COMMENTARY ON INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2023 EAF worsened Loadshedding on Emissions performance further to deteriorated to 55.30% 183 days 0.92kg/MWhSO (Sep 2022: 102 days), despite extensive (Sep 2022: 0.45kg/MWhSO) (Sep 2022: 58.66%) OCGT usage Transmission network Distribution network 1 employee fatality (Sep 2022: 1 employee reliability performance remained stable and 1 contractor) performance declined Lost-time injury rate Net profit after tax Tariff increase of declined to reduced to 0.28 R1.6 billion 18.65% (Sep 2022: 9.61%) (Sep 2022: 0.26) (Sep 2022: R3.8 billion) Arrear municipal debt escalated further to R78 billion Gross debt securities and borrowings (including subordinated Government debt relief R70 billion committed for FY2024 Government loan) of (Mar 2023: R58.5 billion) R442.7 billion (Mar 2023: R423.9 billion) The following commentary provides an overview of our FINANCIAL PERFORMANCE financial and operational performance for the six months ended FINANCIAL RESULTS 30 September 2023, as well as progress on other key matters. Eskom recorded a net profit after tax of R1.6 billion for the Developments after the end of the period to the date of period (September 2022: R3.8 billion) while navigating a very approval have been discussed where relevant. challenging operating environment, with frequent supply constraints which continue to have an adverse impact on the This commentary accompanies the consolidated interim economy. EBITDA and profitability were negatively affected by group financial statements which are available at the impact of load curtailment and loadshedding on revenue www.eskom.co.za/investors/integrated-results/ through lower sales volumes because of unserved energy. Furthermore, production costs did not reduce in proportion to the decline in sales volumes and revenue, largely due to reliance Plant availability has continued to decline, resulting in more on more expensive sources of production such as OCGTs to frequent loadshedding at higher stages on average than in reduce the impact of loadshedding. the previous year, requiring stage 6 loadshedding on 47 days (September 2022: 6 days). Furthermore, we have continued Revenue grew to R158.6 billion (September 2022: R144.8 billion), to experience the adverse effects of these generation supply an increase of 9.5%, due to the favourable impact of the constraints on financial performance, mostly due to the reliance tariff increase for the 2024 financial year, partially offset by a on expensive production from Eskom-owned and independent decline in sales volumes. An amount of R10.7 billion could not power producer (IPP) open-cycle gas turbines (OCGTs). This be recognised as revenue in terms of accounting standards situation will continue until Eskom’s plant availability improves due to non-collectability from municipal and residential to expected levels and South Africa’s generation capacity customers (September 2022: R9.1 billion). Of this, R4.4 billion shortages are alleviated. was subsequently recognised as revenue on a cash basis once payment was received (September 2022: R3.8 billion). 1 The fifth multi-year price determination (MYPD 5), together with support Eskom’s operational stability following the protracted the outcome of successful court review applications, resulted dispute with organised labour, which led to industrial action and in an increase of 18.65% for standard tariff customers supplied widespread disruption of our operations in the prior year. We directly by Eskom from 1 April 2023, and an increase of 18.49% were able to contain the salary adjustment to inflationary levels for municipal and metropolitan distributors from 1 July 2023. and absorb the increase through savings in other areas. Sales volumes declined by 5.9% to 91.9TWh (September 2022: Other operating expenditure increased to R17.3 billion 97.6TWh), with local and international sales decreasing by (September 2022: R15 billion), mostly due to a R1.7 billion 5.1TWh and 0.6TWh respectively. The decline was largely increase in repairs and maintenance. Generation has a result of supply constraints, which led to loadshedding and continued to conduct extensive maintenance to address plant load curtailment, coupled with lower electricity demand from performance challenges in line with the Generation recovery customers at times due to difficult economic conditions and the plan, and additional unplanned maintenance has been required impact of increased embedded self-generation such as solar PV to address several critical plant components. and wind. However, sales volumes would have declined further without the increased use of OCGTs to minimise loadshedding. Altogether, these factors led to a slight decline in EBITDA We experienced a decline in sales across every major to R37.7 billion (September 2022: R38 billion) along with a customer category, apart from the mining sector that saw corresponding worsening in the EBITDA margin to 23.79% increased demand arising from higher production due to (September 2022: 26.21%). Profit before tax declined to favourable commodity prices. Ongoing risks for sales volumes R2.3 billion (September 2022: R5.3 billion) after accounting include continued generation supply constraints, the impact for growth in depreciation to R16.8 billion (September 2022: of embedded self-generation, as well as theft through illegal R15.8 billion) and net finance costs to R19.7 billion connections, meter tampering and ghost vending, which are (September 2022: R17.5 billion). recognised as non-technical losses. MANAGING LIQUIDITY Primary energy costs grew by 10.1%, increasing to R85.1 billion Liquidity remains one of our biggest short-term challenges, (September 2022: R77.3 billion). This was despite a 5.3% decrease limiting our ability to achieve financial and operational stability. in production, from 114.1TWh to 108TWh, largely arising from As mentioned, poor generating plant performance and poor generation performance at Eskom’s coal-fired power depressed economic conditions continue to have a direct stations, requiring the use of production from more expensive impact on financial sustainability, requiring us to make difficult OCGT and IPP sources. We experienced a 5.6% growth in coal trade-offs between liquidity, the utilisation of OCGTs to generation costs arising from inflationary cost pressures, driven minimise loadshedding for the benefit of the economy, as well by a 10.2% increase in the coal purchase price. Expenditure on as accommodating spend on our operational recovery and IPP programmes other than OCGTs increased to R17.4 billion, capital expenditure programmes. largely due to higher production of 8.9TWh from these sources (September 2022: R15.2 billion to produce 7.7TWh) Our financial performance also remains hampered by an inadequate tariff path, above-inflationary cost increases, non- A combined R18 billion was incurred to produce 2.9TWh payment by some customers as well as high debt servicing from Eskom-owned and IPP OCGTs (September 2022: costs. Our turnaround plan focuses on addressing these key R15.8 billion to produce 2.1TWh). Favourable diesel price areas through the Government debt relief, the municipal debt movements during the past six months enabled higher relief programme, as well as a migration to cost-reflective tariffs production from OCGTs than originally anticipated. Delays in and challenging NERSA’s decisions in court. other IPP programmes, such as the Standard Offer Programme, Emergency Generation Programme and the Risk Mitigation Eskom’s liquidity position increased from R7.5 billion at IPP Procurement Programme (RMIPPPP), which have not yet 31 March 2023 to R16.4 billion at 30 September 2023. To delivered capacity in line with expectations, further contributed ensure deleveraging of Eskom’s balance sheet over time, the to the reliance on OCGTs during the period. conditions of Government’s debt relief place strict restrictions on Eskom’s Generation capital expenditure and prohibit any Employee benefit costs increased to R17.4 billion new borrowings during the debt relief period, unless written (September 2022: R16.2 billion), largely due to a salary permission is granted by the Minister of Finance. Given adjustment of 7% for employees, except for top management, in the restriction on new borrowings, we anticipated facing the latter half of the 2022 calendar year. This was necessary to additional liquidity risk during the first quarter of the year while awaiting the first tranche of support from Government. R billion Ratio Ratio 50 20 3.5 3.0 40 15 2.5 30 2.0 10 20 1.5 1.0 5 10 0.5 0 0 0.0 Sep Sep Sep Sep Mar Sep Sep Sep Sep Sep Mar Sep Sep Sep Sep Sep Mar Sep 2019 2020 2021 2022 2023 2023 2019 2020 2021 2022 2023 2023 2019 2020 2021 2022 2023 2023 Debt/equity ratio Cash interest cover Free funds from operations, R billion EBITDA, R billion FFO as % of gross debt Gross debt/EBITDA Debt service cover 2 To manage this risk, we raised an additional R16 billion in implemented previous court-ordered decisions when making funding from private placements at the end of the 2023 this decision. The case was lodged in October 2023. financial year with the support of National Treasury, and received the related disbursements in early April 2023, which Regrettably, there has been no substantial progress on the bolstered our liquidity position. other court applications under way to review NERSA’s revenue and RCA determinations relating to the RCAs for the 2015 to Government has committed a total of R78 billion in debt relief 2018 financial years (MYPD 3), the revenue and RCA decisions for the 2024 financial year, of which R16 billion was received in for 2019 as well as the RCA decision for 2020 (MYPD 4). August, R20 billion in October and R5 billion in December 2023, The legal processes for these review applications are still under with the remainder to flow by year end. The support initially way, which collectively relate to the recovery of an estimated takes the form of a subordinated loan, to be converted to R50 billion. However, we expect favourable outcomes equity once we have demonstrated compliance with the related as our applications adhere to the principles of the MYPD conditions. No such conversions have taken place to date as methodology. These legal processes do take time and, given the compliance with the conditions is assessed retrospectively in the way that the regulatory process works, any amounts awarded quarter after receipt of the funds. in our favour can only be recovered through future revenue and RCA decisions from NERSA. This means that Eskom must The conditions do allow Eskom to continue to draw down on carry the shortfall for the time being, which does have adverse existing facilities. Drawdowns from existing development finance implications for our liquidity. institution (DFI) funding amounted to R3.6 billion for the period, out of a total DFI drawdown plan of R10.6 billion for the year. We submitted our RCA application for the 2022 financial year in April 2023, with a balance of R23.9 billion in favour of Eskom. At 30 September 2023, the gross book value of outstanding Based on the published timelines, NERSA is expected to debt securities and borrowings stood at R442.7 billion announce its decision in December 2023. (March 2023: R423.9 billion), including the R16 billion subordinated loan received from Government during the Non-payment of municipal debt is a systemic challenge to period. Other than that, the increase was largely due to fair the electricity industry as a whole. Eskom has pursued a value movements arising from the weakening of the Rand, multipronged strategy aimed at recovering the municipal arrear which had a negative impact on the balance of foreign- debt owed, although the problem has continued to escalate denominated borrowings. We repaid interest of R18.1 billion over the years. At 30 September 2023, total municipal arrear and capital of R30.9 billion during the period from surplus debt stood at R70 billion (March 2023: R58.5 billion). The top operating cash flows, aided by Government’s debt relief. 20 defaulting municipalities constitute 76.7% of total invoiced municipal arrear debt (March 2023: 77.6%). The debt repayment profile of existing debt only, net of swaps and based on forward rates, remains pressured over Government’s municipal debt relief programme aims to the medium term. Total interest payments of R135 billion and support our existing municipal debt strategy and assist in capital payments of R198 billion are required over the next addressing our arrear debt challenges over the next three five years to March 2028. These repayments can only be met years. The programme will see Eskom, in consultation with continued Government debt relief in the short to medium with National Treasury, write off the arrear debt balance term, with a migration to cost-reflective tariffs in the longer outstanding at 31 March 2023 of eligible municipalities term, supported by a continued focus on cost containment. over three financial years, subject to compliance with the Credit rating agencies have acknowledged Government’s programme’s conditions. On a case-by-case basis, National commitment to providing continued support to Eskom. In Treasury may consider including the growth in arrear debt for May 2023, Fitch affirmed Eskom's credit rating, with a stable certain municipalities from 1 April 2023 up to the date they outlook, based on the announcement of the debt relief are approved to join the programme. No write-offs have been arrangement. Following promulgation of the Eskom Debt Relief processed to date as the municipalities must comply with the Act in July 2023, Moody’s and S&P Global upgraded Eskom’s conditions for 12 months for Eskom to process the first third credit ratings with a stable outlook in September 2023 and of the debt write-off. The programme is expected to improve November 2023 respectively. The stable outlooks reflect payment levels and the settlement of current accounts by these rating agencies’ view that our creditworthiness will continue to municipalities, which will lead to an improvement in Eskom’s benefit from Government’s support, leading to a strengthening operational cash flows over time. of our liquidity position as the balance sheet is deleveraged. By 30 November 2023, a total of 52 municipalities have In terms of revenue outlook, we believe that NERSA’s revenue received approval or conditional approval from National decision of 18.65% and 12.74% for 2024 and 2025, while not Treasury for municipal debt relief. The arrear debt fully addressing the lack of cost-reflective tariffs, will assist balance of these municipalities amounted to R50.2 billion in migrating the tariff path to more appropriate levels and at 31 March 2023, representing around 86% of the total will greatly support our financial sustainability going forward. municipal arrear debt balance at that date. A further As reported previously, the Democratic Alliance and the 20 defaulting municipalities, accounting for R6.5 billion of the South African Local Government Association have taken arrear debt at 31 March 2023, have applied for municipal debt NERSA’s decision under review. The hearing took place in relief and are awaiting approval from National Treasury. September 2023, although the judgement is awaited. Active partnering, where Eskom renders support to capacitate In May 2023, NERSA published its reasons for decision for the municipalities to improve collection and maintain municipal regulatory clearing account (RCA) balance of R204 million infrastructure, will further support the recovery plans for these in favour of the consumer for the 2021 financial year. We municipalities. There are five active partnering agreements in had applied for an RCA balance of R10.7 billion in favour of place, with Phumelela, Msunduzi, Maluti-A-Phofung, Raymond Eskom. We are reviewing NERSA’s decision on a similar basis Mhlaba and Bela-Bela municipalities. Although agreement has been as previous RCA decisions, as it is evident that NERSA has not reached with Maluti-A-Phofung, implementation is still pending. 3 OPERATIONAL PERFORMANCE in declining EAF. The high EUF can be alleviated by adding PLANT AND NETWORK PERFORMANCE additional dispatchable capacity and improving Generation Average unplanned unavailability over the winter period plant reliability. (May to August 2023) was 16 513MW, higher than the Winter Plan’s base case assumption of 15 000MW, resulting Progress on the Generation recovery plan continues and will in loadshedding up to stage 6 on 183 days during the period need to be driven with increased focus. Nevertheless, average (September 2022: 102 days), or 3 578 hours, which translates partial load losses of 6 708MW have increased significantly to an effective 149.1 days (September 2022: 1 653 hours compared to the previous year (September 2022: 5 790MW), equivalent to 68.9 days). By the end of winter, actual unplanned and remain significantly worse than target. Outage slips unavailability had exceeded the maximum assumption of the contributed 3.89% to overall UCLF (September 2022: 3.46%), Winter Plan more than 12.7% of the time. while post-outage UCLF of 32.68% also performed worse than target (September 2022: 36.20%). During the period, only 35.29% of outages met their due date (September 2022: Stage 2 5 52.38%), significantly below the target of 80%. Stage 3 67 The coal fleet recorded 282 trips during the period, less than the previous year (September 2022: 395 trips). The boiler Stage 4 46 tube failure rate (failure per unit per year using a 12-month moving average) reduced to 2.01 for commercial units Stage 5 18 (September 2022: 2.41), with boiler tube failures contributing 2.48% to UCLF (September 2022: 2.98%). The boiler tube Stage 6 47 failure rate has shown an upward trend over the past five years, largely attributed to the maintenance backlog due to outage deferrals and deferred midlife-refurbishments due to constrained Incidents such as the generator explosion at Medupi Unit 4 capital funding. in August 2021, the smokestack duct failure in October 2022 affecting Kusile Units 1, 2 and 3, the Kusile Unit 5 air heater fire Contribution to UCLF, % in September 2022 delaying synchronisation and commissioning of the unit, and the Koeberg Unit 1 extended planned outage means that over 4 000MW was offline for an extended period, further adding to the constrained system and resulting in 12.00 elevated levels of loadshedding being required. 14.44 As mentioned earlier, Eskom and IPP open-cycle gas turbines 34.18% (OCGTs) continued to be utilised frequently to support the power system and limit the stages of loadshedding. Eskom and IPP OCGTs generated 2.9TWh during the period (September 2022: 2.1TWh), at load factors exceeding 20%. 3.81 Plant availability (EAF) at 55.30% remains lower than the 1.61 2.32 previous year (September 2022: 58.66%), and significantly Full load losses Unit trips worse than the shareholder compact target of 65%. The Outage slips Partial load losses decrease in EAF compared to the previous year is largely Boiler tube leaks due to an increase in unplanned losses (UCLF) to 34.18% (September 2022: 30.86%), offset by a slight decrease At 30 September 2023, two stations had stock below their in other load losses (OCLF) to 0.99% (September 2022: individual minimum stockholding level (March 2023: four). 1.50%). Planned maintenance increased slightly to 9.53% Furthermore, normalised coal stock of 34 days (excluding coal (September 2022: 8.97%). The average energy utilisation factor stock at Medupi) has recovered above the target of 32 days (EUF) was over 90% at all 14 coal-fired stations, substantially (March 2023: 29 days). Coal-related load losses contributed above the expected average EUF performance of around 75% 0.80% OCLF during the period (September 2022: 0.62%), over the long term. This has negative technical implications as with most losses being experienced at Matla. We continue to reflected in the increasing plant breakdowns (UCLF) resulting work with mines on initiatives to improve coal quality. 80 % 40 Events/hours Minutes 5 1.0 kg/MWh sent out ℓ/kWh sent out 1.50 4 0.8 1.45 60 30 3 0.6 1.40 40 20 2 0.4 1.35 20 10 1 0.2 1.30 0 0 0 0.0 1.25 Sep Sep Sep Sep Mar Sep Sep Sep Sep Sep Mar Sep Sep Sep Sep Sep Mar Sep 2019 2020 2021 2022 2023 2023 2019 2020 2021 2022 2023 2023 2019 2020 2021 2022 2023 2023 SAIFI SAIDI EAF PCLF UCLF System minutes lost for events <1 minute Relative particulate emissions Water consumption 4 Koeberg Unit 1 was shut down on 10 December 2022 for At Medupi, the focus remains on completing the remaining outage 126, a planned long-duration outage which included scope on the balance of plant work, executing major plant the replacement of the three steam generators. The outage defect repairs and resolving claims towards project close-out. was significantly delayed due to resourcing challenges and unexpected technical challenges experienced as part of Since inception, the completed interventions to correct the the steam generator replacement project. The unit was major plant defects have resulted in a steady improvement in synchronised to the grid on 18 November 2023 and is the availability and reliability of the units at Medupi and Kusile. undergoing commissioning testing at various power levels with Medupi’s EAF for the period exceeded 80% (excluding the the unit connected to the grid. Only on successful completion impact of Unit 4 that is offline for turbine repairs following the of all the tests, will the unit be commercially available. incident in August 2021), an improvement of around 20% since the partial correction of the major plant defects, with some Koeberg Unit 2 has remained online since the reactor trip in units running at or near full load. The performance of Kusile April 2023. The unit went off on outage on 11 December 2023 Unit 4 is steadily improving. to undergo a similar long refuelling and maintenance outage to replace its three steam generators. Ultimately, the correction of the major plant defects will ensure that the plant achieves contractual levels of The long-term operation (LTO) activities to enable Koeberg to performance. The first phase of the partial correction of operate for another 20 years beyond 2024 continue according the major plant defects at Medupi and Kusile is forecast to to schedule. The National Nuclear Regulator (NNR) has be completed by December 2023. Additional plant defect completed the first round of public engagement, with further corrections, undertaken by Eskom with or without third party public participation to follow, with the NNR’s decision due by involvement, is forecast for completion after 2027, depending July 2024. The NNR requested a consolidated LTO readiness on the extent of technical solutions and unit outage report, which we submitted in October 2023. We are also availability under the Eskom outage plan. driving completion of the commitments that were stipulated in the safety case to support long-term operation. If approved, As part of Phase 1 of the battery energy storage systems this would allow Unit 1 to operate until July 2044 and Unit 2 project, construction at Hex site was completed at the end of until November 2045. June 2023. The site was officially opened on 9 November 2023, with commissioning imminent. Construction is under way at To mitigate any delay in the regulatory process, Eskom Pongola and Elandskop sites with construction completion submitted a request to the NNR to separate the licensing planned for December 2023; commissioning is forecast for the of each unit as part of the LTO activities. If the licence is not fourth quarter of the 2024 financial year. Phase 2 of the project separated, both Unit 1 and Unit 2 will need to be shut down in is on hold given the debt relief conditions and unavailability of July 2024. The request is to enable Unit 2’s licensed end-of- Eskom funds from own reserves. life to be aligned to its 40-year life ending in November 2025. We have responded to the NNR’s comments on the request, ENVIRONMENTAL PERFORMANCE and their final decision is awaited. Relative particulate emissions performance has continued to deteriorate and is significantly worse than target, at As part of the licence requirements, we are working with 0.92kg/MWh sent out (September 2022: 0.45kg/MWh sent the NNR to finalise the details of a ring-fenced nuclear out). Kendal continues to contribute significantly to the poor decommissioning fund to ensure sufficient financial resources performance, together with Kriel and Matla, with the stations will be available to fund Koeberg’s decommissioning costs. contributing almost half of the total emitted particulate matter within Generation. By September 2023, 14 units were Transmission system minutes performed within target operating in non-compliance with average monthly emission at 1.71 (September 2022: 1.07), with no major incidents limits, placing 8 588W at risk of being shut down by the being recorded during the period (September 2022: one). authorities (March 2023: 13 units accounting for 7 691MW). Transmission expansion and strengthening projects have Load losses are taken by non-performing units and where been delayed to the late placement of contracts and delays in possible, poor performing units are placed on outage to delivery of equipment such as transformers. However, projects undertake repairs. under the Transmission Development Plan are being prioritised to unlock 37GW of grid capacity over the next decade. Following the failure of the west chimney stack at Kusile in Distribution network performance remained stable and October 2022, the Department of Fisheries, Forestry and continued to perform better than target on all measures, the Environment (DFFE) authorised Eskom in June 2023 although distribution energy losses remain outside target to construct temporary stacks to operate units until the at 9.64% (September 2022: 9.56%). permanent stack can be constructed. The temporary stack structures were completed ahead of time, and Unit 3 was NEW BUILD PERFORMANCE brought back to service on 30 September 2023, followed Despite the setback suffered because of the gas air heater fire by Unit 1 on 16 October 2023, thereby alleviating pressure at Kusile Unit 5 in September 2022, commissioning activities on the power system. Unit 2 returned to service on continue. Repairs were completed at the end of August 2023, 28 November 2023. It is envisaged that permanent repairs and the unit is expected to synchronise to the grid by to the west stack will be completed by December 2024. December 2023, with commercial operation six months later. The DFFE approval to Kusile Power Station for the At Kusile Unit 6, execution of key commissioning activities is postponement of the compliance timeframes in terms of the under way, with first synchronisation forecast for August 2024, National Environmental: Air Quality Act, 2004, was appealed pending delivery of key outstanding boiler and turbine materials by the Centre for Environmental Rights on behalf of several to site. Several key commissioning milestones have been organisations and neighbouring landowners. The DFFE Minister successfully achieved to support first synchronisation. upheld the positive decision of the DFFE in September 2023, 5 with the Nkangala District Municipality accepting the Minister’s Following three rounds of negotiations through the Central decision a few days later. The station is now able to legally Bargaining Forum (CBF), Eskom and its trade unions (NUM, operate subject to conditions which it must comply with. NUMSA and Solidarity) reached a collective agreement covering the period from July 2023 to June 2026. The Regarding the Minimum Emission Standards (MES) appeals, we agreement catered for a 7% salary adjustment per year for all continue to engage with the National Environmental Consultative bargaining unit employees and a 7% increase in the housing and Advisory forum, appointed by the DFFE Minister to advise on allowance, as well as a once-off taxable payment of R10 000 the MES appeals. The forum’s terms of reference were extended for the first two years. This is the first time in a more than a until August 2024. After receiving a recommendation, the DFFE decade that all parties have reached a collective agreement minister will rule on the appeals and, where necessary, DFFE will during the CBF negotiation process, which is testament to the issue revised decisions to Eskom. While the forum’s work on the strengthening of partnerships with Eskom’s trade unions. MES appeals is under way, stations continue to operate under the existing licence conditions. Eskom subsequently approved a 7% adjustment in managerial remuneration costs from October 2023, of which a 4% In respect of the Kendal air quality criminal case, Eskom cost-of-living adjustment was guaranteed for all managerial appeared in court on 1 November 2023, and pleaded employees and the remaining 3% was discretionary, to retain not guilty to three of the four counts. After initial high performers and correct income differentials. administrative discussions, the matter was adjourned until 18 to 20 March 2024, at which stage the prosecution is SOCIETAL IMPACT expected to begin presenting its case. During the period, only procurement spend with black youth- owned suppliers achieved targeted levels. Total preferential Water performance of 1.45ℓ/kWh sent out continued to procurement spend, as well as spend with black-owned and deteriorate (September 2022: 1.33ℓ/kWh sent out). Poor water black women-owned suppliers, qualifying small and exempted management practices due to operational challenges persist micro enterprises, and suppliers owned by black persons living across the fleet, negatively impacting water performance. A with disabilities, continued to perform below target, mainly total of 16 water-related legal contravention incidents have been due to expired supplier B-BBEE certificates and procurement registered year-to-date due to non-compliance with the National spend related to IPP contracts that are not B-BBEE compliant. Water Act, 1998 (September 2022: 26). Focused monitoring These contracts were concluded by the Department of Mineral of the effective implementation of water management action Resources and Energy (DMRE) in terms of the renewable IPP plans, both at power station level and by the Generation programme. Eskom is working with DMRE to develop sector Environmental Compliance Steering Committee, have not yet led codes for IPPs, to mitigate the negative effect on procurement to a significant decrease compared to the previous financial year, equity performance. although some improvement has been recorded. We completed 40 362 connections under DMRE’s The Medupi flue gas desulphurisation (FGD) project is in the electrification programme (September 2022: 35 159). We development phase. In March 2023, the Board Investment further committed corporate social investment spend of and Finance Committee conditionally approved a revised R41.8 million during the period, assisting 174 669 beneficiaries strategy to pursue wet FGD. Initial funding for the project (September 2022: R32.5 million to 282 810 beneficiaries). has been confirmed given the reprioritisation of internal funding. The request for proposal will be issued to the market READINESS FOR LEGAL SEPARATION towards the end of January 2024. The World Bank requires Eskom is implementing legal separation as set out in the that the FGD pollution abatement technology be installed Roadmap for Eskom in a Reformed Electricity Supply Industry issued and has acknowledged an extension of the Medupi FGD by the Department of Public Enterprises (DPE) in October 2019, implementation deadline to 30 September 2029. A more by implementing business separation and forming separate accurate programme will be provided to the World Bank after wholly owned subsidiaries to house Transmission, Distribution the contract is awarded to the selected supplier. and Generation. Several dependencies and risks have delayed the progress against the initial timelines. These have been PEOPLE AND SAFETY considered and attended to, and are at varying stages The group headcount increased slightly to 39 987 at the end of of completion. the period (September 2022: 39 871), with numbers bolstered by learner intake under the Youth Employment Services programme. As reported previously, the functional separation of all line divisions was completed by 31 March 2022 with reporting lines Racial equity at senior management level improved somewhat established through divisional boards. However, the timelines to 77.19% (September 2022: 76.95%), while racial equity to meet the target for operationalisation and commencement at professional and management level increased to 84.37% of trade for the National Transmission Company South Africa (September 2022: 82.67%). Gender equity also improved, to (NTCSA) have not materialised, due to various external 42.69% at senior management level (September 2022: 42.51%) dependencies. and 41.56% at professional and middle management level (September 2022: 40.54%). Disability equity at group level has Commencement of trade by NTCSA is now targeted for declined slightly to 2.90% (September 2022: 2.94%). April 2024, although this is still considered to be at risk, given the following dependencies: The group lost-time injury rate (including occupational • Lender consent has not yet been granted by all lenders, diseases) deteriorated slightly to 0.28 (September 2022: 0.26). although we recently received approval from the World Bank Tragically, we suffered one employee fatality during the period • Regarding the issuing of licences, following delays in the (September 2022: one employee and one contractor). Any life licence decisions, NERSA issued the three licences in lost in Eskom’s service is unacceptable and must be prevented. November 2023 We offer our sincere condolences to the affected family, friends and colleagues. • NTCSA has to be designated as buyer from external sources by DMRE 6 • Conclusion of various governance requirements, with a PROGRESS ON GOVERNANCE CLEAN-UP key issue being the appointment by DPE of independent The Board remains committed to enhancing systems, directors for NTCSA controls, resources, policies and procedures as well as • Amendment of the Electricity Regulation Act, 2006 reporting structures to address this significant focus area. These enhancements are not yet effective as there are still Once all these dependencies have been met, there are also areas that require significant improvement. Our compliance several legislative requirements under the Companies Act, with the Public Finance Management Act, 1999 (PFMA) is 2008 that have to be complied with. being continuously assessed. We have identified gaps and areas where PFMA compliance has been a challenge and will Regarding the legal separation of Distribution, DPE continue to analyse the root causes of non-compliance to has conditionally approved the second application for address them effectively. A detailed action plan to address the operationalising Distribution in August 2023; Distribution audit qualification is under development with clear objectives, continues to engage with DPE to address the conditions. timelines and responsible individuals and departments, progress Furthermore, work has commenced on the remainder of the on which will be monitored regularly. primary activities – completion of the merger agreement, licensing and lender engagement – which are dependent on Eskom has established a dedicated state capture task team, Transmission operationalisation and therefore, the Distribution supported by external legal counsel, which has reviewed timeline is sequenced accordingly. As such, the Distribution the report of the Zondo Commission and developed an divisional board supported corporatisation of the National implementation plan to address the recommendations of the Electricity Distribution Company South Africa (NEDCSA) Commission. The implementation plan has been submitted by June 2024, readiness for operationalisation in July 2025 to the shareholder, together with periodic updates. The task and commencement of trade in November 2025, subject to team has undertaken several steps within Eskom’s control the various dependencies. to implement the recommendations, the highlight being disciplinary processes undertaken against delinquent suppliers. The due diligence report for Generation has been finalised and Based on the task team’s assessment and recommendations, completed. Given the approved corporate structure, the legal 32 delinquent suppliers have been removed from Eskom’s separation of Generation is dependent upon the establishment supplier data base for periods ranging from one to 10 years, and operationalisation of a new holding company, in respect of with recommendations to be made to National Treasury for which we await direction from DPE on the way forward. The their removal from the central supplier database. Suspended revised plans target NewCo establishment in 2024/25 and legal sanctions have been implemented against 30 suppliers. separation of Generation in 2025. The timing of the establishment of NewCo is dependent on legislation and Government policy. Furthermore, an independent legal firm has been appointed to assist the Board in addressing matters arising from allegations OTHER MATTERS made in the Fivaz report and determining any further steps BOARD AND EXECUTIVE CHANGES required. The firm has obtained a copy of the report and is Several executives are acting in vacancies in key executive consolidating the findings to aid in the Board’s investigation. positions, chief among which are Mr Calib Cassim, Group Chief Financial Officer (GCFO) as acting Group Chief Executive An assessment of Eskom’s crime risk management landscape, (GCE), Mr Martin Buys as acting GCFO, Ms Natasha Sithole as in partnership with an independent service provider, is in acting Group Executive: Government and Regulatory Affairs progress. This initiative is aimed at identifying risks related and Ms Winile Madonsela as acting Group Executive: Legal and to bribery and corruption, financial crime, physical asset Compliance. crime, cyber-crime and money laundering. We are also in the process of appointing a service provider to assist with artificial Recruitment processes are under way to address the vacancies intelligence analysis to identify further transactions to be and provide leadership stability. At the same time, Eskom investigated. is also finalising investigations into executives who are on precautionary suspension. OUTLOOK Eskom’s financial performance in the first half of the year tends Regarding the recruitment of the GCE, the Board submitted a to be better than the second half, with the winter period revised shortlist in line with the shareholder’s requirements in typically characterised by higher tariffs and sales volumes than October 2023. After careful consideration by the shareholder, the summer period. In addition, less maintenance is performed Cabinet has approved the appointment of Mr Dan Marokane as in winter to ensure adequate supply to sustain the increased GCE; he is expected to join Eskom no later than 31 March 2024. demand and to offset lower winter production by renewable IPPs. Given this seasonality, there is considerable cost pressure Further to this, Mr Calib Cassim’s term ends in December 2023. in the second half of the financial year, driven by higher summer The Board and Mr Cassim are in discussions to renew his maintenance requirements and costs associated with ensuring employment agreement, with the intention that he returns to his security of supply such as the use of expensive OCGTs. role as GCFO once Mr Marokane takes office. This is being done in consultation with DPE. The Board and Mr Cassim have agreed Despite achieving a profit in the first six months, by the end of in principle on the terms, and the agreement is being finalised. the year we expect to record an after-tax loss of R23.2 billion, as poor generating plant performance, the lack of cost- Mr Mpho Makwana stepped down as Chairman of the Board at reflective tariffs, high debt service costs and non-payment by the end of October 2023, having served one year in the position. some customers continue to contribute to the loss-making Dr Mteto Nyati was appointed as Chairman in his stead. position in the short term. 7 As we have said before, Government’s debt relief solution will Even with these improvements, we still require about go a long way towards improving financial sustainability and 4 000MW–6 000MW of base-load capacity on the grid, to liquidity in the short to medium term, the impact of which ease supply constraints and stabilise the grid, creating the space we have already seen in the recent ratings upgrades. We are for much-needed maintenance of our generating plant. focused on ensuring compliance with the conditions to ensure that the support, which will initially come in the form of a In pursuit of legal separation, we continue with bilateral subordinated loan subject to market interest rates, is converted engagements with lenders regarding the legal separation process to equity, to realise the full benefit thereof. Coupled with this, and associated timelines. The transfer of the Transmission we need to execute our turnaround plan to improve financial Division to NTCSA is subject to certain suspensive conditions and operational performance in the medium to long term. being met, including obtaining applicable lender consent. Sales of 185.3TWh are expected by year end, which is We remain committed to South Africa’s Just Energy Transition in 3.1TWh or 1.6% lower than the previous financial year due the long term to decrease greenhouse gas emissions, promote to continued supply constraints. Primary energy costs are job creation through reskilling, and stimulate economic growth, expected to increase by about 15% year-on-year, due to thereby focusing on long-term growth and sustainability. We are increased production from OCGTs, IPPs and inflationary reviewing our 2035 station shutdown plan, given the prevailing increases. The average coal purchase price per ton is expected system constraints, to ensure the optimised shutdown of to increase by 15.8% year-on-year due to double-digit growth stations that are approaching their end of economic life, while in costs in the mining sector and an increase in more expensive mitigating the associated socio-economic impacts on affected short- and medium-term coal contracts to recover coal stock communities. We are also exploring opportunities for public- days at various sites. private partnerships to fund JET initiatives, with the support of National Treasury. Under the conditions of the Eskom Debt We are managing Eskom-owned OCGT costs within the Relief Act, 2023, greenfield generation projects may be pursued budget of R19.7 billion, with higher production being offset with written approval from the Minister of Finance. by a lower price due to favourable diesel price movements. However, if system performance were to deteriorate further Despite the many challenges facing us, we simply must place or fuel prices increase beyond budget assumptions, an increase Eskom on a more sustainable footing through our turnaround in the OCGT budget may be required to ensure adequate fuel plan, for which we require the support of all our stakeholders. supply is available to maintain grid stability. Any increase will Ultimately, this requires resolving Eskom’s capital and tariff be funded from cash from operations, including through cost structures, delivering on our operational recovery to improve savings in other areas. the performance of our plant and alleviate the constrained power system, and bringing much-needed structural reforms to As mentioned, the Standard Offer Programme, Emergency the electricity industry. Generation Programme and RMIPPPP – intended to provide additional capacity and offset usage of expensive OCGTs – have unfortunately been delayed. IPP OCGTs are expected FORWARD-LOOKING STATEMENTS to operate at a load factor of almost 24% against a budget Certain statements in this commentary regarding Eskom’s of around 12%, to augment supply due to delays in other IPP business operations may constitute forward-looking programmes, by reallocating the unutilised budget from these statements. These include all statements other than programmes. statements of historical fact, including those regarding the financial position, business strategy, management plans and Altogether, the forecast indicates that we will spend around objectives for future operations. R32.2 billion on our own and IPP-owned OCGTs to the end of the financial year. The situation is expected to continue until Forward-looking statements constitute current such time as plant reliability improves, the country’s generation expectations based on reasonable assumptions, data or capacity increases and the shortage is alleviated. methods that may be imprecise and/or incorrect and that may be incapable of being realised. As such, they are Therefore, our overall focus remains on improving the not intended to be a guarantee of future results. Actual performance of the Generation fleet, to reduce the level of results could differ materially from those projected in any loadshedding being experienced by the country and to limit forward-looking statements due to various events, risks, the amount spent on supplementing supply through expensive uncertainties and other factors. Eskom neither intends nor diesel plant. We are targeting to reach an EAF level of 65% by assumes any obligation to update or revise any forward- March 2024, assisted by the return to service of three units looking statements contained in this commentary, whether at Kusile discussed earlier. However, the return to service of as a result of new information, future events or otherwise. Koeberg Unit 1 was followed by Unit 2 going off on extended outage on 11 December 2023, with no immediate net benefit to the system. Although adding to the system constraints in the short term, these extended outages will enable Koeberg to operate reliably for an additional 20 years, subject to the NNR extending the licence, which will benefit the system in the long term. The imminent synchronisation to the grid of Kusile Unit 5 will further assist the grid, even though the unit will not be operating at full power until commercial operation in mid-2024. As indicated, Kusile Unit 6 is planned to be synchronised to the grid in the second half of the 2024 calendar year, at around the same time as the expected return to service of Medupi Unit 4 using a second-hand stator. 8