Eskom group annual results for the year ended 31 March 2019 30 July 2019 The results presentation is available at www.eskom.co.za/IR2019 Contents High-level overview Operational performance Financial performance Future financial position Turnaround plan Conclusion 1 High-level overview Driving turnaround for sustainability • Disappointing results with declining financial, operational and environmental performance • Encouraging progress to instil governance and to root out financial mismanagement, malfeasance and maladministration • Generation nine-point recovery programme realises positive results in plant performance through winter, with no loadshedding since 24 March 2019 • Government financial support arrests short-term liquidity concerns and relieves financial pressure • Turnaround strategy to stabilise, separate and grow the company for financial and operational sustainability remains urgent • It is critical to create a country energy plan as the next few years pose tough challenges for Eskom and the energy industry 3 Overview of results • Net loss after tax of R21 billion • 30 days of rotational loadshedding • Industrial action further impacts operations and finance • Generation energy availability factor (EAF) at 70% • Total spend on diesel-generated power of R6.5 billion to minimise the magnitude of loadshedding (Eskom and independent power producers) • Municipal arrear debt rose to R20 billion • Environmental performance deteriorates further • Leadership stability with Chief Operating and Chief Financial Officers appointed 4 Operational performance Type equation here. Network performance stable as generating plant performance declines Coal plant availability & utilisation % 93 93 93 EAF EUF • Generation EAF declined from 78% to 90 70% 83 81 • Coal plant EAF declined from 75% to 75 75 67% - energy utilisation factor (EUF) 72 70 68 increasing to 90% from 81%; average 67 plant life > 37 years 2014 2015 2016 2017 2018 2019 • Transmission and Distribution Network performance networks show stable performance System minutes lost for events < 1 minute SAIFI • 540MVA transformer capacity installed; SAIDI Events/hours 40 Minutes 4.0 379km of high-voltage transmission 35 3.5 lines commissioned 30 3.0 • Coal stock levels improve over the 25 20 2.5 period 15 2.0 10 1.5 2015 2016 2017 2018 2019 1. System average interruption frequency index 2. System average interruption duration index 6 Environmental and safety performance declines, socio-economic performance stable Environmental performance • Increase water consumption and kg/MWh l/kWh deteriorating particulate emissions sent out Relative particulate emissions Water concumption sent out 0,48 1,44 • 191 585 new households connected 0,46 1,42 0,44 1,40 (2018: 215 519) 0,42 1,38 0,40 1,36 • Lost-time injury rate of 0.31 (2018: 0,38 1,34 1,32 0.24). Regrettably, three employee 0,36 0,34 1,30 1,28 fatalities (2018: three) and three 0,32 1,26 0,30 1,24 contractor fatalities (2018: 11) 0,28 1,22 0,00 1,20 • B-BBEE attributable spend of 2014 2015 2016 2017 2018 2019 R85 billion Electrification (number – 000s) Annual Cumulative • Spend with black-owned suppliers of 220 Annual Cummulative 1 400 1 200 R52 billion 200 1 000 180 • Racial, gender and disability equity 800 160 improved, albeit small 140 600 400 • 933 139 beneficiaries through CSI 120 200 programmes 100 2015 2016 2017 2018 2019 0 7 Financial performance Overview of financial performance • EBITDA of R31.5 billion (2018: R45.4 billion) • Cost savings of R9.9 billion achieved, but absorbed by cost overruns to minimise loadshedding • Net loss after tax of R20.7 billion (2018: R2.3 billion) • Net cash from operations of R32.7 billion (2018: R37.6 billion) • 58% of funding requirement for 2020 secured to date • Audit opinion o Material uncertainty regarding Eskom’s status as a going concern o Modified audit opinion relating to PFMA 9 Process to manage irregular, fruitless and wasteful expenses improved; more work required R billion 1.1 Outstanding issues 1.5 • Request permission from National 0.9 Treasury to accept electronic 25.7 BBBEE certificates 1.7 • Improve management of panels 21.0 3.4 and lifecycle management of contracts Opening Prior year Existing IE New IE Condoned Recovered Closing balance (clean-up) (2019) balance • Enhance information system to Irregular expenses Number R million accurately report on designated Exceed monetary threshold 1 170 sectors Sole source 3 327 • Obtain condonation from National Consignment stock 1 488 Treasury to clear closing balance Tender process 2 161 Other 175 377 Total 182 1 524 10 Decline in EBITDA and net loss recorded Income statement March March YoY % • Revenue: negatively impacted R billion 2019 2018 change by IFRS 15 and pre- Revenue 180 177 3 commissioning capitalisation Other income 2 1 ~ Primary energy (99) (85) (17) • Primary energy cost: higher Net employee benefit (33) (29) (13) OCGT utilisation, higher coal expenses cost and increased IPP Net impairment loss - (1) ~ Other expenses (18) (18) - production EBITDA • Employee benefit cost 31 45 (31) Depreciation and increased: wage settlement of (30) (23) (29) bargaining employees amortisation expenses Net fair value loss on • Depreciation growth: financial instruments and (3) (2) ~ embedded derivatives commissioning of new power Net finance cost (28) (23) (19) station units and accelerated Loss before tax (29) (3) ~ depreciation on Komati Income tax 8 – ~ • Finance costs: growth in Net loss for the year (21) (2) ~ borrowings 11 Revenue before IFRS adjustments increased by 4% • Reduction in sales mainly in mining and March March residential categories 2019 2018 % Growth • Other categories remain stable Revenue, R billion • International sales reduced Local 179 171 5 • Average price increase of 5.8%, from International 8 10 (14) 85c/kWh to 90c/kWh Total billed 187 180 4 • Volume variance – (R3 billion); price revenue variance R7 billion IFRS adjustment (7) (3) • IFRS 15 applies cash basis for defaulting Total revenue 180 177 3 customers, negatively impacting revenue Sales and revenue Sales, TWh R billion TWh Local 196 197 (0.5) 180 250 175 200 International 12 15 (18.4) 170 165 Sales (TWh) 150 Total sales 208 212 (1.8) 160 Revenue (Rbn) 155 100 150 145 50 140 0 0 2014 2015 2016 2017 2018 2019 12 Primary energy cost increased by 17% • Eskom production volume reduced Cost increase, R billion and renewable IPP production Volume volume increased Price Actual 2018 85 • Total (Eskom and IPP) OCGT cost of R6.5 billion, an increase of Coal 1 6 5 R5.9 billion Nuclear 00 • Renewable IPPs is 4.8% of total 0 production and 22% of total cost Eskom OCGTs 3 13 • Eskom total cost increased by Renewables 3 13 R7.8 billion IPP OCGTs 1 1 2 • Renewable IPP cost increased by R3.2 billion and IPP OCGTs by International 1 1 R2.4 billion 0 Actual 2019 99 13 Debt exceeding R440 billion March March YoY % Financial position, R billion 2019 2018 change Property, plant and equipment and intangible assets 656 635 3 Working capital 50 46 9 Liquid assets 12 24 (52) Other assets 41 32 18 Total assets 758 739 3 Equity 153 170 (10) Debt securities and borrowings 441 389 13 Working capital 49 44 12 Other liabilities 115 136 (16) Total equity and liabilities 758 739 3 14 Cash from operations not sufficient to service debt March March YoY % Cash flow statement, R billion 2019 2018 change Net cash from operating activities 33 38 (13) Cash required for debt servicing (69) (44) (60) Net cash movement before investment activities (36) (7) ~ Cash flow used in investment activities (36) (55) 35 Cash flow from financing activities 58 58 ~ Net decrease in cash and cash equivalents (14) (4) ~ Substantial increase in cash required for debt servicing, R billion 110 Capex 100 Debt Servicing 90 80 70 60 50 40 30 20 10 0 2014 2015 2016 2017 2018 2019 15 Most financial ratios deteriorated and are expected to deteriorate further before improving Profitability March March 50 EBITDA (Rbn) 30 Ratio Net profit before tax (Rbn) 2019 2018 40 EBITDA margin (%) 25 EBITDA margin, % 18 26 30 20 20 Cash interest cover, ratio 0.9 1.2 10 15 Debt service cover, ratio 0.5 0.9 0 10 -10 Gross debt/EBITDA, ratio 15.6 9.7 -20 5 -30 0 Debt/equity (including long- 2014 2015 2016 2017 2018 2019 3.1 2.5 term provisions), ratio Cash from operations Cash from operations, Rbn Gearing, % 76 72 Cash interest cov, ratio 2.2 50 DSCR, ratio Free funds from operations 2.0 45 1.8 after interest as % of gross (1) 2 1.6 40 35 debt, % 1.4 30 1.2 25 1.0 20 0.8 0.6 15 0.4 10 0.2 5 0.0 0 2014 2015 2016 2017 2018 2019 16 Reduction in capital expenditure Total Eskom funded capital expenditure, R billion 70 70 Other (Rbn) Existing asset base (Rbn) • Total Eskom group funded capital 65 60 New asset base (Rbn) of R34 billion (2018: R47 billion), 56 55 52 with R20 billion used to expand 50 48 47 45 the asset base and R13 billion 40 35 34 spent on existing assets 30 25 • Department of Energy funded 20 15 electrification capex of 10 R2.8 billion (not shown in graph) 5 0 2014 2015 2016 2017 2018 2019 R billion 2019 2018 Medupi 4.9 7.0 Kusile 8.6 13.2 Total 13.5 20.2 17 Municipality and Soweto debt increase Invoiced municipal arrear debt, R billion • Invoiced municipal arrear debt (including % 20 Arrear Municipal debt (Rbn) 100 interest) increased by R6.3 billion, to Municipal payment levels (%) 95 R19.9 billion 15 90 • Current payment level of 81% by 10 85 municipalities (excluding metros) 80 5 • Invoiced Soweto SPU arrear debt 75 (including interest) increased to 0 70 2014 2015 2016 2017 2018 2019 R18 billion (2018: R15 billion); payment level of 12.5% Soweto small power user (SPU) debt, R billion • Other overdue debt amounting to % 20 Soweto SPU arrear debt (Rbn) 21 R2.5 billion, including R0.8 billion for Soweto SPU payment levels (%) 20 19 international customers 15 18 • Working with Inter-Ministerial Task 17 10 16 Team to address municipal debt 5 15 • Liaising with communities in Soweto to 14 13 address the non-payment culture; legal 0 12 2014 2015 2016 2017 2018 2019 action taken against customers 18 Eskom secures 58% of funding for 2020 financial year-to-date (at 30 June 2019) Guarantee utilisation allocation Actual Funding R billion funding plan 350 R billion 2019 2020 Committed DFIs 10.5 26.7 22.9 ECAs 0.5 5.4 0.3 279 International bonds 21.6 - – Domestic bonds and 9.0 6.1 3.2 notes > 1 year 52 19 Domestic bonds and 3.6 1.0 0.5 Total Drawndown Committed not Available notes < 1 year Government Guarantee drawndown Structured products 15.0 7.0 – Bank funding 3.0 Nominal maturities of guaranteed debt Total funding1 63.3 46.2 26.9 R billion % secured 58% 28 23 25 7 1. Gross of commercial paper 2020 2021 2022 2023 19 Eskom revenue process with NERSA results in non-cost-reflective tariff determination • Lodged reviews of previous NERSA decisions o NERSA decisions on the 2015, 2016, 2017 RCA determinations o NERSA revenue decision (5.23%) for 2019 • NERSA RCA decision for 2018 o NERSA made a decision of R3.9 billion in response to an application of R21.6 billion o The reasons for the decision still to be published • NERSA MYPD 4 decision (2020 – 2022) o Decision of 9.41% average increase implemented together with the R8 billion RCA recovery, resulting in 13.87% average increase o The return on assets reduced with the R23 billion Government support, resulting in a negative return on assets o Reasons for the decision still to be published • Eskom will submit an RCA application for 2019 of around R27 billion 20 Future financial position Results for 2020 expected to be similar, before improvements materialise March March Financial performance 2019 2020 • Results for 2020 expected to Revenue, R billion 180 207 be similar to 2019 EBITDA, R billion 31 34 • Although EBITDA will improve, the net loss is EBITDA margin, % 18 17 projected to be R20 billion, Net loss after tax, R billion1 (21) (20) before Government support, Cash interest cover, ratio 0.9 0.7 due to an increase in net Debt service cover, ratio 0.5 0.3 finance cost Cash flow, R billion • Cash from operations not sufficient to service debt 25 -5 • Most ratios maintain 84 26 -31 negative trend 23 -59 • Continued Government 41 46 support required to manage Cash from Debt Sub-total Investment Debt operations servicing activities raised Initial Sub-total Additional Cash support support movement liquidity (Net) 1. Before Government support 22 Price of electricity not sufficient to recover prudent and efficient costs • Eskom has three sources of funds; revenue, borrowings and shareholder support • Ideally, revenue should be sufficient to redeem the capital over the asset life time and cover the interest cost • Debt funding exceeding R440 billion, reaching limits • Eskom has not recovered its prudent and efficient costs and a fair return for many years • The only short-term option is shareholder support • Cost savings alone will not solve Eskom’s financial health • The only long-term solution is for the electricity price to migrate to cost reflectivity NERSA determined return on assets % 8 7 6 NERSA official, % 5 NERSA allowed, % 4 NERSA after R23bn, % 3 Actual, % 2 1 0 -12014 2015 2016 2017 2018 2019 2020 2021 2022 -2 23 Rapid increase in price of electricity, but still not cost reflective and still low-priced Price comparison – c/kWh (constant 2019) Recent international tariff benchmark – US c/kWh 140 130 BUSA – 108c/kWh 120 EIUG – 118 c/kWh Source: Statista (October 2018) IRP – 116c/kWh 110 100 90 80 70 60 50 40 NERSA price path to cost-reflectivity - upper boundary 30 NERSA price path to cost-reflectivity - lower boundary 20 Actual ave prices 10 Price at %ROA equal to %WACC 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 • Various studies confirmed that Eskom’s price is below efficient and prudent cost reflectiveness • Up to this point Eskom’s balance sheet has subsidised the consumer • The current reality is that this is no more possible as reflected in the results • The result is that Government support is now required to subsidise the consumer 24 Turnaround plan Turnaround plan based on four pillars that is critical for future sustainability • Financial support from Government – Government has shown its commitment in providing liquidity in support of Eskom’s status as a going concern, and is reviewing options to optimise the balance sheet • Cost curtailment o Eskom committed to R77 billion cumulative cash savings by 2023 o Arrest increase in customer debt and recover existing outstanding debt • Tariff increases through NERSA: Price to migrate to efficient and prudent cost reflectivity to ensure long-term financial sustainability • Restructuring of Eskom and electricity industry Government o Appointment of Chief Restructuring Officer Debt funding support o Functional separation in progress Cost-reflective o Legal separation to follow price 26 Conclusion In conclusion • Governance remains a key focus as we root out financial mismanagement, malfeasance, and maladministration • Continued focus on operational and environmental recovery of our generation fleet, as we enter high maintenance summer season • A cost-reflective tariff is necessary, as cost efficiencies alone cannot solve Eskom’s financial situation • The next step in Government support should look at optimising the balance sheet • Turnaround strategy to stabilise, separate and grow the entity for financial and operational sustainability remain urgent • National stakeholder involvement necessary to create country energy plan as the next few years pose tough challenges for Eskom and the energy industry 28 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. 29 Eskom group annual results for the year ended 31 March 2019 30 July 2019 The results presentation is available at www.eskom.co.za/IR2019