Eskom group interim results for the six months ended 30 September 2019 28 November 2019 The results presentation is available at www.eskom.co.za/IR2019/interim Contents Introduction Financial performance Operational performance Governance matters Conclusion 1 Introduction Driving Eskom’s turnaround for sustainability • Eskom’s strategy to stabilise, separate and grow the company to achieve financial and operational sustainability is aligned to DPE’s special paper • Last year, we announced the four pillars of our turnaround strategy, namely: 1  Revenue optimisation through achieving cost-reflective tariffs and increasing sales volumes 2  Cost curtailment through cash savings on operational and capital costs, and working capital, to improve liquidity and financial sustainability 3  Debt relief through Government support 4  Unbundling Eskom into three entities under a holding company 3 Eskom’s turnaround journey • The Generation nine-point recovery programme to improve operational performance ensured no loadshedding during winter • However, loadshedding was required for five days during October and November to stabilise the system, due to unacceptably high levels of unplanned load losses and a shortage of emergency reserves • Despite positive financial performance for the first half of the year, cash flows remain severely constrained • Financial performance is cyclical, with a loss projected by year end • Eskom remains reliant on Government support to maintain a positive cash balance by 31 March 2020 • Progress to instil governance and root out financial mismanagement, malfeasance and maladministration is encouraging 4 Financial performance Financial environment remains challenging • EBITDA of R30.6 billion (Sept 2018: R28.3 billion) • Net profit after tax of R1.3 billion (Sept 2018: R0.6 billion) • Net cash from operations of R19.7 billion (Sept 2018: R26.7 billion) 1• Eskom has lodged applications with the High Court to review NERSA’s recent tariff determinations • Decline in sales continues, with sales volumes 1.29% lower than Sept 2018, with growth hampered by capacity shortages and economic conditions 2• While savings of R5.6 billion have been achieved, savings to year end are expected to be negatively affected by cost overruns on diesel usage to stabilise the grid, as well as escalating municipal arrear debt 3• Government support of R49 billion for 2019/20 and R56 billion for 2020/21 aimed at debt relief, to support Eskom’s status as a going concern • A total of 61% of 2019/20 funding requirement secured to September 2019 6 Most financial ratios deteriorated and are expected to deteriorate further before improving Profitability Sept Sept R billion EBITDA margin, % Net profit after tax, Rbn % Measure 2019 2018 EBITDA, Rbn Revenue, R million 107 502 98 104 35 34 30 32 EBITDA, R million 30 592 28 263 25 20 30 Net profit/(loss) after tax, 1 325 627 15 28 R million 10 26 EBITDA margin, % 28.46 28.81 5 0 24 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19 Cash interest cover, ratio 1.02 1.55 Cash from operations After Govt support 1.14 n/a Cash from operations, Rbn R billion Debt service cover, ratio 0.64 0.60 3.0 Cash interest cover, ratio 35 Debt service cover, ratio 2.5 30 After Govt support 1.14 n/a 25 2.0 Gross debt/EBITDA, ratio 16.55 16.59 20 1.5 Debt/equity (including long-term 15 2.82 2.51 1.0 provisions), ratio 10 0.5 5 Gearing, % 74 72 0.0 0 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19 7 Increase in EBITDA year-on-year; net profit recorded in the first half of the year Sept Sept YoY % • Revenue: negatively impacted by R million 2019 2018 change capitalisation of pre- Revenue 107 502 98 104 10 commissioning revenue Other income 677 1 678 (60) • Primary energy cost: higher coal Primary energy (52 018) (46 146) (13) cost and OCGT utilisation; Employee benefit expense (16 454) (16 944) 3 increased IPP production Net impairment (loss)/reversal (781) 594 • Employee benefit cost declined: Other expenses (8 334) (9 023) 8 once-off payment to unionised EBITDA (before net fair value loss) 30 592 28 263 8 staff in prior year, coupled with Depreciation and amortisation (13 503) (12 870) (5) headcount reduction through Net fair value loss on financial instruments and embedded (480) (821) 42 attrition – vacancies not filled derivatives • Depreciation growth: Net finance cost (14 804) (13 733) (8) commissioning of new power Share of profit of equity- station units and accelerated 40 22 82 accounted investees, net of tax depreciation on Komati Profit before tax 1 845 861 114 Income tax (520) (234) (122) • Finance costs: growth in borrowings and higher rates Net profit for the period 1 325 627 111 8 Total revenue increased by 10% despite declining local sales volumes Sept Sept YoY % • Reduction of 2.7TWh in local sales, 2019 2018 change mainly in industrial and distributor Revenue, R million categories Local 108 568 99 459 9 • International sales increased International 6 151 4 129 49 • Average electricity price of Gross electricity 114 719 103 588 11 110c/kWh increased by 12.1%, below revenue Net revenue not (4 145) (4 601) 10 NERSA’s overall tariff determination recognised of 13.87% due to a change in mix and Total electricity consumption patterns 110 574 98 987 12 revenue Other revenue 1 134 518 119 Sales and revenue Capitalised (4 206) (1 401) (200) R billion Sales, TWh TWh Revenue, Rbn Total revenue 107 502 98 104 10 120 110 100 100 80 Sales, GWh 90 60 Local 96 640 99 367 (3) 80 40 International 7 476 6 115 22 70 20 Total sales 104 116 105 482 (1) 0 60 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19 9 Production decreased by 4.3TWh but primary energy cost increased by 13% Sept 2019 Sept 2018 Sent Unit Sent Unit R/MWh Cost, out, cost, Cost, out, cost, YoY % R million GWh R/MWh R million GWh R/MWh change Coal and other1 36 026 98 037 367 32 570 104 901 310 (18) Nuclear 732 7 564 97 568 5 538 102 5 OCGTs2 1 100 331 3 327 310 108 2 876 (16) Total Eskom 37 858 105 932 357 33 448 110 547 303 (18) generation3 Renewable IPPs 11 241 5 220 2 153 9 710 4 845 2 004 (7) IPP OCGTs4 926 169 4 389 1 083 232 4 664 6 Total IPPs4 12 167 5 389 2 223 10 793 5 077 2 126 (5) International 1 993 3 703 538 1 905 3 721 512 (5) purchases Total primary 52 018 115 024 452 46 146 119 345 387 (17) energy 1. Excluding Medupi and Kusile pre-commissioning production of 5 099GWh 2. OCGT cost comprises fuel, start-up cost and storage and demurrage charges 3. The Eskom generation cost includes only fuel-related costs, and excludes other costs like maintenance and staff costs 4. IPP unit cost is calculated on fuel cost (variable cost) only, and excludes maintenance and capacity charges. Maintenance is included in the total cost shown 10 Cash from operations is insufficient to service debt commitments and a portion of investing activities without Government support Sept Sept YoY % R million 2019 2018 change Net cash from operating activities 19 675 26 656 (26) Cash required for debt servicing (capital and interest) (31 017) (45 220) 31 Net cash shortfall before investing activities (11 342) (18 564) Acquisition of property, plant and equipment and intangibles (11 856) (17 738) 33 Cash flow used in other investing activities (643) (323) (99) Net cash shortfall before financing activities (23 841) (36 625) Debt raised 15 737 33 688 (53) Cash flow from other financing activities 440 3 908 (89) Net cash (shortfall)/surplus before Government support (7 664) 971 Government support1 13 500 – Net increase in cash and cash equivalents 5 836 971 1. Government support is restricted for use to service debt 11 Arrear debt continues to increase Invoiced municipal arrear debt, R billion • Invoiced municipal arrear debt (including R billion Municipal payment levels (excl metros), % % Arrear municipal debt, Rbn interest) increased by R5.2 billion since 30 95 25 +26% March 2019, to R25.1 billion 90 20 • Payment level of 78% by municipalities 15 85 (excluding metros) on amounts billed, 10 19.9 25.1 80 declining from 93% four years ago. 17.0 5 9.2 12.4 75 Payment level of 44% for top 20 5.6 0 70 defaulters Sep-15 Sep-16 Sep-17 Sep-18 Mar-19 Sep-19 • Invoiced Soweto SPU arrear debt Soweto small power user (SPU) debt, R billion (including interest) at R16.1 billion R billion % Soweto SPU payment levels, % (Mar 2019: R18 billion) after writing off Debt write-off, Rbn 9% 20 Soweto SPU arrear debt, Rbn 20 in duplum interest of R3.6 billion; 3.6 payment level of 16% 15 15 • Eskom welcomes the zero tolerance for 10 16.8 18.2 10 non-payment articulated by the President, 16.1 5 11.7 14.1 5 when he indicated that consumers must 9.6 pay for services received 0 0 12 Sep-15 Sep-16 Sep-17 Sep-18 Mar-19 Sep-19 Debt continues to increase, exceeding R450 billion Sept Sept YoY % Financial position, R million 2019 2018 change Property, plant and equipment and intangible assets 659 734 645 131 2 Working capital – inventory and receivables 60 725 48 846 24 Liquid assets 7 814 17 342 (55) Other assets 55 622 49 339 13 Total assets 783 895 760 658 3 Equity 168 747 174 397 (3) Debt securities and borrowings 454 207 419 213 8 Working capital – payables 48 670 46 654 4 Other liabilities 112 271 120 394 (7) Total equity and liabilities 783 895 760 658 3 13 Total of 61% of funding secured for 2020 financial year (at 30 September 2019) Guarantee utilisation R billion R billion Target Committed 350 DFIs 22.2 21.9 ECAs 1.4 0.3 Domestic bonds and notes 291 7.9 4.5 > 1 year Domestic bonds and notes 4.4 1.4 < 1 year 43 16 Structured products 3.0 – International bonds 7.4 – Total Drawn down Committed Available Government not drawn Total funding1 46.2 28.1 guarantee down Projected debt maturity profile Percentage secured 61% R billion Interest Capital 38 A total of R17.6 billion has been drawn down 34 30 28 24 on facilities to 30 September 2019 48 36 38 31 30 1. Gross of commercial paper Mar-20 Mar-21 Mar-22 Mar-23 Mar-24 14 Projections indicate we are unable to service debt and fund capex through operations and debt raising alone Forecast cash flows to 31 March 2020, R billion Operating activities Investing outflows Financing outflows (76) Primary energy – controllable Cost savings alone is not the answer – R50 billion savings amounts to 36% of controllable operational outflows. A cost-reflective tariff is required to (34) Primary energy – ensure long-term financial sustainability Revenue 199 non-controllable1 (34) Employee benefits Debt servicing comprises: (17) Repairs and maintenance Capital of R48 billion (4) Operations (34) Interest of R38 billion (9) Working capital Capex Operating 25 (new & existing) surplus (86) Debt Controllable operational 46 raised requirements are forecast to consume R140 billion Debt Debt service servicing gap of ±R50 billion 1. Non-controllable primary energy includes renewable IPP costs and environmental levies 15 Loss similar to 2019 is projected to year end • Despite the profit recorded for the first half of the financial year, we are projecting a loss at year end, similar to that recorded in the prior year • Performance in the second half of the year has historically been worse than the first:  Revenue: lower summer tariffs combined with lower sales volumes in the second half of year, resulting in a decline in revenue compared to the first six months  Primary energy: lower production from Eskom coal-fired stations due to higher summer maintenance; higher production by RE-IPPs, specifically solar PV; higher coal burn cost due to more expensive coal being used from increased stockpiles and contractual price increases; as well as the possibility of higher OCGT usage  Employee benefit expense: the full impact of annual salary increases (7% for bargaining unit per negotiated wage agreement; 2.8% for managerial levels) is felt  Other opex: higher maintenance costs linked to additional funding provided for the Generation nine-point programme and network strengthening in all divisions to support operational recovery • EBITDA for the second half of the year is expected to show a break-even position, before the effect of depreciation and net finance cost, thereby resulting in an overall projected loss 16 Operational performance Type equation here. Implementation of the Generation nine-point recovery programme is showing good progress • The medium-term programme aims to address critical pain points to fast- track improvement in Generation performance and plant availability • Only one station’s coal stock level remains below minimum (Mar 2019: nine) • Improvement in availability of new build units due to defects being addressed • Two major units on outage (Lethabo Unit 5 of 593MW and Duvha Unit 1 of 575MW) are expected to be returned to service by the end of January 2020 • Utilisation of open-cycle gas turbines down on the previous six months • Average partial load losses continue to exceed the target of 3 500MW, and boiler tube leaks remain a challenge • Outage effectiveness and timely return to service of units remain a concern, contributing to the high level of unplanned losses • Environmental performance remains poor, particularly at Kendal and Matla, although some improvement has been achieved by taking units out of service 18 Both generating plant and network performance deteriorates Plant availability & UCLF % • Generation EAF declined to 69.92% EUF, coal fleet EAF UCLF 100 (Sept 2018: 75.01%) due to environmental 90 78 82 issues and units on major unplanned outage 80 75 70 71 70 • Unplanned maintenance of 19.58% 20 15 15 20 (Sept 2018: 15.22%), with average partial load 10 9 10 losses of 3 632MW, requiring high usage of 0 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19 OCGTs to maintain system stability Network performance • Coal stock levels (normalised) improved to Events/hours Minutes 54 days over the period (Mar 2019: System minutes lost for events < 1 minute SAIFI (system avg interruption frequency index) 36 days) SAIDI (system avg interruption duration index) 40 3.0 • Transmission performance deteriorated due 35 2.5 to severe plant failures; Distribution networks 30 2.0 delivered stable performance 25 1.5 20 1.0 • Medupi Unit 3 (794MW) achieved 15 0.5 commercial operation; 45km of high-voltage 10 0.0 transmission lines commissioned Sep-15 Sep-16 Sep-17 Sep-18 Sep-19 19 Environmental and safety performance declines, socio-economic performance stable Environmental performance • Particulate emissions continue to kg/MWh l/kWh Relative particulate emissions deteriorate, water consumption stable sent out Water consumption sent out 0.5 1.5 • 77 679 new households connected (Sept 2018: 65 386) 0.4 1.4 • Lost-time injury rate of 0.32 (Sept 2018: 1.3 0.3 0.28). Regrettably, five contractor 1.2 fatalities were recorded (Sept 2018: 0.2 1.1 one employee and one contractor) 0.1 1.0 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19 • Preferential procurement (spend with Annual electrification (number, 000) black-owned suppliers) of 60.94% 250 (Sept 2018: 67.80%) 200 • Continued improvement in racial, 150 gender and disability equity • 107 581 beneficiaries through CSI 100 programmes 50 0 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 proj 20 Governance matters Progress on governance clean-up • Lifestyle audits of executive senior managers completed, and disciplinary action taken where necessary. High-risk employees handed to SIU for investigation; awaiting feedback • A total of 145 investigations into fraud, corruption and irregularities completed during the period; disciplinary action recommended in 122 cases • The Court ordered Trillian to repay R600 million to Eskom. Trillian has appealed the judgment • Eskom has issued court papers to set aside contracts and recover funds amounting to R207 million from Deloitte Consulting • Commercial processes have been improved 22 Process to reduce irregular expenditure continues 0.1 27.9 R billion • Reporting procedures amended to comply with recent National Treasury 0.9 instructions • A dedicated function to focus on 1.0 addressing PFMA violations to be established 0.4 • Significant progress on investigations 25.7 and/or disciplinary action, with some Opening Prior year Existing IE New IE Condoned Closing balance (clean-up) (2020 balance matters referred for criminal or civil YTD) action, also leading to dismissals and New irregular No. of the pursuit of recovery of losses expenditure at Sept 2019 incidents R million • Condonations from National Treasury Sole source (ongoing from to be obtained to clear opening 1 856 previous year) balance – until condoned, expenditure Other 6 28 on affected contracts will continue to Total 7 884 be classified as irregular expenditure 23 Conclusion The Eskom journey ahead • The past six months have seen the release of the long-awaited Integrated Resource Plan as well as DPE’s road map for Eskom • Focus on operational and environmental recovery of our generation fleet continues unabated as we enter the high maintenance summer season • Eskom welcomes the Government support, recently approved under the Special Appropriation Act, which will be utilised to service debt commitments • Governance remains a key focus as we continue the clean-up • The appointment of Mr André de Ruyter as GCE is a welcome step towards furthering leadership stability • A cost-reflective tariff remains imperative, to provide customers with long- term price certainty. Furthermore, Eskom’s existing cost base simply cannot accommodate sufficient efficiencies to bridge the revenue gap 25 Disclaimer This presentation does not constitute or form part of and should not be construed as, an offer to sell, or the solicitation or invitation of any offer to buy or subscribe for or underwrite or otherwise acquire, securities of Eskom Holdings SOC Ltd (Eskom), any holding company or any of its subsidiaries in any jurisdiction or any other person, nor an inducement to enter into any investment activity. No part of this presentation, nor the fact of its distribution, should form the basis of, or be relied on in connection with, any contract or commitment or investment decision whatsoever. This presentation does not constitute a recommendation regarding any securities of Eskom or any other person. Certain statements in this presentation regarding Eskom’s business operations may constitute “forward looking statements”. All statements other than statements of historical fact included in this presentation, including, without limitation, those regarding the financial position, business strategy, management plans and objectives for future operations of Eskom are forward looking statements. Forward-looking statements are not intended to be a guarantee of future results, but instead constitute Eskom’s current expectations based on reasonable assumptions. Forecasted financial information is based on certain material assumptions. These assumptions include, but are not limited to continued normal levels of operating performance and electricity demand in the Customer Services, Distribution and Transmission divisions and operational performance in the Generation and Primary Energy divisions consistent with historical levels, and incremental capacity additions through the Group Capital division at investment levels and rates of return consistent with prior experience, as well as achievements of planned productivity improvements throughout the business activities. Actual results could differ materially from those projected in any forward-looking statements due to risks, uncertainties and other factors. Eskom neither intends to nor assumes any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In preparation of this document certain publicly available data was used. While the sources used are generally regarded as reliable the content has not been verified. Eskom does not accept any responsibility for using any such information. 26