Eskom group annual results for the year ended 31 March 2018 23 July 2018 This presentation is available at www.eskom.co.za/IR2018 Contents From “business as usual” to “transition towards sustainability” Key priorities to position Eskom for growth Operational performance Financial performance Conclusion From “business as usual” to “transition towards sustainability” Stabilisation for transition to a sustainable future • Eskom has experienced difficult years following leadership and governance instability • A new board and leadership team was appointed to clean up, stabilise, and set Eskom up for future growth • Despite experiencing a difficult year: o Improved liquidity o Continued improvement in operational performance o Advancement in governance and control systems • A strategic review is being undertaken in partnership with the shareholder to build the Eskom of the future There will be pressure until FY2020, as we transition towards financial and operational sustainability, requiring resolute, tough and decisive leadership 3 From “business as usual” to “transition towards sustainability” Pre-January 2018: business as usual • Dislocation between operations and • Lack of long-term integrated strategy government expectations (statement of • Skewed towards compliance, minimum intent, corporate plans & shareholder strategic engagement compacts) • Compounding this is poor performance o Qualified audit opinion o Allegations of corruption and “The overall financial performance of the mismanagement business had been good, with the Design- o Governance challenges o Negative investor sentiment to-Cost strategy showing positive results • Leadership instability as reflected by an increase in revenue…” o 10 CEOs in 10 years Minister of Public Enterprises, June o 6 Boards in 10 years 2017 • Procrastination on decisions and actions by all stakeholders New Minister of Public Enterprises in 2018 emphasised the importance of alignment of the shareholder compact, Corporate Plan and business strategy 4 2018 State of the Nation Address sets the tone for a new transition Strengthen governance and root out corruption Remove Board members from any role in procurement Review the funding model of SOEs 5 Transition from “business as usual” approach towards sustainability January 2018: Eskom Key decisions by the Board transition • Appointment of new • Committed to the highest level of governance Board • Reviewing the purpose, mandate and powers of all Governance sub-committees • Immediate Board focus: • Decision making by board sub-committees 1. Clean up temporarily elevated to the board 2. Stabilisation • Transition from • Concerns raised regarding 2017 Corporate Plan “business as usual” to o Debt to increase from R387 billion to the Eskom of the future Corporate R600 billion within four years Plan o Gearing increasing from 72% to 80% • Noting Eskom’s size, • Permission from the shareholder to submit a challenges, complexity one-year plan and role in the economy, the Board approved a three- • Emphasis to be placed on maximising revenue and person top team Financial containing costs comprising a GCE, sustainability • Challenge NERSA decision in court – 2018/19 CFO and COO tariff increase insufficient 6 Key priorities to position Eskom for growth Driving key priorities to position Eskom for growth Reposition Eskom as the most trusted state-owned entity Clean up  • Instill transparent and effective governance • Initiative to address qualified audit identified more irregular expenses Improve financial health • 21% increase in EBITDA from R37.5 billion in FY2017 to R45.4 billion in FY2018 Stabilise  • RCA determination of R32.7 billion • Improved liquidity by raising R57 billion since January 2018 • Capex and opex reduction to achieve financial viability Prepare for growth - New initiatives to increase EBITDA • Target 500MW additional demand Efficiency  optimisation • Reduce arrear debt • Manage risk of increasing coal costs • Optimise staff productivity levels Become an innovative and data-driven utility Future Eskom • Grow new markets and products while retaining and growing existing clients to grow the • Achieve long-term sustainability and developmental mandate business  • Sustainable business model for Eskom 8 CLEAN UP: GOVERNANCE Significant progress towards becoming a trusted SOC   10 implicated senior executives exited. Finalisation of outstanding disciplinary hearings relating to senior executives being accelerated  11 criminal cases opened, five of which involve nine senior executives   Total of 1 049 outstanding disciplinary cases since April 2018, of which 628 have been finalised, resulting in 75 employee exits   239 whistle-blowing cases investigated, 122 of which have been concluded. Disciplinary process is under way in respect of 67 confirmed cases   Remedial action has been taken against 25 staff doing business with Eskom; 7 exited   Lifestyle audits of senior management in progress. There is effective declaration of interest   Investigated all irregular supplier contracts (so far five no longer doing business with Eskom – the amount spent with these companies in the past three years was R2.3 billion). Recovered R902 million from McKinsey; pursuing interest recovery   Cooperating with eight regulatory bodies conducting major investigations 1 1. National Treasury procurement investigations, Zondo Commission, Hawks, SIU, Parliamentary Inquiry, National Director of Public Prosecutions, Standing Committee on Public Accounts and SAPS 9 STABILISE LIQUIDITY Efforts are improving liquidity and financial viability to achieve positive shift in investor confidence Improved liquidity Financial viability • Raised R57 billion since January 2018 Reprioritise capex • Raised 22% to date of R72 billion borrowing • Restricted capex to R45 billion over the requirement for 2018/19 next five years, a saving of R55 billion • Firm commitment to increase funding to • Risks and tradeoffs have been identified 62% of 2018/19 borrowing requirement to mitigate against impact of capex • Discussion with lender at advance stage; will reduction increase funding to more than 80% of Reduced opex 2018/19 borrowing requirement • Restrict total operating cost to below • In addition, firm commitment to secure inflation, releasing efficiencies of 34% of R56 billion funding for 2019/20 R11 billion per annum borrowing requirement • Kept maintenance at current levels • Growing investor appetite for Eskom bonds However this is not sufficient, and tough decisions are required Initiatives identified to increase EBITDA margin to 35% by optimising capex, opex and maintenance, while improving productivity and efficiency 10 EFFICIENCY OPTIMISATION Key initiatives to drive growth and efficiency • Stimulate sales by developing new products and services and optimising tariffs • Confirmed 3.5 TWh sales growth initiatives, resulting in R2.9 billion additional Grow sales revenue over two years, with nine deals signed • Target revenue recovery of R600 million per annum • Accelerate customer connections • Intensify credit management Reduce arrear • Collect additional R1 billion per annum from municipalities debt • Together with Government, seek solutions to solve municipal arrear debt • Installation of prepaid meters to continue • Prioritisation of capex investments into cost-plus mines Manage risk of increasing • Optimisation of logistics costs, including migration from road to rail coal costs • Collaboration with state-owned mining company Optimise • Holistic review and robust stakeholder discussions to identify optimal productivity productivity improvement solutions levels 11 ESKOM OF THE FUTURE Decisions required by stakeholders to position Eskom for future growth and achieve developmental mandate Considerations to enable the Eskom of the future Alignment on key policy issues in partnership with the shareholder Review business model to adapt to technological, environmental, social and regulatory changes Create an understanding of the skills and capabilities required to drive growth Identify new growth markets and products to drive revenue growth The world is changing very fast and utilities are adapting; it is important that Eskom adapts to the changing needs of customers 12 Operational performance Operational performance continues to improve Plant availability & utilisation • Generation plant availability improved from 77.3% EAF % EUF % to 78% % 85 84 83 83 • Significant improvement in environmental 82 80 78 77 78 78 performance: 75 75 75 74 71 o Particulate emissions from 0.30 to 70 0.27kg/MWhSO 65 2013 2014 2015 2016 2017 2018 o Water usage from 1.42 to 1.30l/kWhSO • Transmission achieved best performance in 10 Network performance years: system minutes lost improved from 3.8 to 2.1 System minutes lost for events < 1 minute SAIDI • Distribution network improvement SAIFI Events/hours Minutes o (SAIFI1) improved from 18.9 to 18.7 events 45 4.0 o (SAIDI2) improved from 38.9 to 38.8 hours 40 35 3.5 • Reviewed Medupi and Kusile dates 3.0 30 o Three units of Medupi and one unit of Kusile in 2.5 25 commercial operation, with combined installed 20 2.0 15 1.5 capacity of 3 181MW 2013 2014 2015 2016 2017 2018 • 2 510MVA transformer capacity installed; 722km of high-voltage transmission lines commissioned 1. System average interruption frequency index 2. System average interruption duration index 14 Operational performance continues to improve Electrification • 215 519 households connected (2017: Annual Cummulative 207 436) Number 000 Number 000 220 1 200 • More than one million households 200 1 000 connected since 2013 180 800 • Lost-time injury rate improved to 0.23 160 600 140 400 (2017: 0.39), the best since 2008 120 200 • Regrettably, Eskom suffered three 100 0 2013 2014 2015 2016 2017 2018 employee fatalities (2017: four) and 12 contractor fatalities (2017: six) • B-BBEE attributable spend of 80% • Spend with black-owned suppliers of 45% • Employment of female employees in senior management positions 38% (2017: 37%) • Coal stock remains a focus area to achieve adequate levels 15 Financial performance Overview of financial performance • EBITDA of R45.4 billion (2017: R37.5 billion) • Net loss after tax of R2.3 billion (2017: R0.9 billion profit) • Net cash from operations of R37.6 billion (2017: R45.8 billion) • Liquid assets of R22.3 billion (2017: R32.5 billion) • 22% of funding requirement for 2018/19 secured to date • Modified audit opinion 17 Eskom complies with IFRS and PFMA reporting requirements and is audited on that basis State-owned company Public Finance International Financial Management Act, 1999 Reporting Standards The purpose of the PFMA is to regulate • An external auditor expresses an financial management of expenditure, and opinion about the fairness of the ensure assets and liabilities of entities are financial position and financial managed efficiently and effectively performance of an entity: • Irregular expenditure: expenditure other • Unmodified: a true and fair view of the than unauthorised expenditure, incurred in entity’s operations contravention of or that is not in • Modified accordance with a requirement of any applicable legislation or policy o Qualified: auditors take exception to a certain accounting application • Fruitless and wasteful expenditure: o Adverse: a conflict between the auditor expenditure which was made in vain and and entity would have been avoided had reasonable o Disclaimer: no opinion due to care been exercised limitations by the entity 18 Independent auditors’ opinions September 2017 March 2017 (interim review) March 2018 IFRS (1) Modified Going concern (2) (2) Emphasis of matter Unmodified PFMA (3) n/a (4) (5) (1) Prior year restatement due to non-accounting for assets built by customers (2) Uncertainty that may cast significant doubt on the group’s ability to continue as a going concern (similar to emphasis of matter) (3) Incomplete reporting of irregular expenditure (4) No reporting requirement at half-year (5) Incomplete reporting of irregular expenditure, fruitless and wasteful expenditure and losses due to criminal conduct 19 Significant increase in the reported irregular expenses in 2018, amounting to R19.6 billion R million 890 Sole source • Internal processes enhanced to 603 592 improve reporting and governance Modifications 1 398 4 882 • PPPFA includes tax clearance PPPFA certificated (R3.2 billion) NT instructions • Recovered R902 million from McKinsey (not included in figures, CIDB regulations in process of recovering interest) Internal process not 4 724 followed • Identified all modifications that 6 520 More than one breach require National Treasury approval • 60% of incidents relate to R million administrative non-compliance 7 560 5 538 6 520 • R10 billion of condonations awaiting approval Irregular expenditure does not Pre 2018 2018 More than 1 year necessarily mean fruitless and wasteful expenditure 20 Income statement for the year ended 31 March 2018 March March YoY % R billion 2018 2017 change Revenue 177 177 – • Sales down by 0.9%; Other income 1 2 (13) revenue up by 0.8% Primary energy (85) (83) (3) • Primary energy cost Net employee benefit expenses (29) (33) 11 contained Net impairment loss (1) (2) 67 Other expenses (18) (24) 23 • Employee benefit costs and EBITDA (Profit before depreciation operating expenses lower and amortisation and net fair value loss) 45 38 21 due to decrease in Depreciation and amortisation provisions (23) (20) (14) expenses • Depreciation growth due Net fair value loss on financial to commissioning of new instruments and embedded (2) (2) (3) derivatives assets and power station Net finance cost (23) (14) (61) units (Loss)/profit before tax (3) 1 • Finance costs linked to less Income tax – – costs capitalised and Net (loss)/profit for the year (2) 1 growth in borrowings 21 Financial position at 31 March March March YoY % R billion 2018 2017 change Property, plant and equipment and intangible assets 635 593 7 Working capital 46 44 14 Liquid assets 23 33 (31) Other assets 36 41 (5) Total assets 739 710 4 Equity 170 176 (4) Debt securities and borrowings 389 355 9 Working capital 44 52 (15) Other liabilities 136 127 8 Total equity and liabilities 739 710 4 22 Cash flow statement for the year ended 31 March 2018 March March YoY % R billion 2018 2017 change Net cash from operating activities 38 46 (18) Cash required for debt servicing (44) (36) (22) Net cash movement before investment activities (7) 10 Cash flow used in investment activities (55) (62) 11 Cash flow from financing activities 58 44 32 Net decrease in cash and cash equivalents (4) (8) 45.4 2.0 1.0 1.7 0.6 2.4 37.6 EBITDA Provisions Advance receipts Derivative Other Working capital Cash from / payments instruments operations 23 Most financial ratios deteriorated and are expected to deteriorate further before improving Profitability 50 26 March March EBITDA (Rbn) Ratio 45 2018 2017 40 Net profit after tax (Rbn) 24 EBITDA margin (%) EBITDA margin, % 25.9 21.4 35 22 30 20 Cash interest cover, ratio 1.22 1.73 25 20 18 15 Debt service cover, ratio 0.87 1.37 16 10 5 Gross debt/EBITDA, ratio 9.71 10.84 14 0 -5 12 Debt/equity (including long- 2013 2014 2015 2016 2017 2018 2.52 2.11 term provisions), ratio Solvency 2,6 Debt/equity 72 Gearing, % 72 68 Gearing 70 2,4 68 Free funds from operations as 2,2 66 9.09 11.69 64 % of gross debt, % 1 2,0 62 1,8 60 Free funds from operations as 1,6 58 77.84 75.11 56 % of total capex, % 1 1,4 54 1,2 52 1,0 50 1. Shareholder compact definition 2013 2014 2015 2016 2017 2018 24 Overview of capital expenditure Total Eskom funded capital expenditure • Total Eskom group funded capital R billion of R47 billion (2017: R56 billion) 70 3 with R28 billion used to expand 60 2 30 2 2 the asset base and R17 billion 50 29 0 20 19 1 spent on existing assets 40 18 17 30 • Department of Energy funded 20 37 30 31 34 electrification capex of 28 28 10 R3.4 billion (not included in 0 2013 2014 2015 2016 2017 2018 graph) Other (Rbn) Existing asset base (Rbn) New asset base (Rbn) 25 Arrear debt increased Invoiced municipal arrear debt • Invoiced municipal arrear debt R billion % 14 100 (including interest) increased by R4.2 billion, an increase of 44% 12 95 10 • Overdue debt is adequately provided 90 in terms of IFRS 8 6 85 • Current payment level of 86% by 80 municipalities (excluding metros) 4 2 75 • Several initiatives in place to recover 0 70 the overdue municipal debt, involving 2013 2014 2015 2016 2017 2018 Eskom and the shareholder Arrear Municipal debt (Rbn) Municipal payment levels (%) • Invoiced Soweto SPU arrear debt (including interest) increased to R12 billion; payment level of 15% • Other overdue debt amounting to R2.2 billion, including R1 billion for international customers 26 Liquidity and going concern • The external auditors raised an emphasis of matter on Eskom’s status as a going concern in their review for the six months ended 30 September 2017 • The steps taken by the shareholder and the Board boosted investor confidence, and the liquidity position improved since January 2018 • Eskom continues to face significant financial and liquidity challenges in the short to medium term, mainly due to the high debt burden, low sales growth and increased finance costs • Eskom is awaiting the outcomes of the liquidation of the R32.7 billion RCA balance and the MYPD 4 decision, which influences future revenue streams • The auditors raised uncertainty that may cast significant doubt on the group’s ability to continue as a going concern 27 Eskom has secured 22% of funding for 2018/19 financial year to date Guarantee utilisation allocation Funding R billion 350 R billion plan Committed DFIs 15.3 8.8 ECAs 5.8 1.0 275 International bonds 20.0 – Domestic bonds and 13.0 5.5 notes > 1 year 75 Domestic bonds and 58 17 10.0 0.8 notes < 1 year Total Portion Unallocated Under Remaining Structured products 8.0 – Government Guarantee allocated portion negotiation Total funding 72.1 16.1 Nominal maturities of guaranteed debt % secured 22% R billion • Eskom successfully raised R57 billion for the year ended 31 March 2018 27 • R43 billion of this was raised between 20 January and March 2018 12 6 2019 2020 2021 2022 28 Summary of financial performance • Liquidity position improved since January 2018 • Improved investor sentiment • EBITDA and EBITDA margin % increased • However, reported a net loss due to increased depreciation and finance costs • Reduced cash from operations • Most financial ratios deteriorated and are expected to deteriorate further, before stabilising and improving • Additional work is required to ensure continued and enhanced PFMA reporting • Financial performance needs to improve to ensure financial sustainability 29 Conclusion Eskom is transitioning towards sustainability • Liquidity improved, operational performance continues to improve • We are committed to turning around this institution • Need for alignment between the shareholder compact, Corporate Plan and business operations • Shareholder support for Board and management • The transition towards financial and operational sustainability requires resolute, tough and decisive leadership • A strategic review is being undertaken to re-energise, shift direction and set a firm foundation for Eskom’s growth: o Strengthening Eskom’s financial position and balance sheet o Reviewing the business model to respond to global energy industry changes o Growing the business into new markets and products o Improving trust and restoring labour, investor and stakeholder confidence o Reviewing the IPP and coal strategy 31 National and international recognition for best performance Eskom Contractor Academy Top three position in the 2017 community upliftment category Awarded the 2017 Technology Transfer Award for research conducted on the 765kV insulator project The Foundation, with the University of Limpopo, won the Africa Gold Award and Most attractive key Overall Global Thematic occupation (electrical Award in Norway, for engineers) from engineering entrepreneurship and for professionals enterprise skills development 32 Disclaimer This presentation does not constitute or form part of and should not be construed as, an offer to sell, or the solicitation or invitation of any offer to buy or subscribe for or underwrite or otherwise acquire, securities of Eskom Holdings SOC Ltd (Eskom), any holding company or any of its subsidiaries in any jurisdiction or any other person, nor an inducement to enter into any investment activity. No part of this presentation, nor the fact of its distribution, should form the basis of, or be relied on in connection with, any contract or commitment or investment decision whatsoever. This presentation does not constitute a recommendation regarding any securities of Eskom or any other person. Certain statements in this presentation regarding Eskom’s business operations may constitute “forward looking statements”. All statements other than statements of historical fact included in this presentation, including, without limitation, those regarding the financial position, business strategy, management plans and objectives for future operations of Eskom are forward looking statements. Forward-looking statements are not intended to be a guarantee of future results, but instead constitute Eskom’s current expectations based on reasonable assumptions. Forecasted financial information is based on certain material assumptions. These assumptions include, but are not limited to continued normal levels of operating performance and electricity demand in the Customer Services, Distribution and Transmission divisions and operational performance in the Generation and Primary Energy divisions consistent with historical levels, and incremental capacity additions through the Group Capital division at investment levels and rates of return consistent with prior experience, as well as achievements of planned productivity improvements throughout the business activities. Actual results could differ materially from those projected in any forward-looking statements due to risks, uncertainties and other factors. Eskom neither intends to nor assumes any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In preparation of this document certain publicly available data was used. While the sources used are generally regarded as reliable the content has not been verified. Eskom does not accept any responsibility for using any such information. 33