation and amortisation expense 8 801 7 219 8 681 7 059 Depreciation expense – primary energy 13 14 13 14 Amortisation and write-offs of future fuels 2 10 2 10 Net impairment loss (excluding bad debts recovered) 632 798 605 744 Net fair value loss on financial instruments including embedded derivatives 2 054 3 077 2 056 3 148 Net loss/(surplus) on disposal of property, plant and equipment 3 (52) (32) (68) Dividend income (30) (26) (13) (15) Increase in provisions 4 791 4 228 4 729 4 108 Decrease in deferred income (123) (108) (123) (108) Payments made in advance recognised in profit or loss 208 296 207 296 Payments received in advance recognised in profit or loss (228) (819) (228) (747) Other non-cash items 12 4 12 4 Finance income (3 536) (2 436) (3 564) (2 425) Finance cost 7 499 7 177 7 475 7 195 Share of profit of equity-accounted investees (41) (24) – – Non-current assets held-for-sale (146) (93) – – 38 318 30 938 37 586 30 282 Changes in working capital 351 (2 293) 964 (2 435) Increase in payments made in advance (2 115) (3 512) (2 099) (3 508) Increase in inventories (453) (721) (417) (694) Increase in trade and other receivables (3 937) (2 871) (4 360) (1 981) Decrease in loans receivable 9 643 – 549 Increase in trade and other payables 5 708 3 322 6 606 2 240 Expenditure incurred on provisions (2 435) (2 108) (2 339) (1 995) Increase in payments received in advance 3 574 2 954 3 573 2 954 38 669 28 645 38 550 27 847 Eskom Holdings SOC Limited Annual Financial Statements 2012 97 Notes to the consolidated financial statements continued for the year ended 31 March 2012 Group Company 2012 2011 2012 2011 Rm Rm Rm Rm 40. Guarantees and contingent liabilities Eskom issues guarantees for strategic and business purposes to facilitate other business transactions. 40.1 Financial guarantees (a) Long-term debt raised by Motraco Mozambique Transmission Company SARL (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. Eskom has guaranteed the long-term debt raised by Motraco. At 31 March 2012 the outstanding amount was USD21 million (2011: USD23 million), which translates into R159 million (2011: R156 million). The loans of USD21 million mature on 6 September 2019. The guarantees would be triggered if Motraco was unable to meet its obligations in terms of the long- term debt. 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. The risk adjusted credit exposure of Motraco is calculated by applying a rating agency’s annual default probabilities. Applying the default probability of 0.21% (2011: 0.23%), the financial liability in respect of these guarantees is calculated as nil at 31 March 2012 (2011: R1 million). This amount has been raised as a provision, and is included in other provisions (refer to note 25). 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. The unprovided portion, disclosed as a contingent liability, amounted to 159 155 159 155 98 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 Group Company 2012 2011 2012 2011 Rm Rm Rm Rm 40. Guarantees and contingent liabilities (continued) 40.1 Financial guarantees (continued) (b) EFC loans to Eskom group employees Eskom Finance Company SOC Limited (EFC) has granted loans (secured by mortgage bonds on the properties) to employees of the Eskom group. Eskom Holdings SOC Limited has issued guarantees to EFC to the extent to which the loan values of employees exceed the current value of the mortgage security. At 31 March 2012 the guaranteed amounts were R911 million (2011: R481 million). 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. The default probability for the unsecured portion of the EFC loan book (representing 10% of the loan book) is calculated at 27% (2011: 27%), while the secured portion of the loan book (90% of the loan book) is calculated at 0.01% (2011: 0.10%). Applying the combined default probability, the financial liability in respect of this guarantee is calculated at R1 million (2011: R1 million). This amount has been included as a provision in Eskom in the current year, and is included in other provisions (refer to note 25). Changes in variables will not have a significant impact on profit or loss. The unprovided portion, disclosed as a contingent liability, amounted to – – 910 480 Summary of financial guarantees Unprovided portion 159 155 1 069 635 Amounts provided in other provisions 1 1 1 2 Total financial guarantees 160 156 1 070 637 40.2 Other guarantees (a) Guarantees to 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). The South African Revenue Services (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 183 183 183 183 (b) Eskom Pension and Provident Fund Eskom has indemnified the Eskom Pension and Provident Fund against any loss resulting from negligence, dishonesty or fraud by the fund’s officers or trustees. Eskom Holdings SOC Limited Annual Financial Statements 2012 99 Notes to the consolidated financial statements continued for the year ended 31 March 2012 Group Company 2012 2011 2012 2011 Rm Rm Rm Rm 40. Guarantees and contingent liabilities (continued) 40.3 Other contingent liabilities (a) Legal claims Legal claims are in process against Eskom as a result of contractual 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 58 350 58 337 41. Commitments 41.1 Capital expenditure Estimated capital expenditure 201 599 281 064 197 833 278 966 Contracted 74 635 102 881 74 559 102 848 Approved, not yet contracted for 126 964 178 183 123 274 176 118 The expenditure is expected to be incurred as follows: 201 599 281 064 197 833 278 966 Due within one year 60 656 78 972 59 986 78 421 Due between one and five years 119 421 182 145 116 694 180 728 Due after five years 21 522 19 947 21 153 19 817 This expenditure will be financed through shareholder support, debt and internally generated funds. 41.2 Operating leases As lessee The future minimum lease payments payable under non-cancellable operating leases are: 213 237 180 164 Due within one year 122 117 108 97 Due between one and five years 91 109 72 67 Due after five years – 11 – – As lessor The future minimum lease payments receivable under non-cancellable operating leases are: 477 124 477 124 Due within one year 57 63 57 63 Due between one and five years 273 61 273 61 Due after five years 147 – 147 – 41.3 Supply of water Eskom has entered into long-term agreements with the Department of Water Affairs to reimburse the department for the cost incurred in supplying water to Eskom. This cost is regarded as part of primary energy in profit or loss. 41.4 Coal Eskom has entered into long-term agreements with suppliers for coal purchases. The annual cost of coal is regarded as part of primary energy in profit or loss. 42. Related-party transactions The group is wholly owned by its shareholder, the government, represented by the Department of Public Enterprises. Eskom (and its subsidiaries) constitute a schedule 2 public entity in terms of the Public Finance Management Act. Eskom’s government related parties include national departments (including the shareholder), constitutional institutions, (schedule 1) public entities (both major and other public entities schedule 2 and 3) and local government (including municipalities). Eskom’s transactions with local government (with the exception of municipalities) are not individually significant when compared to the total value of the transactions between Eskom and other government related parties and are therefore not disclosed separately. These include, among others, transactions as a result of services provided to government hospitals and libraries. Related parties also comprise subsidiaries of Eskom, 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. The list of public entities in the national sphere of government is provided by National Treasury on its website www.treasury.gov.za. It also provides the names of subsidiaries of public entities. Key management personnel for Eskom include the group’s board of directors and the executive management committee (Exco). Disclosure of related party transactions with key management personnel is included in note 45. 100 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 Group Company 2012 2011 2012 2011 Note Rm Rm Rm Rm 42. Related-party transactions (continued) The following transactions were carried out with related parties: Transactions Sales of goods and services1 58 684 46 763 61 041 47 675 National departments 452 441 449 378 Local government 52 580 41 640 52 580 41 640 Public entities 3 430 2 629 3 406 2 598 Eskom subsidiaries – – 2 384 1 007 Joint ventures in which Eskom is a partner 2 222 2 053 2 222 2 052 Government grant funding received for electrification National departments 23 1 571 1 506 1 571 1 506 Purchases of goods and services2 2 730 2 362 8 941 7 768 National departments 854 703 851 703 Public entities 318 314 300 286 Eskom subsidiaries – – 6 318 5 519 Joint ventures in which Eskom is a partner 7 15 7 15 Other related parties 30 1 551 1 330 1 465 1 245 Finance income 522 589 781 795 National departments 5 1 5 1 Public entities 517 588 517 588 Eskom subsidiaries 36 – – 259 206 Finance cost 6 865 4 362 6 946 4 481 National departments 37 3 453 2 248 3 453 2 248 Public entities 3 412 2 114 3 412 2 114 Eskom subsidiaries 37 – – 81 119 Lease income 50 58 61 65 Public entities 50 58 50 58 Eskom subsidiaries – – 11 7 Lease expenses – – 3 2 Public entities – – – – Eskom subsidiaries – – 3 2 Finance lease finance cost Eskom subsidiaries – – 56 61 Environmental levy Public entities 6 208 4 972 6 208 4 972 1. Goods and services are sold to related parties on an arm’s-length basis at market-related prices. 2. Goods and services are bought from related parties on an arm’s-length basis at market-related prices. Eskom Holdings SOC Limited Annual Financial Statements 2012 101 Notes to the consolidated financial statements continued for the year ended 31 March 2012 Group Company 2012 2011 2012 2011 Note Rm Rm Rm Rm 42. Related-party transactions (continued) Outstanding balances (due by related parties) Receivables and amounts owed by related parties 16 312 8 724 16 848 9 105 National departments 68 30 54 21 Public entities 12 086 7 062 11 919 7 055 Local government 3 954 1 441 3 954 1 441 Eskom subsidiaries – – 717 397 Joint ventures in which Eskom is a partner 204 191 204 191 Payments made in advance to Eskom subsidiaries – – 107 117 Loans to Eskom subsidiaries 10 – – 5 208 3 806 Indirect transactions – assets at nominal value National departments 9 662 13 692 9 662 13 692 Outstanding balances (due to related parties) Payables and amounts owed to related parties1 65 070 61 507 67 278 62 611 National departments 60 074 60 159 60 074 60 159 Borrowings 74 159 74 159 Subordinated loan from shareholder 60 000 60 000 60 000 60 000 Public entities 4 961 1 305 4 959 1 303 Eskom subsidiaries – – 2 210 1 106 Eskom Pension and Provident Fund 35 43 35 43 Loans from subsidiaries 10 – – 1 305 1 462 Debt securities issued2 39 008 34 499 39 008 34 499 Indirect transactions – liabilities at nominal value National departments 614 – 614 – Commitments Eskom does not have any significant commitments with its related parties. Guarantees Guarantees received 350 056 350 050 350 056 350 050 National departments 350 000 350 000 350 000 350 000 Committed 153 611 105 700 153 611 105 700 Uncommitted 196 389 244 300 196 389 244 300 Public entities3 56 50 56 50 Guarantees issued 342 339 1 252 819 National departments 40.2 183 183 183 183 Eskom subsidiaries 40.1 – – 910 480 Joint ventures in which Eskom is a partner 40.1 159 156 159 156 43. Events after the reporting date The board of directors is currently in the process of developing a project plan and strategy for the disposal of Eskom Finance Company SOC Limited, a wholly owned subsidiary in terms of a directive from the shareholder post 31 March 2012. 1. Purchase transactions with related parties are at an arm’s length basis with payment terms of 30 days from invoice date. 2. Bonds are bearer instruments and it is therefore unknown if the initial counterparty still holds the bonds. 3. The guarantees from state-owned enterprises are for future or unpaid electricity consumption accounts. 102 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 44. Restatement of comparatives and change in accounting policies Related parties The revised IAS 24 Related party disclosures became effective during the current financial year. The revised IAS 24 provides government-related entities an exemption which eliminates the requirements to disclose information that is costly to gather and of less value to users. The group applies the IAS 24 paragraph 26 exemption in respect of its relationship with public entities at the national and local government level. Related party disclosures were previously not separately provided for redistributors,which are at the local sphere of government, as the specific guidance from SAICA was applied, which allowed that where management deemed this to be appropriate, only related party disclosure at the national sphere needed to be provided. The revised IAS 24 requires that where management elects to use the exemption, transactions that are individually significant or individually insignificant but collectively significant should be quantitatively or qualitatively disclosed. As a result a quantitative indication of transactions with redistributors (ie municipalities) and entities in the national government sphere are accordingly disclosed (refer to note 42). IAS 24 only provides disclosure requirements and not measurement requirements. Therefore, the revision to IAS 24 did not have an impact on amounts previously recognised in the group’s financial statements. Voluntary change in accounting policy with respect to the presentation of foreign exchange gains and losses Previously, the group presented foreign gains and losses that relate to loans and receivables, debt securities issued and borrowings in profit or loss within finance income or finance cost. With effect from 1 April 2011, the group presents foreign gains and losses in profit or loss within net fair value gain/(loss) on financial instruments, excluding embedded derivatives. This change in accounting policy was considered appropriate to give a fairer presentation of the group’s risk management policy of hedging foreign transactions by disclosing the impact on profit or loss of foreign exchange differences in the same line in profit or loss as where gains and losses on derivatives held for risk management are disclosed, which is within net fair value gain/(loss) on financial instruments, excluding embedded derivatives. Restatement of comparative information for the statements of cash flows The comparative statements of cash flows have been reclassified to enhance disclosure regarding the movements in payments made and received in advance and to reflect financing raised and repaid through commercial paper as a net amount to better reflect the nature of the financing. Restatement of accumulated profit at 31 March 2010 The amortisation period on the euro bond loan was restated resulting in an adjustment between cash flow hedge reserve and accumulated profit of R494 million. Employee benefit obligations Previously, employee benefit related obligations recognised in line with IAS 19 Employee benefits were not presented in the same line item on the statement of financial position. A reclassification of all employee related obligations is now presented in the same line item on the statement of financial position within Employee benefit obligations (refer to note 24). The 2010 statement of financial position has been disclosed as a result of the reclassification in line with the requirements of IAS 1 Presentation of financial statements, paragraph 10. Eskom Holdings SOC Limited Annual Financial Statements 2012 103 Notes to the consolidated financial statements continued for the year ended 31 March 2012 44. Restatement of comparatives and change in accounting policies (continued) The impact of the restatement of comparative information is as follows: Group Company Previously Adjustments Restated Previously Adjustments Restated reported reported Rm Rm Rm Rm Rm Rm Statement of financial position at 31 March 2011 Liabilities Non-current liabilities 18 520 (429) 18 091 18 258 (404) 17 854 Retirement benefit obligations 7 317 (7 317) – 7 140 (7 140) – Provisions 11 203 (860) 10 343 11 118 (811) 10 307 Employee benefit obligations – 7 748 7 748 – 7 547 7 547 Current liabilities 23 131 429 23 560 22 217 404 22 621 Retirement benefit obligations 234 (234) – 234 (234) – Provisions 4 021 (1 468) 2 553 3 503 (1 412) 2 091 Employee benefit obligations – 2 623 2 623 – 2 488 2 488 Trade and other payables 18 876 (492) 18 384 18 480 (438) 18 042 Income statements for the year ended 31 March 2011 Operating profit before net fair value loss and net finance cost 18 880 – 18 880 17 297 – 17 297 Other income 587 – 587 1 688 – 1 688 Net fair value loss on financial instruments, excluding embedded derivatives (3 691) 1 875 (1 816) (3 762) 1 875 (1 887) Net fair value loss on embedded derivatives (1 261) – (1 261) (1 261) – (1 261) Operating profit before net finance cost 14 515 1 875 16 390 13 962 1 875 15 837 Net finance cost (2 866) (1 875) (4 741) (2 895) (1 875) (4 770) Finance income 2 436 – 2 436 2 425 – 2 425 Finance cost (5 302) (1 875) (7 177) (5 320) (1 875) (7 195) Share of profit of equity- accounted investees, net of tax 24 – 24 – – – Profit before tax 11 673 – 11 673 11 067 – 11 067 Income tax (3 261) – (3 261) (3 116) – (3 116) Profit for the year from continuing operations 8 412 – 8 412 7 951 – 7 951 Loss for the year from discontinued operations (56) – (56) – Profit for the year 8 356 – 8 356 7 951 – 7 951 104 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 44. Restatement of comparatives and change in accounting policies (continued) Group Company Previously Adjustments Restated Previously Adjustments Restated reported reported Rm Rm Rm Rm Rm Rm Cash flow statements for the year ended 31 March 2011 Cash flows from operating activities Cash generated from operations 28 275 370 28 645 27 384 463 27 847 Other net cash flows from operating activities (5 991) 93 (5 898) (5 739) – (5 739) Net cash generated from operating activities 22 284 463 22 747 21 645 463 22 108 Cash flows from investing activities Increase in deferred income 463 (463) – 463 (463) – Other net cash flows invested in investing activities (46 458) – (46 458) (44 921) – (44 921) Net cash used in investing activities (45 995) (463) (46 458) (44 458) (463) (44 921) Cash flows from financing activities Debt raised 78 758 (9 567) 69 191 71 101 (9 567) 61 534 Borrowings 32 614 (9 567) 23 047 24 957 (9 567) 15 390 Other debt raised 46 144 – 46 144 46 144 – 46 144 Debt repaid (18 756) 9 567 (9 189) (11 215) 9 567 (1 648) Borrowings (18 115) 9 567 (8 548) (10 437) 9 567 (870) Other debt raised (641) – (641) (778) – (778) Other net cash flows from financing activities (39 672) – (39 672) (40 478) – (40 478) Net cash from financing activities 20 330 – 20 330 19 408 – 19 408 Net decrease in cash and cash equivalents (3 381) – (3 381) (3 405) – (3 405) Cash and cash equivalents at beginning of the year 15 541 – 15 541 14 871 – 14 871 Cash and cash equivalents attributable to non-current assets held-for-sale (73) – (73) – – – Cash and cash equivalents at end of the year 12 087 – 12 087 11 466 – 11 466 Eskom Holdings SOC Limited Annual Financial Statements 2012 105 Notes to the consolidated financial statements continued for the year ended 31 March 2012 45. Directors’ remuneration1 Remuneration philosophy Eskom links management remuneration to the performance of the organisation and an individual’s contribution. Market factors are also crucial as rewards and remuneration must be kept at levels that will assist Eskom in retaining key leadership skills. Basic salary is augmented by short- and long-term incentives. International and local benchmarks are considered to ensure executive packages are aligned with those offered by companies of similar stature to Eskom. Eskom aims to remunerate in line with the median of the market to recruit and retain the best management team to lead the business. The executive remuneration strategy is constantly reviewed to stay aligned with the Department of Public Enterprises remuneration guidelines and abreast with best practices. People and governance committee The people and governance committee helps the board to apply policy relating to the remuneration of directors and executives as set by Eskom’s shareholder. The policy also covers the nomination of executives for senior positions and conditions of service. The committee enhances business performance by: • approving, guiding and influencing key human resources policies and strategies • monitoring compliance with the Employment Equity Act • guiding strategies to achieve equity in Eskom, and • approving the principles governing reward and incentive schemes Non-executive directors Remuneration of non-executive directors is benchmarked against the norms for companies of similar size and is in line with guidelines issued by the shareholder. Remuneration proposals from the people and governance committee regarding non- executive directors’ remuneration are forwarded to the board. The board then makes recommendations to the shareholder. Non-executive directors receive a fixed monthly fee and are reimbursed for out-of-pocket expenses incurred in fulfilling their duties. Executive management committee (Exco) members The committee makes recommendations to the board concerning the remuneration of the chief executive, and approves the remuneration of the other Exco members (group executives). The remuneration is considered in accordance with a framework approved by the shareholder. The board recommendation on the remuneration of the chief executive has to be approved by the shareholder. Factors influencing the remuneration of the Exco members include level of skill, experience, contribution to organisational performance and success of the group. Remuneration includes a basic package and short- and long-term incentives. Every year, the people and governance committee reviews the structure of these packages to ensure an appropriate balance between fixed and variable remuneration and short- and long-term incentives and rewards. The chief executive, finance director and group executives have permanent employment contracts based on Eskom’s standard conditions of service. Six months’ notice is required. Remuneration structure The remuneration of the Exco members includes the following components: Guaranteed amount They receive a guaranteed pay package with remuneration based on cost to company. This comprises a fixed cash portion and compulsory benefits (medical aid, life cover and pension). The guaranteed amount is reviewed annually to keep remuneration in line with the market. Short-term incentives These reward the achievement of individual predetermined performance objectives and targets as set by the chief executive in performance contracts with each Exco member. The people and governance committee approves the targets set for the chief executive. The short-term incentive scheme is calculated as a percentage of pensionable earnings. Long-term incentives These are designed to attract, retain and reward the Exco members for meeting the organisational objectives set by the shareholder. A market benchmarked long-term incentive scheme has been approved by the shareholder effective from 1 April 2005. 1. Includes remuneration of the chief executive, finance director and Exco members (group executives who are senior executives but not directors of Eskom). 106 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 45. Directors’ remuneration1 (continued) Long-term incentive scheme A number of performance shares (award performance shares) were awarded to the Exco members on 1 April 2008, 2009, 2010 and 2011. The value of the performance shares is deemed to be R1 at grant date, and is escalated at a money-market rate to determine the value at reporting date. The board has set performance conditions in line with the Eskom corporate plan and shareholder compact over a three-year performance period. Performance covers financial and non-financial targets in areas such as ensuring business sustainability of Eskom, ensuring reliability of supply to all South Africans, ensuring that future power needs for South Africa are adequately provided for and supporting the developmental objectives of South Africa, with an agreed weighting in each category. Awards only vest if, and to the extent that, these targets are met. Potential vesting percentages range from 0% to 100%. A threshold and a stretch target are set for each measure, with an expected (on target) vesting of 50%. Performance parameters aligned with the shareholder compact and corporate plan are complemented by a set of gatekeeper conditions. If gatekeeper requirements are not met, the board at its discretion may adjust the vesting percentages even though targets have been met. The following gatekeeper conditions trigger a review of vesting percentages: • if the lost-time incident rate is greater than 0.45 • if the sustainability committee gives an unfavourable safety report • if Eskom’s audited annual financial statements show a financial loss • if the auditors qualify Eskom’s annual financial statements • if a significant PFMA contravention occurs • if enhancement of Eskom’s reputation is not achieved The vesting period for award performance shares is three years from the date of grant. At the end of that period, the people and governance committee decides the amounts to be paid in line with: • the percentage of award performance shares that vest, based on the performance conditions achieved • the value of the award performance shares based on the grant value, escalated at a money market rate In addition to the performance conditions, vesting of award performance shares is dependent on the scheme participant remaining in Eskom’s employment throughout the vesting period. The award lapses if employment ceases during the vesting period (other than for permitted reasons). Share awards – vested Award performance shares awarded on 1 April 2009 vested on 31 March 2012 with an expected vesting rate, due to the achievement of non-financial performance conditions over the three-year period of 58.50%. The cash value of the vested shares is payable in June 2012 at R1.22 per share based on the money market rate. Shares awarded on 1 April 2008 were redeemed during the year. Shares vested on 31 March 2012 (with comparative status at 31 March 2011) are: Award Award Award Award Award Award perfor- perfor- perfor- perfor- perfor- perfor- mance mance mance mance mance mance shares shares shares shares shares shares vested on vested payable at vested on vested on redeemed 31 March on R1.22 per 31 March 31 March in 2012 31 March share 2011 2011 at a June at 2012 at a rate of R1.29 per rate of 47.32% share 58.50% Name Number Number R Number Number R BA Dames 2 680 713 1 568 217 1 913 225 2 122 050 1 004 154 1 295 359 PS O’Flaherty 693 000 405 405 494 594 – – – BE Bulunga 311 850 182 432 222 567 – – – T Govender 1 691 424 989 483 1 207 169 1 309 000 619 419 799 050 EL Johnson 2 325 960 1 360 687 1 660 038 1 642 200 777 089 1 002 445 SJ Lennon 1 877 818 1 098 524 1 340 199 1 715 834 811 933 1 047 394 DL Marokane 537 600 314 496 383 685 – – – A Noah 1 797 558 1 051 571 1 282 917 1 642 200 777 089 1 002 445 MM Ntsokolo 2 214 871 1 295 700 1 580 753 2 025 057 958 257 1 236 151 Eskom Holdings SOC Limited Annual Financial Statements 2012 107 Notes to the consolidated financial statements continued for the year ended 31 March 2012 45. Directors’ remuneration (continued) Share awards – vesting The current estimated vesting values of the award performance shares are R1.19 per share for the 1 April 2010 awards (vesting 31 March 2013) and R1.19 for the April 2011 awards (vesting 31 March 2014). The value of the performance shares allocated does not take into account the impact of performance conditions over the applicable three-year performance periods.The vesting percentage of 50% and 50% for the 2010 and 2011 performance shares, respectively, are estimates. The people and governance committee awarded the 1 April 2011 awards retrospectively on 25 May 2012. The performance shares awarded on 1 April 2009 and 1 April 2010 that were deferred pending the outcome of an investigation into the remuneration policy of State Owned Enterprises by the Department of Public Enterprises, were awarded by the board retrospectively on 31 May 2011. Shares awarded on 1 April 2011 Shares awarded on 1 April 2010 Outstanding Award Award Outstanding Award Award award perfor- perfor- award perfor- perfor- perfor- mance mance perfor- mance mance mance shares shares mance shares shares shares vesting on payable in shares vesting on payable in vesting on 31 March June 2014 vesting on 31 March June 2013 at 31 March 2014 at a at R1.19 31 March 2013 at a R1.19 per 2014 rate of 50% per share 2013 rate of 50% share Name Number Number R Number Number R BA Dames 4 900 000 2 450 000 2 915 500 3 330 786 1 665 393 1 981 818 PS O'Flaherty 3 128 895 1 564 448 1 861 693 2 772 000 1 386 000 1 649 340 BE Bulunga 1 871 100 935 550 1 113 305 1 247 400 623 700 742 203 T Govender 2 072 022 1 036 011 1 232 853 1 801 367 900 683 1 071 813 EL Johnson 2 662 934 1 331 467 1 584 446 2 064 290 1 032 145 1 228 253 SJ Lennon 1 999 876 999 938 1 189 926 1 333 251 666 626 793 284 DL Marokane 2 519 731 1 259 866 1 499 240 2 150 400 1 075 200 1 279 488 TBL Molefe 1 734 385 867 192 1 031 959 – – – A Noah 2 057 980 1 028 990 1 224 498 1 595 333 797 667 949 223 MM Ntsokolo 2 358 838 1 179 419 1 403 509 1 572 559 786 280 935 673 The details of the schemes are: Long-term Long-term incentive incentive plan plan Date of grant 1 April 2011 1 April 2010 Number of shares awarded 25 305 761 17 867 386 Contractual life 3 years 3 years Vesting conditions Variable Variable vesting vesting depending depending on the on the achievement achievement of of performance performance conditions conditions Method of settlement Cash Cash Expected attrition of employee (%) – – Expected outcome of performance conditions (%) 50% 50% Long-term Long-term incentive incentive plan 2012 plan 2011 Number Number Reconciliation of performance share movements Outstanding at beginning of the year 17 994 626 31 516 360 Granted during the year 31 998 180 – Forfeited during the year – (963 286) Settled during the year (17 994 626) (12 558 448) Outstanding at end of the year 31 998 180 17 994 626 Carrying amount of liability (R’000) 16 692 10 984 Intrinsic value of liabilities relating to vested rights (R’000) 16 692 10 984 108 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 45. Directors’ remuneration (continued) Details of emoluments paid The following schedule sets out the emoluments due to the directors of Eskom for the current year: Name Directors’ Salaries1 Short-term Long-term Other Total Restated fees bonus bonus payments4 2012 2011 payment2 payment3 R’000 R’000 R’000 R’000 R’000 R’000 R’000 Non-executive directors 6 018 – – – 131 6 149 6 997 ZA Tsotsi5 796 – – – 112 908 – PM Makwana6 619 – – – 19 638 2 626 LC Cele7 119 – – – – 119 478 D Dube7 112 – – – – 112 462 BL Fanaroff8 420 – – – – 420 398 RMQ Gungubele9 241 – – – – 241 – LG Josefsson7 125 – – – – 125 491 HB Lee7 78 – – – – 78 313 N Lesela10 302 – – – – 302 – WB Lucas-Bull7 112 – – – – 112 449 B Luthuli9 259 – – – – 259 – C Mabude10 375 – – – – 375 – Y Masithela10 324 – – – – 324 – MC Matjila10 341 – – – – 341 – B Mehlomakulu8 437 – – – – 437 374 J Mirenge7 107 – – – – 107 427 ME Mkwanazi10 405 – – – – 405 – JR Modise7 124 – – – – 124 495 SPQ Sedibe10 344 – – – – 344 – U Zikalala7 119 – – – – 119 484 DEL Zondo9 259 – – – – 259 – Executive directors – 8 827 3 166 1 295 488 13 776 12 544 BA Dames 11 – 5 000 11 1 681 1 295 308 8 284 7 55811 PS O’Flaherty12 – 3 827 1 485 – 180 5 492 4 986 Exco members (group executives) – 21 132 7 293 5 086 567 34 078 29 368 BE Bulunga – 2 289 740 – 78 3 107 3 040 T Govender13 – 2 534 820 799 75 4 228 3 19014 EL Johnson – 3 257 1 112 1 002 26 5 397 4 838 SJ Lennon – 2 446 830 1 047 45 4 368 3 938 TBL Molefe13 – 2 122 762 – 37 2 921 1 57514 DL Marokane – 3 082 1 163 – 130 4 375 4 155 A Noah13 – 2 517 850 1 002 49 4 418 3 79514 MM Ntsokolo13 – 2 885 1 016 1 236 127 5 264 4 83714 Total directors and group executives 6 018 29 959 10 459 6 381 1 186 54 003 48 909 1. Includes medical aid and pension fund contributions. 2. Short-term incentive bonus awarded for the 2012 financial year. 3. Long-term incentive bonus scheme – Grant 4, which vested on 31 March 2011 was paid in June 2011. 4. Fees related to security services and operating vehicle expenditure. 5. Appointed as chairman in June 2011. 6. Appointed as chairman in June 2010. Exit in July 2011. 7. Contract expired in June 2011. 8. Appointed to the board in April 2010. 9. Appointed to the board in August 2011. 10. Appointed to the board in June 2011. 11. The remuneration disclosed has been adjusted/restated to allocate the salary increase (backdated to the date of appointment of the director as CE) between the current and prior financial years. The increase was approved by the minister during October 2011. The remuneration for the 2011 year end has been restated with a total of R1.817 million consisting of a R1.201 million salary increase and a R616 000 short-term incentive scheme payment. The remuneration for the 2012 year end has been adjusted with an amount of R934 000 relating to the increase in the director’s 2012 salary. Refer to page 40 in the Integrated Report. 12. This director was paid a two year retention bonus of R1.3 million. The repayment condition expired on 31 December 2011. 13. New Exco members in 2012 as a result of new organisational structure. 14. The salaries for 2011 relating to these Exco members were included for comparative purposes. This resulted in a net increase in the total 2011 salaries of R13.4 million. Eskom Holdings SOC Limited Annual Financial Statements 2012 109 Notes to the consolidated financial statements continued for the year ended 31 March 2012 2012 2011 R’000 R’000 45. Directors’ remuneration (continued) Housing loans to Exco members at 31 March BA Dames 1 571 3 162 T Govender 4 723 – DL Marokane 1 577 4 790 7 871 7 952 The interest rate loan from Eskom Finance Company SOC Limited at 31 March 2012 was 7.25% (2011: 7.25%). The loans are repayable over a maximum period of 30 years.1 The following board and Exco members were directors of Eskom directly held subsidiary companies. Fees paid for attendance of meetings were all paid to Eskom Holdings. Eskom Enterprises SOC Limited2 DL Marokane – – PS O’Flaherty – – Escap SOC Limited3 PS O’Flaherty 43 40 Eskom Finance Company SOC Limited3 BE Bulunga 10 – PS O’Flaherty 5 – 46. 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 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 the National Energy Regulator of South Africa (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. This shortfall is expected to disappear once the electricity tariff determined in terms of the regulatory methodology, which is based on the depreciated replacement values, is fully phased in by NERSA. Historical Adjustments After Historical Adjustments After cost revaluation cost revaluation 31 March 31 March 31 March 31 March 31 March 31 March 2012 2012 2012 2011 2011 2011 Rm Rm Rm Rm Rm Rm Summarised group statements of financial position at 31 March 2012 Assets 382 365 228 509 610 874 328 145 297 410 625 555 Property, plant and equipment 290 661 209 313 499 974 236 724 283 708 520 432 Deferred tax 43 19 196 19 239 59 13 702 13 761 Other assets 91 661 – 91 661 91 362 – 91 362 Equity and liabilities 382 365 228 509 610 874 328 145 297 410 625 555 Total equity 103 103 150 705 253 808 87 259 204 270 291 529 Deferred tax 13 807 77 804 91 611 7 931 93 140 101 071 Other liabilities 265 455 – 265 455 232 955 – 232 955 1. On resignation the terms and conditions of the loan are renegotiated. 2. Paid by Eskom. 3. Fees paid to Eskom. 110 Eskom Holdings SOC Limited Annual Financial Statements 2012 Notes to the consolidated financial statements continued for the year ended 31 March 2012 Historical Adjustments After Historical Adjustments After cost revaluation cost revaluation 31 March 31 March 31 March 31 March 31 March 31 March 2012 2012 2012 2011 2011 2011 Rm Rm Rm Rm Rm Rm 46. Pro forma revaluation of property, plant and equipment (continued) Summarised group income statements for the year ended 31 March 2012 Operating profit before depreciation and amortisation expense, net impairment loss and other operating expenses 46 959 – 46 959 36 467 – 36 467 Depreciation and amortisation expense (8 801) (14 368) (23 169) (7 219) (16 898) (24 117) Net impairment loss (620) 6 (614) (788) 114 (674) Other operating expenses (15 209) (256) (15 465) (12 070) (141) (12 211) Operating profit/(loss) before net finance cost 22 329 (14 618) 7 711 16 390 (16 925) (535) Net finance cost (3 963) (4 999) (8 962) (4 741) (8 589) (13 330) Share of profit of equity- accounted investees, net of tax 41 – 41 24 – 24 Profit/(loss) before tax 18 407 (19 617) (1 210) 11 673 (25 514) (13 841) Income tax (5 156) 5 493 337 (3 261) 7 144 3 883 Profit/(loss) for the year from continuing operations 13 251 (14 124) (873) 8 412 (18 370) (9 958) Loss for the year from discontinued operations (3) – (3) (56) – (56) Profit/(loss) for the year 13 248 (14 124) (876) 8 356 (18 370) (10 014) Eskom Holdings SOC Limited Annual Financial Statements 2012 111 112 Eskom Holdings SOC Limited Annual Financial Statements 2012 BASTION GRAPHICS www.eskom.co.za Eskom Holdings SOC Limited Registration number 2002/015527/06