Reviewed condensed group interim financial statements for the six months ended 30 September 2016 Contents Currency of financial statements 1 Approval of the condensed group interim financial statements 2 Independent auditors' review report on the condensed group interim financial statements to the Minister of Public Enterprises 3 Condensed group statement of financial position 4 Condensed group income statement 5 Condensed group statement of comprehensive income 5 Condensed group statement of changes in equity 6 Condensed group statement of cash flows 7 Selected notes to the condensed group interim financial statements: Note 1 General information 8 2 Basis of preparation 8 3 Significant accounting policies 8 4 Critical accounting estimates and judgements 9 5 Segment information 10 6 Issuances, repurchases and repayments of debt securities and borrowings and share capital 10 7 Dividend paid 10 8 Significant events and transactions 11 9 Seasonality of interim results 11 10 Revenue 11 11 Primary energy 11 12 Employee benefit expense 11 13 Finance cost 11 14 Income tax 11 15 Fair value classification and measurement 12 16 Material events subsequent to 30 September 2016 18 17 Restatement of comparatives 19 The reviewed condensed group interim financial statements for the six months ended 30 September 2016 have been prepared under the supervision of the chief financial officer, A Singh CA(SA). These condensed group interim financial statements have been independently reviewed by the group's external auditors and were published on 3 November 2016. Currency of financial statements The reviewed condensed group interim financial statements are expressed in South African rand (R). The following are approximate values of the rand to one unit of the selected currencies: Average Reporting date mid-spot rate 30 September 31 March 30 September 30 September 31 March 30 September 2016 2016 2015 2016 2016 2015 Euro 16.32 15.21 13.93 15.46 16.77 15.52 United States dollar (USD) 14.53 13.79 12.55 13.79 14.71 13.87 Pound sterling (United Kingdom) 19.99 20.74 19.36 17.91 21.13 21.05 Swiss franc 14.93 14.15 13.17 14.21 15.35 14.23 Japanese yen 0.14 0.12 0.10 0.14 0.13 0.12 Reviewed condensed group interim financial statements 1 Approval of the condensed group interim financial statements Basis of preparation The condensed group interim financial statements from page 4 to page 19 for the six months ended 30 September 2016 have been prepared in accordance with the recognition and measurement requirements of International Financial Reporting Standards (IFRS), the presentation and disclosure requirements of International Accounting Standards (IAS) 34 Interim Financial Reporting, and in the manner required by the Companies Act. Going concern The board of directors (the board) has made an assessment of the ability of the group to continue as a going concern in the foreseeable future. The board reviewed the performance for the period ended 30 September 2016 and the cash flow forecast for the 12 months ending 30 September 2017. The board continues to critically examine the group's activities and costs in order to balance its cash flow requirements. There is continued focus on the Design-to-Cost (DTC) initiative to identify cost saving and efficiency opportunities. The board is pursuing funding options to implement the group's borrowing programme. In assessing the ability to raise funds, the current economic climate as well as Eskom's and the sovereign's credit ratings have been taken into account. Based on the above, the board is satisfied that Eskom and the group have access to adequate resources and facilities to be able to continue its operations for the foreseeable future. Accordingly the board has continued to adopt the going-concern basis in preparing the financial statements. Approval In the opinion of the board, based on the information available to date, the condensed group interim financial statements fairly present the financial position of the group at 30 September 2016 and the results of the operations and cash flow information for the six months then ended. The condensed group interim financial statements have been approved by the board and signed on its behalf by: B Ngubane B Molefe A Singh Chairman Group chief executive Chief financial officer 27 October 2016 27 October 2016 27 October 2016 2 Eskom Holdings SOC Ltd Independent auditors' review report on the condensed group interim financial statements to the Minister of Public Enterprises Introduction We have reviewed the accompanying condensed group interim financial statements of Eskom Holdings SOC Ltd set out on pages 4 to 19, which comprise the condensed group statement of financial position at 30 September 2016, and the condensed group income statement, statements of comprehensive income, changes in equity and cash flows for the six months then ended and selected explanatory notes. The board's responsibility for the financial statements The board is responsible for the preparation and presentation of these condensed group interim financial statements in accordance with the recognition and measurement requirements of IFRS, the presentation and disclosure requirements of IAS 34 Interim Financial Reporting, the requirements of the Companies Act and for such internal control as the directors determine is necessary to enable the preparation of interim financial statements that are free from material misstatement, whether due to fraud or error. Auditors' responsibility for the financial statements Our responsibility is to express a conclusion on these condensed group interim financial statements based on our review. Scope of review We conducted our review in accordance with the International Standard on Review Engagements 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity. A review of the condensed group interim financial statements consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters which might be identified in an audit. Accordingly, we do not express an audit opinion. Conclusion Based on our review, nothing has come to our attention that causes us to believe that the accompanying condensed group interim financial statements of Eskom for the six months ended 30 September 2016, are not prepared, in all material respects, in accordance with the recognition and measurement requirements of IFRS, the presentation and disclosure requirements of IAS 34 Interim Financial Reporting and the requirements of the Companies Act. A Mthimunye SizweNtsalubaGobodo Inc Director Registered auditor 31 October 2016 20A Morris Street East Woodmead 2191 Reviewed condensed group interim financial statements 3 Condensed group statement of financial position at 30 September 2016 Reviewed Audited Reviewed1 30 September 31 March 30 September 2016 2016 2015 Rm Rm Rm Assets Non-current assets 589 873 565 475 535 912 Property, plant and equipment and intangible assets 554 555 521 174 486 730 Future fuel supplies 8 672 10 502 8 940 Payments made in advance 2 250 2 579 3 266 Derivatives held for risk management 21 800 27 600 24 659 Trade, finance lease, loan and other receivables 605 601 9 285 Investment in securities 1 533 2 485 2 527 Other assets 458 534 505 Current assets 90 282 86 268 75 820 Inventories 20 540 17 821 17 329 Taxation – 93 152 Investment in securities and financial trading assets 15 387 11 585 14 246 Payments made in advance 2 738 3 891 3 342 Derivatives held for risk management 427 2 582 4 705 Trade, finance lease, loan and other receivables 20 879 21 842 23 200 Cash and cash equivalents 30 311 28 454 12 846 Non-current assets held-for-sale 8 925 8 942 – Total assets 689 080 660 685 611 732 Equity Capital and reserves 186 581 180 563 171 117 Liabilities Non-current liabilities 426 776 404 343 370 862 Debt securities and borrowings 317 267 306 970 281 616 Embedded derivatives 5 186 5 410 5 590 Derivatives held for risk management 4 544 2 862 840 Deferred tax 23 138 21 000 22 375 Deferred income and payments received in advance 18 660 18 142 16 727 Employee benefit obligations 13 664 12 405 12 277 Provisions 33 381 32 841 30 194 Trade, finance lease and other payables 10 936 4 713 1 243 Current liabilities 74 037 73 971 69 753 Debt securities and borrowings 15 653 15 688 15 833 Embedded derivatives 1 708 1 615 1 499 Derivatives held for risk management 4 660 2 011 515 Employee benefit obligations 5 607 5 190 4 126 Provisions 8 404 11 415 10 356 Deferred income and payments received in advance 5 838 4 333 4 942 Trade, finance lease and other payables 31 082 32 409 30 820 Taxation – 60 – Financial trading liabilities 1 085 1 250 1 662 Non-current liabilities held-for-sale 1 686 1 808 – Total liabilities 502 499 480 122 440 615 Total equity and liabilities 689 080 660 685 611 732 1. Restated. Refer to note 17. 4 Eskom Holdings SOC Ltd Condensed group income statement for the six months ended 30 September 2016 Reviewed Reviewed1 Audited six months six months year ended ended ended 30 September 30 September 31 March 2016 2015 2016 Note Rm Rm Rm Revenue 10 97 131 87 876 163 395 Other income 752 1 369 2 390 Primary energy 11 (40 380) (40 999) (84 728) Employee benefit expense 12 (15 758) (13 806) (29 257) Net impairment loss (615) (122) (1 170) Other expenses (9 635) (8 723) (18 663) Profit before depreciation and amortisation expense and net fair value (loss)/gain (EBITDA) 31 495 25 595 31 967 Depreciation and amortisation expense (9 998) (7 609) (16 531) Net fair value (loss)/gain on financial instruments (1 875) 3 (455) Profit before net finance cost 19 622 17 989 14 981 Net finance cost (6 535) (3 498) (7 919) Finance income 2 766 1 542 3 447 Finance cost 13 (9 301) (5 040) (11 366) Share of profit of equity-accounted investees, net of tax 18 28 43 Profit before tax 13 105 14 519 7 105 Income tax 14 (3 749) (4 172) (2 488) Profit for the period2 9 356 10 347 4 617 Condensed group statement of comprehensive income for the six months ended 30 September 2016 Reviewed Reviewed Audited six months six months year ended ended ended 30 September 30 September 31 March 2016 2015 2016 Rm Rm Rm Profit for the period2 9 356 10 347 4 617 Other comprehensive (loss)/income (3 338) 4 332 6 508 Items that may be reclassified subsequently to profit or loss (3 039) 4 076 5 903 Available-for-sale financial assets 56 (15) (57) Cash flow hedges (4 262) 5 683 8 226 Foreign currency translation differences on foreign operations (10) (5) 21 Income tax thereon 1 177 (1 587) (2 287) Items that may not be reclassified subsequently to profit or loss (299) 256 605 Re-measurement of post-employment medical benefits (415) 351 840 Income tax thereon 116 (95) (235) Total comprehensive income for the period2 6 018 14 679 11 125 1. Restated. Refer to note 17. 2. A nominal amount is attributable to the non-controlling interest in the group. The remainder is attributable to the owner of the group. Reviewed condensed group interim financial statements 5 Condensed group statement of changes in equity for the six months ended 30 September 2016 Share Equity Cash flow Available- Unrealised Foreign Accumulated Total capital reserve hedge for-sale fair value currency profit reserve reserve reserve translation reserve Rm Rm Rm Rm Rm Rm Rm Rm Balance at 31 March 2015 – 30 520 5 699 4 (8 854) 18 89 777 117 164 Restated profit for the period – – – – – – 10 347 10 347 Other comprehensive income/(loss), net of tax – – 4 092 (11) – (5) 256 4 332 Share capital issued 10 000 – – – – – – 10 000 Conversion of subordinated loan from the shareholder to share capital 60 000 (30 520) – – – – (206) 29 274 Transfer between reserves – – – – (816) – 816 – Balance at 30 September 2015 70 000 – 9 791 (7) (9 670) 13 100 990 171 117 Loss for the period – – – – – – (5 730) (5 730) Other comprehensive income/(loss), net of tax – – 1 831 (30) – 26 349 2 176 Share capital issued 13 000 – – – – – – 13 000 Transfer between reserves – – – – (7 042) – 7 042 – Balance at 31 March 2016 83 000 – 11 622 (37) (16 712) 39 102 651 180 563 Profit for the period – – – – – – 9 356 9 356 Other comprehensive (loss)/income, net of tax – – (3 069) 40 – (10) (299) (3 338) Transfer between reserves – – – – 801 – (801) – Balance at 30 September 2016 83 000 – 8 553 3 (15 911) 29 110 907 186 581 6 Eskom Holdings SOC Ltd Condensed group statement of cash flows for the six months ended 30 September 2016 Reviewed Reviewed Audited six months six months year ended ended ended 30 September 30 September 31 March 2016 2015 2016 Rm Rm Rm Cash flows from operating activities Profit before tax 13 105 14 519 7 105 Adjustment for non-cash items 21 583 10 873 29 904 Changes in working capital (2 611) (3 488) (2 201) Cash generated from operations 32 077 21 904 34 808 Net cash flows (used in)/from derivatives held for risk management (382) 845 643 Interest received 592 457 2 322 Interest paid (17) (4) (11) Income taxes paid (337) (162) (520) Net cash from operating activities 31 933 23 040 37 242 Cash flows used in investing activities Proceeds from disposal of property, plant and equipment and intangible assets 86 320 360 Acquisitions of property, plant and equipment and intangible assets (26 000) (24 149) (54 175) Expenditure on future fuel supplies (304) (270) (1 754) Net cash flows used in investment in securities and financial trading assets (22) (2 041) (1 886) Increase in payments made in advance (118) (101) (274) Expenditure incurred on provisions (4 296) (637) (3 054) Net cash flows from/(used in) derivatives held for risk management 780 (158) 771 Interest received 581 455 1 202 Other cash flows from investing activities 31 63 220 Net cash used in investing activities (29 262) (26 518) (58 590) Cash flows from financing activities Debt securities and borrowings raised 21 910 16 519 41 052 Payments made in advance to secure balances raised (626) (155) (555) Debt securities and borrowings repaid (4 248) (5 594) (11 123) Share capital issued – 10 000 23 000 Net cash flows (used in)/from derivatives held for risk management (2 502) 377 11 847 Decrease in finance lease payables (21) (54) (157) Increase in investment in securities and financial trading assets and liabilities (2 755) (3 710) (1 621) Interest received 1 473 550 1 275 Interest paid (14 082) (10 503) (22 791) Net cash (used in)/from financing activities (851) 7 430 40 927 Net increase in cash and cash equivalents 1 820 3 952 19 579 Cash and cash equivalents at beginning of the period 28 454 8 863 8 863 Foreign currency translation (10) (5) 21 Effect of movements in exchange rates on cash held 22 36 75 Non-current assets held-for-sale 25 – (84) Cash and cash equivalents at end of the period 30 311 12 846 28 454 Reviewed condensed group interim financial statements 7 Selected notes to the condensed group interim financial statements for the six months ended 30 September 2016 1. General information Eskom Holdings SOC Ltd (Eskom), a state-owned company and holding company of the group, is incorporated and domiciled in the Republic of South Africa. Eskom is a vertically integrated operation that generates, transmits and distributes electricity to industrial, mining, commercial, agricultural, redistributors (metropolitan and other municipalities), and residential customers and to international customers in southern Africa. Eskom also purchases electricity from independent power producers (IPPs) and international suppliers in southern Africa. These represent the significant activities of the group. The business focus of the subsidiaries is to primarily support the electricity business. 2. Basis of preparation The reviewed condensed group interim financial statements of Eskom as at and for the six months ended 30 September 2016 comprise the company, its subsidiaries, joint ventures, associates and structured entities (together, the group). The reviewed condensed group interim financial statements do not include all of the information required for full financial statements and should be read in conjunction with the Eskom Holdings SOC Ltd 31 March 2016 group annual financial statements. The annual financial statements of the group as at and for the year ended 31 March 2016 are available for inspection at the company's registered office and on the Eskom website at www.eskom.co.za. The condensed group interim financial statements are prepared in accordance with the recognition and measurement requirements of IFRS, the presentation and disclosure requirements of IAS 34 Interim Financial Reporting, and in the manner required by the Companies Act. The condensed group interim financial statements are prepared on the historical-cost basis except for the following items which are measured at fair value: • derivatives held for risk management • embedded derivatives • investment in securities • financial trading assets • financial trading liabilities The board of directors (the board) has made an assessment of the ability of the group to continue as a going concern in the foreseeable future. The board reviewed the performance for the period ended 30 September 2016 and the cash flow forecast for the 12 months ending 30 September 2017. The board continues to critically examine the group's activities and costs in order to balance its cash flow requirements. There is continued focus on the DTC initiative to identify cost saving and efficiency opportunities. The board is pursuing funding options to implement the group's borrowing programme. In assessing the ability to raise funds, the current economic climate as well as Eskom's and the sovereign's credit ratings have been taken into account. Based on the above, the board is satisfied that Eskom and the group have access to adequate resources and facilities to be able to continue its operations for the foreseeable future. Accordingly the board has continued to adopt the going-concern basis in preparing the financial statements. 3. Significant accounting policies The accounting policies are consistent with those applied in the audited financial statements as at 31 March 2016 except for the revised statements and interpretations of IFRS which have become effective during the six months ended 30 September 2016. These changes had no or minimal impact on the interim financial statements. 8 Eskom Holdings SOC Ltd 4. Critical accounting estimates and judgements The significant estimates and judgements made by management in applying the accounting policies and the key sources of estimation uncertainty were substantially the same as those applied to the financial statements as at and for the year ended 31 March 2016 except for embedded derivatives as detailed below. 4.1 Embedded derivatives The forward electricity price used to value the embedded derivatives at 30 September 2016 is based on the National Energy Regulator of South Africa Multi-Year Price Determination 3 tariff increase of 8% for 2017/18, whereafter a forecast return on the regulatory asset base is used until maturity. Another key estimate in the valuation of embedded derivatives includes the forecast United States (US) production price index (PPI) which is based on an internal model which simulates US PPI using other observable market prices such as the South African consumer price index and ZAR/USD forward exchange rates. The contracted electricity price used to value embedded derivatives is based on a combination of the factors in the table below over the contracted period. Forecast sales volumes are based on the most likely future sales volumes based on past trends and taking into account future production plans in consultation with industry specific experts and key customer executives. The fair value of embedded derivatives takes into account the inherent uncertainty relating to the future cash flows of embedded derivatives, such as liquidity, model risk and other economic factors. The following valuation assumptions for the future electricity price curve discussed above for the valuation of embedded derivatives were used and are regarded as the best estimates by management: Period ended 30 September 2016 (reviewed) Input Unit 2016 2017 2018 2019 2020 2021 Aluminium USD per ton 1 661 1 685 1 732 1 785 1 844 1 905 Volatility Year-on-year (ratio) 0.20 0.20 0.20 0.20 0.20 0.20 Rand interest rate Continuous actual/365 days (%) 7.21 7.29 7.81 7.72 7.35 7.44 Dollar interest rate Annual actual/365 days (%) 0.48 0.86 1.26 1.29 1.02 1.08 United States PPI Year-on-year (%) (0.48) 1.75 1.52 2.10 2.06 1.49 Rand/USD Rand per USD 13.79 14.25 15.19 16.15 17.23 18.41 Period ended 31 March 2016 (audited) Input Unit 2016 2017 2018 2019 2020 2021 Aluminium USD per ton 1 485 1 555 1 606 1 663 1 729 1 790 Volatility Year-on-year (ratio) 0.18 0.18 0.18 0.18 0.18 0.18 Rand interest rate Continuous actual/365 days (%) 7.06 8.24 7.70 7.93 8.09 8.25 Dollar interest rate Annual actual/365 days (%) 0.51 1.30 0.86 0.98 1.10 1.21 United States PPI Year-on-year (%) (2.07) 1.86 1.66 1.75 1.65 1.71 Rand/USD Rand per USD 14.70 15.76 16.86 17.79 19.11 20.90 Period ended 30 September 2015 (reviewed) Input Unit 2015 2016 2017 2018 2019 2020 Aluminium USD per ton 1 551 1 588 1 655 1 725 1 796 1 864 Volatility Year-on-year (ratio) 0.19 0.19 0.19 0.19 0.19 0.19 Rand interest rate Continuous actual/365 days (%) 6.06 7.26 7.06 7.38 7.62 7.83 Dollar interest rate Annual actual/365 days (%) 0.24 0.97 0.75 0.99 1.21 1.40 United States PPI Year-on-year (%) (5.30) 2.18 2.01 1.51 2.23 2.36 Rand/USD Rand per USD 13.87 14.31 15.25 16.26 17.35 19.76 Reviewed condensed group interim financial statements 9 Selected notes to the condensed group interim financial statements (continued) for the six months ended 30 September 2016 5. Segment information Gene- Trans- Distri- Energy Group Group All other Reallocation Group ration mission bution purchases/ customer capital segments and inter- sales services segment transactions Rm Rm Rm Rm Rm Rm Rm Rm Rm 30 September 2016 (reviewed) External revenue – – 591 5 847 90 693 – 662 (662) 97 131 Inter-segment revenue/ recoveries 62 664 5 906 13 917 5 095 (87 405) (65) 5 890 (6 002) – Total revenue 62 664 5 906 14 508 10 942 3 288 (65) 6 552 (6 664) 97 131 Profit/(loss) before tax 7 541 2 046 3 930 (223) 1 227 (2 127) 1 446 (735) 13 105 Income tax – – – – – – (3 948) 199 (3 749) Profit/(loss) for the period 7 541 2 046 3 930 (223) 1 227 (2 127) (2 502) (536) 9 356 Segment assets 209 673 47 520 75 126 11 327 18 377 239 902 109 887 (22 732) 689 080 Segment liabilities 48 550 1 592 29 827 13 262 16 557 14 506 400 235 (22 030) 502 499 30 September 2015 (reviewed) External revenue – – 484 3 284 84 108 – 568 (568) 87 876 Inter-segment revenue/ recoveries 58 828 5 045 12 867 5 263 (81 847) – 6 008 (6 164) – Total revenue 58 828 5 045 13 351 8 547 2 261 – 6 576 (6 732) 87 876 Profit/(loss) before tax 7 499 1 972 3 700 (89) 1 813 (2 502) 1 669 457 14 519 Income tax – – – – – – (4 044) (128) (4 172) Profit/(loss) for the period 7 499 1 972 3 700 (89) 1 813 (2 502) (2 375) 329 10 347 Segment assets 177 836 44 507 70 535 1 251 17 244 227 822 98 706 (26 169) 611 732 Segment liabilities 43 595 1 642 26 374 2 747 16 504 18 819 357 071 (26 137) 440 615 31 March 2016 (audited) External revenue – 9 1 621 8 105 153 660 – 1 251 (1 251) 163 395 Inter-segment revenue/ recoveries 110 536 7 232 20 809 10 949 (149 237) (87) 11 205 (11 407) – Total revenue 110 536 7 241 22 430 19 054 4 423 (87) 12 456 (12 658) 163 395 Profit/(loss) before tax 2 254 759 2 538 (190) 2 149 (3 337) 2 824 108 7 105 Income tax – – – – – – (2 449) (39) (2 488) Profit/(loss) for the period 2 254 759 2 538 (190) 2 149 (3 337) 375 69 4 617 Segment assets 182 994 46 018 73 205 5 257 15 862 249 778 112 876 (25 305) 660 685 Segment liabilities 48 513 1 789 27 671 6 581 15 509 18 859 386 317 (25 117) 480 122 6. Issuances, repurchases and repayments of debt securities and borrowings and share capital 6.1 Debt securities and borrowings The nature of the group's issuances, repurchases and repayments of debt securities and borrowings are consistent with those reported previously. The debt raised and repaid by the group is disclosed in the statement of cash flows. 6.2 Share capital There was no change in share capital during the six months ended 30 September 2016. 7. Dividend paid No dividend was paid to the shareholder during the six months ended 30 September 2016 nor in the comparative periods presented. 10 Eskom Holdings SOC Ltd 8. Significant events and transactions The following significant movements occurred in the six months ending 30 September 2016: 8.1 Property, plant and equipment Property, plant and equipment increased by R33 billion as a result of the continuing capital expansion programme as well as a new IPP finance lease asset. 8.2 Derivatives held for risk management The net derivatives held for risk management decreased by R12 billion arising mainly from the strenghtening of the rand against the euro and United States dollar. 8.3 Finance lease payables Finance lease payables increased by R6 billion because of a new IPP power supply agreement. 9. Seasonality of interim results The sale of electricity is subject to seasonal fluctuations where revenue is normally higher during the first six months of the financial year (winter months) as compared to the summer months, both in terms of tariff energy charges and peak demand. Reviewed Reviewed Audited six months six months year ended ended ended 30 September 30 September 31 March 2016 2015 2016 Rm Rm Rm 10. Revenue Electricity 96 474 87 484 161 688 Other 657 392 1 707 97 131 87 876 163 395 Electricity revenue of R2 395 million (30 September 2015: R868 million; 31 March 2016: R1 472 million) was not recognised as it was assessed that there is a high probability that the related economic benefits will not materialise. Eskom continues to actively pursue recovery of these amounts. 11. Primary energy Own generation costs 26 018 28 151 57 594 Environmental levy 4 167 4 091 8 120 International electricity purchases 1 396 2 149 3 660 Independent power producers 8 697 6 501 15 106 Other 102 107 248 40 380 40 999 84 728 12. Employee benefit expense Gross employee benefit expense 17 461 15 387 32 523 Capitalised to property, plant and equipment (1 703) (1 581) (3 266) 15 758 13 806 29 257 13. Finance cost Gross finance cost 18 783 15 394 30 792 Capitalised to property, plant and equipment (9 482) (10 354) (19 426) 9 301 5 040 11 366 14. Income tax Income tax for the interim period is recognised based on management's best estimate of the weighted average annual income tax rate expected for the full financial year which is applied to the pre-tax income of the interim period. Reviewed condensed group interim financial statements 11 Selected notes to the condensed group interim financial statements (continued) for the six months ended 30 September 2016 15. Fair value classification and measurement 15.1 Accounting classification and fair value Held-for- Loans and Available- Liabilities Other Total Fair trading receivables for-sale at amortised assets and carrying value cost liabilities amount Rm Rm Rm Rm Rm Rm Rm 30 September 2016 (reviewed) Financial assets Investment in securities – – 13 455 – – 13 455 13 455 Government bonds – – 3 530 – – 3 530 3 530 Negotiable certificates of deposit – – 9 925 – – 9 925 9 925 Loans receivable1 – 94 – – – 94 94 Derivatives held for risk management 195 – – – 22 032 22 227 22 227 Foreign exchange contracts 106 – – – 18 124 124 Cross-currency swaps 69 – – – 22 014 22 083 22 083 Commodity forwards 11 – – – – 11 11 Credit default swaps 9 – – – – 9 9 Finance lease receivables1 – – – – 462 462 462 Trade and other receivables1 – 20 810 – – – 20 810 20 810 Financial trading assets 3 465 – – – – 3 465 3 465 Repurchase agreements 1 900 – – – – 1 900 1 900 Listed shares 1 209 – – – – 1 209 1 209 Government bonds 356 – – – – 356 356 Cash and cash equivalents – 30 311 – – – 30 311 30 311 Bank balances – 20 195 – – – 20 195 20 195 Unsettled deals – (223) – – – (223) (223) Fixed deposits – 10 339 – – – 10 339 10 339 3 660 51 215 13 455 – 22 494 90 824 90 824 Financial liabilities Debt securities and borrowings – – – 332 920 – 332 920 308 797 Eskom bonds – – – 138 652 – 138 652 135 389 Promissory notes – – – 50 – 50 53 Commercial paper – – – 3 979 – 3 979 3 538 Eurorand zero coupon bonds – – – 4 747 – 4 747 4 697 Foreign bonds – – – 55 188 – 55 188 56 651 Development financing institutions – – – 83 969 – 83 969 64 234 Export credit facilities – – – 37 067 – 37 067 35 675 Other loans – – – 9 268 – 9 268 8 560 Embedded derivatives – – – – 6 894 6 894 6 894 Derivatives held for risk management 5 173 – – – 4 031 9 204 9 204 Foreign exchange contracts 3 049 – – – 964 4 013 4 013 Cross-currency swaps 943 – – – 3 067 4 010 4 010 Commodity forwards 1 – – – – 1 1 Credit default swaps 1 180 – – – – 1 180 1 180 Finance lease payables – – – – 10 183 10 183 10 722 Trade and other payables1 – – – 30 513 – 30 513 30 513 Financial trading liabilities 1 085 – – – – 1 085 1 085 Short-sold government bonds 75 – – – – 75 75 Repurchase agreements 1 010 – – – – 1 010 1 010 6 258 – – 363 433 21 108 390 799 367 215 12 Eskom Holdings SOC Ltd Held-for- Loans and Available- Liabilities Other Total Fair trading receivables for-sale at amortised assets and carrying value cost liabilities amount Rm Rm Rm Rm Rm Rm Rm 31 March 2016 (audited) Financial assets Investment in securities – – 10 226 – – 10 226 10 226 Government bonds – – 3 769 – – 3 769 3 769 Negotiable certificates of deposit – – 6 457 – – 6 457 6 457 Loans receivable1 – 80 – – – 80 80 Derivatives held for risk management 1 130 – – – 29 052 30 182 30 182 Foreign exchange contracts 1 008 – – – 1 151 2 159 2 159 Cross-currency swaps 82 – – – 27 901 27 983 27 983 Commodity forwards 31 – – – – 31 31 Credit default swaps 9 – – – – 9 9 Finance lease receivables1 – – – – 499 499 499 Trade and other receivables1 – 21 839 – – – 21 839 21 839 Financial trading assets 3 844 – – – – 3 844 3 844 Repurchase agreements 2 044 – – – – 2 044 2 044 Listed shares 1 187 – – – – 1 187 1 187 Government bonds 613 – – – – 613 613 Cash and cash equivalents – 28 454 – – – 28 454 28 454 Bank balances – 28 452 – – – 28 452 28 452 Unsettled deals – 2 – – – 2 2 4 974 50 373 10 226 – 29 551 95 124 95 124 Financial liabilities Debt securities and borrowings – – – 322 658 – 322 658 282 770 Eskom bonds – – – 126 466 – 126 466 120 216 Promissory notes – – – 46 – 46 45 Commercial paper – – – 4 822 – 4 822 4 822 Eurorand zero coupon bonds – – – 4 462 – 4 462 3 358 Foreign bonds – – – 58 815 – 58 815 54 739 Development financing institutions – – – 82 976 – 82 976 58 602 Export credit facilities – – – 37 597 – 37 597 34 465 Other loans – – – 7 474 – 7 474 6 523 Embedded derivatives – – – – 7 025 7 025 7 025 Derivatives held for risk management 2 928 – – – 1 945 4 873 4 873 Foreign exchange contracts 1 482 – – – 106 1 588 1 588 Cross-currency swaps 382 – – – 1 839 2 221 2 221 Credit default swaps 1 064 – – – – 1 064 1 064 Finance lease payables1 – – – – 3 928 3 928 3 928 Trade and other payables1 – – – 32 922 – 32 922 32 922 Financial trading liabilities 1 250 – – – – 1 250 1 250 Short-sold government bonds 227 – – – – 227 227 Repurchase agreements 1 023 – – – – 1 023 1 023 4 178 – – 355 580 12 898 372 656 332 768 1. The fair values of these financial instruments approximate their carrying amounts. The effect of discounting is not expected to be material. Reviewed condensed group interim financial statements 13 Selected notes to the condensed group interim financial statements (continued) for the six months ended 30 September 2016 15. Fair value classification and measurement (continued) 15.1 Accounting classification and fair value (continued) Held-for- Loans and Available- Liabilities Other Total Fair trading receivables for-sale at amortised assets and carrying value cost liabilities amount Rm Rm Rm Rm Rm Rm Rm 30 September 2015 (reviewed) Financial assets Investment in securities – – 11 258 – – 11 258 11 258 Government bonds – – 3 852 – – 3 852 3 852 Negotiable certificates of deposit – – 7 406 – – 7 406 7 406 Loans receivable1 – 8 911 – – – 8 911 7 395 Secured by mortgages – 8 716 – – – 8 716 7 266 Other – 195 – – – 195 129 Derivatives held for risk management 4 328 – – – 25 036 29 364 29 364 Foreign exchange contracts 3 249 – – – 1 169 4 418 4 418 Cross-currency swaps 1 060 – – – 23 867 24 927 24 927 Commodity forwards 10 – – – – 10 10 Credit default swaps 9 – – – – 9 9 Finance lease receivables2 – – – – 500 500 500 Trade and other receivables2 – 23 059 – – – 23 059 23 059 Financial trading assets 5 515 – – – – 5 515 5 515 Repurchase agreements 3 881 – – – – 3 881 3 881 Listed shares 1 132 – – – – 1 132 1 132 Government bonds 502 – – – – 502 502 Cash and cash equivalents – 12 846 – – – 12 846 12 846 Bank balances – 8 628 – – – 8 628 8 628 Unsettled deals – (857) – – – (857) (857) Fixed deposits – 3 804 – – – 3 804 3 804 Gilt carries – 1 271 – – – 1 271 1 271 9 843 44 816 11 258 – 25 536 91 453 89 937 Financial liabilities Debt securities and borrowings – – – 297 449 – 297 449 282 910 Eskom bonds – – – 118 296 – 118 296 115 910 Promissory notes – – – 43 – 43 46 Commercial paper – – – 7 369 – 7 369 8 971 Eurorand zero coupon bonds – – – 4 194 – 4 194 3 322 Foreign bonds – – – 55 454 – 55 454 52 909 Development financing institutions – – – 68 205 – 68 205 52 671 Export credit facilities – – – 36 314 – 36 314 33 828 Other loans – – – 7 574 – 7 574 15 253 Embedded derivatives – – – – 7 089 7 089 7 089 Derivatives held for risk management 960 – – – 395 1 355 1 355 Foreign exchange contracts 116 – – – 24 140 140 Cross-currency swaps 2 – – – 371 373 373 Commodity forwards 2 – – – – 2 2 Credit default swaps 840 – – – – 840 840 Finance lease payables2 – – – – 482 482 482 Trade and other payables2 – – – 30 159 – 30 159 30 159 Financial trading liabilities 1 662 – – – – 1 662 1 662 Short-sold government bonds 264 – – – – 264 264 Repurchase agreements 1 398 – – – – 1 398 1 398 2 622 – – 327 608 7 966 338 196 323 657 1. The fair value of loans receivable is based on what a market participant would be willing to pay to acquire the loans. This participant would not have the ability to garnish salaries, thus increasing the probability of default resulting in a lower fair value than the group's carrying value. 2. The fair values of these financial instruments approximate their carrying amounts. The effect of discounting is not expected to be material. 14 Eskom Holdings SOC Ltd Valuation processes The group has a controlled framework with respect to the measurement of fair values. The framework includes a valuation team that reports to the chief financial officer, and has overall responsibility for all significant fair value measurements. The valuation team regularly reviews significant unobservable inputs and valuation adjustments. If third party information, such as broker quotes or pricing services, is used to measure fair value, then the valuation team assesses and documents the evidence obtained from the third parties to support their conclusion that such valuations meet the requirements of IFRS, including the level in the fair value hierarchy that the resulting fair value estimate should be classified to. Principal markets The group is involved in various principal markets because of the unique funding activities undertaken. The fair value is determined by each participant in the different principal markets. The principal markets are: • capital and money markets • development financing institutions • export credit agencies 15.2 Fair value hierarchy There has been no change in the valuation technique applied. The hierarchy levels are defined as follows: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (ie as prices) or indirectly (ie derived from prices). Level 3: Inputs for the financial asset or liability that are not based on observable market data (unobservable inputs). The group recognises transfers between levels of the fair value hierarchy at the end of the reporting period during which the transfers have occurred. Eskom’s policy for determining when transfers between levels in the hierarchy have occurred includes monitoring of the following factors: • changes in market and trading activity (eg significant increases/decreases in activity) • changes in inputs used in valuation techniques (eg inputs becoming/ceasing to be observable in the market) There were no transfers between level 1, 2 or 3 of the fair value hierarchy during the six months ended 30 September 2016 nor in the comparative periods presented. The valuation techniques used are as follows: Level 1: Quoted prices (unadjusted) in active markets The fair values of financial instruments traded in active markets are based on quoted market prices at the reporting date. A market is regarded as active when it is a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. The quoted market price used for financial assets held by the group is the current bid price. For financial liabilities included in level 1, the current ask price is used. Instruments included in level 1 comprise listed investments classified as trading securities or available for sale. Level 2: Inputs other than quoted prices included within level 1 that are observable Financial instrument Fair value determination Derivatives Valuation determined with reference to broker quotes as well as use of discounted cash flow and option pricing models. Broker quotes are tested for reasonableness by discounting expected future cash flows using a market interest rate for a similar instrument at the measurement date Valuations of cross-currency swaps include the credit risk of Eskom (known as debit value adjustment) and counterparties (known as credit value adjustment) where appropriate. A stochastic modelling approach is followed where the expected future exposure to credit risk for Eskom and its counterparties (considering default probabilities and recovery rates derived from market data) is modelled Non-derivatives including finance A discounted cash flow technique is used, which uses expected cash flows and a market- lease payables related discount rate Trade and other receivables The future cash flows are discounted at the implicit interest rate based on the contractual and payables and finance lease terms. The fair values approximate the carrying value as the effect of discounting at a market receivables rate as opposed to an Eskom-specific rate is not expected to be material Level 3: Inputs not based on observable market data (unobservable inputs) Level 3 items are fair valued using unobservable inputs. For information on the valuation techniques and assumptions of embedded derivatives refer to page 9 and 17. Reviewed condensed group interim financial statements 15 Selected notes to the condensed group interim financial statements (continued) for the six months ended 30 September 2016 15. Fair value classification and measurement (continued) 15.2 Fair value hierarchy (continued) The table below analyses fair value measurements which are categorised into the different levels in the fair value hierarchy based on the inputs to the valuation techniques used: Level 1 Level 2 Level 3 Total Rm Rm Rm Rm 30 September 2016 (reviewed) Assets measured at fair value Investment in securities 3 530 9 925 – 13 455 Government bonds 3 530 – – 3 530 Negotiable certificates of deposit – 9 925 – 9 925 Derivatives held for risk management – 22 227 – 22 227 Foreign exchange contracts – 124 – 124 Cross-currency swaps – 22 083 – 22 083 Commodity forwards – 11 – 11 Credit default swaps – 9 – 9 Financial trading assets 1 565 1 900 – 3 465 Repurchase agreements – 1 900 – 1 900 Listed shares 1 209 – – 1 209 Government bonds 356 – – 356 5 095 34 052 – 39 147 Liabilities measured at fair value Embedded derivatives – – 6 894 6 894 Derivatives held for risk management – 9 204 – 9 204 Foreign exchange contracts – 4 013 – 4 013 Cross-currency swaps – 4 010 – 4 010 Commodity forwards – 1 – 1 Credit default swaps – 1 180 – 1 180 Financial trading liabilities 75 1 010 – 1 085 Short-sold government bonds 75 – – 75 Repurchase agreements – 1 010 – 1 010 75 10 214 6 894 17 183 31 March 2016 (audited) Assets measured at fair value Investment in securities 3 769 6 457 – 10 226 Government bonds 3 769 – – 3 769 Negotiable certificates of deposit – 6 457 – 6 457 Derivatives held for risk management – 30 182 – 30 182 Foreign exchange contracts – 2 159 – 2 159 Cross-currency swaps – 27 983 – 27 983 Commodity forwards – 31 – 31 Credit default swaps – 9 – 9 Financial trading assets 1 800 2 044 – 3 844 Repurchase agreements – 2 044 – 2 044 Listed shares 1 187 – – 1 187 Government bonds 613 – – 613 5 569 38 683 – 44 252 Liabilities measured at fair value Embedded derivatives – – 7 025 7 025 Derivatives held for risk management – 4 873 – 4 873 Foreign exchange contracts – 1 588 – 1 588 Cross-currency swaps – 2 221 – 2 221 Credit default swaps – 1 064 – 1 064 Financial trading liabilities 227 1 023 – 1 250 Short-sold government bonds 227 – – 227 Repurchase agreements – 1 023 – 1 023 227 5 896 7 025 13 148 16 Eskom Holdings SOC Ltd Level 1 Level 2 Level 3 Total Rm Rm Rm Rm 30 September 2015 (reviewed) Assets measured at fair value Investment in securities 3 852 7 406 – 11 258 Government bonds 3 852 – – 3 852 Negotiable certificates of deposit – 7 406 – 7 406 Derivatives held for risk management – 29 364 – 29 364 Foreign exchange contracts – 4 418 – 4 418 Cross-currency swaps – 24 927 – 24 927 Commodity forwards – 10 – 10 Credit default swaps – 9 – 9 Financial trading assets 1 634 3 881 – 5 515 Repurchase agreements – 3 881 – 3 881 Listed shares 1 132 – – 1 132 Government bonds 502 – – 502 5 486 40 651 – 46 137 Liabilities measured at fair value Embedded derivatives – – 7 089 7 089 Derivatives held for risk management – 1 355 – 1 355 Foreign exchange contracts – 140 – 140 Cross-currency swaps – 373 – 373 Commodity forwards – 2 – 2 Credit default swaps – 840 – 840 Financial trading liabilities 264 1 398 – 1 662 Short-sold government bonds 264 – – 264 Repurchase agreements – 1 398 – 1 398 264 2 753 7 089 10 106 The movement in the fair value measurements in level 3 of the fair value hierarchy is as follows: Embedded derivatives Rm Balance at 31 March 2015 8 022 Net fair value gain (933) Balance at 30 September 2015 7 089 Net fair value gain (64) Balance at 31 March 2016 7 025 Net fair value gain (131) Balance at 30 September 2016 6 894 The fair value of embedded derivatives is determined by using a forward electricity price curve to value the host contract and the derivative contract is valued by using market forecasts of future commodity prices, rand/USD exchange rate, interest rate differential, future sales volumes, production prices and liquidity, model risk and other economic factors. The forecast cash flow is determined and then discounted at the relevant interest rate curve. The net present value of the cash flows is then converted to the reporting currency at the spot rand/USD exchange rate. The fair value of the embedded derivative is adjusted, where applicable, to take into account the inherent uncertainty relating to the future cash flows of embedded derivatives such as liquidity, model risk and other economic factors. The important assumptions are obtained either with reference to the contractual provisions of the relevant contracts or from independent market sources where appropriate. These assumptions are: • spot and forward commodity prices • spot and forward rand/USD exchange rates • spot and forward interest rates • forecast sales volumes • spot and forward consumer and foreign production prices indices • liquidity, model risk and other economic factors Embedded derivatives that are not separated are effectively accounted for as part of the hybrid instrument. Non-option based derivatives are separated on terms that result in a fair value at the date of inception of zero. Option-based derivatives are separated on the terms stated in the contracts and will not necessarily have a fair value equal to zero at the initial recognition of the embedded derivative resulting in day-one gains or losses. These day-one gains or losses are recognised over the period of the agreement. The fair value will depend on the strike price at inception. The only significant unobservable input is the US PPI. Reviewed condensed group interim financial statements 17 Selected notes to the condensed group interim financial statements (continued) for the six months ended 30 September 2016 15. Fair value classification and measurement (continued) 15.2 Fair value hierarchy (continued) Sensitivity analysis The approximate change in the value of embedded derivatives if one of the inputs is changed is disclosed below. The analysis assumes that all other variables remain constant and the possible impact on profit or loss is: Reviewed Audited Reviewed 30 September 2016 31 March 2016 30 September 2015 increase decrease increase decrease increase decrease Unit change Rm Rm Rm Rm Rm Rm Aluminium price 1% 78 (78) 87 (87) 97 (97) Rand interest rate 100 basis points 454 (489) 468 (497) 573 (615) Dollar interest rate 100 basis points (303) 309 (321) 335 (395) 410 Electricity tariffs 1% (277) 273 (263) 258 (400) 392 United States PPI 1% 153 (156) 128 (124) 162 (161) Rand/USD 1% 104 (98) 106 (103) 120 (116) 15.3 Day-one gain/(loss) The group recognises a day-one gain/(loss) on initial recognition of cross-currency and credit default swaps held as hedging instruments where applicable. Cross- Credit Total currency default swaps swaps Rm Rm Rm Gain at 31 March 2015 732 24 756 Day-one loss recognised (106) – (106) Amortised to profit or loss (461) – (461) Gain at 30 September 2015 165 24 189 Day-one loss recognised (200) – (200) Amortised to profit or loss (6) – (6) (Loss)/gain at 31 March 2016 (41) 24 (17) Day-one loss recognised (611) – (611) Amortised to profit or loss 36 (24) 12 Loss at 30 September 2016 (616) – (616) 16. Material events subsequent to 30 September 2016 There were no material events after the reporting date. 18 Eskom Holdings SOC Ltd 17. Restatement of comparatives Eskom restated the financial statements at 31 March 2016 because of a change in the measurement basis of cross-currency swaps classified as held for risk management and as a result, the statement of financial position and income statement at 30 September 2015 were restated accordingly. Eskom makes use of a valuation technique in terms of IFRS to determine the fair value of cross-currency swaps that are held for risk management. Eskom reviewed and improved the valuation technique to better reflect non-performance risk, in particular credit risk taking into account the credit value adjustment (CVA) of the counterparty and debit value adjustment (DVA) of Eskom. This resulted in a value that is more representative of the net credit exposure to a counterparty. The tax treatment of the conversion of the subordinated loan from the shareholder to equity was updated at 30 September 2015 to reflect the treatment applied at 31 March 2016. The related tax impact was charged against the statement of changes in equity to better reflect where the underlying transaction took place instead of applying the charge to the income statement as had been done previously. The impact of the restatement for the period ended 30 September 2015 is as follows: Previously Adjustments Restated reported Rm Rm Rm Statement of financial position at 30 September 2015 Assets Non-current Derivatives held for risk management 31 048 (6 389) 24 659 Equity Capital and reserves attributable to owner of the company 175 717 (4 600) 171 117 Liabilities Non-current Derivatives held for risk management 840 – 840 Deferred tax 24 164 (1 789) 22 375 Income statement for the period ended 30 September 2015 Profit before depreciation and amortisation expense and net fair value (loss)/gain (EBITDA) 25 595 – 25 595 Depreciation and amortisation expense (7 609) – (7 609) Net fair value (loss)/gain on financial instruments (668) 671 3 Profit before net finance cost 17 318 671 17 989 Net finance cost (3 498) – (3 498) Finance income 1 542 – 1 542 Finance cost (5 040) – (5 040) Share of profit of equity-accounted investees, net of tax 28 – 28 Profit before tax 13 848 671 14 519 Income tax (2 539) (1 633) (4 172) Profit for the period 11 309 (962) 10 347 Reviewed condensed group interim financial statements 19 Contact details Telephone numbers Websites and email addresses Eskom head office +27 11 800 8111 Eskom website www.eskom.co.za Contact@eskom.co.za Eskom Media Desk +27 11 800 3304 Eskom Media Desk MediaDesk@eskom.co.za +27 11 800 3309 +27 11 800 3343 +27 11 800 3378 +27 82 805 7278 Investor Relations +27 11 800 2775 Investor Relations InvestorRelations@eskom.co.za Eskom Corporate Affairs +27 11 800 2323 Eskom integrated results www.eskom.co.za/IR2016 Toll-free Crime Line 0800 112 722 Feedback on our report IRfeedback@eskom.co.za Eskom Development Foundation +27 11 800 6128 Eskom Development Foundation www.eskom.co.za/csi CSI@eskom.co.za Ethics Office Advisory Service +27 11 800 2791 Ethics Office Advisory Service Ethics@eskom.co.za +27 11 800 3187 +27 11 800 3189 National Sharecall number 08600 ESKOM or Promotion of Access to Information Act PAIA@eskom.co.za 08600 37566 Customer SMS line 35328 Integrated demand management and AdvisoryService@eskom.co.za energy advice CS (customer service) mobile Dial *120*6937566# or Customer Service CSOnline@eskom.co.za *120*myeskom# MyEskom mobi-site www.myeskom.co.za MyEskom app Facebook EskomSouthAfrica Twitter Eskom_SA Physical address Postal address Eskom Megawatt Park 2 Maxwell Drive Sunninghill PO Box 1091 Johannesburg 2000 Sandton 2157 Company Secretary Company registration number Ms Suzanne Daniels Eskom Holdings SOC Ltd Eskom Holdings Secretariat 2002/015527/30 PO Box 1091 Johannesburg 2000 20 Eskom Holdings SOC Ltd 1167