Group annual results for the year ended 31 March 2021 14 December 2020 31 August 2021 The results presentation is available at www.eskom.co.za/IR2020/interim The results presentation is available at www.eskom.co.za/IR2021 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 Distribution and Transmission Divisions and operational performance in the Generation Division 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. 1 Contents Strategy and performance overview Page 3 to 10 Operational performance Page 11 to 15 André de Ruyter Group Chief Executive Financial performance Page 16 to 28 Outlook Page 29 to 30 Calib Cassim Chief Financial Officer 2 STRATEGY AND PERFORMANCE OVERVIEW Highlights and lowlights • Financial results challenging, net loss after tax of R18.9 billion • COVID-19 impacted performance, sales volumes down 6.7% • Headcount reduced by 4.5%, employee costs contained • Gross debt burden reduced by R81.9 billion, with Government support of R56 billion contributing towards debt servicing • Generating plant performance reduced to 64.19% EAF due to higher planned maintenance – a short-term trade-off for longer term sustainability • Transmission and distribution network performance improved • Environmental performance remains disappointing, particularly at Kendal • Business separation gaining momentum, with functional separation completed in June 2021 3 STRATEGY AND PERFORMANCE OVERVIEW Progress on Medupi and Kusile MEDUPI POWER STATION • Unit 1 achieved commercial operation on 31 July 2021, after being synchronised to the national grid on 27 August 2019 • Signifies completion of construction activities on the 4 764MW project, which commenced in May 2007 • Planned operational life of Medupi Power Station is 50 years, using direct dry-cooling systems due to the water scarcity in Lephalale area • Fourth largest coal-fired plant and largest dry-cooled power station in the world • FGD to be retrofitted at a cost of R38.4 billion KUSILE POWER STATION MEDUPI UNIT 4 EXPLOSION • Two Kusile units commissioned, adding 1 598MW capacity to the • Generator at Medupi Unit 4 exploded on 8 August 2021, national grid with extensive damage to the generator o Unit 2: 29 October 2020 • Apparently caused by a deviation in operating procedure o Unit 3: 29 March 2021 during a short-term outage • FGD included in units being constructed, requiring limestone to • No injuries were sustained during the incident operate • Until completion of the Major Event Investigation, employees placed on precautionary suspension 4 STRATEGY AND PERFORMANCE OVERVIEW The impact of COVID-19 • As an essential service, we were allowed to continue operating at full capacity even during level 5 of South Daily peak demand reduced by Africa’s national lockdown, with coal mines permitted to operate to supply stations between 7 500MW to 11 000MW during level 5 of • Our priority was the supply of electricity, and maintaining the safety of our people the lockdown • Where possible, employees have worked at home since the start of the national lockdown, with some staff returning to work as restrictions were lifted Generation output had to reduce drastically in response • Group IT enabled a large amount of the workforce to work remotely during the lockdown • Measures are in place to protect critical staff and minimise the number of employees on site wherever possible. Plans are in place to protect key operations The slowdown of the • Capital and generation maintenance projects were delayed early on due to restrictions on movement and economy amid the COVID-19 pandemic led limiting the number of people on site to an unprecedented decline • Continued uncertainty around COVID-19 is expected to continue threatening future sales volumes, the in sales cost of production and customers’ ability to pay • Demand is not expected to recover to pre-COVID-19 levels in the short to medium term, due to the Electricity sales long-lasting impact of the economic recession experienced in 2020 – largely stagnant sales volumes of 191 852GWh approximately 190TWh per year anticipated for at least the next five years down 6.7% YOY, with 78% of the reduction in the first half of the year At 17 August 2021, Eskom had recorded 6 980 positive COVID-19 cases (including 43 Industrial, rail and international reinfections), comprising 5 775 employees and 1 205 contractors, with 6 140 recoveries sectors most severely affected Sadly, 128 employees and 17 contractors have succumbed to the disease 5 STRATEGY AND PERFORMANCE OVERVIEW Our strategy and turnaround plan Operations recovery Improve the income statement Strengthen the balance sheet Business separation People and culture 6 STRATEGY AND PERFORMANCE OVERVIEW Our Exco team driving the turnaround Exco diversity Years in service Age André de Ruyter Calib Cassim Jan Oberholzer Group Chief Executive Chief Financial Officer Chief Operating Officer Race Gender Faith Burn Nthato Minyuku Nerina Otto Chief Information Officer Group Executive: Acting Group Executive: Government and Regulatory Affairs Legal and Compliance The recently launched Eskom Rising campaign is aimed at Elsie Pule Jainthree Sankar Vuyolwethu Tuku driving change and the success of our turnaround plan Group Executive: Acting Chief Procurement Officer Group Executive: Human Resources Turnaround Management Office 7 STRATEGY AND PERFORMANCE OVERVIEW Financial performance IMPROVE THE INCOME STATEMENT STRENGTHEN THE BALANCE SHEET • The COVID-19 lockdown, depressed economic conditions and supply • Government support of R56 billion received to support Eskom’s status constraints hampered growth, with a 6.7% reduction in sales volumes. as a going concern, with a further R31.7 billion committed for 2022 Winter sales incentives were offered to mitigate this impact • Gross debt and borrowings reduced by R81.9 billion to R401.8 billion • Total revenue improved to R204.3 billion due to a 8.76% tariff increase due to Government support and strengthening of the Rand • Favourable High Court judgments received on a number of NERSA • Gross funding of R18.9 billion secured for 2021, mainly from DFIs and review applications local bond issuances • Cost savings of R14.4 billion achieved against a target of R14.1 billion • Further credit rating downgrades arising from concerns around • Growth in primary energy costs contained to 3.4%, with a 3.9% operational and financial sustainability decrease in production, offset by higher use of relatively more • Payment levels for customers in arrears are improving, although they expensive OCGTs to minimise loadshedding and higher RE-IPP use remain below acceptable levels • Decline in EBITDA to R32.8 billion due to lower sales volumes and an • Municipal arrear debt grew by R7.3 billion to R35.3 billion. increase in primary energy and other operating expenditure Negotiations for active partnering agreements are under way with 45 • Operating profit (EBIT) of R5.8 billion achieved despite a very municipalities for Eskom to act as agent for the supply of electricity, challenging environment maintenance services and collection of revenue • Unsustainable debt burden resulted in net finance costs of • Opportunities for disposal of non-core assets bearing some fruit R31.5 billion, and a net loss after tax of R18.9 billion for the year 8 STRATEGY AND PERFORMANCE OVERVIEW Operating performance OPERATIONS RECOVERY BUSINESS SEPARATION PEOPLE AND CULTURE • Generating plant availability deteriorated to • Divisionalisation completed by March 2020 • Headcount reduced by 2 023 to 42 749 64.19% (2020: 66.64%), mainly driven by an • New structures approved and operating (2020: 44 772), resulting in reduced employee increase in PCLF to 12.26% (2020: 8.92%) model implemented benefit costs • Satisfactory progress on the Generation • Major milestones achieved by year end, • Support staff relinked to line divisions as part recovery plan except service level agreements and IT of functional separation • Improvement in transmission and distribution changes • Granted 74 voluntary separation packages network performance, although energy losses • Business separation gaining momentum, with • Developing an improved performance have increased functional separation completed in June 2021 management framework • Transmission sustainability improvement plan • New functions set up to support separation • Lost-time injury rate improved significantly to and Distribution network development plan and a transitioned energy future 0.22 (2020: 0.30) approved • Separation of the Transmission entity • External stakeholder relations and internal • Two new build units commissioned at Kusile targeted by December 2021, although communications performed well despite • Significant improvement in particulate some dependencies are lagging behind constraints imposed by COVID-19 emissions performance, although Kendal • Separation of the Generation and Distribution challenges not yet resolved entities targeted by December 2022 9 STRATEGY AND PERFORMANCE OVERVIEW Progress on business separation BUSINESS SEPARATION • DPE’s Roadmap provided timelines for the restructuring of Eskom from a vertically integrated utility to an unbundled state with three wholly owned, separate legal entities • Functional separation to drive accountability for each division and thereby, improve business performance • Divisions capacitated to function relatively independently while aligning with and implementing the overall Eskom strategy • Following completion of functional separation, focus has shifted to legal separation TRANSMISSION ENTITY • Timelines are aggressive and considered high risk due to critical external and regulatory decisions and dependencies, and dependent on Government playing an active, supportive role • Set up of the entity depends on lender approval and licensing by NERSA • Eskom Conversion Act, 2001 and Electricity Regulation Act, Transmission to be 2006 to be amended separated by December 2021 • Approved trading arrangements must be in place by 31 December 2021, which requires wholesale and aligned Generation and Distribution to be separated by retail tariff structures December 2022 10 OPERATING PERFORMANCE Generating plant and network performance GENERATION AND NEW BUILD Generation performance NETWORK PERFORMANCE • High unplanned load losses resulted in % % • System reliability improved, with both 85 25 capacity constraints, leading to loadshedding system minutes <1 and major incident 80 20 on 47 days (2020: 46 days) performance meeting target 75 15 • Gas turbine usage remained high, at a cost 70 • Customers are experiencing fewer 10 of energy (Eskom and IPP-owned OCGTs) 65 incidents of interruptions and shorter 5 of R7 billion (2020: R7.5 billion) outage duration 0 0 • Generation recovery programme and 2016 2017 2018 2019 2020 2021 • Load reduction initiative contributed reliability maintenance recovery programme EUF EAF PCLF UCLF positively to reducing equipment failure showing results related to overloading caused by illegal Network performance connection and bypassing of meters • Investments in wet coal handling paid Minutes dividends – stations survived two weeks 5.0 Events/hours 40 • Negative economic outlook and socio- during Cyclone Eloise without having to 4.0 economic challenges led to higher 30 loadshed due to wet coal 3.0 distribution non-technical losses, • Significant progress made correcting major 20 particularly due to theft of electricity 2.0 plant defects on Medupi and Kusile units, 1.0 10 • Asset vandalism, equipment theft and with Medupi Unit 3 reaching full generation 0.0 0 overloaded networks has led to 2016 2017 2018 2019 2020 2021 capacity in April 2020 increased breakdowns, maintenance • Operational excellence initiative launched System minutes lost for events <1 minute SAIFI SAIDI costs and increased safety risk SAIFI = System average interruption frequency index to ensure skills and disciplined execution SAIDI = System average interruption duration index 11 OPERATING PERFORMANCE Environmental performance PERFORMANCE Environmental performance EMISSION CHALLENGES • Relative particulate emission performance kg/MWh sent out l/kWh • Stations allowed by DFFE to operate under sent out improved significantly to 0.38kg/MWh sent out 0.50 1.45 pre-1 April 2020 emission limits (2020: 0.47kg/MWhSO) 0.45 1.40 0.40 • Cost of full compliance estimated at • Besides Kendal Power Station, Kriel, Lethabo, 0.35 1.35 R300 billion, with significant implications for Matla and Tutuka experienced periods of poor 0.30 1.30 capacity, immediately and after 2025 performance, due to poor coal quality and 1.25 • Emission abatement projects under way to poor performing dust handling and SO3 plant 0.00 1.20 2016 2017 2018 2019 2020 2021 reduce particulate emissions • Water consumption at power stations Relative particulate emissions Water consumption • Kendal implementing an emission recovery deteriorated slightly to 1.42l/kWhSO plan across all units, leading to a significant (2020: 1.41l/kWhSO) Coal fleet emissions, past 40 years (1982 to 2021) reduction in emissions • A total of 80 environmental legal -92.5% 6.00 • At times, Kendal had to operate outside contraventions recorded (2020: 59), 5.15 5.00 4.46 allowed limits due to generation constraints 68 were water-related 4.00 • Kendal operating in general compliance • Performance on legal contraventions showing 3.00 2.02 2.00 with emission limits since December 2020 improvement since year end 1.00 0.76 0.38 0.42 0.40 0.39 0.23 • Criminal charges laid against Eskom in 2019 • Ingula Nature Reserve wetlands declared 0.00 1982 1985 1990 1995 2000 2005 2010 2015 2021 regarding Kendal’s particulate emissions wetlands of international importance by the Relative particulate emissions, kg/MWhSO (coal only) challenges. The matter was postponed International Ramsar Convention 12 OPERATING PERFORMANCE People and safety • Lost-time injury rate improved to 0.22 (2020: 0.30). LTIR Safety performance including contractors also improved to 0.25 (2020: 0.34) Number Index • Sadly, two employee and eight contractor fatalities recorded 20 0.40 during the year (2020: nine contractors) 15 0.30 • Adequate learner pipeline in place, with overall training 10 0.20 spend at 2.58% of gross employee benefit costs, despite 5 0.10 lockdown restrictions (2020: 3.67%) 0 0.00 • Racial equity improved substantially at senior management 2016 2017 2018 2019 2020 2021 and middle management/professional level, at 73.72% and Fatalities (employees & contractors) LTIR 80.10% respectively (2020: 71% and 78.04%) • Gender equity at both levels showed improvement, to Group headcount 41.99% and 38.95% respectively (2020: 41.73% and 38.24%) Number -4.5% -5.8% 47 658 48 628 50 000 46 665 44 772 • Disability equity deteriorated to 2.93% (2020: 3.01%) 42 749 40 263 40 000 • Employee benefits costs successfully managed within budget, 30 000 driven by a reduction in headcount 20 000 • Production bonuses of R129 million to qualifying staff 10 000 • Reduction of R179 million in overtime costs. Further reduction remains a challenge, given poor plant performance 0 2017 2018 2019 2020 2021 2026 Target • Rollout of workplace vaccination programme for employees ERI Eskom and contractors at a number of sites commenced 13 OPERATING PERFORMANCE Socio-economic performance 106 669 electrification Awarded 1 299 contracts • Customer satisfaction improved, particularly for top customers, connections under worth R102.5 billion, although unreliability of supply and slow resolution of interruptions DMRE’s electrification with local content of remain a concern programme R67.7 billion • Preferential procurement spend reduced slightly to 64.51% (2020: 65.97%) Committed CSI spend of Since inception of the new R67.4 million, aiding • Preferential procurement spend is negatively affected by spend with build programme, awarded 802 635 beneficiaries RE-IPPs under contracts negotiated by DMRE to the extent of contracts worth about 12% R227 billion, with local content of R169.5 billion • Procurement spend with the majority of supplier categories remains B-BBEE level 8 below target • Electrification programme curtailed as DMRE reduced funding for the year by R1 billion, although connections were still delivered despite the lockdown • Deploy modular microgrids developed by RT&D to accelerate electrification programme • Financial challenges, exacerbated by the impact of COVID-19, limited the implementation of CSI programmes 14 OPERATING PERFORMANCE Advancing Broad-Based Black Economic Empowerment PREFERENTIAL PROCUREMENT ESKOM CONTRACTORS IN IN THE PAST FIVE YEARS (2017 TO 2021 FINANCIAL YEARS) NEW BUILD PROJECTS (2007 TO 2021 FINANCIAL YEARS) Total contracted value Local to site companies Total measurable spend R731 billion R227 billion R12 billion B-BBEE compliant suppliers Local content contracted Jobs created R498 billion (68% of TMPS) R146 billion (64% of contract value) ~189 000 Black-owned businesses Local content spend Skills developed R251 billion (34% of TMPS) R170 billion (74% of contract value) ~11 400 Black women-owned companies Large black-owned companies Industrialisation R87 billion (12% of TMPS) R86 billion R1.12 billion Black youth-owned suppliers Black women-owned suppliers Infrastructure development R16 billion (2% of TMPS) R19 billion ~R3 billion Small and medium enterprises (QSE & EMEs) Small and medium enterprises (QSE & EMEs) Enterprise development R109 billion (15% of TMPS) R18 billion ~R1 billion 15 FINANCIAL PERFORMANCE Financial results for the year PROFITABILITY Electricity sales Favourable High Court 191 852 GWh • COVID-19 hampered revenue, with industrial, rail and international sales most affected down 6.7% due to national lockdown judgments on NERSA’s revenue and RCA • Growth in total primary energy costs was stable at 3.4% due to lower production, decisions, with a 15.06% Electricity revenue although more expensive production sources were required to minimise loadshedding R202 644 million tariff increase awarded up 2.7% due to 8.76% tariff increase for the 2022 financial year • Net finance costs and employee benefit costs remained stable • Strengthening of the Rand had a significant positive impact on results for the year Net interest-bearing debt R393.6 billion Received LIQUIDITY AND FUNDING down 3.1% due to debt servicing R56 billion • Liquidity remains constrained due to debt servicing and working capital requirements, Net finance costs R31.5 billion in Government and limited debt raising activities. Credit ratings remain at sub-investment grade level up 0.3% due to higher borrowing costs and less interest capitalised equity support • Concerted effort to reduce Eskom’s debt burden and improve gearing, with the support of Government equity injections Gearing • Lack of cost-reflective tariffs and escalating municipal arrear debt also contribute to Debt/equity Gross debt/EBITDA 4.0 16 liquidity constraints. Court review applications and municipal interventions being pursued 3.0 12 • Capital expenditure restricted to improve liquidity 2.0 8 AUDIT OPINION 1.0 4 • Qualified audit opinion relating to irregular expenditure under the PFMA 0.0 0 2016 2017 2018 2019 2020 2021 • Material uncertainty regarding Eskom’s status as going concern Gross debt/EBITDA ratio Debt/equity ratio 16 FINANCIAL PERFORMANCE Key financial indicators Financial indicator 2021 2020 1 Profitability KEY TAKEAWAYS Revenue, R million 204 326 199 468 R billion % • Some financial indicators 50 30 40 25 improved slightly despite very EBITDA, R million 32 813 36 816 30 challenging conditions, yet remain 20 20 EBITDA margin, % 16.06 18.46 10 15 well below acceptable levels 0 10 -10 • Improvement in solvency ratios is 5 Operating profit (EBIT), R million 5 797 9 037 -20 largely attributable to the -30 0 2016 2017 2018 2019 2020 2021 Net loss after tax, R million (18 934) (20 769) Government equity received, EBITDA, R billion EBITDA margin, % which supported our liquidity and Net profit/(loss) before tax, R billion Pre-tax nominal return on assets, % 0.98 1.56 helped us to reduce our debt balance during the year Cash interest cover, ratio 0.85 0.94 Solvency • Cash interest cover and debt Debt service cover, ratio 0.30 0.52 R billion Ratio service cover ratios declined as 50 2.0 operating cash flows remain Gross debt/EBITDA, ratio 13.96 14.46 40 1.5 inadequate to fund even the Debt/equity (including long-term 30 2.03 2.45 1.0 interest component of our debt provisions), ratio 20 0.5 servicing requirements Gearing, % 67 71 10 0 0.0 Free funds from operations (FFO) 2016 2017 2018 2019 2020 2021 9.53 7.72 as % of gross debt Cash from operations, R billion Debt service cover ratio Performance improved Performance declined Cash interest cover ratio 1. Restatements are disclosed in note 49 of the annual financial statements 17 FINANCIAL PERFORMANCE Group income statement for the year ended 31 March 2021 FINANCIAL COMMENTARY R million 2021 2020 1 % Revenue 204 326 199 468 2▲ • Revenue: 8.76% tariff increase for 2021, nearly fully eroded by an unprecedented 6.7% decline in sales volumes Other income 2 662 1 238 115▲ • Primary energy cost: contractual price escalations as well Primary energy (115 903) (112 119) 3▲ as higher OCGT and RE-IPP usage, combined with lower Net employee benefit expenses (32 887) (33 158) 1▼ Eskom coal production. Increase in average coal purchase Net impairment (loss)/reversal (1 367) 61 cost per ton limited to 3.2% (2020: 16.3%) Other expenses (24 018) (18 674) 29▲ • Employee benefit cost: no managerial salary increases EBITDA (before net fair value) 32 813 36 816 11▼ and headcount reduction through natural attrition and VSPs, Depreciation and amortisation expenses (27 016) (27 779) 3▼ offset by a 7% increase for bargaining unit under the three- Operating profit (EBIT) 5 797 9 037 36▼ year wage settlement agreement Net fair value and foreign exchange gain/(loss) on • Other expenses: increase in decommissioning provision 883 (4 626) 119▲ financial instruments and embedded derivatives costs due to a reduction in the long-term discount rate, as Net finance cost (31 509) (31 407) well as other once-off items; normalised increase of 1.6% Share of profit of equity-accounted investees 71 63 • Net fair value gain: recovery of the Rand to levels last Loss before tax (24 758) (26 933) seen before the SA credit rating downgrade in March 2020 Income tax credit 5 824 6 164 R1.56 billion recovered Long-term decommissioning provision discount rate Net loss for the year (18 934) (20 769) 9▼ from ABB South Africa through a voluntary disclosure 3.86% (2020: 4.82%) ▲ Income/gain increased ▼ Income/gain declined of overpayments relating to Year-end USD exchange rate ▼ Expense/loss declined ▲ Expense/loss increased the Kusile project R14.75 (2020: R17.82) 1. Restatements are disclosed in note 49 of the annual financial statements 18 FINANCIAL PERFORMANCE Sales and revenue Revenue, R million 2021 2020 % Sales and revenue • Unprecedented 13.8TWh decline in Local R billion TWh sales due to the COVID-19 lockdown. 202 429 196 868 3▲ 240 215 Despite this, electricity revenue grew International 10 383 12 229 15▼ 220 210 from a 8.76% tariff increase Gross electricity 200 205 • Reduction in sales across all customer 212 812 209 097 2▲ revenue 180 200 categories due to economic downturn Net revenue not 195 and depressed commodity prices (6 177) (6 107) 1▲ recognised (IFRS 15) 0 190 Capitalised 2016 2017 2018 2019 2020 2021 2022 • Decline of 16.5% in sales volumes in (3 991) (5 683) 30▼ Target Q1, recovered by year end due to the Sales, TWh Electricity revenue, R billion Net electricity phased easing of the lockdown and 202 644 197 307 3▲ revenue Sales volumes per recovery of commodity markets in Other revenue 1 682 2 161 22▼ 2021 2020 category, TWh % the latter half of the year Total revenue Distributors 82.4 86.0 4.1▼ 204 326 199 468 2▲ • Customers in many sectors Residential 10.9 11.3 3.0▼ temporarily halted or curtailed Commercial 9.7 10.5 7.5▼ operations, entered into business Sales volumes, GWh 2021 2020 % Industrial rescue or closed down 40.9 45.6 10.4▼ Local 178 355 190 446 6▼ Mining 27.0 28.7 6.0▼ • Demand has increased in 2022, International 13 497 15 189 11▼ Agriculture 5.5 5.8 5.4▼ although sales are not expected to Rail 1.9 2.6 25.7▼ recover to pre-COVID-19 levels in Total sales 191 852 205 635 7▼ International the medium term 13.5 15.2 11.1▼ ▲ Revenue/sales increased ▲ Non-recognition/capitalisation increased ▼ Revenue/sales declined ▼ Non-recognition/capitalisation declined Total 191.9 205.6 6.7▼ 19 FINANCIAL PERFORMANCE Primary energy expense • Energy produced reduced by 8.7TWh 2021 2020 to meet lower demand Cost, Sent out, Unit cost, Cost, Sent out, Unit cost, R/MWh Category R million GWh R/MWh R million GWh R/MWh % change • Despite lower production, total primary energy costs increased by 3.4% due to Coal and other 1 74 908 184 305 406 73 664 191 637 384 6▲ use of more expensive sources to Nuclear 1 040 9 903 105 1 330 13 252 100 5▲ alleviate supply constraints experienced OCGTs 2 4 125 1 457 2 778 4 350 1 328 3 231 14▼ during periods of the year Eskom generation 3 80 073 195 665 409 79 343 206 217 385 6▲ • Growth in own generation costs was contained due to a decline in coal and Renewable IPPs 27 921 12 821 2 178 24 810 11 247 2 206 1▼ nuclear production IPP OCGTs 4 2 911 704 3 579 3 250 711 4 049 12▼ • The increase in coal, nuclear and import Total IPPs 3 30 832 13 526 2 280 28 060 11 958 2 347 3▼ unit costs (▲) were largely due to Imports 3 4 998 8 812 567 4 716 8 568 550 3▲ inflationary and contractual increases Primary energy 115 903 218 003 532 112 119 226 742 494 8▲ • The decline in OCGT unit costs (▼) were as a result of favourable diesel ▼ Production cost declined ▲ Production cost increased price movements during the year 1. Excluding Medupi and Kusile pre-commissioning production of 5 735GWh (2020: 8 751GWh) for units synchronised to the grid, but not yet commissioned 2. OCGT unit cost is calculated on fuel and start-up cost, and excludes storage and demurrage charges. Storage and demurrage of R79 million (2020: R59 million) is included in the total cost shown 3. Note that the unit cost of IPPs and international purchases is based on the full cost of operation, whereas the unit cost of Eskom-owned generation is based only on the primary energy cost. Given that IPP and international purchases are treated as a variable cost in Eskom’s accounts, this treatment is considered appropriate 4. The IPP OCGT unit cost is calculated on fuel cost (variable cost) only, and excludes maintenance and capacity charges. Maintenance of R391 million (2020: R371 million) is included in the total cost shown 20 FINANCIAL PERFORMANCE Group statement of financial position at 31 March 2021 R million FINANCIAL COMMENTARY 2021 2020 1 % • Liquidity: constrained due to debt servicing and Property, plant and equipment and intangible assets 666 225 657 189 1▲ working capital requirements, and limited debt raising Working capital – inventory and current receivables 64 072 57 563 11▲ activities. The 2020 balance includes payments of R5.3 Liquid assets – cash and cash equivalents and billion which were delayed due investments 18 442 34 971 47▼ to technical IT issues Derivatives held for risk management 11 379 57 636 80▼ • Working capital: increase in coal stock, Other assets 2 21 530 15 864 36▲ maintenance spares and consumables due to the Generation recovery programme, as well as growth Total assets 781 648 823 223 5▼ in municipal and metro debt and diesel rebates Equity 3 215 836 186 068 16▲ • Derivatives: derivatives used in hedging activities Debt securities and borrowings 401 826 483 682 17▼ declined due to the strengthening of the Rand Working capital – current payables 52 288 54 904 5▼ • Equity: share capital of R56 billion issued in exchange for Government support, reduced by the loss Derivatives held for risk management 8 370 2 941 185▲ • Debt: R65.6 billion repaid, offset by R15.8 billion Other liabilities 4 103 328 95 628 8▲ debt raised. Foreign-denominated borrowings Total equity and liabilities 781 648 823 223 5▼ declined due to the strengthening of the Rand ▲ Asset increased ▼ Asset declined ▼ Liability declined ▲ Liability increased The largest movement is the reduction of R81.9 billion in debt securities and borrowings 1. Restatements are disclosed in note 49 of the annual financial statements 2. Mainly comprises future fuel and non-current receivables 3. Includes Government support of R56 billion received for the year (2020: R49 billion) 4. Mainly comprises non-current provisions, employee benefit obligations, contract liabilities and lease liabilities 21 FINANCIAL PERFORMANCE Net interest-bearing debt and net finance cost overview R million • Reliance on debt remains unsustainable, with gross 2021 2020 % finance costs the second largest cost after primary Debt securities and borrowings 401 826 483 682 17▼ energy Net market making liabilities 2 62 • Efforts to reduce Eskom’s debt burden were possible Cash and cash equivalents 1 (4 041) (22 990) 82▼ through Government support, leading to an overall reduction of R81.9 billion in gross debt Net derivatives held for risk management 1 (3 009) (54 695) 94▼ • Foreign-denominated borrowings (approximately 40% Net interest-bearing debt 394 778 406 059 3▼ of portfolio) impacted by the strengthening of the Rand • Derivatives held for risk management were similarly ▼ Asset declined ▼ Liability declined impacted by exchange rate movements Debt securities and R million 2021 2020 2 % 2021 borrowings, R billion Gross finance cost 45 625 48 601 6▼ Opening balance 483.7 Debt raised (net of Finance income (2 400) (2 610) 8▼ 15.8 commercial paper) Borrowing costs capitalised to assets (11 716) (14 584) 20▼ Debt repaid (65.6) Average cost of debt Exchange rate movement (35.4) Net finance cost 31 509 31 407 0.3▲ 9.66% ▲ (2020: 9.58%) Accruals, discounting, 3.3 ▲ Income/capitalisation increased ▼ Income/capitalisation declined interest and other Average investment return ▼ Expense declined ▲ Expense increased Closing balance 401.8 3.87% ▼ (2020: 6.81%) 1. In this table, assets are reflected as negative amounts 2. Restatements are disclosed in note 49 of the annual financial statements 22 FINANCIAL PERFORMANCE Funding plan progress 2021 2022 1 Guarantee utilisation at 31 July 2021 Funding Secured Funding Committed R billion R billion plan at year end plan 31 July 2021 350 DFIs 11.8 9.3 8.5 8.2 ECAs 0.7 0.1 0.5 0.5 271 Domestic bonds and notes >1 year 5.4 5.4 – – 32 47 Domestic bonds and notes ≤1 year 3.1 3.1 0.6 0.6 Total Government Drawn down Committed not Available Derivative loans 1.0 1.0 – – guarantees drawn down International bond – – 10.0 – Private placement 2 7.0 – 7.0 7.0 Debt maturity profile at 31 July 2021 4 Syndicated loan 2 10.0 – 15.0 – R billion Total funding 3 39.0 18.9 41.6 16.2 17 31 29 23 % secured 48% 39% 25 19 48 40 36 33 31 Debt servicing costs of R71 billion for 2022, reducing to an average of around 14 R60 billion per year to 2025. Capital repayments in 2026 and 2027 based on maturities Mar-22 Mar-23 Mar-24 Mar-25 Mar-26 Mar-27 Interest Capital 1. Funding sources targeted for 2022 are subject to change depending on requirements 2. Delays in Government guarantees meant that certain planned funding had to be postponed to the 2022 financial year 3. The table above includes gross commercial paper, whereas the debt raised figure in the statement of cash flows is net of commercial paper 4. Based on existing debt only, using forward rates and net of swaps 23 FINANCIAL PERFORMANCE Overview of cash flow movements KEY TAKEAWAYS Cash flows for the year ended 31 March 2021 R billion • Cash from operations 204 remains insufficient to meet debt (78) Primary energy, servicing and some controllable capital investment requirements • Cost savings alone (38) Primary energy, Debt servicing of non-controllable1 is not the answer, as R103 billion comprising Employee benefits Capital of R66 billion R75 billion in savings Debt service gap of (33) Interest of R37 billion ±R75 billion amounts to 43% of (13) Working capital without support operational outflows Repairs, maintenance (12) and operations • Eskom’s capital and (173) 31 (37) tariff structure have to be resolved to (6) (19) 16 ensure long-term (25) financial sustainability (66) 56 Government support of (75) R56 billion was Revenue Operating Operating Interest repaid Balance before Capital Balance Debt raised Debt repaid Debt service gap Government cashflows surplus investing expenditure before funding support received to alleviate and other some of the cash flow pressure 1. Non-controllable primary energy includes renewable IPP costs and environmental levies 2. Debt raised for the year is reported net of commercial paper in the statement of cash flows 24 FINANCIAL PERFORMANCE Arrear debt management Invoiced municipal arrear debt • Invoiced municipal arrear debt (including interest) % grew by R7.3 billion, adding liquidity pressure Our municipal debt management R billion 40 +26% 100 • Payment level of 83% by municipalities, excluding strategy focuses on 95 metros (2020: 79%). Payment level of 53% for CURRENT ACCOUNT MANAGEMENT 30 90 top 20 defaulting municipalities (2020: 49%) Stop defaulting and enforce payment of current amounts 20 35.3 85 • Progress achieved from our municipal debt 28.0 80 management strategy, as well as ring-fencing of FUTURE DEBT MANAGEMENT 10 19.9 13.6 75 6.0 9.4 arrear accounts, leading to lower interest charges Reduce and/or eliminate overdue debt 0 70 2016 2017 2018 2019 2020 2021 • The Political Task Team and Multi-disciplinary ARREAR DEBT MANAGEMENT Arrear municipal debt, R billion Municipal payment levels, % Revenue Committee are focusing their efforts on Prevent future defaulting through pre-emptive action the top 20 defaulting municipalities Soweto small power user (SPU) debt • Active partnering agreements are being pursued; Payment agreements at 31 March 2021 R billion % discussions under way with 45 municipalities 20 -41% 22 43 active payment agreements in place, with • Invoiced Soweto SPU debt (including interest) only 10 fully honoured 20 15 decreased to R7.5 billion, due to write-off of This includes 12 of the top 20 defaulting municipalities, 18 10 prescribed debt and “in duplum” interest. Of this, with only two fully honoured 18.2 12.8 15.4 12.8 16 only R536 million is deemed collectable and Non-adherence to payment agreements continues to 5 10.5 7.5 14 reflected as receivables in the financial statements contribute to the increase in arrear municipal debt 0 2016 2017 2018 2019 2020 2021 12 • In negotiation with the City of Johannesburg for the proposed transfer of customers to City Power On 28 April 2021, we entered into our first Total invoiced Soweto SPU debt, R billion Soweto SPU payment levels, % active partnering agreement with • Other than municipal and residential arrear debt, Msunduzi Local Municipality in KwaZulu-Natal only two large customers, with combined debt of 1. Soweto debt prior to 2019 includes prescribed debt and “in duplum” components that were not written off at the time R0.7 billion, owe amounts in excess of R100 million 25 FINANCIAL PERFORMANCE Capital expenditure • Total Eskom group funded capital of R24 billion (2020: R23.4 billion), with Total Eskom funded capital expenditure R9.3 billion used to expand the asset base through Group Capital projects R billion • Capital expenditure restricted to improve liquidity and also lower due to deferral of outages, resource constraints and a slowdown in activities as a result of the national lockdown 57 60 48 • Capital savings were targeted through Eskom’s cost saving initiatives to offset the 34 24 financial impact of lower sales volumes during the national lockdown 23 2016 2017 2018 2019 2020 2021 • Continued deferral of capital maintenance outages, refurbishment and replacement of infrastructure may lead to operational challenges • Current total estimated cost to correct defects of all Medupi and Kusile units, based on the best available information, ranges between R5.6 billion and R7.2 billion, excluding amount to be recovered from contractors • Medupi: R120.6 billion spent, cost to completion of R145 billion (excluding FGD). Remaining spend relates to balance of plant, including civil and mechanical work. Cost of Medupi FGD estimated at R38.4 billion • Kusile (pictured right): R141.1 billion spent, cost to completion of R161.4 billion (includes FGD) 26 FINANCIAL PERFORMANCE Processes to manage irregular and fruitless and wasteful expenditure Movement in irregular expenditure since 2017 • A centralised Loss Control Department has been established to R billion address PFMA violations and oversight of consequence management, including disciplinary actions, condonations and New Board 19.3 appointed; start recovery of losses of governance clean-up process 14.4 • Implemented revised PFMA reporting procedures to ensure that 11.7 all assessments and investigations into occurrences of irregular expenditure and fruitless and wasteful expenditure are performed 5.5 5.9 by this function from 1 April 2021 3.0 1.5 2.2 0.2 • Progress in obtaining condonations of irregular expenditure has 2017 2018 2019 2020 2021 been slow for a number of years. Until condoned, expenditure on Total irregular expenditure (including prior year clean-up and new) New irregular expenditure affected contracts remains irregular. Towards the end of the year, we received notice of condonation of 296 transactions valued at Irregular expenditure R9.5 billion breakdown, R billion 2021 New irregular No. of Opening balance expenditure incidents R million • We are working with DPE and National Treasury to ring-fence 36.3 Not an emergency Monthly 1 251 historical irregular expenditure to prioritise the close-out of these Prior year clean-up and 9.5 items and minimise the continued impact on our annual financial existing IE (pre-2021) Non-compliance with 25 380 New IE (2021) 2.2 tender process statements Recovered Not in accordance 1 260 (1.2) with NT instructions • A procurement roadmap is in place to enhance internal Condoned (9.5) procurement processes and contract management Other 23 267 Closing balance 37.2 Total > 50 2 158 27 FINANCIAL PERFORMANCE Segment information • Segment information for the three operating divisions is presented below. The “Other” column includes information for corporate and support functions, as well as subsidiary information and intergroup eliminations • Note that only selected line items are presented R million Generation Transmission Distribution Other Eskom group INCOME STATEMENT Total revenue 136 566 42 975 24 975 (190) 204 326 Primary energy (80 073) (35 818) (12) – (115 903) Employee benefit expense (10 942) (2 347) (11 583) (8 015) (32 887) Other expenses (24 016) (1 824) (9 566) 11 388 (24 018) Profit/(loss) before depreciation and amortisation expense and 22 371 3 123 4 644 2 675 32 813 fair value adjustments (EBITDA) Depreciation and amortisation expense (19 342) (3 063) (3 977) (634) (27 016) Profit before net finance cost 3 135 432 272 2 841 6 680 Net finance cost (23 350) (5 206) (2 769) (184) (31 509) (Loss)/profit before tax (20 215) (4 774) (2 497) 2 728 (24 758) BALANCE SHEET Total assets 542 661 78 969 115 931 44 087 781 648 Total liabilities 82 494 19 116 47 458 416 744 565 812 Additions to property, plant and equipment and intangible assets 16 722 3 160 6 249 (3 292) 22 839 28 OUTLOOK Financial outlook for 2022 financial year Actual Budget • Financial performance is expected to improve as a result Financial indicator March 2021 March 2022 of our turnaround plan Revenue, R million 204 326 235 879 • Despite a tariff increase of 15.06% for the 2022 financial year, a loss after tax is anticipated due to the lack of EBITDA, R million 32 813 45 113 cost-reflective tariffs, structural challenges and the EBITDA margin, % 16.06 19.13 continued impact of COVID-19. Our Corporate Plan assumes a return to profitability from 2026 Operating profit (EBIT), R million 5 797 13 978 • Demand is unlikely to recover to pre-COVID-19 levels Net loss after tax, R million (18 934) (15 155) for the next five years due to the economic recession Cash interest cover, ratio 0.85 1.79 • We are working with Government to explore avenues to stimulate sales and implement long-term negotiated Debt service cover, ratio 0.30 0.74 pricing agreements for the benefit of the economy Gross debt/EBITDA, ratio 13.96 11.30 • We are awaiting NERSA’s decisions on the MYPD 5 Debt/equity (including long-term provisions), ratio 2.03 2.09 application and proposals for the restructuring of tariffs, to be implemented from 1 April 2022 Free funds from operations (FFO) 9.53 9.57 as % of gross debt Performance improved Performance declined Government support of R31.7 billion received for the 2022 financial year, and Without Government support, cash from operations remains insufficient to service debt. Gearing a further R21.9 billion and R21 billion and solvency is expected to improve due to continued Government support, while profitability is committed for 2023 and 2024 expected to improve from growth in the tariff as well as cost containment measures 29 OUTLOOK Positive financial outlook • Require a reduction in debt and an improvement in EBITDA margin to be in a position to achieve independent financial sustainability • Financial results will be positively affected by an improvement in operational performance • Cost savings alone not sufficient to improve Eskom’s financial position • Government equity support has improved liquidity and key debt metrics by assisting with debt servicing, but will not resolve Eskom’s long-term financial viability • Leveraging relationship with Government for recovery of municipal and Soweto arrear debt • Migration towards a cost-reflective tariff is necessary to recover our cost of capital and, combined with cost efficiencies and reducing debt levels, will restore financial sustainability • Electricity Regulation Act amended to allow generation of up to 100MW without a licence. Customer-funded capacity and IPPs will address immediate supply/demand gap • Repurposing and repowering ageing power stations will serve to reduce electricity supply gap • Continued focus on Generation recovery plan and reliability maintenance recovery to improve plant performance • Since completing Medupi, focus shifts to first synchronisation of Kusile Unit 4 (June 2022) and recovery of Medupi Unit 4 • JET required to attract funding to shift to cleaner power generation, while managing the impact on jobs and livelihoods 30 Eskom group annual results for the year ended 31 March 2019 The results presentation is available at www.eskom.co.za/IR2021 BACKUP Court applications under way to pursue cost-reflective tariffs MYPD 3 RCA • Favourable court judgment received in June 2020 (2015, 2016 and 2017) • In January 2021, NERSA awarded an additional amount of R4.7 billion in respect of the RCA. We reviewed the decision in May 2021. NERSA Eskom application: R66.7 billion has not opposed this review NERSA decision: R32.7 billion MYPD 3 RCA (2018) • Eskom founding affidavit submitted in April 2020 Eskom application: R21.6 billion • NERSA served its opposing affidavit on 19 October 2020. A court date is awaited NERSA decision: R3.9 billion 2019 REVENUE DECISION • Favourable court judgment received in March 2020 Eskom application: R220 billion, or • Eskom submitted a supplementary tariff application of R5.4 billion in July 2020 effective increase of 19.9% NERSA decision: R190.4 billion, or • In January 2021, NERSA awarded an amount of R1.3 billion against the supplementary tariff application. We are taking this decision on review, effective increase of 5.23% in conjunction with the 2019 RCA decision 2019 RCA • Reasons for decision published in October 2020 Eskom application: R27.3 billion • In January 2021, based on detailed analysis of the reasons for decision, Eskom resolved to take the 2019 RCA decision as well as the decision NERSA decision: R13.3 billion on the supplementary application for the 2019 financial year on review • The founding affidavit was lodged in April 2021. NERSA has communicated its decision to oppose the review application, however, their opposing affidavit is awaited MYPD 4 REVENUE DECISION • Favourable court judgment received in July 2020 (2020, 2021 and 2022) • Court reviewed and set aside NERSA’s determination – Eskom to recover R69 billion in a phased manner Eskom application: effective annual • NERSA was granted leave to appeal the judgment in the Supreme Court of Appeal. NERSA lodged its appeal with the Supreme Court of Appeal increases of 15% NERSA decision: standard tariff increases in June 2021; a court date is awaited of 9.41%, 8.10% and 5.22% • In February 2021, pending finalisation of the appeal, a judgment was received from the High Court, allowing Eskom to recover R10 billion of The decision resulted in a shortfall of allowable revenue in the 2022 financial year R102 billion over MYPD 4 2020 RCA • RCA application of R8.4 billion submitted to NERSA in December 2020. A decision is expected during the 2022 financial year In June 2021, Eskom submitted the MYPD 5 application for financial years 2023 to 2025 in accordance with MYPD methodology. In addition, Eskom is awaiting NERSA’s decision on restructuring of tariffs, to be implemented from 1 April 2022 32