CONTENTS IFC Performance overview 2 About this report 3 Our business and strategy 4 Chairman’s statement Integrated report 8 Our business model 16 Ethical leadership 31 March 2018 28 Operating environment 32 Strategy and outlook 36 Stakeholder engagement and material matters 40 Risks and opportunities, assurance and controls 47 Our governance 48 Governance framework 48 Board of Directors and committees 53 Executive Management Committee 54 Executive remuneration and benefits 60 Financial review 61 Chief Financial Officer’s report 66 Value added statement 67 Condensed annual financial statements 70 Our finances 83 Operating performance 84 Chief Executive’s review 89 Our infrastructure 98 Our interaction with the environment 108 Our people 117 Our role in communities 123 Our know-how 126 Supplementary information 127 Abbreviations and glossary of terms Integrated report | 31 March 2018 130 Independent sustainability assurance report 134 Leadership qualifications and directorships 137 Board and Exco meeting attendance 139 Environmental implications of using electricity 140 Statistical tables 146 Plant and benchmarking information 153 Customer information 155 Contact details 156 Our suite of reports Integrated report Annual financial statements Foundation report 31 March 2018 31 March 2018 31 March 2018 Achieving sustained success Achieving sustained success Achieving sustained success Achieving sustained success 1923 - 2018 www.eskom.co.za NAVIGATION ICONS The following navigation icons are used to link our strategy and resources to material matters, strategic risks, key performance indicators and performance: FC Our finances (financial capital) MC Our infrastructure (manufactured capital) NC Our interaction with the environment (natural capital) PERFORMANCE HIGHLIGHTS FOR THE YEAR HC Our people (human capital) SRC Our role in communities (social and relationship capital) New Board appointed in Excellent Transmission IC Our know-how (intellectual capital) January 2018 performance Request for feedback We want to ensure that our report continues to provide relevant information to stakeholders. We R20bn 27 IPP welcome your feedback on ways in which we could facility signed to contracts signed improve our report in future. Please send your suggestions to IRfeedback@eskom.co.za improve liquidity Information block Additional information or case study in the integrated report cost Significant Environmental Supplementary information provided Information available online containment performance and OUR VALUES efforts LTIR improved in a fact sheet A list of abbreviations and glossary of terms are available at the back of this report on significantly Zero Harm Sinobuntu (Caring) pages 127 to 129 3 new 215 519 Integrity Customer Satisfaction build units Throughout this integrated report, performance against target is indicated as follows: electrification commissioned connections Innovation Excellence Actual performance met or exceeded target  Actual performance almost met target (within a 5% threshold)  Actual performance did not meet target SC Indicates that a key performance indicator is included in the shareholder compact JOINT VENTURE [0001] ABOUT THIS REPORT Board responsibility and approval The Board is accountable for the integrity and completeness of the integrated report and any supplementary OUR BUSINESS AND STRATEGY information, and is assisted by the Audit and Risk Committee and the Social, Ethics and Sustainability Committee. The Board has applied its collective mind to the preparation and presentation of the integrated report and has concluded that it is presented in accordance with the International Framework. Considering the completeness 4 Chairman’s statement of the material items dealt with and the reliability of information presented, based on the combined assurance 8 Our business model process followed, the Board approved the 2018 integrated report, annual financial statements and supplementary 16 Ethical leadership information on 2 July 2018. 28 Operating environment 32 Strategy and outlook 36 Stakeholder engagement and Mr Jabu Mabuza Ms Sindi Mabaso-Koyana Prof. Malegapuru Makgoba material matters Chairman Chairman: Audit and Risk Chairman: Social, Ethics and Committee Sustainability Committee 40 Risks and opportunities, assurance and controls Reporting boundary and frameworks We aim to address mainly material matters, both This integrated report reviews our financial, positive and negative, in this integrated report. Based operational, environmental, social and governance on feedback received on the 2017 report, we have performance for the year from 1 April 2017 to strived to improve on the disclosure of governance- related information and outcomes, as well as the 31 March 2018, and follows our 2017 integrated report. Material events up to the date of approval have been conciseness of the report by a greater focus on Strategy material matters. However, there were a number of included. The integrated report should be read in conjunction with our full set of group annual financial significant issues which had to be addressed, which may review due by statements for a comprehensive overview of our have negatively impacted conciseness. September 2018 financial performance. The content is guided by legal and regulatory requirements, such as the Companies Act, 2008 and Our group annual financial statements are available at the King IV Report on Corporate Governance for www.eskom.co.za/IR2018 South Africa, 2016 (King IV TM), as well as global best Clear mandate practice. The report examines our performance in relation to our strategy and the six capitals. Unless otherwise Assurance approach and support from indicated, the information presented is comparable to Our combined assurance model relies on three lines new Minister that of prior years, with no significant restatements. of defence, namely review by management, as well as The information in this report refers to the internal and external assurance. The Audit and Risk performance of the group, which includes the business Committee and the Board rely on combined assurance in assessing the adequacy of our risk management and of Eskom Holdings SOC Ltd, operating in South Africa, and its major operating subsidiaries, unless otherwise internal controls. Permanent Group stated. The results of the internal and external assurance of our suite of Chief Executive Our value creation process is depicted in our business model on pages 12 to 13 reports is set out on page 46 appointed in Our Assurance and Forensic Department provided reasonable assurance on certain aspects of the report. June 2018 Basis of preparation The sustainability KPIs contained in the shareholder Our integrated report is based on the principles compact were subject to external assurance; all but contained in the International Framework, two have received reasonable assurance. published by the International Integrated Reporting Council (IIRC). The report seeks to provide a balanced Significant The independent sustainability assurance report is included on and transparent account of how we create value through our use of and impact on the various capitals. pages 130 to 133 progress on It considers both qualitative and quantitative matters, material to our operations and strategic objectives, The consolidated annual financial statements have cost containment been audited by the group’s independent auditors, which may influence stakeholders’ decision-making. Our SizweNtsalubaGobodo Inc. who issued a qualified initiatives strategic risks are considered as part of this process. opinion relating to the completeness of amounts disclosed in terms of the PFMA. Except for this The determination of material matters is set out on pages 37 to 39, qualification, the consolidated annual financial while our strategic risks are discussed on pages 41 to 42 statements are fairly presented in terms of IFRS. Although this is our primary report to stakeholders, Refer to the annual financial statements for the independent audit aimed at providers of financial capital, it provides opinion information of interest to all stakeholders. 2 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 3 CHAIRMAN’S STATEMENT Our business and strategy JABU MABUZA Chairman No-one can deny that Eskom has experienced However, a number of factors posed a serious threat Governance I believe that the action taken within a relatively short a tumultuous year. This was not due to to Eskom’s ability to obtain funding for its capital It was against this backdrop that the new Board was space of time against those who played a key role in operational issues – our generation plant and expansion programme, thereby putting a significant appointed in January 2018, with a clear mandate to some of the critical governance lapses over the past network produced solid performance, and strain on liquidity. Firstly, the prior year’s audit report stabilise and restore Eskom. Four of the directors few years demonstrates how serious we are about the new build programme delivered another contained a qualification relating to the completeness appointed to the interim Board in 2017 were retained. rooting out corruption and irregular practices. I view three units at Medupi and Kusile, with another of irregular expenditure information disclosed in the An Interim Group Chief Executive was appointed at this as only the first step in combating corruption, annual financial statements, as the auditors could not the same time, to bring stability to an organisation but it is by no means the end of the road – we will two units expected in the near future, while place reliance on certain of the processes supporting which had witnessed a seemingly endless parade of continue to pursue those engaged in wrongdoing and electrification of households continued at a the information in question. Secondly, serious individuals heading the organisation over the past take corrective action within the South African legal brisk pace. allegations of financial mismanagement were levelled framework. few years. These appointments constituted the first against a number of senior executives. step towards improving governance and restoring We are determined to clear the company of confidence in the company, ultimately aimed at corruption in all its forms, with about 250 cases Progress on the improvement process to address the audit assisting with the execution of funding initiatives, qualification on irregular expenditure is discussed under “Ethical reported through Eskom’s whistle-blowing channels improving Eskom’s financial position and restoring its leadership” on page 18 currently under investigation. Disciplinary action is operational performance. taken where warranted. We are also in the process These all contributed to several credit ratings Our immediate priorities when we took of conducting mandatory lifestyle audits on all top downgrades due to Eskom’s deteriorating liquidity over in January were to address the liquidity executives and senior managers. These actions are position and profitability, combined with a highly- challenges, tackle governance issues and part of a collective effort to improve trust and restore geared balance sheet, ineffective governance processes investor confidence, to enable Eskom to re-establish release the interim results on a going concern and internal controls, as well as Government’s its credibility so as to access financial markets. basis. perceived inability to provide sufficient and timely support. The downgrades further hampered our We acknowledge the Board’s responsibility for the We spent the first two months, which falls within the implementation of King IV TM. However, due to the efforts to obtain funding and consequently, raised year under review, inculcating a culture of effective lapses in governance in recent years, not all of the serious concerns around Eskom’s long-term viability and transparent governance, to ensure that those principles have yet been implemented effectively, and status as a going concern. engaged in corrupt and irregular activities are brought although many of the required practices are in place, In addition, the effective 2.2% price increase granted to account. This process has since led to the departure and have been for many years. by NERSA for 2017/18 put further pressure on Eskom’s of seven members of senior management as a result of financial position, resulting in a weakening of the serious allegations of misconduct. The finalisation of Nevertheless, we are committed to driving the majority of financial ratios over the past year, despite investigations into suspended executives remains our implementation of King IV TM, together with an a stringent focus on cost savings in order to manage key priority, while we continue to focus on improving overall improvement in governance and ethics, liquidity. The much lower than expected price increase, corporate governance in Eskom. to ultimately ensure that Eskom returns to its coupled with the liquidity issues, led to the external values, a process which has already begun. auditors reporting an emphasis of matter related to Investigations into allegations of corruption and misconduct are discussed under “Ethical leadership” on page 19 going concern on our interim results. For more information on our assessment of the level of effectiveness of Eskom’s implementation of the King IV TM principles, refer to pages 20 to 23 under “Ethical leadership” 4 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 5 CHAIRMAN’S STATEMENT continued Strategy • Prioritising financial sustainability and strengthening Given recent challenges, we have refined our strategy the balance sheet, while minimising reliance on debt to respond appropriately. We aim to clean up and Government guarantees Our business and strategy governance issues, stop the bleeding and stabilise the • Influencing energy policy and the regulatory business by continuing to do what we do, and doing it environment to support the organisation’s well, and thereafter re-energise the business in order turnaround, by working with DPE, DoE, the DEA, to set a firm foundation for growth. At the same time, National Treasury and NERSA. Issues include we will continue implementing initiatives identified electricity tariffs, the long-awaited IRP and future in the prior year, by focusing on strengthening our IPP allocations, as well as dealing with municipal financial position through demand stimulation, cost arrear debt containment and efficiencies, while striving to achieve a If we succeed at all of these priorities, we expect that cost-reflective price of electricity. it will positively impact Eskom’s credit ratings, and Under the leadership of our newly appointed Group thereby its ability to secure funding in both domestic Chief Executive, we are undertaking a strategy and international markets. However, executing the review in support of our mandate of being South turnaround will require difficult decisions. There is Africa’s trusted and reliable electricity provider. no doubt that the next few years will be challenging, We plan to develop a new ambition for the period but the turnaround has already begun, with positive to 2035, focused on implementation and disciplined progress since the appointment of the new Board. The execution of actions to ensure the sustainability of start of restoration of investor confidence is evidenced Eskom. This review is expected to be completed by by the R20 billion bridge-to-bond facility signed in September 2018. The main areas of focus are: February 2018, with great strides being made towards • Strengthening Eskom’s financial position and its improving governance and rooting out financial balance sheet mismanagement and malfeasance. • Reviewing the business model, which could lead As expected from a responsible corporate citizen, to restructuring if warranted to respond to global Eskom must comply with the Constitution, applicable changes in the energy industry laws and regulations, as well as our own policies and • Growing the business in existing markets, expanding procedures, and act in accordance with our mandate, into new markets and delivering new products vision and strategy. We also have a developmental across these markets responsibility – through building new capacity, I am grateful to our new Minister, the Honourable As President Cyril Ramaphosa once said, Looking ahead executing DoE’s electrification programme, and Mr Pravin Gordhan, for his unwavering support and “Eskom is a jewel of our democracy”. Eskom has suffered an absence of ethical leadership at supporting skills development and job creation – guidance on this difficult journey, which has only just the highest level for some time, but we aim to rectify and play a pivotal role in the country’s economy. In begun. I wish to extend a particular word of thanks to We must never forget that the success of Eskom means that as a matter of urgency. We also need to focus on executing our mandate, Eskom provides the basis for those executives who had the courage to denounce the success of South Africa – if we fail, the country addressing executive vacancies, although this is partly growth in South Africa and SADC, and as a result, the corruption they witnessed in this once-great fails. We cannot let the nation down. Government, dependent on the final structure of the organisation, transforms lives. organisation. I also which to thank Mr Mark Lamberti business, customers and investors all have great and after completing the strategy review. We need to have In order to improve trust and restore for his selfless contribution and commitment to justifiable expectations of Eskom. We all need to take the right people in the right places doing the right investor confidence in Eskom, it is crucial rebuilding Eskom. Lastly, but most importantly, to responsibility for our part on the road to rebuilding things, to stabilise Eskom and set it up for sustained the more than 48 000 Eskom Guardians who are Eskom and regaining the nation’s trust, which is sure that we improve our integrity and thereby success, while fulfilling both its commercial and committed to keeping the lights on to power our great to require a change in mindset and a great deal of our credibility. If not, we will not be able to developmental mandate. nation, thank you for your resilience and professional sacrifice. I trust that we will all accede to the call for access financial markets to fund our build outlook in the face of adversity. renewal. Over our three-year term, we intend focusing on the programme. following: I believe that Eskom’s newly appointed • Improving liquidity and solidifying Eskom’s status as Concluding remarks Board, supported by a capable and committed going concern, which will require a focus mainly on My congratulations go to Mr Phakamani Hadebe on his Jabu Mabuza executive team, has the necessary skills, costs, given the recent price increases. Given that recent appointment, approved by Cabinet, as Group Chairman strength, courage and enthusiasm to deliver primary energy and employee benefit costs are our Chief Executive. This is a reflection of the excellent on Eskom’s mandate, by making the difficult biggest categories of operating expenditure, we have work he has done while acting in the position since decisions required in the best interests of to focus our attention on those, as well as robust January this year. His appointment is an important step Eskom and the country. management of capital expenditure. This will require towards stabilising Eskom. Phakamani has a strong a significant improvement in financial and business reputation of turning around organisations and, in light discipline of Eskom’s current financial challenges, we are lucky • Instilling transparent and effective governance to to have someone with his financial expertise to steer support a culture of ethical behaviour by returning Eskom towards achieving our vision for the future. to our values 6 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 7 OUR BUSINESS MODEL Our mandate, vision and mission financial position through demand stimulation, cost Eskom Holdings SOC Ltd is a state-owned company containment initiatives, improving efficiencies through (SOC) as defined in the Companies Act, 2008. We limiting capital expenditure, and attaining a cost- We operate Our business and strategy are wholly owned by the South African Government, reflective price of electricity. through our shareholder ministry, the Department of Public Enterprises (DPE). We also answer to the Department of Energy (DoE), as the ministry which Throughout the report, shareholder compact KPIs are indicated using SC . These KPIs are also included in the statistical tables, available as a fact sheet at the back of this report 30 POWER STATIONS sets energy policy, and National Treasury, which provides financial oversight. Total nominal capacity of 45 561MW Vision and mission We are South Africa’s primary electricity Our mission remains to provide sustainable supplier, generating approximately 90% of the electricity solutions to promote economic 37 868MW 1 860MW 2 724MW 600MW 2 409MW 100MW electricity used in South Africa, and about 40% growth and social prosperity in South Africa of coal-fired of nuclear pumped hydro of gas-fired Sere Wind of the electricity used in Africa. and the region. This supports our vision of stations power storage stations stations Farm “Sustainable power for a better future”. As a public entity, we are subject to the Public Finance We are undertaking a strategy review, which is Base-load stations Mid-merit/peaking stations Self-dispatching Management Act (PFMA), 1999. We are also bound by the provisions of our Memorandum of Incorporation expected to be completed by September 2018. (MOI). We want to ensure an integrated strategy which addresses not only current challenges, but also Our network consists of 285 737MVA Mandate Our mandate is defined in DPE’s Strategic Intent ensures a clear future direction which focuses on the sustainability of the business, part of which includes 381 594km Cumulative substation capacity Statement, which is periodically set by the Minister of of high-, medium- and low-voltage power lines a review of the operating model. The Board’s key Public Enterprises (the Minister). focus is the development of a turnaround plan to shift performance, thereby accelerating a return to financial We proudly fulfil our mandate of providing a and operational sustainability. stable electricity supply in a sustainable and efficient manner, in order to assist in lowering Our business model and the value the cost of doing business in South Africa and we create enabling economic growth. We create value by transforming inputs from the The electricity industry is regulated by NERSA in Under our new build programme, which aims natural environment – coal, nuclear and liquid fuels, terms of the Electricity Regulation Act, 2006 and the to meet South Africa’s growing energy demand We also acknowledge that we have a developmental while also using significant amounts of water in the National Energy Regulatory Act, 2004. NERSA not and strengthen our transmission grid, three units role, by supporting transformation, broad-based black process – into electricity, which is used to power only provides licences, regulatory rules, guidelines and at Medupi Power Station and one at Kusile have economic empowerment, job creation, economic and homes and businesses, thereby supporting economic codes, but also determines our revenue requirement already been commissioned and are supplying power skills development, and other national initiatives. growth and prosperity. A key element of the process based on the requirements of the Electricity Pricing to the grid; a further unit at each station has been is effectively and efficiently balancing electricity supply Policy. We will shortly submit the fourth multi-year synchronised to the grid and both are expected to We have to carefully balance three roles while price determination revenue application, MYPD 4, achieve commissioning status during the coming year. delivering on our primary mandate, namely supporting and demand in real time, by maintaining the frequency of the power system at 50Hz. which will cover the three-year period from socio-economic development, ensuring regulatory 1 April 2019 to 31 March 2022. compliance and maintaining commercial viability. The core operations in our value chain include the We prepare an annual Corporate Plan to give effect generation, transmission, distribution and sale of Our revenue applications are discussed further under “Financial electricity, as well as the construction of new power review – Our finances” on pages 70 to 82 Target Delivered to our mandate and set out our medium- to long-term strategic objectives. The annual shareholder compact stations and network infrastructure. These are backed to 2022/23 since 2005 by support functions in the form of finance, human Our nuclear power station, Koeberg, is regulated by agreed with DPE outlines the key performance resources, procurement, risk and sustainability, the National Nuclear Regulator (NNR), to ensure indicators (KPIs) which support our mandate and Generating capacity 17 384MW 10 750MW information technology, telecommunications, that Koeberg complies with nuclear safety standards, strategic objectives. stakeholder management and corporate so that individuals, society and the environment are communications. adequately protected against radiological hazards Performance against the 2017/18 shareholder compact is set out in associated with the use of nuclear technology. High-voltage the directors’ report in the annual financial statements, which are 9 756km 7 469km available online South Africa’s electricity supply industry transmission lines The country’s electricity supply industry covers the Nature of our business and customer base generation, transmission, distribution and sale of Our business is vertically integrated across a value The 2018/19 Corporate Plan, which is aligned to the electricity, as well as the import and export thereof. chain that supplies electricity to South Africa and the Substation capacity 42 470MVA 36 900MVA 2018/19 shareholder compact (which does not yet Southern African Development Community (SADC) account for the impact of the 5.23% revenue decision We operate most of the base-load and region, with a strategy to expand our transmission for 2018/19), covers the five-year period from 2018/19 peaking capacity, although the role played network further into the region in order to increase to 2022/23 and builds on the aspirations of the by independent power producers (IPPs) is sales into Africa. To do this, we are reliant on SADC Detailed information on our power stations, power lines and previous Corporate Plan. Due to their short tenure substation capacities is available as a fact sheet at the back of expanding. members to ensure adequate transmission grids within when finalising the Corporate Plan in March 2018, this report their borders; we are engaging these utilities to this the Board approved only the first year of the plan, end. An integrated grid connects the Southern African while supporting 2019/20 and 2020/21. The key focus Capacity added and energy supplied by IPPs are discussed further on page 94 Power Pool (SAPP), which comprises South Africa, areas in the Corporate Plan are to strengthen our Botswana, Lesotho, Mozambique, Namibia, Swaziland, Zambia and Zimbabwe. 8 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 9 OUR BUSINESS MODEL continued Eskom’s energy wheel Our equity at 31 March 2018 totalled R170.3 billion, Our social and relationship capital includes our The energy wheel, or energy flow diagram, indicates the electricity which flowed from Eskom’s power stations, as consisting of R83 billion in share capital and the relationships with customers, suppliers, communities well as IPPs and cross-border suppliers, to Eskom’s supply points to local and export customers, and also accounts balance in retained earnings, with debt securities and and the public in general. This is positively impacted Our business and strategy for energy losses incurred. borrowings of R388.7 billion provided by lenders and by our activities enabling economic growth, as well as investors (bond holders). We presently do not pay our contribution to job creation, skills development, Electricity available for distribution GWh Electricity demand GWh dividends to our shareholder, with any funds generated supplier transformation and broad-based black Generation of electricity 221 936 Local sales 196 922 being reinvested in the business. Lenders and investors economic empowerment. In addition, our corporate Less: Used for pumping by pumped storage stations (6 031) International sales 15 268 earn a return in the form of interest paid, coupled with social investment (CSI) activities improve the lives of the repayment of debt. many less fortunate South Africans. Furthermore, our Net sent out by Eskom 215 905 Total external sales 212 190 electrification programme has seen close to six million IPP purchases 9 584 Technical and other losses 21 086 The various elements of our financial capital, and our financial households electrified within our licensed areas of International purchases 7 731 Internal use 440 performance, are discussed under “Our finances” on pages 70 to 82 supply since 1991, significantly enhancing the lives of Wheeling1 2 266 Wheeling1 2 266 those affected. Strong stakeholder relationships are Unaccounted (496) Natural capital, in the form of coal, liquid fuels, nuclear critical to our ability to create value. Total available for distribution 235 486 Total energy demand 235 486 fuel and water, are the primary energy sources used as inputs by our power stations in the process of Our interaction with customers, suppliers and the public, as well as 1. Wheeling refers to the movement of electricity between international customers through our network, without the power being available to generating electricity. This process results in waste, our CSI activities and electrification programme, are discussed under customers on the South African grid. such as gaseous and particulate emissions, ash and “Our role in communities” on pages 117 to 122 nuclear waste, which negatively impacts natural capital. The electricity which we generate, together with Energy of 221 936GWh was generated by Eskom from In an effort to reduce our impact on the environment, Our intellectual capital consists of technology, imports and that produced by IPPs, is supplied in bulk the following primary energy sources: we are gradually transitioning to a cleaner energy mix, which is a key enabler of our business and includes to distributors, both metros and municipalities, as well including renewable energy, mainly provided by IPPs, telecommunications, information technology, as well as distributed to industrial, commercial, residential and Source GWh clean coal technologies and eventually, nuclear energy. as research and innovation; the latter focuses on other customers in our licensed areas of supply. The highly anticipated update to DoE’s Integrated industrialising future technologies such as battery Coal-fired stations 202 106 Resource Plan (IRP) will provide a view of the country’s storage and the improvement of current operations. Nuclear power 14 193 We also supply a number of international customers, desired energy mix and Eskom’s future role. Intellectual capital also includes organisational Pumped storage stations 4 479 including electricity utilities, in the SADC region. knowledge, systems, policies and procedures. Hydro stations 709 Furthermore, we import electricity from some Wind 331 Our usage of natural resources in the form of primary energy, and neighbouring countries. Open-cycle gas turbines (OCGTs) 118 the impact of our operations on the environment, is discussed under Our intellectual capital is discussed under “Our know-how” on “Our interaction with the environment” on pages 98 to 107 pages 123 to 125 Total 221 936 Our manufactured capital consists of our power We sold 212 190GWh of electricity to a total of stations, together with our transmission and 6 258 616 customers. distribution networks. Our manufactured capital base Zambia Mozambique is eroded in the process of generating, transmitting The number of customers by segment, as well as electricity sales and distributing electricity, while it is restored through Namibia Zimbabwe volumes and revenue by customer segment are set out in the fact maintenance and major refurbishment. sheet at the back of this report Botswana The performance of our existing plant and new build programme, Our impact on the capitals as well as capacity provided by IPPs, is discussed under “Our Swaziland The six capitals identified in the International infrastructure” on pages 89 to 97 South Lesotho Framework all play a role in our business, some as Africa inputs and others in the form of outcomes, although Our human capital comprises our employees and the capitals are interrelated in the way that they affect contractors, and their competencies, capabilities our value creation process. and experience. Human capital is enhanced by the development of learners as part of our skills pipeline, Imports from Exports to In order to operate, our business requires financial and through training. We strive for racial, gender and capital, which consists of equity in the form of equity disability transformation of our employee base, while invested by the shareholder, retained earnings and debt being cognisant of optimising our workforce to be funding, some of which is supported by Government efficient and productive, in order to manage one of our guarantees. Our own credit rating, as well as that of most significant cost elements. the Sovereign, has deteriorated over the past year, impacting our ability to secure external funding. Our Our workforce, employment equity and safety is discussed under financial capital increases or decreases based on “Our people” on pages 108 to 116 our financial performance and the execution of our funding plan. 10 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 11 OUR BUSINESS MODEL Sun 50Hz Exports Wind Wind turbines IPPs Solar Distribution line Agriculture Hydro Rail RENEWABLE PRIMARY ENERGY POWER GENERATION TRANSMISSION DISTRIBUTION CUSTOMERS NON-RENEWABLE Mining Substation Nuclear plant Commercial Industrial High-voltage transmission line Coal mine Residential Coal-fired plant Substation Municipalities Customers INPUTS PERFORMANCE OUTPUTS FC Capital expenditure R48 billion NC 28 days Normalised coal stock HC 0.23 Group LTIR FC Electricity revenue R175 billion SRC 212 190GWh Total sales NC 115.49Mt coal burnt MC Energy availability (EAF) 78% SRC 2.09 System minutes lost <1 NC 31.65Mt Ash produced 41% Municipalities 5.8% Residential NC 276 335Mℓ raw water used MC Planned maintenance SRC System interruption frequency NC 205.5Mt CO2 emissions (PCLF) 10.35% (SAIFI) 18.7 events 22.6% Industrial 5% Commercial MC 45 561MW installed capacity at NC 57.13kt Particulate emissions 30 stations MC Unplanned maintenance SRC System interruption duration 14.2% Mining 2.7% Agriculture SRC 215 905GWh Electricity sent out by Eskom (UCLF) 10.18% (SAIDI) 38.8 hours 7.2% International 1.5% Rail HC 48 628 Group employees MC IPP purchases 9 584GWh SRC 9.15% Total energy losses SRC 235 486GWh Total energy demand FC Municipal arrear debt R13.6 billion OUTCOMES FOR ESKOM OUTCOMES FOR OTHERS FC EBITDA R45.4 billion FC Cash and cash equivalents R15.8 billion FC Cash interest cover 1.22 HC Racial equity in senior management 68.31% FC EBITDA margin 25.91% FC BPP cost savings R20.73 billion FC Debt service cover 0.87 HC Gender equity in senior management 38.20% FC Average electricity price 85.06c/kWh MC Maintenance expense R14 billion NC Relative particulate emissions 0.27kg/MWhSO HC 1 441 Group employees with disabilities FC Free funds from operations after interest paid MC Depreciation expense R23.1 billion NC Specific water consumption 1.30ℓ/kWhSO SRC Eskom KeyCare index 105.9 R9.1 billion MC 2 units at Medupi and 1 at Kusile commissioned HC Employee benefit costs R29.5 billion SRC Electrification 215 519 households connected FC External funding raised R57.5 billion MC 722.3km Transmission lines installed HC 4 176 Total learner pipeline SRC CSI committed spend R192 million FC Debt/equity ratio 2.52 HC 15 Employee and contractor fatalities SRC 80.25% B-BBEE compliant spend For a discussion of the performance of the abovementioned KPIs against target, refer to “Financial review” and “Operating performance” 12 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 13 OUR BUSINESS MODEL continued Legal and operating structure There have been no significant changes to our group structure during the year. Our head office remains based in Johannesburg, with operations across South Africa, including administrative offices in most major centres. Line Service Strategic Our business and strategy divisions functions functions The geographic location of our power stations and major transmission lines is set out in the map on page 147 Generation Primary Energy Risk and Sustainability Transmission Group Finance Strategy Support Legal structure (noting only major subsidiaries) Distribution Group Human Resources Legal and Compliance Customer Services Group Procurement Corporate Affairs Group Capital (new build) Group IT Assurance and Forensic Group Security (reports directly to the Board) Eskom Holdings SOC Ltd Eskom Pension and Provident Fund Contribution to financial performance Eskom Enterprises Eskom Finance Eskom Development The contribution by the main companies to the group’s financial performance and position is shown below. Escap SOC Ltd SOC Ltd Company SOC Ltd Foundation NPC The Eskom business remains the most significant. Eskom Eliminations Eskom Eskom Rotek Industries SOC Ltd Eskom Uganda Ltd Pebble Bed Modular Reactor SOC Ltd South Dunes Coal Terminal Company SOC Ltd R million company EE group Escap EFC Foundation and other group Revenue 177 424 9 429 3 376 861 – (13 666) 177 424 EBITDA1 43 428 797 1 210 139 – (215) 45 359 Note that Eskom Holdings SOC Ltd is the main operating company, which houses the electricity business and also holds investments in subsidiaries. Net (loss)/profit after tax (4 608) 465 1 497 107 – 202 (2 337) The Eskom group comprises the operating company and its subsidiaries and joint ventures. Total assets 729 011 7 771 12 587 8 927 6 (19 186) 739 116 Total liabilities 570 936 2 462 5 975 7 888 6 (18 487) 568 780 The main function of our subsidiaries is to provide Although the disposal of Eskom Finance Company SOC Capital expenditure2 50 623 490 – – – (383) 50 730 strategic services to Eskom and its employees. Ltd (EFC) has been delayed, we remain committed to the disposal, as mandated by our shareholder. 1. EBITDA excludes fair value adjustments on financial instruments and embedded derivatives. Eskom Enterprises SOC Ltd (EE) functions as an 2. The company and group figures include DoE funded capital expenditure of R3.4 billion and assets transferred from customers. investment holding company. Through its subsidiary, The activities of the Eskom Development Foundation Eskom Rotek Industries SOC Ltd (ERI), it provides NPC (the Foundation) were absorbed into Eskom For detailed segment disclosure, refer to note 7 in the consolidated annual financial statements lifecycle and technical support, plant maintenance and from 1 April 2017, although the Foundation started support for the capacity expansion programme to operating as a subsidiary again from 1 April 2018, Eskom’s line divisions. following the shareholder’s advice to delay the Foundation’s dissolution, pending completion of a Eskom Uganda Limited, a subsidiary of Eskom review of our operating model. Enterprises SOC Ltd (EE), operates and maintains two hydroelectric power stations at Nalubaale and Kiira The Eskom Pension and Provident Fund is a hybrid under a 20-year concession arrangement, now in its defined benefit and defined contribution pension fund, fifteenth year. registered as a self-administered pension fund in terms of the Pension Funds Act, 1956. It is an independent Pebble Bed Modular Reactor SOC Ltd (PBMR) legal entity, governed by a board of trustees, and is the created intellectual property (IP) over the period of second-largest pension fund in the country, with assets its operation. PBMR remains in a state of care and well in excess of R100 billion. Eskom celebrates 95 years of powering the nation Executive, Phakamani Hadebe said: “Turning 95 years maintenance in order to preserve the IP created. Eskom turned 95 years old on 1 March 2018, and the is a great milestone for our organisation and provides EE holds an effective 69% interest in South Dunes Coal Full details of Eskom’s equity-accounted investees and subsidiaries at organisation celebrated this occasion with 100 380 motivation as we manoeuvre through the liquidity and Terminal Company SOC Ltd (SDCT), both directly and 31 March 2018 are set out in notes 11 and 12 of our annual financial households that have connected to the national grid governance challenges that we are currently grappling statements over the past six months. indirectly through Golang Coal SOC Ltd (not shown). with. What is more striking about Eskom’s proud SDCT participated in the Phase V expansion of the heritage is that people have and will always remain Operating structure Through a successful electrification programme, more at the heart of this business whose history is deeply Richards Bay Coal Terminal (RBCT), which entitles it Eskom is made up of line divisions that operate the than five million households within Eskom’s licensed to the right to export coal. embedded in the history and the development of electricity value chain, service functions which support areas of supply have been electrified since 1990. South Africa.” EE’s remaining dormant subsidiaries (not reflected those operations and strategic functions to develop According to Statistics South Africa, over 90% of South above) are still in the process of being wound up or the organisation. Members of our executive committee Africans have access to electricity, with the majority of He added that: “Together with the Board, we are busy liquidated. (Exco) are assigned to take accountability for the new customers now being electrified in more remote formulating a strategic framework that will ensure that various areas. and deep rural areas. this institution survives another 100 years.” Escap SOC Ltd is Eskom’s wholly owned insurance captive company, and manages and insures the business National Treasury has allocated R17.3 billion to Eskom risk of Eskom and our subsidiaries, excluding nuclear and the municipalities to electrify a further 640 000 and aviation liabilities. households over the next three years. South Africa hopes to achieve universal access to electricity by 2025. Commenting on Eskom’s journey of contributing to the growth and development of the people of South Africa and its economy, Eskom’s then Interim Group Chief 14 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 15 ETHICAL LEADERSHIP One of the essential components of a governance The Board demonstrates ethical leadership when it Ethics based on our values We are currently investigating almost 250 cases framework is role clarity between the shareholder, displays integrity, competence, fairness, transparency, Eskom is a signatory to the United Nations Global reported through whistle-blowing channels. By the the Board of Directors (the Board) and management, accountability and responsibility, and makes an effort Compact, which includes an anti-corruption clause, end of March 2018, about a third of the investigations Our business and strategy as provided by the Strategic Intent Statement. Our to minimise the negative effects of the organisation’s as well as the World Economic Forum’s “Partnership were completed, of which about half resulted in a Board is responsible for providing strategic direction activities on society and the six capitals. The Board Against Corruption” initiative. Fraud prevention and disciplinary process. to the organisation, while Exco is responsible for should also be effective, not losing sight of strategic whistle-blowing policies set out our zero tolerance implementing that strategy, by exercising executive objectives, and focus on achieving results. approach towards dishonesty and fraud, as well as We are determined to clear the company of control in managing the day-to-day operations. principles which enable all employees to report corruption in all its forms. Furthermore, the Board ensures that Eskom and its unlawful or irregular conduct, in good faith and in a The majority of directors are independent non- subsidiaries comply with the requirements of the Governance challenges proper manner. The reporting system is managed by an executives, with only the Group Chief Executive and Companies Act, 2008; PFMA, 1999; section 29 of the In September 2017, Parliament’s Public Enterprises independent service provider to ensure the integrity the Chief Financial Officer being executive directors. National Treasury regulations; as well as any other Committee started an inquiry into alleged state capture and confidentiality of the process. The shareholder appoints directors with the approval applicable legislation, regulations and guidelines. at three of South Africa’s state-owned companies, with of Cabinet; non-executive directors are reviewed Eskom’s Board is accountable for managing ethics Eskom being one. The focus of the inquiry includes an annually at the annual general meeting. The People within the organisation; this is delegated to the People investigation into SOCs’ governance practices. The and Governance Committee, a Board subcommittee, and Governance Committee. The approved Code of inquiry has indirectly resulted in a number of executive assists the shareholder by identifying the necessary The Minister of Public Enterprises recently set out his Ethics is underpinned by our core values, which are level resignations at Eskom, due to the new Board acting skills, qualifications and experience required by the expectations of all SOC boards, in the spirit of Thuma intended to promote an ethical culture and inform all on allegations surfacing during the inquiry. Board to achieve our objectives. Mina. He expects boards to: of our practices, policies, procedures and behaviour, including areas of HR, procurement, health, safety and We have also been under scrutiny from lenders, civil • Undertake their duties diligently, with due regard and governmental organisations, as well as the media, Refer to “Our governance” on pages 48 to 54 for detail on the to their fiduciary responsibilities the environment. Board and Exco composition, as well as activities of the Board and its for poor governance. This has resulted in a loss of trust committees • Restore an ethical culture at state-owned and confidence in our governance processes, thereby Our values are set out on page 1 enterprises negatively impacting our reputation. A number of Our governance approach is focused on providing • Ensure that good governance, accountability and issues have led to investigations into our governance Operational responsibility for the management of effective corporate governance that enables the Board transparency are restored practices, including allegations of impropriety, liquidity ethics lies with Exco. The Group Chief Executive is and Exco to exercise their fiduciary duties, by driving • Maintain the necessary independence from concerns and the prior year qualified audit opinion on assisted by the Ethics Office in setting the framework, optimal and quality decision-making that considers management to enable effective oversight, whilst the completeness of irregular expenditure. Evidence rules, standards and boundaries for ethical behaviour. risks and appropriate mitigation, while providing simultaneously having a thorough knowledge of the of governance contraventions has resulted in legal Additionally, an ethics management programme has oversight of all our operations. The Board is the focal activities at the company proceedings that are still under way. been established to manage ethics effectively. Reporting point for corporate governance, and is responsible • Investigate any allegations of corruption and, where of unethical behaviour takes place at all levels across the In January 2018, the Government announced a number to the company itself for survival and prosperity, and there is evidence of malfeasance, act decisively business, while the implementation of our ethics policies of measures to strengthen governance in Eskom, also to the shareholder and other stakeholders for to hold the relevant individuals to account and and programmes is consistently monitored. including the appointment of nine new Board members our performance, by meeting financial, operational and recover any funds that were misappropriated and stabilising management. other business expectations. The Code of Ethics is supplemented by a conflict • Review the financial status and ensure financial of interest policy, which sets out the obligations of Not only is effective governance a key enabler sustainability of the company The appointment of the new Board was well employees and directors when dealing with conflicts of of the successful execution of our strategy, but • Ensure that the company delivers effectively, received by both the public and the investor interest and declaring private work, supplier relations the absence thereof has a powerful impact on efficiently and financially sustainably on its core and the receiving and offering of gifts. Employees community, and was seen as a step in the right our reputation, as evidenced by our experience mandate, whilst simultaneously contributing to are required to perform an annual declaration of direction to return Eskom to financial and over the past year. the transformation and industrialisation of the interest, or as soon as any circumstances, which may operational stability. economy affect their declaration, change. Conflicts of interest Good corporate governance is displayed through the • Put in place a stable and competent executive declared by directors and Exco members are minuted We now need to focus on restoring stakeholder exercise of ethical and effective leadership, to achieve management team that will lead the institution for the record. confidence – lenders, ratings agencies and the public a number of required governance outcomes, namely with integrity in general. The perceived maladministration has had an ethical culture, satisfactory performance, effective Furthermore, no Eskom official is allowed to do a significant impact on the availability of funding, • Ensure adequate controls and oversight over control and legitimacy. business with Eskom while being an employee of placing severe pressure on our liquidity position. procurement are in place, and that conflicts of Eskom or its subsidiaries. Through an audit process, We acknowledge the need for a comprehensive review King IV TM stipulates that the governing body’s primary interest are correctly managed 36 employees were identified during the past two years across governance processes, specifically quality of roles and responsibilities include: • Rebuild the credibility and confidence of South as having business interests in suppliers doing business information, governance structures and ethics. We are • Steering the organisation and setting the strategic Africans, employees and lenders in state-owned with Eskom. Remedial action has commenced, and implementing a five-point plan to transform governance: direction, which in our case is aligned to DPE’s enterprises sanctions of only three remain outstanding. • Strengthening our internal ethics and fraud Strategic Intent Statement and other shareholder • Reposition state-owned enterprises as assets that All transactions need to be approved in terms of an framework, and focusing on consequence objectives serve South Africa and improve the wellbeing of all approved Delegation of Authority (DOA) framework. management • Approving policies and plans which give effect to the its citizens Changes have been proposed to the current DOA; • Implementing independent lifestyle and conflict of strategy interest audits on senior management and other • Overseeing strategy implementation and execution these changes have been subject to internal and external reviews. The revised DOA is expected to be levels, as deemed necessary by management, by monitoring performance • Terminating all irregular supplier contracts and work • Ensuring accountability for performance through implemented from 1 April 2019. • Enhancing our commercial governance process reporting and disclosure A fraud and corruption hotline, which encourages to ensure robust scrutiny, and strengthening the whistle-blowing, is operated by an independent service delegation of authority framework provider. We also maintain an Ethics Helpline to assist • Instituting disciplinary charges and taking legal employees with queries around ethical conduct. action, if required 16 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 17 ETHICAL LEADERSHIP continued The McKinsey contract has been terminated and Allegations of corruption and misconduct Special Investigating Unit the contract with Impulse International suspended. While the Board continues to focus on corporate The President signed Proclamation No 41561 on There are no dealings, contractually or otherwise, The PFMA defines irregular expenditure as governance improvements, the finalisation of 6 April 2018, mandating the Special Investigating Unit Our business and strategy with Trillian. We are in the process of reversing “expenditure, other than unauthorised expenditure, investigations into suspended executives remains a (SIU) to investigate Eskom, Transnet and Denel. The administrative decisions through the High Court for incurred in contravention of or that is not in key priority for the Board. The prioritisation of this scope of the investigation includes maladministration recovery of about R1.6 billion (including VAT). accordance with a requirement of any applicable process has since led to the departure of seven senior that occurred from 1 January 2010 until the publication legislation”. This should be very clearly distinguished managers, including executives, based on serious date of the Proclamation, which does not have an end These actions are part of a collective effort allegations of misconduct. A further two executives date. We are assisting the SIU in their investigation, by from fruitless and wasteful expenditure, which means to further improve trust and restore investor remain on suspension; their disciplinary hearings providing relevant documentation, as well as audit and “expenditure which was made in vain and would have confidence to enable Eskom to re-establish our been avoided had reasonable care been exercised”. commenced in May 2018, but have yet to be concluded. investigation reports. credibility in order to access financial markets. We will continue to practice a zero tolerance Therefore, the definition is very broad, as it includes The following executives departed as a result of the Rooting out financial mismanagement, approach to fraud, corruption and other forms all transgressions of any statute. It doesn’t matter process: malfeasance and maladministration, coupled of economic crime or dishonest activity. whether the breaches were deliberate or accidental, • Anoj Singh, Chief Financial Officer with entrenching sound financial and or whether they happened unknowingly or in good • Matshela Koko, Group Executive: Generation business discipline in order to rebuild investor Improvement process to address irregular faith. Furthermore, as opposed to fruitless and • Sean Maritz, Chief Information Officer confidence in Eskom, remain the Board’s expenditure wasteful expenditure, the fact that Eskom received • Prish Govender, General Manager: Capital Projects non-negotiable obligation. Eskom received a qualified audit opinion for the something of value (an asset or service) in return for • Frans Hlakudi, Senior Manager: Capital Contracts financial year ended 31 March 2017, as the external the expenditure is not relevant. • Charles Kalima, General Manager: Supply Chain Audit reportable irregularities auditors could not rely on the processes in place to • Edwin Mabelane, Senior General Manager: Group The external auditors have raised a number of It should further be noted that the reason for incurring Technology ensure the completeness of irregular expenditure reportable irregularities (RIs) in terms of section 45 the expenditure is not the cause for the irregular reported. We established and implemented an of the Auditing Profession Act (APA), 2005. classification, but that the irregularity arises from lack In many instances, the problem was not improvement process to address shortcomings of compliance with legislation and/or processes. One a failure of our internal controls, but identified, by ensuring adequate systems and processes of the main reasons for classifying items as irregular management override of those controls. to monitor and report all irregular expenditure, as well expenditure is that they were incorrectly treated as taking the necessary corrective actions to address In terms of the APA, a reportable irregularity is any as emergency procurement, effectively bypassing Major investigations the audit qualification. unlawful act or omission committed by any person the normal procurement process. Another reason Eskom has been supporting three major investigations The Audit and Risk Committee oversees the progress is that the PPPFA requires all suppliers to submit related to allegations of corruption or misconduct. responsible for the management of an entity, which: of the recovery plan. At year end, we had reviewed tax clearance certificates, but foreign suppliers are (a) has caused or is likely to cause material financial unable to do so, as they are not registered South National Treasury loss to the entity or to any partner, member, about 98% of 205 contracts over R1 billion and 91% of African taxpayers. Eskom also applied the PPPFA National Treasury is investigating the procurement shareholder, creditor or investor of the entity in 6 998 contracts under R1 billion awarded over a period limits exclusive of VAT, as we are able to claim the and contract management of the Tegeta contract respect of his, her or its dealings with that entity; or of three years, to ensure compliance to procurement input VAT. However, the limits should be applied with Eskom. The objective is to determine whether and other relevant legislation, as well as various (b) is fraudulent or amounts to theft; or inclusive of VAT. proper process and procedures were followed in internal policies and procedures. (c) represents a material breach of any fiduciary duty awarding the contract to Tegeta. National Treasury An irregularity can also be condoned, by an internal procured the services of a forensic firm to conduct the owed by such person to the entity or any partner, The contract review originally included all contracts governance structure, the relevant government investigation on its behalf. We have been supporting member, shareholder, creditor or investor of the awarded since 1 April 2015. We have now included all department or National Treasury. Once the breach the investigation by providing the required information, entity under any law applying to the entity or the contracts since December 2012 in the scope, as that is condoned, the expenditure is no longer deemed to documents and witnesses, including previous audit and conduct or management thereof. was when Eskom’s earlier exemption from the relevant regulations ceased. The review of the remaining be irregular, although it is still disclosed as part of the investigation reports related to this transaction. contracts is in process. cumulative total. The impact of fraud and corruption on coal cost The external auditors are required to first report As a result of this process, irregular expenditure is being investigated. With respect to the Tegeta any RI to the Independent Regulatory Board for reported has increased significantly. The auditors contract, investigations into procurement and contract Auditors (IRBA), and only then report the matter to have again qualified the completeness of information The improvement in the reporting of PFMA matters management at Hendrina Power Station were completed. management, at the same time affording management disclosed in terms of the PFMA relating to irregular following the first phase of the improvement process Procurement irregularities include non-declaration an opportunity to respond and/or rectify the matter. expenditure, fruitless and wasteful expenditure and is evident in the significant increase in the numbers of interests and the conclusion of the contract while losses due to criminal conduct in the 2018 annual reported, even though challenges are still being documents were still outstanding. Issues emanating from A number of RIs were reported during the audit financial statements. experienced in the reporting process. The second the Hendrina contract management investigation included for the year ended 31 March 2017, as well as the phase of the improvements, to address remaining failures in coal sampling by Eskom employees, payment for independent review of the six months ended For further information, refer to the directors’ report in the concerns and shortcomings, will be rolled out in the coal not received, as well as changes to contract terms in 30 September 2017 and the audit for the year ended consolidated annual financial statements coming financial year. Tegeta’s favour without following the proper governance 31 March 2018. The Board is in the process of closing process. The implicated employees were suspended and out all reported irregularities, although the finalisation To avoid a recurrence of instances of non-compliance, Disclosure of irregular expenditure required in terms of the PFMA is they have subsequently resigned. of some RIs depends on external investigations and the monitoring and compliance controls have been set out in note 51 in the annual financial statements outcome of court cases. enhanced. We have also revised our procedure on Directorate for Priority Crime Investigation (Hawks) supply chain management, which has been approved The Hawks are investigating all suspected cases of Details of the RIs reported, as well as the action taken and status of by the Board and reviewed by National Treasury. criminality, fraud and corruption relating to various the respective matters, are discussed in the directors’ report in the contracts in Eskom which have been in the public annual financial statements The revised procedure is being implemented. domain recently. The investigations are pursued by the Hawks on behalf of Eskom. We have been assisting the Hawks with relevant documentation, as well as audit and investigation reports implicating various current and former executives. 18 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 19 ETHICAL LEADERSHIP continued Application of King IV TM principles King IV TM gap analysis by our Assurance and Forensic King IV TM principle Governance context The principles of King IV TM encapsulate the aspirations Department, we assess our overall level of effectiveness on the journey towards good corporate governance. of implementation of the King IV TM principles as partially Principle 4: Strategy and performance The Board maintains oversight of Eskom’s core purpose, its risks and opportunities, Our business and strategy They provide guidance on what organisations should effective. We have numerous policies, procedures, The governing body should appreciate that strategy, business model, performance and sustainable development through an integrated strive to achieve through the application of suggested standards and controls in place, and these are generally the organisation’s core purpose, its risks strategy development process, Corporate Plan and results management process, which and opportunities, strategy, business model, includes monitoring performance against the shareholder compact. governance practices. deemed to be adequate, but do not necessarily function performance and sustainable development effectively, as is evidenced by the governance failures are all inseparable elements of the value This process is integrated and incorporates various feedback mechanisms to ensure that In order to give effect to the principles, practices are reported. Given that we have only just started applying strategic risk and sustainable development principles inform our strategic direction and creation process business model, and that implementation of the Corporate Plan is monitored, and that recommended at the level of leading practice. Those King IV TM, we also do not imagine that we can claim to non-performance or any change in context is highlighted and acted upon. associated with a particular principle should be applied be fully compliant with all the requirements in any given so that they support and give effect to the aspiration area. This is achieved through the use of integrated tools, various governance and oversight expressed in the principle. bodies at operational and Board levels, and a combined assurance process. The table below sets out the 16 principles, with some Based on an internal assessment by senior managers Principle 5: Reporting Eskom prepares its annual and interim financial statements in terms of International additional context. Financial Reporting Standards (IFRS), the PFMA, 1999 and Companies Act, 2008. The Audit accountable for the various areas, supported by a The governing body should ensure that reports issued by the organisation enable and Risk Committee reviews these externally published reports and recommends approval stakeholders to make informed assessments thereof to the Board. The external auditors review the interim financial statements and of the organisation’s performance, and its audit the annual financial statements in line with International Auditing Standards, as well as King IV TM principle Governance context short, medium and long-term prospects the PFMA and Companies Act. The integrated report is prepared based on the principles contained in the International Principle 1: Leadership Eskom’s Board exercises effective leadership, adhering to the duties of directors. Directors Framework. The Audit and Risk Committee and Social, Ethics and Sustainability The governing body should lead ethically have the necessary competence and act ethically in discharging their responsibility to Committee review the integrated report, which is approved by the Board. and effectively provide strategic direction and control of the company as provided for in the Board Charter and Eskom’s MOI. However, this cannot be said to have been the case throughout While we make every effort to ensure that reports issued to stakeholders are useful for the past year, as evidenced by allegations of corruption, irregularities and state capture. decision-making, we acknowledge that there is always room for improvement. The new Board is committed to setting Eskom’s strategic direction, based on an ethical Principle 6: Primary roles and The recently appointed Board recognises that good corporate governance is key to the foundation, to support a sustainable business, while acting in the best interests of the responsibilities of the governing body successful execution of our strategy. organisation, as well as taking into account Eskom’s short- and long-term impact on the economy, society, environment and our stakeholders. The Board considers risks and The governing body should serve as the The approved Board Charter is reviewed annually. It sets out the Board’s roles, oversees and monitors strategy implementation and execution by management, ensuring focal point and custodian of corporate responsibilities, membership requirements and procedural conduct. accountability for the company’s performance. governance in the organisation The Board has constituted various committees which assist the Board with its oversight role. Although the Board delegates duties to various committees and management, accountability remains vested in the Board. The Board or any Board committee may obtain independent, external professional advice concerning matters within the scope of their duties. Eskom’s current leadership is placing much greater focus on governance-related matters, and there is a clear migration towards restoring Eskom’s ethical culture and good The company exercises its rights and is involved in the decision-making of its subsidiaries governance practices. on material matters. Subsidiaries have adopted the Subsidiary Governance Framework and have aligned it to their MOIs and shareholder compacts. Principle 2: Organisational ethics The Board, with the assistance of the People and Governance Committee, oversees the management of ethics, and monitors the organisation’s activities to ensure that they are in Principle 7: Composition of the The Government is the sole shareholder of Eskom and is represented by the Minister of The governing body should govern the line with Eskom’s ethics management programme, policies and procedures. governing body Public Enterprises. All directors are appointed at the discretion of the shareholder. The ethics of the organisation in a way that The governing body should comprise the shareholder takes into consideration diversity across race, gender, age, independence and supports the establishment of an ethical Policies and procedures are applicable to both employees and contractors, and adherence appropriate balance of knowledge, skills, skills when appointing Board members. culture to policies and procedures forms part of our contractual arrangements with suppliers. Our experience, diversity and independence values are set out in the Code of Ethics. for it to discharge its governance role and responsibilities objectively and effectively Principle 3: Responsible corporate DPE’s Strategic Intent Statement and Eskom’s Corporate Plan embody our strategic citizenship direction and our interaction with stakeholders in line with relevant legislative Principle 8: Committees of the Committees have been established to assist the Board in discharging its responsibilities. The governing body should ensure that requirements. governing body The committees report to the Board on how they have discharged their duties. Formal the organisation is and is seen to be a Furthermore, the Board sets the direction for good corporate citizenship, including The governing body should ensure that its terms of reference are established and approved for each committee; these are reviewed responsible corporate citizen compliance with the Constitution, relevant laws and regulations, as well as our own arrangements for delegation within its own annually. standards, policies and procedures, all while remaining aligned to our mandate, purpose and structures promote independent judgement, All members of the Board may attend any meeting of the Board committees. strategic direction. and assist with balance of power and the effective discharge of its duties In some instance, evidence of committees reporting to the Board was not always available, Performance is measured against the shareholder compact, and a quarterly report is or minutes were not signed timeously. submitted to DPE, detailing our performance against the shareholder compact, as well as providing an overview of financial and operational performance, and any other relevant The various committees, their roles and responsibilities and key activities, as well as matters. statements on their conduct, are disclosed in “Our governance”. When considering performance, we consider all aspects, such as financial performance, our Principle 9: Evaluation of the A Board evaluation is meant to be conducted annually by an independent party, the societal and environmental impacts, as well as the wellbeing of our people. As set out in performance of the governing body outcomes of which are considered by the Board. The concerns and areas of improvement this report, our performance is aligned to the six capitals. Refer to the sections on “Our raised should be consistently monitored. finances”, “Our infrastructure”, “Our interaction with the environment”, “Our people”, The governing body should ensure that the “Our role in communities” and “Our know-how”. evaluation of its own performance and that An external assessment was conducted in May 2017, covering the year ended of its committees, its chair and its individual 31 March 2017. Areas for improvement identified included a shortage of accounting skills members, support continued improvement among Board members, separating the Audit and Risk Committee into two separate in its performance and effectiveness committees as required by King IV TM, the leadership instability in Eskom, alignment with the principles of King IV TM and concerns around the ethics policy. Some of these issues have already been addressed through the appointment of a new Board, and its actions since being appointed. Due to numerous changes to the Board over recent years, a performance evaluation was not always performed annually. However, a performance evaluation of the new Board is planned before the end of the coming financial year. 20 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 21 ETHICAL LEADERSHIP continued King IV TM principle Governance context King IV TM principle Governance context Principle 10: Appointment and Eskom operates in accordance with an approved DOA framework that sets out the powers Principle 15: Assurance The Audit and Risk Committee (ARC) provides independent oversight of the effectiveness Our business and strategy delegation to management and authorities delegated by the Board. It sets out the scope, conditions and parameters The governing body should ensure that of the organisation’s assurance functions and services, with particular focus on combined The governing body should ensure that within which the powers can be exercised by directors, employees and/or committees. assurance services and functions enable assurance arrangements, including external assurance service providers, internal audit, the appointment of, and delegation to, an effective control environment, and that risk management and the finance function. Performance of the Group Chief Executive is evaluated in terms of the targets set by the management contribute to role clarity Board, while the GCE sets the targets for Exco members. Performance against these is also these support the integrity of information Under its terms of reference, ARC is responsible for providing independent oversight of and effective exercise of authority and considered by the Board when deciding on short-term and long-term incentives to be for internal decision-making and of the the integrity of the annual financial statements and disclosure of sustainability issues in the responsibilities awarded to Exco. organisation’s external reports integrated report, to ensure that they are reliable and in line with the financial information. Although the Board has delegated authority to employees and committees, it has reserved ARC’s conclusions on the matters above are set out in their report in the annual financial specific matters for its own deliberation and conclusion. These matters are recorded in statements. the MOI. Furthermore, the Senior General Manager, Assurance and Forensics has concluded that Succession planning at executive level is expected to be addressed in future. Eskom’s systems of internal control and risk management are considered adequate, based on a review of our systems of internal control and risk management, including the design, Principle 11: Risk governance The Board, supported by the Audit and Risk Committee, provides oversight of Eskom’s implementation and effectiveness of internal financial controls through a formal The governing body should govern risk in a strategic and business risks as well as opportunities, by delegating this responsibility to documented process during the year ended 31 March 2018. His conclusion also considers way that supports the organisation in setting management through the Risk and Resilience Management policy and plan. information and explanations provided by management, and discussions with the external and achieving its strategic objectives auditors on the results of the external audit. Principle 12: Technology and The Chief Information Officer (CIO) is a member of Exco and is responsible for Principle 16: Stakeholders We are committed to an inclusive stakeholder approach, and acknowledge our obligation information governance implementing and executing effective information technology (IT) management. Governance In the execution of its governance roles and for the execution of stakeholder relationship management. Underscoring our stakeholder structures are in place to oversee and monitor effective use of technology and information, responsibilities, the governing body should management and value creation is our commitment to maintaining the highest level of The governing body should govern and identify opportunities where appropriate. adopt a stakeholder-inclusive approach integrity, accountability and responsiveness to stakeholders. technology and information in a way that supports the organisation setting and that balances the needs, interests and Engaging with stakeholders in a structured and well-managed way enables the proactive A quarterly report is submitted to the Audit and Risk Committee to provide assurance that expectations of material stakeholders in the achieving its strategic objectives Eskom’s technology and information management systems are secure and available. cultivation of relationships that can serve as a valuable resource during challenging times. best interests of the organisation over time Collaboration and regular interaction with all stakeholder groups is essential to our Further information is set out under “Risks and opportunities, assurance and controls – long-term resilience and to build trusting relationships. Governance of technology and information” on pages 44 to 45. A report on stakeholder engagement is submitted to Exco and the Board for oversight, and informs members of challenges that could impact on Eskom’s licence to operate. Principle 13: Compliance governance In terms of the Compliance Charter, the Board is ultimately accountable for the group’s The governing body should govern compliance with regulatory requirements; this is effected through the Audit and Risk Our interaction with stakeholders is discussed under “Stakeholder engagement and compliance with applicable laws and Committee. The overall responsibility for the implementation and execution of compliance material matters – Our interaction with stakeholders” on pages 36 to 37. adopted, non-binding rules, codes and management has been delegated to Exco. Our interaction with customers is set out in “Our role in communities – Customer service standards in a way that supports the Eskom adopted a compliance philosophy to respect the rule of law. This is supported by a performance” on page 118 and our reputation is discussed in “Our role in communities organisation being ethical and a good policy that it will, in all material respects, ensure compliance with the letter and spirit of – Our reputation” on page 119. corporate citizen legal and regulatory requirements in general. Overall compliance maturity is assessed based on the extent of understanding the compliance universe, the related controls as well as subsequent routine monitoring. The Board acknowledges that not all the principles The Board, through its subcommittees, is contained in King IV TM have yet been implemented committed to driving an overall improvement Principle 14: Remuneration We have an approved remuneration philosophy for employees and executives. We are effectively, and that the recent lapses in governance in governance and ethics, and effective governance aligning the executive remuneration practice with the Guidelines for the Remuneration and Incentives for State-Owned Companies issued by DPE in February 2018. These guidelines are of grave concern to the shareholder, investors implementation of King IV TM during the The governing body should ensure that the organisation remunerates fairly, responsibly specifically address the remuneration of executive directors, prescribed officers and and the public alike. Appointing ethical leadership and coming year. and transparently so as to promote the non-executive directors, and compel Eskom to develop a policy to align its executive building a culture of compliance are important enablers achievement of strategic objectives and remuneration practice with the Guidelines. to ensure that our governance is restored to credible positive outcomes in the short, medium and This will improve governance and ensure that remuneration is fair, responsible and levels. Several steps have been taken to improve long term transparent, and that it balances performance measures with value creation. governance. The appointment of a new Eskom Board Information on executive remuneration is set out under “Our governance – Executive in January 2018 has already improved our credibility remuneration and benefits on pages 54 to 58, while remuneration of staff is covered under with external organisations. A permanent Group “Our people – Remuneration and benefits” on pages 112 to 113. Chief Executive was announced in May 2018, with the appointment of a permanent Chief Financial Officer (CFO) expected soon. 22 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 23 BOARD OF DIRECTORS at 31 March 2018 Our business and strategy DR ROD CROMPTON (65) MS NELISIWE MAGUBANE (52) MS JACKY MOLISANE (43) Independent non-executive director Independent non-executive director Non-executive director MR JABU MABUZA (60) BA Hons (University of Natal) B Sc Electrical Engineering – Heavy Current BA Hons Economics (Unisa) Chairman (University of Natal) PhD Humanities (University of Natal) Diploma in Financial Markets and Effective Leadership Program Postgraduate Diploma in Business Instruments (Academy of Financial (Pennsylvania University) Administration (University of West London) Markets) Executive Development Program (University of California) MR SIFISO DABENGWA (59) PROF. MALEGAPURU MAKGOBA DR PULANE MOLOKWANE (41) Independent non-executive director (65) Independent non-executive director B Sc Engineering (University of Independent non-executive director Postgraduate Diploma in Applied Radiation Zimbabwe) MB ChB (University of Natal) Science and Technology (University of Executive Program (University of North West) DPhil (University of Oxford) Michigan) M Sc (University of North West) C Fellowship of the Royal College of Physicians of London PhD (University of Pretoria) C C MR PHAKAMANI HADEBE (51) MR MARK LAMBERTI (67) DR BANOTHILE MAKHUBELA (33) PROF. TSHEPO MONGALO (44) Interim Group Chief Executive Independent non-executive director Independent non-executive director Independent non-executive director M A Economics (University of Durban-Westville) B Com (Unisa) M Sc (University of Cape Town) LLM Commercial Law (University of MA Rural Development (Sussex University) Presidents Program in Leadership PhD (University of Cape Town) Cambridge) (Harvard) PhD Commercial Law (University of Cape Town) C MR CALIB CASSIM (46) MS SINDI MABASO-KOYANA MS BUSISIWE MAVUSO (39) MR GEORGE SEBULELA (47) Acting Chief Financial Officer (48) Independent non-executive director Independent non-executive director B Accounting Sciences (Unisa) Independent non-executive director B Compt (Unisa) BA (Com) (University of Fort Hare) Chartered Accountant (SA) B Com (University of KwaZulu-Natal) Master of Business Leadership (Unisa) Advanced Management Program Master of Business Leadership (Unisa) Chartered Accountant (SA) Association of Chartered Certified (INSEAD) Diploma in Introduction to Mining Accountants (ACCA) (University of Witwatersrand) C Membership of Board committees Board skills Director classification Racial diversity Gender diversity Audit and Risk Committee 7 Science and engineering 7% 13% 13% White 40% Female Investment and Finance Committee 5 Business and commerce Non-executive Executive Number People and Governance Committee 4 Finance and accounting Social, Ethics and Sustainability Committee 2 Economics 2 Law and governance Board Tender Committee 6 Leadership C Denotes chairmanship of a committee 2 CAs on the Board 80% Independent non-executive 87% ACI 60% Male Qualifications listed above are not exhaustive. Refer to pages 134 to 135 for full details of directors’ qualifications and active directorships Ages are shown at 31 March 2018. Mr Phakamani Hadebe was appointed permanently, effective 1 June 2018. Mr Mark Lamberti resigned as director on 6 April 2018. 24 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 25 EXECUTIVE MANAGEMENT COMMITEE at 31 March 2018 Our business and strategy MR THAVA GOVENDER (50) MR MONGEZI NTSOKOLO (57) MR KOBUS STEYN (55) Group Executive: Generation Group Executive: Distribution Acting Group Executive: Group Capital MR PHAKAMANI HADEBE Acting Group Executive: Risk and Appointed to Exco in October 2003 Appointed to Exco in January 2018 (51) Sustainability 27 years in Eskom 32 years in Eskom Interim Group Chief Executive B Sc Electrical Engineering B Eng (University of Pretoria) Appointed to Exco in September 2010 Appointed to Exco in January 2018 27 years in Eskom (University of Witwatersrand) Master of Business Leadership (Unisa) <1 year in Eskom Executive Development Program B Sc Hons Energy Studies – Nuclear and MA Economics (University of (City University of New York) Fossil (Rand Afrikaans University) Durban-Westville) MA Rural Development (Sussex Advanced Management Program University) (Harvard Business School) MR WILLY MAJOLA (52) MS ELSIE PULE (50) MS NONDUMISO ZIBI (42) Acting Group Executive: Transmission Group Executive: Human Resources Acting Chief Information Officer Appointed to Exco in January 2017 Appointed to Exco in November 2014 Appointed to Exco in January 2018 24 years in Eskom 20 years in Eskom 18 years in Eskom B Sc Engineering (University of BA Hons Psychology (University of B Tech Engineering (Durban University Witwatersrand) Pretoria) of Technology) Registered Professional Engineer (ECSA) M Sc Business Engineering (Warwick Master of Business Leadership (Unisa) University) MR CALIB CASSIM (46) Acting Chief Financial Officer Appointed to Exco in July 2017 MS AYANDA NOAH (51) 16 years in Eskom Group Executive: Customer Services B Accounting Sciences (Unisa) Appointed to Exco in June 2007 Chartered Accountant (SA) 26 years in Eskom Master of Business Leadership (Unisa) B Sc Electrical Engineering (University of Cape Town) Advanced Management Program (Harvard Business School) Exco skills Years service Racial diversity Gender diversity 1 >30 years 1 <1 year 11% White 33% Female 6 Science and engineering 4 Business and commerce Number 6 Leadership 1 Economics 1 Finance and accounting 1 Other 4 21-30 years 3 11-20 years 89% ACI 67% Male Qualifications listed above are not exhaustive. Refer to page 136 for full details of Exco members’ qualifications and active Ages are shown at 31 March 2018. directorships Mr Phakamani Hadebe was appointed permanently, effective 1 June 2018. Mr Abram Masango was suspended at 31 March 2018, and is not shown above. 26 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 27 OPERATING ENVIRONMENT We need to consider the macroeconomic climate and Key to fulfilling our mandate is the challenge Higher expected future demand requires utility sector context in which we operate, as these of effectively and efficiently balancing supply increased capacity, and we continue to directly influence our strategy, also posing a number with demand, by ensuring that the power The utility death spiral commission new capacity at Medupi and Kusile Our business and strategy of risks to which we need to respond. Despite the system is stable at 50Hz. Traditional utility business models around the world Power Stations to ensure that the country’s challenges, opportunities exist which we can capitalise are under threat due to a number of transformational future energy needs are met. on to strengthen and grow the organisation. Macroeconomic climate changes and energy disrupters. As new technology The global upswing in economic activity is gaining allows self-generation to become increasingly price GDP growth and Eskom’s sales growth have generally Utilities around the world are all being affected by momentum, with global growth projected to rise to competitive for the consumer, a utility’s sales decline. trended negatively over the past three years, with unprecedented levels of change. The change spans 3.7% in both 2018 and 2019, although growth in many The utility, having invested in long-term assets with a the outlook remaining relatively neutral in the years technological, social, political and environmental areas, developing countries remains weak. Despite inflation large proportion of fixed operational costs, requires ahead. Electricity sales growth could be flat over the thereby impacting the entire value chain. Market and being under control in most advanced economies, an ever-increasing tariff to generate the required next few years, although we are pursuing options to customer needs and choices are also shifting, as the developing nations still experience higher inflation. revenue from declining sales. These price increases increase sales by slightly more than 1% per year over way in which electricity is produced, transmitted, Commodity exporters such as South Africa can expect add to customers’ incentive to move off-grid, further the medium term. stored and used is evolving. This means that business rising demand for their products, although with fierce decreasing the customer base. models, related policy frameworks, as well as market At a regional level, while cross-border sales growth competition. As a result, electricity consumption could structures and rules need to adapt. increased during the prior financial year, attributed increase in industries that benefit from the global We are undertaking the largest capital investment commodity price upswing; Eskom should position largely to the drought in sub-Saharan Africa, the Renewable electricity production and technologies programme in the country and the continent, to itself to stimulate and capitalise on increased demand. drought seems to have ended, and hydroelectric plant have grown rapidly in recent years. This has resulted ensure adequate electricity capacity for growth and However, the commodity upswing could also pose a in the region is returning to optimal capacity, negating in greater competition for electricity supply, increased replacement of existing capacity nearing the end of its serious risk to Eskom, as countries like India and China the need for higher electricity imports by neighbouring client choice and changing consumption patterns from useful life. This is done in an environment characterised import low-quality coal from South Africa, typically countries. Nonetheless, our intent is still to rigorously grid-based services. Utilities need to understand client by low economic growth, sub-optimal tariff allocations used by Eskom, and they are prepared to pay in excess pursue demand growth, especially in the region. preferences in order to retain clients and survive. and a DoE policy requirement to sign long-term of current market rates. Supply outlook power purchase agreements (PPAs) with IPPs. This has A collaborative effort with Government, Given the market trends and demand outlook, we The slowdown in the growth of economies in industry players, clients and interest groups detracted from Eskom pursuing cost-reflective tariffs. need to match capacity requirements with production sub-Saharan Africa is easing, although the lack of is crucial to ensure that the consumer and the integrated infrastructure across the region constrains and sales. Whilst we are delivering on the new build External factors affecting our strategy economy are not disadvantaged by paying for the potential for growth. Furthermore, rising public programme, with another 7GW to be delivered over Several market and demand trends have reshaped stranded assets. debt could impede infrastructure development in the the next three to five years, IPPs are also expected to the global energy sector landscape over the past few region, limiting the amount of electricity we are able increase capacity, from 4GW to 6GW. Our internal years, with disruptive technologies having an impact Demand outlook to export. operating surplus capacity situation is worsened as on the market as a whole. South Africa and Eskom The rapid evolution of technology developments in we are required to sign contracts with IPPs on a take- will not escape the changes – it is clear that we need the sector, exacerbated by electricity shortages and South Africa’s economy is forecast to grow by or-pay basis, while we are in a position where we are to prepare to operate in a world in which traditional above-inflation price increases that have manifested approximately 2.5% year-on-year. However, growth is experiencing an operating surplus at times. However, utility business models will come under pressure, and over the last decade, coupled with climate shifts to projected to remain subdued, despite more favourable peak network demand is only anticipated to grow by in which we will need to evolve our business model to more moderate winters, have culminated in a declining commodity export prices and strong agricultural about 2GW over the same timeframe. Our energy continue to meet client needs. sales trend. In South Africa, power consumption has production, as investors await positive results from the contribution to the grid is expected to decrease from recent changes in political leadership. declined by about 0.5% a year on average since 2006. about 91% to just over 88% over the next five years, The decline was highest in large power users due to a largely due to the displacement resulting from capacity Lower than expected growth will have a wide range of factors, including low economic growth, growth from IPPs. negative impact on electricity demand. commodity market volatility – particularly in gold, Macroeconomic climate platinum and ferrochrome – and increasing electricity As plant availability and capacity increases, the energy The gross national debt is anticipated to increase to costs, which have had an impact on the ability of our utilisation factor (EUF) of generation plant, which R3.4 trillion or 60% of gross domestic product (GDP) clients to maintain their electricity consumption reached 93% in recent years, decreases. Based on the by 2020, as Government is forced to borrow to fund or to grow their demand. Nevertheless, with a few current sales forecast, combined with displacement Market trends policy implementation. This trend, coupled with commodities experiencing improved prices over the of capacity from IPPs, EUF from coal-fired plant is recent ratings downgrades and the view by ratings last year, opportunities still exist to collaborate with anticipated to reduce to 68% in the next five years. agencies that SOCs are a risk to the Sovereign, could the mining sector to capitalise on the current global This means that we are likely to be left with stranded Demand outlook negatively impact our ability to secure funds backed by commodity upturn. assets which cannot be optimally utilised. A long- Government guarantees. term strategy is required to deal with the operating The National Development Plan (NDP) sets the surplus capacity, while minimising the impact on our Market trends direction for economic growth, which will be workforce, suppliers and the community at large. Supply outlook As part of our strategy design process, we have to hampered without sustainable and sufficient electricity consider trends in the broader power, manufacturing capacity. We are chiefly responsible for enabling GDP The timing of these strategic decisions is of and mining industry. Globally, the last five years have growth as the base-load electricity supplier in the paramount importance, as premature closure been challenging for traditional power utilities, which market. and decommissioning of stations could lead to Policy and regulatory environment have suffered significant declines in market share and a shortage of capacity. profitability, often leading to the so-called “utility death spiral” scenario. 28 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 29 OPERATING ENVIRONMENT continued The commissioning of IPP capacity will further constrain Therefore, although we are aware of the the optimal deployment of our plant, which has a shifts in the electricity industry and emerging marginal cost of production much lower than the technology disrupters, we cannot respond until Our business and strategy incremental cost of IPPs; this is contrary to NERSA’s instructed to do so by DoE. requirement of using the least-cost merit order of dispatching plant. Furthermore, the timing of renewable The IRP should have been updated in 2013, but did not energy supply is not always matched to demand, and materialise. Another update was proposed in 2016, storage solutions are not yet available on the grid. but this has not yet been approved, although it was Therefore, we will need to ensure that we have capacity expected to have been done during the past year. Not available to dispatch at short notice to ensure system only does the IRP affect future new build decisions, Pic/design stability and to meet demand requirements. This has but also decisions which impact generation plant life to be achieved within an environment of lower than extension or closure. In order for Eskom to plan required tariffs and liquidity constraints that threaten to properly and be adequately prepared for the long-term negatively affect our going concern status. challenges in the electricity industry, it is critical that the updated IRP be approved as soon as possible. We further have to ensure that there is sufficient backup capacity available to cater for the unpredictable behaviour of renewable technologies such as wind, or that we have alternative strategies available to ensure balancing of the system, such as the ability to interrupt Finalisation of the IRP would restore policy certainty customers at short notice through demand response in the electricity sector. The signing of 27 renewable initiatives. We also have to strengthen the transmission energy IPP agreements in April 2018 is seen as an and distribution networks to allow for network access indication of Government’s resolve to deliver the by IPPs. Additionally, IPPs may be situated in areas of certainty required by investors. low demand, and our network has to be capable of DoE recently indicated that the updated IRP is evacuating the power from these IPPs and transporting undergoing a final set of processes and consultations, it to areas of higher demand. as stipulated by Cabinet in December 2017, before All of this comes at a cost. being published in the Government Gazette. Internal factors to be considered Strengths, weaknesses, opportunities and A number of internal factors also affect how we do threats The declining long-term EUF and slow increase in business. These include: To ensure successful implementation of our strategy, capacity in a slow-growing economic environment • Governance challenges and the negative impact on we need to leverage strengths and address weaknesses, The MYPD 3 period from 1 April 2013 to 31 March 2018 present significant challenges. Our goal to increase our reputation so that we can capitalise on opportunities to support has now concluded. NERSA granted an 8% standard the efficiency of our fleet and optimise the least-cost • Challenges in our procurement processes, as the achievement of our objectives. In addition, we need tariff average price increase for the five years, resulting dispatch of plant has resulted in reduced usage of older evidenced by the prior year audit qualification to create contingency plans to cater for threats which in a revenue shortfall of R225 billion over the period. and less efficient stations. The fate of these older, related to reporting on the completeness of could derail our strategies. In response, we had to undertake various initiatives less efficient stations is being addressed during the irregular expenditure to contain costs, such as the Business Productivity Eskom’s strengths in terms of market position and strategy review. • The unsustainable gap between our allowed revenue Programme (BPP), prioritisation of capital expenditure experience mean that we are capable of confronting and committed costs, coupled with varying levels Policy and regulatory environment and the Design-to-Cost strategy introduced a few years the challenges presented by our current circumstances. of success on cost savings initiatives introduced in Decisions about what or when to build new capacity ago. Despite these efforts, the average standard tariff We have a wealth of experience with an excellent pool recent years are not up to Eskom. Policy decisions around new price increases have not enabled a migration towards of resources to tackle the task at hand, with a strong • Escalating municipal and Soweto arrear debt capacity, energy mix – such as lower carbon-emitting cost-reflective tariffs as envisaged in the Electricity ethos of individual training and personal development. • Significant debt funding required for our new build energy sources – and the types of technologies to be Pricing Policy, which gives broad guidelines to NERSA However, we have not fully exploited our bargaining programme deployed are set out in DoE’s IRP, which also provides on approving prices and tariffs for the electricity supply position in terms of spend in order to reduce costs. • The cost of debt funding can only be recovered over Eskom an allocation, as well as specifying the capacity industry. An inflexible asset base, which is hard-pressed to deal the life of plant of more than 30 years, although it to be catered for by IPPs. has to be repaid over an average of about eight years with changing demand and a declining market, poses Cost containment initiatives alone will not further challenges. Furthermore, we have been plagued restore Eskom’s financial sustainability, and • Numerous credit ratings downgrades, which affect Current investment decisions are based on the 2010 by issues of leadership, governance and purported therefore the price of electricity must migrate our ability to secure or draw down on funding version of the IRP, which assumes far higher demand corruption. to cost reflectivity over time. • Difficulty attaining economic and workforce and materially different technology costs than is transformation targets given conflicting priorities However, our networks within South Africa and the currently the case. and cost constraints SAPP, along with the growth of new technologies such These challenges will be discussed in more detail in the as battery storage, provide opportunities to expand relevant sections of the report. the business and improve our financial position. These can be explored, as long we pay attention to the threats posed by declining sales, deterioration of our credit rating, and misaligned policy and regulatory environments, which restrict us from fully meeting the objectives set by our shareholder. 30 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 31 To provide electricity in an efficient and sustainable manner, ESKOM STRATEGY AND OUTLOOK MANDATE including its generation, transmission, distribution and retail. We also have a developmental role and will promote transformation, economic development and broad-based black economic empowerment. Strategic context This is in response to recent credit ratings downgrades We face numerous challenges along the path to and various governance issues which have constrained achieving our goals, as set out in the DPE Strategic access to funding, requiring clear trade-offs on capital Our business and strategy Intent Statement (SIS). However, we are not alone – and operating expenditure. as discussed earlier, traditional utility business models To do this, the strategy is divided into immediate around the world are under threat due to a number focus areas, the current business and the future of transformational changes and energy industry STRATEGIC business. The framework for this strategy (as shown disrupters. Driven by the SIS objectives, we will continue to focus on our mandate, while also focusing in the exhibit alongside) promotes stabilisation, re- OBJECTIVES energisation and growth of the business going forward, on remaining relevant in a changing energy landscape. and links strategic objectives, initiatives and timelines To achieve our mandate, we need to balance for execution. FC MC HC SRC NC IC three roles: supporting socio-economic Our strategy remains aligned to the key areas set out Our finances Our infrastructure Our people Our role in Our impact on Our know-how improvements, ensuring regulatory compliance in DPE’s Strategic Intent Statement, which are also (financial capital) (manufactured (human capital) communities the environment (intellectual and maintaining commercial viability. aligned to the six capitals, namely: capital) (social and (natural capital) capital) • Providing reliable and predictable electricity in line relationship As a major employer in the economy, our actions with regulatory methodology, while striving for cost capital) have an impact on the wider community, therefore containment and improved operational efficiencies any decisions must be made with this in mind. Added • Ensuring and maintaining a financially viable and Financially Focused to this is the safety of our workforce, the community sustainable company viable and Reliable, predictable, Transformative socio- Environmentally research and and our assets. We are committed to upholding our • Reducing Eskom’s impact on the environment sustainable affordable electricity economic contribution responsible development value of Zero Harm at all times. In order to continue through identifying, implementing or supporting delivering on our mandate, we need to remain options for low carbon-emitting generation and commercially viable and financially and operationally transportation opportunities sustainable. • Consolidating our socio-economic contribution Strategy overview to ensure alignment to national transformation In recent years, we embarked on the Design-to-Cost imperatives to unlock growth, drive IMPLEMENTATION strategy, which entailed short-term initiatives to industrialisation, create employment and support TIMELINE respond to our financial sustainability challenges. Our skills development key strategic objectives were to: Immediate focus: Clean up, stop the bleeding • Enable growth and transformation in South Africa and stabilise the business Immediate Medium Longer and SADC Firstly, a comprehensive clean-up has been initiated. focus term term • Lay the foundation for the Eskom of tomorrow This includes the correction of previous audit findings, The most • Achieve an investment-grade credit rating, by implementation of a renewed focus on ethics and Stabilise the business Re-energise the Grow the future trusted state- reducing Government guarantees by R105 billion, governance, and ensuring sufficient liquidity. Once • Clean up current business business owned entity while maintaining a moderate electricity price path attained, these actions will be maintained as they governance issues • Improve liquidity • Reduce reliance on which powers over time provide a solid foundation on which to build. • Stop the bleeding • Increase EBITDA debt funding Africa’s growth margin • Achieve standalone Given recent challenges, we have refined our strategy Secondly, a “stop-the-bleeding” phase has been investment-grade to respond appropriately. We aim to clean up introduced to stabilise the business. This phase credit rating governance issues, stop the bleeding and re-energise will focus on disciplined execution of the following the business in order to set a firm foundation priorities set in the prior year: for growth. At the same time, we will continue • Growing local and exports sales Disciplined execution implementing cost savings initiatives, while focusing on • Improving primary energy cost efficiencies strengthening our financial position through demand • Driving workforce optimisation stimulation, cost containment and efficiencies, while • Implementing advanced analytics striving to achieve a cost-reflective price of electricity. • Optimising capital spend while completing the new build programme This is all aimed at improving liquidity over the next two years, as well as improving the EBITDA margin to above 35%. Our goal BUSINESS remains achieving a standalone investment- PRIORITIES grade credit rating within the next five to seven years by reducing our reliance on debt 1 2 3 4 5 financing. Growing local Improving primary Driving workforce Implementing Optimising capital and exports sales energy cost optimisation advanced analytics spend while efficiencies completing new build 32 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 33 STRATEGY AND OUTLOOK continued Cost efficiencies will be focused mainly on optimisation Grow the future business Primary energy cash savings exceeded the target due Due to the funding and liquidity challenges experienced of coal, human resources and capital spend. These Lastly, the growth phase will be introduced through to lower than expected volumes, even though the over the past year, we have not yet been able to make up the majority of Eskom’s cost base, so initiatives to support our priorities and sow the seeds price was marginally higher than target on short- and release any Government guarantees. It is not foreseen Our business and strategy provide the greatest opportunity for efficiency for the Eskom of tomorrow, to set us on a path to medium-term contracts. Even so, the average increase that we will be able to do so in the foreseeable future. improvements. In addition, we will focus on other becoming a market-centric, technologically excellent in the purchase cost per ton was contained to 3.8% cost-saving initiatives such as reducing municipal debt, and energy-related service company with diversified for the year. Recovery plans are being put in place An analysis of risks has consistently found that the proper contract management to avoid penalties and revenue streams by 2035. to improve productivity at cost-plus mines, together majority of risks will have an adverse impact on cost overruns, as well as the completion of adequate with continued efforts to drive least-cost dispatch of the growth and innovation and capital optimisation maintenance to enable efficient servicing of demand. To establish the business over the medium to longer stations and optimise coal logistics. objectives. The ultimate consequence will be on term and prepare for the future, a transition to Eskom’s financial and operational sustainability, with We require greater emphasis on disciplined a diversified portfolio of products and services is Capital savings for the year exceeded R10 billion. impacts felt across the entire Eskom value chain. execution and achievement of targets within imperative. We plan to drive new products into new Most of the savings were achieved through project prudent budgets and agreed timelines. and existing markets – this will be managed through a deferments and some level of optimisation. We will Outlook set of targets matched to our risk appetite, building on continue to prioritise capex spend in line with our A number of issues have the potential to derail our Tracking and reporting will be key elements our core competencies. mandate. Workforce optimisation met target, although strategy. Our assumptions during the planning process contributing to the success of initiatives. are set out below. headcount reduction and overtime management In parallel, we are developing a new ambition for 2035, remain areas of concern. Re-energise the current business with a focus on implementation and disciplined execution Thirdly, the re-energise phase will be implemented. of actions. This new strategy, which is expected to be Advanced analytics, an area new to Eskom, identified This includes a focus on improving staff productivity finalised by September 2018, will focus on making Eskom initiatives worth potential savings of R2.3 billion, and financial ratios, ensuring environmental compliance the most trusted state-owned entity which powers although initiatives are in the very early stages. and selling non-core assets. This phase is focused on Africa’s growth. As the strategy unfolds during the coming continuing to do what we do, well. year, we will start implementing the outcomes. Issue Strategic assumption We will drive operational excellence and reliability By 2035 Eskom will be a market centric, Structure of the industry and Eskom’s role The current structure of the electricity supply industry will remain unchanged over the efforts across our generation fleet and network technologically excellent, energy and related medium term through a combination of effective maintenance, services company with a diversified revenue performance improvements and management. The Electricity price path Eskom’s price for electricity is not yet at a stage where it recovers efficient and prudent new build programme will remain a core focus area – portfolio focusing on South Africa and the rest costs. This has been further exacerbated by sub-inflation increases for the past two of Africa. years. The business will develop contingencies to respond to lower than requested tariff efforts will continue to complete Medupi and Kusile increases. More stringent levers including structural changes may be required within revised schedules and approved costs. Executing the strategy Eskom’s role in further new build New build options will be allocated to Eskom in future by means of the revised IRP Further savings of more than R50 billion on coal In the prior year, we indicated that we would focus on Ability to fund all new investments and Partnerships and private sector participation will be increasingly pursued spend compared to the previous Corporate Plan are five critical targets over the next five years: successfully market in Africa targeted, and our capital portfolio has been limited 1. Stimulating industrial production in South Africa Impact of self-generation technologies on Electricity sales are projected to increase by around 1% per year. Eskom will respond to to a maximum level of R45 billion per year for at least and SADC by achieving average annual growth customer retention declining sales due to emerging technologies through the marketing strategy the next three years, in support of our intent to move of 2.1% in local demand and 8% in cross-border Level of reliance on imports Imports will not exceed 15% of total capacity towards investment-grade ratios. demand over the medium term Cost containment initiatives Costs have been reduced across the company, including restricting the increase in primary We will prioritise grid connections to provide new 2. Transforming the South African coal sector by energy costs, with all cost elements being targeted to increase by no more than CPI on clients with access to electricity, while radically reducing primary energy spend by R43 billion over an annual basis. Cost increases beyond those assumed will further exacerbate financial improving client experience across key touch points the next five years, through greater efficiencies and pressures will be paramount. We will also strive to improve industry restructuring to ensure sustainability of Ability of our fleet to operate in order to As the proportion of non-dispatchable capacity on the system increases, dispatchable recovery of revenue from non-paying clients through the coal sector balance the system capacity will need to be more flexible, and more mid-merit plant will be required effective credit management, and where necessary, 3. Optimising planned capex spend by R25 billion over Ability to negotiate a carbon budget to suit Eskom will renegotiate its next five-year carbon budget in 2019, for the cycle to 2025. through stakeholder engagement. the next five years, while meeting regulatory and our fleet composition and electricity output After 2020, non-compliance with the budget will result in penalties licensing requirements required Due to the operational capacity outlook expected over the next five years and assuming plant availability 4. Establishing world-class capabilities in digital Ability to comply with existing environmental The Department of Environmental Affairs (DEA) will consider postponement of the of 80%, the production plan requires three of the commitments and the impact on our licence requirement to meet minimum emission standards, five years at a time, at which time we and advanced analytics to deliver R6 billion to operate will request further postponements. The requirement to install flue gas desulphurisation more expensive stations to be placed in cold reserve improvement in EBITDA (FGD) on older plant will be extended beyond 2025, due to the exorbitant cost involved, or extended cold reserve, with possible closure as as long as we comply with existing commitments 5. Reducing the burden on the fiscus by releasing a last resort. We will drive this process in a way R105 billion in Government guarantees, while Extent of municipal arrear debt Municipal arrear debt has increased at an alarming rate over the last three years. It is that optimises coal, people and capital costs across maintaining a moderate price path over time assumed that municipal arrear debt will continue to increase due to poor cash flow the fleet, and minimises negative environmental and positions of municipalities. Eskom will engage relevant parties to have appropriate policies socio-economic impacts. We may be faced with some Growth and innovation performance is below the and legislation revised in order to recover amounts due difficult and unpalatable decisions in the future. target set due to lower local and international electricity demand. The decline in local sales is related We must ensure that the company structure is to lacklustre economic conditions, while international responsive to the changing energy landscape, sales have been affected by the change in drought including scenario-based planning based conditions as well as increased competition in regional on price elasticity and demand elasticity for supply. We have been engaging with NERSA in different client groups. Recommendations pursuit of a short-term pricing framework to enable arising from the review of Eskom’s operating incentivising additional sales. Further efforts are also model will be implemented in the coming year. being made to accelerate client connections. 34 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 35 STAKEHOLDER ENGAGEMENT AND MATERIAL MATTERS Stakeholder engagement is an enabler of our strategy Eskom is mandated to support South Africa’s As a state-owned entity, we must implement Refer to “Our role in communities – Our reputation” on page 119 for more information and therefore a high priority, as our reputation growth and developmental aspirations, with government policy and strategy. It is therefore depends on and is influenced by stakeholder a significant role in the country’s socio- important to ensure alignment with the shareholder Our business and strategy perceptions, which in return affect our performance. to facilitate the best possible outcome for the We assure our stakeholders that we remain economic development. Continued validity of The Board has delegated the management of organisation. committed to achieving our mandate and that our social licence to operate relies heavily on stakeholder relationships to Exco, with oversight by we will place special focus on strengthening our willingness to be inclusive in decisions that Quality of relationships the Social, Ethics and Sustainability Committee (SESC). corporate governance and ethics going impact on sustainability. Our poor reputation was not caused by a single event, forward, to restore confidence and stability Stakeholder inclusivity requires ongoing conversations although the downward spiral over the past few years in the company. Our stakeholder engagement objectives are as follows: in order to understand and adequately respond has been constant, brutal and destructive. The decline to stakeholder needs, interests and expectations. • Identify, influence and educate key stakeholders on has been accelerated by the perceived lack of decision- our strategic priorities Exco has and will continue to meet with critical Responsible lobbying and shareholder activism form making by our leadership, continuous issues of poor stakeholders, including employees, to share and obtain an important part of stakeholder engagement. Our • Involve and engage key stakeholders as an governance and a rapid decline in liquidity and financial opportunity to improve our position within and support for our strategic and operational plans. engagements with stakeholders are carefully planned sustainability. Regrettably, these issues have remained in terms of scope and the engagement approach, with contribute to society, by pursuing and reporting our unresolved for an inordinately long period of time, Issues raised by stakeholders clear expectations of the intended outcome of the achievements although we are now taking bold steps to shift our Issues raised by different groups include the following: interaction. • Provide leadership with timely and relevant reputation in a positive direction. information, allowing them to understand societal and Our interaction with stakeholders stakeholder expectations and relationship dynamics We require effective stakeholder management to Stakeholder group Issues raised In support of our strategic goals, the stakeholder enable the successful execution of our strategy, and Government Performance against the shareholder compact, new build programme, electrification programme, job creation, debt engagement approach consists of interactive, two-way support our ability to create value. We also need to management, governance and leadership issues engagements and responsive relationships, ensuring educate stakeholders on the challenges and conflicting transparency and continuous engagement. Parliament Governance and leadership issues, municipal debt management, financial sustainability, procurement processes, policy priorities we face, and the trade-offs required to compliance, environmental compliance, performance against the shareholder compact, business continuity planning respond effectively to those challenges. Stakeholder groups NERSA Revenue increase, credit ratings, contract management, Government guarantees, nuclear programme, tariff increases, We operate within a complex landscape which involves cost containment initiatives Our stakeholder engagement strategy many different stakeholders with diverging objectives, Our stakeholder engagement strategy sets the Investors Loan agreements, declining credit ratings, funding plans, cash projections, governance and leadership issues, rising who are engaged through several engagement channels context for future engagements, to ensure that we debt, cost containment initiatives, cleaner technology adoption and touch points. Although Exco assumes ultimate improve relationships by increasing both the quality responsibility for the effectiveness of stakeholder Customers Inaccurate accounts, quality and reliability of supply, electricity pricing, customer connections, electrification grants, and quantity of conversations. Our stakeholder service levels engagements, the engagements with different engagement strategy is aimed at a better understanding stakeholder groups are the responsibility of various Business and Business opportunities, affordable electricity, governance and leadership issues, infrastructure management, of the vision and values of our stakeholder groups, functions within Eskom. industry improvement of procurement processes, and operational status updates which ultimately support the achievement of our objectives. The following graphic provides an overview of our key Employees and Job security, employee benefits, perceived lack of consultation and decisiveness, governance and leadership issues, organised labour electricity pricing, economic impact, business performance stakeholder groups; it includes only the most notable stakeholders per area. Stakeholders have been classified Suppliers Governance and leadership issues, financial and operational performance, health and safety, skills development as authorisers, influencers, enforcers or partners. programmes, supplier development and localisation, job creation, progress on the new build programme and workforce demobilisation Civil society Responding to climate change, renewable energy and nuclear programmes, cost management, governance and leadership issues, international reputation, perceived financial mismanagement, corruption, innovation projects International Renewable energy, collaboration and investment opportunities, skills development programmes, cross-border institutions collaboration opportunities, grid expansion into Africa Regulators Investors Media Suppliers Employees National Energy Regulator, Investors, lenders, Traditional, social Manufacturers, fuel Management, employees National Nuclear financial institutions, and digital media; suppliers, security, and organised labour Material matters numerous platforms – these include lenders and Regulator, National commercial banks, ratings international, national, networks, capacity Treasury agencies, economists, provincial and local expansion, technology, A matter is considered material if it influences or is investors, key customers, customer surveys, matters analysts media groups; agencies information services, IPPs likely to influence the decisions, actions and behaviour raised by the media and in Parliament, and more of either stakeholders or Eskom, or affect our ability generally via the Stakeholder Relations Department. to create value in the short, medium and long term. Authorisers Enforcers Influencers Partners Issues are ranked as being of high, medium, or low Materiality determination process materiality by considering the level of impact the On an annual basis, we consider those matters which issue has or could have on our ability to achieve our may influence decision-making or affect our ability to strategy and thereby create value, the level of concern create value; particular attention is given to changes to stakeholders and the degree to which we can in the strategic and operating environment since control and influence the issue. Those deemed to be Business Customers Civil society Government Parliament the previous review. We consider topics discussed material matters are covered in detail in our integrated Financial institutions, Large industrial customers, Environmental groups, Departments of Energy, Portfolio Committees, local and international metros and municipalities, lobbyists, academia, Public Enterprises, Select Committees, at Board level, risk management outcomes and report, while other matters are dealt with using other cooperations, chambers, commercial, agricultural specialists, analysts, Environmental Affairs, presiding officers, issues raised by various stakeholder groups through platforms. business associations, and residential customers, local and international Cooperative Governance leaders of parties, MPs, councils, forums cross-border states and pressure groups, and Traditional Affairs, Standing Committee on utilities, business and associations, coalitions, Water and Sanitation, Trade Public Accounts (SCOPA), industry civic groups, consumer and Industry, Traditional National Council of forums, religious groups Council, South African Local Provinces Government Association 36 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 37 STAKEHOLDER ENGAGEMENT AND MATERIAL MATTERS continued Current year material matters The material matters reported in our previous integrated report remain applicable, although the level of importance may have changed. Two matters which have become significantly more prominent are those dealing Our business and strategy with governance, leadership and corruption, and liquidity and financial sustainability. The following have been identified as material matters in this report. Current impact Timeframe of Current impact Timeframe of Material matter Associated strategic risk on value creation impact Material matter Associated strategic risk on value creation impact HC Poor governance and leadership Breakdown in relations with recognised organised Negative Short to medium FC Decommissioning stations or placing Reduced demand for Eskom’s electricity, coupled with Both positive and Medium to long instability, coupled with possible labour term units/stations into cold reserve, a increasing competition for end users, leading to revenue negative term MC SRC corruption and the prior year audit problem which is exacerbated by the shortfall qualification on irregular expenditure Further deterioration of Eskom’s reputation, caused NC impact of IPPs. Decommissioning will also by acts of unethical behaviour by Eskom leadership affect our workforce, suppliers and the Inability to sell in the region in the long term, partly due and senior management, which will impact Eskom on HC communities in which we operate to an inability to build transmission lines fast enough to multiple levels support the capacity increase, leading to stranded assets SRC in South Africa and over-investment in transmission FC Liquidity and funding, including credit Eskom saturating its borrowing capacity, coupled with Both positive and Short, medium assets in the region ratings downgrades credit ratings downgrades negative and long term Breakdown in relations with recognised organised FC Lack of policy and regulatory certainty, Market rules and long-term industry structure are Negative Short, medium labour MC including the electricity price path and unclear, coupled with the impact of revised IRP (or no) and long term treatment of RCAs, as well as the long- allocations, which may impact or alter our energy mix FC Strategy review and turnaround plan Inability to sell in the region in the long term leading to Expected to be Medium to long NC delayed revised IRP and flexibility stranded assets in South Africa and over-investment in both positive and term MC transmission assets in the region negative FC Financial sustainability and going concern, Declining levels of long-term profitability due to Negative Short, medium NC considering revenue adequacy and cost declining sales or limited ability to implement the and long term Breakdown in relations with recognised organised containment efforts growth strategy, inadequate price increases and HC labour unsuccessful cost containment initiatives SRC Eskom saturating its borrowing capacity, coupled with FC Declining or stagnant sales (utility death Reduced demand for Eskom’s electricity, coupled with Negative Short, medium credit ratings downgrades spiral), and pursuing opportunities for increasing competition for end users, leading to revenue and long term growth shortfall Declining levels of long-term profitability due to declining sales or limited ability to implement the Declining levels of long-term profitability due to growth strategy, inadequate price increases and declining sales or limited ability to implement the unsuccessful cost containment initiatives growth strategy, inadequate price increases and unsuccessful cost containment initiatives Further deterioration of Eskom’s reputation, caused by acts of unethical behaviour by Eskom leadership FC Escalating municipal and Soweto arrear Unreliable supply or increasing municipal debt driving Negative Short to medium and senior management, which will impact Eskom on debt away customers looking for reliable alternatives, thereby term multiple levels SRC decreasing sales MC Ensuring security of supply through Reduced demand for Eskom’s electricity, coupled with Positive Medium to long satisfactory plant performance, which increasing competition for end users, leading to revenue term Our strategic risks, which are largely aligned to the material matters, The stakeholder engagement strategy will set SRC would reduce the possibility of load shortfall are set out on pages 41 to 42 with the impact and associated the direction for much-needed conversations shedding timeframe Unreliable supply or increasing municipal debt driving to resolve issues and create opportunities for away customers looking for reliable alternatives, thereby cooperative partnerships. decreasing sales Outlook MC Coal and water security to ensure Unreliable supply or increasing municipal debt driving Positive or Short, medium The past year in the energy sector has been continued availability of power stations away customers looking for reliable alternatives, thereby negative and long term challenging, although there is cause for optimism for NC decreasing sales future improvement. It is reasonable to assume that MC Environmental performance and Inability to meet climate change mitigation targets Positive or Short, medium the majority of stakeholder groups will participate in compliance, including emissions and impacting our licence to operate negative and long term conversations to bring new perspectives, business and NC greenhouse gas reporting service delivery models to achieve mutually beneficial Failure to implement climate change adaptation outcomes. measures, which could affect plant performance MC Climate change, including energy mix and Inability to meet climate change mitigation targets Positive or Medium to long We plan to change the stakeholder experience complying with carbon budgets impacting our licence to operate negative term by building stronger, more enduring and trusting NC relationships with stakeholders. This requires Failure to implement climate change adaptation measures, which could affect plant performance thorough research and planning to set the scene for critical conversations, partly to control elements that MC Ensuring adequate skills to execute our Breakdown in relations with recognised organised Positive Medium to long pose a threat to our reputation and also to deepen our strategy and ensure optimal business labour term HC performance, while transforming the understanding of material stakeholder issues. workforce Lack of adequate, available and affordable skills 38 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 39 RISKS AND OPPORTUNITIES, ASSURANCE AND CONTROLS Enterprise risk management process Disaster risks Our strategic risks In some instances, we are being exposed to risk In line with King IV TM, the Board has oversight of the Risks inherent to our operations, that would have a Strategic risks are categorised across five dimensions, that exceeds our risk appetite and tolerance levels. management of risks and opportunities in Eskom. The significant consequence should they materialise, are namely: Furthermore, our integrated risk analysis raises a Our business and strategy Board has delegated this responsibility to management, deemed disaster risks. Those are generally managed • Market and competition, both local and regional concern that we may be moving towards the limit of through the Risk and Resilience Management Policy through our resilience initiatives, given their apparent • People our strategic risk bearing capacity, and levers used in and Plan, in support of the organisation achieving its low likelihood, coupled with the perceived adequacy of • Finance the past to address strategic risks, pertaining to finance strategic objectives. the controls. • Sustainability specifically, may no longer be available. For example, • Governance Government guarantees for SOCs are beginning to Eskom follows both a bottom-up and top-down Priority 1 disasters are those related to our core reach their limits, and fiscal constraints make further approach to risk management. Divisions are operations, which would have a major impact on The strategic risk landscape continues to be affected equity injections highly unlikely. Customers are also responsible for identifying and managing business risks, the country. Priority 2 disasters are external items by a number of key concerns, namely the continued beginning to switch to lower cost energy options as well as strategic risks allocated to them. Strategic which could impact our operations, and in so doing, impact of the NERSA determination on our financial where feasible, making price increases less effective risks are those which are most significant to our ability potentially lead to a Priority 1 disaster. Our identified sustainability; credit ratings downgrades; persistent and in fact, further deepening the utility death spiral to achieving our strategic objectives. All risks, including disaster risks remain as follows: high levels of municipal arrear debt; continued low referred to earlier. emerging risks, are considered by the Board, through or declining sales growth; and slow improvement in Priority 1 the Audit and Risk Committee (ARC). governance and action with regard to corruption. If the limit of the strategic risk bearing Nuclear incident capacity is reached and the risks materialise, Our risk management process has not changed Emerging strategic risks include low employee morale National blackout but may no longer be treated, it means that significantly in the past year. We still perform periodic Severe power system constraint due to cost saving initiatives, which may result in a scans of the environment to assess risks, and tailor explicit trade-offs will have to be made. This loss of jobs, as well as productivity concerns and skills our response within our risk appetite and tolerance will require innovative approaches and will be availability due to staff turnover. Declining levels of levels. Outcomes are monitored regularly, and our Priority 2 a key feature of the upcoming strategy review. required asset management or maintenance, due to direction adjusted when required. The aim is to have National industrial action capital constraints, are also likely. a strategy development function which is integrated Cyber-attack or catastrophic IT system failure Our strategic risks are noted below. and proactive, thereby assisting in adequate strategy Solar or geomagnetic storm National liquid fuels crisis execution. National drought Likely impact on Timeframe Worldwide pandemic of infectious disease Strategic risk Associated material matter value creation of impact Our approved Risk Appetite and Tolerance Terrorism or political instability Framework sets out the levels of risk that Economic or financial collapse Market and competition Eskom is willing to tolerate in pursuit of FC Reduced demand for Eskom’s Declining or stagnant sales (utility death spiral), and Negative Short, our business objectives; this is governed by electricity, coupled with increasing pursuing opportunities for growth medium and the Board through the enterprise risk and SRC competition for end users, leading to Ensuring security of supply through satisfactory plant long term revenue shortfall performance, which would reduce the possibility of load resilience function. A national blackout remains a low-likelihood, high- shedding The Risk Appetite and Risk Tolerance Framework is consequence disaster scenario given the various system Decommissioning stations or placing units/stations into cold barriers in place to prevent its occurrence. However, reserve aligned to internal risk and resilience management policies, and takes into consideration the principles given the severe impact of a national blackout should FC Unreliable supply or increasing Escalating municipal and Soweto arrear debt Negative Short, outlined in King IV TM, ISO 31000 on risk management it occur, and the lack of disaster preparedness for municipal debt driving away customers Ensuring security of supply through satisfactory plant medium and such an incident across the country, risk causes that SRC looking for reliable alternatives, thereby long term and the COSO internal control framework. decreasing sales performance, which would reduce the possibility of load increase the likelihood of a blackout need to be shedding Strategic risks avoided or rapidly treated should these occur, including Coal and water security to ensure continued availability of The assessment of strategic risks, which cut across implementation of load shedding when required. power stations the organisation, is performed by our Enterprise Risk FC Inability to sell in the region in the Decommissioning stations or placing units/stations into cold Negative Short, and Resilience Department, and clarified in workshops The automatic under-frequency system (comprising long term, partly due to an inability to reserve medium and with Exco and Board, with input from divisions and the seven stages of load reduction) is the final defence MC build transmission lines fast enough to Strategy review and turnaround plan long term involvement of key subject matter experts. Regular against a system blackout. The last incident that SRC support the capacity increase, leading resulted in the automatic under-frequency system to stranded assets in South Africa and environmental scanning monitors changes in our over-investment in transmission assets broader operating environment. Strategic risks and being triggered was on 14 September 2015. in the region associated treatment plans are reviewed regularly, with A system blackout differs substantially from manual People input from Exco and ARC. load shedding as experienced in 2008 and 2015. A FC Breakdown in relations with recognised Poor governance and leadership instability, coupled with Negative Short, Business risks blackout is an uncontrolled incident, which could affect organised labour possible corruption and the prior year audit qualification on medium and Line management is responsible for the identification the whole of the power system or a part thereof; it MC irregular expenditure long term of business risks, which may affect the achievement could take days to weeks to recover from such an HC Ensuring adequate skills to execute our strategy and ensure of divisional business plans. The accountability and incident. Load shedding is a highly controlled process, optimal business performance, while transforming the SRC with the points at which supply is interrupted being workforce responsibility to treat business risks also rests with line management, although Priority 1 business risks – those determined by the System Operator. Decommissioning stations or placing units/stations into cold reserve with the greatest potential impact on the organisation – are reported to Exco and ARC for oversight. Risk Strategy review and turnaround plan levels are based on a combination of likelihood and MC Lack of adequate, available and Ensuring adequate skills to execute our strategy and ensure Negative Medium to consequence criteria; the latter ranges from financial HC affordable skills optimal business performance, while transforming the long term to reputational, safety and environmental outcomes or workforce impacts. 40 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 41 RISKS AND OPPORTUNITIES, ASSURANCE AND CONTROLS continued Likely impact on Timeframe We have various disaster management structures In existing markets with existing products, we have to Strategic risk Associated material matter value creation of impact in place, which are activated based on the level of consider new generation investments carefully. Firstly, response required. When a functional response is we have to consider the timing to avoid stranded assets Our business and strategy Finance required in a given division, our Tactical Command as a result of the utility death spiral and secondly, we FC Eskom saturating its borrowing Liquidity and funding, including credit ratings downgrades Negative Short, Centre structures are activated, while our strategic should explore smaller, incremental responses to reduce capacity, coupled with credit ratings Strategy review and turnaround plan medium and Emergency Response Command Centre is activated the investment risk. Development of new generation downgrades long term when the response involves the entire organisation capacity in new markets in the sub-Saharan region is a FC Declining levels of long-term Financial sustainability and going concern, considering Negative Medium to at a national level. When a coordinated response longer term option that will consider local and regional profitability due to declining sales or revenue adequacy and cost containment efforts long term is required across several divisions in a particular market dynamics and appropriate technologies. MC limited ability to implement the growth strategy, inadequate price increases Declining or stagnant sales (utility death spiral), and province, our Provincial Joint Command Centres HC pursuing opportunities for growth (PJCCs) are activated. Revenue growth in existing markets through existing, and unsuccessful cost containment SRC initiatives Strategy review and turnaround plan modified or new products will prioritise disruptive products, such as renewables through rooftop PV, Sustainability battery storage, electric vehicles and smart FC Market rules and long-term industry Lack of policy and regulatory certainty, including the Most likely Short, technologies. This will allow us to offset lost sales and structure are unclear, coupled with electricity price path and treatment of RCAs, as well as the negative medium and On 31 January 2018, a severe storm damaged both continue meeting changing client needs. For Eskom MC the impact of revised IRP (or no) long-delayed revised IRP long term Eskom 132kV supplies to Sibanye-Stillwater’s Beatrix to be successful, we will have to approach our entire allocations, which may impact or alter Mine, leaving 950 miners trapped underground when NC our energy mix and flexibility service and product offering in an agile way so as to the mine’s emergency backup generators failed. reduce risk, while gaining maximum benefits. NC Inability to meet climate change Environmental performance and compliance, including Negative Medium to mitigation targets impacting our licence emissions and greenhouse gas reporting long term The Free State PJCC was activated from 1 to During the development of the growth focus, over SRC to operate Climate change, including energy mix and complying with 2 February 2018, and the incident was the first of its 250 opportunities for growth and diversification were carbon budgets nature to be managed using the new incident command identified. These include growth into new markets using system on which the team had been trained only existing skills and assets of the Eskom group, as well MC Failure to implement climate change Environmental performance and compliance, including Negative Medium to adaptation measures, which could affect emissions and greenhouse gas reporting long term two weeks earlier. Through a coordinated response as diversification into the products and industries by NC plant performance between Eskom and the mine, power was successfully leveraging intellectual property development and skills Climate change, including energy mix and complying with carbon budgets restored and no injuries were sustained. Sibanye- from within the group. For the upcoming period, our Stillwater’s leadership lauded Eskom for its handling predominant focus will be on the following key projects: Governance, ethics and fraud of the incident. • Commercialisation of Eskom’s spare fibre optic FC Further deterioration of Eskom’s Poor governance and leadership instability, coupled with Negative Short, reputation, caused by acts of unethical possible corruption and the prior year audit qualification on medium and capacity MC behaviour by Eskom leadership and irregular expenditure long term • Conversion of Eskom Rotek Industries’ transformer senior management, which will impact Our annual national simulation exercise was maintenance facility into an assembly facility HC Strategy review and turnaround plan Eskom on multiple levels successfully executed on 3 October 2017. The scenario • Investigation into the viability of a desalination SRC simulated was that of a national blackout, triggered by project in Cape Town, following the success of the a cyber-attack on Eskom’s distribution system. This desalination plant at Koeberg Eskom’s challenges have not improved over the past Enterprise resilience was a live exercise, and the first time that our new • Development of a business case for the viability of five years, but instead have become even more severe. Our enterprise resilience programme aims to incident command system was tested. the manufacturing of pebble bed modular reactor As part of the strategy review being undertaken, some ensure compliance with the Disaster Management fuel, as well as nuclear consulting The objectives of the exercise were to assess the tough decision-making will be required to manage the Act, 2002. This is supported by our implementation • Supporting the implementation of Eskom’s efficacy of divisional and provincial blackout plans; risks to achieving our current objectives, such as: of the international business continuity management integrated Africa strategy assess the integration of divisional, provincial and • Developing a comprehensive and innovative human standard, ISO 33201; compliance with key performance national planning; assess our emergency response • Investigation into viable micro- and mini-grid resources strategy to reduce staff numbers, as areas and enablers in the National Disaster maturity; evaluate the effectiveness of crisis solutions natural attrition will not be adequate Management Framework; and implementation of the communications; identify enhancements that will incident command system which is based on a joint One of the areas we are targeting is the sale of ash. • Possibly closing power stations that are contributing support planning for extreme incidents; and compare initiative between the Federal Emergency Management Promulgation of the revised National Environmental to the high cost base the observations of this exercise to those of the Agency (FEMA) and South Africa. Management: Waste Act, 2008 will relax the • Preparing a comprehensive plan to address liquidity previous exercise conducted in March 2016. The conditions on ash being deemed a hazardous material. challenges apart from borrowing, such as new outcome of the exercise was satisfactory, and lessons Whilst we are addressing our disaster management This will address the challenges experienced in the ways to increase revenue and implementing more learnt are being addressed. obligations in terms of the Disaster Management Act, past to sell ash to stimulate small business, and will extreme measures to assist in debt recovery concerns remain about the country-level planning for Furthermore, all nine provinces underwent surprise thereby enhance our drive to increase localisation • Implementing far-reaching steps to reduce capital a major electricity-related incident, such as a national simulation exercises during the past year. opportunities. and operational expenditure, by reducing waste and blackout. We have raised this concern formally with addressing corruption Assurance and controls the National Disaster Management Centre (NDMC) Identifying and prioritising opportunities • Reviewing the current operating model ARC is responsible for setting the direction for for the past two years. Whilst legal accountability for growth Risks and issues out of Eskom’s control, or those in terms of the Act rests with DoE, the NDMC has risk management, internal controls and combined Eskom Enterprises was mandated to establish a that we can only partially influence, will need to be confirmed that, given the scale of a national blackout, assurance. ARC further sets the direction for Growth Office to expand existing capabilities into new addressed through a national dialogue that includes it will coordinate this planning through a national Assurance and Forensic (A&F), our internal audit markets. Existing knowledge of nuclear operations, as issues such as the industry structure, the future role of technical committee. department, through the approval of its annual charter, well as transmission and distribution operations, could Eskom and the national energy mix. a risk-based audit plan and a resource plan to ensure be sold as intellectual property. Diversification into that the internal audit function has adequate resources new markets with new products is envisaged to be a to address the complexity of the risks faced by the longer term aspiration, albeit with short-term actions organisation. ARC also ensures A&F’s independence, as required to enable growth at a later date, particularly A&F reports functionally to ARC. where we have existing skills. 42 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 43 RISKS AND OPPORTUNITIES, ASSURANCE AND CONTROLS continued Systems, policies and procedures OHSAS 18001:2007, ISO 31000:2009 and AA 1000, practice and legislation. Identified areas of non- Compliance All aspects of our operations – from the construction to regulate environmental management, occupational compliance are remedied and monitored accordingly. We have adopted a compliance philosophy to respect of a transmission line, the generation of electricity, to health and safety, risk management and stakeholder We are confident that adequate compensating controls the rule of law and to comply with all regulatory Our business and strategy the payment of creditors – are supported, controlled engagement respectively. are in place where needed. Furthermore, disaster requirements that impact Eskom. As stated in our and guided by systems, policies and procedures. recovery plans are tested regularly. Compliance Charter, the Board is accountable for Standardised processes, policies and procedures have Risk management and internal controls compliance with regulatory requirements, which been developed for all aspects of the business; these The Board, through ARC, ensures that an effective Group IT remains ISO 9001:2008 certified, although is effected through ARC. The implementation and are updated regularly to ensure good governance risk management process is in place and that internal ISO 9001:2015 certification is in progress. ISO 27001 execution of compliance management has been and efficiency improvements. We track a number of controls are both adequate and effective. The provides the framework for Eskom’s information delegated to Exco. Our focus is on improving our KPIs to measure business performance, most notably combined assurance model provides ARC with an security management system, which includes overall compliance maturity, and understanding both the those determined by the shareholder in our annual overview of significant risks, as well as the effectiveness security policies, standards, risk treatment plans, as obligations incurred as well as the rights and protections shareholder compact, as well as additional KPIs set out of critical controls to treat those risks. well as controls and procedures, and also ensures that compliance affords. Any penalties arising from non- in our Corporate Plan. confidentiality, integrity and availability of information, compliance are reported via the PFMA process. A&F performs assessments on the governance, design, as well as requirements relating to the protection of We are ISO 9001:2008 certified, although we are in implementation and effectiveness of risk management, personal information (POPI). A review is being conducted of Eskom’s overall the process of transitioning to ISO 9001:2015, with as well as controls. The outcome of the assessments, compliance status at 31 March 2018. It is based on a certification expected during the coming financial based on the results of audit work planned and Group IT continues to align its objectives with per-act assessment and focuses on the following: year. Furthermore, in specific divisions or business completed by both internal and external assurance Eskom’s cost control initiatives, mainly through the • The extent to which specific controls have been units, we have implemented ISO 14001:2004, providers, concluded the following: implementation and support of advanced analytics. The linked to individual obligations following key initiatives are being targeted: • The extent of monitoring of implementation of the • Advanced analytics to assist in realising cost savings, linked controls primarily across predictive maintenance, fraud detection and improved customer interaction The assessment, to be completed in the coming • Automation of the primary energy value chain from financial year, will provide an indication of the overall Governance Risk management Controls pit to plant compliance risk faced by the organisation. • Transition to hybrid technologies, such as digital and cloud solutions Eskom’s new Board has prioritised A system for identifying, managing Although internal financial controls cleaning up all governance issues, and reporting on risk is in place and • Smart metering of customers’ consumption are operating effectively, efforts thereby demonstrating a high considered adequate. The majority are being made to improve certain ethical standard. With this tone of divisions are compliant with the operational controls. Control Our combined assurance model at the top, it is clear that there risk management process. There is deficiencies have, however, been is a migration towards restoring commitment that all divisions will identified in the compliance Eskom’s ethical culture and sound migrate to full compliance environment. Management Operations management and specialised review functions governance practices, which should interventions are under way to bring ultimately result in the achievement LEVEL the organisation to full compliance, Assurance over the adequacy of operational risk Line management of an ethical culture, satisfactory with particular reference to PFMA 1 management, effective adherence to control processes is responsible for performance, effective control requirements and delivery against business operational and sustainability managing risk and and legitimacy, as anticipated by performance objectives King IV TM Oversight by group executives Risk, resilience and compliance management Specialised control functions Interventions designed to address and improve the An IT charter and policies have been implemented LEVEL Assurance over Development and Management is control environment are continuing, with benefits and are reviewed on a regular basis to ensure the 2 the implementation maintenance of internal supported in Combined assurance of risk, resilience control frameworks executing its duties; expected to be realised in the medium to long term. confidentiality, integrity and availability of information. provides a layer of Improvements have been seen in most areas where The Information Risk and Compliance Committee and compliance and policies, reviewing control over risk management policies their suitability and these have been implemented. ensures that information and technology risks are management and processes monitoring their logged in the risk management system. Risks and application Oversight by Exco, Governance of technology and information treatment plans are also incorporated in the integrated ARC and SESC The Board has delegated its governance oversight and risk report submitted to ARC. responsibility for technology and information to ARC and Exco respectively. The Group IT business plan, Group IT governance structures are in place to Internal audit External audit which is aligned to the Corporate Plan, outlines how oversee and monitor effective use of information LEVEL Assurance over Independent reasonable Independent of technology and information will be approached and technology and to prevent, detect and respond 3 the adequacy and assurance that the management addressed in the organisation. Where appropriate, appropriately to cyber-attacks. Processes are in effectiveness of the financial statements Final oversight by opportunities and emerging trends are identified place to evaluate and monitor technology projects network of risk are free from material ARC and included in IT plans. The CIO is responsible to throughout their lifecycles. Our disposal policy governs management, control misstatement and are implement and execute effective technology and the responsible disposal of obsolete technology, and governance prepared, in all material information management. considering both environmental impacts and processes, including respects, in accordance key financial controls with IFRS. Provides information security. We are finalising a policy for the A&F includes reports on information and technology as represented by business insights on responsible use of technology and information. management internal financial controls audits in its submissions to Exco and ARC, thereby and financial reporting providing assurance on Group IT’s compliance with Group IT reviews compliance with applicable laws, legal and regulatory requirements. as well as compliance with standards in line with best 44 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 45 RISKS AND OPPORTUNITIES, ASSURANCE AND CONTROLS continued Combined assurance the combined assurance framework. Operational Combined assurance offers benefits extending responsibility for combined assurance has been OUR GOVERNANCE beyond mere compliance. It includes maximising delegated to A&F, which performs our internal audit risk and governance oversight; optimising overall function, facilitates and coordinates the execution of assurance activities; improved reporting to the Board combined assurance activities and reports back to 48 Governance framework and other committees; coordinated and relevant the committee. ARC receives reports on the status assurance, with an emphasis on key risks faced by the of governance, risk management, compliance and the 48 Board of Directors and committees organisation; as well as enhanced control efficiencies adequacy of preventative and corrective controls from 53 Executive Management Committee and a possible reduction in assurance costs. The the various levels of assurance. 54 Executive remuneration and benefits combined assurance model includes a combination of line function oversight, risk and resilience management With the introduction of King IV TM, combined and compliance functions, as well as other specialist assurance reporting was expanded to Board assurance services. subcommittees, enhancing oversight of operational responses to issues raised. This facilitates greater value The combined assurance model assists the Board and add, strategic risk discussion and widens the Board ARC in forming their view of the adequacy of risk oversight function beyond ARC. New Board is dealing management and internal controls in the organisation. decisively with corruption Our governance ARC is ultimately accountable for providing oversight The internal and external assurance of our year-end of the combined assurance activities in terms of reports and the results thereof are set out below: Framework(s) Report applied Internal assurance External assurance Outcome Lifestyle audits being Integrated report International Framework Reviewed by divisional Sustainability KPIs contained management, group executives in the shareholder compact Reasonable assurance by A&F of figures and associated narrative in the following conducted on all and acting CFO were externally assured by sections: Reviewed and recommended SizweNtsalubaGobodo Inc. (SNG) • Governance executives for approval by Exco, Audit • Finance review and Risk Committee (ARC) • Operational performance and Social, Ethics and • Supplementary information Sustainability Committee (SESC) Reasonable assurance provided by SNG on all but two KPIs Improvement process Approved by Board SNG also reviewed the integrated to address prior year A&F provided reasonable report for consistency with the annual assurance on certain aspects financial statements audit qualification of the report Annual IFRS Reviewed by finance Audited by SNG, our Qualified audit opinion relating to the financial management and acting CFO independent external auditors completeness of amounts disclosed in statements Companies Act, 2008 Reviewed and recommended for approval by Exco and ARC terms of the PFMA Except for the qualification, the New DOA framework PFMA, 1999 Approved by Board consolidated annual financial statements are fairly presented in terms of IFRS being developed ARC has concluded, based on the information and explanations provided by management and A&F, as well as through discussions with the external auditors, that the systems and processes of risk management and compliance are adequate, and that the internal accounting controls are adequate to ensure that the financial records may be relied upon for the preparation of reliable financial statements and to maintain accountability for assets and liabilities. Furthermore, ARC concluded that A&F is operated effectively, and has adequate expertise, resources and experience. Refer to the report of the Audit and Risk Committee in the annual financial statements for the full assessment of Eskom’s internal control environment 46 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 47 OUR GOVERNANCE Governance framework As a state-owned company, our purpose is to deliver Legislation and regulations of Incorporation, the shareholder compact and any The Board encompasses an adequate mix of diverse on the strategic intent as set out by our shareholder. We are subject to numerous laws and regulations which other applicable legislation or policy or procedure as skills and experience in the fields of science, We also adhere to the statutory responsibilities set govern our operations, including conditions relating to determined by the shareholder, known collectively engineering, law, finance, economics, accounting and out in the Companies Act, 2008 and the Public Finance tariffs, expansion activities, environmental compliance, as the governance framework. If there is a conflict auditing, governance as well as business and enterprise Management Act, 1999. as well as regulatory and licence conditions, such as between the Board Charter and the governance risk management. water usage and atmospheric emissions. framework, the framework will take precedence. As noted earlier, ethical leadership forms the At the date of approval of this integrated report, there foundation of effective corporate governance. Given Our licensing conditions place strict limits on Directors, in exercising their duties, shall apply are two executive directors and 12 non-executive the governance issues that we have faced in the recent plant emissions to reduce the country’s current the relevant principles of King IV TM, and explain directors, of whom 11, including the Chairman, are past, we are in the process of re-establishing a culture and future environmental footprint. the application of these principles. The roles and independent. Mr Mark Lamberti, an independent non- of ethical behaviour and ethical leadership at Eskom. responsibilities of the Chairman and the Group Chief executive director, tendered his resignation effective Integrating sustainability concerns with decision- Legislation that influences our governance includes Executive are detailed. 6 April 2018, due to personal reasons. making in an effective manner is of utmost importance the Electricity Regulation Act, 2006; Companies Act, The Charter sets out the Board’s responsibilities The composition of the Board at 31 March 2018 and to Eskom. 2008; Public Finance Management Act (PFMA), 1999; with regard to setting the strategic direction for the dates of appointment are indicated below, as well National Environmental Management Act, 1998; Executive authority over the company is vested the organisation, approval of policy and planning, as details of previous directors who served on the National Water Act, 1998; Preferential Procurement in the Minister of Public Enterprises, the overseeing and monitoring strategy execution and Board during the year. Policy Framework Act (PPPFA), 2000; Promotion of ensuring accountability. Our governance Honourable Mr Pravin Gordhan, MP. Access to Information Act (PAIA), 2000; Promotion of Current independent non-executive directors Administrative Justice Act (PAJA), 2000; Occupational Board constitution and appointments Mr Jabu Mabuza (Chairman), appointed 19 January 2018 The Board guides the group’s strategic direction which Health and Safety Act, 1993; and Employment Equity In accordance with our MOI, the Board must Dr Rod Crompton, appointed 19 January 2018 is set out in our Corporate Plan, and monitors Exco’s Act, 1998. The King IV TM Report on Corporate consist of a minimum of three and a maximum Mr Sifiso Dabengwa, appointed 19 January 2018 progress in implementing and executing the strategy. Governance for South Africa, 2016; the Protocol of 15 directors, the majority of which must be on Corporate Governance in the Public Sector; the Mr Mark Lamberti, appointed 19 January 2018, Our governance framework requires clarity of non-executive directors. resigned 6 April 2018 JSE Listings Requirements; and various international roles between the shareholder, the Board and the guidelines direct us regarding best practice in Non-executive directors are appointed to the Board Ms Sindi Mabaso-Koyana, appointed 19 January 2018 management of Eskom, as set out in the Strategic Intent governance and reporting. by the shareholder for a period of three years, Ms Nelisiwe Magubane, appointed 19 January 2018 Statement and our shareholder compact with DPE. Our MOI also regulates the company and our relationship reviewable annually, and may not serve more than Prof. Malegapuru Makgoba, appointed 8 December 2017 Comprehensive disclosure in the integrated report is restricted by the three consecutive terms. The People and Governance with our shareholder. The new Minister and new Board nature, volume and complexity of PAIA requests, together with the Dr Banothile Makhubela, appointed 26 June 2017 have reconfirmed their working relationship. percentage of refusals. The information is available on request Committee assists the shareholder by identifying the necessary skills, qualifications and experience required Ms Busisiwe Mavuso, appointed 19 January 2018 by the Board to achieve our objectives. Dr Pulane Molokwane, appointed 23 June 2017 The responsibilities of the Board have been discussed under “Ethical Board of Directors and committees leadership” on page 16 Prof. Tshepo Mongalo, appointed 8 December 2017 Governance of the group and the responsibility for driving good corporate citizenship is vested in a unitary Refer to pages 24 to 25 for the profiles and committee memberships Mr George Sebulela, appointed 19 January 2018 The following diagram depicts the elements of our of the Board, as well as an indication of the racial and gender equity board, supported by several Board committees and the balance of the Board, together with the mix of skills governance framework. Current non-executive director group company secretary. Ms Jacky Molisane, appointed 19 January 2018 No racial or gender targets have been set, and are In the last three years, we have seen a lapse in not currently considered necessary, given the profile Current executive directors governance, with the previous Board requiring all of the Board. Furthermore, as all directors are newly Mr Phakamani Hadebe, appointed 22 January 2018 decisions to be elevated to the Board. The new Board Strategic Intent appointed, succession planning has not yet been Mr Calib Cassim, appointed 28 July 2017 Statement is committed to strengthening governance and will addressed. Both of these issues will be considered in Relevant review all mandates and delegations of committees. policies and due course, in consultation with the shareholder. Previous non-executive directors Shareholder procedures 1 compact The Board believes that a three-person top team, Mr Simphiwe Dingaan, appointed 26 June 2017, As the Chairman is an independent non-executive resigned 19 January 2018 7 2 comprising a Group Chief Executive, a Chief Financial director, the Board does not consider it necessary to Officer and a Chief Operating Officer, is warranted. Mr Sathiaseelan Gounden, appointed 26 June 2017, appoint a lead independent director. Governance Mr Phakamani Hadebe was appointed as Group Chief resigned 19 January 2018 Codes framework Corporate Executive with effect from 1 June 2018, and the Board 6 3 Mr Zethembe Khoza, resigned 19 January 2018 of good Plan Qualifications of directors and active directorships are set out in the governance is in the process of appointing a Chief Financial Officer fact sheet on pages 134 to 135 and Chief Operating Officer. Key executive vacancies Ms Venete Klein, resigned 12 May 2017 5 4 were also filled through permanent appointments. Mr Giovanni Leonardi, resigned 19 January 2018 Changes in Board composition Relevant Memorandum of In January 2018, the Government announced the Ms Chwayita Mabude, resigned 23 June 2017 legislation Incorporation Board Charter The Board Charter, which is reviewed annually, was appointment of a new Board, with 13 non-executive Dr Pat Naidoo, resigned 19 January 2018 updated in July 2017. In it, the Board acknowledges directors, four of whom were existing directors, and Dr Baldwin Ngubane, resigned 12 June 2017 the need to align with King IV TM and sees it as an two executive directors, one of whom was an existing director. Twelve of the non-executive directors are Previous executive directors opportunity for directors to agree on the structures, regarded as independent. Ms Jacky Molisane is a DPE Mr Johnny Dladla, appointed 22 June 2017, resigned processes, roles and responsibilities of the Board to The materiality framework sets out the requirements employee and considered a shareholder representative, 6 October 2017 enhance the effectiveness and efficiency of the Board. for those matters which require approval in terms of and therefore not deemed independent. Mr Sean Maritz, appointed 6 October2017, resigned the PFMA and, together with our DOA framework, The Board is to carry out its role and responsibilities, 22 January 2018 guides the referral of matters from executive-level and exercise its authority as determined by the The removal of the previous Board members was in response to critical governance lapses Mr Anoj Singh, resigned 22 January 2018 committees to Board and also to DPE and National Companies Act, 2008, read with the PFMA, 1999, Treasury, where applicable. Eskom’s delegation of authority and its Memorandum over the past few years. 48 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 49 OUR GOVERNANCE continued Group company secretary Board evaluation Board committees Committees exercise their authority in accordance The group company secretary is an official with a A formal Board evaluation of the previous Board was The effectiveness of the Board is enhanced by with Board-approved terms of reference, which define central role in the governance and administration of conducted during May 2017 and the results tabled subcommittees to which it delegates authority without their composition, mandate, roles and responsibilities. the organisation’s affairs and is vital to the efficient and at the AGM in June 2017. A number of areas for diluting its own accountability. The Board appoints These terms of reference are aligned with the effective functioning of the Board, providing advice and improvement were identified, some of which have members to the various committees, with due delegation of authority policy, legislative requirements support to directors. already been addressed through the appointment of consideration of the necessary skills and experience and best practice, and are reviewed each year. the new Board. required. The group company secretary, Ms Suzanne Daniels, Deliberations of the committees do not reduce the was suspended on 2 October 2017 and remains on For further information, refer to Principle 9 under “Ethical leadership Appointments to ARC are made by the shareholder individual and collective responsibilities of directors suspension pending disciplinary action. In her absence, – Application of King IV TM principles” on page 21 in terms of our MOI. ARC and SESC are both regarding their fiduciary duties and responsibilities. the company secretary statement in the annual statutory committees as prescribed by the Directors are required to exercise due care and financial statements is signed by Mr Wynand van No evaluation has yet been conducted for the Companies Act, 2008. judgement in accordance with their statutory Wyngaardt, the acting company secretary. year to 31 March 2018 due to the appointment of obligations. the new Board, which makes an evaluation of the All Board committees are chaired by an Director induction and training independent non-executive director and consist The tables below set out the membership, purpose previous Board’s effectiveness redundant. A full A director onboarding plan is in place, comprising a of a majority of independent non-executive and key activities of the various Board committees, independent Board evaluation will be conducted one formal induction and site visits to familiarise directors directors. as well as the number of meetings held during the year after appointment of the majority of the new with Eskom’s operations. To ensure that all directors year. References to sections of the integrated report Our governance Board members. Preparations for this evaluation are remain informed about pertinent matters, continuous relevant to the duties and activities of the committees under way. training and updates are provided on a regular basis. are also provided. Time is set aside at each scheduled Board meeting to Board meetings address the training needs of the Board or individual A total of 27 Board meetings, including special and in- Audit and Risk Committee 15 meetings held during the year directors, and to brief directors on any new legislation committee meetings, were held during the year. Four Membership (at year end) Ms Sindisiwe Mabaso-Koyana (Chairman), Dr Rod Crompton, Prof. Malegapuru Makgoba, Mr George Sebulela or regulations. of these meetings, including special and in-committee meetings, were convened by the new Board. Invitees No external advisors were invited to committee meetings during the year All new Board members have undergone an induction The acting Chief Financial Officer and Senior General Manager: Assurance and Forensics are invited to attend process. No other planned training took place during all ARC meetings the year. Purpose Oversight of financial reporting and disclosure, risk management and internal control systems, as well as internal and external audit functions Board 26 meetings held during the year Key activities • Recommended the approval of the 2017 year end and interim group financial statements and integrated reports to the Board Purpose • Setting our strategic direction, aligned with DPE’s Strategic Intent Statement, and accepting that strategy, risk, performance and sustainability are inseparable • Reviewed the MOI, governance and ethics report, declarations of interest and delegation of authority • Providing oversight through an effective compliance framework and processes; ensuring that risks are • Accepted an external controls and governance framework review report and approved the implementation plan recognised and managed through the establishment of effective internal controls; internal audit is risk-based; • Approved the subsidiary governance framework policy and procedure and by promoting integrity in financial reporting • Oversight of the improvement process to remedy the prior year audit qualification on irregular expenditure • Ensuring Eskom is a responsible corporate citizen (ethically, socially and environmentally) and promoting an • Monitored financial performance and liquidity; IT governance, risk, security and compliance; ethics; nuclear ethical culture assurance; enterprise risk and resilience; litigation and new legislation; compliance management Invitees No external advisors were invited to Board meetings during the year References • Refer to the report of the Audit and Risk Committee in the annual financial statements • Refer to “Risks and opportunities, assurance and controls” Key activities and • Approved the revised Board Charter and Board committees’ terms of reference decisions by the new • Approved the integrated report and annual financial statements Conclusion The committee fulfilled all its statutory duties in terms of section 94(7)(f) of the Companies Act, 2008. The Board include • Approved submission of the 19.9% revenue application for 2018/19 to NERSA committee has adopted an appropriate formal terms of reference as its charter, has regulated its affairs in • Considered progress on the improvement process to address and remedy the prior year audit qualification compliance with this charter and has discharged all its responsibilities contained therein • Modified the value limit for probity checks by A&F • Approved the tariff suite for energy-intensive industry customers Investment and Finance • Approved the Eskom private sector participation policy Committee 8 meetings held during the year • Approved the contract and procurement strategy for the Tutuka low NO x burner refurbishment project Membership (at year end) Mr Mark Lamberti (Chairman), Ms Jacky Molisane, Prof. Tshepo Mongalo • Approved the conclusion of the power purchase agreements with IPPs relating to bid windows 3.5 and 4 Subsequent to Mr Lamberti’s resignation as a director on 6 April 2018, Mr Sifiso Dabengwa was appointed • Resolved that no separation packages will be offered to any executive who is requested to resign or faces as chairman disciplinary action as a result of any fraudulent or irregular activities committed by them in the course of their duties Invitees No external advisors were invited to committee meetings during the year • Resolved that any Eskom employee who has any interest in any company that was doing business with Eskom will have one week within which to extricate themselves from that business or they must resign from Purpose Investment and financial decision-making Eskom. Any employee caught conducting business with Eskom after this amnesty will face severe disciplinary Key activities include • Monitored progress on municipality and Soweto payments, and approved the write-off of bad debt action and where applicable, criminal charges • Approved mandates to secure funding, and various capital and refurbishment projects • Noted the feedback on disciplinary cases and suspended executives, and supported the efforts of the Chairman and the Interim GCE • Concluded firm power sales agreements with a number of SADC countries • Approved the transfer of the coal supply agreement from Anglo American lnyosi Coal (Pty) Ltd to • Approved the update on the disposal of Eskom Finance Company Seriti Coal (Pty) Ltd • Approved the borrowing programme for the 2018/19 financial year • Approved the negotiation of a bridge-to-bond loan facility for an amount up to R20 billion References • Refer to “Our infrastructure” Conclusion The Board has adopted an appropriate formal terms of reference as its Board Charter, has regulated its affairs • Refer to “Our finances” in compliance with this Charter and has discharged all its responsibilities contained therein. Furthermore, the Conclusion The committee has adopted an appropriate formal terms of reference, has regulated its affairs in compliance Board is satisfied that it comprises the appropriate balance of knowledge, skills, experience, diversity and with its terms of reference and has discharged all its responsibilities contained therein independence, and is satisfied with the reasons for removal or resignation of previous directors 50 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 51 OUR GOVERNANCE continued People and Governance The acquisition of goods and services by Eskom is a • Mr Willy Majola became the acting Group Executive: Committee 6 meetings held during the year cornerstone activity which enables the generation, Generation on 2 August 2017. He was appointed transmission and distribution of electricity. The Board as acting Group Executive: Transmission effective Membership (at year end) Mr Jabu Mabuza (Chairman), Ms Busisiwe Mavuso, Prof. Tshepo Mongalo Tender Committee provides the Board with meaningful 26 March 2018 Invitees No external advisors were invited to committee meetings during the year oversight of these procurement activities, and assists • Mr Anoj Singh, the previous Chief Financial Officer Purpose Nomination and remuneration of directors and senior executives; human resources strategies and policies; the Board in discharging its responsibilities as they was placed on special leave on 28 July 2017, and custodian of corporate governance relate to procurement activities, internal controls, then suspended on 28 September 2017. He resigned relevant codes of practice and external regulations, as effective 22 January 2018 Key activities include • Reviewed the governance and ethics report, the declarations of interest, delegation of authority, governance and ethics review, MOI well as ensuring ethical practices and behaviour. The • Mr Calib Cassim was appointed as acting Chief • Approved the remuneration framework for executives committee will be reconstituted during the coming Financial Officer and executive director, effective • Considered mentorship and succession plans for executives year and, as part of this process, independent technical 28 July 2017 • Noted and reviewed reports on industrial relations, employment equity, ethics, and employee engagement experts will be appointed to assist the committee in • Mr Sean Maritz was appointed as Interim Group survey feedback fulfilling its mandate. Furthermore, a more appropriate Chief Executive, effective 6 October 2017 until name will be adopted, to replace the misleading term References • Refer to “Board constitution and appointments” earlier in this section 22 January 2018, when he returned to his previous “Board Tender Committee”. • Refer to “Executive remuneration” later in this section position as Chief Information Officer. He was • Refer to “Our people” Meeting attendance suspended on 26 January 2018, and resigned on Our governance Conclusion The committee has adopted an appropriate formal terms of reference, has regulated its affairs in compliance Meetings of the Board and its committees are 28 February 2018 with its terms of reference and has discharged all its responsibilities contained therein scheduled annually in advance. Special meetings are • Ms Nondumiso Zibi was acting Chief Information convened as and when required to address specific Officer from 6 October 2017 until 10 January 2018. Social, Ethics and issues of importance. She was again appointed acting Chief Information Sustainability Committee 3 meetings held during the year Officer, effective 1 March 2018 Membership (at year end) Prof. Malegapuru Makgoba (Chairman), Dr Banothile Makhubela, Ms Busisiwe Mavuso Attendance of Board and subcommittee meetings is available in the • Mr Prish Govender was appointed acting Group fact sheet on page 137 Invitees No external advisors were invited to committee meetings during the year Executive: Group Capital effective 22 March 2017. He was suspended from 3 October to Purpose Oversight of Eskom’s social and economic development role, good corporate citizenship, environment, health Executive Management Committee 28 December 2017. He returned to his previous and public safety programmes, nuclear oversight, operational sustainability index and sustainability audit Exco is established by the Group Chief Executive position as general manager in Group Capital Key activities include • Reviewed ethics report and state of ethics in Eskom (GCE), and assists the GCE in executing the strategy on 29 December 2017. He resigned effective • Considered sustainability audit and the recovery plan set by the Board, as well as exercising executive 31 January 2018 • Noted the strategy to manage the older power stations, as well as pollution prevention and atmospheric control over day-to-day operations. • Mr Abram Masango, Group Executive: Office of the emissions plans The shareholder appoints the GCE. The shareholder GCE, was suspended effective 15 November 2017. • Provided nuclear oversight, including safety and new build may request the Board to identify, nominate His suspension was lifted on 24 April 2018 and he • Noted and reviewed a number of reports, including occupational health and safety; industrial and employee relations; skills development; stakeholder engagement; environmental management; climate change; and evaluate potential candidates. However, the returned as Group Executive: Group Capital operational sustainability; and electrification shareholder’s appointment of the GCE binds the • Mr Peter Sebola was appointed acting Group References • Refer to “Our infrastructure” company to the exclusion of the Board. Executive: Group Capital effective 12 October 2017 • Refer to “Our Interaction with the environment” until 29 December 2017, when he returned to his The Chief Financial Officer is appointed by the previous position as general manager in Group Capital Conclusion The committee fulfilled all its statutory duties as set out in Regulation 43 of the Companies Act, 2008. The Board, subject to approval by the shareholder. Group committee reports that it has adopted an appropriate formal terms of reference, has regulated its affairs in • Mr Kobus Steyn was appointed acting Group executives are recommended by the GCE and appointed compliance with its terms of reference and has discharged all its responsibilities contained therein Executive: Group Capital, effective 11 January 2018. by the People and Governance Committee; they are He returned to his previous position as general full-time employees of the company, subject to Eskom’s Board Tender Committee 14 meetings held during the year manager in Group Capital once Mr Abram Masango conditions of service. returned to work Membership (at year end) Dr Pulane Molokwane (Chairman), Mr Sifiso Dabengwa, Ms Nelisiwe Magubane Refer to page 136 for the profiles and areas of responsibility of Exco • Mr Phakamani Hadebe was appointed as Interim Invitees No external advisors were invited to committee meetings during the year Group Executive and executive director, effective members, including their appointment dates, qualifications and Purpose Ensure that the procurement system is equitable, transparent, competitive and cost effective to support directorships, if any 22 January 2018. He was permanently appointed commercial decision-making. The committee evaluates tenders over R750 million, as required by the approval with effect from 1 June 2018 limits set out in Eskom’s DOA, in line with the requirements of the PFMA, 1999 Changes in Exco during the year • Mr Thava Govender was transferred from Group Key activities include • Tenders approved include short-term coal supply agreements; power purchase agreements with IPPs and The following changes in Exco composition took place Executive: Transmission and appointed Group municipal generators; various capital and refurbishment projects; and supply of petrol, diesel and fuel oil to during the year in approximate chronological sequence: Executive: Generation, effective 26 March 2018. He the coal-fired power stations • Mr Matshela Koko was appointed Interim Group remains acting Group Executive: Sustainability and Risk • Approved the procurement strategy for spent fuel storage at Koeberg Nuclear Power Station Chief Executive effective 1 December 2016 • Approved the National Treasury Procurement plan for 2018/19 until 22 June 2017. He was suspended effective For further information on executives suspensions and terminations, References • Refer to “Our infrastructure” 2 August 2017. He returned to work on refer to “Ethical leadership – Allegations of corruption and • Refer to “Our interaction with the environment” 2 January 2018, but was again suspended on misconduct” on page 19 • Refer to “Our role in communities” 28 January 2018. He resigned on 16 February 2018 Exco subcommittees Conclusion The committee has adopted an appropriate formal terms of reference, has regulated its affairs in compliance • Mr Johnny Dladla was appointed as Interim Exco held 16 meetings during the year. with its terms of reference and has discharged all its responsibilities contained therein Group Chief Executive, from 22 June 2017 until 6 October 2017, when he returned to his previous Attendance of Exco meetings is shown in the fact sheet on page 138 position as Chief Executive Officer of Eskom Rotek Industries 52 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 53 OUR GOVERNANCE continued The following subcommittees assist Exco in the execution of their duties: It is important that Eskom is able to attract and retain Eskom participates in three external executive key leadership skills, especially over the longer term. remuneration surveys annually to ensure an objective Subcommittee Purpose/key activities In order to achieve this objective, we believe it is and independent view of executive remuneration is Capital Committee Investment decisions to support Eskom’s strategy important to appropriately remunerate our executives considered. Results are analysed per quartile, position Decisions about the commercial process and employees. This is achieved by reviewing the and survey companies. Considers the impact of decisions on the funding plan, equity and key financial ratios guaranteed remuneration of each executive on an Key areas of focus Exco Tender Committee Ensures that the procurement system is fair, equitable, transparent, competitive and cost effective as annual basis in the light of market trends. Eskom links The PGC is focused on the following: required by the PFMA executive remuneration to the performance of both the organisation and the executive. Eskom’s aim is to • Acting in the best interest of the organisation Finance Committee Decisions on financial strategy and budgets • Implementing DPE’s guidelines for the remuneration remunerate at the median of the market. Integration of Treasury and business activities and incentives of employees of state-owned Monitors funding pipeline, cash flow position and financial risk management To meet shareholder expectations and other companies Nuclear Management Management of Eskom’s nuclear objectives, both existing plant and new build challenges, it follows that Eskom can ill afford to • Adopting the principles of King IV TM on the Committee Interfaces with regulatory bodies and deals with licensing matters remunerate its workforce for merely showing up remuneration of directors and senior executives Risk management for nuclear operations for work. Hence, Eskom’s philosophy rests on the • Ensuring that executive directors, prescribed following three fundamental premises, namely to: officers and non-executive directors are Operating Committee Key operational decisions in Generation, Transmission, Distribution and new build programme Risk evaluation and mitigation approach to technical and operational health performance • Attract and retain talent remunerated fairly, responsibly and transparently, to Our governance • Reward good performance promote the achievement of strategic objectives and People Committee Human resources decisions, issues, processes and procedures positive outcomes in the short, medium and long • Compete in the commercial labour market on a fair Talent management and staffing term as required by Principle 14 of King IV TM and equitable basis Strategic workforce planning • Establishing that the remuneration and incentive Regulation, Policy and Reviews impact of regulatory and economic policies, as well as long-term energy policy DPE issued new guidelines for the remuneration and philosophy is aligned to the shareholder compact, as Economics Committee Development of regulatory response strategy and tariff outlook incentives of employees of state-owned companies in well as organisational and individual performance Oversight of Eskom’s regulated licences February 2018; it replaces the 2007 DPE remuneration Recommends regulatory submissions for approval guidelines approved by Cabinet. The revised Eskom and its shareholder have identified inequality as Approach to environmental policies and Eskom’s economic impact guidelines specifically address the remuneration of a collective national challenge and accordingly, it is vital executive directors, prescribed officers and non- that Eskom and the Board operate in alignment with Risk and Sustainability Consolidation and monitoring of overall business risks and processes executive directors. Adherence to the guidelines will the DPE policy of fiscal prudence, as well as in the best Committee Monitors operational risk within compliance guidelines improve governance and ensure that remuneration interests of the people of South Africa, when deciding Considers safety, health, environmental and quality compliance is fair, responsible and transparent, and that it aligns on remuneration policies. Reputational risk management performance measures with value creation. We will continue to fulfil our mandate and support Executive remuneration is being reviewed for the lives of all South Africans. However, we are alignment with DPE’s remuneration guidelines and facing significant financial and business sustainability Executive remuneration and benefits best practice. challenges, as well as operational, structural, and Update on Mr Brian Molefe’s pension pay-out Our approach to remuneration strategic difficulties that require both immediate action Mr Brian Molefe, Eskom’s then Group Chief Executive, The People and Governance Committee (PGC) is Eskom is the largest state-owned company in South and the development and implementation of a longer- reportedly went on early retirement from Eskom mandated by the Board to oversee all aspects of Africa and is comparable to the largest companies term strategy. As noted earlier, we are undertaking a effective 31 December 2016 and he received a pension remuneration in a fair, transparent, responsible and listed on the JSE in terms of revenue, local asset value strategy review, which is expected to be completed by pay-out. On 2 May 2017, the Board rescinded their equitable manner, and to ensure that the Board is fully and number of employees. Given the complexity September 2018. The remuneration philosophy must decision approving Mr Molefe’s early retirement, apprised of developments regarding the remuneration of Eskom’s business and the fact that we have to align with the new strategy to ensure that responsible and he returned as GCE on 15 May 2017. However, of executives and employees. participate in an extremely competitive labour remuneration practices support Eskom’s sustainability on 2 June 2017, the Board rescinded the subsequent market, Eskom must attract and remunerate key in the longer term. During the past year, the PGC complied with decision and Mr Molefe was asked to step down as talent comparable with that of large commercial all relevant regulatory and legal requirements GCE. Mr Molefe approached the Labour Court on the organisations. Accordingly, it is of the utmost Remuneration philosophy pertaining to the remuneration of employees The PGC assists the Board in approving, guiding and basis that overturning his reappointment was unlawful. importance that suitable remuneration assumptions On 6 June 2017, the High Court ruled that Mr Molefe across our organisation. The PGC also notes and benchmarking be applied. To this end, a suite of influencing key human resources policies and initiatives may not return to work until such time as the Labour that there was compliance with Eskom’s benchmark companies are used to determine the in accordance with shareholder requirements, social Court has ruled. executive remuneration philosophy throughout best fit in the market. We also include an evaluation expectations and legislation, such as the Employment the year, and no deviations were noted. to ensure that jobs of similar size and complexity are Equity Act, 1998. These duties are carried out in Three High Court applications by the DA, EFF and compared. Levels of remuneration are established to accordance with the committee’s approved terms of Solidarity regarding Mr Molefe were heard before a King IV TM has a specific focus on remuneration attract, retain and motivate executives of the quality reference that are reviewed and approved annually. full bench of the North Gauteng High Court, which in Principle 14. In particular, it emphasises that required to successfully run the organisation. ruled on 25 January 2018 that Mr Molefe had indeed remuneration practices should be equitable, The PGC is solely responsible for determining resigned, ordering him to pay back the R11 million responsible and transparent, linked to Eskom’s The committee can utilise the services of external executive remuneration, rewards or other benefits; received as part of his pension pay-out. The High strategy, and should result in continued shareholder consultants as and when required. External survey executives are not involved in the approval process. Court ruling was upheld in an appeal hearing in value creation. In this regard, the PGC aims to ensure companies were used to obtain benchmarking data and The PGC also retains an oversight right to adjust, April 2018. Mr Molefe has appealed the ruling. that remuneration is commensurate with the roles provide independent market trends. withhold or veto any remuneration payable to and responsibilities of executives and also linked to the executives. achievement of our strategic objectives, to promote Eskom’s long-term sustainability. 54 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 55 OUR GOVERNANCE continued The PGC makes recommendations regarding • Gatekeepers form a critical part of the short-term Short-term incentive scheme Performance conditions and targets in terms of the the remuneration of the GCE for the Board’s incentive framework. A gatekeeper must first be Executive performance compacts incorporate the long-term incentive scheme have been determined consideration. The Board then recommends the achieved for employees to qualify for a bonus. following main features: by the Board over a three-year period, in line with remuneration to the shareholder for approval. Employees will only qualify for a bonus once all Gatekeeper or hurdle conditions the Corporate Plan and shareholder compact with Moreover, the PGC approves the remuneration of identified gatekeepers have been met No bonuses are paid if the following conditions are not a weighting for each category. Conditions include other group executives in line with a framework achieved: financial and non-financial targets in areas such as approved by the shareholder. Factors that influence Executive remuneration includes a guaranteed package, ensuring business sustainability and reliability of • Net profit above R500 million, thus self-funding the remuneration of Exco members include their level other payments (such as personal security, fleet card electricity supply, providing for future power needs • An unqualified audit opinion of skill, experience, contribution to organisational and telephone costs), as well as short- and long-term through the new build programme, and supporting • 80% achievement of shareholder compact targets performance and success of the group. Incentives are incentives. The PGC reviews the structure of these South Africa’s developmental objectives. linked to the performance of the organisation and an packages annually to ensure an appropriate balance These conditions also apply to the short-term individual’s own contribution. between fixed and variable remuneration. incentive scheme for staff. Awards only vest if, and to the extent that, these targets are met. Potential vesting percentages The PGC has adopted the following principles and Group executives have permanent employment Key performance areas range from 0% to 70% of pensionable earnings; on- guidelines to ensure that business performance is contracts based on Eskom’s standard employment KPAs established for each group and division have a target vesting is set at 50% of pensionable earnings. optimised: conditions. The contract contains matters such as future focus and comprise the following: Pensionable earnings equal 70% of guaranteed the employee’s powers and duties, confidentiality, • High-priority initiatives pay. Threshold and stretch targets are set for • Remuneration policies are designed in a way remuneration including variable remuneration, Our governance that demonstrates a clear relationship between • Operational performance each measure. appropriate provisions of company policies and • Human capital performance executive performance and remuneration. This procedures, intellectual property rights, retirement • Quality, safety and environmental performance The vesting period for award performance shares is assists in succession planning and identification of benefits and more. three years from the date of grant. The PGC decides executives for senior positions High-priority initiatives constitute 45% of the individual at the end of that period on the amounts to be paid in • Executives and management are motivated to The newly appointed GCE has a five-year term compact; specific KPAs per group ensure that key line with the: pursue the long-term growth and success of Eskom contract. However, term contracts create a areas defined by Exco are addressed. Operational within an appropriate risk management control • Percentage of award performance shares which vest discrepancy with the standard employment conditions, performance constitutes 30% of the compact, human framework based on the performance conditions achieved as term contract employees do not qualify for benefits capital performance 10% and quality, safety and • Every effort is made to promote an ethical culture • Value of the award performance shares based on the such as pension fund, medical aid and the like. environmental performance 5%. The final 10% is that supports responsible corporate citizenship, grant value, escalated at the money market rate allocated at the discretion of the GCE. with appropriate short- and long-term incentives Structure of remuneration elements The vesting of the awarded performance shares is that are fair and achievable Remuneration of executive management is set out The calculation of short-term incentive (STI) pay-outs dependent on the scheme participant remaining in • Variable executive remuneration is linked to below. is based on an individual’s guaranteed remuneration. Eskom's employment throughout the vesting period. individual and organisational performance through However, individuals will only be able to benefit from The award lapses if employment ceases during the financial and non-financial targets set upfront for The remuneration of managerial and bargaining unit employees is the scheme if the gatekeepers are achieved. The vesting period (other than for permitted reasons such discussed under “Our people – Remuneration and benefits” on bonus for on-target performance is set at 35% of an KPIs, subject to achieving financial and/or technical pages 112 to 113 as retirement or death). gatekeepers. This serves to align the interests of individual’s guaranteed package and capped at 42%. executives with those of the shareholder Illustration of potential earnings for executive management Set performance conditions were attached to the on single total figure basis GCE’s interim appointment. If satisfactorily achieved, Remuneration element Executive management Link to strategic intent these would entitle him to a performance incentive, Assuming below expected subject to the Minister’s approval. However, the 100 performance (guaranteed pay only) Guaranteed The PGC approves the annual remuneration increases for executives in To ensure that talented remuneration April of each year; these are approved by the shareholder. Group executives individuals are attracted and GCE has decided to forgo any payment in light of our receive a guaranteed package. The guaranteed amount is fixed and includes retained current financial situation. 100 35 35 Assuming on-target performance compulsory benefits such as medical aid, pension, group life and death benefit. The guaranteed amount is reviewed annually to keep remuneration Long-term incentives in line with market trends based on an appropriate comparison group Performance shares are awarded to senior executives. 100 42 49 Assuming stretched performance Other benefits Cell phone allowance, fleet card and personal security To provide support to employees These awards are made on an annual cycle on 1 April to perform their role efficiently of each year, and have a three-year vesting period. The Guaranteed pay Long-term incentive value of the performance shares is deemed to be R1 Short-term incentives The short-term incentive scheme rewards the achievement of To manage and facilitate the Short-term incentive predetermined performance objectives and targets linked to the shareholder performance of executives at grant date and is escalated at a money market rate compact, subject to the achievement of defined gatekeepers. Performance through a results-driven to determine the value at reporting date. The PGC objectives and targets are determined by the GCE in individual performance approach that is collaborative, retains full discretion whether an award for a year will contracts for each financial year. The GCE’s objectives and targets are transparent and fair be made or not. No short-term or long-term incentives will be approved by the PGC awarded to executives for the 2017/18 financial Long-term incentives The long-term incentive scheme is designed to attract, retain and reward To ensure the long-term Operational performance is evaluated primarily against year. Exco members for meeting organisational objectives determined by the sustainability of the organisation the targets in the shareholder compact; the Minister of shareholder over a three-year period. The final vesting percentage is at the Public Enterprises is provided with quarterly reports discretion of the PGC on the progress towards achieving these targets. The Termination or Terminations are managed within Eskom’s conditions of employment Not applicable achievement of Eskom’s Corporate Plan requires separation benefits disciplined execution and cascading of performance indicators and targets into the performance compacts of both business units and individual employees. 56 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 57 OUR GOVERNANCE Safety tips continued Fees paid to non-executive directors Total remuneration earned by directors and that that save save lives lives Remuneration of non-executive directors is group executives Safety Safety tips tips for for the the Agricultural Agricultural Sector Eskom cares Eskom cares about about your your safety benchmarked against the norms for companies safety Category, R 000 2017/18 2016/17 of similar stature to Eskom and is in line with the Non-executive directors 6 026 6 439 Sector guidelines issued by DPE. The PGC submits proposals Executive directors 10 932 16 335 on non-executive director remuneration to the Other group executives 35 207 41 489 Board, which then makes recommendations regarding Total remuneration 52 155 64 263 Is electrical safety an issue Yes, the tendency to think that people only hurt themselves by using non-executives’ remuneration to the shareholder for in the farming sector? electricity unsafely in their homes is wrong. There are quite a few approval. Payment for termination of office electrical safety issues occurring on farms that Eskom needs to make Non-executive directors are paid a fixed monthly fee. Included in the executive directors’ remuneration owners and their employees aware of. earned, is a notice payment of R2 564 000 paid to The current Chairman did not earn any director’s fee Mr Anoj Singh, the former Chief Financial Officer, who for the year. resigned on 22 January 2018. The notice payment is in Implementation of remuneration principles and terms of his contractual agreement. There have been two incidents in the Northern Cape where an owner Have there been any and his employee tried to cut down branches close to powerlines. Both policies During the current financial year, certain changes have Short-term incentives incidents on farms recently? were killed when the branches made contact with the lines. Cutting No short-term incentives will be paid, as the down branches near powerlines is very dangerous and should never be been made to the reporting practice for executive gatekeepers were not achieved. attempted by members of the public. remuneration in the interests of improved clarity and transparency and to align with the reporting Long-term incentives requirements of King IV TM. In the tables in the annual Performance shares (award performance shares) were financial statements, two perspectives are provided: awarded to Exco members on 1 April 2014, 2015 and Eskom does patrol all lines on a regular basis but it would be most the first being a single total figure of remuneration that 2016. The Board resolved that no awards will be made What should they helpful if farmers and their workers could also check for tree branches reflects earnings attributable to performance delivered for 2017. have done? growing too close to a powerline. If you encounter a tree branch during the relevant cycle; the second perspective is growing too close to a power line, please contact Eskom immediately earnings received by each incumbent during the cycle. Performance shares awarded on 1 April 2015 vested and we will send out a team to cut the branches. on 31 March 2018, with a vesting rate over the three- Refer to note 49 in the annual financial statements for detailed year period of 38.73%. However, the Board applied remuneration information as required by King IV TM its discretion and resolved that the grant will vest at 0%. There will therefore be no vested shares payable Here are some safety tips for the agricultural sector In previous remuneration reports, only the short- in June 2018. Shares awarded on 1 April 2014 were term cash bonus was reported on an accrued basis redeemed during 2017. with long-term incentives being reported in the year Conclusion that they were paid to the participant. In the current 1. Look up, look out! Identify all powerlines on the farm – underground and overhead powerlines. Make sure that farm The People and Governance Committee is satisfied report, both the short-term cash incentive and long- workers know where they all are, especially the underground power cables if there are any. that Eskom has complied with its remuneration term incentives are reported on an accrued basis philosophy throughout the 2017/18 year, and no 2. Make sure that people and equipment stay at least three metres away from any powerline to prevent an incident. in the single total figure of remuneration, once the deviations have been noted. Electricity can electrocute you and damage your equipment if you’re too close to a powerline. performance conditions attached to the award element are met, in line with the requirements of King IV TM. To 3. Look out for broken or damaged powerlines. If you see one, stay at least 10 metres away. Report the fallen powerline determine cash earnings in the cycle, the accruals are to Eskom or your municipality immediately. removed, and accruals from previous cycles are added 4. Beware of the height of your equipment. Weather conditions can impact powerlines causing them to drop to a lower back. This has required the restatement of executive level. remuneration for the 2016/17 financial year to aid comparison. 5. If you’re involved in a collision with a powerline, stay in the vehicle, call the emergency number, your municipality or Eskom on 08600 37 566, and make sure everyone else on the site, including emergency first responders, stay at least 10 metres back until the power has been shut off. 6. Work gloves and rubber boots offer no protection against contact with a power cable. The best protection is proper gloves that electricians use. 7. The safest way to move a ladder, pole, pipe or rod from one location to another is to have two people carrying it. Carry these horizontally or flat to avoid contact with overhead wires. 8. Make sure that all family members and farm employees know where and how to disconnect power in case of an electrical emergency. 9. Make sure that your farm’s entire electrical system is properly grounded and conduct regular visual inspections of electrical boxes, wiring and extension cords to identify any damage. Ensure that extension cords are only used as a temporary measure. 10. Ensure the wiring in your barns and outbuildings meet the local Electrical Safety Code by having a qualified electrician check the system and review the wiring when a new installation is made. A new certificate of compliance must be completed by the electrician. Tel (sharecall): 08600 37566 • SMS: 35328 Tel (sharecall): 08600 37566 • SMS: 35328 Email: customerservices@eskom.co.za • www.eskom.co.za Powering your world Email: customerservices@eskom.co.za • www.eskom.co.za Powering your world 58 Integrated report | 31 March 2018 Facebook: Eskom Hld SOC Ltd • Twitter: @Eskom_SA SOC Ltd 59 www.eskom.co.za Eskom Holdings Facebook: Eskom Hld SOC Ltd • Twitter: @Eskom_SA www.eskom.co.za FINANCIAL REVIEW CHIEF FINANCIAL OFFICER’S REPORT 61 Chief Financial Officer’s report 66 Value added statement 67 Condensed annual financial statements 70 Our finances Adverse decision by NERSA on outstanding RCAs CALIB CASSIM Acting Chief Financial Officer Revised funding plan Eskom’s financial health has deteriorated over constraints, building on the previous 2.2% increase executed due to recent years as a result of lower demand, granted by NERSA for the 2017/18 financial year; this above-inflationary cost increases, especially amounts to consumers receiving an effective decrease renewed positive in coal and employee benefit costs, and an in electricity prices in real terms in a situation where Financial review costs to produce electricity are increasing. This sentiment electricity price that is not cost reflective. In addition, we embarked on an ambitious capital negatively affected our financial health, which has been exacerbated by lower than expected demand expansion programme to provide much- and upward cost pressures, combined with the capital needed generation capacity and extension of requirements of the new build programme and an Improved EBITDA our transmission network. These factors had an adverse impact on our balance sheet and increase in debt servicing costs. These factors have had an adverse impact on Eskom’s balance sheet and and EBITDA margin, liquidity position. All major financial ratios liquidity position. have deteriorated, and ratings agencies have despite price increase downgraded Eskom to sub-investment grade. of only 2.2% 16 3,0 During the first half of the financial year, we experienced unprecedented challenges with the execution of our 14 2,5 borrowing programme. This was mainly as a result of governance concerns raised by the State of Capture Coal purchase cost 12 Report released by the Public Protector, followed by 2,0 the release of a number of other investigative reports, increase limited to 3.8% as well as the commencement of the Parliamentary 10 inquiry into Eskom during the same period. The audit 8 1,5 qualification related to the completeness of irregular expenditure disclosed in terms of the PFMA, and the 6 subsequent emphasis of matter related to going concern 1,0 raised by the auditors during their review of our half- 4 year results negatively affected the market appetite for Eskom debt. This was further compounded by poor 0,5 2 governance and large-scale allegations of corruption that resulted in a loss of confidence in Eskom, negatively 0 0,0 impacting our reputation. 2013/14 2014/15 2015/16 2016/17 2017/18 2017/18 Target The most recent NERSA determination granted Debt/equity ratio FFO as % of gross debt Eskom another below-inflation tariff increase of 5.23% Cash interest cover Gross debt/EBITDA for the 2018/19 financial year – about 3% of this is Debt service cover reserved for IPPs, with the balance to cover growth in Eskom’s costs. This resulted in tough financial 60 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 61 CHIEF FINANCIAL OFFICER’S REPORT continued Furthermore, all three ratings agencies downgraded The appointment of a permanent Group Chief The Board has resolved that Eskom’s financial our credit ratings on a number of occasions over Executive at the end of May is expected to further 50 30 % R billion sustainability, liquidity and status as a going the past year. Common reasons for the downgrades improve investor confidence, with the appointment of concern will not be compromised in support of centred on concerns around our liquidity position, a permanent Chief Financial Officer expected soon. 25 operational sustainability and balancing supply perceived insufficient Government support and Potential investors are also expecting to see whether 40 and demand. limited visibility of our plans for placing our longer our turnaround plan will address current liquidity 20 term business and financial position on a sustainable issues, leading to a sustainable financial position. In their report, the external auditors have highlighted footing; this is affected by the uncertain regulatory 15 that material uncertainty exists, which may cast doubt environment in which we operate. Overview of performance 30 on our ability to continue as a going concern. In terms of the Electricity Regulation Act, 2006, the 10 Our standalone credit rating is deemed highly allowed revenue as determined by NERSA must enable Strategy and outlook speculative within the sub-investment grade rating an efficient licensee to recover the full cost of its 20 Crucial to the improvement of our financial 5 matrices. As an SOC, our credit rating enjoys a licensed activities, including a reasonable margin or position is increasing the EBITDA margin, through a substantial uplift because of implicit and explicit return. In developing the MYPD methodology, NERSA combination of delivering on cost savings initiatives 0 Government support, which also means our rating also adopted the following objectives: 10 and efficiencies, stimulating demand to increase sales, is linked to that of the Sovereign. While evidencing • Ensuring Eskom’s sustainability as a business while and attaining a cost-reflective price of electricity. We -5 strong support, Government has stopped short of also limiting the risk of excess or inadequate are targeting an increase in EBITDA to at least 35% providing further direct support, such as through returns, and providing incentives for new investment over the medium term, as this will ensure that most 0 -10 additional capital injections, to shore up our financial • Enabling reasonable tariff stability and smoothed 2013/14 2014/15 2015/16 2016/17 2017/18 2016/17 financial ratios will improve over the longer term. profile. Ratings agencies believe that further tangible changes over time, consistent with Government’s Target It is imperative that the regulatory environment is Government support may be required, as the recent socio-economic objectives seen to be predictable, compared to the existing Free funds from operations, R billion EBITDA margin, % NERSA tariff announcement has introduced further challenging regulatory environment with uncertainties EBITDA, R billion Net (loss)/profit after tax margin, % funding uncertainty over the medium term. We remain of the view that NERSA’s decision on around our future financial trajectory linked to tariff the 2018/19 revenue application was not made in The execution of a large portion of the planned funding setting due to NERSA’s inconsistent application of the accordance with the Act or the MYPD methodology. Nonetheless, the managing of arrear debt remains a initiatives for the year had to be postponed, and is now MYPD methodology. Furthermore, we believe the impact of this decision significant challenge, with invoiced municipal arrear debt planned for the first half of the coming financial year. will also have far-reaching consequences for our escalating to R13.6 billion (including interest) at year Given this, our original funding requirement of R72 billion sustainability, going concern status and ability to settle end (March 2017: R9.4 billion). We continue to engage was revised to R57 billion, necessitating further drastic debt commitments. It will also hinder our ability to 120 40 % R billion with Government and affected municipalities to find a cost savings efforts and limitation of capital expenditure. secure further funding. We are proceeding with a Financial review solution, as the current position is wholly unsustainable. As a result, liquidity levels were severely affected, court review to set aside NERSA’s decision. NERSA’s 35 100 especially in comparison to previous years, where revenue decision for 2018/19 contained numerous While operational performance, as measured liquidity had been maintained at levels above R20 billion. mistakes and inconsistencies and did not comply with by cash from operations, has improved over the 30 the MYPD methodology, neither is it cost-reflective. past five years, cash required for debt servicing 80 However, since the appointment of the new costs – both capital and interest – has increased 25 Board, we have seen steady progress in the We also note with dismay NERSA’s decision substantially, while cash required for capital stabilisation of the organisation, together with to grant less than half of the RCA balance 60 20 expenditure has remained constant at close to focused efforts to restore good governance, for the preceding three years, by allowing R60 billion per year. Over the past year, cash which has started restoring our credibility with only R32.7 billion out of R66.7 billion applied 15 raised from funding activities was not sufficient the financial markets. We have also made good for, given that we had applied the MYPD 40 to fund capital expenditure, thereby reducing progress in resolving the issues that led to the methodology and principles set out by NERSA 10 cash resources. prior year audit qualification. during previous RCA decisions. We are 20 considering our options in this regard. Eskom’s Board is responsible for assessing our status 5 Refer to the discussion under “Ethical leadership – Governance as a going concern and satisfying the external auditors We continue robust engagements with NERSA to that we remain a going concern. In order to do so, the 0 0 challenges” on pages 17 to 19 for further information 2018/19 2019/20 2020/21 2021/22 2022/23 advance the stability, credibility and maturity of the Board relies on projected cash flows. For the coming regulatory framework in South Africa, in order to year, there is a high level of certainty regarding the There is an increased appetite for Eskom bonds, and EBITDA, R billion EBITDA margin, % progress towards the achievement of cost-reflective cash flow projections and our ability to continue as a we have seen a discernible positive change in investor tariffs in the electricity supply industry. going concern. After that, the position is less certain sentiment in both the domestic and international markets. The most notable achievement is the Nevertheless, EBITDA and the EBITDA margin improved, as a result of the uncertainty around the future tariff Of note is the expected increase in IPP costs over the R20 billion bridge-to-bond facility provided by a mainly as a result of significant cost containment initiatives path. However, there is sufficient time for the strategy medium term. Expenditure is expected to increase consortium of banks in February 2018, significantly to compensate for the below-inflation price increase review being undertaken to show a firm response to to R42.8 billion by 2022/23, while energy supplied bolstering our liquidity. While it is still early to of the past year. We have saved close to R70 billion in the associated risk. will increase to 19 883GWh, at an average price of celebrate, we are encouraged by these sentiments. operating and capital expenses over the past five years, 226c/kWh. This will place a significant burden on This combination of factors and options allows the through the BPP programme that evolved into the Board to express confidence in the fact that there our primary energy costs, requiring more stringent Fitch Ratings, in its recent announcement of Design-to-Cost strategy. While strict cost containment is no risk to our going concern status, despite management of costs under our control. Furthermore, the decision to maintain our credit ratings, measures remain in place to minimise the increase in expectations of reduced cash flow. Furthermore, the cost of IPPs exceeds our short-run marginal cost, noted the positive measures that have controllable expenses, above-inflationary price increases the Board continues to critically examine the group’s and any replacement of our plant by IPPs will affect the been implemented by the new Board and are required to strengthen our financial position. electricity price. activities and costs in order to balance its cash flow management to turn the company around in However, despite various initiatives to stimulate demand, requirements. There is a focus on initiatives to identify their short tenure at Eskom. We believe that overall sales levels remain stagnant, limiting our ability to cost savings and efficiency opportunities, while also this is a sign of things to come. improve profitability. ensuring that funding options are more firm. 62 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 63 CHIEF FINANCIAL OFFICER’S REPORT continued Our current Corporate Plan does not include any employee benefit costs, maintenance and third-party a suitable opportunity arises. We plan to pursue should create sufficient investor appetite specific costs or impacts of the decommissioning spend. This will be done without negatively affecting a foreign issuance in the coming months to raise and depth in the market for successful of power stations, although it does include cost operating performance between R15 billion and R20 billion. implementation of our borrowing programme. reductions associated with the extended cold reserve • Borrowings: The approved borrowings programme We will also manage the risks surrounding our strategy. The premature closure of stations would will be managed through various financial instruments The debt repayment profile, based on existing debt only, is relatively pressured over both the short and credit ratings, as well as general investor and result in an acceleration of depreciation, which would including utilising Government guarantees lender concerns. negatively impact net income. • Debt collection: A strategy will be implemented to long term, with interest payments of approximately deal with municipal arrear debt, including curtailing R215 billion and debt repayments of R228 billion over Managing liquidity will also require major attention to the next five years, and maturities currently extending I greatly appreciate the support we’ve received so supply to defaulting municipalities. The rollout of far from our new Board, who have acted swiftly to ensure our status as a going concern, particularly over the Soweto split metering project and conversion to 2043. The weighted average term to maturity of the next three years. A key initiative to solving the debt securities and borrowings is just over seven years. start rooting out corruption and thereby improving of customers from post-paid to prepaid should our reputation. I also wish to congratulate our newly issues of liquidity and other financial health challenges also assist in managing arrear debt. Normal credit Our funding strategy will continue to prioritise longer is restricting Eskom-funded capital expenditure to term funding to support short-term debt maturities and appointed Group Chief Executive, Phakamani Hadebe control procedures will be applied to remaining – the road ahead is challenging, but I believe he is R45 billion per year for at least the next three years; customers alleviate repayment risk. Ideally, the term of our debt thereafter it can be increased should our financial should match the useful life of the assets being financed, up to the task of steering us back onto a course of • Restricting capital expenditure: This will be restricted sustainability and prosperity. In addition, our Treasury position improve. However, we will continue to focus on based on affordability; this amounts to R45 billion to align to the methodology applied by NERSA when the completion of the capacity expansion programme calculating the required rate of return. Department has worked tirelessly under the leadership per year for at least the next three years of our treasurer, André Pillay, to secure much-needed and pursue compliance to environmental requirements • Implementation of the recovery of RCA balances: Once within the prevailing capital constraints. Another area funding under extremely trying circumstances. the outstanding RCA applications are processed by I appreciate their monumental efforts, as well as that requiring urgent attention is the collection of specifically NERSA, any recovery thereof will improve liquidity. 70 municipal and Soweto arrear debt, which would unlock of every single Guardian who does their bit every day It is likely that, once liquidity has stabilised, RCA to contain costs in an effort to live within our means. It significant improvements in liquidity. amounts will be applied to settling existing debt 60 isn’t always easy, but it is necessary, and it will remain We will continue to manage liquidity through the • Balance sheet optimisation: This will be achieved so going forward. We all agree that things can no following levers: through working capital management and the sale of 50 longer continue as if everything is normal. non-core assets • Revenue: The migration of the price of electricity to I also need to acknowledge the strong partnerships we prudent cost-reflectivity is critical, as the current The funding strategy over the medium term aims to 40 have with DFIs that have supported Eskom through this price is not cost-reflective. It is envisaged that maintain a sufficient liquidity buffer and increasing difficult period, as well as other lenders and investors, above-inflationary price increases will be required committed funding facilities. Nevertheless, we need 30 particularly the consortium of banks which provided the to achieve cost-reflectivity. Furthermore, we are to increase cash from operations to such an extent it Financial review short-term facility in February 2018. We would not have focusing on increasing sales to energy-intensive can fund the cash required for debt servicing, as well as gotten through the worst without them. electricity consumers, including offering short-term a portion of capital expenditure required to maintain 20 incentivised tariffs operations, such as Generation outages, refurbishment Looking ahead, we expect that most ratios will first • Cost containment: The drive to contain operating of plant and replacement of components. Borrowings 10 weaken before improving – there is no single magical costs equal to or below inflation will be accelerated, should only fund capacity expansion. Cash from lever that can be used to achieve the goals we’ve set with the emphasis on primary energy costs, operations will improve if the EBITDA margin improves. ourselves. Furthermore, depreciation and net finance 0 2018/19 2019/20 2020/21 2021/22 2022/23 cost will increase as units from Medupi and Kusile are commercialised, which will put further pressure on Goal Improve liquidity Increase profitability Reduce debt reliance Capital, R billion Interest, R billion net profit before tax. Therefore, the key to improving Timeframe Short term Medium term Long term profitability is to increase the EBITDA margin to Description Liquidity, with reasonable debt Profit margins need to increase to We want to be in a position where our at least 35%. Nonetheless, financial sustainability is exposure, is crucial to maintaining offset the increase in depreciation and operational cash surplus is sufficient to In order to deliver on our financial strategy, we require achievable in the medium to long term, although it going concern status. Profitability may finance cost due to new plant being service debt requirements and capital support from multiple stakeholders. Furthermore, a will require sacrifice and dedication to execute the need to be sacrificed in the short brought online. This will in turn expenditure to maintain operations. demanding initiatives required. term, as operating and capital strengthen the balance sheet through Debt should be settled, and new debt number of risks could impede the execution of our expenditure is re-baselined improved levels of equity kept to a minimum strategy, such as: We’ve had to undertake various initiatives to contain Key metrics Debt service cover EBITDA margin Debt/equity ratio (gearing) • Possible further credit ratings downgrades costs in response to the MYPD 3 determination, such Cash interest cover Net profit before tax FFO as percentage of gross debt • Adverse decisions on the recovery of the RCA balance as the Business Productivity Programme, continual Cash balance Gross debt/EBITDA ratio and the upcoming MYPD 4 application, failing to result prioritisation of capital expenditure and the Design-to- in cost-reflective tariffs Cost strategy introduced a few years ago. Despite these the financiers have adopted of financing non-coal- • Further escalation particularly in municipal arrear debt efforts, the average standard tariff price increases have Our ultimate goal is to achieve a standalone related technologies. The positive investor sentiment • An inability to restructure our cost base due to not enabled a migration towards cost-reflective tariffs as investment-grade credit rating within the is beginning to show in the increased appetite for and external pressures envisaged in the Electricity Pricing Policy. next five to seven years by migrating towards prudent cost-reflective electricity prices, enquiries on the domestic bond front. Conclusion Cost containment initiatives alone will not effectively reducing our reliance on debt The same can be expected in the international bond The Board and various stakeholders are restore Eskom’s financial sustainability, and financing, which should allow us to optimise market, considering the yields that the emerging engaged in considering the role Eskom should therefore the price of electricity must migrate our balance sheet. market issuers provide to the international investors. play in the next five to 10 years to ensure it to cost reflectivity over time. The international bond market still provides sizeable contributes positively to the economy while The DFIs and ECAs, together with other lenders funding opportunities with a relatively short lead-time. remaining financially stable. The continuous that were beneficiaries of the ECA insurance cover, Although the cost of issuance in this market is higher drive to improve governance and achieve continued to support Eskom throughout the past than other instruments, the international market efficiencies in the business will improve Calib Cassim year, and have expressed interest in providing further remains a significant source of liquidity. The plan is financial and operational performance, which Acting Chief Financial Officer support going forward, in line with the new rules that to access this market every 12 to 18 months, when 64 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 65 VALUE ADDED STATEMENT CONDENSED ANNUAL FINANCIAL STATEMENTS Value added statement The group and company financial results set out in the condensed financial statements which follow have been for the year ended 31 March 2018 extracted from the Eskom Holdings SOC Ltd consolidated annual financial statements for the year ended 31 March 2018, which have been prepared in accordance with International Financial Reporting Standards (IFRS) and 2018 2017 in the manner required by the Companies Act, 2008 and PFMA, 1999. Rm Rm The consolidated annual financial statements have been prepared under the supervision of the acting Chief Financial Revenue 177 424 177 136 Other income 1 406 1 608 Officer, Mr Calib Cassim CA(SA), and were duly approved by the Board of Directors on 2 July 2018. Less: Primary energy and other operating expenses (105 578) (109 529) The consolidated annual financial statements have been audited by the group’s independent auditors, Value added 73 252 69 215 SizweNtsalubaGobodo Inc. in accordance with the Public Audit Act of South Africa, 2008, the General Notice Finance income 2 872 5 212 issued in terms thereof and International Standards on Auditing; they issued a qualified opinion relating to the Wealth created 76 124 74 427 completeness of amounts disclosed in terms of the PFMA. Except for the qualification, the consolidated annual financial statements are fairly presented in terms of IFRS. Value distributed 75 007 75 947 The consolidated annual financial statements, which detail the financial performance of the group and company, are available online Benefits to employees 32 655 36 833 Social spending to communities 180 201 The financial statements may also be inspected at Eskom’s registered office; limited hard copies are available on Finance costs to lenders 41 508 37 822 Taxation to Government 664 1 091 request. Any reference to future performance plans and/or strategies included in the integrated report has not been Value reinvested in the group to maintain and develop operations 1 117 (1 520) reviewed or reported on by the group’s independent auditors. Depreciation and amortisation 23 132 20 300 Borrowing costs capitalised (15 547) (18 233) Employee costs capitalised (3 201) (3 655) Condensed income statements Deferred tax (930) (820) Net (loss)/profit (2 337) 888 for the year ended 31 March 2018 Group Company Wealth created 76 124 74 427 2018 2017 2018 2017 Value created, R million Rm Rm Rm Rm Revenue per employee 3.65 3.72 Continuing operations Value added per employee 1.51 1.45 Financial review Revenue 177 424 177 136 177 424 177 136 Wealth created per employee 1.57 1.56 Other income 1 372 1 573 1 787 2 094 Value added per GWh generated 0.33 0.31 Primary energy (85 202) (82 760) (85 202) (82 760) Number of employees and fixed-term contractors 48 628 47 658 Employee benefit expense (29 454) (33 178) (24 455) (27 902) GWh generated 221 936 220 166 Net impairment loss (553) (1 669) (528) (1 629) Other expenses (18 228) (23 570) (25 598) (30 950) Profit before depreciation and amortisation expense and net fair value loss (EBITDA) 45 359 37 532 43 428 35 989 Depreciation and amortisation expense (23 132) (20 300) (23 110) (20 277) Net fair value loss on financial instruments, excluding embedded derivatives (1 898) (3 342) (1 998) (3 203) Average values per unit, R million Net fair value gain on embedded derivatives 123 1 611 123 1 611 4.0 Profit before net finance cost 20 452 15 501 18 443 14 120 Net finance cost (23 089) (14 377) (24 199) (15 389) 3.5 Finance income 2 872 5 212 1 874 4 290 Finance cost (25 961) (19 589) (26 073) (19 679) 3.0 Share of profit of equity-accounted investees after tax 34 35 – – 2.5 (Loss)/profit before tax (2 603) 1 159 (5 756) (1 269) Income tax 266 (271) 1 148 399 2.0 (Loss)/profit for the year1 (2 337) 888 (4 608) (870) 1.5 1. A nominal amount is attributable to the non-controlling interest in the group. The remainder is attributable to the owner of the company. 1.0 The statements of comprehensive income and statements of changes in equity can be found in the consolidated annual financial statements 0.5 0.0 17 18 17 18 17 18 17 18 20 20 20 20 20 20 20 20 Revenue per employee Wealth created per employee Value added per employee Value added per GWh generated 66 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 67 CONDENSED ANNUAL FINANCIAL STATEMENTS continued Condensed statements of financial position Condensed statements of cash flows at 31 March 2018 for the year ended 31 March 2018 Group Company Group Company 2018 2017 2018 2017 2018 2017 2018 2017 Rm Rm Rm Rm Rm Rm Rm Rm Assets Cash flows from operating activities Non-current assets 658 068 622 331 658 441 622 683 (Loss)/profit before tax (2 603) 1 159 (5 756) (1 269) Adjustment for non-cash items 44 710 47 932 46 193 47 985 Property, plant and equipment and intangible assets 634 593 592 848 634 962 593 296 Changes in working capital (2 448) (1 730) (2 580) (276) Future fuel supplies 7 157 8 190 7 157 8 190 Investment in equity-accounted investees and subsidiaries 372 364 479 479 Cash generated from operations 39 659 47 361 37 857 46 440 Derivatives held for risk management 13 705 16 868 13 705 16 868 Net cash flows (used in)/from derivatives held for risk management (1 726) (1 787) (1 738) (1 700) Investment in securities – 1 537 – 1 537 Finance income received 393 1 342 393 1 342 Other non-current assets 2 241 2 524 2 138 2 313 Finance cost paid (28) (22) (28) (22) Income taxes paid (724) (1 053) – – Current assets 72 122 78 879 70 530 78 797 Net cash from operating activities 37 574 45 841 36 484 46 060 Inventories 24 348 22 359 24 122 22 156 Cash flows from investing activities Loans receivable 18 14 6 201 6 187 Proceeds from disposal of property, plant and equipment 453 398 448 388 Derivatives held for risk management 1 873 1 000 1 875 1 000 Acquisitions of property, plant and equipment and intangibles (49 501) (57 259) (49 412) (56 572) Trade and other receivables 20 124 19 379 21 428 20 609 Expenditure on future fuel supplies (1 618) (639) (1 618) (639) Investment in securities 6 839 10 541 – 5 167 Increase in payments made in advance (40) (99) (40) (99) Financial trading assets 1 501 2 919 168 1 730 Expenditure incurred on provisions (4 788) (6 890) (4 788) (6 890) Other current assets 1 596 2 242 1 357 1 984 Net cash flows (used in)/from derivatives held for risk management (91) 389 (91) 389 Cash and cash equivalents 15 823 20 425 15 379 19 964 (Increase)/decrease in investment in securities and financial trading assets (1 492) 496 – – Non-current assets held-for-sale 8 926 8 799 40 70 Decrease/(increase) in loans receivable and finance lease receivables 31 26 (6) 203 Dividends received 63 71 27 32 Total assets 739 116 710 009 729 011 701 550 Finance income received 1 486 1 221 534 546 Equity Net cash used in investing activities (55 497) (62 286) (54 946) (62 642) Capital and reserves attributable to the owner of the company 170 336 175 942 158 075 165 964 Financial review Liabilities Cash flows from financing activities Non-current liabilities 474 353 453 777 473 788 453 275 Debt securities and borrowings raised 53 234 50 994 53 761 51 073 Payments made in advance to secure debt raised (929) (1 096) (929) (1 096) Debt securities and borrowings 348 112 336 770 348 060 336 690 Debt securities and borrowings repaid (12 548) (7 034) (12 591) (7 072) Embedded derivatives 3 434 4 032 3 434 4 032 Net cash flows used in derivatives held for risk management (1 824) (7 738) (1 824) (7 738) Derivatives held for risk management 16 570 6 767 16 570 6 767 Net cash flows from/(used in) investment in securities and financial trading assets 8 045 (1 142) 8 045 (1 142) Deferred tax 15 846 18 067 15 665 18 090 Net cash flows (used in)/from finance lease payables and financial trading liabilities (1 487) 343 (1 487) 343 Employee benefit obligations 13 725 13 790 13 404 13 458 Finance income received 1 034 2 365 1 004 2 328 Provisions 44 370 44 021 44 359 43 908 Finance cost paid (31 909) (28 788) (32 051) (28 888) Finance lease payables 9 533 9 819 9 533 9 819 Taxes paid (69) (49) (69) (49) Deferred income 19 796 17 700 19 796 17 700 Other non-current liabilities 2 967 2 811 2 967 2 811 Net cash from financing activities 13 547 7 855 13 859 7 759 Net decrease in cash and cash equivalents (4 376) (8 590) (4 603) (8 823) Current liabilities 92 745 78 607 97 148 82 311 Cash and cash equivalents at the beginning of the year 20 425 28 454 19 964 28 136 Debt securities and borrowings 40 572 18 530 44 525 22 017 Foreign currency translation (25) (45) – – Embedded derivatives 1 857 1 382 1 857 1 382 Effect of movements in exchange rates on cash held 10 647 10 651 Derivatives held for risk management 4 896 3 826 4 896 3 838 Assets and liabilities held-for-sale (211) (41) 8 – Employee benefit obligations 3 244 7 348 2 992 6 848 Cash and cash equivalents at the end of the year 15 823 20 425 15 379 19 964 Provisions 5 309 9 057 5 194 8 573 Trade and other payables 32 116 31 782 32 944 33 059 Payments received in advance 3 003 3 591 2 996 3 585 Other current liabilities 1 748 3 091 1 744 3 009 Non-current liabilities held-for-sale 1 682 1 683 – – Total liabilities 568 780 534 067 570 936 535 586 Total equity and liabilities 739 116 710 009 729 011 701 550 68 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 69 OUR FINANCES An organisation uses financial capital to fund its Cash and cash equivalents decreased to R15.8 billion operations. Sources of financial capital are either debt at year end (March 2017: R20.4 billion), boosted or equity, which can be generated from operations or by a R20 billion bridge-to-bond facility obtained in provided by shareholders. In a state-owned enterprise February 2018. Liquid assets, which include cash and like Eskom, the shareholder does not often provide investments in securities, decreased to R22.7 billion equity. This, coupled with inadequate profitability, (March 2017: R32.5 billion). An amount of R3.9 billion means that we are highly dependent on debt funding. is however not available as liquid funds, due to being In order to optimise returns, we need to increase reserved for Escap’s insurance solvency requirements. revenue and reduce costs. Furthermore, managing liquidity is of the utmost importance. Net cash inflows from operating activities for the year were R37.6 billion (March 2017: R45.8 billion). The In pursuing financial sustainability, we strive to move working capital ratio improved to 1.05 (March 2017: the organisation towards a state where the rate of 0.85), although the cash interest cover ratio declined return on assets is at least equal to the weighted significantly to 1.22 (March 2017: 1.73, restated); the average cost of capital, in order to ensure that we debt service cover ratio also declined considerably, remain a going concern and able to meet short-term to 0.87 (March 2017: 1.37). liquidity requirements, while also being able to service long-term debt and financial commitments. In order to Cash flows used in investing activities were achieve this, we have to increase the EBITDA margin R55.5 billion for the year (March 2017: R62.3 billion). to at least 35%, by reducing costs, increasing sales Acquisition of property, plant and equipment, volumes and also migrating to a cost-reflective price intangible assets and future fuel, exclusive of of electricity. The ideal is to be in a position where we capitalised borrowing costs, amounted to R51.1 billion are able to fund total debt service cost and a portion (March 2017: R57.9 billion), predominantly due to of capital expenditure from operational cash flows. We expenditure on the new build programme, Generation also have to reduce our reliance on debt funding. outage and technical plan requirements, as well as expenditure on our network infrastructure. Looking back on prior year focus areas We continued with initiatives to stimulate demand, For detail of capital expenditure incurred, refer to the table on although overall sales declined further. page 97 Financial review Arrear debt remains an area of significant concern. Net cash inflows from financing activities for the Municipal arrear debt continued to escalate over year were R13.5 billion (March 2017: R7.9 billion) for the year, and there has not been much progress on the group. Debt securities and borrowings raised collecting amounts due directly from customers on amounted to R53.2 billion (March 2017: R51 billion); behalf of struggling municipalities, although pilot we also repaid debt of R12.5 billion (March 2017: projects have commenced in two areas. Efforts R7 billion). Interest paid totalled R31.9 billion continue to convert customers to prepaid metering. (March 2017: R28.8 billion). HIGHLIGHTS CHALLENGES We were forced to intensify the drive to contain Price applications to support revenue • R20 billion facility signed in February 2018, easing • Several credit ratings downgrades over the past year operating costs, focusing on primary energy costs, requirements liquidity pressures • Most financial ratios worsened year-on-year and remain employee benefit costs, maintenance and third- We requested permission from NERSA to submit a • Cost savings exceeded BPP target, and additional savings well below acceptable levels; substantial improvement is party spend, as a result of the liquidity challenges one-year revenue application for 2018/19, given the achieved in response to liquidity challenges needed to boost credit ratings • EBITDA improved to R45.4 billion, and EBITDA margin • Matching the term of external debt to the life of the plant experienced during the year. Advanced analytics to regulatory uncertainty resulting from the Borbet case to 25.91% being financed, with regulatory returns linked to the life achieve cost savings, such as in performing predictive reported on last year. We duly submitted a revenue of the asset maintenance and optimising coal burn, are in the early application of R219.5 billion, equating to a 19.9% • Overall sales remain stagnant due to challenging stages of implementation. Capital optimisation also standard customer tariff increase, of which NERSA economic conditions continued in order to reduce our funding requirement. approved total allowed revenue of R190.3 billion, • Expenditure on IPPs account for 23% of primary energy corresponding to an average standard tariff price costs, although IPPs supplied only 4% of GWh energy Managing liquidity sent out increase of only 5.23% for 2018/19. Of that, IPP One of the biggest issues we’ve had to face this year increases account for about 3%, with the balance • Growth in depreciation and net finance cost linked to commissioning of units under the new build programme was managing liquidity. The audit qualification related available to cover growth in Eskom’s costs. to the completeness of irregular expenditure in the 2016/17 financial statements, coupled with ongoing Together with the 2.2% increase for 2017/18, we IMPROVEMENTS LOWLIGHTS governance issues, severely restricted our access to received an average increase of 3.72% for the two funding in both domestic and foreign markets. years, with the average for Eskom being only 2.2%, • Liquidity improved since half-year position • Severe liquidity challenges due to impact on access to • Export sales volumes were maintained funding of prior year audit qualification on irregular which is wholly inadequate to ensure the recovery of expenditure and governance-related issues Other issues contributed to our liquidity problems, prudent costs while earning a fair return on assets, as • Increase in the average purchase cost per ton of coal was restricted to 3.8% • Price increases of 2.2% in 2017/18 and 5.23% for 2018/19 not least of which being the price increase of only 2.2% required by the Electricity Pricing Policy. This follows • Headcount reduced slightly year-on-year, before insufficient to sustain current operations granted by NERSA for the 2017/18 financial year, as increases of 12.69% and 9.4% for the preceding two accounting for appointments required by the Labour • Only R32.7 billion of the RCAs of R66.7 billion relating well as escalating municipal arrear debt. In an effort to years, based on the 8% awarded under MYPD 3, Relations Act, 1995 to three years of MYPD 3 was approved by NERSA in manage the problem, we restricted our organisational together with the recovery of the regulatory clearing June 2018 cash requirements through targeted savings on account (RCA) balances awarded in those years. • Considerable escalation in municipal arrear debt operating and capital expenditure. 70 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 71 OUR FINANCES continued The impact of the decision is expected to have We also submitted our RCA application of R23.9 billion Performance of the BPP programme per value stream consequences for our financial sustainability, going for the 2016/17 financial year, bringing the total Value stream, Target concern status and ability to settle debt commitments, of the three outstanding RCAs for MYPD 3 to R billion 2013/14 2014/15 2015/16 2016/17 2017/18 Total Target met? which also means we will be unable to release R66.7 billion. Written comments on these were due Government guarantees. It may also hinder our by 23 March 2018, and country-wide public hearings Revenue 0.1 0.4 1.3 (0.4) 0.1 1.5 4.8 ability to raise further debt, as investors require price were held during April and May 2018. In response Primary energy – 2.8 6.2 9.4 6.3 24.7 15.6 certainty. to concerns raised by stakeholders during the public Employee benefit costs – 0.9 3.5 4.2 5.1 13.7 16.7 hearings, we have agreed to recovery of the approved Repairs and maintenance – 0.4 0.5 2.1 1.6 4.6 2.3 We don’t believe NERSA’s decision on the 2018/19 RCA balance in a phased manner, likely from 2019/20 Finance stream 0.1 0.3 0.3 0.5 0.5 1.7 1.0 revenue application was made in accordance with onwards. the Electricity Regulation Act, 2006 or the MYPD External spend 2.1 3.9 5.7 4.4 7.1 23.2 21.5 methodology, both of which require NERSA to make a On 14 June 2018, NERSA announced its decision Total 2.3 8.7 17.5 20.2 20.7 69.4 61.9 revenue decision that allows Eskom to recover efficient to allow R32.7 billion in respect of all three RCAs costs and a fair return. We will approach the court to submitted, amounting to less than 50% of the amount set aside NERSA’s decision. applied for, despite Eskom applying the MYPD A significant portion of the savings has been driven by In response to the liquidity challenges experienced methodology and the principles followed by NERSA cost containment activities, including the reduction in during the year, the business was challenged to realise during previous RCA decisions. NERSA has indicated the baseline budget at the start of BPP in maintenance, an additional R10 billion in savings on operating costs that it will issue its reasons for the decision in due employee benefit costs and other general expenses. during the year, approximately half of which was Overview of the RCA mechanism Efficiencies have been realised via the Tetris expected to result in cash savings. This was supported course, and will provide the implementation plan for As outlined in the MYPD methodology, the RCA is maintenance plan through optimisation of time and by a further R5 billion cash savings targeted on capital recovery of the RCA balance by 30 September 2018. defined as a risk management control and pass-through people. Other savings on operating expenditure expenditure. These targets were largely achieved. mechanism. The methodology states that “the risk of The RCA forecast for 2017/18 is approximately include the containment of spend on consulting and excess or inadequate returns is managed in terms of R21 billion, driven by under recovery of revenue other office expenses. However, savings on employee Group funded capital expenditure, excluding the RCA. The RCA is an account in which all potential of R24.7 billion, reduced by under expenditure of benefit costs have not been fully realised due to higher electrification connections funded by DoE, amounted adjustments to Eskom’s allowed revenue that has been R3.8 billion on primary energy. We envisage making than anticipated headcount and other levers identified to R48 billion for the year (March 2017: R60 billion), approved by the Energy Regulator is accumulated.” this RCA application after the publication of our for savings not fully materialising. mainly due to a reduction in spend in Group Capital 2017/18 annual financial statements. In accordance with and Generation, in accordance with available funds. When a new MYPD revenue application is made, it is Primary energy-related savings are attributable to the MYPD methodology, we will continue to apply for Managing arrear debt forward-looking and based on projected assumptions. lower coal costs and lower international purchases. RCAs on an annual basis. Global and local economic conditions, for instance Nevertheless, there is a direct link between MYPD The coal price was favourable compared to budget, commodity prices and consumer confidence, are Financial review decisions and RCA applications as risks are managed in We are in the process of preparing for a three-year particularly for the 2015/16 and 2016/17 financial years. RCA applications. Thus if a significant risk is passed to MYPD 4 revenue application, covering 2019/20 to affecting customers’ sustainability, thereby impacting Eskom at the point of a revenue decision, the impact 2021/22. Our submission to NERSA will be made in The remaining savings are due to net improvement in the revenue we generate and their ability to pay. In would materialise in an RCA application. The consumer the second half of the 2018 calendar year in terms of revenue recovery and revenue protection, as well as some customer segments, we also have to contend is therefore protected from the risk at the initial stage regulatory timelines. cash savings due to restructuring and implementation with social issues, such as a culture of non-payment during the revenue determination. Variances in RCA of financial market instruments, such as cross-currency and theft. applications are linked to two key sources: Controlling expenditure to maintain liquidity swaps and other swap transactions. Business Productivity Programme Total debtors days declined year-on-year to 71.11 days, • Variances in costs due to a changing environment Other cost savings initiatives mainly due to the deterioration in municipal debtors The five-year Business Productivity Programme (BPP) and assumptions after the MYPD decision Cost savings initiatives identified in last year’s days, with levels of municipal arrear debt remaining concluded on 31 March 2018. The programme was • Assumptions made during the MYPD revenue implemented to close the revenue gap created by the Corporate Plan relating to coal spend and capital unacceptably high. decision which do not materialise MYPD 3 revenue decision, which granted an increase expenditure are showing success, although sales growth initiatives are not progressing as well We continue to apply the IAS 18 accounting principle The RCA is thus a backward-looking reconciliation that of 8% per year against 16% per year which we applied of not recognising revenue if it is not considered for. BPP savings are measured in accordance with as anticipated due to lacklustre local economic determines the variance between the amount awarded conditions, combined with increased regional collectible at the date of sale, although we carry on by NERSA based on the forecast contained in the the baseline committed to Government as part of its billing customers based on consumption. As a result, support package provided in 2015/16. competition impacting the selling price of exported MYPD application, and the revenue actually achieved electricity. Initiatives to utilise advanced analytics to external revenue and debtors of R3.3 billion were not by Eskom. Actual results are based on Eskom’s audited Two major goals were to unlock cash and/or contain deliver cost savings are in the very early stages. No recognised during the year (March 2017: R3.2 billion); financial statements. A variance arises if Eskom either expenditure, and to assist the business in delivering Government guarantees have yet been released. the cumulative figure is R8.5 billion. does not achieve or exceeds the awarded revenue, or sustainable productivity improvements. Value streams incurs costs that are higher or lower than those that were identified where efficiencies could be unlocked or Key debt management indicators at 31 March 2018 were taken into account when NERSA computed the spend could be contained. A systematic approach was Target Target Target Actual Actual Actual Target allowed revenue under the MYPD. followed to develop and define value packages within Measure and unit 2022/23 2018/19 2017/18 2017/18 2016/17 2015/16 met? The RCA balance could be either in favour of Eskom or each of the value streams. Arrear debt as % of revenue, % SC 2.60 1.70 2.17 2.73 2.42 1.14 in favour of the customer, and is subject to a prudency For the year under review, we achieved BPP savings review by NERSA. The timing and method of the of R20.7 billion against a target of R18.9 billion, largely Average debtors days (including Soweto), days SC 59.47 78.95 73.38 71.11 57.31 50.05 recovery of the RCA balance is determined by NERSA, due to lower spend on primary energy and external Debtors days – municipalities, average 95.09 96.27 89.00 76.63 53.25 42.93 and the methodology allows for the adjustment of debtors days costs. The programme achieved overall savings of Debtors days – large power top customers future tariffs to address past variances; this may result R69.4 billion over five years, thereby exceeding the 14.88 14.88 15.40 13.89 15.34 15.51 excluding disputes, average debtors days in an increase or decrease of future electricity prices target of R61.9 billion by R7.5 billion. Other large power user debtors days by adjusting Eskom’s allowed revenue. 16.52 16.66 16.30 16.64 16.78 16.24 (<100GWh p.a.), average debtors days Debtors days – small power users excluding 39.64 46.08 48.20 43.36 48.75 48.24 Soweto, average debtors days 1. Debtors days are based on amounts processed on our billing system, and shown before accounting adjustments relating to uncollectability. 72 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 73 OUR FINANCES continued Municipal arrear debt Invoiced municipal arrear debt by province, R million The initiatives proposed in the prior year in response Total invoiced municipal arrear debt increased to concerns raised by municipalities and SALGA have significantly, to R13.6 billion (including interest) Revenue collection pilot projects been implemented. Since July 2017, interest charged at year end (March 2017: R9.4 billion). The top 20 A pilot project commenced in Phumelela Local on overdue amounts has reduced to prime plus 2.5%, defaulting municipalities constitute 82% of total Municipality in the Free State during October 2017. with payments now being applied to settle capital 542 invoiced municipal arrear debt (March 2017: 79%), The goal is to install prepaid meters and collect before interest. Furthermore, payment periods for and almost 48% of the arrear debt is owed by revenue on behalf of the municipality. A total of 751 municipalities with bulk supply points only (excluding Free State municipalities. At year end, there were 874 3 292 metropolitan areas) were extended to 30 days, from 866 meters had been installed when the project came 23 municipalities with total arrear debt of more than to a halt due to community protest action. We are 15 days previously. The rationalisation of the number R100 million each (March 2017: 18). 6 476 negotiating with the municipality to find ways of of municipal tariffs has not yet been approved by overcoming the challenges. NERSA. 289 Invoiced municipal arrear debt (including interest) and A pilot project was initiated in Raymond Mhlaba Local With paying customers of affected municipalities being arrear debt percentage at 31 March 2018, R billion 833 Municipality in the Eastern Cape, with a total of 5 648 severely impacted, curtailment of supply remains our meters having been installed by year end. The project last resort. Nevertheless, where municipalities default 25 397 is expected to be finalised early in the coming financial on payment, we will initiate interruption of supply in 1 year, after which the learnings of the pilot project will line with the PAJA process. 68% be shared. Residential arrear debt 20 The aim of these projects is not necessarily to recover The impact of municipal arrear debt on Eskom’s overdue debt, but rather to ensure payment of current business is more significant than that of defaulting 62% small power user (SPU) customers, particularly in 15 amounts to prevent the debt increasing. Soweto, for two reasons. Firstly, municipal debt covers 13.6 53% a few hundred municipal customers, whereas Soweto 50% 9.4 SPU debt relates to tens of thousands of residential 10 Disconnecting defaulting municipalities customers, making the latter much more difficult to 6.0 The top 10 defaulting municipalities, who owed a Immediately after non-paying municipalities have been manage and collect. Secondly, municipal arrear debt 5.0 combined total of R9.5 billion in invoiced arrear debt advised of their contract breach, the PAJA process is has grown exponentially over the past few years, 5 (or 70% of total invoiced municipal arrear debt) at year started in order to disconnect or interrupt supply to whereas Soweto SPU debt is growing at a much lower 6.5 end, are: those municipalities. During the past year, numerous rate, as the problem is mainly historic. The majority of Financial review 4.9 5.3 5.9 • Maluti-A-Phofung Municipality, Free State: municipalities concluded agreements with Eskom or the growth on Soweto SPU debt relates to interest. R2 694 million made suitable arrangements that were supported 0 2014/15 2015/16 2016/17 2017/18 • Matjhabeng Municipality, Free State: by their Provincial Treasury. Since September 2017, R1 770 million electricity supply has been interrupted to 16 Current amounts Invoiced municipal arrear debt • Emalahleni Local Municipality, Mpumalanga: municipalities. A total of 45 municipalities were An overview of the PAJA process R1 577 million removed from the planned interruption list after Eskom follows the PAJA process before it can interrupt • Ngwathe Local Municipality, Free State: payment arrangements were concluded, while six supply to affected municipalities. This process can be At 31 March 2018, a total of 52 active payment R915 million municipalities were interrupted in the last quarter of summarised as follows: agreements were in place with defaulting municipalities the financial year. • Emfuleni Local Municipality, Gauteng: The electricity supply agreement between Eskom and (March 2017: 66), including 12 of the top 20 defaulters. R621 million The High Court instructed Eskom to suspend municipalities stipulates that the monthly account However, of these, only 28 were being fully honoured, • Govan Mbeki Municipality, Mpumalanga: interruption to Maluti-A-Phofung, Emalahleni and becomes due as soon as the municipality receives the with only four of the top 20 fully honouring their R514 million Thaba Chweu, all three in the list of top 10 defaulters. invoice. However, should the municipality fail to pay agreements. Only two of the Free State municipalities We were also interdicted from interrupting supply to the account within 30 days of the due date, Eskom may • Lekwa Local Municipality, Mpumalanga: were honouring their payment arrangements. Nketoane Municipality. Interruptions are currently disconnect supply to the municipality after giving the R479 million The top three Free State municipalities – Maluti- • Thaba Chweu Local Municipality, Mpumalanga: planned in three municipalities, although negotiations municipality 14 days’ written notice. A-Phofung, Matjhabeng and Ngwathe – account for R420 million continue with the relevant municipalities to avert interruption. Nevertheless, Eskom also has to follow a public almost R5.4 billion of the total outstanding debt. • Ditsobotla Local Municipality, North West: consultation process before it can disconnect supply Supply interruptions planned for Maluti-A-Phofung R286 million An inter-ministerial committee, chaired by the Minister to the municipality; this starts with a written notice were halted through an interdict by a group of • Naledi Local Municipality, North West: of Public Enterprises, and consisting of DPE, COGTA, of intent being issued to the municipality. Should customers. Under an interim court ruling, we agreed R271 million National Treasury, Eskom, SALGA, the Portfolio the municipality fail to correct the breach or make not to interrupt supply to the customers who brought Committee on Co-operative Governance and the alternative arrangements within this period, we will the application, provided they pay Eskom directly until Standing Committee on Public Accounts (SCOPA), issue a public notice in local newspapers in two of such time as the final application is heard in court; this is investigating constitutional matters which have an the official languages spoken in the affected area. was scheduled for June 2018. Matjhabeng submitted impact on electricity supply and reticulation by Eskom The public notice provides details of our intent to a proposed payment plan, while Ngwathe concluded and municipalities. Our view is that, unless the root disconnect the municipality for non-payment, and a payment plan in March 2018. However, should the causes identified are addressed, the payment challenges invites interested and affected parties to submit municipalities default on the arrangements, the PAJA in municipalities will not improve significantly. comments or reasons as to why we should not process will be restarted. continue with the disconnection. 74 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 75 OUR FINANCES continued Total invoiced Soweto SPU debt has increased further years ago, in an effort to address this problem. However, In May 2018, Fitch affirmed our credit ratings, which related to the completeness of irregular expenditure to R12 billion (including interest) at year end, of we have encountered significant community resistance remain on Rating Watch Negative, except for the disclosed in terms of PFMA requirements, had a which arrear debt constituted about 98%. Moreover, to the project, coupled with frequent vandalism of Government-guaranteed debt, which reflects a stable significant impact on our ability to borrow in both payment levels of about 15% on Soweto residential equipment. We have started switching off transformers outlook. We view the ratings decision as positive – domestic and foreign markets. In response, we accounts remain unacceptably low, and have declined when the community refuses the installation of split Fitch acknowledged the positive measures to turn the curtailed our organisational cash requirement through over recent years. The rollout of split meters with meters. In future, all new installations will be done in organisation around, which have been implemented by savings on capital and operating expenditure, resulting conversion to prepaid metering was initiated several prepaid mode. the new Board during their short tenure, with support in a revised funding requirement of R57.4 billion for from management. Although concerns over liquidity the year. Credit ratings and funding challenges remain the main rationale for retaining the Ratings Watch Negative position on our rating, During the past year, we experienced a lack of demand Solvency ratios in the local bond market due to market concerns over Fitch conceded that we have made positive strides in Target Target Target Actual Actual Actual Target addressing liquidity issues in recent months. corporate governance, future funding requirements Measure and unit 2022/23 2018/19 2017/18 2017/18 2016/17 2015/16 met? and inadequate tariff structures, although we have seen Group Funding activities an increase in local and international investor demand Our original funding plan of R71.7 billion for the for our bonds since January 2018. Most state-owned Free funds from operations as % of gross debt, % 18.55 8.98 8.15 9.09 11.69 10.98 2017/18 financial year excluded the sale of Eskom entities are failing in their attempts to obtain funding in Cash interest cover, ratio 1 2.46 1.16 1.19 1.22 1.73 1.73 Finance Company, which has been further delayed. the domestic bond market. Furthermore, ongoing governance issues and the Debt service cover, ratio 1.15 0.56 0.69 0.87 1.37 1.14 audit qualification on the 2016/17 financial statements, Gross debt/EBITDA, ratio 5.26 11.97 15.50 9.71 10.84 10.95 Debt/equity (including long-term provisions), 3.27 3.18 2.46 2.52 2.11 1.65 Progress on the execution of the 2017/18 and 2018/19 borrowing programmes at 31 March 2018 ratio Gearing, % 77 76 71 72 68 62 2017/18 2018/19 1. The basis for calculating cash interest cover was revised during the year, to exclude interest earned on investing activities. Comparatives have Committed Committed been restated. Potential sources, R billion Target to date Target to date DFIs 19.6 18.6 15.3 8.8 Although the majority of solvency ratios performed occasions by all ratings agencies, thereby impacting our ECAs 3.6 3.8 5.8 1.0 better than target, they worsened considerably access to unguaranteed funding and increasing the cost International bonds – – 20.0 – compared to the prior year and remain well below of borrowings. Domestic bonds and notes > 1 year 7.3 8.4 13.0 1.5 the accepted norm. Credit ratings also remain below Financial review Domestic bonds and notes < 1 year 4.4 4.2 10.0 – investment-grade levels. It is expected that most ratios The reasons cited for the downgrades over the year Structured products 2.5 2.5 8.0 – and the net loss will decline further before improving, include our deteriorating liquidity position, ongoing Bank funding 20.0 20.0 – – once the revised strategy is implemented. governance concerns and Government’s perceived inability to provide sufficient and timely support. This Total 57.4 57.5 72.1 11.3 Of concern is the fact that cash from operations and was exacerbated by uncertainty about our ability to 1. Committed sources include funding raised or signed facilities with milestone drawdowns. funding activities was not sufficient to meet debt meet financial obligations in the short term, given the service and capital spend requirements. It is expected tight liquidity, high gearing and weak interest cover and Our Treasury Department achieved the reduced stability and improvement in governance. Any further that this trend will continue for some time before debt service cover metrics. Furthermore, the national funding requirement for the year by securing downgrades would exacerbate the current situation improving, due to our ongoing new build programme, budget announced by the Minister of Finance in R57.5 billion; the amount includes a short-term bridge- and put the execution of the funding plan at risk. coupled with electricity tariffs being lower than that February 2018 contained no tangible financial support to-bond facility of R20 billion, which was provided by required to sustain operations and the persistent for Eskom. a consortium of banks in February 2018. The facility is The recent ratings downgrades have not had an impact issues surrounding municipal arrear debt. ring-fenced for capital expenditure, and is repayable by on previously signed and committed facilities which have Common reasons for the most recent downgrades been drawn down. Borrowing costs on new transactions Credit ratings referred to limited visibility of our plans for placing 31 August 2018. may increase, coupled with the potential for more There have been significant changes to the credit our financial position and the business on a sustainable The ratings downgrades have increased lenders’ stringent covenant requirements, while our ability to ratings of both Eskom and the Sovereign over the footing in the longer term, despite ratings agencies requirements for Government guarantees of our achieved targeted funding volumes could decrease with past year. The Sovereign was downgraded to sub- recognising the recent positive actions relating to debt. At 31 March 2018, R240.5 billion of the any further downgrades in our credit rating. Funding investment level, and Eskom, already at sub-investment governance and liquidity. Government guarantees has been utilised, relating costs have gradually increased and include a blend of level, was further downgraded on a number of to loans and bond issuances, both foreign and local, fixed and floating rates. Given that fixed finance costs to date. Of the total facility of R350 billion, 79% has provide better hedging of interest rate exposures, 72% Summary of Eskom’s credit ratings at 31 March 2018 been committed, 17% is under negotiation and 4% of finance costs are currently fixed. Rating Standard & Poor’s Moody’s Fitch: local currency remains available for future funding. Contrary to earlier expectations, we have not been able to release We plan to secure funding of R72.1 billion during Foreign currency CCC+ B2 n/a 2018/19, of which R11.3 billion, or 16%, was committed Local currency CCC+ B2 BB- any Government guarantees, nor will we be in a position to do so in the foreseeable future. at year end. Funding activities towards the end Standalone ccc- caa2 CCC of the financial year were focused on securing Outlook Negative Negative Ratings Watch Negative Investors rely heavily on the resolution of governance- sufficient liquidity to manage short-term demand, related issues and associated investigations before and therefore pre-funding for the 2018/19 year was Last rating action Downgrade Downgrade Downgrade Last action date 27 February 2018 28 March 2018 31 January 2018 any firm commitments on funding will be made. limited. To meet the plan for the coming year, we aim Furthermore, investors require stability in executive to secure additional funding from DFIs and ECAs, management. Ratings agencies have also indicated their which is currently under negotiation, together with deep concerns regarding governance and leadership domestic bonds and note issuances, as well as through at Eskom, and they are closely monitoring leadership international bond issuances. 76 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 77 OUR FINANCES continued Given recent events, the risk of default has increased; Factors that have the potential to affect our ability to Anticipated capital and interest cash flows (including swaps) of the strategic and trading portfolio at 31 March 2018, R billion this could trigger the call-up of Government successfully execute the borrowing programme include guarantees and cross-defaults. The risk has been Government’s ability to provide explicit financial 70 exacerbated by the low electricity tariff increases in support, as well as the credit ratings of both Eskom recent years, which further threatens our revenue and the Sovereign. The ratings downgrades discussed 60 with a material impact on cash flows, coupled with our earlier are expected to continue to put pressure on weak standalone credit rating. However, no events of both borrowing costs and our access to unguaranteed 50 default have occurred to date. funding. We plan to secure funding of R274.4 billion for the 40 five years until 2022/23; this relates to the funding Eskom automatically makes certain representations of Eskom Holdings SOC Ltd only and excludes our 30 and warranties to the lenders, when requesting to subsidiaries. It reflects a decrease of R63.3 billion draw down on existing loan facilities, and at each compared to the R337.7 billion targeted for the period 20 interest payment date. These include: 2017/18 to 2021/22, largely due to a reduction in capital • No event of default is continuing or might requirements in response to the restriction on our 10 reasonably be expected to result from the utilisation ability to borrow. 0 • No other event or circumstance is outstanding 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 which constitutes a default under any other Annual funding requirement R billion agreement or instrument which is binding on 2018/19 72.1 Capital Interest the borrower (Eskom), or to which any of the 2019/20 56.5 borrower’s assets are subject and which has or is 2020/21 47.2 reasonably likely to have a material adverse effect 2021/22 48.5 Despite some progress, a number of issues continue to Financial results of operations • No acts of corruption, fraud or anti-competitive 2022/23 50.1 impact our ability to secure funding in both domestic The group recorded a net loss after tax of R2.3 billion practices exist in funded contracts Total 274.4 and foreign markets. These include insufficient for the year (March 2017: R0.9 billion profit), and • Eskom is in compliance with existing laws operational cash flow to service debt, along with EBITDA of R45.4 billion (March 2017: R37.5 billion). The Board has approved the 2018/19 borrowing the impact of the prior year audit qualification and The EBITDA margin improved further to 25.91% Misrepresentation in itself constitutes an event programme, and supported the plan for 2019/20 and governance-related issues, as well as markets awaiting (March 2017: 21.44%), primarily due to significant cost of default. 2020/21. the appointment of permanent executive management. containment efforts by the business. No short-term Financial review The appointment of the new Board in January 2018 performance bonus provision was raised, as the The borrowing requirement for 2018/19 includes provided investors with some level of comfort, scheme has to be self-funded. R20 billion required for the repayment of the short- resulting in an increased appetite for investment in In order to transact in international markets, we are term bridge-to-bond funding. The five-year funding required to remain within a foreign borrowing limit Eskom. A permanent Group Chief Executive was Refer to the consolidated annual financial statements available online, programme also takes into account requirements for announced on 23 May 2018, with the appointment which detail the financial performance of the group and company of R308 billion set by National Treasury. The nominal future liability management, and as such, not all funding value of foreign currency debt is monitored on a of a permanent Chief Financial Officer expected to secured will be utilised to meet business requirements. be completed soon. Potential investors are waiting The return on assets, using both historical valuation of quarterly basis, and our foreign borrowings remain Given this, targeted funding raised to meet business to see whether our turnaround plan, which is being assets and the replacement value, remains far below well within the prescribed limit. We await approval requirements will be capped at around R45 billion per developed, will address liquidity issues, thereby the weighted average cost of capital. This continues the from DPE and National Treasury to increase the year for at least the next three years. The balance of supporting a sustainable financial position. trend discussed in prior years. foreign borrowing limit, to ensure successful execution the funding will be utilised for liability management of the borrowing programme in future years. strategies, as well as to ensure that liquidity reserves are Over the short term, we will continue to leverage Future funding requirements restored to acceptable levels. cost savings initiatives and efficiency improvements The primary focus of our borrowing programme is to stabilise and manage liquidity levels. However, With interest payments of approximately R215 billion along with effective governance and stable leadership, to secure funding to match our annual capital spend. and debt repayments of R228 billion over the next five Additional objectives include: adequate tariff increases remain critical to ensure that years, and maturities currently extending to 2043, our Eskom is able to improve its balance sheet over the • Ensuring that we have adequate liquidity reserves debt repayment profile is relatively pressured over longer term and meet the minimum accepted financial to meet cash flow requirements, by maintaining and both the short and long term. Our funding strategy will cover ratios to successfully execute the borrowing managing appropriate cash balances and committed continue to prioritise longer term funding to support programme. lines of credit short-term debt maturities and alleviate repayment • Diversifying both our sources of funding and risk. Ideally, the term of our debt should match the investor base, while maximising ECA funding of useful life of the assets being financed, to align to the capital expenditure methodology applied by NERSA when calculating the • Raising cost-effective funding within acceptable risk required rate of return. levels • Managing the risk associated with interest rates, foreign exchange fluctuations and liquidity, associated with borrowings 78 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 79 OUR FINANCES continued Profitability ratios Operating costs A comparison of the primary energy unit cost of the Target Target Target Actual Actual Actual Target Operating expenses, R billion various generation categories is shown below: Measure and unit 2022/23 2018/19 2017/18 2017/18 2016/17 2015/16 met? Unit cost, R/MWh 2017/18 2016/17 % change Company 180 Coal 309 293 5.46 Electricity revenue per kWh (including Nuclear 94 85 10.59 134.50 89.40 84.76 85.06 83.60 76.24 160 environmental levy), c/kWh OCGTs 2 313 2 072 11.63 Electricity operating costs, R/MWh 829.63 690.79 663.50 634.69 662.98 628.00 140 IPPs 2 015 1 714 17.56 Value add per employee, R million per full-time International purchases 358 361 (0.83) 2.75 1.90 1.32 1.56 1.44 1.23 employee SC, 1 120 BPP savings, R million SC n/a n/a 18.93 20.73 20.21 17.45 The graph sets out the breakdown of primary energy Group 100 costs, with the contribution to GWh energy produced in brackets. EBITDA, R million 117 495 42 956 30 942 45 359 37 532 32 811 80 EBITDA margin, % 39.13 22.92 17.22 25.91 21.44 20.29 Primary energy breakdown, R million 60 Working capital, ratio 1.59 1.14 0.93 1.05 0.85 0.83 2017/18 40 Free funds from operations (FFO), R million2 114 702 46 189 39 090 40 022 47 571 39 443 8 061 160 (2%) (n/a) FFO after net interest paid, R million 65 127 11 156 7 785 9 147 21 148 17 927 20 FFO as % of total capex, %1, 2 232.74 95.94 61.94 77.84 75.11 66.23 0 1. Value add per employee is calculated according to the shareholder compact definition. 2013/14 2014/15 2015/16 2016/17 2017/18 2017/18 2. Free funds from operations are calculated before accounting for interest paid for shareholder compact-related ratios. Target Primary energy costs Depreciation and amortisation 19 317 (4%) Although most indicators performed better than target Although overall customer numbers are growing, Employee benefit expense Other operating expenses and improved year-on-year, results remain well below this is predominantly due to a growth in residential levels acceptable to investors. Given the price increase customers, with some sectors slowly shrinking. This of only 2.2% awarded by NERSA for the year, we did contributed to the decline in sales. The declining trend Primary energy 53 756 2 768 well to contain costs to limit the quantum of the in sales volumes remains a concern. Primary energy cost (including coal, water and (3%) (85%) pre-tax loss. liquid fuels) increased marginally to R85.2 billion Financial review 320 (March 2017: R82.8 billion). Our own generation costs (0%) 820 Sales and revenue (excluding the environmental levy) increased by 5.5% (6%) Revenue for the group was R177.4 billion (March 2017: Initiatives to increase sales to R54.9 billion (March 2017: R52 billion), driven by an R177.1 billion). Electricity revenue of R175 billion We launched the “Demand Response Morning increase of 3.8% in the average coal purchase cost per (March 2017: R175.1 billion) decreased by R0.1 billion Peak Sales” programme in July 2017, which achieved ton. Total coal burn costs (excluding the environmental Coal IPPs year-on-year. This does not reflect the 2.2% price 10.4GWh in incremental sales. Additional sales were levy) increased by 5.5% to R53.8 billion (March 2017: Nuclear fuel Environmental levy increase, as the amount was reduced by revenue derived by incentivising increased usage in the last hour R51 billion), with production from coal-fired stations OCGT fuel Other of R3.3 billion not recognised in terms of IAS 18 of the morning peak period (i.e. 8:00 to 9:00), by billing remaining relatively stable. As required by NERSA, Electricity imports (March 2017: R3.2 billion). The revenue per kWh additional volumes at a lower rate. we apply the least-cost merit order dispatch of sold of 85.06c/kWh reflects a year-on-year increase available stations. NERSA approved a two-year application for special 2016/17 of 1.7%. incentive pricing for silicon smelters, which is expected Usage of OCGTs was limited, with 118GWh being 194 8 086 (2%) Revenue related to electricity produced at Medupi and to lead to increased production at smelters in generated during the year at a cost of R320 million, (n/a) Kusile, after units are synchronised to the grid and Polokwane and Emalahleni. Another application, aimed excluding the environmental levy (March 2017: producing electricity but prior to those units being at sustaining silicon carbide production in South Africa, R340 million spent producing 29GWh). The current placed in commercial operation, is capitalised for was submitted to NERSA in August 2017 and is in the year cost includes diesel storage and demurrage accounting purposes under IFRS requirements, even process of being considered. charges of R52 million, due to the low utilisation of the though the power is transmitted into the electricity OCGT units (March 2017: R280 million). We continue to evaluate proposals submitted by 19 757 grid for sale to customers. This further reduced (5%) customers for support packages, although the Expenditure on IPPs amounted to R19.3 billion for revenue by R2.2 billion (March 2017: R0.7 billion). DoE framework for short-term negotiated pricing the year, adding 9 584GWh to the energy production Electricity sales of 212 190GWh for the year were agreements is required, before we can submit any mix (March 2017: R19.8 billion and 11 529GWh). 50 975 0.9% lower than last year (March 2017: 214 121GWh). further incentive pricing deals to NERSA. The amount spent on IPPs was reduced by R2 billion, (84%) 2 681 Distributors recorded a decline of 2.9% or 2 579GWh, relating to the accounting charge on the Avon and (3%) In addition, we have been engaging with key industrial of which 1 507GWh was due to higher self-generation Dedisa gas peakers, which are treated as arrangements customers to determine the potential to increase 340 by City Power in Johannesburg. Industrial and mining containing a lease under IFRIC 4 (March 2017: (0%) demand. We are also working with the dti InvestSA 727 customers’ volumes also declined by close to 1% each. R2 billion). The average IPP unit cost (before the lease (6%) in interactions with new investors, as it contributes directly to additional sales. We have already connected adjustment) increased to 222c/kWh (March 2017: For the number of customers by customer segment, as well as 148 large power customers, generating additional sales 188c/kWh), as cheaper IPP options used during the electricity sales by customer category, both volumes and revenue, Coal IPPs refer to the fact sheet on pages 153 to 154 of 1 361GWh. prior year were no longer available. Nuclear fuel Environmental levy OCGT fuel Other Refer to “Our infrastructure – Energy supplied by IPPs” on page 94 Electricity imports for further information 80 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 81 OUR FINANCES continued Other operating costs Changes in the fair value of embedded derivatives The number of employees in the group (including fixed- continued to impact the group income statement. term contractors) increased to 48 628 (March 2017: The net impact for the year was a fair value gain of OPERATING PERFORMANCE 47 658), with the ERI headcount increasing by 1 594 R0.1 billion (March 2017: R1.6 billion), with the year- year-on-year due to the permanent employment of on-year variance primarily influenced by a change in the temporary workers required by the Labour Relations aluminium price curve and unwinding of volumes. 84 Chief Executive’s review Act, 1995. Net employee benefit costs for the year amounted to R29.5 billion, after capitalisation of Net finance cost 89 Our infrastructure costs to qualifying assets (March 2017: R33.2 billion). Gross finance income for the year was R2.9 billion for 98 Our interaction with the environment No short-term bonus was provided, as we recorded the group (March 2017: R5.2 billion), due to lower cash 108 Our people a loss for the year; this accounts for approximately balances than in the prior year. Gross finance cost for the group was R41.5 billion (March 2017: R37.8 billion), 117 Our role in communities R3.5 billion of the year-on-year decrease. Overtime cost reduced slightly to R2.1 billion (March 2017: due to both higher levels of borrowings and the higher 123 Our know-how R2.3 billion) due to our efforts to contain costs. cost thereof. Borrowing costs capitalised to property, plant and equipment amounted to R15.5 billion Net impairments recognised amounted to R0.6 billion (March 2017: R18.2 billion); the decline is due to fewer (March 2017: R1.7 billion), attributable to the units under construction attracting interest, as units uncertainty of collecting amounts due from debtors. from the new build programme come online. Net The cumulative impairment provision raised at year finance cost for the group amounted to R23.1 billion end for arrear customer debt (excluding interest) was (March 2017: R14.4 billion). R8.4 billion for all electricity debtors (March 2017: 2.09 system R8.7 billion). Taxation The effective tax rate for the year was 10% minutes lost <1 Other operating expenses, including maintenance, (March 2017: 23%), due to an increase in non- amounted to R18.2 billion (March 2017: R23.6 billion). deductible expenditure. The decrease is mainly due to a reduction in the Movement in assets and liabilities decommissioning provision because of a change in the treatment of spent nuclear fuel, offset by a provision of Balance sheet movements relating to the increase 3 new build units R1.5 billion relating to possible forfeiture to the insurer in net interest-bearing debt was discussed under funding activities. The impact of the capital expansion commissioned as a result of the contract for the repair of the Duvha Financial review Unit 3 boiler being set aside. As mentioned earlier, programme can be seen in the growth in property, expenditure was tightly controlled in response to the plant and equipment. The reduction in liquid assets was discussed under liquidity. liquidity challenges, evidenced by the reduction in other operating expenses. Specific water Future focus areas Maintenance expenditure remains a large contributor • Strengthening Eskom’s balance sheet given the highly consumption geared position and growing debt service cost, to operating expenditure. The group’s net repairs and maintenance for the year, which includes coupled with lobbying to move the electricity price 1.30ℓ/kWhSO overhead costs, amounted to R14 billion (March 2017: to levels more reflective of prudent costs R14.1 billion), after capitalisation of costs to • Managing liquidity to support operations, as well as qualifying projects, but before eliminating intergroup capital expenditure and debt service requirements transactions for work done by ERI. Maintenance in • Pursuing initiatives to improve collection of LTIR of 0.23 Generation Division was lower than the prior year due municipal arrear debt, such as partnering with to system constraints and an effort to contain costs Government, SALGA and municipalities to find given liquidity constraints, leading to a slight reduction sustainable solutions, and managing electricity in maintenance expenditure. supply and revenue collection on behalf of struggling Depreciation and amortisation increased to municipalities 215 519 households • Continuing to secure funding to match our annual R23.1 billion (March 2017: R20.3 billion), with another capital spend, ideally moving to a position where an connected two units at Medupi and one at Kusile achieving operational cash surplus is sufficient to fund both commercial operation during the year. debt servicing and capital expenditure to maintain operations Net fair value loss on financial instruments and • Accelerating the drive to contain operating costs embedded derivatives through the use of digital and advanced analytics, The net fair value loss for the group on financial with the emphasis on primary energy costs, instruments, excluding embedded derivatives, was employee benefit costs, maintenance and third-party R1.9 billion (March 2017: R3.3 billion), and arose mainly spend; this will be done without negatively affecting from exchange rate movements. operating performance • Ongoing balance sheet optimisation to drive a reduction in our debt requirement 82 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 83 CHIEF EXECUTIVE’S REVIEW PHAKAMANI HADEBE Group Chief Executive When I accepted the role of taking the reins One of our biggest tasks is rooting out the corrupt We are undertaking a strategy review, expected to Overview of performance to steer the ship in January this year, I was behaviour of some of our own employees which has be completed by September 2018, to ensure that Overall, Eskom has delivered solid operational fully aware that Eskom was fraught with threatened Eskom’s financial viability, another real Eskom has an integrated strategy that addresses not performance over the past year, despite the financial many real challenges. I firmly believed, and challenge that we are managing. As a leadership team, only our current challenges, but also ensures that the and governance challenges facing the organisation. continue to do so, that Eskom’s narrative is we are committed to eradicating corruption across all future direction is clear and focuses on stabilising the levels of the business, and we are taking action against organisation by cleaning up governance issues and Medupi Unit 5 achieved commercial operation not one of doom and gloom, but that our on 3 April 2017, after completing performance, implicated individuals. We appreciate the assistance of stopping the bleeding, and thereafter re-energising and colleagues have what it takes to weather the reliability and compliance tests. This was followed Eskom Guardians in helping to expose such behaviour, growing the business. A key focus at Board level is the storm. Three of the immediate challenges by Kusile Unit 1 achieving commercial operation as without proper corporate governance, institutions development of a turnaround plan, which will allow for we faced at the time were poor governance, die. We need to drive the right organisational culture a shift in performance to facilitate a return to financial on 30 August 2017, and Medupi Unit 4 on liquidity concerns and leadership instability. to help us to build a sustainable and top performing and operational sustainability. 28 November 2017. The three units have added Nevertheless, the challenges facing Eskom organisation. total installed capacity of 2 387MW to the national are not insurmountable, and we have already The following areas are under consideration: grid (March 2017: 1 332MW from the four Ingula units). made significant headway in addressing those Strategy • Improving the EBITDA margin to at least 35% by Furthermore, Kusile Unit 2 and Medupi Unit 3 challenges. Despite satisfactory progress being maintained on growing revenue, both regulated and unregulated, achieved first synchronisation on 24 March and the new build programme, as well as solid operational and reducing costs. This will assist in improving our 8 April 2018 respectively, in support of commercial Operating performance performance for the current financial year, Eskom levels of equity over the medium term operation which is expected within six to nine months. continues to face significant challenges in the short to • Managing liquidity, including the recovery of arrear We remain confident that the new build programme medium term. Revenue levels remain unsatisfactory, debt will be completed by 2022/23, barring delays as a result and the 5.23% increase for the 2018/19 financial year • Investing in cost-plus mines to benefit from cheaper of contractor performance, industrial action or other further compounds the impact of the 2.2% tariff coal issues outside our control. increase awarded in the 2017/18 financial year, and is • Restricting capital expenditure to R45 billion per therefore not expected to lead to much improvement. year for at least the next three years The construction of transmission lines performed very Levels of arrear debt, especially from municipalities, • Continuing to reduce or contain operating well, with 722.3km lines constructed against a target of remain unacceptably high. In the short term, our focus expenditure 677km (March 2017: 585.4km), further strengthening will remain on cost efficiencies to support financial • Reducing reliance on debt financing through our high-voltage network. The target for installing sustainability. optimisation of the balance sheet new transformer capacity of 2 010MVA was also • Managing possible operating surplus generating exceeded, with 2 510MVA commissioned (March 2017: To address Eskom’s challenges, the key focus capacity through cold reserve or decommissioning 2 300MVA). areas in our current Corporate Plan are to stations strengthen Eskom’s financial position through • Reviewing the business model and possible demand stimulation, cost containment and restructuring where indicated improving efficiencies (through a reduction in capital and operating expenditure), supported by a cost-reflective price of electricity. This will go a long way towards improving liquidity and thereby Eskom’s financial sustainability. 84 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 85 CHIEF EXECUTIVE’S REVIEW continued Plant availability performed slightly better than last Tegeta mines which are in business rescue; these The group headcount increased slightly to 48 628 at Looking ahead year, at 78% for the year (March 2017: 77.30%). supply Hendrina, Komati and Majuba Power Stations. year end (March 2017: 47 658), due to the permanent We remain committed to our mandate of Planned maintenance of generation plant decreased However, we have put in place a recovery plan to appointment of temporary workers in Eskom Rotek decreasing the cost of doing business in to 10.35% (March 2017: 12.14%), due to a delay in improve the coal stockpile levels at these stations, Industries in terms of the Labour Relations Act, South Africa, enabling economic growth and outages, partly due to system constraints and deferral based on potential sources identified. We are working 1995. Both learner intake, as well learners at all levels providing a stable and sustainable electricity of maintenance in response to liquidity challenges. with National Treasury on ways to expedite the coal (engineers, technicians and artisans), exceeded target. supply, not only in South Africa, but also in the Unplanned maintenance deteriorated to 10.18% for procurement process. Coal security is not considered At senior management level, the racial equity target region. the year (March 2017: 9.90%), partly due to an increase at risk. in equipment failures and delays in returning units was achieved, whilst gender equity continues to Water supply to our coal-fired stations is not improve, although slightly below target. At middle We face several challenges in the business environment from planned maintenance, which is then classified as considered to be at risk over the short to medium management/professionally qualified level, racial equity while working towards this mandate. Some of these unplanned maintenance. term due to healthy dam levels. However, the is at acceptable levels (although marginally below challenges fall within Eskom’s span of control and Eskom purchased 9 584GWh from IPPs at a cost of Department of Water and Sanitation is experiencing target), whilst gender equity remains a challenge, others outside. R21.3 billion during the year (March 2017: 11 529GWh severe financial constraints, which may affect its ability although slightly above target. Gender and racial equity We have set a target to improve generation plant at R21.7 billion), at an average cost of 222c/kWh to manage existing and implement new bulk water have been achieved at supervisory and lower levels. performance, and we are on course to achieve plant (March 2017: 188c/kWh). At 31 March 2018, total infrastructure to ensure water security to Eskom. We try to limit promotions to save cost, leading to availability of 80% during the next financial year, available IPP capacity of 4 779MW consisted of Water availability in the Vaal River System under slower progression against racial and gender equity with 10% planned maintenance and 10% unplanned renewable IPPs of 3 774MW and IPP gas peakers of drought conditions may become a risk due to a delay targets. Disability equity is above target, although maintenance. Load shedding this winter is not likely, 1 005MW (March 2017: total of 5 027MW). beyond 2025 of the construction and commissioning of a concern remains that the majority of people with as we implement plans to manage a shift in plant the Lesotho Highlands Phase 2. The main construction disabilities are represented at lower occupational During April 2018, we signed power purchase performance and coal stock levels. work is expected to start in 2019. levels. We have to audit our facilities to ensure that agreements (PPAs) with 27 IPP projects under they are disability-friendly, and we have to ensure that With the growth seen in IPPs and the moderate the DoE’s bid windows 3.5 and 4. This translates Medupi Power Station’s flue gas desulphurisation we provide reasonable accommodation where required sales growth expected in the near future, surplus into greater non-dispatchable capacity being made (FGD) retrofit requires additional water from the to our disabled staff. operational capacity may be available. At this stage, available to the electricity grid, thereby affecting grid Mokolo Crocodile Water Augmentation Project we are not intending to renew older stations to stability and exacerbating operational challenges. The Phase 2A by February 2024, whilst the water Sadly, the group experienced three employee and 12 extend their useful life. In particular, the older Komati, decision to sign the PPAs with IPPs also has significant delivery date is expected to be January 2024. Failure contractor fatalities during the year (March 2017: four Hendrina, Grootvlei and Camden Power Stations implications for our financial sustainability, with IPP to commission the FGD plant within the agreed employees and six contractors). However, the group are not economical to renew and extend beyond power – which is more expensive than the current timelines may render Eskom in breach of World Bank lost-time injury rate (including occupational diseases) their current useful life of 50 years. However, for average cost of Eskom power – being purchased ahead loan agreements and our emission licence, which has improved significantly to 0.23 (March 2017: 0.39). now they will not be decommissioned, but put into of Eskom’s offering, thereby creating additional surplus would result in the units not being able to operate. We extend our sincere condolences to the extended cold reserve. We continue to fast-track capacity on the Eskom side. Nonetheless, we remain committed to the retrofit family, friends and colleagues of those who the build programme, with another 6 382MW to be installation of wet FGD technology at Medupi, and Eskom understands that it must comply once a lost their lives in service to Eskom. commissioned at Medupi and Kusile over the next five we are actively pursuing schedule acceleration to ministerial determination has been made and all years. After these stations are fully commissioned, we meet committed dates for four units, with potential the statutory and contractual obligations have been During the year, only the targets for procurement will reconsider decommissioning older stations. acceleration of the remaining two units, depending on complied with as envisaged in the relevant legislation. water availability. spend with black-owned, black women-owned and All nuclear procurement processes were suspended However, Eskom must act as a responsible organ of black youth-owned suppliers, as well as exempted after the Western Cape High Court decision; a new state and exercise its fiduciary duties on a prudent The particulate (ash) emissions performance for micro enterprises, have been achieved at group level, nuclear build programme will only be considered in the basis. Accordingly, Eskom initiated a process with the year was 0.27kg/MWhSO, substantially better largely due to the inclusion of suppliers that are 30% broader context of affordability. We will determine government stakeholders to investigate the need for than the target of 0.34kg/MWhSO (March 2017: owned by black women when calculating attributable the way forward once the long-awaited revised IRP is Operating performance new generation capacity at this stage. This has delayed 0.30kg/MWhSO). This is largely due to increased spend. Overall attributable spend, as well as spend published, which will provide clarity on the types of the signing of IPP contracts over and above those opportunities for outages which have improved the with qualifying small enterprises and suppliers owned technologies to be delivered, and Eskom’s role therein. recently requested by the Minister of Energy. condition of the operating plant, as well as the impact by black people living with disabilities, performed of the Grootvlei fabric filter plant retrofits. below target. We continue to focus our efforts on increasing growth Transmission delivered excellent system minutes in demand for electricity and ensuring sustainable lost <1 performance of 2.09 minutes for the year Water usage related to power station operations We also connected 281 368 new residential customers revenue collection, as collection of municipal arrear (March 2017: 3.80), setting a new performance record. for the year was 1.30ℓ/kWhSO, significantly better to the grid during the year, including 215 519 debt remains one of our key challenges. Nonetheless, No major network incidents have occurred and good than the annual target of 1.37ℓ/kWhSO (March 2017: electrification connections (March 2017: 207 436), we continue with interventions and have enlisted the line fault performance was sustained. Distribution 1.42ℓ/kWhSO). truly a remarkable achievement in our quest to support of Government to enhance our efforts. network interruption frequency and duration both achieving universal access to electricity. performed better than target and prior year. Our lenders accepted cancellation of the proposed Eskom also faces several operational and strategic 100MW Kiwano concentrating solar power (CSP) Corporate social investment spend of R192 million was risks going forward. Operational risks involve rising However, theft of network equipment and illegal project, subject to their approval of a suitable committed to 264 projects during the year, impacting primary energy input costs at reducing quality, connections continue to pose a risk to security to alternative solution. In March 2018, the Board a total of 1 116 044 beneficiaries (March 2017: escalating municipal debt and instability at Eskom sites supply to affected areas, as well as negatively impacting approved distributed battery storage with distributed R225.3 million spent on 841 845 beneficiaries). caused by a disgruntled workforce or members of public safety. solar PV at sites close to renewable IPP plants and the community. Strategic risks include the possibility Sere Wind Farm. The lenders have accepted the Normalised coal stock levels (excluding stock at of Eskom saturating its borrowing capacity, declining battery storage project as a suitable alternative, as Medupi and Kusile Power Stations, and excess stock levels of long-term profitability, a lack of adequate, it is expected to meet the same objectives as the CSP at Lethabo) stood at 28 days at year end (March 2017: available and affordable skills, the shifting shape of the project. 38 days) below the target of 37 days, with seven power load profile and increasing competition for end users. stations below their minimum stock levels. Recovery efforts have been impacted by low delivery from the 86 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 87 CHIEF EXECUTIVE’S REVIEW continued OPERATING PERFORMANCE For the current business to endure, plans must include I have accepted the task of serving both Eskom and building new capabilities, creating a stable funding our country; it is indeed an honour for me to be plan, driving client-centred operations, implementing entrusted to steer Eskom forward, by guiding Eskom’s meaningful transformation, and ensuring that the Guardians as we begin to address our challenges. I am company structure is responsive to a changing energy fortunate to have met and worked with passionate landscape. To establish the future business, however, and committed people in this organisation, who the transition to a diversified portfolio of products truly understand that “individually we are one drop; and services will be managed through a set of targets together we are an ocean” and the value of working matched with Eskom’s risk appetite, building on its together as a team, driving our strategic objectives. core competencies. I am confident that with like-minded Eskom employees, Eskom has been given leeway to review its business who believe in and live up to our six values of Zero model and to assess whether all its current activities Harm, Integrity, Innovation, Sinobuntu, Customer should remain housed within the organisation. The Satisfaction and Excellence, we will be able to turn review should not be seen as privatisation, but is this ship around and reclaim our proud heritage as the aligned with our ambition to ensure that Eskom pride of South Africa and a shining light in powering remains sustainable. Africa’s growth. However, if we don’t build the culture we want, the culture will build itself. The next few years will certainly be challenging, particularly regarding the actions It is important to remember that what Eskom required to improve our financial position. employees do every day changes the lives of We will need to make tough decisions to turn millions of South Africans and also has an Eskom around, and we will need the support impact on the rest of the continent. Eskom of all our stakeholders to achieve this. Our plays a critical role in driving the South African ultimate ambition is to be Africa’s powerhouse economy, and the economic growth and by 2035, thereby powering Africa’s growth. development of the African continent. Conclusion Access to water, shelter, food, and infrastructure such I thank the Honourable Minister of Public Enterprises, as roads would not be possible without Eskom. Eskom Mr Pravin Gordhan and the Cabinet of South Africa for enables businesses to create jobs and families to put their confidence in appointing me to this role. I must food on the table; our efforts help to alleviate the also acknowledge the Eskom Board, especially the scourge of poverty and allow students to do away with Chairman, for the support they have given me since studying by candlelight or paraffin lamps. I came aboard in January 2018. We have had to make We may be facing serious challenges, but we are on the some tough decisions; I am grateful for their strategic right path to turn things around. If we do our job and guidance, as well as for the support of the Exco team. do it well, we can be the catalyst for growth in Africa. And of course, none of our great strides over the past That should be our vision. few months would have been possible without the effort and support of our Eskom Guardians, who are OUR INFRASTRUCTURE Through a collaborative approach and the engine of this great organisation. relentless focus, we are on a path to stabilise HIGHLIGHTS CHALLENGES Operating performance the organisation and to achieve sustained success. I am so proud of what we do and am • Medupi Units 4 and 5 and Kusile Unit 1 achieved • Managing supply and demand during periods of both power very excited about leading Eskom into the commercial operation during the year shortages or surplus capacity future! • We signed power purchase agreements with 27 RE-IPP • Eskom is not intending to renew older stations to extend projects in April 2018 their useful life • Systems minutes performance set a new record • The weighted average IPP purchase cost amounted to 222c/kWh, compared to our average selling price of 85.06c/kWh • Socio-economic conditions continue to drive theft and Phakamani Hadebe IMPROVEMENTS vandalism of network equipment, including conductor theft Group Chief Executive • Boiler tube failures reduced to 1.37% UCLF (March 2017: 1.66%) • Partial load losses improved to 3.29% UCLF LOWLIGHTS (March 2017: 3.48%) • System constraints were experienced in the last quarter of • Kusile Unit 2 and Medupi Unit 3 achieved first the year due to high levels of maintenance, requiring higher synchronisation on 24 March and 8 April 2018 OCGT usage to meet demand respectively • A number of IPP connection projects have been completed 88 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 89 OUR INFRASTRUCTURE continued Our infrastructure constitutes our manufactured our customers in accordance with our mandate. The capital, which comprises our generation fleet and various defence systems in place are frequently tested transmission and distribution networks, together with to ensure their effective response capability to prevent Eskom’s Thava Govender steps in as President of Relationship between generation plant performance capacity provided by IPPs. Furthermore, it covers the a major system event, such as a regional or national GO15 Steering Board for 2017/18 and health KPIs new power stations and high-voltage transmission lines blackout. Eskom is a member of the GO15, an organisation that The four generation plant performance and health being constructed as part of our new build programme. comprises 19 of the largest grid operators around indicators (EAF, PCLF, UCLF and OCLF) together add For the first nine months of the year, the generation the world, representing the backbone connecting up to 100%, being the energy that could have been In operating our infrastructure, our focus is on plant performed well and very low usage of OCGTs electricity producers and consumers. This includes produced at full nominal capacity, after accounting for ensuring security of supply, as well as balancing the was required to support the power system. However, grid operators from Asia, Mexico, Russia, Brazil, auxiliary power used to operate the station. supply and demand of electricity. We are executing during the last quarter of the financial year, system Africa, USA, Middle East, Australia and Europe. These the largest capital expansion programme in Africa, as constraints were experienced, requiring a higher usage EAF (energy availability factor) reflects the plant or operators deliver electricity to over half the world’s well as projects to ensure environmental compliance, of both Eskom-owned and IPP-owned OCGTs to meet unit’s availability to produce energy as a percentage population which accounts for more than two-thirds of transmission strengthening, customer and IPP demand during peak periods. The constraints were due of the energy that could have been produced at full global electricity consumption. connections, as well as refurbishing existing assets. to high levels of planned and unplanned maintenance capacity for the duration of the reference period. It being carried out during the summer months. Despite Mr Thava Govender has stepped in as the President of considers all matters affecting the availability of plant Looking back on prior year focus areas this, the total OCGT usage for the financial year the GO15 Steering Board for 2017/18. to produce energy. Given improved plant availability, we are placing some remained low. of the older coal-fired units into cold reserve to allow Speaking at GO15’s annual meeting in Belgium, he said: PCLF (planned capability loss factor) reflects for optimised economic usage of available generation Several coal-fired units were placed into cold reserve “As the new President, I have a personal stake, both unavailable energy resulting from planned plant repairs, capacity. We continue to optimise maintenance across during the winter months when there was surplus emotional and professional, in our success. This is tests or refurbishment activities under the control generation, transmission and distribution plant by operating capacity, to allow for optimised economic an industry whose success is a catalyst for economic of plant management. It reflects the effectiveness realising the benefits of moving from time-based to dispatch of generation capacity. Generators in cold growth in our respective countries. As the only of planning the execution of plant repairs and risk- or condition-based maintenance, as well as using reserve are taken offline, but are available to be called member from Africa, I am mindful of the enormity refurbishment in maintaining the availability of plant advanced analytics, which improve fault visibility and back into service at relatively short notice (typically of this role. We have the potential to strengthen and systems for the safe generation of electricity. isolation. Optimisation of transmission and distribution 12 to 16 hours). During winter, the number of units economic ties and socio-economic growth in our outages is improved by understanding the customer placed into cold reserve varied from four to six units countries and for Africa.” UCLF (unplanned capability loss factor) reflects energy contribution to sales. during week days, and up to 14 units over weekends. that was not produced during the period due to Some units at Grootvlei, Hendrina and Komati Power The GO15 acknowledged the unprecedented evolution unplanned plant unavailability as a result of unplanned Although our aim is to strengthen the transmission Stations were placed into extended cold reserve for of the power supply system and the substantial shutdowns, outage extensions or load reductions, due backbone to attain N–1 compliance as required by most of the financial year, with a call-back time of five investments required in transforming the power to causes under plant management’s control. the Grid Code, and strengthen distribution networks days or more. industry as we move towards a carbon-free society. to accommodate customer growth and ensure the The intent is to contribute to reliable and sustainable OCLF (other capability loss factor) reflects other ability to accommodate power from IPPs, risks around Unit 1 at Kusile Power Station and Units 4 and 5 at power grids at an affordable cost. unplanned energy losses due to external influences transmission and distribution plant reliability still Medupi Power Station were commissioned during the not under plant management’s control. It reflects remain, due to ageing assets and resource constraints. year, adding 2 387MW installed capacity to the grid, “This vote of confidence by our members, for Eskom unplanned conditions that caused the failure of supply thereby providing the System Operator with greater to lead this international organisation in 2017/18, of resources for electricity generation or the failure of There is a continual focus on the reduction of flexibility. Another unit at each station is already showcases Eskom’s leadership and technical ability as access to the National Grid that prevents the supply of non-technical energy losses by conducting regular supplying energy to the grid and are expected to be a leading industry player and compares it to the best electricity. and targeted meter audits. Unbilled revenue due to placed in commercial operation during 2018/19. The in the world,” noted Mr Alain Steven, GO15 Secretary tampered or faulty meters, or customers not correctly General. “Eskom plays an integral role in our Steering EUF (energy utilisation factor) is a measure of the latest projections show one additional unit from each degree to which the available energy capacity of an loaded on the billing system, is being recovered station being placed in commercial operation per year, Board that delivers on key projects and provides from large and small power users. The conversion of innovative solutions for the transmission and system electricity supply network is utilised. It reflects the Operating performance resulting in the last Medupi unit becoming commercial ratio of actual energy produced (not availability) against residential customers to split metering continues in in 2020/21 and the last Kusile unit in 2022/23. It is operator industry,” he concluded. Soweto, Midrand and Sandton to secure the revenue the energy that the full available capacity could have anticipated that we will return to an operating surplus produced. It is an indication of how hard the plant is stream with the conversion to prepaid meters. capacity situation where it will not be necessary to working. Execution of environmental compliance projects utilise all our existing plant to meet demand. Generation performance aimed at reducing nitrogen oxides, sulphur dioxide and Nevertheless, the increasing renewable energy We aim to optimally operate and maintain our particulate matter continues. The installation of fabric capacity continues to pose an additional challenge electricity generating assets for the duration of their filter plant at Grootvlei Power Station has reduced Generation 80:10:10 sustainability strategy in balancing supply and demand. In addition to daily economic life. We operate 30 base-load, mid-merit particulate emissions very effectively. We are committed to accomplishing the overarching variations in wind generation, a seasonal variation is or peaking and renewable power stations, with a total goal of meeting the country’s electricity demand becoming apparent, showing higher wind generation nominal capacity of 45 561MW. The demolition of Duvha Unit 3 is continuing, with at minimum cost. We will continue to improve the completion expected by the second half of 2018. during summer months and lower generation during availability and performance of our generation assets winter months. Detailed information on the installed and nominal capacity of each of our power stations, as well as IPP capacity, is set out in the fact sheet and optimise our production plan, to reduce the The dual-fuel conversion of OCGTs at Ankerlig and on pages 146 to 147 usage of more expensive coal-fired power stations. Gourikwa was completed as planned. Refer to page 125 in “Our know-how” for a discussion of the challenges posed by managing the impact of renewable energy We prioritise which stations to operate based on the Managing supply and demand least-cost merit order dispatch approach, as required Role of the System Operator by NERSA, and plant availability. The System Operator performs an integrative function for the operation and risk management of the interconnected power system by balancing supply and demand in real time and ensuring that the network operates at 50Hz, enabling us to supply electricity to 90 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 91 OUR INFRASTRUCTURE continued Our 80:10:10 strategy strives for 80% plant availability, We have identified Hendrina, Grootvlei and Komati as Maintenance plan • The availability of the top-performing stations in the requiring unplanned maintenance to be limited to the power stations with the largest cash impact, which In line with industry trends, we apply risk- and VGB benchmark has historically been consistent, 10% on average, while performing an average of 10% includes the coal dispatch cost, as well as the cost condition-based maintenance, where we assess the but has shown signs of instability since 2012, when a planned maintenance. The achievement of the strategy of upgrades and significant maintenance required to health and condition of each item of plant, together decline in performance was observed is assisted by additional capacity coming online through continue operations. The Board has decided that these with the consequence of failure. Using the Tetris • Eskom units generally compare favourably with the new build programme and purchases from IPPs, stations will be ramped down to zero production and planning tool and advanced analytics, we optimised the VGB benchmark with respect to planned thereby creating space for more planned maintenance placed in lean preservation in 2019/20 to minimise the the maintenance plan, as it allows for more informed maintenance in the median and low quartiles, while and mid-life refurbishments. operating surplus and optimise generation costs. decision-making regarding the prioritisation of planned maintenance of Eskom’s best-performing maintenance and rescheduling outages. Outages are units was significantly better than that of VGB Managing capacity This decision is subject to Eskom achieving plant executed first on high-risk plant items, even if it is benchmark units Eskom generally has adequate capacity available to availability of 80%, as well as an impact assessment earlier than the prescribed time-based interval, while • Since 2012, Eskom’s UCLF performance showed meet demand for most of the day. However, the on affected employees and local communities. Should outages for low-risk plant are deferred. a significant deterioration compared to the VGB system is constrained during peak hours, especially the demand growth be higher than current assumptions, benchmark on all quartiles evening peak, when there is often not enough available these stations could be recalled to meet demand. The In accordance with the three-year maintenance • With respect to the use of available plant (energy capacity to meet demand without the use of OCGTs. timing of the new build after Medupi and Kusile, and plan submitted to National Treasury as part of utilisation factor or EUF), all Eskom coal-fired units As more new build units (Medupi and Kusile) come the possible decommissioning of older stations, will be the Government support framework agreement, are performing at a level close to, and in many cases online and generation plant availability improves, the influenced by DoE’s updated Integrated Resource Plan 73 outages were on the base plan for 2017/18. At year above, the VGB best quartile, which is an indication situation will improve. (IRP), once it is published. end, 23 of those have been completed, 31 deferred, that Eskom is operating its power station units at seven were being executed and 12 were cancelled. much higher levels than the VGB benchmark units Technical performance An additional 46 unplanned, mainly short-term outages were also executed during the year. Koeberg Nuclear Power Station Target Target Target Actual Actual Actual Target Eskom is affiliated to the World Association of Nuclear Measure and unit 2022/23 2018/19 2017/18 2017/18 2016/17 2015/16 met? Of the original 50 backlog outages reported, 44 outages Operators (WANO) and the Institute of Nuclear have been completed or are in execution, three will be Power Operations (INPO), while South Africa is a Energy availability factor (EAF), % SC 80.00 80.00 78.00 78.00 77.30 71.07 executed during the coming year, while three have been member of the International Atomic Energy Agency Planned capability loss factor (PCLF), % SC 9.00 9.00 10.00 10.35 12.14 12.99 cancelled as the units were placed in cold reserve. These (IAEA). These affiliations enable us to benchmark Unplanned capability loss factor (UCLF), % 9.90 9.90 10.90 10.18 9.90 14.91 outages are no longer considered as backlog due to the performance, conduct periodic safety reviews, Other capability loss factor (OCLF), % 1.10 1.10 1.10 1.47 0.66 1.03 change in maintenance philosophy mentioned above. define standards, disseminate best practice and train 1. In accordance with our policy, the performance of Medupi Units 4 and 5 and Kusile Unit 1, still within their first year after commissioning, have Benchmarking personnel at our nuclear plant, Koeberg. A routine not been included in the above KPIs. Medupi Unit 6 has been taken into account since September 2016. Coal-fired power stations WANO peer review of Koeberg was carried out in Generation Division benchmarks the performance February 2017. EAF has improved marginally year-on-year and PCLF Regarding the Koeberg Steam Generator Replacement of its coal-fired power stations against those of the was slightly better than target. While UCLF has Project, executive-level involvement between Eskom, Through INPO, we have maintained our accreditation members of VGB (Vereinigung der Großkesselbesitzer worsened year-on-year, there was an increase in AREVA Framatome and SENPEC is ongoing, to ensure from the National Nuclear Training Academy in the e.V), a European-based technical association for UCLF in the last three months of the year, consistent commitment and adherence to the manufacturing United States for our systematic approach to the electricity and heat generation industries. When with seasonal trends. These equipment failures schedule to meet the refuelling outages scheduled training of licensed and non-licensed nuclear operators interpreting the results of the benchmarking study, have contributed to the capacity constraints in this for March 2021 and September 2021. Delivery of at Koeberg. We are the only non-US utility to have it must be noted that the operating regimes of other period. Nonetheless, both partial load losses and the two units’ new steam generators are planned for received such accreditation. utilities contributing to the VGB database may not be boiler tube failures have reduced over the year. Since September 2020 and January 2021 respectively, in time the same as those of Eskom. For the review period, Koeberg performance has December 2017, units in extended cold reserve have for installation during refuelling outages. generally been better than the median for the range of been included in OCLF, resulting in an increase in The graphs in the fact sheet illustrate the results of the Operating performance Update on Duvha Unit 3 over-pressurisation incident WANO performance indicators. OCLF of about 0.5%. benchmarking for the 2007 to 2016 calendar years (the The main boiler contract for the procurement and VGB results for 2017 are not yet available). The Eskom For graphs relating to the benchmarking of our coal-fired and nuclear Plant utilisation (EUF) was 71.64% for the year for fitment of the boiler at Duvha Power Station was data on the graphs has been plotted to the end of the power stations, refer to the fact sheet on pages 149 to 152 all stations (March 2017: 74.95%). Eskom’s EUF awarded on 28 March 2017 to Dongfang of China. 2017 calendar year to show the trend. The results remains above the international norm, indicating the Subsequently, a court judgment was handed down indicate that: Use of open-cycle gas turbines high levels at which we are operating our plant to on 30 June 2017, wherein Eskom and Dongfang were • Our coal-fired power stations continue to perform As mentioned previously, the energy availability of maintain security of supply, supporting the strategy interdicted from executing the contract, pending worse than the VGB benchmark plant across all Eskom’s generation fleet deteriorated towards the end of putting units into cold reserve at this stage rather the final determination of the review application, indicators of the financial year, resulting in OCGTs producing than decommissioning them. Once the EUF drops which is expected by the second half of 2018, 118GWh for the year, compared to 29GWh in the to acceptable norms, the decision to decommission assuming no appeal is lodged. As a result, the project prior year. power stations will be reviewed. completion date of January 2023 is at risk and we are reviewing our options. Demolition works are, Koeberg performance however, continuing, with completion expected Target Target Target Actual Actual Actual Target At 31 March 2018, Koeberg Unit 1 was undergoing during the coming financial year. Measure and unit 2022/23 2018/19 2017/18 2017/18 2016/17 2015/16 met? a refuelling and maintenance outage. The unit OCGT production, GWh 1 057 211 211 118 29 3 936 experienced two reactor trips in January 2018, which OCGT diesel usage, R million2 3 883 666 672 320 340 8 690 ended the unit’s run of continuous operation of 435 days since returning from its previous refuelling 1. The 2022/23 target is the cumulative target over the next five years. outage. Koeberg Unit 2 has been online ever since 2. The OCGT cost includes diesel storage and demurrage costs of R52 million (March 2017: R280 million) incurred as a result of not utilising the returning from a refuelling outage in May 2017. OCGTs. 92 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 93 OUR INFRASTRUCTURE continued Energy supplied by IPPs IPP operational capacities by type at 31 March 2018 International sales and purchases DoE’s Renewable Energy IPP (RE-IPP) Programme is Target Target Target Actual Actual Actual Target derived from ministerial determinations for renewable GWh 2022/23 2018/19 2017/18 2017/18 2016/17 2015/16 met? energy from IPPs. The first determination called for 3 725MW of renewable energy to be in commercial International sales 81 461 14 987 15 118 15 268 15 093 13 465 operation by the end of 2018. This was supplemented MW Contracted Operational International purchases 38 974 8 111 9 670 7 731 7 418 9 703 by subsequent determinations for 8 500MW of Net sales 42 487 6 876 5 448 7 537 7 675 3 762 renewable energy before 2025. The programme currently has 3 774MW operational. Wind 1 995 1 978 1. The 2022/23 target is the cumulative target over the next five years. We received PFMA and regulatory approval for the signing of additional PPAs for bid windows 3.5 Solar PV 1 478 1 474 While cross-border sales have increased by 1.2% year- corridors that carry power north of South African and 4 of the RE-IPP Programme. In April 2018, we on-year, sales to Botswana are down on last year, as borders, there is considerable regional demand that signed agreements with 27 RE-IPP projects totalling they are now almost self-sufficient. Work continues to cannot currently be met. 2 405MW. The power purchase agreements take into Gas turbines 1 005 1 005 conclude further firm sales agreements in the region. Integrated demand management account changes in foreign exchange spot rates from The volume of cross-border purchases was well below Integrated demand management (IDM) plays a key role those at the bid submission dates. Concentrating target, primarily due to Hidroelèctrica de Cahora in assisting Eskom to balance power supply and demand During the year, we commissioned 664MW of solar power 500 300 Bassa (HCB) reducing its supply as a result of low dam during periods of supply constraints. The demand renewable IPP capacity, less than the targeted 742MW, levels due to the continued drought in that area. response programme is contingent on the support of due to delays in signing power purchase agreements Hydro, biomass customers by means of interruptible load agreements. 27 22 The Mozambican power utility, EDM, has indicated a It enables the System Operator, during times of for new contracts. We expect 200MW to be and landfill desire to increase its supply from HCB by 200MW, generation constraint, to request these customers to commissioned during the coming year, representing which would require us to relinquish that capacity. reduce load or completely switch off on a scheduled two concentrated solar projects. Total 5 005 4 779 However, the majority of HCB’s capacity is wheeled day, in order to maintain the system frequency at through South Africa to Motraco. We met with EDM 50Hz. The demand response programme achieved an in March 2018 to discuss the proposal. As South Africa average certified capacity of 1 296MW during the year only receives 150MW benefit from HCB’s power (March 2017: 1 267MW). Energy capacity and purchases (supply of 1 100MW less the 950MW wheeled to The following table summarises the IPP capacity available and the actual energy procured under various IPP Motraco), there is in fact not enough available power Furthermore, IDM’s key role is to shift demand from programmes for the year to 31 March 2018. to meet EDM’s request. We suggested selling power peak to off-peak periods, in order to create space for to EDM at a reasonable tariff level; EDM may consider future sales growth. Target Target Target Actual Actual Actual Target our offer should the price be competitive. Measure and unit 2022/23 2018/19 2017/18 2017/18 2016/17 2015/16 met? Network performance Export growth strategy Transmission operates and maintains our transmission Total capacity, MW 7 287 4 981 5 521 4 779 5 027 3 392 Our export growth strategy is to maximise cross- assets, which transmit energy from our power stations, Total energy purchases, GWh 79 803 11 526 11 217 9 584 11 529 9 033 border electricity sales through existing transmission while our distribution network relays electricity from infrastructure, as well as the construction of additional the high-voltage transmission network to customers, Total spent on energy, R million 180 656 26 659 23 391 21 300 21 721 15 446 transmission lines, which require the support of including municipalities that manage their own IFRIC 4 accounting adjustment, R million2 (10 346) (2 019) (1 999) (1 983) (1 964) (340) n/a regional partners. Due to a lack of investment in distribution networks. Total expenditure, R million 170 310 24 640 21 392 19 317 19 757 15 106 transmission infrastructure in the key electricity Operating performance Weighted average cost, c/kWh3 226 226 209 222 188 171 Target Target Target Actual Actual Actual Target 1. The 2022/23 target is the cumulative target over the next five years. Measure and unit 2022/23 2018/19 2017/18 2017/18 2016/17 2015/16 met? 2. For accounting purposes, the capacity charges for the Avon and Dedisa IPP gas peakers are treated as arrangements that contain a lease in terms of IFRIC 4. Refer to note 28 in the annual financial statements for the related accounting policy. Number of system minutes lost <1 minute, 3. The weighted average cost has been calculated on the total amount spent on energy, before the IFRIC 4 adjustment. 3.53 3.53 3.53 2.09 3.80 2.41 minutesSC, 1 Number of major incidents >1 minute, number 2 2 2 − − 1 Renewable IPPs achieved an average load factor of Cross-border sales and purchases of electricity System average interruption duration index 37.0 38.0 39.0 38.8 38.9 38.6 31.5% during the year (March 2017: 30.7%), while the The Southern African Power Pool (SAPP) aims to (SAIDI), hoursSC weighted average cost (before the lease adjustment) provide reliable and economical electricity supply to System average interruption frequency index 19.6 19.8 20.0 18.7 18.9 20.5 amounted to 222c/kWh (March 2017: RE-IPPs and each of its members. Access to electricity in all SAPP (SAIFI), eventsSC peakers only: 244c/kWh). member states, with the exception of South Africa, is Distribution energy losses, % SC 6.91 7.45 7.55 7.73 7.55 6.43 below 45% and as low as 10% in one instance, creating 1. One system minute is equivalent to interrupting the whole of South Africa at maximum demand for one minute. a significant impediment to regional growth. This has been exacerbated by the drought which affected most of the SADC region over the past year or two. The system minutes performance set a new record for to effective restoration responses. Nevertheless, the transmission network. We experienced 24 system performance risks still remain, with ageing assets interruptions during the year (March 2017: 36), which and vulnerabilities due to network unfirmness, were primarily caused by plant failures and operation which should be addressed as we move towards N–1 of the related breaker protection systems. However, compliance. the impact of these interruptions was limited due 94 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 95 OUR INFRASTRUCTURE continued On average, distribution customers experienced limiting ghost vending of prepaid electricity During the year, Medupi Unit 5 (with an installed We remain committed to the retrofit installation of shorter duration outages and fewer network • Installing split smart and/or prepaid meters within capacity of 794MW) attained commercial operation on wet flue gas desulphurisation (FGD) technology at interruptions as measured through SAIDI and SAIFI. protective enclosures to prevent tampering 3 April 2017, Kusile Unit 1 (799MW) on 30 August 2017 Medupi in accordance with World Bank requirements, Sustaining network performance remains our focus, • Converting customers from post-paid to prepaid and Medupi Unit 4 (794MW) on 28 November 2017. and are actively pursuing schedule acceleration to through safeguarding network reliability and closing supply The original equipment manufacturer value of 800MW meet committed dates for four of the units, with the regulatory compliance gap given the available for Kusile Unit 1 was revised to 799MW, based on the potential acceleration of the remaining two units, to resources. Equipment theft outcome of performance tests conducted for grid code meet the World Bank requirement of completing the External socio-economic conditions continue to drive compliance. retrofit within six years of commercial operation date, Benchmarking theft and vandalism of network equipment, of which failing which we would not be allowed to operate the Transmission participated in a benchmarking exercise conductor theft constitutes the highest number of Kusile Unit 2 experienced a gas heater fire in units. However, this is dependent on sufficient water with 27 other international transmission companies in incidents. Equipment theft severely impacts local October 2017, which caused some delays to the being available from the Mokolo Crocodile Water 2017/18. The study focused on maintenance and plant network performance and causes loss of revenue, and scheduled synchronisation. Nevertheless, the unit was Augmentation Project Phase 2. We are also pursuing reliability performance and identified best international further leads to loss of life or injury to the public and synchronised on 24 March 2018, and is still expected viable options to limit the sulphur content of coal to practice for the transmission industry. These studies employees. to go into commercial operation by March 2019, ahead reduce exceedances of sulphur dioxide limits. FGD have been used to identify opportunities for the of the revised schedule. Medupi Unit 3 achieved first costs are in line with established benchmarks. development of continual improvement initiatives. Losses due to conductor theft, cabling and related synchronisation on 8 April 2018, enabling it to feed equipment totalled R46 million for the year electricity into the national grid during performance Energy losses (March 2017: R70 million), involving 5 152 incidents Refer to “Our interaction with the environment – Mokolo Crocodile and optimisation tests. We expect it will go into Water Augmentation Project (MCWAP) Phase 2” on page 101 for The impact of IPPs, given their location on the (March 2017: 5 734 incidents). Actions to combat these commercial operation in September 2018, ahead of further information network, has resulted in reducing transmission losses are managed by the Eskom Network Equipment the revised schedule. energy losses to 1.96% (March 2017: 2.22%) and Crime Committee, in collaboration with other affected The Board will insist on proper project and contract increasing distribution losses to 7.73% (March 2017: state-owned enterprises and the South African Police At both Medupi and Kusile, the remaining units are management as well as execution, in order to eliminate 7.55%). Overall Eskom losses have increased to 9.15% Service. The combined effort resulted in 216 arrests progressing well against the revised schedule. The time and cost overruns on our mega projects, namely (March 2017: 8.85%). This is because IPPs deliver (March 2017: 235) and recovery of R3 million worth Medupi project is expected to be completed in Medupi and Kusile. The Board will ensure that all energy directly to the distribution network, which of stolen material (March 2017: R5 million). 2020/21, while the Kusile project is expected to be projects are completed within both budget and the would otherwise have been transported from power completed in 2022/23, barring any delays as a result of contracted value; modifications or variations will not stations via the transmission network, thereby We aim to improve the security of the network contractor performance, industrial action or any other through the early detection of potential threats using be tolerated, aside from exceptional circumstances. reducing the load on transmission lines and therefore unforeseen issues. transmission losses. Furthermore, IPP production is surveillance technology, in conjunction with a national driven not by demand, but by contractual terms. guarding strategy. Group funded capital expenditure (excluding capitalised borrowing costs) per division Target Actual Actual Actual Eskom uses targeted meter audits to improve the Delivering capacity expansion Division, R million 2017/18 2017/18 2016/17 2015/16 efficiency of losses detection and resolution. During The capacity expansion programme to build new power stations and reinstate mothballed stations, Group Capital 32 300 29 278 35 458 33 799 the year under review, we made the following progress: as well as increase high-voltage transmission power Generation 8 444 9 746 14 376 11 440 • Historically unbilled revenue, amounting to Transmission 948 807 940 998 R367.7 million, was billed to large and small power lines and transformer capacity, started in 2005 and Distribution 7 028 5 170 5 220 5 490 customers (March 2017: R215 million). This relates is expected to be completed by 2022/23. When to meter tampering, faulty or vandalised metering completed, the programme will have increased Subtotal 48 720 45 001 55 994 51 727 installations, or customers incorrectly loaded on installed generation capacity by 17 384MW, Future fuel 1 599 1 226 114 2 114 the system transmission lines by 9 756km and transmission Eskom Enterprises 1 549 476 1 107 373 • Tamper fines amounting to R20.8 million were substation capacity by 42 470MVA. Other areas including intergroup eliminations 3 015 1 300 2 817 3 138 Operating performance recovered from prepaid customers who had Since inception to 31 March 2018, we have increased Total Eskom group funded capital expenditure 54 883 48 003 60 032 57 352 tampered with their electricity meters (March 2017: installed generation capacity by 10 750MW, R24 million) transmission lines by 7 469km and substation capacity 1. Capital expenditure includes additions to property, plant and equipment, intangible assets and future fuel, but excludes strategic spares, construction stock and capitalised borrowing costs. We continue with initiatives to improve revenue by 36 900MVA. To date, the programme has cost recovery from residential customers, such as: R363.8 billion, excluding capitalised borrowing costs For information on future new build projects, refer to “Our know-how – Investing in appropriate technologies” on pages 123 to 124 (March 2017: R335.7 billion). • Removing illegal connections, conducting meter audits, repairing faulty or tampered meters, and Future focus areas • Rolling out mobility and real-time dispatching tools • Improving the availability of our generation assets to improve scheduling, response times and outage Target Target Target Actual Actual Actual Target and optimising our production plan based on the resolution to distribution customers Measure and unit 2022/23 2018/19 2017/18 2017/18 2016/17 2015/16 met? least-cost merit order dispatch approach • Using a risk-based approach to prevent revenue Generation capacity installed and • Optimising maintenance planning by using advanced losses, especially in the prepaid domain 7 182 800 1 460 2 387 1 332 794 commissioned (commercial operation), MWSC analytics and new technologies • Completing the Medupi and Kusile new build Transmission lines installed, km SC 2 233.0 596.0 677.0 722.3 585.4 345.8 • Continuing to evaluate fleet renewal or preservation projects to deliver the remaining 6 382MW of new Transmission transformer capacity installed and options generation capacity 8 985 1 040 2 010 2 510 2 300 2 435 • Strengthening the transmission backbone towards • Constructing 2 233km of transmission and other commissioned, MVA SC attainment of N–1 compliance, and strengthening lines and commissioning 8 985MVA of transformer 1. The 2022/23 target is the cumulative capacity to be commissioned and/or installed over the next five years. distribution networks to accommodate customer capacity growth in support of universal access • Completing refurbishment projects, including Matla, • Effectively prioritising investments in system Duvha and low-pressure retrofits strengthening and renewal • Executing environmental compliance projects such as nitrogen oxide, sulphur dioxide, fabric filter plants and the Medupi FGD plant 96 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 97 OPERATING PERFORMANCE Our interaction with the environment considers • Attaining a delivered cost of coal in line with the our utilisation of renewable and non-renewable NERSA determination environmental resources that support our ability • Optimising logistics to drive cost efficiency while to create value, by powering our generation delivering the road-to-rail migration programme fleet – the use of renewable energy is one way in • Ensuring the optimal dispatch of coal-fired power which we try to limit our negative impact on the stations environment. Furthermore, it considers our impact • Supporting Government and Eskom’s transformation on the environment through emissions from our objectives by increasing coal spend on black-owned power stations, as well as other impacts related companies and leveraging Eskom’s buying power to to environmental contraventions and biodiversity. shape the coal market Environmental compliance can impact operational sustainability and is critical to maintaining our licence Composition of coal supply by volume to operate, and supporting security of supply. As such, we remain committed to our principle of Zero Harm to the environment. 35% Looking back on prior year focus areas 38% We maintain focus on our coal procurement strategy, to improve management of coal quality from suppliers to ensure the required coal quality and stock levels at all stations. The procurement process to appoint coal supply contractors for Kusile is expected to be concluded by December 2018. We have signed a long-term contract for the supply of limestone from Upington, Northern Cape for Kusile’s FGD plant, which will reduce sulphur dioxide emissions. 27% We also continued implementation of our emissions reduction and air quality offset plans, coupled with Cost-plus Short/medium-term contracts the sale of ash. Our efforts to develop new local Fixed price and international markets for ash beneficiation also OUR INTERACTION WITH THE ENVIRONMENT carry on. We continue to explore drought contingency plans Composition of coal supply by value HIGHLIGHTS CHALLENGES to mitigate the medium-term water supply risk, until Lesotho Highlands Phase 2 is commissioned. • Successfully concluded a transformation project with the • Timeously securing new coal contracts and addressing the transfer of ownership of the Anglo cost-plus mines to a below-target delivery of coal from existing contracts Continued focus on station-specific water strategy new black-empowered entity, Seriti Coal • Lack of capital funding for cost-plus mines negatively implementation plans has led to improved water • Following good summer rains, dam levels in the Vaal River impacted production and affects the mines’ ability to management. 32% increased to over 100% produce coal in the future • Particulate emissions and water use performance • Coal supply to Hendrina, Komati and Majuba Power Securing our resource requirements We aim to safely and sustainably source, procure and Operating performance improved significantly Stations was affected by Tegeta mines being placed in 48% • Proclamation of the Ingula Nature Reserve in KwaZulu- business rescue deliver the necessary amounts of primary energy – Natal and Free State at the site of the Ingula Pumped • Coal-related load losses for the year were 22% higher than coal, nuclear fuel, liquid fuels, diesel, gas, water and Storage Scheme the previous year limestone – of the required quality to our power • The drought in the Western Cape still poses a risk to operations at Koeberg Nuclear Power Station stations, at the right time and at optimal cost. • Potential delays in meeting commitments made in minimum emission standards postponement applications Securing our coal requirements IMPROVEMENTS • Several sites received compliance notices regarding Coal supply strategy 20% adherence to atmospheric emission licences A number of dynamics, including a reduction in the • Successful testing and burning of low quality coal at all six units of Matla Power Station, allowing access to a cheaper • Continued to phase out material containing PCBs, with global coal price and environmental factors, have coal resources 26.3 tons of PCB-containing equipment thermally destroyed resulted in reduced private investment as well as Cost-plus Short/medium-term contracts • Koeberg Nuclear Power Station installed a groundwater in 2017/18 divestment in the coal mining industry over recent Fixed price desalination plant in response to the water shortage in the • Budget constraints may impact future environmental years, and therefore limited the coal supply in the Western Cape performance, by delaying required environmental projects and maintenance of equipment market. • Started implementing the approved air quality offset About 90% of the forecast coal requirement for programme The Board approved our coal supply strategy in the the next five years has been secured, presuming • Obtained environmental authorisation for the prior year, which targets the following: the investments in cost-plus mines assumed in the construction of a nuclear power station at the Duynefontein site in the Western Cape LOWLIGHTS • Achieving an acceptable balance of security of Corporate Plan take place as scheduled. • Seven power stations ended the year below minimum coal supply and risk exposure, by entering into required coal stock levels a balanced portfolio of long- and short-term contracts, including cost plus contracts, with built-in flexibility on term, volume, quality and logistics 98 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 99 OUR INTERACTION WITH THE ENVIRONMENT continued Additional information on our top 10 coal suppliers Investment in cost-plus mines At the end of June 2018, coal stock levels at the The quality assurance process relating to short- and Supplier Contract type The majority of the cost-plus mines require significant following stations were below the minimum: medium-term coal supplies is receiving attention. investment or recapitalisation in order to increase • Arnot: Dedicated supply contracts to Arnot have Contamination controls at cost-plus mines will also be Exxaro Coal Mix of cost-plus and fixed-price production and/or maintain existing production. Lower subject to increased focus. expired, and coal contracted for Arnot was moved Anglo Operations/Seriti Coal Cost-plus production should be expected from these mines until to stations like Hendrina, whose coal supply was Implementing coal haulage and the road-to-rail South32 Mix of cost-plus and fixed-price the collieries can be recapitalised. Recurring financial affected by the associated mines being placed under Universal Coal Development 1 Fixed-price migration plan constraints have hampered our ability to fund the business rescue Iyanga Mining Fixed-price The haulage of coal by rail did not meet the annual required capital expenditure, leading to an increase in • Camden: The station was slightly below its minimum Tshedza Mining Resources Fixed-price target due to a number of Transnet Freight Rail Umsimbithi Mining Fixed-price procuring coal on short- or medium-term contracts, stock level due to delays in security short- and infrastructure failures. A decision was also taken to Koornfontein Mines Fixed-price which also incurs additional transport cost, as those medium-term coal stop the Camden rail service to achieve cost savings. Keaton Mining Fixed-price collieries are generally not situated close to our power • Duvha: Although not below the minimum stock Wescoal Mining Fixed-price stations. holding at year end, stock levels have subsequently We regularly engage with local authorities about declined, due to coal stock being routed to other the large number of trucks transporting coal, as well Recapitalisation will only be considered for those stations with low stock levels, coupled with as their contribution to the deterioration of road Coal quality mines where long-term benefits can be demonstrated. challenges experienced with the coal conveyor conditions in Mpumalanga Province, and the serious We aim to transfer coal quality risk to the supplier. Increased volumes of acceptable quality coal will • Hendrina: The station’s coal stock is at 15 days, threat this poses to road safety. Several public safety To this end, newer agreements have more rigorous reduce our overall coal spend by limiting the short- following a write-off of approximately 17 days’ awareness campaigns have been carried out at key quality clauses to provide us with greater recourse and medium-term coal required. We will also consider worth of coal stock. The circumstances of the points on major routes used by coal trucks. for the supply of poor quality coal. We continue to financing expansion at cost-plus mines to access write-off are the subject of an internal forensic evaluate the feasibility of a multitude of cost-effective remaining contracted reserves, to increase production Securing our water requirements investigation technologies to improve coal quality, such as and enable contract extensions. Our short-term water security risk has improved • Komati: Coal stock is at the minimum level. de-stoning, washing and screening of coal. Nonetheless, due to Komati’s low burn, coal can due to increased dam levels in the Vaal River System. During the past year, we continued to focus on easily be rerouted to the station if required The commissioning by the Department of Water and Our long-term goal remains to determine coal quality those improvements at cost-plus mines that didn’t • Kriel: The Kriel mine has experienced difficulty Sanitation (DWS) of the acid mine drainage project at the point of delivery. Our research unit is working require capital investment. Although effective, supplying due to lack of reserves, as the cost-plus by 2023 and the Lesotho Highlands Water Project on the design of real-time processes and systems to these improvements are limited, and further capital contract has to be extended and a corresponding Phase 2 will contribute to longer term water security sample and analyse coal consignments upon arrival at investment is required. We plan to spend R10.7 billion investment into the mine is required for Eskom. However, the Lesotho project is currently power stations, prior to offloading, by using coal DNA on financing expansion over the next five years. • Majuba: Although deliveries have increased, coal at risk of being delayed beyond 2025. characterisation. However, a two- to three-year delay can be expected before the capital investment will result in increased burn was higher than planned, resulting in stock To assist with water security in Gauteng, we output and productivity levels. levels declining from 28 days at 31 December 2017 committed last year to use the Drakensberg Pumped to about 15 days Storage Scheme to pump at least 285 million cubic Technical performance • Tutuka: Mine production was lower than planned, metres of water per year over three years from the Target Target Target Actual Actual Actual Target partly due to a mining production incident Thukela River into the Sterkfontein Dam, which feeds Measure and unit 2022/23 2018/19 2017/18 2017/18 2016/17 2015/16 met? A recovery plan – based on potential sources identified into the Vaal River System. Coal burnt, Mt 2 n/a n/a 117.44 115.49 113.74 114.81 n/a for procurement – has been put in place to improve Deteriorating raw water quality requires collective Coal purchased, Mt n/a n/a 130.32 115.25 120.25 118.70 n/a the stock days at these stations. However, recovery action by DWS and water users, including Eskom, to Coal purchase R/ton, % increase SC 9.0 9.0 12.0 3.8 3.5 19.2 efforts have been impacted by low delivery from the protect water resources and deal with polluters. We Coal stock days 37 37 37 68 74 58 Tegeta mines which are in business rescue. We are are implementing treatment plans to manage this risk. Normalised coal stock days 37 37 37 28 38 36 working with National Treasury on ways to expedite the coal procurement process. Mokolo Crocodile Water Augmentation Project Operating performance Road-to-rail migration (additional tonnage 64.4 12.9 12.9 11.6 13.2 13.6 (MCWAP) Phase 2 transported on rail), Mt SC, 3 Coal-related load losses for the year were 22% higher Medupi Power Station’s FGD retrofit requires 1. Future targets shown as n/a are dependent on system requirements. than the previous year. Together, Matla (58%) and additional water from the MCWAP project by 2. The 2017/18 coal burnt figure excludes 1 901kt burnt during the commissioning of Medupi Units 5 and 4 and Kusile Unit 1 (2016/17: 623kt for Tutuka (31%) contributed 89% of all coal quality- February 2024, whilst the water delivery date has pre-commissioning burn). related load losses for the past year: been delayed to January 2024. Failure to commission 3. The 2022/23 road-to-rail target is the cumulative target over the next five years. the FGD plant within the agreed timelines may render • Matla Power Station’s decision to burn poor quality local coal has significantly increased load losses, Eskom in breach of the World Bank loan agreements Coal stock days remained significantly higher than Excluding the above, the normalised coal stock days although it has reduced the need for expensive and our emission licence, which would mean the target largely due to more coal than required being stood at 28 days, well below the target. This is partly short-term coal affected units would not be permitted to operate. delivered to Lethabo, Medupi and Kusile Power due to a number of stations with coal stock days below • At Tutuka, we are working with the colliery to Stations. Lethabo is supplied by a cost-plus mine, required minimum levels. improve underground water controls to limit the Refer to “Our infrastructure – Delivering capacity expansion” on where there is no financial benefit in reducing coal moisture impact on the coal supplied. Improved page 97 for further information production. Due to the delays in the commissioning quality control has already led to a reduction in of units at Medupi and Kusile, coal requirements are coal-related load losses lower than originally anticipated, although we continue to take coal in terms of the take-or-pay coal supply contract. It is also not practical to transport coal from Medupi to other stations in Mpumalanga. 100 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 101 OUR INTERACTION WITH THE ENVIRONMENT continued Securing our nuclear fuel requirements Target Target Target Actual Actual Actual Target Existing contracts for the supply of nuclear fuel Measure and unit 2022/23 2018/19 2017/18 2017/18 2016/17 2015/16 met? Koeberg responds to water shortages by launching a fabrication services and the delivery of fabricated Relative particulate emissions, kg/MWh desalination plant 0.18 0.33 0.34 0.27 0.30 0.36 nuclear fuel to Koeberg Nuclear Power Station are sent out SC, 1 In February 2018, Eskom’s Koeberg Nuclear Power sufficient to cover Koeberg’s demand until 2021/22. Specific water consumption, ℓ/kWh sent out SC,1 1.25 1.36 1.37 1.30 1.42 1.44 Station launched a mobile groundwater desalination The existing contracts for enriched uranium, which is Net raw water consumption, Mℓ n/a n/a n/a 276 335 307 269 314 685 n/a plant, to supply the station’s water needs, thereby used as feed for the abovementioned fuel fabrications, easing pressure on the City of Cape Town’s water Environmental legal contraventions in terms of provide for about 40% of our demand until the end 1 1 1 2 − 1 the Operational Health Dashboard, number2 supply. of 2020. The commercial process for the supply of enriched uranium is in progress. 1. The performance of Medupi Units 4 and 5 and Kusile Unit 1, still within their first year after commissioning, has not been included in the The desalination plant is part of Koeberg’s three- performance above. Medupi Unit 6 has been included since September 2016. pronged water management strategy to address 2. In defined circumstances where the management of an environmental legal contravention indicates specific management issues or failings, it is the current water shortages in the Western Cape, See note 10 on future fuel supplies and note 20 on inventories in the recorded on the Eskom Operational Health Dashboard. annual financial statements for further information on nuclear fuel to ensure that the plant is able to provide safe and balances sustainable electricity. The strategy includes reducing Reducing particulate and gaseous emissions participation process, as well as the completion of the power station’s daily water usage, storing adequate Progress on regional gas and hydro projects The relative particulate emissions performance for the detailed atmospheric impact assessments. There are water on site and considering alternative water Mozambican projects year was significantly better than target, and showed a delays to the abatement technology implementation supplies such as ground and sea water. While we remain interested in pursuing hydro, gas and marked improvement on the performance achieved in schedule committed to in the 2014 postponement transmission projects in Mozambique, further direction the prior year. The improvement is due to an increased application. We are engaging proactively with key “When the City of Cape Town called on the people of is awaited from Mozambique’s Ministry of Mineral opportunity for outages to address issues relating to stakeholders and have initiated internal processes to the Western Cape to address the water issue, we had Resources and Energy about which projects it wishes emissions, combined with lower load factors which mitigate the projected delays. to respond with a sustainable solution as a responsible to pursue and the role envisaged for South Africa, and reduced the burden on the emission abatement corporate citizen. To this end, we have saved The following emission reduction projects are being Eskom in particular. equipment. approximately 115 000kℓ since June 2017, compared undertaken: to previous averages. This equates to the City of Cape Grand Inga Hydro Project • The FFP retrofit on Units 2, 3 and 4 at Grootvlei Information on gaseous emissions is available in the technical statistical Town supplying 10.5kℓ of water to approximately The Grand Inga project, which would establish a tables on pages 142 to 143 Power Station was completed in October 2017. The 11 000 houses for a month. Our water tanks are kept 4 800MW hydroelectric station, of which 2 500MW refurbishment of the electrostatic precipitators (ESP) full to cater for emergencies,” said Velaphi Ntuli, is allocated to South Africa, was discussed as part of Emission standards on four of the six units at Matla Power Station was Koeberg Power Station Manager. a binational commission between South Africa and Minimum emission standards (MES) were published also completed, resulting in an improving trend in the Democratic Republic of the Congo (DRC) held in in 2010, and stipulated emission limits, which had particulate emissions performance Koeberg can operate for about two weeks without June 2017. The DRC government advised that they have to be complied with by April 2015 for existing plant • Lethabo Power Station is busy with the first phase of off-site potable water. The desalination solution was directed two remaining bidders to prepare one bid and standards. More stringent limits, applicable to new a particulate emissions reduction solution through therefore very important to ensure continuity of resubmit a combined offer. plant standards, must be complied with by April 2020. the installation of high-frequency power supply on all supply. Koeberg already saves about 22 billion litres Compliance with the new plant standards will require six units. The second phase is being developed; this of fresh water per year, as its condensers are cooled DoE also shared the preferred transmission solution all coal-fired power stations to implement emission will cover the refurbishment of the ESP, upgrading the by means of sea water, which is returned to the sea for the Southern African power grid with the DRC reduction technologies, such as fabric filter plant (FFP), SO2 plant and installing an ammonia injection plant after use. delegation. This is the subject of an inter-governmental low NO x burners or FGD. • Planning for the installation of high-frequency Memorandum of Understanding that is being transformers to reduce particulate emissions is developed between South Africa, Botswana, Zambia, Eskom has adopted a phased and prioritised approach progressing at Matla and Duvha Power Stations, Water for future power stations Zimbabwe and the DRC. Some disagreement regarding to reduce emissions, by considering the remaining life of while Lethabo, Kendal and Matimba are on track for The development of new power stations beyond our the technology solution for evacuating power from power stations in our fleet and their impact on ambient construction from 2021 to 2025 Operating performance current new build programme will need to consider the DRC was identified and has to be reconciled. The air quality. In cases where it is not possible for power • Development work continues for low NOx burner the quality and availability of water resources, lead commission also identified the need for support from stations to comply with the MES within the compliance replacement or retrofits at Tutuka, Majuba and Matla. times for the development of new water supply intermediary countries. timeframe, or before they are decommissioned, we have Detailed designs for Majuba Power Station were infrastructure, as well as climate change impacts. submitted an application for postponement. Reducing our environmental footprint completed during the year We assess our environmental performance in various The Department of Environmental Affairs (DEA) • Tutuka and Kriel FFP retrofits are behind schedule For a discussion of our water usage performance, refer to “Reducing water consumption” on page 104 in this section ways, such as relative particulate emissions, and granted Eskom previous postponements, some until due to budget constraints, as well as lengthy specific water consumption by all commissioned power 2020 and others until 2025, on condition that we engineering, project and commercial processes. stations, as well as the number of environmental legal would develop and implement an environmental Tutuka has initiated a postponement and licence contraventions. offset programme to improve ambient air quality in variation process to adjust emission limits from communities close to our power stations. However, April 2019. However, the PFMA application for Refer to the fact sheet on page 139 for information on the there are delays to the implementation schedule the Kriel retrofit project was declined by DPE in environmental implications of using or saving electricity committed to in the 2014 postponement application, February 2018, based on “a lack of policy direction on which are not viewed in a favourable light by the life extension of coal-fired power stations; it would relevant authorities. Furthermore, the potential delay be presumptuous to commence the project in the to Medupi’s FGD retrofit due to a possible lack of absence of a revised Integrated Resource Plan from sufficient water supply will render us non-compliant the DoE.” Potential delays are predicted in meeting with the conditions of the World Bank loan. legally binding commitments made in these stations’ postponement applications In terms of the National Environmental Management: • The FGD plant is to be retrofitted to the units at Air Quality Act, 2004, we must request further Medupi, although this is behind schedule. The units and successive postponements in compliance with at Kusile are being constructed with the FGD plant a prescribed process that includes a rigorous public included 102 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 103 OUR INTERACTION WITH THE ENVIRONMENT continued Failure to comply with the atmospheric emission Reducing water consumption The following provisions have been raised in respect of environmental rehabilitation and restoration: licence (AEL) standards, or to meet the commitments Our strategy Actual Actual Actual in our emission retrofit programme, could result in Our comprehensive water strategy for all coal-fired R million 2017/18 2016/17 2015/16 the withdrawal of licences to operate or not being power stations is based on maintaining our strategic granted further postponement applications. This user status and complying with applicable water Power station-related environmental restoration – nuclear plant 15 928 17 650 12 677 would also result in a breach of specific loan covenants, legislation. The strategy supports overall financial, Power station-related environmental restoration – other power plant 13 375 12 643 8 339 environmental and operational sustainability by Mine-related closure, pollution control and rehabilitation 12 737 11 706 8 580 such as the Medupi FGD loan conditions, and in some instances, could be grounds for criminal action against working with relevant stakeholders in addressing both Total environmental provisions 42 040 41 999 29 596 Eskom. the country’s and our particular water challenges. Offset programmes All power stations have developed water strategy Refer to note 29 in the annual financial statements for more information on these provisions As per our MES postponement commitment discussed implementation plans, focusing on actions to reduce above, an air quality offset plan to improve ambient water use and ensure compliance. Progress against Biodiversity air quality – especially particulate matter levels – in plans is monitored and reported, and initial actions The Ingula Nature Reserve was formally declared in Kwa-Zulu Natal in March 2018 and in the Free State in May 2018. communities close to our power stations was approved have been closed out. The reserve covers some 8 000 hectares and surrounds the Ingula Pumped Storage Scheme. This brings the area of by DEA and the affected district municipalities in land managed by Eskom, which is formally declared as a nature reserve, to about 18 000 hectares, resulting in the early Water usage achievement of the 2025 target. September 2016. The offset plan has a nominal cost in Specific water use for the generation of electricity excess of R4 billion over nine years. for the year was substantially better than the target, The rollout of air quality offset interventions will and also considerably better than the previous year. commence in settlements in KwaZamokuhle and Continued focus on station-specific water strategy implementation plans, water data audits, as well as a Ingula, Eskom’s sustainability champion What makes Ingula special? Ezamokuhle in Mpumalanga, as well as the Sharpeville/ focus on improving water management, contributed to Eskom’s Ingula Pumped Storage Scheme is situated on Ingula is located within a high altitude grassland Vaal area in Gauteng during the coming year, while a the improved performance. The reduction in energy the boundary of the Free State and KwaZulu-Natal, ecosystem, a severely threatened system in South baseline study will be conducted in the Marapong area generated by older power stations, which are less straddling the escarpment of the lower Drakensberg. Africa of which less than 2% is formally protected. in Limpopo. The interventions will focus on switching water efficient, has also reduced specific water use. Following approval of the environmental impact The reserve is host to several hundred species of households from burning coal and waste to using assessment (EIA) study, Eskom was given authorisation birds, reptiles and mammals. Endangered bird species, electricity in combination with liquefied petroleum gas. Reducing environmental legal contraventions to construct the scheme in December 2002. One including the wattled crane, Eurasian bittern, yellow- A separate health assessment is planned in parallel to There were two Operational Health Dashboard of the recommendations of the specialist studies breasted pipit, southern bald ibis and white-bellied confirm the improved health status when indoor and contraventions (as defined earlier) reported during during the EIA was the need to purchase additional korhaan are visitors to Ingula. In addition, Ingula was ambient air pollution is reduced. the year. There were, however, 30 environmental legal land surrounding the scheme in order to secure the thrust into the spotlight with the discovery of one of NEMA section 30 performance contravention incidents identified (March 2017: 29, biodiversity value of the site. the rarest birds in the world, the white-winged flufftail, The atmospheric emission licences issued to power restated). There were 20 water-related incidents, four in the upper wetlands. related to waste, three related to emission licences, Why Ingula as a nature reserve? stations require unexpectedly high atmospheric and three biodiversity-related. The Ingula Partnership was formed between Eskom, emissions to be reported under section 30 of the BirdLife South Africa and Middelpunt Wetland Trust in National Environmental Management Act, 1998 Phasing out polychlorinated biphenyls (PCBs) 2004, and a steering committee established to ensure (NEMA). A total of 22 of these incidents occurred In terms of the Stockholm Convention, South Africa is that the objectives of the partnership are achieved. during the year, an improvement from 48 reported in required to phase out PCB-contaminated equipment by These included ensuring that the long-term integrity the previous year. Power stations have operated under 2025. In response, we developed a national inventory of the conservation area be formally protected as a conditions where section 30 is triggered for 0.88% of of PCBs in 2015, together with a plan to dispose of 140 nature reserve for all South Africans to enjoy. The the time during the year (March 2017: 2.24%). PCB-contaminated pieces of equipment before 2023. To partnership is directly involved in the management Operating performance Sulphur dioxide (SO2) emission limits for Medupi date, 28 pieces of equipment have been phased out. The of the nature reserve, eradication of alien invasive and Matimba are being exceeded due to the high plan is to phase out another 18 transformers during the species, control of erosion and the development of sulphur content of coal supplied to these stations. coming year and 16 the year after. social projects. We submitted an application to increase the SO2 limit in the AEL by means of a postponement application. In Information on the disposal of ash, asbestos, PCB-containing material, as well as nuclear waste and used nuclear fuel is set out in the response, DEA asked us to submit detailed action plans statistical table on pages 142 to 143 by the end of August 2018, setting out commitments to bring these power stations into compliance with the Provisions for environmental restoration and MES. Further engagements in this regard are planned. rehabilitation The elusive white-winged flufftail We continue to provide for the estimated (© Sergey Dereliev, www.dereliev-photography.com) Ashing facilities and ash utilisation Our exemption applications to allow for a period of decommissioning cost of nuclear plant, including four to six years after authorisation to install linings rehabilitation of the associated land, as well as the Visitors to Ingula are hosted at the Visitor Centre, at the Majuba, Kendal, Tutuka and Matimba dry-ashing management of spent nuclear fuel assemblies and from which guided walks or a tour, including a visit facilities have all been approved. radioactive waste. Provision is also made for the to the underground pumped storage scheme, can decommissioning of other generating plant and be arranged. Now internationally acclaimed, Ingula In terms of our ash utilisation strategy we sold 2 736kt rehabilitation of the associated land. remains a pioneering example of how the development of ash from our power stations (March 2017: 2 760kt). of industry can be harmoniously integrated with the Eskom continues to coordinate and support discussions Furthermore, where a constructive or contractual protection and enhancement of biodiversity. to further develop new local and international markets obligation exists to pay coal suppliers from cost-plus for ash beneficiation in line with Operation Phakisa mines, provision is made for the estimated cost of The magical rolling hills of the Drakensberg, home to Ingula initiatives to create jobs and new skills while continuing closure at the end of the life of the mine, together with to ensure responsible environmental management. pollution control and rehabilitation of the land. 104 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 105 OUR INTERACTION WITH THE ENVIRONMENT continued During the year, 256 red data bird mortalities were Carbon mitigation mechanisms Future focus areas recorded on Eskom’s infrastructure, substantially less National Treasury has proposed that a carbon tax be • Meeting future coal cost targets by managing costs than the 502 mortalities recorded last year. Although Greenhouse gases and climate change levied on reported GHG emissions, in order to send within agreed parameters, while maintaining security lines and segments within sensitive areas have been About 70% of the sunlight reaches the earth’s surface a price signal to the market to reduce consumption of supply to the generation fleet, by securing new identified, proactive mitigation actions to ensure that and is reflected upward in the form of infrared of carbon-intensive products. We are participating coal contracts in line with financial targets and they are made bird-friendly have been slower than radiation. The heat caused by this radiation is absorbed in the pilot phase of the carbon budgeting process. contracting for coal at acceptable levels of quality, anticipated. by greenhouse gases (GHGs), including carbon dioxide, Eskom once again achieved better than the pilot quantity and cost methane, nitrous oxide, sulphur hexafluoride, as carbon budget for 2017. However, until such time as • Investing capital in cost-plus mines, to improve We have been undertaking biological monitoring at we are allocated additional lower carbon-emitting well as hydrofluorocarbons and perflourocarbons. production the Sere Wind Farm. Results confirmed that the direct technologies in terms of the revised IRP, we remain While GHGs only make up about 1% of the earth’s • Returning coal stock at power stations to expected impact of turbines on bats (19 mortalities in the year) concerned about our ability to reduce the liability in atmosphere, they regulate the world’s climate by levels and birds (11 mortalities) is relatively low. Although terms of the pending carbon tax. trapping heat, holding it in a kind of warm-air blanket • Ensuring functioning processes to measure coal the wildlife interaction incidents will be continually that surrounds the planet – the greenhouse effect. deliveries and to test quality on site monitored and mitigated, there is no immediate In 2017, the DEA gazetted the National Greenhouse Problems begin when human activities distort and • Meeting atmospheric emission licence compliance concern. We will continue to determine which types of Gas Emission Reporting Regulations, the Declaration accelerate the natural process by creating more GHGs obligations in a cost-effective way to ensure a species are being impacted and, in particular, whether of Greenhouse Gases as Priority Pollutants and the in the atmosphere. This is known as the enhanced sustainable business any red data species are at risk. National Pollution Prevention Plans Regulations. The greenhouse gas effect or climate change. • Rolling out a raw water smart metering system Climate Change Bill was published for public comment Investing in renewable energy across water schemes supplying our power stations The Intergovernmental Panel on Climate Change on 8 June 2018; this will coordinate all climate change We aim to deliver on our commitment to • Confirming that flow meters are calibrated and (IPCC), which represents a number of world climate legislation under one Bill. As a major emitter, we will environmental sustainability and reducing our carbon functioning, to aid in accurate and verified water change experts, has already released five globally be required to comply with all these regulations. footprint through purchases of renewable energy from measurements, billing and payments recognised reports. These illustrate that human- IPPs, coupled with our own investment in renewables. We support a delay in the implementation of the induced GHGs are changing the earth’s climate in Renewable energy sources include wind, solar power, proposed carbon tax, until such time as the reporting terms of climatic variability, extreme events and long- biomass, landfill gas and small hydro technologies. system is well entrenched and the tax can be term climate change. These climatic changes will have implemented as a “tax enforces budget” option, as a direct impact on the development of countries and For capacity provided by renewable IPPs, refer to page 94 recommended by a World Bank-sponsored study. their economies, including infrastructure, development Under this option, only emissions which exceed the planning, as well as food and energy production. Sere Wind Farm contributed 331GWh to the national carbon budget allocated by the DEA would attract tax. Globally, the power generation sector is the largest grid during the year (March 2017: 345GWh), with Eskom also objects to the proposed curtailment of the contributor of GHG emissions. an average load factor of 36.05% and an average renewables premium rebate by 31 December 2022, availability factor of 98.77% (March 2017: 37.63% In realising the urgent need to reduce GHGs, given that the RE-IPP procurement programme and 99.65% respectively). participating countries signed the United Nations contracts extend as far as 2038. Further hearings have Framework Convention on Climate Change been promised. The small hydro plants in the Eastern Cape recorded (UNFCCC), which governs and drives the negotiating total energy sent out of 11GWh during the financial process at international levels, by considering what can year (March 2017: 20GWh) due to low rainfall in be done to reduce or mitigate climate change through the catchment areas. The eight rooftop and ground- GHG reductions, as well as to adapt to and cope with mounted PV commissioned sites in operation the impacts of climate change. produced total energy sent out of 4.02GWh during the year (March 2017: 4.19GWh). South Africa signed the UNFCCC in 1998, the Kyoto Operating performance Protocol in 2002 and the Paris Agreement in 2015. Climate change Arising from this is a requirement to submit a national South Africa’s pledge report on climate change activities every four years. South Africa’s pledge to the Paris Agreement requires National GHG emissions were estimated at around the country’s CO2 emissions to peak by 2025, plateau 347Mt in 1990, rising to around 518Mt in 2012, of for another 10 years and then decline from 2035. which Eskom contributed approximately 44%. In Electricity historically accounts for around 42% of Paris, South Africa committed that its national GHG national CO2 emissions. To achieve this target, the emissions would peak at between 398Mt and 614Mt country will need to invest in lower or zero-emitting by 2025, then plateau for a decade, and thereafter technologies, as and when the current coal-fired decline in absolute terms. The DEA is responsible for electricity generation fleet reaches the end of its life. managing these commitments. A concerted effort is therefore required to focus on greener technologies such as nuclear, cleaner coal technologies, renewables, gas and large hydro imports. The trade-offs between technologies must however be discussed and rationalised to arrive at an appropriate electricity mix. This will be informed by the revised IRP, once it is finalised by DoE. 106 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 107 OPERATING PERFORMANCE Without our people, we would not be able to execute Looking back on prior year focus areas our strategy or deliver on our mandate. To that end, The focus on workforce optimisation, increasing we need to ensure that we have the right people in employee engagement, and reducing both manpower the right positions doing the right things. One way of costs and headcount remains ongoing, as does the ensuring that is through our learner pipeline, another drive to prevent incidents and share key safety is through developing and training our people. We learnings. also need to make sure that our people are adequately rewarded for their efforts, in order to recruit and We are making progress in closing the gender equity retain a skilled workforce. gap, although this is not expected to be achieved by 2020 as had previously been anticipated, due to Furthermore, we strive to foster mindsets and financial constraints limiting opportunities to recruit behaviours that express Eskom’s values, leadership and promote women. We are aware that people living brand and support transformation efforts. Leaders with disabilities are represented mostly at lower levels across the organisation are required to adopt a of the organisation; we are working on initiatives to transformational mindset, take accountability and live address this. by our values and our leadership brand pillars. Our workforce Safety continues to be the foundation of all our The group headcount at year end was 48 628 operations and is critical to our performance. We (March 2017: 47 658), including permanent staff and remain committed to our goal of Zero Harm, on the fixed-term contractors, consisting of 41 316 Eskom basis that all incidents are preventable, and we strive employees and 7 312 Eskom Rotek Industries (ERI) to manage activities to eliminate incidents, mitigate employees (March 2017: 41 940 and 5 718 respectively). occupational hygiene and safety risks and promote Of these, approximately 84% were covered by excellence in safety performance. collective bargaining agreements. The number of ERI employees increased primarily due to the permanent employment of temporary workers as required by the Labour Relations Act, 1995, while the Eskom headcount showed a slight reduction, in Leadership with a accordance with our drive to optimise our workforce heart of a servant and reduce employee benefit costs. Staff turnover during the past year was approximately 4.6%. The reconciliation of our headcount is shown below. Number of employees 2017/18 Leadership that Headcount at 1 April 2017 47 658 OUR PEOPLE creates a learning Add: Appointments 3 169 organisation Less: Resignations (1 114) Retirements (740) HIGHLIGHTS CHALLENGES Operating performance Deaths in service (190) • Strong learner pipeline to cater for future skills • Racial and gender equity, although improving, are well Dismissals (123) requirements below levels expected by the shareholder Absconded (4) • Achieving disability equity at all levels, and reasonable Other (28) accommodation of people with disabilities Leadership Headcount at 31 March 2018 48 628 • Instilling a culture that supports safe behaviour at all times characterised by IMPROVEMENTS to prevent fatalities and lost-time incidents good governance Due to the financial constraints we are facing, a • Eskom’s headcount is slowly reducing, although levels reduction in employee benefit costs, as one of the have increased year-on-year when including our subsidiary most significant cost elements, is required to ensure • First phase of income differentials adjustments for bargaining unit staff has been implemented LOWLIGHTS sustainability. Headcount reduction through natural • Lost-time injury rate has shown a significant improvement attrition is one of the key levers to reduce employee • Increase in fatalities of employees, contractors and members of the public benefit costs. A further reduction could be realised Leadership through separations and a reduction in overtime. characterised by disciplined execution For a discussion of employee benefit costs, refer to “Our finances – Other operating costs” on page 82 108 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 109 OUR PEOPLE continued The divisional breakdown of our workforce at 31 March 2018 is shown below, indicating that about Average cost per employee World Bank study into reasonable staffing levels at Eskom 65% of employees are directly involved in the supply Note that total employee benefit costs includes a In August 2016, the World Bank’s Energy and for which capacity expansion is required many years of electricity to customers, with the balance employed number of elements, such as overtime, performance Extractives Global Practice Group released a policy ahead of actual anticipated demand growth. Insufficient in the new build programme, support functions and bonus, leave, post-employment medical benefits for research working paper titled “Financial Viability or late expansion of capacity can result in load our subsidiary ERI, which focuses on supporting the those who qualify, pension benefits, training and of Electricity Sectors in Sub-Saharan Africa – Quasi- shedding and significant economic disruption, which electricity business. development, as well as the cost of temporary staff. It Fiscal Deficits and Hidden Costs”. We appreciate the South Africa experienced due to the late start of the would therefore be erroneous to try and determine World Bank report as it provides valuable insights new build programme. Using the 2007 sales volume the average cost per employee by dividing the 7 312 into utilities in sub-Saharan Africa. The report as a denominator ignores the impact of customer and employee benefit cost figure in the income statement (15%) provides comprehensive analysis of the viability and network growth since then. by the headcount, without removing non-payroll costs. 12 213 sustainability of these utilities, as well as detailed (25%) staffing benchmarks against South American utilities. Irrespective of current sales volumes, the Eskom The average cost per employee, calculated based on business has grown over the past decade, in terms guaranteed pay, is below R500 000 per employee for In virtually all respects the report corroborates the of our generation capacity, network size, customer the year. messaging and statements made by Eskom over many base and staff required for the new build programme. 7 606 (16%) years. Most of the media commentary on this report, Furthermore, one has to consider that Eskom has 2 005 however, focused on only one aspect of the report, to maintain sufficient infrastructure to cater for (4%) namely “optimum staffing levels”. This is unfortunate peak capacity, and cannot simply divest itself of The composition of our employee benefit costs is set out in note 35 from two perspectives: firstly that it seems the infrastructure and staff to match the average level of of the annual financial statements 2 040 report’s overall messages, observations, conclusions sales during the year. Catering for the growth in the (4%) 2 590 and recommendations are going unnoticed or being business, an average of 11 000 additional employees Employee benefit costs are the second largest (5%) ignored, and secondly it appears that the “optimum would be required. Added to the 2006 levels of 30 728, 14 862 component of operating costs, constituting about 22% (31%) staffing levels” is the one area of the report where this would have resulted in staff numbers (at a company of total operating costs. The strategy review being human errors have slipped in – ironically, specifically level) of 41 728 by 31 March 2015. undertaken will explore the reduction of employee with regard to the Eskom analysis. Generation Group Capital To address some of the limitations stated above, the benefit costs through workforce optimisation. We are According to the World Bank report, Eskom is World Bank approach was used as a base to determine Transmission Support functions focusing on the retention of core, critical and scarce Distribution Subsidiaries overstaffed by 66% and only requires 14 244 employees appropriate staffing levels for the licensed divisions, skills across the business, while reducing non-essential Customer Services to operate – of this, 4 648 employees relate to while other global benchmarks were applied to positions. Generation Division, and 9 596 for Transmission support functions. This approach ensures a robust The breakdown of our workforce at 31 March 2018 and Distribution. The report only used customer yet balanced and fair determination of possible Eskom based on age is shown below. An area of focus is For information on the racial and gender breakdown of our numbers per full-time equivalent for Transmission staffing levels, taking into account South Africa’s workforce, refer to “Improving internal transformation” ensuring knowledge transfer from those employees and Distribution staff, and the number of units for unique energy sector characteristics, such as Eskom’s on pages 114 to 115 nearing retirement age. Generation operations and maintenance staff, to arrive developmental role and the fact that it is a vertically at the total Eskom staffing requirements. It does not integrated utility, with the majority of support services consider other areas within Generation Division, provided in-house or by our subsidiary. % 45 such as engineering or projects; nor support functions across the entire business, such as finance, human Based on the revised approach, an optimal group resources, commercial, IT, sustainability and risk, legal, staffing level of 33 249 was calculated – this consists 40 stakeholder relations or corporate communications of 10 107 Generation and related staff, 2 005 for Operating performance 35 functions; or even staff required for the new build Transmission, 10 508 for Distribution and Customer programme. The report also did not take into account Services, 1 441 for the new build programme, 1 889 30 either customer density, as end users of municipalities for finance, HR and procurement, 2 135 for other were not considered; or the length of reticulation lines corporate and support functions, and 5 164 for Eskom 25 in our network, which constitutes almost 80% of our Rotek Industries. This figure is aligned to our view that network; or the difference in the level of automation we may be up to one-third overstaffed, but is being 20 or outsourcing between the reference utilities and refined further as part of our strategy review. 15 Eskom. Furthermore, it seems that the capacity per The results of the normalised calculations are being employee used to calculate Generation staffing levels validated against other indicators, for example 10 was inconsistent with averages for similar utilities, and productivity benchmarks, to ensure the accuracy indeed significantly higher than the average for sub- and completeness thereof. We also continue to 5 Saharan Africa. conduct benchmarking, research and analysis to Moreover, comparing Eskom’s staffing levels to those identify potential areas for efficiency improvements, 0 20-29 30-39 40-49 50-59 60+ in 2007, on the basis that sales volumes are similar, in response to the dynamic business environment is also considered simplistic. Electricity generation, within which we operate. 2016/17 2017/18 transmission and distribution are long-term industries, 110 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 111 OUR PEOPLE continued Building and retaining strong skills Our human resources strategy also needs to address Nevertheless, unjustifiable race and gender based commitment to Eskom and its goals. Furthermore, We seek to deliver transformation through the requirements of our shareholder, set out in our income differentials have been identified and are being a number of initiatives are in place to ensure open recruitment and retention using a targeted employee shareholder compact, and those of Government addressed, through a payment structure review and dialogue, and to provide employees with a platform value proposition. Essential to this is attracting as a whole. The review of our operating model will standardisation to achieve remuneration equity across to supply feedback to Eskom’s leadership. These and retaining critical skills. We also use internal ensure optimal skills and capacity levels across the races and genders. Income differential adjustments include face-to-face meetings, employee engagement talent boards at managerial and leadership levels to business, and we will conduct a bottom-up skills and for bargaining unit employees were implemented surveys and an ongoing weekly communication to identify employees with high potential and those remuneration analysis. in December 2017, the first phase in a three-year all employees, with all employees being given the with development gaps, to aid succession planning implementation plan. The implementation of opportunity to contribute. Our human resources strategy relies on three main areas: adjustments for managerial employees will commence for critical workforce segments, and actively manage • Creating a culture of high performance in the 2018/19 financial year. Health and wellness talent pools and careers to achieve transformation • Ensuring that we have a productive workforce, The health and wellness of our employees is objectives. Through the use of our internal talent efficiently organised and appropriately skilled Managerial employees receive a guaranteed package, paramount to a healthier and more productive pools, we also try to reduce external recruitment in an • Retaining core and critical skills while ensuring that which includes compulsory benefits such as medical workforce. Our health and wellness strategy seeks to effort to manage employee benefit costs. Optimisation our workforce is engaged aid, pension, dread disease cover, group life and death improve the health and wellbeing of every employee, of our business model will be included in the strategy benefit. The guaranteed amount is reviewed annually, thereby improving work attendance and individual review, and therefore recruitment has been restricted with increases awarded in October each year, to keep work capacity, through the prevention of occupational to critical vacancies only. Nevertheless, we are remuneration in line with market trends based on an diseases and injuries, early detection of occupational committed to retaining the right level of skills and to appropriate comparison group. Annual reviews are and lifestyle diseases (such as hypertension, diabetes achieving transformation targets. approved by Exco and ratified by the PGC. and HIV), medical surveillance, medical fitness for duty Learner pipeline assessments and wellness programmes. Bargaining unit employees receive a basic salary and Target Target Target Actual Actual Actual Target benefits, which include pension, medical aid, death Wellness programmes include physical wellness Measure and unit 2022/23 2018/19 2017/18 2017/18 2016/17 2015/16 met? benefit, housing allowance, cell phone allowance and programme using the sports, recreation and cultural Engineering learners, number n/a n/a 391 1 241 1 480 895 a car allowance (subject to qualifying criteria). Basic programme as a vehicle to promote employee Technician learners, number n/a n/a 652 838 1 209 415 salaries are reviewed annually, with increases awarded wellbeing. The employee assistance programme (EAP) Artisan learners, number n/a n/a 1 434 1 815 2 155 1 955 in July, to keep remuneration in line with market trends also offers counselling, financial wellness and various based on appropriate comparative groups. Annual other psychosocial preventative programmes. The EAP Learner intake, number SC, 1, 2 2 500 500 500 726 3 048 1 370 reviews are approved by Exco and ratified by the PGC. utilisation was about 12.6% for the year, exceeding the Training spend as % of gross employee benefit 5.00 5.00 5.00 5.21 4.89 4.45 public sector average of 10.7%. The top four problems costsSC The short-term incentive scheme rewards the presented to the EAP were relationship issues, stress, achievement of predetermined objectives and targets organisational concerns and trauma. Employees with 1. From 2018/19, learner numbers will reflect only new contracts awarded to learners and not the full learner pipeline as is currently presented, (linked to the shareholder compact), subject to hence the significant reduction in numbers. financial challenges are offered debt counselling and 2. The 2022/23 target for learner intake is the cumulative figure targeted over the next five years. the achievement of defined gatekeepers. Individual coaching on managing their finances. performance objectives and targets are determined by an employee’s line manager and the employee, Levels of sick leave within the organisation remain a Our learner pipeline currently exceeds target, Where possible, learning and development initiatives in agreed performance contracts and covers the concern. The sick absenteeism frequency rate (SAFR), with a total of 4 176 learners in the system, with an are delivered by our Eskom Academy of Learning. financial year. Incentive bonuses are calculated by which measures the number of sickness absences additional 282 non-technical learners not reflected Success rates of internally delivered interventions to applying a performance measurement formula. The per employee for a 12-month rolling period, of 2.35 above. This is considered adequate to meet our future close competency gaps, based on participant feedback, formula ensures alignment with strategic objectives, (March 2017: 2.38) is much higher than the target skills requirements. During the year, 424 learners exceeded 90%. and is weighted based on an employee’s contribution of 2.04. However, the gross sick absenteeism rate were appointed into permanent positions, where During the year under review, a total of 361 employees to individual, team, divisional and organisational (GSAR), which reflects the days lost due to sickness vacancies and funding allowed. Those who couldn’t Operating performance were assessed in terms of the recognition of prior objectives. as a percentage of total potential work days, of 2.73% be accommodated participated in a Career Fair with learning process, which considers learning and (March 2017: 2.72%) remains well within the target of suppliers, to assist learners with opportunities in the As the incentive scheme is expected to be self-funding experience, however obtained, against registered 3.50%. All employees with high SAFR and GSAR rates broader labour market. and the net profit target of R500 million was not met, unit standards and qualifications outcomes. Of those, are referred to Eskom clinics for “fitness for duty” no performance bonus provision was raised. assessments and managed accordingly thereafter. However, our learner pipeline is being reduced from the 31 were declared competent, while 330 are closing original 14% to 6% of total headcount, to align to our the competency gaps identified. All but one of these Employees too sick to continue working are advised Executive remuneration is discussed under “Our governance – and assisted to apply for ill-health retirement. available financial resources. Over the next five years, employees work in technical fields. Executive remuneration and benefits” on pages 54 to 58 we will only accept 500 new learners per year, in the A total of 1 502 employees are enrolled with various Lifestyle diseases remain the main cause for employees occupational categories of engineers, artisans, technicians Employee engagement academic institutions to further their studies, 713 of to be approved for ill-health retirement. Targeted and sector-specific positions. We train learners not only The Employee Relations Department ensures sound which relate to technical studies, and 789 to non- wellness programmes were developed to increase for our own business needs, but also to contribute to the employee relations in the workplace, also engaging technical studies. Approximately 56% of those enrolled awareness of lifestyle diseases, including early skills development strategy of the country. with organised labour to achieve high organisational are women. and adequate medical management of all chronic Learning and development performance. The relationship with organised labour conditions. Employees with chronic diseases are Learning and development focuses on improving the Remuneration and benefits is well regulated, with agreements and formalised encouraged to adhere to treatment offered by their competencies of employees and building skills in future Our approach to remuneration and benefits is processes in place. medical aid schemes through allocated chronic disease sourcing pools, as well as advancing leadership skills. designed to attract and retain skilled, high-performing management companies. employees. We aim to remain competitive by providing Our employee engagement programme, established in Our training spend over the past year constituted 2015, aims to rebuild relationships with employees by 5.21% of gross employee benefit costs, totalling market-related remuneration structures, benefits and conditions of service, within the guidelines set by the helping them to feel more connected to the business R1.44 billion (March 2017: R1.54 billion). and to one another, thereby establishing an emotional shareholder. 112 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 113 OUR PEOPLE continued Industrial relations Racial and gender equity at senior management Our total workforce comprises 68% male and 32% Targets for grievances resolved and disciplinary action level, as well as middle management/professionally female employees at all occupational levels, unchanged with sanctions were exceeded, with close to 80% of qualified levels, have all improved over the past year, from the prior year. Through our Eskom Women The Eskom Women Advancement Programme is a grievances resolved and in excess of 90% of disciplinary although not all measures have achieved their targets. Advancement Programme (EWAP), opportunities holistic plan aimed at breaking the mould of perceptions actions resulting in sanctions, indicating that employees However, no targets are set at executive level. Limited which arise due to attrition are expected to be about women which perpetuate misrepresentation are not subjected to unwarranted disciplinary recruitment and promotion opportunities restricted targeted and reserved for women. This should lead to of women in leadership and technical roles. The 2030 measures. Slightly less than 90% of disputes referred to opportunities to achieve equity targets. approximately 45% female employees by 2022/23, with Agenda for Sustainable Development is central to external institutions were ruled in Eskom’s favour, just racial equity expected to reach about 85% over the the emancipation of women. The United Nations has Racial equity by level of employment missing the target of 90%. same period. committed to positioning gender equality at the centre of the global agenda, and has included gender equality 100 Executive suspensions and dismissals are discussed under “Ethical Although Eskom has achieved the disability target set and the empowerment of women and girls as one of its leadership – Allegations of corruption and misconduct” on page 19 and Sustainable Development Goals. This has further been “Our governance – Executive Management Committee” on page 53 by the shareholder, the proportional representation of persons with disabilities remains a concern, as they strengthened by the incorporation of gender sensitive 80 are overrepresented at lower occupational levels, targets in a quest to achieve sustainable economic, social Our recognised trade unions – NUM, NUMSA and with inadequate representation at executive, senior and environmental development. Solidarity – lodged a dispute with the Council for Conciliation, Mediation and Arbitration (CCMA), management and middle management/professional seeking a ruling that Eskom should have a single 60 levels. Managers are encouraged to recruit and bargaining unit for all its employees, or alternatively promote more employees with disabilities. Similarly Focus on safety to EWAP, we have established a forum focusing on the Eskom is subject to legal, regulatory and licence two bargaining units – one for bargaining unit advancement of people with disabilities. We also have a conditions surrounding occupational hygiene, safety and employees and one for managerial employees. The 40 Disability Office that deals with disability issues in the environmental compliance. Our safety performance CCMA issued an arbitration award in April 2018, workplace. Wherever possible, we ensure reasonable is assessed in terms of the number of fatalities finding that the current bargaining unit should be accommodation of people with disabilities; an audit among employees and contractors, as well as the extended to include certain levels of professionals and 20 will be performed to ensure that all of our premises lost-time injury rate (LTIR), which is a proportional middle management employees. We intend to review are disability-friendly. The safety of our staff living with representation of the occurrence of lost-time injuries the arbitration award. disabilities is an area of focus. per 200 000 working hours over a period of 12 months. In addition, the trade unions are seeking a CCMA 0 Executives Senior Middle Skilled Semi-skilled ruling that Eskom is not entitled to use temporary management management and Target Target Target Actual Actual Actual Target professionals employment service providers or subcontractors. Measure and unit 2022/23 2018/19 2017/18 2017/18 2016/17 2015/16 met? The arbitration was postponed to June 2018. Actual Actual met target Fatalities (employees and contractors), number − − − 15 10 17 Target Actual almost met target (within 5% threshold) The Essential Services Committee issued a notice Fatalities (public), number1 − − − 26 20 27 in March 2018, advising that it intended investigating Gender equity by level of employment Lost-time injury rate, index (including whether the designation declaring the generation, 45 0.34 0.34 0.31 0.23 0.39 0.30 occupational diseases) – group transmission and distribution of power as an essential Lost-time injury rate, index (excluding service should be varied or withdrawn. If the 40 0.34 0.34 0.31 0.21 0.28 0.27 occupational diseases) – group designation is varied or cancelled, everyone employed in the generation, transmission and distribution of 35 Unfortunately, despite our intense commitment to safety, we suffered three employee fatalities (March 2017: four) power could be entitled to embark on industrial action. and 12 contractor fatalities (March 2017: six) during the year. The causes of fatalities are shown below: 30 Due to the financial challenges we are facing, we offered Operating performance a 0% wage increase to the bargaining unit for the coming 25 2017/18 2016/17 year. This led to widespread protest action, which 20 1 resulted in rotational load shedding over three days in June 2018. We have since revised our offer, which 3 2 2 15 includes a three-year agreement; the trade unions are considering the revised offer. Our biggest challenge is 10 funding the increase given our financial challenges, and in 4 light of this, efficiency optimisation is needed. 5 1 1 Improving internal transformation 0 Employment equity remains one of the key processes Executives Senior Middle management management and Skilled Semi-skilled through which meaningful transformation can be professionals realised. We are making progress in ensuring that the Actual Actual met target workforce at all occupational levels truly reflects the Target Actual almost met target (within 5% threshold) 3 3 demographics of the country, although gender and 2 3 disability equity remain a challenge at some occupational levels. Our Employment Equity Plan aims to transform At executive level, the organisation is lagging behind on our workforce profile at all occupational levels. gender equity. It is expected that, through our Gender Equalisation Plan, gender parity at this occupational Vehicle accidents Struck by/caught between objects Vehicle accidents Contact with heat level will only be achieved by 2020. Electrical contact Crime-related Electrical contact Drowning Our group and company employment equity performance at senior management level, as well as at professional and middle management Falls from heights Occupational disease Falls from heights levels, is set out in the non-technical statistical tables on pages 144 to 145 114 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 115 OUR PEOPLE continued OPERATING PERFORMANCE In memoriam We extend our heartfelt condolences Employees Contractors to the families, friends and colleagues of the Qedokwakhe Elphas William Kolobe Mabotha Mthokozisi Mthethwa following people who Madonsela Msimelelo Malotana Jacob Mzizi lost their lives in the Jackson Zwelibanzi Musa Elliot Maluleke Sifiso Ncamphalala Mkhwanazi line of duty Tebogo Happy Mokgola Jerome Ngubane Christopher Mogudi Tshepo Mokwena Elliot Thetwa Ngubeni Pule Monageng Smawonda Sekhosana Similar to the causes of fatalities, the major reasons safety requirements. Furthermore, all contractors for lost-time incidents (LTIs) are motor vehicle conducting critical or high-risk activities are required accidents, falls from heights, incidents related to being to have written safe work procedures in place for struck by or caught between objects, as well as slips, those activities. Compliance is monitored through trips and falls. inspections and audits in order to improve contractor safety. Twenty occupational diseases have been confirmed for the Eskom group for the year ended 31 March 2018 Comprehensive analysis of all contractor safety (March 2017: 20, restated). These incidents relate incidents continues on a monthly basis, and results mainly to noise-induced hearing loss incidents, which are shared with safety managers. Poor performing accounts for 75% of cases. contractors are required to develop and submit improvement plans, which will assist in sharing best Public fatalities and public safety programmes are discussed under practice. In addition, new suppliers are assessed for “Our role in communities – Public safety” on page 122 compliance with SHE requirements, before being accepted as registered vendors. Safety programmes With motor vehicle accidents being one of the leading Future focus areas cause of both LTIs and fatalities, we have introduced • Supporting headcount reduction initiatives through several initiatives to enhance vehicle and driver safety, natural attrition, targeted relocation programmes namely vehicle safety campaigns, the development and an improvement in employee productivity of a motor vehicle evidence collection course, the through skills-based assessments appointment of internal driver competency assessors, and the implementation of vehicle monitoring systems. • Reviewing and implementing the new operating model by 2019/20, by rationalising managerial span OUR ROLE IN COMMUNITIES of control and reducing organisational reporting Operating performance Working at heights forms a substantial part of work layers in order to reduce managerial headcount HIGHLIGHTS CHALLENGES in Eskom and is regarded as a high-risk activity; as • Identifying and implementing efficient methods of a result, all precautions must be taken to prevent managing and/or eliminating employee benefit cost • All customer service indicator targets exceeded, with • B-BBEE attributable spend decreased year-on-year, due incidents while working at heights. Technical specialists drivers such as overtime, ad hoc salary increases some also improving slightly year-on-year to generally lower B-BBEE ratings of suppliers since have been appointed to provide advice and support on • Our CSI initiatives benefitted more than 1.1 million implementation of the new Codes of Good Practice and band creep beneficiaries during the year • Communities around Kusile are demanding work and technical matters related to working at heights. • Monitoring and improving employee productivity • For the second year running, we electrified more than business opportunities, which pose strike threats, We have also been conducting surveys assessing and performance, through employee engagements, 200 000 new homes compounded by the possibility of transport disruptions improved industrial relations, leadership and • Increasing workforce demobilisation at Medupi leading to perceptions of our safety culture across line divisions; unemployment could result in unrest these are intended to establish a knowledge base operational performance metrics to assist management in understanding the safety • Aligning employment equity plans to headcount and culture within the organisation, and also to identify cost reduction initiatives appropriate plans to improve the culture. • Ensuring fair representation of people living with IMPROVEMENTS LOWLIGHTS disabilities at all levels Contractor management • Continuing our focus on incident prevention and • Reinstated the weekly system status reports available to • Eskom’s reputation, as measured by the RepTrak® score, is the public at an all-time low Contractor safety management remains a priority, sharing key learnings in safety communications, in • Spend with black-owned, black women-owned and black • Spend with suppliers owned by black people living with due to the vital role that contractors play in our order to reduce LTIs and fatalities youth-owned suppliers improved since the prior year and disabilities is lagging far behind target operations. Contractor fatalities require leadership exceeded target intervention to provide more focus on at-risk behaviour relating to compliance with stipulated 116 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 117 OUR ROLE IN COMMUNITIES continued Our role in communities focuses on our relationships Looking back on prior year focus areas Our reputation with our direct customers, suppliers, communities, We continue to support the transformation of Our reputation has been negatively impacted by the beneficiaries of our CSI activities and electrification the supplier landscape through our considerable challenges facing the organisation since 2008. We Reinstatement of Eskom system reports aim to efforts, as well as the public in general, which includes procurement spend, in order to increase the capacity conduct a review of our perception by the public on rebuild trust through transparency our indirect customers, with the aim being to work of black and other targeted supplier groups. an annual basis, using the South African RepTrak® We have recently relaunched our weekly system together to improve the wellbeing of Eskom and the Pulse reputation study, which measures a company’s status report on our website (at www.eskom.co.za/ communities in which we operate. A crucial factor is Our new build projects carry on implementing CSI reputation and demonstrates the strength of the Whatweredoing/SupplyStatus/Pages/SupplyStatusT.aspx), our reputation among stakeholders, which is strongly initiatives to benefit the surrounding communities and emotional bond between a company and the public. as part of our broader efforts to rebuild trust with influenced by the level of trust in our organisation. improve the sustainability of projects. The DoE funded It is based on a number of elements, namely direct South African citizens, who remain sceptical about electrification programme, which targets universal experience, a company’s communications and word- our ability to keep the lights on. The report provides We strive to become a customer-centric organisation access by 2020, is ongoing, with great progress of-mouth. It is scored along seven dimensions, namely a weekly view of energy sent out, peak demand, that delivers world-class customer service across achieved during the past year. products and services, performance, leadership, performance of generating units in terms of the energy all customer segments. Furthermore, we play a We continue to target communities with a high citizenship, governance, workplace and innovation. availability factor, as well as the outlook for the coming critical role in skills development and economic incidence of illegal connections and focus on educating Results of the survey also reflect that an organisation’s three-month horizon. The service was discontinued empowerment, as mandated by Government. We aim children about unsafe electricity usage in public safety reputation contributes about 69% to the score, with during Mr Brian Molefe’s tenure as Group Chief to transform society through our supplier development programmes, in order to reduce incidents and fatalities only 31% influenced by its products. Executive. and localisation drive, as well as corporate social investment in community education, health and related to public interaction with our infrastructure. Based on the 2017 survey, Eskom is ranked 50 th out The launch was held at Eskom National Control in developmental projects. Our most direct contribution of 50 companies surveyed, with a score of 33.2 (in the Germiston, and was attended by Public Enterprises Customer service performance to transformation remains through the rollout of bottom tier) against an average score of 45.2 for state- Minister Pravin Gordhan, Eskom’s Chairman, Jabu We still employ a range of statistical perception and Government’s electrification programme. owned enterprises. These results show that Eskom’s Mabuza and our newly appointed Group Chief interaction-based customer surveys, conducted by independent research organisations, to measure our reputation is at an all-time low, with the lowest Executive, Phakamani Hadebe. Minister Gordhan said customers’ satisfaction with our service. dimensions being leadership and governance, which the reintroduction of the reporting service should is not surprising, given the events of the past year. be seen as part of efforts to increase transparency at Financial sustainability remains challenging, with rising the organisation, which had, in recent years, become Target Target Target Actual Actual Actual Target tariffs and the perceived burden to the fiscus caused by synonymous with corruption, weak governance and Measure and unit 2022/23 2018/19 2017/18 2017/18 2016/17 2015/16 met? Government guarantees. inefficiency. The Minister said transparency was critical Eskom KeyCare, index 104.0 104.0 104.0 105.9 107.0 104.3 not only for rebuilding Eskom’s reputation, but also for Given our reputational challenges, many organisations ensuring accountability, without which malfeasance and Top Customer KeyCare, index 104.0 104.0 104.0 107.5 108.1 107.2 are reluctant to continue their association with us. bad governance had flourished. Enhanced MaxiCare, index 95.0 95.0 93.7 97.7 95.8 96.5 Chief amongst these are financial institutions, that went as far as setting operational conditions to their Our System Operator, Bernard Magoro, said the system CustomerCare, index 8.2 8.2 8.2 9.9 9.8 8.4 lending agreements with Eskom. status report would provide citizens with an up-to- date snapshot of electricity supply and demand, while Changing the perception of all stakeholders requires offering some insight into what was involved in balancing Both Eskom KeyCare and Top Customer KeyCare, action from Board and Exco to act on irregularities the power system for every second of every day. He which measure the satisfaction of our large industrial and poor governance. Our immediate focus is to said the prognosis for the high-demand winter period customers, continue to perform above target, although Eskom reached a major milestone during June 2017, rebuild and strengthen confidence and trust in Eskom. was positive and that no load shedding was foreseen, both have declined slightly year-on-year. Through daily when we connected our six millionth customer. This We strive to improve our RepTrak® score to 60 unless there was a catastrophic event. Furthermore, our engagements with key customers, we remain close to was a significant achievement on the road to achieving (a “moderate” score) over the next five years. latest medium-term system adequacy outlook report, our key customers and aim to address any queries or universal access to electricity. This accomplishment is published in October 2017, showed that the system has Operating performance concerns with urgency. the result of all Eskom Guardians working together to enough generation capacity to meet expected electricity Both Enhanced MaxiCare, which measures perception ensure that our customers, especially those in rural demand over the medium term to 2022. among residential, small and medium-sized customers, areas, are able to experience electricity for the first time. Publishing the system status report is another way of and CustomerCare, which measures customer demonstrating that we are moving towards being a satisfaction on a transactional basis, exceeded target One of Eskom’s priorities is to increase demand for transparent entity whose day-to-day running is public and improved since the prior year, reflecting the electricity; the growth in customer numbers goes a knowledge. It is aligned to international standards, commitment to servicing customers of call centre and long way to meeting this objective. This, however, must where most power utilities make their operating field staff. be complemented by a customer-centric approach, performance publically available. However, customers have raised concerns over the which ensures that we deliver an excellent customer quality and reliability of supply, increasing electricity experience overall. This is not only the responsibility prices, slow restoration times, pollution caused by of customer-facing staff, but of everyone in the coal-fired power stations and the perception of Eskom organisation. As customer numbers continue to grow, as an unreliable provider of electricity-related services. there must be increased focus to ensure that we We are working on addressing these concerns. collect all monies due to us and minimise energy theft. 118 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 119 OUR ROLE IN COMMUNITIES continued Our contribution to supplier development Total measured procurement spend for the group Skills development through our new build During the year, our CSI activities impacted 1 116 044 We place particular emphasis on supplier development amounted to R127.4 billion on all active contracts projects beneficiaries with a committed spend of R192 million and localisation to transform our supplier base, whilst during the year, of which 91.54% was spent with Collaborative efforts with our construction and (March 2017: 841 845 beneficiaries and committed developing supply sectors important to the industry. B-BBEE compliant suppliers. The annual targets government partners continue to drive skills spend of R225.3 million). The number of beneficiaries for procurement spend with black-owned, black development and skills transfer. Through skills increased due to several interventions with a national Eskom-wide, a total of 1 373 new contracts worth women-owned and black youth-owned suppliers were committees and audit processes, we are ensuring footprint. A selection of initiatives is discussed below. R70.4 billion were awarded and commenced during the met. Nonetheless, attributable spend with B-BBEE that no demobilisation is concluded without proof year under review, of which 87.16% (or R61.3 billion) compliant suppliers, those owned by black people of upskilling the affected workers. This process has For more information on our CSI initiatives, please refer to the of the contract value was committed to local content. with disabilities, qualifying small enterprises and proven effective, as the demobilisations that have taken Foundation’s report for the 2017/18 year, which is available online Of those, 85 contracts worth R1.8 billion were exempted micro enterprises performed below target, place to date have complied with skills development awarded within the new build programme. Of these, with performance generally slightly worse than the requirements. Empowering entrepreneurs with vital business the local content committed amounted to R1.6 billion, previous year. Due to the implementation of the new skills representing 85.59% of the value contracted in new Codes, certain elements can no longer be claimed Furthermore, the primary focus of our exit strategies The Contractor Academy graduation ceremony was build projects during the year. when calculating total measured procurement spend. at new build sites is to mitigate the impact of job held in May 2017, where 150 contractors celebrated Recovery initiatives are being implemented to address losses by supporting the towns and local communities the completion of the eight-month programme, which Since inception of the respective new build projects, surrounding our new build projects. By doing so, combines both practical and theoretical course work. contracts to the value of R196.2 billion have been and improve the B-BBEE performance, to comply with the PPPFA requirements. we hope to collaborate with other social partners, Since 2008, more than 1 000 graduates have graduated awarded, in which suppliers committed to total local in particular the local and provincial government from the Contractor Academy, a 97.7% success rate, content of R125.6 billion, representing 64.02% of structures, in addressing some of the challenges that with a fair gender representation and a sizeable youth the total contract value. The actual cumulative local For an update on the improvement process launched to address the prior year audit qualification on the completeness of irregular these communities face. group. Since 2010, Eskom has awarded 629 contracts content spend is R138 billion, which constitutes 70.33% expenditure, refer to “Ethical leadership – Improvement process to to the value of R2.7 billion to Academy graduates. of the local content. address irregular expenditure” on page 18 We also continue to drive the reduction of dependency on foreign nationals and to ensure transfer of skills Helping learners from a disadvantaged school Our target in accordance with the shareholder At 31 March 2018, 38 111 people were employed on to South African employees. Contractors have been The Foundation donated school uniforms and teaching compact is to achieve a level 4 B-BBEE rating. the capacity expansion programme at the Medupi, tasked with expediting the skills transfer programmes aids to Sifunindlela Primary School in Sifunindlela However, Eskom is rated as level 8 until June 2018, Kusile and Ingula new build sites, and on large to build capacity within the South African workforce. Trust, Mpumalanga. The donation included uniforms when the current certificate expires. The low rating transmission projects (March 2017: 39 277). The for 41 orphaned learners, as well as teaching aids for is because being state-owned is not considered being Corporate social investment Social Sciences. expected demobilisation at these sites has not yet black-owned under the new B-BBEE Codes of Good The Eskom Development Foundation NPC (the materialised due to delays at these projects. Practice. Foundation) is responsible for the coordination and The rural school, whose learners pay no school fees, execution of our corporate social investment activities was established in 1991 and has 1 026 learners from Our group and company procurement equity performance is set out in support of our business objectives. CSI initiatives are Grades R to 7. Despite being in a poor rural area, in the non-technical statistical tables on pages 144 to 145 at the back focused on developing small and medium enterprises, Sifunindlela’s learners produce good results. The of the report education, health, food security, community principal said they are already seeing an improvement development, energy and the environment. in the learners’ results since receiving our donation. “We don’t have an abundance of resources or Maximising our socio-economic contribution The Foundation was absorbed into Eskom, effective facilities at our school, but the level of commitment 1 April 2017, although CSI initiatives continued. from both our learners and educators is admirable Target Target Target Actual Actual Actual Target Measure and unit 2022/23 2018/19 2017/18 2017/18 2016/17 2015/16 met? In September 2017, Exco recommended to the and the teaching aids came in handy. The uniforms Board Investment and Finance Committee that donated by Eskom have gone a long way towards giving Total electrification connections, number2 729 914 201 200 201 200 215 519 207 436 158 016 the Foundation operates as a subsidiary again from the orphaned learners their dignity and a sense of 1 April 2018, following the shareholder’s advice to Operating performance Corporate social investment committed, belonging. We are all thankful for Eskom’s assistance.” 940.5 175.9 178.0 192.0 225.3 103.6 delay the dissolution of the Foundation as a subsidiary, R million SC Corporate social investment, number of pending the review of Eskom’s operating model. Bringing healthcare to elderly women at 16 Days of 3 500 000 500 000 400 000 1 116 044 841 845 302 736 Activism event beneficiaries The Foundation, as part of its national CSI health 1. The 2022/23 target is the cumulative target over the next five years. programme, participated at a 16 Days of Activism for 2. The reporting boundary for the number of electrification connections was changed in 2017/18 to include farm worker connections. The figures for 2016/17 and 2015/16 have been restated to include 247 and 1 080 farm worker connections respectively. Awards received No Violence Against Women and Children event at The Foundation, with the University of Limpopo, won Emadlangeni, KwaZulu-Natal in December 2017. The the Africa Gold Award and Overall Global Thematic event aimed to create awareness about the ongoing Electrification Award in Norway, one for entrepreneurship and one fight against violence against women, the plight of We continue to connect previously disadvantaged for enterprise skills development. child-headed families and the importance of medical households in our licensed areas of supply through the screening. The occasion was used to share information DoE funded electrification programme. We exceeded Furthermore, the Eskom Contractor Academy was about government programmes available to support the target for the year in all provinces. awarded the Trialogue Strategic CSI award locally. the most vulnerable groups of society, including Universal access has been reached in terms of clinics women and particularly, elderly women. Eskom also continues to hold a top three position and we are only connecting new clinics. in the Sunday Times Top Brands 2017 survey in the community upliftment category. 120 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 121 OUR ROLE IN COMMUNITIES continued OPERATING PERFORMANCE The Foundation implemented the Bophelong Mobile As part of these efforts, Electricity Safety month was Our know-how is the intellectual capital within Health Clinic programme with four mobile buses, launched in Protea South in Soweto on 1 August 2017. Eskom. It includes both intellectual property, such as servicing primary school children in Mpumalanga, The first event took place at the Protea South Primary patents, copyrights, software, rights and licences, and Limpopo, KwaZulu-Natal, Free State and Northern School where Eskom, SAPS and Disaster Management also “organisational capital”, such as tacit knowledge, Cape. With many in the community of Emadlangeni teams educated learners on electricity safety and other systems, procedures and protocols. having little or no access to healthcare facilities, one security matters. The launch was followed by a media mobile health clinic was made available during the tour to Oukasie near Brits, North West, focusing on Looking back on prior year focus areas event, to cater specifically for basic medical checks and the dangers of illegal connections. A project has commenced to consider bulk energy needs of the elderly women from the area. storage solutions. We were invited by the Department of Basic Education Providing wheelchairs to people living with to nominate two members to participate in the school Investing in appropriate technologies disabilities curriculum revision committee, where Eskom will Future new build Majuba Power Station and Group Capital Division provide input on electrical safety. Eskom will determine the way forward on the future partnered to uplift the lives of the people of Dr Pixley new build energy mix once the revised IRP has been Ka Isaka Seme Local Municipality by donating Nuclear safety published and Eskom given an allocation by DoE. Until 45 wheelchairs to people living with disabilities. The plant design and resultant assessment of risk then, the project for another coal-fired power station The handover of the wheelchairs took place in to the public from Koeberg Nuclear Power Station is on hold and no development work is taking place. February 2018 at Amajuba Memorial Hospital in remain well within licensing limits, and better than the Volksrust, Mpumalanga. recommended international standards. Operational Nuclear new build practices at Koeberg are not challenging the design All nuclear procurement processes were suspended after Giving happiness to lives of children at orphanage boundaries or assumptions; there is currently no the Western Cape High Court set aside the section 34 The Duvha Unit 3 Recovery Project gathered unacceptable risk due to the design or operation determination which formed the basis for nuclear at Madrassa Orphanage Centre in Emalahleni, of Koeberg. The interaction between oversight procurement. Based on an earlier environmental impact Mpumalanga to hand over a donation in line with the organisations and line management is continually assessment (EIA), we obtained environmental approval project’s social commitments. Madrassa Orphanage monitored by the relevant governance and nuclear from the DEA in October 2017 for the construction of Centre is a home for destitute children; it currently oversight bodies; these organisations are having a a nuclear power station and associated infrastructure houses about 40 children up to 18 years old. The positive impact on nuclear safety and our efficiency. at the Duynefontein site in the Western Cape. Should donation, which amounted to approximately R84 000, it proceed, this is an important milestone in the included a 5 000ℓ JoJo tank, which was fully integrated The Koeberg units continue to be operated safely, with development of South Africa’s nuclear programme. into the home’s water system, two state-of-the-art solid technical performance demonstrated by long washing machines, two microwave ovens, a kettle and periods of continuous operation. Gas-fired capacity 15ℓ urn, three fire extinguishers, as well as a number of The scoping report for a greenfield gas-fired station consumables. We also pledged to train staff on the use Future focus areas has been approved by the DEA. However, there are of the fire extinguishers. • Managing the relationship with large customers’ discussions regarding the biodiversity of species on general managers to improve KeyCare results and OUR KNOW-HOW identified land which impact the EIA. Once the DEA Public safety improve customer satisfaction decides how these matters will be addressed, the EIA We strive to minimise the potential harm to members • Prioritising electrification of homes, with more than application will be submitted. of the public due to exposure to Eskom’s operations, 700 000 households to be connected over five years IMPROVEMENTS Battery storage products and/or assets caused by illegal activities and • Providing assistance, mainly to vulnerable members of society, through philanthropic and strategic • All open-cycle gas turbine units at Ankerlig Last year, we reported that the Board had provisionally inadequately secured sites and assets. This impacts our and at Gourikwa have now been converted donations and grants approved the discontinuation of the Kiwano 100MW ability to lead and partner with members of the public. to dual-fuel capability • Pursuing a 10% reduction in external spend in line concentrating solar power (CSP) project. However, the Operating performance • The high-voltage direct current (HVDC) civil There were 26 public fatalities during the year with cost savings initiatives engineering at the first test site is due for lenders required an equally transformational renewable (March 2017: 20), which included 19 incidents due to • Providing proactive assurance of procurement completion in the near future. The second project that addressed both the CSP project’s electrical contact and five vehicle-related incidents. transactions to ensure compliance with governance test site was moved to the Apollo Substation, objectives and the existing funding conditions. with civil work due to commence during the Not included in this figure are five fatalities due to principles coming financial year Subsequently, the lenders accepted the cancellation of the transport of coal by road to our power stations • Continuing public education on safe electricity the CSP project, subject to their approval of the most (March 2017: four). usage, also participating in the revision and suitable alternative solution. After much deliberation, development of a new school curriculum, with the lenders have accepted the battery storage project as We remain committed to the principle of Zero particular reference to electrical safety a suitable alternative as it is expected to meet the same Harm, and conduct numerous community visits and forums which highlight how to use electricity safely. In objectives. In March 2018, the Board approved distributed addition, ongoing social media notifications, television battery storage with distributed solar PV at Eskom sites, advertisements and media statements are used to close to renewable IPP plants and Sere Wind Farm. educate the public about electricity safety. Current research projects We spent R445 million, including allocated overhead costs, on Board-approved research projects, testing and development work during the year (March 2017: R441 million). We are committed to continuing with research in appropriate technologies that will have an impact on customers, coal, as well as distribution and transmission asset management. 122 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 123 OUR KNOW-HOW continued Research area Description eMobility (electric vehicles) Develop an electric vehicle programme to drive future sales and revenue from this untapped sector, by Managing the effect of renewable generation on the The Tetris maintenance planning tool collaborating with electric vehicle manufacturers and Government to lower the capital cost of entry for electric vehicles, and to develop innovative pricing models to increase demand power system Tetris is used to provide a graphical view of available Renewable generation, including solar photovoltaic (PV), power in relation to scheduled outages of generation Coal logistics and Provide quality assurance that coal procured is of the right quality, as well as a real-time fingerprint (DNA) wind, concentrating solar power (CSP), small hydro characterisation of each type of coal procured and transported, thereby enabling more effective operational burn decisions units. It is used to assist with planning long-term and biomass generators, are self-dispatching generators multiple outages within the set Tetris limit. If outages High-voltage direct current Deliver knowledge and expertise for HVDC use in future Transmission expansion projects. One site is which are connected to the power system and provide totalling more than the set limit are undertaken, then (HVDC) test facilities expected to be ready by June 2018, with a second to be ready by March 2019 electrical energy to consumers via the national grid. load shedding or load curtailment will be required. Distributed energy resources Establish an Eskom footprint within the rapidly growing market through development of product offerings Being self-dispatching, the output of these generators to ensure market entry and revenue protection The Tetris limit is calculated as [total installed capacity, is not planned, controlled or dispatched centrally by less expected peak demand, less expected unplanned Energy storage (battery Develop bulk energy storage solutions that will allow Eskom to deploy energy storage technologies at the System Operator, as is the case for conventional storage) scale, for grid strengthening and other operational and financial benefits. Also consider small-scale storage maintenance] for that period. The limit will vary as coal, diesel, nuclear or hydro generators. In the solutions for consumers to store their own generated solar power the peak demand changes, as it is affected by seasonal case of PV, CSP and wind generators, their output is changes and time of day. Robotics and drone inspection Develop an unmanned robotic technology and the use of drones to assist in efficient and effective fault determined by the degree of solar radiation or the wind and maintenance location on transmission and distribution lines to reduce network downtime and inspection and strength and speed. As these environmental factors The power lost to the system when a unit goes on maintenance costs. Civil Aviation requirements for the use of drones will be adhered to tend to be intermittent over time, the output of these outage is stacked like Tetris blocks, building toward the Off-grid smart community A community has been identified in which we will invest in several off-grid technologies and control generators tends to vary accordingly. The variability of limit. By knowing the limit and the cumulative capacity systems to assess the ability to provide remote communities with sustainable power solutions. Renewable the renewable energy generators requires the System lost when units are on outage, long-term planning of energy and storage technologies will be part of the mix Operator to adjust the output of the conventional outages is possible. Commercialisation of the Equity partners are being sought for the project to enable it to bridge the gap from research and generators in order to compensate for the variability of underground coal gasification demonstration to commercialisation. The focus will be on local supplier development and opportunities the renewable generators, thereby balancing supply and Tetris was developed internally and has been demonstration plant found in the local primary energy market. The project is in care and maintenance but has not been demand and ensuring that the frequency of the power successfully used by Generation since 2015, when it stopped. The due date has been extended to June 2021 system remains stable at 50Hz. was initially used to avoid load shedding, and is now In the past, the System Operator utilised a forecast of used for more effective planning of outages. Technology transfer customer demand to ensure that sufficient conventional We acquired intellectual property worth R26.1 million generation was available to meet demand. In recent Eskom Research Testing and Development wins 2017 years, it has become necessary for the System Operator Technology Transfer award (March 2017: R31 million) during the year, and are Future focus areas exploring opportunities to expand the technology to forecast the output of renewable generators to Eskom Research, Testing and Development Department ensure that sufficient conventional generation is • Confirming Eskom’s role in future new build (RT&D) has been honoured with the 2017 Technology transfer approach to other areas of the business. projects, such as gas, coal and the nuclear new build available to compensate for the renewable generation Transfer award by the US-based Electric Power Particular areas of focus in the current financial programme variability. Each renewable generating facility supplies Research Institute (EPRI) for research conducted on the year included fabric filter technology, FGD design, the System Operator with a forecast of their generation • Executing the distributed battery storage project 765kV insulator project. The results of the study were engineering standards, as well as turbine technical output; this is then combined with the demand forecast implemented in the parameters that guided our choice of information. to determine how much conventional generation polymeric insulators for a section of the Kappa Sterrekus On-the-job training included boiler design, low-NOx should be available over a particular period. In order to 765kV line in the Western Cape, which is situated in emitting burners, FGD plant and risk-based inspection cater for uncertainties and inaccuracies in the demand a coastal environment. It is important to get a reliable or renewable forecasts, the System Operator makes know-how. A total of 63 people benefited from skills insulator which matches the expected lifetime of the line. provision for operating reserves through additional development initiatives during the year (March 2017: 54). conventional generation and demand response The EPRI Technology Transfer awards recognise resources. These reserves are available to be utilised in Operating performance Our systems and process industry leaders and innovators at the vanguard real-time to maintain the supply and demand balance. of adopting new technology and spearheading the Refer to “Risks and opportunities, assurance and controls – Systems, However, not all renewable generating plants are application of research findings. Those recognised policies and procedures” on page 44 for additional information on our connected directly to the transmission system –many exemplify the initiative, collaboration and leadership systems and processes of these plants are connected to the lower voltage that transform research into results. distribution or municipal networks. All generators Sumaya Nassiep, Eskom’s RT&D acting General with installed capacity above a certain limit, which are Manager, said, “We are immensely honoured by the connected to the distribution or transmission network, recognition of the value realised from our research are required to supply real-time data to the National investment into the insulator space. Our research Control or regional centres. This data is available in team has excelled in the application of research and real-time at the National Control Centre, allowing technology in solving an operational challenge of both the System Operator to continuously track renewable generation and adjust the output of the conventional size and significance. Special congratulations goes to generators accordingly to maintain system stability. Nishal Mahatho for leading the project and ensuring that Eskom continues to champion technology As the amount of renewable generation in South within the organisation and across the industry, thus Africa increases, the System Operator will need to driving progress in the electricity sector by providing enhance forecasting accuracy of renewable generation meaningful benefits for our stakeholders and society. output and will increasingly require flexible, centrally This award is a testament to the immense talent dispatchable generation resources that can respond and capability within Eskom in leading technology quickly in order to compensate for the changes in development and application on a global level.” output of renewable generation. 124 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 125 ABBREVIATIONS ARC Audit and Risk Committee LPU Large power user SUPPLEMENTARY INFORMATION B-BBEE Broad-based black economic empowerment LTIR Lost-time injury rate (see glossary) CFO Chief Financial Officer Mℓ Megalitre = 1 million litres 127 Abbreviations COGTA Department of Cooperative Governance and Traditional MOI Memorandum of Incorporation Affairs mSv Millisievert 128 Glossary of terms CSI Corporate social investment Mt Million tons 130 Independent sustainability assurance CSP Concentrating solar power MVA Megavolt-ampere report DEA Department of Environmental Affairs MW Megawatt = 1 million watts 134 Leadership qualifications and DFI Development finance institution MWh Megawatt-hour = 1 000kWh directorships DOA Delegation of Authority MYPD Multi-year price determination 137 Board and Exco meeting attendance DoE Department of Energy NDP National Development Plan 139 Environmental implications of using or DPE Department of Public Enterprises NERSA National Energy Regulator of South Africa saving electricity DWS Department of Water and Sanitation NNR National Nuclear Regulator 140 Ten-year technical statistics EAF Energy availability factor (see glossary) OCGT Open-cycle gas turbine (see glossary) 144 Five-year non-technical statistics EBITDA Earnings before interest, taxation, depreciation and OCLF Other capability loss factor amortisation and fair value adjustments 146 Power station capacities ECA Export credit agency OHS Occupational health and safety 148 Power lines and substations in service ERI Eskom Rotek Industries SOC Ltd PCLF Planned capability loss factor 149 Benchmarking information EU European Union PAIA Promotion of Access to Information Act, 2000 153 Customer information such as number PAJA Promotion of Administrative Justice Act, 2000 EUF Energy utilisation factor (see glossary) of customers and electricity sales and PFMA Public Finance Management Act, 1999 Exco Executive Management Committee revenue per customer category PGC People and Governance Committee FGD Flue gas desulphurisation PPA Power purchase agreement 155 Contact details GCE Group Chief Executive PV (Solar) photovoltaic GDP Gross domestic product RCA Regulatory Clearing Account GE Group executive RE-IPP Renewable independent power producer GW Gigawatt = 1 000 megawatts SADC Southern African Development Community GWh Gigawatt-hour = 1 000MWh SAIDI System average interruption duration index IFRS International Financial Reporting Standards SAIFI System average interruption frequency index IPP Independent power producer (see glossary) SALGA South African Local Government Association IRP Integrated Resource Plan SAPP Southern African Power Pool King IV TM King IV Report on Corporate Governance for South Africa, 2016 SESC Social, Ethics and Sustainability Committee kℓ Kilolitre = 1 000 litres SPU Small power user KPI Key performance indicator TMPS Total measured procurement spend kt Kiloton = 1 000 tons UAGS Unplanned automatic grid separations kV Kilovolt UCLF Unplanned capability loss factor (see glossary) kWh Kilowatt-hour = 1 000 watt-hours (see glossary) USA United States of America kWhSO Kilowatt-hour sent out Supplementary information 126 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 127 GLOSSARY OF TERMS Base-load plant Largely coal-fired and nuclear power stations, designed to operate continuously Load curtailment Typically larger industrial customers reduce their demand by a specified percentage for the duration of a power system emergency. Due to the nature of their business, these customers require two hours’ Cash interest cover (ratio) Provides a view of the company’s ability to satisfy the interest burden on its borrowings by utilising cash notification before they can reduce demand generated from operating activities. It is calculated as (net cash from operating activities divided by net interest paid (interest paid on financing activities less interest received from financing activities) Load management Activities to influence the level and shape of demand for electricity so that demand conforms to the present supply situation, long-term objectives and constraints Daily peak Maximum amount of energy demanded by consumers in one day Load shedding Scheduled and controlled power cuts that rotate available capacity between all customers when demand is Debt/equity including long- Net financial assets and liabilities plus non-current retirement benefit obligations and non-current greater than supply in order to avoid blackouts. Distribution or municipal control rooms open breakers term provisions provisions divided by total equity and interrupt load according to predefined schedules Debt service cover (ratio) Cash generated from operations divided by (net interest paid from financing activities plus debt securities Lost-time injury (LTI) A work injury which arises out of and in the course of employment and which renders the injured and borrowings repaid) employee or contractor unable to perform his/her regular/normal work on one or more full calendar days or shifts other than the day or shift on which the injury occurred. It includes occupational diseases Decommission To remove a facility (e.g. reactor) from service and either store it safely or dismantle it Lost-time injury rate (LTIR) Proportional representation of the occurrence of lost-time injuries over 12 months per 200 000 working Demand side management Planning, implementing and monitoring activities to encourage consumers to use electricity more hours. It includes occupational diseases efficiently, including both the timing and level of demand Maximum demand Highest demand of load within a specified period EBITDA margin EBITDA as a percentage of electricity revenue (excluding electricity revenue not recognised due to uncollectability) Off-peak Period of relatively low system demand Electricity operating costs Electricity-related costs (primary energy costs, employee benefit costs, plus net impairment loss and other Open-cycle gas turbine Liquid fuel turbine power station that forms part of peak-load plant and runs on kerosene or diesel. per MWh operating expenses, less other income) divided by total electricity sales in GWh multiplied by 1 000 (OCGT) Designed to operate in periods of peak demand Electricity revenue per kWh Electricity revenue (including electricity revenue not recognised due to uncollectability) divided by total Outage Period in which a generating unit, transmission line, or other facility is out of service kWh sales multiplied by 100 Peak demand Maximum power used in a given period, traditionally between 7:00 and 10:00, as well as 18:00 to 20:00, in Embedded derivative Financial instrument that causes cash flows that would otherwise be required by modifying a contract summer; and 6:00 to 9:00, as well as 17:00 to 19:00, in winter according to a specified variable such as currency Peaking capacity Generating equipment normally operated only during hours of highest daily, weekly or seasonal loads Energy availability factor (EAF) Measure of power station availability, taking account of energy losses not under the control of plant management and internal non-engineering constraints Peak-load plant Gas turbines, hydroelectric or a pumped storage scheme used during periods of peak demand Energy efficiency Programmes to reduce energy used by specific end-use devices and systems, typically without affecting Primary energy Energy in natural resources, e.g. coal, liquid fuels, sunlight, wind, uranium and water services provided Pumped storage scheme A lower and an upper reservoir with a power station/pumping plant between the two. During off-peak Energy utilisation factor (EUF) Ratio of actual electrical energy produced during a period of time divided by the total available energy periods the reversible pumps/turbines use electricity to pump water from the lower to the upper capacity. It is a measure of the degree to which the available energy capacity of an electricity supply reservoir. During periods of peak demand, water runs back into the lower reservoir through the turbines, network is utilised. Available energy capacity refers to the capacity after all unavailable energy (planned generating electricity and unplanned energy losses) has been taken into account, and represents the net energy capacity made available to the System Operator or national grid Reserve margin Difference between net system capability and the system’s maximum load requirements (peak load or peak demand) Forced outage Shutdown of a generating unit, transmission line or other facility for emergency reasons or a condition in which generating equipment is unavailable for load due to unanticipated breakdown Return on assets EBIT divided by the regulated asset base, which is the sum of property, plant and equipment, trade and other receivables, inventory and future fuel, less trade and other payables and deferred income Free basic electricity Amount of electricity deemed sufficient to provide basic electricity services to a poor household (50kWh per month) System minutes Global benchmark for measuring the severity of interruptions to customers. One system minute is equivalent to the loss of the entire system for one minute at annual peak. A major incident is an Free funds from operations Cash generated from operations adjusted for working capital interruption with a severity ≥1 system minute Gross debt Debt securities and borrowings plus finance lease liabilities plus the after-tax effect of provisions and Technical losses Naturally occurring losses that depend on the power systems used employee benefit obligations Unit capability factor (UCF) Measure of availability of a generating unit, indicating how well it is operated and maintained Gross debt/EBITDA ratio Gross debt divided by earnings before interest, taxation, depreciation, amortisation and fair value adjustments Unplanned capability loss Energy losses due to outages are considered unplanned when a power station unit has to be taken out of factor (UCLF) service and it is not scheduled at least four weeks in advance Independent non-executive A director who: director • Is not a full-time salaried employee of the company or its subsidiary Used nuclear fuel Nuclear fuel irradiated in and permanently removed from a nuclear reactor. Used nuclear fuel is stored • Is not a shareholder representative on-site in used fuel pools or storage casks • Has not been employed by the company and is not a member of the immediate family of an individual who is, Watt The watt is the International System of Units’ (SI) standard unit of power. It specifies the rate at which or has been in any of the past three financial years, employed by the company in any executive capacity electrical energy is dissipated (energy per unit of time) • Is not a professional advisor to the company • Is not a significant supplier or customer of the company Working capital ratio (Inventory plus the current portion of payments made in advance, trade and other receivables and taxation • Is not receiving remuneration contingent upon the performance of the company assets) divided by (the current portion of trade and other payables, payments received in advance, provisions, employee benefit obligations and taxation liabilities) Independent power producer Any entity, other than Eskom, that owns or operates, in whole or in part, one or more independent power (IPP) generation facilities Kilowatt-hour (kWh) Basic unit of electric energy equal to one kilowatt of power supplied to or taken from an electric circuit Supplementary information steadily for one hour Load Amount of electric power delivered or required on a system at any specific point 128 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 129 INDEPENDENT SUSTAINABILITY ASSURANCE REPORT Independent assurance provider’s reasonable assurance report on selected key No. Indicator Unit of measure Boundary Reporting criteria performance indicators to the directors of Eskom Ensure financial sustainability Introduction We have been engaged to perform an independent assurance engagement for Eskom Holdings SOC Ltd (Eskom) on 15. Value add per employee1 R million/ Eskom selected key performance indicators (KPIs) reported in Eskom’s integrated report for the year ended 31 March 2018. full-time employee Our engagement was conducted by a team with relevant experience in sustainability reporting. 16. Cash interest cover Ratio Eskom Subject matter 17. Debt equity ratio including long-term provisions Ratio Eskom We are required to provide reasonable assurance on the following selected sustainability key performance indicators 18. Free funds from operations as percentage of gross debt % Eskom to be published in the integrated report, which include the indicators contained in Eskom’s shareholder compact as well as KPIs selected by the directors. The KPIs described below cover only Eskom (company and not group) and 19. Business productivity programme savings R Eskom Eskom’s measurement have been prepared in accordance with Eskom’s reporting criteria that are available on Eskom’s website, at Free funds from operations as percentage of capital specification 20. % Eskom www.eskom.co.za/OurCompany/SustainableDevelopment/Pages/Sustainable_Development.aspx expenditure 21. EBITDA margin1 % Eskom No. Indicator Unit of measure Boundary Reporting criteria 22. Arrear debt as % of electricity revenue 1 % Eskom Focus on safety Average debtors days for municipalities, top customers, 23. Days Eskom LPUs and SPUs (including Soweto)1 Occupational Health and 1. Lost-time injury rate (LTIR) (including occupational diseases)1 Index Eskom Safety Act 24. Coal purchased R/ton, % increase 1 % Eskom Improve operations Human capital 2. Planned capability loss factor (PCLF) Percentage Generation 25. Training spend as % of gross manpower costs % Eskom 3. Energy availability factor (EAF) Percentage Generation 26. Learner intake Number Eskom 4. System average interruption duration index (SAIDI) Hours Distribution 27. Disability equity in total workforce % Eskom Eskom’s measurement specification Eskom’s measurement 5. System average interruption frequency index (SAIFI) Number Distribution 28. Racial equity in senior management % Eskom specification 6. System minutes <1 Minutes Transmission 29. Gender equity in senior management % Eskom 7. Distribution total energy losses % Distribution 30. Racial equity in professional and middle management % Eskom Deliver capital expansion 31. Gender equity in professional and middle management % Eskom 8. Generation capacity installed and commissioned MW Generation Economic impact 9. Transmission lines installed Km Transmission Eskom’s measurement 32. Percentage of local content contracted in new build % Eskom Eskom’s measurement specification Transmission transformer capacity installed and specification 10. MVA Transmission 33. Percentage of local content contracted (Eskom-wide) % Eskom commissioned Percentage of B-BBEE attributable spend against total Reduce environmental footprint in existing fleet 34. % Eskom measured procurement spend (TMPS) 11. Relative particulate emissions kg/MWh sent out Generation Environmental Act 35. Percentage of BO attributable spend against TMPS % Eskom 12. Specific water usage ℓ/kWh sent out Generation Water Act 36. Percentage of BWO attributable spend against TMPS % Eskom Eskom’s measurement 37. Percentage of BYO attributable spend against TMPS % Eskom B-BBEE amended Codes of 13. Carbon dioxide emissions 2 kg/kWh Generation specification Good Practice 38. Percentage of BPLwD attributable spend against TMPS % Eskom Implementing coal haulage and the road-to-rail migration plan 39. Percentage of QSE attributable spend against TMPS % Eskom Eskom’s measurement 14. Migration of coal delivery volume from road to rail Mt Generation specification 40. Percentage of EME attributable spend against TMPS % Eskom 41. B-BBEE score level1 Number Eskom 42. Technology transfer: acquisition of intellectual property Number Eskom Eskom’s measurement 43. Technology transfer: skills development Number Eskom specification Electrification Supplementary information Eskom’s measurement 44. Department of Energy funded electrification connections2 Number Eskom specification Socio-economic impact: corporate social investment (CSI) Eskom’s measurement 45. CSI committed1 R million Eskom specification 1. Not assured in the prior year. 2. Not included in the shareholder compact. 130 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 131 INDEPENDENT SUSTAINABILITY ASSURANCE REPORT continued Directors’ responsibilities International Standard on Assurance Engagements Given the circumstances of the engagement, in Conclusion The directors are responsible for the selection, (ISAE) 3000 (revised), Assurance Engagements other performing the procedures listed above we: In our opinion, except for the effects of the matters preparation and presentation of the sustainability than Audits or Reviews of Historical Financial Information, • Interviewed management and senior executives described in the “Basis for qualified conclusion” information in accordance with the Eskom’s reporting issued by the International Auditing and Assurance to obtain an understanding of the internal control section of our report, the directors’ statement that criteria. This responsibility includes the identification Standards Board. That standard requires that we plan environment, risk assessment process and information the KPIs are presented in accordance with Eskom of stakeholders and stakeholder requirements, and perform our engagement to obtain reasonable systems relevant to the sustainability reporting Holdings SOC Ltd’s reporting criteria is, in all material material issues, commitments with respect to assurance about whether the selected KPIs are free process respects, fairly stated. sustainability performance and design, implementation from material misstatement. • Inspected documentation to corroborate the and maintenance of internal control relevant to the Other matters statements obtained from management and senior preparation of the report that is free from material A reasonable assurance engagement in accordance Our report includes the provision of reasonable executives in our interviews misstatement, whether due to fraud or error. with ISAE 3000 (revised) involves performing assurance on selected KPIs, on which we were • Reviewed the process that Eskom has in place for procedures to obtain evidence about the quantification previously not required to provide assurance, as determining material selected KPIs to be included in Inherent limitations of the selected sustainability information and indicated in the table above. Hence, with regard to the report Non-financial performance information is subject to related disclosures. The nature, timing and extent these KPIs, the current year information relating • Applied the assurance criteria in evaluating the data more inherent limitations than financial information, of procedures selected depend on our judgement, to prior reporting periods has not been subject to generation and reporting processes given the characteristics of the subject matter and the including the assessment of the risks of material assurance procedures. • Reviewed the processes and systems to generate, method used for determining, calculating, sampling misstatement, whether due to fraud or error. In collate, aggregate, monitor and report on the The maintenance and integrity of the Eskom website and estimating such information. The absence of a making those risk assessments we considered internal selected KPIs is the responsibility of Eskom management. Our significant body of established practice on which to control relevant to Eskom’s preparation of the • Evaluated the reasonableness and appropriateness procedures did not involve consideration of these draw allows for the selection of certain different but selected KPIs. A reasonable assurance engagement also of significant estimates and judgements made by matters and, accordingly we accept no responsibility acceptable measurement techniques, which can result includes: management in the preparation of the KPIs for any changes to either the information in the report in materially different measurements and can impact • Assessing the suitability in the circumstances of • Performed site work at various coal-fired power or our independent reasonable assurance report comparability. Qualitative interpretations of relevance, Eskom’s use of its reporting criteria as the basis for stations, Transmission operating units and Distribution that may have occurred since the initial date of its materiality and the accuracy of data are subject to preparing the selected sustainability information operating units presentation on the Eskom website. individual assumptions and judgements. The precision • Evaluating the appropriateness of quantification • Evaluated whether the selected KPIs presented thereof may change over time. It is important to read methods and reporting policies used, and the Restriction of liability in the integrated report are consistent with our the report in the context of the reporting criteria. reasonableness of estimates made by Eskom Our work has been undertaken to enable us to overall knowledge and experience of sustainability • Evaluating the overall presentation of the selected key express the conclusions on the selected KPIs to the In particular, where the information relies on the management and performance at Eskom performance indicators (KPIs) directors of Eskom in accordance with the terms factors derived by independent third parties, our We believe that the evidence we have obtained is of our engagement and for no other purpose. We assurance work has not included examination of the Summary of work performed sufficient and appropriate to provide a basis for our do not accept or assume liability to any party other derivation of those factors and other third-party Our work included examination, on a test basis, conclusions. than Eskom for our work, for this report, or for the information. of evidence relevant to the selected sustainability information. It also included an assessment of conclusion we have reached. Basis for qualified conclusion Our independence and quality control the significant estimates and judgements made by The validity and accuracy of the Coal migration KPI We have complied with the independence and all the directors in the preparation of the selected could not be confirmed as the processes and systems other ethical requirements of the Code of Professional sustainability information. We planned and performed put in place to collate, review and monitor the data Conduct for Registered Auditors issued by the our work so as to obtain all the information and that supports the reliable measurement of the KPI SizweNtsalubaGobodo Inc. Independent Regulatory Board of Auditors, which explanations that we considered necessary in order to are not complied with. The alternative procedures Registered auditors is founded on fundamental principles of integrity, provide us with sufficient evidence on which to base performed confirmed the weaknesses in the objectivity, professional competence and due care, our conclusion in respect of the selected sustainability environment. Furthermore the completeness of the Per BF Zwane confidentiality and professional behaviour. information. number reported could not be ascertained. Chartered Accountant (SA) SizweNtsalubaGobodo Inc. applies the International Our procedures included the understanding of risk The validity, accuracy and completeness of the Director Standard on Quality Control 1 and accordingly assessment procedures, internal control, and the Learner intake KPI could not be validated in spite of maintains a comprehensive system of quality control, procedures performed in response to the assessed 9 July 2018 performing alternatives audit procedures. This is due including documented policies and procedures risks. The procedures we performed were based on to inadequate processes and systems in place to ensure regarding compliance with ethical requirements, our professional judgement and included inquiries, reliable reporting of the KPI. Furthermore, in certain professional standards and applicable legal and observation of processes performed, inspection instances, not all evidence was made available for audit regulatory requirements. of documents, analytical procedures, evaluating purposes, leading to the limitation of audit scope. Our responsibility the appropriateness of quantification methods and Our responsibility is to express a reasonable reporting policies, and agreeing or reconciling with assurance conclusion on the selected KPIs based on underlying records. Supplementary information the procedures we have performed and the evidence we have obtained. We conducted our reasonable assurance engagement in accordance with the 132 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 133 LEADERSHIP QUALIFICATIONS AND DIRECTORSHIPS Board of Directors at 31 March 2018 1 4 7 10 14 MR JABU (JA) MABUZA (60) DR ROD (RDB) CROMPTON (65) MS SINDI (SN) MABASO-KOYANA DR BANOTHILE (BCE) PROF. TSHEPO (TH) MONGALO Chairman Independent non-executive director (48) MAKHUBELA (33) (44) Independent non-executive director Independent non-executive director Independent non-executive director Independent non-executive director Qualifications Qualifications BA (University of Natal) Qualifications Qualifications Qualifications Effective Leadership Program Diploma in Higher Education (University B Com (University of KwaZulu-Natal) B Sc (University of Zululand) BProc (University of Natal) (Pennsylvania University) of Natal) Postgraduate Diploma in Accounting B Sc Hons (University of Cape Town) LLB (University of Natal) Executive Development Program BA Hons (University of Natal) (University of KwaZulu-Natal) M Sc (University of Cape Town) LLM Commercial Law (University of (University of California) PhD Humanities (University of Natal) Chartered Accountant (SA) PhD (University of Cape Town) Cambridge) Directorships Diploma in Introduction to Mining PhD Commercial Law (University of Directorships (University of Witwatersrand) Directorships Cape Town) 4 Blueberryfields Knysna (Pty) Ltd None None ABInBev Africa (Pty) Ltd Directorships Directorships Break-Red Dance Trading (Pty) Ltd Adcorp Holdings Ltd Hope City Investment (Pty) Ltd Business Leadership South Africa Advanced Fire Fixed System Tong-Mongalo Corporate Services cc Business Unity South Africa Advanced Fire Suppresion Technologies Casino Association of South Africa 5 Africa Leadership Initiatives South Africa 11 Eglin Investments no. 44 (Pty) Ltd AIH Northwind Holdings/AWCA Human Emma Mabuza JV (Pty) Ltd MR SIFISO (RSN) DABENGWA (59) Capital Eternity Star 242 CC Independent non-executive director Astra Aircraft Corporation MS BUSISIWE (B) MAVUSO (39) 15 Javas Tbos Properties (Pty) Ltd Atos SA Independent non-executive director Jaxson 653 (RF) (Pty) Ltd Qualifications AWCA Investment Holdings MR GEORGE (JG) SEBULELA (47) Lexshell 627 Investments (Pty) Ltd B Sc Engineering (University of Zimbabwe) Qualifications Bell Equipment Sales South Africa Ltd Independent non-executive director Lodge 748, Fancourt (Pty) Ltd MBA (University of Witwatersrand) B Compt (Unisa) Betungwa Investment Holdings Executive Program (University of Michigan) Postgraduate Diploma in Management (GIBS Kuncedzana Investment Holdings (Pty) Ltd Kenry Fire Protection Qualifications Motema Investments (Pty) Ltd Business School) Directorships LIPOCET BA (Com) (University of Fort Hare) Oteo Investment Holdings Master of Business Leadership (Unisa) Megapro Holdings (Pty) Ltd Macquarie Equities Diploma in Marketing (Institute of Marketing Petroport N3 Heidelberg (Pty) Ltd Association of Chartered Certified MTN Zakhele Futhi (RF) Management) Sphere Holdings (Pty) Ltd Accountants (ACCA) Ogwini Alumni Advanced Management Program Sumart 005 Property Holdings (Pty) Ltd Phembani Group Directorships (INSEAD) Telkom SA SOC Ltd Toyota South Africa Black Management Forum Investment Teza Investments (Pty) Ltd 6 Directorships Business Leadership of South Africa The Jabu Mabuza Family Trust Avuke Energy Zarara Hydro Carbons Trading Limited Ayo Technologies MR MARK (MJ) LAMBERTI (67) Grey4 Media Group Independent non-executive director 8 Inspur SA 12 Mediquip SA Qualifications B Com (Unisa) MS NELISIWE (NVB) MAGUBANE Sanlam Private Wealth 2 MBA (University of Witwatersrand) (52) MS JACKY (MJ) MOLISANE (43) Sebvest Capital Presidents Program in Leadership (Harvard) Independent non-executive director Non-executive director Sebvest Development Africa MR PHAKAMANI (PS) HADEBE (51) Sebvest Financial Services Interim Group Chief Executive Directorships Qualifications Qualifications Anjuvid Trust Sebvest Holdings Executive director B Sc Electrical Engineering – Heavy Current BA Economics and Political Science (Unisa) Beltimar (Pty) Ltd Sebtech Technologies (University of Natal) BA Hons Economics (Unisa) Qualifications Bermilat (Pty) Ltd Diploma in Financial Markets and Skyco Digital Media Postgraduate Diploma in Business MA Economics (University of Durban- Business Leadership South Africa Instruments (Academy of Financial Markets) Stryker Security (Pty) Ltd Administration (University of West London) Westville) Imperial Capital Ltd Tongzhou Construction MBA (Milpark Business School) Directorships MA Rural Development (Sussex University) Imperial Holdings Ltd Imperial Mobility International B.V Directorships None Directorships Lamberti Education Trust Enerugi 243 Holdings GroCapital Holdings Motus Corporation (Pty) Ltd Inani Infrastructure Ramblite (Pty) Ltd Matleng Energy Solutions Ratelimb (Pty) Ltd Pro Afrika Group The National Education Collaboration Trust Pro Afrika Power 13 State Information Technology Agency 3 Thebe Energy Resources Advisory Council DR PULANE (PE) MOLOKWANE Trakprops 40 (41) MR CALIB (C) CASSIM (46) Independent non-executive director Acting Chief Financial Officer Executive director Qualifications 9 B Sc (University of North West) Ages are shown at 31 March 2018. Qualifications Postgraduate Diploma in Applied Radiation B Com (University of Natal) Science and Technology (University of Only active directorships are reflected. Supplementary information B Accounting Sciences (Unisa) PROF. MALEGAPURU (MW) North West) Mr Phakamani Hadebe was appointed Chartered Accountant (SA) MAKGOBA (65) M Sc (University of North West) permanently as Group Chief Executive, Master of Business Leadership (Unisa) Independent non-executive director PhD (University of Pretoria) effective 1 June 2018. Directorships Qualifications Directorships Mr Mark Lamberti resigned as a director, Escap SOC Ltd MB ChB (University of Natal) Endulo Resources effective 6 April 2018. Eskom Enterprises SOC Ltd DPhil (University of Oxford) Nzuri Eskom Finance Company SOC Ltd Fellowship of the Royal College of Physicians Oloenviron Ms Jacky Molisane is an employee of the of London South African Forestry Company Department of Public Enterprises, our Advanced Management Program Thulaganyo shareholder ministry. Therefore, she is not (INSEAD) Tinungu regarded as being independent. Directorships None 134 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 135 LEADERSHIP QUALIFICATIONS AND DIRECTORSHIPS BOARD AND EXCO MEETING ATTENDANCE continued Executive Management Committee Attendance at Board and committee meetings at 31 March 2018 for the year ended 31 March 2018 Social, Audit Investment People and Ethics and Board 1 4 7 Members Board and Risk and Finance Governance Sustainability Tender MR PHAKAMANI HADEBE (51) MR WILLY MAJOLA (52) MR MONGEZI NTSOKOLO (57) Total number of meetings 26 15 8 6 3 14 Interim Group Chief Executive Acting Group Executive: Transmission Group Executive: Distribution Appointed to Exco in January 2018 Appointed to Exco in January 2017 Appointed to Exco in October 2003 Current directors <1 year in Eskom 24 years in Eskom 27 years in Eskom Non-executive directors Qualifications Qualifications Qualifications MA Economics (University of Durban B Sc Engineering (University of B Sc Electrical Engineering Mr Jabu Mabuza (Chairman) 4/4* 1/1* Westville) Witwatersrand) (University of Witwatersrand) MA Rural Development (Sussex University) Registered Professional Engineer (ECSA) BBA Hons (University of Stellenbosch) Dr Rod Crompton 4/4 0/0 Directorships Directorships MBA (University of Stellenbosch) Mr Sifiso Dabengwa 4/4 1/1 GroCapital Holdings Motraco Private Company Executive Development Program (City University of New York) Mr Mark Lamberti 4/4 1/1* Directorships Eskom Enterprises SOC Ltd Ms Sindi Mabaso-Koyana 4/4 0/0* 5 2 Eskom Rotek Industries SOC Ltd Ms Nelisiwe Magubane 4/4 1/1 MR ABRAM MASANGO (49) MR CALIB CASSIM (46) Group Executive: Office of the GCE Prof. Malegapuru Makgoba 9/9 2/2 1/1* Acting Chief Financial Officer Appointed to Exco in October 2015 8 Dr Banothile Makhubela 15/18 4/4 2/2 6/11 Appointed to Exco in July 2017 21 years in Eskom 16 years in Eskom MS ELSIE PULE (50) Qualifications Ms Busisiwe Mavuso 4/4 1/1 0/0 Qualifications National Diploma in Mechanical Engineering Group Executive: Human Resources B Com (University of Natal) Ms Jacky Molisane 4/4 1/1 National Higher Diploma Mechanical Appointed to Exco in November 2014 B Accounting Services (Unisa) Engineering (Vaal Triangle Technikon) 20 years in Eskom Dr Pulane Molokwane 17/18 11/12 5/5 3/4 12/12* Chartered Accountant (SA) M Sc (cum laude) (Da Vinci Institute for Qualifications Master of Business Leadership (Unisa) Technology Management) Prof. Tshepo Mongalo 8/9 1/1 1/1 1/1 BA Social Work (University of the North) Directorships Directorships BA Hons Psychology (University of Pretoria) Mr George Sebulela 4/4 0/0 Escap SOC Ltd Eskom Development Foundation NPC M Sc Business Engineering (Warwick Eskom Enterprises SOC Ltd University) Executive directors Eskom Finance Company SOC Ltd Directorships Mr Calib Cassim 10/11 <5> <4> None 6 Mr Phakamani Hadebe 4/4 <1> <1> 3 MS AYANDA NOAH (51) Previous directors Group Executive: Customer Services MR THAVA GOVENDER (50) 9 Appointed to Exco in June 2007 Non-executive directors Group Executive: Generation 26 years in Eskom MR KOBUS STEYN (55) Acting Group Executive: Risk and Mr Simphiwe Dingaan 14/14 11/12 5/5 11/11 Qualifications Acting Group Executive: Group Capital Sustainability B Sc Electrical Engineering Appointed to Exco in January 2018 Mr Sathiaseelan Gounden 12/14 12/12 4/4 2/2 Appointed to Exco in September 2010 (University of Cape Town) 32 years in Eskom 27 years in Eskom MBA (International Management Centres) Ms Venete Klein 4/4 1/1 1/1 Qualifications Qualifications Executive Development Programme B Eng (University of Pretoria) Mr Zethembe Khoza 22/22 5/7 3/3 1/1 2/2 B Sc Chemistry and Biochemistry (University of Witwatersrand) B Com (Unisa) (University of Durban-Westville) Advanced Management Program Mr Giovanni Leonardi 6/22 1/3 1/1 3/3 Master of Business Leadership (Unisa) B Sc Hons Energy Studies – Nuclear and (Harvard Business School) Fossil (Rand Afrikaans University) Directorships Ms Chwayita Mabude 8/8 3/3 2/2 1/1 2/2 Directorships Management Development Programme Eskom Rotek Industries SOC Ltd Council for Scientific and Industrial Research Dr Pat Naidoo 19/22 13/14 7/7 3/3 10/13 (Unisa) Energy Access Partnerships Advanced Management Program Dr Baldwin Ngubane 6/6 0/1 (Harvard Business School) Eskom Rotek Industries SOC Ltd SANEA 10 Directorships Executive directors Electric Power Research Institute (EPRI) MS NONDUMISO ZIBI (42) Mr Johnny Dladla 5/7 <4> <1> Eskom Enterprises SOC Ltd Acting Chief Information Officer Eskom Rotek Industries SOC Ltd Mr Sean Maritz 6/7 <2> <1> <1> Appointed to Exco in January 2018 GO15 Steering Board (President) 18 years in Eskom Rosherville Properties SOC Ltd Mr Anoj Singh 11/12 <1> <5> Supplementary information SANEA Qualifications National Diploma Electrical Engineering Attendance as reflected above refers to directors who were members of that committee during the year to 31 March 2018 and reflects changes in (Eastern Cape Technicon) committee composition during the year. B Tech Engineering (Durban University of An asterisk denotes the chairmanship of the Board or committee at 31 March 2018. Ages are shown at 31 March 2018. Technology) <> reflects executives attending as officials. Only active directorships are reflected. Master of Business Leadership (Unisa) Mr Mark Lamberti resigned as a director, effective 6 April 2018. Mr Phakamani Hadebe was appointed Directorships permanently as Group Chief Executive, effective None 1 June 2018. Mr Abram Masango was reinstated as Group Executive: Group Capital, effective 10 May 2018. 136 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 137 BOARD AND EXCO MEETING ATTENDANCE ENVIRONMENTAL IMPLICATIONS OF USING OR SAVING ELECTRICITY continued Attendance at Exco meetings Factor 1 for the year ended 31 March 2018 Figures are calculated based on total electricity sales by Eskom, which is based on the total available for distribution (including purchases), after excluding losses through Transmission and Distribution (technical losses), losses through Number of meetings theft (non-technical losses), our own internal use and wheeling. Thus to calculate CO2 emissions, divide the quantity Members Divisional responsibility attended of CO2 emitted by the electricity sales: Total number of meetings 16 205.5Mt of CO2 ÷ 212 190GWh sales = 0.97 tons per MWh Mr Phakamani Hadebe Interim Group Chief Executive, effective 22 January 2018 1/3 Factor 2 Mr Calib Cassim Acting Chief Financial Officer, effective 28 July 2017 10/12 Figures are calculated based on total electricity generated, which includes coal, nuclear, pumped storage, wind, Mr Johnny Dladla Interim Group Chief Executive, from 22 June 2017 until 6 October 2017 3/8 hydro and gas turbines, but excludes the total consumed by Eskom. Thus the quantity of CO2 emissions, divided by (electricity generated less Eskom’s electricity consumption): Mr Prish Govender Acting Group Executive: Group Capital until 3 October 2017 8/8 205.5Mt of CO2 ÷ (221 936GWh generated less 6 031GWh own consumption) = 0.95 tons per MWh Group Executive: Transmission and Sustainability up to 26 March 2018 Mr Thava Govender 16/16 Group Executive: Generation and Sustainability from 26 March 2018 Figures represent the 12-month period from 1 April 2017 to 31 March 2018. Mr Matshela Koko Interim Group Chief Executive, until May 2017 1/1 Factor 1 Factor 2 If electricity consumption is measured in: (total energy (total energy Acting Group Executive: Generation up to 26 March 2018 Mr Willy Majola 14/16 sold) generated) kWh MWh GWh TWh Acting Group Executive: Transmission from 26 March 2018 Coal use 0.54 0.53 kilogram ton thousand tons (kt) million tons (Mt) Mr Sean Maritz Interim Group Chief Executive, from 6 October 2017 to 22 January 2018 10/13 Water use1 1.30 1.28 litre kilolitre megalitre (Mℓ) thousand megalitres Mr Abram Masango Group Executive: Office of the GCE until 15 November 2017 6/6 Ash produced 149 146 gram kilogram ton thousand tons (kt) Particulate emissions 0.27 0.26 gram kilogram ton thousand tons (kt) Ms Ayanda Noah Group Executive: Customer Services 13/16 CO2 emissions2 0.97 0.95 kilogram ton thousand tons (kt) million tons (Mt) Mr Mongezi Ntsokolo Group Executive: Distribution 12/16 SO x emissions2 8.49 8.34 gram kilogram ton thousand tons (kt) NO x emissions3 4.05 3.98 gram kilogram ton thousand tons (kt) Ms Elsie Pule Group Executive: Human Resources 13/16 Mr Peter Sebola Acting Group Executive: Group Capital, from 12 October 2017 until 29 December 2017 5/5 1. Volume of water used at all Eskom power stations. 2. Calculated figures based on coal characteristics and power station design parameters. Sulphur dioxide and carbon dioxide emissions are based Mr Anoj Singh Chief Financial Officer, until 28 July 2017 5/5 on coal analysis and using coal burnt tonnages. Figures include coal-fired and gas turbine power stations, as well as oil consumed during power station start-ups and, for carbon dioxide emissions, the underground coal gasification pilot plant. Mr Kobus Steyn Acting Group Executive: Group Capital, effective 11 January 2018 3/3 3. NO x reported as NO2 is calculated using average station-specific emission factors, which have been measured intermittently, and tonnages of coal burnt. Acting Chief Information Officer, effective 12 October 2017 until 10 January 2018, and Ms Nondumiso Zibi 8/8 again from 1 March 2018 Multiply electricity consumption or saving by the relevant factor in the table above to determine the environmental implication. Example 1: Water consumption Example 2: CO2 emissions Using Factor 1 Using Factor 1 Used 90MWh of electricity Used 90MWh of electricity 90 X 1.30 = 117 90 x 0.97 = 87.3 Therefore 117 kilolitres of water used Therefore 87.3 tons CO2 emitted Using Factor 2 Using Factor 2 Used 90MWh of electricity Used 90MWh of electricity 90 x 1.28 = 115.2 90 x 0.95 = 85.5 Therefore 115.2 kilolitres of water used Therefore 85.5 tons CO2 emitted Further information can be obtained through the Eskom Environmental Helpline. Contact details are available at the back of the integrated report For CDM-related Eskom grid emission factor information, please go to the following link: www.eskom.co.za/OurCompany/SustainableDevelopment/Pages/CDM_Calculations.aspx or via the Eskom website: Our Company > Sustainable Development > CDM calculations Supplementary information 138 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 139 TEN-YEAR TECHNICAL STATISTICS Measure and unit 2017/18 2016/17 2015/16 2014/15 2013/14 2012/13 2011/12 2010/11 2009/10 2008/09 Customer statistics Arrear debt as % of revenue, % 2.73RA 2.42 1.14 2.17 1.10 0.82 0.53 0.75 0.83 1.54 Debtors days – municipalities, average debtors days 76.6RA 53.3RA 42.9 47.6 32.7 22.4 – – – – Debtors days – large power top customers excluding disputes, average debtors days 13.9 RA 15.3RA 15.5 16.8 14.5 12.3 14.4 15.5 15.4 16.5 Debtors days – other large power users (<100 GWh p.a.), average debtors days 16.6RA 16.8 RA 16.2 17.0 16.9 18.3 – – – – Debtors days – small power users (excluding Soweto), average debtors days 43.4 RA 48.8 RA 48.2 49.1 50.2 48.2 42.9 45.1 40.5 47.5 Eskom KeyCare, index 105.9 107.0 104.3RA 108.7 108.7 105.8 105.9 101.2 98.1 101.2 Top Customer KeyCare, index 107.5 108.1 107.2 110.5 110.8 107.5 108.0 – – – Enhanced MaxiCare 97.7 95.8 96.5RA 99.8 92.7 93.2 90.7 89.4 93.0 92.8 CustomerCare, index 9.9 9.8 8.4 8.0 8.3 8.4 8.2 8.1 8.2 8.3 Sales and revenue Total sales, GWh1 212 190 214 121 214 487 216 274 217 903 216 561 224 785 224 446 218 591 214 850 (Reduction)/growth in GWh sales, % (0.9) (0.2) (0.8) (0.7) 0.6 (3.7) 0.2 2.7 1.7 (4.2) Electricity revenue, R million 175 041 175 094 161 688 146 268 136 869 126 663 112 999 90 375 69 834 52 996 Growth in revenue, % (0.0) 8.3 10.5 6.9 8.1 12.1 25.0 29.4 31.8 21.8 Electricity output Power sent out by Eskom stations, GWh (net) 221 936 220 166 219 979 226 300 231 129 232 749 237 289 237 430 232 812 228 944 Coal-fired stations, GWh (net) 202 106 200 893 199 888 204 838 209 483 214 807 218 210 220 219 215 940 211 941 Hydroelectric stations, GWh (net) 709 579 688 851 1 036 1 077 1 904 1 960 1 274 1 082 Pumped storage stations, GWh (net) 4 479 3 294 2 919 3 107 2 881 3 006 2 962 2 953 2 742 2 772 Gas turbine stations, GWh (net) 118 29 3 936 3 709 3 621 1 904 709 197 49 143 Wind energy, GWh (net) 331 345 311 1 2 1 2 2 1 2 Nuclear power station, GWh (net) 14 193 15 026 12 237 13 794 14 106 11 954 13 502 12 099 12 806 13 004 IPP purchases, GWh 9 584 11 529 9 033 6 022 3 671 3 516 4 107 1 833 – – Wheeling, GWh2 2 266 2 910 3 930 3 623 3 353 2 948 3 099 3 423 3 175 – Energy imports from SADC countries, GWh2 7 731 7 418 9 703 10 731 9 425 7 698 9 939 10 190 10 579 12 189 Total electricity available (generated by Eskom and purchased), GWh1 241 517 242 023 242 645 246 676 247 578 246 911 254 434 252 876 246 566 241 133 Total consumed by Eskom, GWh3 (6 031) (4 808) (4 046) (4 114) (3 862) (4 037) (3 982) (3 962) (3 695) (3 816) Total available for distribution, GWh 235 486 237 215 238 599 242 562 243 716 242 874 250 452 248 914 242 871 237 317 Supply and demand Total Eskom power station capacity – installed, MW 48 039 46 407 45 075 44 281 44 189 44 206 44 115 44 145 44 175 44 193 Total Eskom power station capacity – nominal, MW 45 561 44 134 42 810 42 090 41 995 41 919 41 647 41 194 40 870 40 506 Total IPP power station capacity – nominal, MW 4 779 5 027 3 392 2 606 1 677 1 135 1 008 803 – – Peak demand on integrated Eskom system, MW 35 301 34 122 33 345 34 768 34 977 35 525 36 212 36 664 35 850 35 959 Peak demand on integrated Eskom system, including load reductions and non-Eskom 35 613 34 913 34 481 36 170 36 002 36 345 37 065 36 970 35 912 36 227 generation, MW National rotational load shedding No No Yes Yes Yes RA NoRA NoRA NoRA NoRA Yes Demand savings, MW 40.2 236.9 214.9 171.5RA 409.6RA 595.0 RA 365.0 RA 354.1 – – Internal energy efficiency, GWh 1.4 6.0 1.7RA 10.4 RA 19.4 RA 28.9 RA 45.0 RA 26.2RA – – Asset creation Generation capacity installed and commissioned, MW 2 387RA 1 332RA 794 RA 100 RA 120 RA 261RA 535RA 315RA 452RA 1 770 Transmission lines installed, km 722.3RA 585.4 RA 345.8 RA 318.6RA 810.9 RA 787.1RA 631.3RA 443.4 RA 600.3RA 418.3 Substation capacity installed and commissioned, MVA 2 510 RA 2 300 RA 2 435RA 2 090 RA 3 790 RA 3 580 RA 2 525RA 5 940 RA 1 630 RA 1 375 Total capital expenditure – group (excluding capitalised borrowing costs), R billion 48.0 60.0 57.4 53.1RA 59.8 RA 60.1 58.8 47.9 48.7 43.7 Safety Employee lost-time injury rate (LTIR) – company, index4, 5 0.23 0.43 0.29 0.36 0.31RA 0.40 RA 0.41RA 0.47RA 0.54 RA 0.50 Employee lost-time injury rate (LTIR) – group, index4, 5 0.23RA 0.39 0.30 0.33 0.32 – – – – – Fatalities (employees and contractors), number 15 10 17 10 23RA 19 RA 24 RA 25RA 17RA 27 Employee fatalities, number 3 4 4 3 5RA 3RA 13RA 7RA 2RA 6 Supplementary information Contractor fatalities, number 12 6 13 7 18 RA 16RA 11RA 18 RA 15RA 21 1. The difference between electricity available for distribution and electricity sold is due to energy losses. 2. Prior to 2009/10, wheeling was combined with the total imported for the Eskom system. 3. Used by Eskom for pumped storage facilities and synchronous condenser mode of operation. 4. The employee lost-time injury rate (LTIR) includes occupational diseases. 5. Prior to 2013/14, only company numbers were reported. RA Reasonable assurance provided by the independent assurance provider. Refer to pages 130 to 133 of the integrated report. 140 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 141 TEN-YEAR TECHNICAL STATISTICS continued Measure and unit 2017/18 2016/17 2015/16 2014/15 2013/14 2012/13 2011/12 2010/11 2009/10 2008/09 Primary energy Coal stock, days 68 74 58 51 44 RA 46RA 39 RA 41RA 37RA 41 Road-to-rail migration (additional tonnage transported on rail), Mt 11.6Q 13.2Q 13.6RA 12.6RA 11.6RA 10.1RA 8.5 7.1 5.1 4.3 Coal purchased, Mt 115.3 120.3 118.7 121.7 122.0 126.4 124.3 126.2 121.8 132.7 Coal burnt, Mt 115.5 113.7 114.8 119.2 122.4 123.0 125.2 124.7 122.7 121.2 Average calorific value, MJ/kg 19.81 20.05 19.57 19.68 19.77 19.76 19.61 19.45 19.22 19.10 Average ash content, % 30.92 28.62 28.19 27.63 28.56 28.69 28.88 29.03 29.56 29.70 Average sulphur content, % 0.87 0.84 1.07 0.80 0.87 0.88 0.79 0.78 0.81 0.83 Overall thermal efficiency, % 31.2 31.2 31.1 31.4 31.3 32.0 31.4 32.6 33.1 33.4 Diesel and kerosene usage for OCGTs, Mℓ 37.8 10.0 1 247.8 1 178.6 1 148.5RA 609.7RA 225.5RA 63.6RA 16.1RA 28.9 Plant performance Unplanned capability loss factor (UCLF), %1 10.18 9.90 14.91RA 15.22RA 12.61RA 12.12RA 7.97RA 6.14 RA 5.10 RA 4.38 Planned capability loss factor (PCLF), %1 10.35RA 12.14 RA 12.99 9.91RA 10.50 RA 9.10 9.07 7.98 9.04 9.54 Energy availability factor (EAF), %1 78.00 RA 77.30 RA 71.07RA 73.73RA 75.13RA 77.65RA 81.99 RA 84.59 RA 85.21 85.32 Unit capability factor (UCF), %1 79.47 78.00 72.10 74.87 76.90 RA 78.80 RA 83.00 RA 85.90 RA 85.90 86.10 Generation load factor, %1 55.9 57.9 58.8 61.5 62.8 63.6 65.1 66.4 66.2 67.0 OCGT load factor trend, % 0.6 0.1 18.6 17.6 19.3RA 10.4 RA 3.9 1.1 0.3 – Integrated Eskom system load factor (EUF), %1 71.6 75.0 82.7 83.4 83.6 81.9 79.4 78.5 77.7 78.6 Network performance Total system minutes lost for events <1 minute, minutes 2.09 RA 3.80 RA 2.41RA 2.85RA 3.05RA 3.52RA 4.73RA 2.63RA 4.09 RA 4.21 Major incidents, number 0 0 1 2 0 RA 3RA 1RA 0 RA 1RA 3 System average interruption frequency index (SAIFI), events 18.7RA 18.9 RA 20.5RA 19.7RA 20.2RA 22.2RA 23.7RA 25.3RA 24.7RA 24.2 System average interruption duration index (SAIDI), hours 38.8 RA 38.9 RA 38.6RA 36.2RA 37.0 RA 41.9 RA 45.8 RA 52.6RA 54.4 RA 51.5 Total energy losses, % 9.1 8.9 8.6 8.8 8.9 9.1 8.7 8.3 8.5 7.9 Transmission energy losses, % 2.0 2.2 2.6 2.5 2.3RA 2.8 RA 3.1RA 3.3RA 3.3 3.1 Distribution energy losses, % 7.7RA 7.6RA 6.4 6.8 7.1RA 7.1RA 6.3RA 5.7RA 5.9 5.5 Environmental statistics Emissions Relative particulate emissions, kg/MWh sent out 2 0.27RA 0.30 RA 0.36RA 0.37RA 0.35RA 0.35RA 0.31RA 0.33RA 0.39 RA 0.27 Carbon dioxide (CO2), Mt 2 205.5RA 211.1RA 215.6RA 223.4 233.3RA 227.9 RA 231.9 RA 230.3RA 224.7RA 221.7 Sulphur dioxide (SO2), kt 2 1 802 1 766 1 699 1 834 1 975RA 1 843RA 1 849 RA 1 810 RA 1 856RA 1 874 Nitrous oxide (N2O), t 2 2 642 2 782 2 757 2 919 2 969 2 980 2 967 2 906 2 825 2 801 Nitrogen oxide (NO x) as NO2 , kt 3 859 885 893 937 954 RA 965RA 977RA 977RA 959 RA 957 Particulate emissions, kt 57.13 65.13 78.37 82.34 78.92RA 80.68 RA 72.42RA 75.84 RA 88.27RA 55.64 Water Specific water consumption, ℓ/kWh sent out1 1.30 RA 1.42RA 1.44 RA 1.38 RA 1.35RA 1.42RA 1.34 RA 1.35RA 1.34 RA 1.35 Net raw water consumption, Mℓ1 276 335 307 269 314 685 313 078 317 052 334 275 319 772 327 252 316 202 323 190 Waste Ash produced, Mt 31.65 32.61 32.59 34.41 34.97RA 35.30 RA 36.21RA 36.22RA 36.01RA 36.66 Ash sold, Mt 2.7 2.8 2.7 2.5 2.4 2.4 2.3 2.0 2.0 2.1 Ash (recycled), % 8.6 8.5 8.3 7.3 7.0 RA 6.8 RA 6.4 RA 5.5RA 5.6 5.7 Asbestos disposed, tons 144.9 383.0 274.5 991.0 458.0 374.6 448.1 611.5 321.4 3 590.8 Material containing polychlorinated biphenyls thermally destroyed, tons 26.3 61.9 59.8 0.0 10.2 0.9 14.3 422.9 19.1 505.6 Nuclear Public individual radiation exposure due to effluents, mSv4 0.0012 0.0005 0.0006 0.0010 0.0012 0.0019 0.0024 0.0043 0.0040 0.0045 Low-level radioactive waste generated, cubic metres 164.2 162.9 176.1 164.1 180.7RA 188.2RA 184.7RA 165.3RA 137.8 140.8 Low-level radioactive waste disposed of, cubic metres 118.8 108.0 213.1 377.6 324.0 RA 54.0 RA 53.8 RA 81.0 RA 216.0 189.0 Intermediate-level radioactive waste generated, cubic metres 20.8 11.4 33.4 27.6 28.7RA 35.7RA 25.4 RA 39.3RA 47.1 23.9 Intermediate-level radioactive waste disposed of, cubic metres 0 0 0 138 178 RA 0 RA 128 RA 0 RA 266 474 Used nuclear fuel, number of elements discharged 5 116 60 56 112 48 56 60 112 56 56 Used nuclear fuel, number of elements discharged, cumulative figure 2 405 2 289 2 229 2 173 2 061 2 013 1 957 1 897 1 785 1 729 Supplementary information Legal contraventions Environmental legal contraventions 6 30 29 20 20 34 RA 48 50 63 55 114 Environmental legal contraventions reported in terms of the Operational Health Dashboard, 2 0 1 1 2RA 2 5 4 0 12 number7 1. In accordance with our policy, the performance of Medupi Units 4 and 5 and Kusile Unit 1, still within their first year after commissioning, have not been included in the KPIs. 2. Calculated figures based on coal characteristics and power station design parameters based on coal analysis and using coal burnt tonnages. Figures include coal-fired and gas turbine power stations, as well as oil consumed during power station start-ups and, for carbon dioxide emissions, includes the underground coal gasification pilot plant. 3. NO x reported as NO2 is calculated using average station-specific emission factors (which are measured intermittently) and tonnages of coal burnt. 4. The limit set by the National Nuclear Regulator is ≤0.25mSv. 5. The gross mass of a nuclear fuel element is approximately 670kg, with UO2 mass typically between 462kg and 464kg. 6. The number of incidents for 2016/17 has changed from 28 to 29, due to an accident in February 2017 being ratified as a legal contravention incident for that year. 7. Reported in terms of the 2002 definition of the Operational Health Dashboard. From 2008, repeat legal contraventions are included. RA Reasonable assurance provided by the independent assurance provider. Refer to pages 130 to 133 of the integrated report. Q Qualified by the independent assurance provider. Refer to pages 130 to 133 of the integrated report. 142 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 143 FIVE-YEAR NON-TECHNICAL STATISTICS Company Group Measure and unit 2017/18 2016/17 2015/16 2014/15 2013/14 2017/18 2016/17 2015/16 2014/15 2013/14 Finance1 Electricity revenue per kWh (including environmental levy), c/kWh 85.06 83.60 76.24 67.91 62.82 Electricity operating costs, R/MWh 634.69 662.98 628.00 600.72 535.08 622.41 651.98 617.02 587.97 528.70 EBITDA margin, % 24.81RA 20.55 19.13 16.28 16.15 25.91 21.44 20.29 16.54 17.23 EBITDA, R million 43 428 35 989 30 932 23 811 22 101 45 359 37 532 32 811 24 186 23 586 Cash interest cover, ratio 1.18 RA 1.73 1.64 1.62 2.14 1.22 1.73 1.73 1.75 2.15 Debt service cover, ratio 0.84 1.37 1.09 0.82 1.28 0.87 1.37 1.14 0.91 1.24 Working capital ratio 1.06 0.86 0.86 0.82 0.70 1.05 0.85 0.83 0.81 0.71 Gross debt/EBITDA, ratio 10.22 11.39 11.71 13.84 12.59 9.71 10.84 10.95 13.60 11.77 Debt/equity (including long-term provisions), ratio 2.70 RA 2.22RA 1.71 2.67 2.12 2.52 2.11 1.65 2.50 2.00 Gearing, % 73 69 63 73 68 72 68 62 71 67 Free funds from operations, R million 39 064 46 336 37 954 36 032 29 528 40 022 47 571 39 443 36 179 31 158 Free funds from operations after net interest paid, R million 8 017 19 776 16 260 20 343 18 455 9 147 21 148 17 927 20 564 20 139 Free funds from operations as % of gross debt, % 8.80 RA 11.30 RA 10.48 RA 10.93 10.61 9.09 11.69 10.98 11.00 11.22 Free funds from operations as % of total capex, % 76.68 RA 74.46 64.13 63.83 48.98 77.84 75.11 66.23 65.66 52.10 BPP savings, R billion 20.73RA 20.21RA 17.45RA 8.70 2.30 Building skills Headcount (including fixed-term contractors) 41 316 41 940 42 767 41 787 42 923 48 628 47 658 47 978 46 491 46 919 Training spend as % of gross employee benefit costs 5.21RA 4.89 RA 4.45RA 6.18 RA 7.87RA Total engineering learners in the system, number 1 241 1 480 895 1 315 1 962RA Total technician learners in the system, number 838 1 209 415 826 815RA Total artisan learners in the system, number 1 815 2 155 1 955 1 752 2 383RA Learner intake 726Q 3 048 Q 1 370 – – Transformation Socio-economic contribution Corporate social investment committed, R million 192.0 RA 225.3 103.6 115.5 132.9 RA Corporate social investment, number of beneficiaries 1 116 044 841 845 302 736 323 882 357 443RA Job creation on new build projects, number 38 111 39 277 23 169 25 875 25 181RA Total number of electrification connections, number2 215 519 RA 207 436 158 312 160 933 202 780 Procurement equity Local content contracted (Eskom-wide), % 87.16RA 73.37Q 75.22Q 25.13 40.80 Local content contracted (new build), % 85.59 RA 85.78 Q 84.04 RA 33.62LA 54.60 RA B-BBEE attributable expenditure, R billion 97.0 137.3 132.0 120.8 125.4 RA 102.3 127.7 125.0 116.0 119.4 RA Black-owned expenditure, R billion 53.5 50.4 51.0 47.5 43.6RA 57.6 53.9 52.9 49.4 45.8 RA Black women-owned expenditure, R billion 19.7 17.3 30.2 8.9 9.6RA 20.9 19.4 30.8 9.3 9.8 RA Black youth-owned expenditure, R billion 3.4 1.7 1.3 0.9 1.3RA 3.9 2.0 1.4 0.9 1.3RA Procurement from B-BBEE compliant suppliers, % 74.24 RA 100.75RA 83.08 RA 88.89 RA 93.90 RA 80.25 98.25 81.65 89.39 91.80 RA Procurement from black-owned (BO) suppliers, % 40.93RA 36.98 RA 30.98 RA 34.91 32.70 RA 45.20 41.49 33.61 34.41 35.30 RA Procurement from black women-owned (BWO) suppliers, % 15.08 RA 12.67RA 17.72RA 6.61 7.20 RA 16.41 14.92 19.30 6.49 7.50 RA Procurement from black youth-owned (BYO) suppliers, % 2.58 RA 1.25RA 0.82RA 0.64 RA 1.00 RA 3.05 1.52 0.94 0.63 1.00 RA Procurement spend with suppliers owned by black people living with disability (BPLwD), 0.11RA 0.02RA 0.01RA 0.00 0.00 0.20 0.02 0.01 0.00 0.00 % of TMPS Procurement spend with qualifying small enterprises (QSE), % of TMPS 7.80 RA 7.67 RA 4.03RA 6.74 11.90 8.86 8.91 4.62 6.75 15.09 Procurement spend with exempted micro enterprises (EME), % of TMPS 9.32 RA 10.15RA 4.81RA 5.12 – 10.21 11.24 5.89 5.78 – Technology transfer Acquisition of intellectual capital, R million 26RA 31RA 54 RA – – Skills development, number of people 63RA 54 RA 29 RA – – Employment equity Disabilities, number of employees 1 292 1 263 1 271 1 294 1 283RA 1 441 1 396 1 311 1 325 1 305RA Employment equity – disability, % 3.13RA 3.01RA 2.97RA 3.12RA 2.99 RA 2.96 2.93 2.73 2.89 2.77RA Supplementary information Racial equity in senior management, % black employees 67.97RA 65.77RA 60.90 RA 61.58 RA 59.50 RA 68.31 65.80 61.06 61.70 59.30 RA Racial equity in professionals and middle management, % black employees 75.35RA 73.60 RA 71.98 RA 72.28 RA 71.20 RA 75.27 73.50 71.68 71.77 70.60 RA Gender equity in senior management, % female employees 38.25RA 36.69 RA 28.07RA 29.83RA 28.90 RA 38.20 36.58 28.13 29.82 28.80 RA Gender equity in professionals and middle management, % female employees 38.06RA 36.65RA 36.01RA 36.10 RA 35.80 RA 37.47 35.98 35.11 35.29 34.90 RA 1. Ratios impacted by the restatements in the annual financial statements were restated where possible. 2. Electrification connections for 2017/18 include farmworker connections. Comparatives for the previous years have been adjusted to include farmworker connections RA Reasonable assurance provided by the independent assurance provider. Refer to pages 130 to 133 of the integrated report. Q Qualified by the independent assurance provider LA Limited assurance provided by the independent assurance provider. 144 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 145 POWER STATION CAPACITIES as at 31 March 2018 The difference between installed and nominal capacity reflects auxiliary power consumption and reduced capacity caused by the age of plant. Years commissioned, Number and installed capacity Total installed Total nominal Total nominal Name of station Location first to last unit of generator sets, MW capacity, MW capacity, MW Name of station capacity MW Base-load stations Nominal capacity of Eskom-owned power stations 45 561 Coal-fired (15) 40 180 37 868 Independent power producers (IPP) capacity 4 779 Arnot Middelburg Sep 1971 to Aug 1975 1x370; 1x390; 2x396; 2x400 2 352 2 232 Concentrating solar power 300 Camden1, 2 Ermelo Mar 2005 to Jun 2008 3x200; 1x196; 2x195; 1x190; 1x185 1 561 1 481 Gas/liquid fuel 1 005 Duvha3 Emalahleni Aug 1980 to Feb 1984 5x600 3 000 2 875 Hydroelectric 14 Grootvlei1 Balfour Apr 2008 to Mar 2011 4x200; 2x190 1 180 1 120 Landfill 8 Hendrina 2, 4 Middelburg May 1970 to Dec 1976 1x210; 4x200; 2x195; 1x170; 1x168 1 738 1 638 Solar PV energy 1 474 Kendal5 Emalahleni Oct 1988 to Dec 1992 6x686 4 116 3 840 Wind 1 978 Komati1, 2 Middelburg Mar 2009 to Oct 2013 4x100; 4x125; 1x90 990 904 Kriel Bethal May 1976 to Mar 1979 6x500 3 000 2 850 Total nominal capacity available to the grid – Eskom and IPPs 50 340 Kusile 5, 6 Ogies Aug 2017 1x799 799 720 Under construction 5x800 1. Former moth-balled power stations that have been returned to service. The original commissioning dates were: Lethabo Vereeniging Dec 1985 to Dec 1990 6x618 3 708 3 558 • Camden was originally commissioned between August 1967 and September 1969. Majuba5 Volksrust Apr 1996 to Apr 2001 3x657; 3x713 4 110 3 843 • Grootvlei was originally commissioned between June 1969 and November 1977. Matimba 5, 6 Lephalale Dec 1987 to Oct 1991 6x665 3 990 3 690 • Komati was originally commissioned between November 1961 and March 1966. Matla Bethal Sep 1979 to Jul 1983 6x600 3 600 3 450 2. Due to technical constraints, some coal-fired units at these stations have been de-rated. Medupi5 Lephalale Aug 2015 to Nov 2017 3x794 2 382 2 157 3. Duvha Unit 3 (600MW installed/575MW nominal capacity) removed from installed/nominal base. Under construction 3x794 4. Hendrina Unit 3 (195MW installed/185MW nominal capacity) removed from installed/nominal base. 5. Dry-cooled unit specifications based on design back-pressure and ambient air temperature. Tutuka Standerton Jun 1985 to Jun 1990 6x609 3 654 3 510 6. Medupi Units 5 and 4, and Kusile Unit 1 were commissioned during the year. Nuclear (1) 7. Pumped storage facilities are net users of electricity. Water is pumped during off-peak periods so that electricity can be generated during peak periods. Koeberg Cape Town Jul 1984 to Nov 1985 2x970 1 940 1 860 8. Use restricted to periods of peak demand, dependent on the availability of water in the Gariep and Vanderkloof dams. Peaking stations 9. Installed and operational, but not included for capacity management purposes. Gas/liquid fuel turbine stations (4) 2 426 2 409 Acacia Cape Town May 1976 to Jul 1976 3x57 171 171 Ankerlig Atlantis Mar 2007 to Mar 2009 4x149.2; 5x148.3 1 338 1 327 Gourikwa Mossel Bay Jul 2007 to Nov 2008 5x149.2 746 740 Port Rex East London Sep 1976 to Oct 1976 3x57 171 171 Pumped storage schemes (3)7 2 732 2 724 Polokwane Drakensberg Bergville Jun 1981 to Apr 1982 4x250 1 000 1 000 Ingula Ladysmith June 2016 to Feb 2017 4x333 1 332 1 324 Palmiet Grabouw Apr 1988 to May 1988 2x200 400 400 Pretoria Hydroelectric stations (2) 8 600 600 Gariep Norvalspont Sep 1971 to Mar 1976 4x90 360 360 Johannesburg Vanderkloof Petrusville Jan 1977 to Feb 1977 2x120 240 240 Total used for capacity management purposes 47 878 45 461 Upington Renewable energy Richards Bay Wind energy (1)9 Kimberley Sere Vredendal Mar 2015 46x2.2 100 100 Bloemfontein Durban Total capacity including renewable energy 47 978 45 561 Other hydroelectric stations (4)9 61 – Colley Wobbles Mbashe River 3x14 42 – Gariep First Falls Umtata River 2x3 6 – Sere Supplementary information Ncora Ncora River 2x0.4; 1x1.3 2 – Ankerlig Second Falls Umtata River 2x5.5 11 – East London Total Eskom power station capacities (30) 48 039 45 561 Port Elizabeth Cape Town Mossel Bay Available nominal capacity – Eskom-owned 94.84% Existing Thermal power station Wind Not yet complete Nuclear power station Gas power station Possible future grid system Hydroelectric  or pumped storage Interconnection substation Town station Future substation 146 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 147 POWER LINES AND SUBSTATIONS IN SERVICE BENCHMARKING INFORMATION at 31 March 2018 Category 2017/18 2016/17 2015/16 2014/15 2013/14 The fact sheet details the benchmarking exercises undertaken by Generation Division. Power lines The results of benchmarking of our coal-fired and nuclear stations are set out under “Our infrastructure – Generation performance” on page 93 Transmission power lines, km1 31 951 32 220 31 957 31 107 29 924 765kV 2 784 2 782 2 608 2 235 2 235 Coal-fired stations 533kV DC (monopolar) 1 035 1 035 1 035 1 035 1 035 400kV 2 18 804 18 943 18 872 18 377 17 011 Energy availability factor (EAF), all coal sizes (VGB units exclude Eskom units), % 275kV 2 7 218 7 358 7 343 7 361 7 361 220kV 1 221 1 220 1 217 1 217 1 217 100 132kV 889 882 882 882 1 065 95 Distribution power lines, km 48 550 48 805 49 210 48 278 46 093 90 132kV and higher 24 646 25 011 25 528 24 929 22 719 85 33 to 88kV 23 904 23 794 23 682 23 349 23 374 80 Reticulation power lines, km 22kV and lower 293 324 296 188 288 550 281 510 276 027 75 70 Underground cables, km 7 769 7 499 7 571 7 436 7 293 65 132kV and higher 79 75 66 65 65 33 to 88kV 415 215 375 361 364 60 22kV and lower 7 275 7 209 7 130 7 010 6 864 55 50 Total all power lines, km 381 594 384 712 377 287 368 331 359 337 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Total transformer capacity, MVA 285 737 276 583 244 637 239 490 232 179 VGB worst quartile Eskom worst quartile VGB median Eskom median VGB best quartile Eskom best quartile Transmission, MVA 3 151 105 147 415 143 440 139 610 138 350 Distribution and reticulation, MVA 134 632 129 168 101 197 99 880 93 829 Unplanned capability loss factor (UCLF), all coal sizes (VGB units exclude Eskom units), % Unplanned capability loss factor (UCLF), all coal sizes (92 VGB units, excluding Eskom units), % Total transformers, number 383 284 372 995 342 387 335 242 329 314 Transmission, number 442 433 427 423 420 30 Distribution and reticulation, number 382 842 372 562 341 960 334 819 328 894 25 1. Transmission power line lengths are included as per distances from the Geographic Information System. 2. The decrease in the km of transmission lines in service as at end March 2018 is due to the decommissioning of a 275kV line in order to build a new 400kV line on the same servitude. In addition, a portion of another 400kV line was temporarily taken out of service in order to commission 20 a new substation and the associated turn-in lines. 3. Base of definition: transformers rated ≥30MVA and primary voltage ≥132kV. 15 10 5 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 VGB worst quartile Eskom worst quartile VGB median Eskom median VGB best quartile Eskom best quartile Supplementary information 148 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 149 BENCHMARKING INFORMATION continued Planned capability loss factor (PCLF), all coal sizes (VGB units exclude Eskom units), % Koeberg Nuclear Power Station Planned capability loss factor (PCLF), all coal sizes (92 VGB units, excluding Eskom units), % Unit capability factor (UCF) for all pressurised water reactor (PWR) units worldwide, % 95 25 90 20 85 15 80 75 10 70 5 65 60 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Mar 18 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Koeberg mean Worldwide PWR worst quartile Worldwide PWR median Worldwide PWR best quartile VGB worst quartile Eskom worst quartile VGB median Eskom median VGB best quartile Eskom best quartile Unplanned capability loss factor (UCLF) for all pressurised water reactor (PWR) units worldwide, % Energy utilisation factor (EUF), all coal sizes (VGB units exclude Eskom units), % 10 100 8 87 6 74 4 61 2 48 0 35 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Mar 18 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Koeberg mean Worldwide PWR worst quartile Worldwide PWR median Worldwide PWR best quartile VGB worst quartile Eskom worst quartile VGB median Eskom median VGB best quartile Eskom best quartile Unplanned automatic scrams for all pressurised water reactor (PWR) units worldwide, UA7 rate per 7 000 hours 2.0 1.5 1.0 Supplementary information 0.5 0.0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Mar 18 Koeberg mean Worldwide PWR worst quartile Worldwide PWR median Worldwide PWR best quartile 150 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 151 BENCHMARKING INFORMATION CUSTOMER INFORMATION continued 12-month collective radiation exposure (CRE) for all pressurised water reactor (PWR) units worldwide, man-Sieverts per unit Category 2017/18 2016/17 2015/16 2014/15 2013/14 1.2 Number of Eskom customers Local 6 258 605 5 976 546 5 688 629 5 477 591 5 232 904 1.0 Distributors 800 802 801 804 801 Residential1 6 120 122 5 838 754 5 550 307 5 338 723 5 093 847 0.8 Commercial 51 848 50 956 50 816 50 613 50 425 Industrial 2 703 2 706 2 733 2 773 2 781 0.6 Mining 993 1 012 1 013 1 034 1 054 Agricultural 81 638 81 806 82 450 83 136 83 489 0.4 Rail 501 510 509 508 507 International 11 11 11 11 11 0.2 Utilities 7 7 7 7 7 End users across the border 4 4 4 4 4 0.0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Mar 18 6 258 616 5 976 557 5 688 640 5 477 602 5 232 915 Koeberg mean Worldwide PWR worst quartile Worldwide PWR median Worldwide PWR best quartile Electricity sales per customer category, GWh Local 196 922 199 028 201 022 204 274 205 525 36-month collective radiation exposure (CRE) for all pressurised water reactor (PWR) units worldwide, man-Sieverts per unit Distributors 87 133 89 718 89 591 91 090 91 262 Residential1 12 302 11 863 11 917 11 586 11 017 1.00 Commercial 10 539 10 339 10 150 9 644 9 605 Industrial 47 854 48 295 50 150 53 467 54 658 Mining 30 235 30 559 30 629 29 988 30 667 0.75 Agricultural 5 711 5 405 5 733 5 401 5 191 Rail 3 148 2 849 2 852 3 098 3 125 International 15 268 15 093 13 465 12 000 12 378 0.50 Utilities 6 384 5 750 4 018 2 797 3 401 End users across the border 8 884 9 342 9 447 9 203 8 977 0.25 212 190 214 121 214 487 216 274 217 903 International sales to countries in southern Africa, GWh 15 268 15 093 13 465 12 000 12 378 0.00 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Mar 18 Botswana 147 984 1 099 1 237 1 608 Lesotho 276 252 205 230 122 Koeberg mean Worldwide PWR worst quartile Worldwide PWR median Worldwide PWR best quartile Mozambique 8 326 8 120 8 281 8 360 8 314 Namibia 2 147 2 089 1 746 924 1 248 Swaziland 839 986 1 044 882 741 The smoothing over a longer period than used in the benchmarks above takes into account the frequency of Zambia 362 352 344 16 143 refuelling outages, of which three occur per two-year moving window. Zimbabwe 2 250 1 743 252 108 154 Short-term energy market 2 921 567 494 243 48 WANO index for members of WANO Atlanta Center, various reactor types 1. Prepayments and public lighting are included under residential. 100 2. The short-term energy market consists of all the utilities in the southern African countries that form part of the Southern African Power Pool. Energy is traded on a daily, weekly and monthly basis as there is no long-term bilateral contract. 90 80 Supplementary information 70 60 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Mar 18 Koeberg mean WANO-AC worst quartile WANO-AC median WANO-AC best quartile 152 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 153 CUSTOMER INFORMATION CONTACT DETAILS continued Category 2017/18 2016/17 2015/16 2014/15 2013/14 Telephone numbers Websites and email addresses Electricity revenue per customer category, R million Eskom head office +27 11 800 8111 Eskom website www.eskom.co.za Contact@eskom.co.za Local 170 530 167 813 154 959 140 074 129 688 Eskom Media Desk +27 11 800 3304 Eskom Media Desk MediaDesk@eskom.co.za Distributors 72 935 73 009 66 396 60 051 55 371 +27 11 800 3309 Residential1 14 585 14 070 12 884 11 361 10 181 +27 11 800 3343 Commercial 11 725 11 279 10 157 8 599 7 940 +27 11 800 3378 Industrial 33 505 32 701 31 412 30 377 28 305 +27 82 805 7278 Mining 26 277 25 915 23 895 20 848 19 829 Investor Relations +27 11 800 2775 Investor Relations InvestorRelations@eskom.co.za Agricultural 8 154 7 659 7 349 6 247 5 645 Rail 3 151 2 990 2 755 2 591 2 417 Eskom Corporate Affairs +27 11 800 2323 Eskom integrated results www.eskom.co.za/IR2018 IPP network charge 198 190 111 – – Toll-free Crime Line 0800 112 722 Feedback on our report IRfeedback@eskom.co.za International 9 530 10 682 8 055 6 306 5 887 Eskom Development Foundation +27 11 800 8111 Eskom Development Foundation www.eskom.co.za/csi Utilities 5 696 6 632 4 163 2 988 2 837 CSI@eskom.co.za End users across the border 3 834 4 050 3 892 3 318 3 050 National Call Centre 08600 ESKOM or Promotion of Access to PAIA@eskom.co.za 08600 37566 Information Act requests Gross electricity revenue 180 060 178 495 163 014 146 380 135 575 Customer SMS line 35328 Customer Service CSOnline@eskom.co.za Environmental levy included in revenue2 430 512 513 485 1 322 Less: Revenue capitalised3 (2 172) (717) (367) – (28) MyEskom mobi-site www.myeskom.co.za MyEskom app Less: IAS 18 revenue reversal 4 (3 277) (3 196) (1 472) (597) – Electricity revenue per note 32 in the annual financial Facebook EskomSouthAfrica Twitter Eskom_SA 175 041 175 094 161 688 146 268 136 869 statements 1. Prepayments and public lighting are included under residential. Physical address Postal address 2. The environmental levy of 2c/kWh tax was effective from 1 July 2009 to 31 March 2011. On 1 April 2011 the levy was raised to 2.5c/kWh. On 1 July 2012 the levy was raised to 3.5c/kWh. The levy is payable for electricity produced from non-renewable sources (coal, nuclear and Eskom Megawatt Park PO Box 1091 petroleum). The levy is raised on the total electricity production volumes and is recovered through sales. 2 Maxwell Drive Johannesburg 3. Revenue from the sale of production, while testing generating plant not yet commissioned, is capitalised to plant. Sunninghill 2000 4. The IAS 18 principle of only recognising revenue if it is deemed collectable at the date of sale, as opposed to recognising the revenue and then Sandton impairing the customer debt when conditions change, has been applied since 2015. External revenue to the value of R3 277 million was thus 2157 not recognised at 31 March 2018. Group company secretary Company registration number Office of the Company Secretary Eskom Holdings SOC Ltd PO Box 1091 2002/015527/30 Johannesburg 2000 Supplementary information 154 Integrated report | 31 March 2018 Eskom Holdings SOC Ltd 155 OUR SUITE OF REPORTS Our 2018 suite of reports consists of the following: Integrated report and supplementary information Integrated report 31 March 2018 The integrated report provides an overview of our strategy, governance and performance, and is prepared in accordance with the IIRC’s International Framework, and subject to combined assurance, with verification by our internal audit department and reasonable assurance on some KPIs provided by our external auditors. Supplementary information, which may be of interest to Achieving sustained success some stakeholders, is available at the back of the report. Annual financial statements Annual financial statements 31 March 2018 The consolidated annual financial statements of Eskom Holdings SOC Ltd have been prepared in accordance with IFRS as well as the requirements of the Public Finance Management Act, 1999 and the Companies Act, 2008, and were audited by our independent auditors, SizweNtsalubaGobodo Inc. Achieving sustained success Foundation report Foundation report 31 March 2018 The Eskom Development Foundation NPC (the Foundation), although now incorporated into Eskom, coordinates and executes our corporate social investment activities which support certain business imperatives. The report details our CSI activities during the 2017/18 year. Achieving sustained success All documents are available online at www.eskom.co.za/IR2018 Forward-looking statements Certain statements in this report regarding Eskom’s business operations may constitute forward-looking statements. These include all statements other than statements of historical fact, including those regarding the financial position, business strategy, management plans and objectives for future operations. Forward-looking statements constitute our current expectations based on reasonable assumptions, data or methods that may be incorrect or imprecise and that may be incapable of being realised and, as such, are not intended to be a guarantee of future results. Actual results could differ materially from those projected in any forward-looking statements due to various events, risks, uncertainties and other factors. Eskom neither intends to nor assumes any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Eskom is a supporter member of the JOINT VENTURE [0001] 156 Integrated report | 31 March 2018