Annual Financial Statements 31 March 2015 Contents 19. Financial trading assets and liabilities Statement of directors’ responsibilities and approval 2 80 Report of the audit and risk committee 3 20. Cash and cash equivalents 80 21. Non-current assets and liabilities held-for-sale 81 Statement by company secretary 4 22. Service concession arrangements 82 Directors’ report 5 23. Share capital 82 24. Debt securities and borrowings 83 Independent auditors’ report to Parliament and the shareholder – Minister of Public Enterprises 13 25. Embedded derivatives 85 26. Deferred income 85 Statements of financial position 16 27. Employee benefit obligations 86 Income statements 17 28. Provisions 88 Statements of comprehensive income 17 29. Finance lease payables 89 30. Trade and other payables 90 Statements of changes in equity 18 31. Payments received in advance 90 Statements of cash flows 19 32. Revenue 91 33. Other income 91 Notes to the financial statements: 34. Primary energy 91 Note 1. General information 21 35. Net employee benefit expense 91 2. Summary of significant accounting policies 21 36. Depreciation and amortisation expense 92 3. Critical accounting estimates and judgements 34 37. Net impairment loss 92 4. Financial risk management: 38 38. Other expenses 92 4.1 Credit risk 38 39.  Net fair value gain/(loss) on financial instruments, excluding embedded derivatives 92 4.2 Market risk 47 40. Finance income 93 4.3 Liquidity risk 52 41. Finance cost 93 4.4 Capital management and going concern 57 42. Income tax 93 4.5 Accounting classifications and fair values 58 43. Cash generated from operations 95 5. Segment information 66 44. Guarantees and contingent liabilities 96 6. Property, plant and equipment 69 45. Commitments 97 7. Intangible assets 71 46. Related-party transactions 98 8. Investment in equity-accounted investees 72 47. Events after the reporting date 100 9. Investment in subsidiaries 73 48. Restatement of comparatives 100 10. Future fuel supplies 74 49. Directors’ remuneration 102 11. Deferred tax 74 50. New standards and interpretations 106 12. Investment in securities 75 51. Information required by the Public Finance 13. Loans receivable 75 Management Act 108 14. Derivatives held for risk management 75 52. Pro forma revaluation of property, plant and 15. Finance lease receivables 78 equipment (unaudited) 110 16. Payments made in advance 78 17. Trade and other receivables 79 Appendix – Abbreviations and acronyms 111 18. Inventories 79 The annual financial statements have been prepared under the supervision of the acting chief financial officer, NS Veleti CA(SA). The financial statements have been audited in compliance with section 30 of the Companies Act. The audited financial statements of the group and Eskom as at and for the year ended 31 March 2015 are available for inspection at the company’s registered office and on the Eskom website at www.eskom.co.za and were published on 16 July 2015. Annual Financial Statements | 31 March 2015 1 Statements of directors’ responsibility and approval The directors are responsible for the maintenance of adequate accounting records and appropriate systems of internal control as well as the preparation, integrity and fair presentation of the annual consolidated financial statements which includes financial results, performance against predetermined objectives and the financial position at the end of the year of Eskom Holdings SOC Ltd (Eskom), its subsidiaries, joint ventures, associates and structured entities (together, the group). The annual financial statements have been prepared in accordance with International Financial Reporting Standards, the Public Finance Management Act and the Companies Act. In preparing the annual financial statements, the directors are required to consistently apply appropriate accounting policies, make reasonable and prudent judgements and estimates, state whether applicable accounting standards have been followed and whether the annual financial statements for Eskom and the group will continue to be prepared on the going-concern basis in the foreseeable future. To enable the Eskom board of directors to meet the above mentioned responsibilities, the board sets standards and management implements systems of internal control. The controls are designed to provide cost-effective assurance that assets are safeguarded, and that liabilities and working capital are efficiently managed. Policies, procedures, structures and approval frameworks provide direction, accountability and division of responsibilities, and contain self-monitoring mechanisms. The controls throughout Eskom and the group focus on those critical risk areas identified by operational management and confirmed by executive management. Both management and the internal audit department closely monitor the controls and actions are taken to correct deficiencies as they are identified. Eskom’s audit and risk committee plays an integral role in risk management as well as in overseeing Eskom’s internal audit function (audit and forensic). The group’s internal audit function, which operates unimpeded and independently from operational management, and has unrestricted access to the group’s audit and risk committee, assesses and, when necessary, recommends improvements to the system of internal control and accounting policies, based on audit plans that take cognisance of the relative degrees of risk of each function or aspect of the business. Eskom’s audit and risk committee has reviewed the going-concern basis and the effectiveness of Eskom and the group’s internal controls. The committee has evaluated Eskom and the group’s annual financial statements and has recommended their approval to the board. The audit and risk committee’s approval is set out on page 3. Based on the information and explanations given by management, the internal audit function and discussions held with the independent external auditors, the directors are of the opinion that the internal accounting controls of Eskom and the group are adequate to ensure that the financial records may be relied upon for preparing the annual financial statements, and that accountability for assets and liabilities is maintained. The directors have made an assessment of the ability of Eskom and the group to continue as a going concern in the foreseeable future. The directors reviewed Eskom’s and the group’s performance for the year ended 31 March 2015 and the cash flow forecast for the Multi-Year Price Determination (MYPD) 3 period ending 31 March 2018. NERSA decided in Eskom’s favour regarding an Regulatory Clearing Account (RCA) adjustment application of a R7.8 billion variance between assumed and actual costs and revenues for year 3 of MYPD 2 (2013 financial year). This variance will be recovered in the 2016 financial year through an adjustment to the electricity price increase from 8% to 12.69%. Eskom submitted an RCA adjustment application for a R38 billion variance for year 1 of MYPD 3 (2014 financial year) in February 2015. NERSA will decide on the application after following their governance processes. Based on Eskom’s submission for a selective reopener relating to the Open-Cycle Gas Turbines and Short-Term Power Purchase Programme, NERSA announced in May 2015 their intention to conduct a public consultation process upon this application. A decision in this regard is expected on 29 June 2015. Eskom is calculating the RCA adjustment variance for year 2 of MYPD 3 (2015 financial year). Eskom will also initiate a reopening for the remainder of the MYPD period. The board continues to critically examine activities and costs in order to balance the group’s cash flow requirements through the Business Productivity Programme to identify and achieve cost savings and efficiency opportunities to reduce the revenue shortfall. The board is pursuing alternative funding options, including potential government support. The board will not commit Eskom beyond its means and has not approved any capital expenditure beyond the Kusile project. In assessing the ability to raise funds, the current economic climate as well as Eskom’s and the sovereign’s credit ratings have been taken into account. Based on the above, the directors are satisfied that Eskom and the group have access to adequate resources and facilities to be able to continue its operations for the foreseeable future. Accordingly the board continued to adopt the going-concern basis in preparing the financial statements. The annual financial statements are based on appropriate accounting policies, supported by reasonable and prudent judgements and estimates. In the opinion of the directors, based on the information available to date, the annual financial statements fairly present the financial position of Eskom and the group at 31 March 2015 and the results of its operations and cash flow information for the year then ended. The independent external auditors are responsible for independently auditing the financial statements in accordance with International Standards of Auditing (ISA) and the Public Audit Act (PAA). The independent external auditors audited the Eskom and group annual financial statements in accordance with ISA and the PAA and their unqualified audit report is presented on page 13. The independent external auditors were given unrestricted access to all financial records and related data, including minutes of all meetings of the board of directors and committees of the board. The directors believe that all representations made to the independent external auditors during their audit are valid and appropriate. The Eskom and group annual financial statements for the year ended 31 March 2015 have been prepared under the supervision of the acting chief financial officer NS Veleti CA(SA), and approved by the board of directors and signed on its behalf on 28 May 2015 by: B Ngubane MV Pamensky Acting chairman Non-executive director 28 May 2015 28 May 2015 2 Eskom Holdings SOC Ltd Report of the audit and risk committee Mandate and terms of reference The audit and risk committee (the committee) presents its report in terms of the requirements of the Public Finance Management Act (PFMA), the Companies Act (section 94(7)(f)) and in accordance with the King Code of Governance Principles for South Africa for the financial year ended 31 March 2015. The role of the committee is defined in its mandate. It covers, amongst others, its statutory duties and the assistance to the board of directors (board) with the oversight of financial and non-financial reporting and disclosure, internal control system, risk management, internal and external audit functions and combined assurance, including information technology governance. Information on the membership and composition of the committee is set out in the 2015 integrated report and related information on the Eskom website. The committee fulfilled all its statutory duties as required by section 94(7) of the Companies Act. The committee reports that it has adopted an appropriate formal terms of reference as its audit and risk committee charter, has regulated its affairs in compliance with this charter, and has discharged all of its responsibilities contained therein. Eskom is applying a combined assurance model to ensure coordinated assurance activities. The committee oversees the assurance activities and the establishment of effective systems of internal control to provide reasonable assurance that Eskom’s financial and non-financial objectives are achieved and that the preparation of financial statements for external purposes is in accordance with International Financial Reporting Standards (IFRS). Execution of functions In the conduct of its duties the committee has, inter alia, reviewed the following functions: Going-concern assumption The committee considered the following: • robustness of budgets and business results • cash flow projections for the 15 months ending 30 June 2016 • regulatory clearing account mechanism (MYPD 3) • cost saving opportunities to reduce the revenue shortfall • the cost of the capital projects, including the capacity expansion programme • funding plan to finance the capacity expansion programme up to the Kusile project • going-concern as the basis of preparation of the annual financial statements Oversight of financial and non-financial reporting and disclosure The committee considered the following: • annual financial statements for fair presentation with the relevant requirements of the PFMA, Companies Act and IFRS • adequacy, reliability and accuracy of financial and non-financial information provided by management and risks that may impact the integrity of the integrated report • the integrated report is presented in accordance with the International Integrated Reporting Framework • disclosure of sustainability information in the integrated report to ensure that it is reliable and it does not conflict with the financial information • the expertise, resources and experience of the finance function Internal control, management of risks and compliance with legal and regulatory provisions The committee considered the following: • effectiveness of internal control systems and governance processes • reviewed legal matters that could have a material impact on the group • effectiveness of the system and process of risk management including the following specific risks: – financial reporting – internal financial controls – fraud risks relating to financial reporting – information technology risks relating to financial reporting – the effectiveness of the entity’s compliance with legal and regulatory requirements Internal and external audit The committee considered the following: • charter, annual audit plan, independence, effectiveness, coordination with external auditors and performance of the assurance and forensic department (internal audit) • appointment of the external auditors in terms of the Companies Act and other applicable requirements • external audit plan, audit budget, actual fee and terms of engagement of the external auditors • the independence and objectivity of the external auditors • accounting, sustainability and auditing concerns identified as a result of the internal and external audits, including reportable irregularities Annual Financial Statements | 31 March 2015 3 Report of the audit and risk committee (continued) Opinion The committee is of the opinion, based on the information and explanations given by management and the assurance and forensic department during the year and at year-end as well as discussions with the independent external auditors that: • the expertise, resources and experience of the finance function are adequate • the system and process of risk management and compliance processes are adequate • the internal accounting controls are adequate to ensure that the financial records may be relied upon for preparing the financial statements and accountability for assets and liabilities is maintained • the internal audit charter was approved by the committee • the expertise, resources and experience of the assurance and forensic department are adequate • the assurance and forensic department operated effectively • the information contained in the integrated report and related information on the Eskom website is reliable and does not contradict the financial information of the integrated report or the annual financial statements • Eskom and the group have access to adequate resources and facilities to be able to continue its operations for the foreseeable future, supporting the going-concern assumption • is satisfied with the independence and objectivity of the external auditors having considered the matters set out in section 94(8) of the Companies Act Nothing significant has come to the attention of the committee to indicate that any material breakdown in the functioning of the controls, procedures and systems has occurred during the year under review. Recommendation of the annual financial statements The committee has evaluated the financial statements of Eskom and the group for the year ended 31 March 2015 and based on the information provided to it, considers that they comply, in all material respects, with the requirements of the Companies Act, the PFMA and International Financial Reporting Standards. The committee concurs with the board and management that the adoption of the going-concern premise in the preparation of the financial statements is appropriate. The committee has therefore, at its meeting held on 27 May 2015, recommended the adoption of the financial statements by the board of directors. C Mabude Chairman 28 May 2015 Statement by company secretary In terms of section 88(2)(e) of the Companies Act, I certify that the company has filed with the Companies and Intellectual Property Commission all such returns and notices in terms of this Act, and all such returns appear to be true, correct and up to date. M Phukubje Company secretary 28 May 2015 4 Eskom Holdings SOC Ltd Directors’ report for the year ended 31 March 2015 The directors are pleased to present their report for the year ended 31 March 2015. Nature of the business Eskom is South Africa’s primary electricity supplier and generates, transmits and distributes electricity to industrial, mining, commercial, agricultural and residential customers and to redistributors (metros and municipalities), who in turn distribute electricity to businesses and households within their areas. The company’s head office is in Johannesburg. Eskom also purchases electricity from Independent Power Producers (IPPs), as well as buys and sells electricity in the Southern African Development Community region. The company has several subsidiaries. The nature of the business of the significant operating subsidiaries is set out in note 9 in the annual financial statements. Business performance Eskom managed to deliver some good results in its business performance for the year despite the many challenges that the organisation is currently facing. The group achieved a net profit after tax for the year of R3.6 billion (2014: R7.1 billion), while revenue for the group for the year was R147.7 billion (2014: R138.3 billion). The cost containment initiatives that were implemented delivered results with a marginal increase in employee benefit cost for the year to R25.9 billion from R25.6 billion in 2014, and other operating cost reducing to R15.8 billion in 2015 from R19.2 billion in 2014. This good performance was offset by the increase in primary energy cost to R83.4 billion (2014: R69.8 billion). Despite the pressure on the primary energy cost, the earnings before interest, tax, depreciation and amortisation was R25.2 billion (2014: R25.1 billion). The savings achieved in 2015 through the Business Productivity Programme (BPP) were R9 billion (2014: R2.7 billion) comprising savings in operational and capital expenditure as well as savings through reduced working capital. Eskom issued a USD1.25 billion (R14.8 billion) 10-year bond in February 2015 despite a further downgrade by the rating agencies. This demonstrates the ability of Eskom to raise additional funding even though the funding costs are higher and more stringent conditions apply. Good transmission network performance was achieved with system minutes lost for events (less than one minute) measured at 2.85 against the target of not more than 3.80. The distribution network performed well and all the targets were exceeded. Electricity customers indicated their positive satisfaction with Eskom’s performance, despite load shedding. There was a substantial increase in particular in Enhanced Maxi Care which measures the satisfaction of smaller customers. Eskom’s fixed asset base increased by R54.5 billion during the year to R458.9 billion (2014: R404.4 billion). The first synchronisation of Medupi power station unit 6 was achieved on 2 March 2015. The Sere wind farm with a generating capacity of 100MW was placed into commercial operation on 31 March 2015. Some of the major challenges facing the organisation are financial and operational sustainability. NERSA’s third Multi-Year Price Determination (MYPD) of an 8% tariff increase in response to Eskom’s request of 16% resulted in significant pressure on the liquidity and going-concern status of Eskom. Eskom was successful with its revenue adjustment application for the MYPD 2 where NERSA allowed an additional 4.69% price increase effective 1 April 2015. Eskom experienced a major challenge in managing the supply and demand of electricity which was exacerbated by the decline in the generation plant performance. Regrettably, Eskom had to implement rotational load curtailment and load shedding to manage the power supply system. A total of 548GWh was lost due to load shedding which accounted for 0.3% of total sales. It was necessary to shut down the Majuba power station on 30 November 2014 as a result of the collapse of one of the coal silos. A temporary plan was implemented to get the power station back into commercial operation and the power station is currently operating near full capacity. It will take a while to implement a permanent solution to restore the power station back to full capacity. Turnaround strategy Eskom developed a turnaround strategy during November 2014 to address the decline in performance and stabilise the business. The government of South Africa also constituted an inter-governmental team to assist Eskom. The turnaround strategy incorporated the initiatives from the inter-governmental task team and the Eskom executive committee and focuses on four key areas: financial sustainability, operational sustainability, revenue and customer sustainability as well as asset creation sustainability. Certain key milestones that have been achieved by the inter-governmental task team include a request for proposal for a coal IPP that has been issued by the Department of Energy. A request for information for demand management interventions was also issued. A memorandum of understanding has been signed regarding the supply of diesel. The IPP contracts that expired at the end of March 2015 were renewed for another year. There will be focus on accelerating the conversion of the Open-Cycle Gas Turbines (OCGTs) from diesel fuel to gas and diesel as fuel source. Eskom needs space to execute philosophy-based preventative maintenance to improve plant performance while avoiding load shedding. The immediate focus will be on sustained maintenance and operational efficiency to reduce the unpredictable breakdowns in plant and in the medium- to long-term to commission new generation capacity to alleviate the constrained power supply system. Performance in terms of the shareholder compact The government, represented by the Minister of Public Enterprises, is Eskom’s sole shareholder. Eskom agrees on its performance objectives, measures, indicators and targets each year in consultation with the shareholder and in line with the Public Finance Management Act (PFMA). Quarterly performance reports are provided to the shareholder. Eskom prepares a corporate plan annually to comply with the requirements of the PFMA and the National Treasury Regulations. The consolidated corporate plan is submitted to the Department of Public Enterprises and National Treasury annually. The latest plan covers the five-year period from 1 April 2015 to 31 March 2020 and focuses on Eskom’s response plan to its changing environment. Annual Financial Statements | 31 March 2015 5 Directors’ report (continued) for the year ended 31 March 2015 Business performance (continued) Performance in terms of the shareholder compact (continued) The table sets out Eskom’s performance in terms of key performance indicators (KPIs) in the shareholder compact that was reviewed by the external auditors. Shareholder compact performance 2014/15 Company Key performance Key performance indicator Unit Target Target Actual Actual Actual areas 2014/15 met 2014/15 2013/14 2012/13 Focus on safety Employee lost-time injury rate index 0.35 0.33 0.31 0.40 Sustainable asset Outstanding maintenance backlog1 number 1 2 5 n/a base whilst ensuring Demand savings MW 246.0 171.5 409.6 595.0 security of supply Internal energy efficiency: Energy savings non-essential consumption GWh 10.0 10.4 19.4 28.9 Put customer at the Eskom KeyCare2 % 102.0 108.7 108.7 105.8 centre Enhanced MaxiCare2 % 96.0 99.8 92.7 93.2 Improve operations Unplanned capability loss factor % ≤10.00 14.22 10.98 8.71 Energy availability factor % 80.00 73.73 75.13 77.65 System average interruption frequency index 2 number 22.0 19.7 20.2 22.2 System average interruption duration index hours 43.0 36.2 37.0 41.9 System minutes <1 minutes 3.8 2.85 3.05 3.52 Deliver capital Generation capacity installed: first expansion synchronisation units 1 1 n/a n/a Generation capacity installed and commissioned MW 433 100 120 261 Transmission lines installed km 315.1 318.6 810.9 787.1 Transmission transformers installed and commissioned MVA 2 090 2 090 3 790 3 580 Reduce Relative particulate emissions (kg/MWh environmental sent out) kg/MWh 0.35 0.37 0.35 0.35 footprint in existing Specific water consumption (litres per kWh fleet sent out) L/kWh 1.39 1.38 1.35 1.42 Implement coal Migration of coal delivery volume from haulage and road-to-rail (additional tonnage transported the road-to-rail by rail) migration plan Mt 11.50 12.59 11.60 10.10 Ensure financial Cost of electricity (excluding depreciation) R/MWh 532.63 610.43 541.92 496.24 sustainability Interest cover3 ratio 0.69 0.44 0.65 0.27 Debt/equity (including long-term provisions) ratio 2.48 2.70 2.21 1.96 Free funds from operations as % of gross debt3 % 7.63 2.37 9.21 8.55 Key: Actual performance met or better than target Actual performance did not meet the target Actual performance almost met the target 1. The comparative for this indicator was restated. 2. The comparative for the indicator was not reviewed by the external auditors. 3. These indicators have been calculated in line with the shareholder compact definitions that could differ from the definitions applied in note 4.4 due to the changes and reclassifications made as outlined in note 48. 6 Eskom Holdings SOC Ltd Company Key performance Key performance indicator Unit Target Target Actual Actual Actual areas 2014/15 met 2014/15 2013/14 2012/13 Maximise Local content contracted (Eskom-wide)2 % 65.00 25.13 40.80 n/a socio-economic Local content contracted (new build) % 65.00 33.62 54.60 80.20 contribution: procurement equity Percentage of broad-based black economic empowerment spend against total measured procurement spend (TMPS) % 75.00 88.89 93.90 86.30 Procurement spend with black-owned suppliers as % of TMPS2 % 12.50 34.91 32.70 22.10 Procurement spend with black women- owned suppliers as % of TMPS2 % 6.00 6.61 7.20 4.70 Procurement spend with black youth-owned spend against TMPS % 2.00 0.64 1.00 1.00 Procurement spend with suppliers owned by black people living with disabilities as % of TMPS2 % 1.00 0.00 0.00 n/a Procurement spend with qualifying small enterprises and exempted micro enterprises as % of TMPS2 % 12.50 11.86 11.90 n/a Maximise Disability equity in total workforce % 2.50 3.12 2.99 2.59 socio-economic Racial equity in senior management, % black contribution: employees % 60.00 61.58 59.50 58.30 employment equity Racial equity in professionals and middle management, % black employees % 70.00 72.28 71.20 69.60 Gender equity in senior management, % female employees % 31.00 29.83 28.90 28.20 Gender equity in professionals and middle management, % female employees % 37.00 36.10 35.80 34.60 Build strong skills Training spend as % of gross employee benefit costs % 5.00 6.18 7.87 n/a Learner throughput or qualifying number 1 200 424 n/a n/a The reasons for the variances between the actual compared to the targeted KPI performance for the year are as follows: Focus on safety • Employee lost-time injury rate (LTIR) (actual better than target by 0.02) – the improvement in employee LTIR can be attributed to the safety improvement initiatives implemented, and the significant efforts undertaken to manage the safety of employees and contractors more effectively, including the continued focus on compliance with occupational health and safety requirements. Motor vehicle accidents, slips, trips and falls are the major causes of lost-time injuries for both employees and contractors Sustainable asset base whilst ensuring security of supply • Outstanding maintenance backlog number (actual worse than target by 1) – Eskom rigorously pursued the execution of outages, but due to the need to balance supply with demand in a constrained environment, Eskom was unable to execute all the outages within the planned timeframe • Demand savings (actual worse than target by 74.5MW) – the verified demand savings are significantly below target due to lack of funding • Internal energy efficiency (actual better than target by 0.4GWh) – the internal energy efficiency programme yielded results better than target Put customer at the centre • Eskom KeyCare (actual better than target by 6.7%) – the good score in KeyCare can be attributed to the fact that Eskom continuously informs customers of the system status which assists top customers in planning their operational activities • Enhanced MaxiCare (actual better than target by 3.8%) – the good result in enhanced MaxiCare is mainly because of the implementation of the customer service improvement plan Annual Financial Statements | 31 March 2015 7 Directors’ report (continued) for the year ended 31 March 2015 Business performance (continued) Performance in terms of the shareholder compact (continued) Shareholder compact performance 2014/15 (continued) Improve operations • Unplanned capability loss factor (UCLF) (actual worse than target by 4.22%) – UCLF deteriorated due to the increase in partial load losses (5.65%), boiler tube failures (2.08%), unit trips and the three major incidents (2.58%) that occurred during the year (Duvha unit 3 incident, Majuba coal silo collapse and Kendal unit 2 outage slip) • Energy availability factor (EAF) (actual worse than target by 6.27%) – the EAF reduced due to increases in the UCLF and the ageing plant that requires increased maintenance – the EAF was also impacted by the Duvha unit 3 incident, Kendal unit 2 outage slip and Majuba coal silo incident • System average interruption frequency index (SAIFI) and system average interruption duration index (SAIDI) both better than target – the good performance in these indicators is as a result of previous investments in refurbishment and strengthening of the transmission and distribution networks • System minutes lost for events <1 minute (actual better than target by 0.95 minutes) – the good performance in system minutes lost smaller than one is a result of a reduction in line faults and plant failures Deliver capital expansion • Generation capacity installed: first synchronisation (actual equals target) – the first synchronisation of Medupi power station unit 6 was achieved on 2 March 2015 • Generation capacity installed and commissioned (actual below target by 333MW) – the Sere wind farm (100MW) was placed into commercial operation on 31 March 2015. The commissioning of Ingula power station unit 3 (333MW) was delayed as work was suspended by the Mine Health and Safety Inspectorate investigation after the Ingula accident in 2013 • Transmission lines installed (actual exceeded target by 3.5km) – the target of 315.1km transmission lines installed was marginally exceeded • Transmission transformers installed and commissioned (actual equals target) – the Kusile high voltage yard transformers (90MVA) and the Sterrekus substation (2 000MVA) were commissioned Reduce environmental footprint in existing fleet • Relative particulate emissions (actual worse than target by 0.02kg/MWh) – slow progress was made on the installation or maintenance of the necessary emission control equipment at high emitting power stations because the power stations could not be shut down for the installation or maintenance due to supply constraints • Specific water consumption (actual better than target by 0.01L/kWh sent out) – the water performance target was met Implement coal haulage and the road-to-rail migration plan • Migration of coal delivery volume from road to rail, additional tonnage transported by rail (exceeded target by 1.09Mt) – the target for migration of coal delivery was exceeded through a collaborative effort by all relevant stakeholders Ensure financial sustainability • Cost of electricity, excluding depreciation (actual worse than target by R77.80/MWh) – the cost of electricity was higher than target as a result of overspending in primary energy cost (mainly OCGT and IPP costs and the delay in commissioning the Medupi power station) and sales volumes that were 2.4TWh lower than target • Interest cover ratio (actual worse than target by 0.25) – the weak interest cover ratio was as a result of an increase in net finance costs due to higher levels of debt as well as a decline in profit before interest and tax • Debt/equity including long-term provisions (actual worse than target by 0.22) – Eskom’s debt increased and the profit decreased as a result of lower sales volumes and over expenditure in primary energy. Debt has increased more than equity • Free funds from operations (FFO) as % of gross debt (worse than target by 5.26%) – free funds from operations were lower than target as a result of lower sales volumes and over expenditure in primary energy Maximise socio-economic contribution: procurement equity • Local content contracted, Eskom-wide (actual below target by 39.87%) and local content contracted, new build (actual below target by 31.38%) – the below target performance for these indicators was as a result of the decrease in the number of new build contracts awarded with supplier development and localisation obligations and the decline in larger contracts relating to the capital expansion programme where larger contracts were awarded in the early stages of the build programme • Percentage of broad-based black economic empowerment spend (actual exceeded target by 13.89%), procurement with black-owned suppliers (actual exceeded target by 22.41%) and black women-owned suppliers (actual exceeded target by 0.61%) – the above target performance for these indicators was as a result of the increase in the number of black-owned vendors that have obtained high value contracts • Procurement spend with black youth-owned suppliers (actual worse than target by 1.36%), with qualifying small enterprises and exempted micro enterprises (actual worse than target by 0.64%) and black people living with disabilities (actual worse than target by 1%) – targets were not met for these measures due to the implementation of the Preferential Procurement Policy Framework Act which places restrictions on the awarding of contracts and therefore limits the ability to reserve contracts for low value contractors 8 Eskom Holdings SOC Ltd Maximise socio-economic contribution: employment equity • Disability equity in total workforce (actual better than target by 0.62%) – the increased performance for this measure was as a result of the disability drive that Eskom launched to move towards a more disability- friendly environment • Racial equity in senior management (actual better than target by 1.58%) and in professionals and middle management (actual exceeded target by 2.28%) – the targets in both categories were met because of continued management attention • Gender equity in senior management (actual worse than target by 1.17%) and in professionals and middle management (actual worse than target by 0.9%) – the gender targets were not met as a result of the limit placed on headcount numbers, the lack of opportunities to appoint because of financial constraints and the impact of natural attrition Build strong skills • Training spend as a % of gross employee benefit costs (actual exceeded target by 1.18%) – training spend was marginally above target • Learner throughput or qualifying (actual below target by 776 learners) – the learner target was not achieved as a result of financial constraints Financial sustainability Eskom’s financial health has been influenced by its profit margins that have been declining mainly due to the electricity price which is not cost reflective. While Eskom’s asset base increased with the capacity expansion plan, the profit margin declined. This resulted in Eskom experiencing a liquidity constraint that directly impacts on its financial sustainability. Obtaining parity between the price of electricity and the associated costs plus a margin will form a fundamental part of the shift towards financial sustainability. This is exacerbated by the funding required for the construction of the Medupi, Kusile and Ingula power stations and the transmission network. In addition, compliance with the new atmospheric emission legislation will significantly increase financial obligations. Eskom spent R265.1 billion since 2005 on the capital expansion programme that was mostly funded by borrowings. The capital expenditure in terms of the latest corporate plan over the next five years amounted to R293 billion, while the borrowing plan for the next five years is only R237 billion. Eskom has to raise an additional estimated R50 billion to prevent delays in some of the capital projects. Going concern and liquidity Eskom is taking several steps to address the current financial position and the future financial sustainability of Eskom. It is critical that Eskom’s rate of return on assets should not be less than its cost of capital. Migration to a cost-reflective price of electricity therefore remains of critical importance. Eskom’s rate of return (pre-tax, real) on its assets has been too low for too long, resulting in the weakening of Eskom’s financial position. Some of the actions taken to address the financial position include: • NERSA announced its decision on 30 July 2014 to allow Eskom to recoup R7.8 billion in respect of the under recoveries for the MYPD 2 period. The R38 billion revenue adjustment application for the first year of MYPD 3 is currently under review by NERSA. Eskom also submitted further revenue adjustment applications for the liquidation of the R8.1 billion equity return postponed during MYPD 2, and the selective reopener to increase the OCGT usage, the potential increase in the environmental levy by 2c/kWh as well as to extend the short-term IPPs until the end of MYPD 3 • Eskom implemented the BPP which successfully contributed towards a reduction in certain cost categories during the year. Savings of R9 billion were achieved to date • the government will inject equity of about R23 billion into Eskom during the 2016 and 2017 financial years. The first R10 billion is expected in June 2015 • Eskom had reasonable success in managing both the current liquidity and the longer-term funding requirements, and is methodically implementing the approved borrowing programme of R237 billion for 2016 to 2020. Debt securities and borrowings increased by R43 billion during the year to R297 billion for the group. The government support is critical to ensure continued operational activity without further constraints. The current borrowing programme does not incorporate any allocations of capital projects from the government’s Integrated Resource Plan 2010 after Kusile • two of the three credit rating agencies downgraded Eskom to sub-investment grade during the year which will increase the cost of funding and reduce availability of funding. Future downgrades could also trigger certain loan covenants. It is critical for Eskom to regain its investment grade credit rating. Eskom is meeting with the rating agencies to re-establish what is needed to regain their confidence and improve the credit grading • Eskom reached a point where it can no longer continue to provide power without receiving payment in return. Eskom approved the application of various load management interventions in March 2015 for the top defaulting municipalities to limit its financial risk exposure. Eskom issued a media statement on 10 April 2015 of its intention to interrupt supply to 20 defaulting municipalities. Subsequently 10 municipalities have made payment arrangements with Eskom and their supply will not be interrupted as long as they adhere to the agreed repayment plan • the residential revenue management strategy implemented in Soweto focuses on energy protection and energy loss programmes through the installation of split metering and the conversion of the meters of non-paying credit metering customers to prepaid meters Annual Financial Statements | 31 March 2015 9 Directors’ report (continued) for the year ended 31 March 2015 Business performance (continued) Financial sustainability (continued) Going concern and liquidity (continued) Eskom’s cash flow performance for the year was as follows: • cash and cash equivalents at 31 March 2015, together with liquid investment in securities, amounted to R17.4 billion (2014: R30.6 billion). The liquidity reserves consist of R4.8 billion of South African government bonds and the balance in money market assets and call deposits • the net cash inflow from operating activities for 2015 was R27.3 billion (2014: R23.6 billion) • cash flows used for investing during the year amounted to R56.4 billion (2014: R56.5 billion) of which the majority relates to property, plant and equipment as well as intangible assets • the net cash inflows from financing activities for the year were R18.0 billion (2014: R41.5 billion). The raising of borrowings and the issuing of securities have been managed to match the capital expenditure. Gross debt increased by R49.5 billion (2014: R44.1 billion) during the year while R14.4 billion (2014: R8.0 billion) was repaid during the year and interest repaid during the year amounted to R17.1 billion (2014: R13.1 billion) • the forward liquidity outlook indicates that cash and cash equivalents will be below the R20 billion liquidity buffer within the next 12 months, but will not reach zero Funding and borrowing programme The downgrade of Eskom’s credit ratings to sub-investment grade by both Moody’s and Standard & Poor’s during the year could lead to increased cost of debt and reduced funding available for future borrowings or a decrease in the breadth of the investor base because of investor and trustee mandates. Investors may also request stricter loan covenants in future. Discussions have been held with development financing institutions for loans without guarantees to ensure that Eskom meets its obligations as per the loan covenants. Eskom issued a USD1.25 billion (R14.8 billion) 10-year bond in February 2015. Eskom also raised R17.2 billion from the domestic bond markets during the year through the issuance of bonds listed under the R150 billion domestic multi-term note programme. The market holdings of Eskom company commercial paper (issued for a period up to one year) decreased from R15 billion at 31 March 2014 to R7.2 billion at 31 March 2015. Eskom signed a loan agreement with Kreditanstalt für Wiederaufbau for an amount of R3.9 billion on 31 March 2015. Financial results The net profit after tax for the group for the year was R3.6 billion (2014: R7.1 billion). Revenue for the group for the year was R147.7 billion (2014: R138.3 billion). Electricity revenue of R597 million, mostly for municipalities and Soweto, was not recognised as it was assessed that there is a high probability that the related economic benefits will not materialise. Despite this, Eskom continues to actively pursue recovery of these amounts. Electricity sales of 216 274GWh declined by 1 629GWh or 0.7% from the previous year (2014: 217 903GWh). Downscaling of operations of some mines and industries and the prolonged labour unrest resulted in a negative impact on sales numbers. Primary energy costs (including coal, water and liquid fuels) increased to R83.4 billion (2014: R69.8 billion). Due to the generation demand- supply constraints, Eskom incurred additional costs to balance the demand-supply equation by using the expensive OCGT stations and more renewable and short-term IPPs to address the supply shortfall. The cost of OCGTs was R9.5 billion (2014: R10.6 billion) while the cost of IPPs was R9.5 billion (2014: R3.3 billion). OCGTs added 3 709GWh (2014: 3 621GWh) and IPPs 6 022GWh (2014: 3 671GWh) to the energy mix. Eskom also provided for the Medupi take or pay agreement as per the contractual obligation. The number of employees in the group (inclusive of fixed-term contractors) decreased from 46 919 in 2014 to 46 490 this year. The net fair value gain on embedded derivatives for the year amounted to R1.3 billion (2014: R2.1 billion). The fair value gain on financial instruments contributed R630 million to the profit in 2015 compared to a loss of R620 million in 2014. Gross finance costs for the year were R26.5 billion (2014: R20.5 billion), mainly due to an increase in interest on debt securities and borrowings. During the year R17.4 billion (2014: R13.3 billion) of interest cost was capitalised. Gross finance costs include the interest cost in respect of the unwinding of the environmental, employee and other provisions amounting to R4.3 billion (2014: R2.7 billion). Operational sustainability Good transmission network performance was achieved with system minutes (less than one) measured at 2.85 against the target of 3.80. Investments made in the distribution network continue to yield good network performance, with the SAIDI and SAIFI technical measures exceeding the targets for the year. The SAIDI performance measure improved over the last five years by 33.4% whilst the SAIFI measure improved by 20%. Capacity of 5 701MW has been contracted with IPPs at 31 March 2015. Eskom signed contracts for a total of 3 887MW under the IPP procurement programme since inception. A total of 1 795MW of renewable IPP generation capacity has been connected and is providing power to the grid. Renewable projects with signed power purchase agreements are at various stages in the construction phase. Over 60% of Eskom’s coal-fired power stations have reached or are past their mid-life cycle and they require more regular and intense plant maintenance. Eskom experienced a significant increase in planned and unplanned outages, including the Duvha unit 3 boiler pressurisation event and the Majuba coal silo incident. Plant availability (EAF) decreased from 85.2% to 74.7% (target 80%) over the last five years. The UCLF was 14.2% against a target of 10%. Partial load losses, boiler tube failures and significant incidents were the main contributors to the total system unplanned losses. 10 Eskom Holdings SOC Ltd Sustainable asset creation A total of 6 237MW of generating capacity, 5 816km of transmission network and 29 655MVA of transmission sub-station capacity have been completed at a cost of R265.1 billion from inception of the build programme to 31 March 2015. The first synchronisation of Medupi unit 6 was achieved on 2 March 2015. The completion and optimisation of unit 6 is proceeding to plan, with full load expected to be achieved during the end of the second quarter of 2015 and commercial operation in the third quarter of 2015. The Sere wind farm with a generating capacity of 100MW was placed into commercial operation on 31 March 2015. The first unit of Kusile power station will be synchronised in the first half of 2017. Limited progress was made at Ingula power station during the last year due to the section 54 work stoppage imposed in November 2013, following the fatal accident in October 2013. The date of the first synchronisation of unit 3 of Ingula has been revised to the second half of 2016. Revenue and customer sustainability Debt collection of outstanding electricity receivables, especially from municipalities, remains a challenge with arrear debt increasing significantly compared to the previous year. Municipal arrear debt increased from R2.6 billion in 2014 to R5 billion in 2015 and the municipal debtors’ days were 47.6 against a target of 25. Environmental sustainability The Department of Environmental Affairs issued its decisions on Eskom’s Minimum Emission Standards postponement applications in February 2015. The decisions allowed power stations to continue operating from 1 April 2015 when the new standards became effective. Several power stations are reaching the end of their current ash storage capacity which may impact on electricity production if extensions to storage facilities are not done. These challenges are being addressed, including obtaining of the relevant funding. The particulate emission performance for the year was 0.37kg/MWhSO, worse than the year-end target of 0.35kg/MWhSO. Water performance for the year was slightly better than target at 1.38L/kWhSO, but worse than the 1.35L/kWhSO reported in the previous year. Transformation and social sustainability Eskom committed R115.5 million for its corporate social investment initiatives for the year. Financial constraints resulted in a lower budget than in prior years, leading to the reprioritisation and deferring of certain initiatives. A total of 159 853 (2014: 201 788) electrification connections were achieved during the year. Safety and security Eskom’s aspiration to achieve Zero Harm goes beyond compliance. Zero Harm means sustaining a work environment which supports the health and safety of its people. It also means building strong relationships with contractors, the community, the supply chain and enhancing the organisation in a sustainable way. Eskom sadly experienced three employee fatalities, seven contractor fatalities and 28 public fatalities during 2015. Governance and risk Directors Eskom’s board of directors is responsible for governing the company. The non-executive directors, including the chairman of the board and the chief executive, are appointed by the shareholder. The finance director is appointed by the board after approval of the candidate by the shareholder. The chairman cannot hold an executive position in the company and therefore cannot also be the chief executive. Mr TJ Matona was appointed as the chief executive of Eskom with effect from 1 October 2014. Mr MC Matjila, who acted as interim chief executive since 1 April 2014, resumed his position as a member of the board from that date. The cabinet approved the new board on 11 December 2014, which included four directors who were retained from the previous board – Mr ZA Tsotsi (chairman), Ms C Mabude, Mr TJ Matona (chief executive), Ms TBL Molefe (finance director). The chairman announced the suspension of two executive directors and two group executives following a board resolution to commission an independent enquiry on the current status of the business and its challenges. The independent enquiry will focus on the following: • poor performance of the generation plant assets • delay in bringing new generation capacity online • escalating costs of primary energy • cash flow challenges The suspension is for three months and is to ensure that the enquiry process is as transparent and uninhibited as possible. The suspended executives are the chief executive (Mr TJ Matona), the finance director (Ms TBL Molefe), the group executive: Group capital (Mr DL Marokane) and the group executive: Technology and commercial (Mr M Koko). A non-executive board member, Mr ZW Khoza, was appointed as interim chief executive. Ms NS Veleti was appointed as acting chief financial officer, Mr AA Masango as acting group executive: Group capital and Mr ET Mabelane as acting group executive: Commercial and technology. Mr ZA Tsotsi resigned on 30 March 2015 from his position as director and chairman of the board and on the same day Dr B Ngubane was appointed acting chairman of Eskom. Mr B Molefe was appointed as acting chief executive on 20 April 2015. Annual Financial Statements | 31 March 2015 11 Directors’ report (continued) for the year ended 31 March 2015 Governance and risk (continued) Directors (continued) Mr NT Baloyi was removed as a non-executive director on 22 April 2015 by the Minister of Public Enterprises due to a breach of fiduciary duties in terms of section 76 of the Companies Act. The auditors have, in accordance with the requirements of section 44 of the Auditing Profession Act, reported this matter to the Independent Regulatory Board for Auditors as a reportable irregularity. Ms M Cassim and Mr G Leonardi have been appointed as non-executive directors with effect from 25 May 2015. Eskom and Mr TJ Matona reached a mutual agreement to separate amicably effective 31 May 2015. The enquiry initiated by the board into the state of affairs at Eskom will continue. Mr Matona’s suspension falls away and the separation is in no way an anticipation of the outcomes of the enquiry. The board of directors at 28 May 2015 was as follows: Non-executive directors • Dr B Ngubane (acting chairman) • Mr G Leonardi • Ms N Carrim • Ms C Mabude • Ms M Cassim • Ms DV Naidoo • Mr ZW Khoza • Dr P Naidoo • Ms VJ Klein • Mr MV Pamensky • Mr R Kumalo Executive directors • Mr TJ Matona (chief executive) • Ms TBL Molefe (finance director) The following directors retired or resigned: • Mr NT Baloyi • Mr MC Matjila • Dr BL Fanaroff • Dr B Mehlomakulu • Ms Q Gungubele • Mr ME Mkwanazi • Ms N Lesela • Mr SPQ Sedibe • Ms B Luthuli • Mr ZA Tsotsi • Ms Y Masithela • Ms L Zondo Directors’ remuneration The remuneration of directors and the executives who were members of Exco during the financial year is disclosed in note 49 to the annual financial statements. Internal control and combined assurance The board, through the audit and risk committee, ensures that internal controls are effective and adequately reported on for auditing and regulatory purposes. In line with King Code of Governance Principles for South Africa, Eskom applies a combined assurance model to ensure coordinated assurance activities. This model gives the audit and risk committee an overview of significant risks, as well as the effectiveness of critical controls to mitigate these risks. The principles for the combined assurance model are embedded in the combined assurance framework. Eskom’s internal audit function is managed by the assurance and forensics department which reports directly to the audit and risk committee. For more information, refer to the audit and risk committee report on page 3. Risks facing Eskom The risk profile of Eskom changed significantly during the year, driven by challenges associated with the shortage of electricity supply which has led to the need to implement load shedding and load curtailment across the country and the continued financial constraints affecting the ability to sustain operations. Auditors The shareholder appointed the SizweNtsalubaGobodo Inc consortium as external auditors for the Eskom group at the annual general meeting held on 11 July 2014. 12 Eskom Holdings SOC Ltd Independent auditors’ report to Parliament and the shareholder – Minister of Public Enterprises Report on the financial statements Introduction We have audited the financial statements of the group and of Eskom Holdings SOC Ltd (Eskom) set out on pages 16 to 109, which comprise the statements of financial position as at 31 March 2015, the statements of comprehensive income, statements of changes in equity and statements of cash flows for the year then ended and the notes, comprising a summary of significant accounting policies and other explanatory information to the financial statements. Directors’ responsibility for the financial statements The board of directors, which constitutes the accounting authority, is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards (IFRS) and the requirements of the Public Finance Management Act (PFMA) and the Companies Act and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ responsibility for the financial statements Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the Public Audit Act (PAA), the General Notice issued in terms thereof and International Standards on Auditing. Those standards require that we comply with ethical requirements, and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated and separate financial statements present fairly, in all material respects, the financial position of the group and Eskom as at 31 March 2015 and their financial performance and cash flows for the year then ended, in accordance with IFRS and the requirements of the PFMA and the Companies Act. Emphasis of matter We draw attention to the matter below. Our opinion is not modified in respect of this matter. Going concern Without qualifying our opinion, we draw attention to note 4.4 of these financial statements regarding the directors’ assumptions made in preparing these financial statements on the going-concern basis. Additional matter Independent enquiry The directors’ report on page 11 indicates that the board of directors of Eskom commissioned an independent enquiry on the status of its business and the challenges it faces. To ensure that the process is transparent and uninhibited the board of directors suspended four executives on 12 March 2015 for a period of three months for the envisaged duration of the enquiry. Other reports required by the Companies Act As part of our audit of the financial statements for the year ended 31 March 2015, we have read the report of the audit and risk committee, the statement by the company secretary and the directors’ report for the purpose of identifying whether there are material inconsistencies between these reports and the audited financial statements. These reports are the responsibility of the respective preparers. Based on reading these reports we have not identified material inconsistencies between these reports and the audited financial statements. We have not audited these reports and accordingly do not express an opinion on them. Annual Financial Statements | 31 March 2015 13 Independent auditors’ report to Parliament and the shareholder – Minister of Public Enterprises (continued) Report on other legal and regulatory requirements Reportable irregularities In accordance with our responsibilities in terms of sections 44(2) and 44(3) of the Auditing Profession Act (APA), we report that we have identified certain unlawful acts committed by persons responsible for the management of Eskom which may be breaches of material fiduciary duties to the company which constitute reportable irregularities in terms of the APA and have reported these matters to the Independent Regulatory Board for Auditors. The matters pertaining to the reportable irregularities have been described under the Governance and risk section in the directors’ report and in note 51 of the financial statements. The conduct as described is to the best of our knowledge, no longer occuring. Public Audit Act Requirements In accordance with the PAA and the General Notice issued in terms thereof, we report the following findings relevant to the reported performance against predetermined objectives, compliance with laws and regulations as well as internal control. We performed tests to identify reportable findings as described under each subheading but not to gather evidence to express assurance on these matters. Accordingly, we do not express an opinion or conclusion on these matters. Predetermined objectives We performed procedures to obtain evidence about the usefulness and reliability of the information in the Performance in terms of the shareholder compact section included in the directors’ report as set out on pages 5 to 9 of the financial statements and reported thereon to the directors. The procedures performed were limited to the following selected objectives: • focus on safety • sustainable asset base whilst ensuring security of supply • put the customer at the centre • improve operations • implementing coal haulage and the road-to-rail migration plan • maximise socio-economic contribution: procurement equity • maximise socio-economic contribution: employment equity The reported performance against predetermined objectives was evaluated against the overall criteria of usefulness and reliability. We evaluated the usefulness of the reported performance information to determine whether it was presented in accordance with the National Treasury’s annual reporting principles and whether the reported performance was consistent with the planned objectives. We further performed tests to determine whether indicators and targets are well defined, verifiable, specific, measurable and time bound and relevant as required by the National Treasury’s Framework for Managing Programme Performance Information. We assessed the reliability of the reported performance information to determine whether it was valid, accurate and complete. We did not identify any material findings on the usefulness and reliability of the reported performance information for the selected objectives as reported in the Performance in terms of the shareholder compact section included in the directors’ report. Additional matter Although we raised no material findings on the usefulness and reliability of the reported performance information for the selected objectives, we draw attention to the following matter: Achievement of planned targets Refer to the information in the Performance in terms of the shareholder compact section included in the directors’ report as set out on pages 5 to 9 for information on the achievement of planned targets for the year. Compliance with laws and regulations We performed procedures to obtain evidence that the public entity had complied with laws and regulations regarding financial matters, financial management and other related matters. Our findings on material non-compliance with specific matters in key legislation, as set out in the general notice issued in terms of the PAA, are as follows: Expenditure management The accounting authority did not take effective steps to prevent irregular expenditure as required by section 51(1)(b)(ii) of the Public Finance Management Act. Internal control We considered internal control relevant to our audit of the financial statements, the Performance in terms of the shareholder compact included in the directors’ report and compliance with laws and regulations, but not for expressing an opinion on the effectiveness of internal control. The matters reported below are limited to the significant internal control deficiencies that resulted in our opinion and the findings on non-compliance with laws and regulations included in this report. 14 Eskom Holdings SOC Ltd Leadership The public entity did not exercise adequate oversight responsibility regarding compliance with applicable laws and regulations which resulted in instances of irregular expenditure. The public entity’s executive management did not provide adequate and effective leadership based on a culture of honesty and ethical business practices protecting and enhancing the best interests of the entity. Other reports Investigations During the financial year under review the group conducted investigations into alleged irregularities, fraud and corruption within the procurement environment. No material findings were identified relating to the investigations completed during the year. At the reporting date, certain investigations are still ongoing. Audit related services As requested by Eskom Holdings SOC Ltd, the following engagement was conducted for the period 1 April 2014 to 31 March 2015: • National Treasury Public Entity Consolidation Template SizweNtsalubaGobodo Inc Registered auditor Per A Mthimunye Chartered Accountant (SA) Director 28 May 2015 20A Morris Street East Woodmead 2191 Annual Financial Statements | 31 March 2015 15 Statements of financial position at 31 March 2015 Group Company 2015 2014 2015 2014 Note Rm Rm Rm Rm Assets Non-current assets 505 198 439 869 498 326 433 440 Property, plant and equipment 6 455 977 401 373 457 468 402 207 Intangible assets 7 2 904 3 016 2 746 2 810 Investment in equity-accounted investees 8 348 318 95 95 Investment in subsidiaries 9 – – 455 2 337 Future fuel supplies 10 9 079 8 744 9 079 8 744 Deferred tax 11 230 339 – – Investment in securities 12 2 481 4 841 2 481 4 841 Loans receivable 13 8 646 8 654 – – Derivatives held for risk management 14 19 242 9 361 19 242 9 361 Finance lease receivables 15 500 520 500 520 Payments made in advance 16 3 004 2 676 3 003 2 509 Trade and other receivables 17 2 787 27 3 257 16 Current assets 57 686 64 977 59 442 66 862 Inventories 18 16 033 12 422 15 896 12 135 Taxation 94 47 – – Investment in securities 12 6 015 6 066 2 321 3 319 Loans receivable1 13 269 329 6 553 6 665 Derivatives held for risk management 14 709 2 812 709 2 812 Finance lease receivables 15 20 18 20 18 Payments made in advance 16 2 505 2 764 2 261 2 761 Trade and other receivables 17 16 856 16 578 18 553 16 882 Financial trading assets 19 6 322 4 265 5 143 3 226 Cash and cash equivalents 20 8 863 19 676 7 986 19 044 Non-current assets held-for-sale 21 – 147 – – Total assets 562 884 504 993 557 768 500 302 Equity Capital and reserves attributable to owner of the company 122 247 119 784 116 040 114 671 Liabilities Non-current liabilities 366 002 310 915 364 020 308 716 Debt securities and borrowings 24 277 458 234 562 275 954 233 042 Embedded derivatives 25 6 647 7 871 6 646 7 870 Derivatives held for risk management 14 520 310 520 310 Deferred tax 11 20 131 19 461 19 825 18 842 Deferred income 26 14 055 12 518 14 055 12 518 Employee benefit obligations 27 11 960 9 922 11 665 9 674 Provisions 28 31 078 21 157 31 039 21 093 Finance lease payables 29 474 488 637 705 Trade and other payables 30 1 015 1 037 1 015 1 073 Payments received in advance 31 2 664 3 589 2 664 3 589 Current liabilities 74 635 74 181 77 708 76 915 Debt securities and borrowings 2 24 19 976 20 258 22 176 22 227 Embedded derivatives 25 1 375 1 461 1 375 1 461 Derivatives held for risk management 14 2 845 1 197 2 845 1 197 Deferred income 26 863 774 863 774 Employee benefit obligations 27 3 926 4 561 3 661 4 256 Provisions 28 9 972 9 601 9 807 9 102 Finance lease payables 29 14 12 70 64 Trade and other payables 30 27 984 28 531 29 267 30 062 Payments received in advance 31 2 157 2 127 2 145 2 114 Taxation 24 1 – – Financial trading liabilities 19 5 499 5 658 5 499 5 658 Non-current liabilities held-for-sale 21 – 113 – – Total liabilities 440 637 385 209 441 728 385 631 Total equity and liabilities 562 884 504 993 557 768 500 302 1. Loans to subsidiaries of R6 553 million (2014: R6 665 million) that were previously disclosed separately are now included in loans receivable as the nature is considered to be the same. 2. Loans from subsidiaries of R2 559 million (2014: R2 453 million) that were previously disclosed separately are now included in debt securities and borrowings as the nature is considered to be the same. 16 Eskom Holdings SOC Ltd Income statements for the year ended 31 March 2015 Group Company Restated 1 Restated1 2015 2014 2015 2014 Note Rm Rm Rm Rm Continuing operations Revenue 32 147 691 138 313 147 691 138 313 Other income 33 4 444 1 441 6 645 1 873 Primary energy 34 (83 425) (69 812) (83 425) (69 812) Net employee benefit expense 35 (25 912) (25 622) (22 187) (22 384) Depreciation and amortisation expense 36 (14 115) (11 937) (14 001) (11 934) Net impairment loss 37 (3 766) (1 557) (3 755) (1 549) Other expenses 38 (15 771) (19 177) (22 083) (24 340) Profit before net fair value gain/(loss) and net finance cost 9 146 11 649 8 885 10 167 Net fair value gain/(loss) on financial instruments, excluding embedded derivatives 39 630 (620) 539 (753) Net fair value gain on embedded derivatives 1 310 2 149 1 310 2 149 Profit before net finance cost 11 086 13 178 10 734 11 563 Net finance cost (6 109) (4 058) (6 769) (4 619) Finance income 40 2 996 3 189 2 360 2 622 Finance cost 41 (9 105) (7 247) (9 129) (7 241) Share of profit of equity-accounted investees after tax 8 49 43 – – Profit before tax 5 026 9 163 3 965 6 944 Income tax 42 (1 366) (2 137) (1 169) (1 520) Profit for the year from continuing operations 3 660 7 026 2 796 5 424 Discontinued operations (Loss)/profit for the year from discontinued operations 21 (42) 63 – – Profit for the year 3 618 7 089 2 796 5 424 Attributable to: Owner of the company 3 618 7 089 2 796 5 424 Non-controlling interest 2 – – – – 3 618 7 089 2 796 5 424 Statements of comprehensive income for the year ended 31 March 2015 Group Company 2015 2014 2015 2014 Note Rm Rm Rm Rm Profit for the year 3 618 7 089 2 796 5 424 Other comprehensive (loss)/income (1 155) 3 556 (1 162) 3 605 Items that may be reclassified subsequently to profit or loss (501) 2 925 (525) 2 948 Available-for-sale financial assets – net change in fair value (63) (377) (64) (376) Cash flow hedges Effective portion of changes in fair value 471 5 697 471 5 697 Changes in fair value 528 5 951 528 5 951 Ineffective portion of changes in fair value reclassified to profit or loss (57) (254) (57) (254) Net amount transferred to initial carrying amount of hedged items (1 136) (1 226) (1 136) (1 226) Foreign currency translation differences on foreign operations 24 (23) – – Income tax thereon 42 203 (1 146) 204 (1 147) Items that may not be reclassified subsequently to profit or loss (654) 631 (637) 657 Re-measurement of post-employment medical benefits 27.1 (909) 882 (884) 912 Income tax thereon 42 255 (251) 247 (255) Total comprehensive income for the year 2 463 10 645 1 634 9 029 Total comprehensive income for the year attributable to: Owner of the company 2 463 10 645 1 634 9 029 Non-controlling interest 2 – – – – 2 463 10 645 1 634 9 029 1. Refer to note 48. 2. Nominal amount. Annual Financial Statements | 31 March 2015 17 Statements of changes in equity for the year ended 31 March 2015 Attributable to owner of the company Share Equity Cash flow Available- Unrealised Foreign Accumulated Total Non- Total capital1 reserve2 hedge for-sale fair value currency profit7 controlling equity reserve3 reserve 4 reserve5 translation interest1 reserve6 Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm Group Balance at 31 March 2013 – 30 520 2 959 321 (3 648) 17 78 970 109 139 – 109 139 Profit for the year – – – – – – 7 089 7 089 – 7 089 Other comprehensive income/(loss), net of tax – – 3 219 (271) – (23) 631 3 556 – 3 556 Transfer between reserves – – – – (4 096) – 4 096 – – – Balance at 31 March 2014 – 30 520 6 178 50 (7 744) (6) 90 786 119 784 – 119 784 Profit for the year – – – – – – 3 618 3 618 – 3 618 Other comprehensive (loss)/ income, net of tax – – (479) (46) – 24 (654) (1 155) – (1 155) Transfer between reserves – – – – 3 973 – (3 973) – – – Balance at 31 March 2015 – 30 520 5 699 4 (3 771) 18 89 777 122 247 – 122 247 Company Balance at 31 March 2013 – 30 520 2 959 322 (3 648) – 75 489 105 642 – 105 642 Profit for the year – – – – – – 5 424 5 424 – 5 424 Other comprehensive income/(loss), net of tax – – 3 219 (271) – – 657 3 605 – 3 605 Transfer between reserves – – – – (4 096) – 4 096 – – – Balance at 31 March 2014 – 30 520 6 178 51 (7 744) – 85 666 114 671 – 114 671 Profit for the year – – – – – – 2 796 2 796 – 2 796 Other comprehensive loss, net of tax – – (479) (46) – – (637) (1 162) – (1 162) Transfer between reserves – – – – 3 973 – (3 973) – – – Common control transfer 8 – – – – – – (265) (265) – (265) Balance at 31 March 2015 – 30 520 5 699 5 (3 771) – 83 587 116 040 – 116 040 Dividends proposed No dividend has been proposed in the current or prior year. There are no restrictions on the distribution of dividends. 1. Nominal amount. 2. The equity reserve comprises the day-one gain on initial recognition of the subordinated loan from the shareholder. Refer to note 24. 3. The cash flow hedge reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments (forward exchange contracts and cross-currency swaps) related to hedged transactions that have not yet occurred. The cross-currency swap hedges foreign exchange rate risk of the future interest payments and the principal repayment on bonds and loans (denominated in US dollar, euro and yen). 4. The available-for-sale reserve comprises the cumulative net change in the fair value of available-for-sale financial assets until the investments are derecognised. 5. The cumulative net change in the fair value of financial instruments that have not been designated as cash flow hedging instruments is recognised in profit or loss. The unrealised portion of the net change in fair value is not distributable and has been reallocated from a distributable reserve (accumulated profit) to a non-distributable reserve. 6. The foreign currency translation reserve comprises exchange differences resulting from the translation of the results and financial position of foreign operations. 7. Accumulated profit is the amount of cumulative profit retained in the business after tax. 8. Refer to note 9. 18 Eskom Holdings SOC Ltd Statements of cash flows for the year ended 31 March 2015 Group Company Restated 1 Restated1 2015 2014 2015 2014 Note Rm Rm Rm Rm Cash flows from operating activities Cash generated from operations 43 27 528 22 841 25 450 22 733 Net cash flows (used in)/from derivatives held for risk management (751) 676 (751) 676 Interest received 697 445 696 443 Interest paid (10) (136) (10) (136) Income taxes paid (153) (184) – – Net cash from operating activities 27 311 23 642 25 385 23 716 Cash flows used in investing activities Proceeds from disposal of property, plant and equipment 139 28 136 23 Proceeds from disposal of intangible assets 19 – 19 – Acquisitions of property, plant and equipment (51 578) (52 137) (50 409) (52 658) Acquisitions of intangible assets (846) (1 023) (795) (953) Expenditure on future fuel supplies (1 999) (2 675) (1 999) (2 675) Increase in payments made in advance (966) (2 088) (966) (2 088) Expenditure incurred on provisions (1 670) (1 349) (1 670) (1 349) Net cash flows from derivatives held for risk management 253 2 747 253 2 747 Decrease in investment in securities (946) (310) – – Net cash flows used in financial trading assets (20) (221) – – Decrease/(increase) in loans receivable 77 (459) 135 (442) Decrease in finance lease receivables 20 17 20 17 Net cash flows from non-current assets and liabilities held-for-sale 21 1 7 – – Proceeds from disposal of subsidiaries 21 14 – – – Dividends received 29 27 19 21 Dividends received – investment in equity-accounted investees 8 19 21 – – Interest received 1 068 954 465 394 Net cash used in investing activities (56 386) (56 461) (54 792) (56 963) Cash flows from financing activities Debt securities and borrowings raised 49 500 44 142 50 559 44 155 Payments made in advance to secure balances raised (187) (521) (187) (521) Debt securities and borrowings repaid (14 429) (8 014) (15 251) (7 488) Net cash flows (used in)/from derivatives held for risk management (1 982) 7 751 (1 982) 7 751 Decrease in investment in securities 3 071 6 058 3 071 6 058 Decrease in finance lease payables (111) (11) (163) (58) Net cash flows used in financial trading assets (2 534) (1 250) (2 534) (1 250) Net cash flows from financial trading liabilities 241 4 383 241 4 383 Interest received 1 449 2 083 1 417 2 047 Interest paid (17 064) (13 102) (17 106) (13 120) Net cash from financing activities 17 954 41 519 18 065 41 957 Net (decrease)/increase in cash and cash equivalents (11 121) 8 700 (11 342) 8 710 Cash and cash equivalents at beginning of the year 19 676 10 620 19 044 9 830 Foreign currency translation 24 (23) – – Effect of movements in exchange rates on cash held 284 504 284 504 Cash and cash equivalents at beginning of the year attributable to non-current assets and liabilities held-for-sale – (125) – – Cash and cash equivalents at end of the year 20 8 863 19 676 7 986 19 044 1. Refer to note 48. Annual Financial Statements | 31 March 2015 19 Statements of cash flows (continued) for the year ended 31 March 2015 Group Company Restated 1 Restated1 2015 2014 2015 2014 Note Rm Rm Rm Rm Reconciliation of net cash flow to movement in net debt Net increase in debt securities and borrowings 35 071 36 128 35 308 36 667 Net cash flows used in financial trading assets (2 534) (1 250) (2 534) (1 250) Net cash flows from financial trading liabilities 241 4 383 241 4 383 Decrease in finance lease payables (111) (11) (163) (58) Net cash flows (used in)/from derivatives held for risk management (2 480) 11 174 (2 480) 11 174 Decrease in investment in securities 3 071 6 058 3 071 6 058 Decrease/(increase) in loans receivable 77 (459) 135 (442) Net debt raised 33 335 56 023 33 578 56 532 Non-cash flow movements 4 696 503 4 695 464 Foreign currency translation (24) 23 – – Effect of movements in exchange rates on cash held (284) (504) (284) (504) Cash and cash equivalents at beginning of the year attributable to non-current assets and liabilities held-for-sale – 125 – – Net decrease/(increase) in cash and cash equivalents 11 121 (8 700) 11 342 (8 710) Movement in net debt for the year 48 844 47 470 49 331 47 782 Net debt at beginning of the year 210 267 162 797 213 935 166 153 Net debt at end of the year 259 111 210 267 263 266 213 935 Analysis of net debt Debt securities and borrowings 24 297 434 254 820 298 130 255 269 Financial trading assets (5 143) (3 226) (5 143) (3 226) Financial trading liabilities 19 5 499 5 658 5 499 5 658 Finance lease payables 29 488 500 707 769 Derivatives held for risk management 14 (16 586) (10 666) (16 586) (10 666) 281 692 247 086 282 607 247 804 Cash and cash equivalents 20 (8 863) (19 676) (7 986) (19 044) Investment in securities (4 802) (8 160) (4 802) (8 160) Loans receivable 13 (8 915) (8 983) (6 553) (6 665) Net debt at end of the year 259 112 210 267 263 266 213 935 1. Refer to note 48. 20 Eskom Holdings SOC Ltd Notes to the financial statements for the year ended 31 March 2015 1. General information Eskom Holdings SOC Ltd (Eskom), a state-owned company and holding company of the group, is incorporated and domiciled in the Republic of South Africa. Eskom is a vertically integrated operation that generates, transmits and distributes electricity to industrial, mining, commercial, agricultural, redistributors (ie municipalities), and residential customers and to international customers in southern Africa. These represent the significant activities of the group. The business focus of the subsidiaries is to primarily support the electricity business. The nature of the businesses of the significant operating subsidiaries is set out in note 9. 2. Summary of significant accounting policies The principal accounting policies applied in the preparation of these separate and consolidated financial statements are set out below. 2.1 Basis of preparation and measurement Statement of compliance The consolidated financial statements of Eskom at and for the year ended 31 March 2015 comprise the company, its subsidiaries, joint ventures, associates and structured entities (together, the group). The separate and consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and in the manner required by the Public Finance Management Act (PFMA), and the Companies Act. The financial statements have been prepared on the going-concern basis. Basis of measurement The separate and consolidated financial statements are prepared on the historical cost basis except for the following items which are measured at fair value: • investment in securities • derivatives held for risk management • financial trading assets • financial trading liabilities • embedded derivatives • non-current assets and liabilities held-for-sale The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are disclosed in note 3. Functional and presentation currency Items included in the financial statements of each of the group’s entities are measured using the currency of the primary economic environment in which the entity operates (functional currency). The consolidated financial statements are presented in South African rand (rounded to the nearest million unless otherwise stated), which is the company’s functional currency and the presentation currency of the group. Changes in accounting policies and comparability The group has consistently applied the accounting policies to all periods presented in these consolidated financial statements except for the new or revised statements and interpretations implemented during the year. The nature and effect of new standards and interpretations are discussed in note 50.2. 2.2 Consolidation Investment in subsidiaries Subsidiaries are entities (including structured entities) controlled by the group. The group controls an entity when it is exposed to, or has rights to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity’s relevant activities. Subsidiaries are consolidated from the date on which control is transferred to the group. They are deconsolidated from the date that control ceases. Investments in subsidiaries are accounted for at cost less impairment losses in the separate financial statements of the company. Disposal of subsidiaries When the group ceases to have control in an entity, any retained interest in the entity is re-measured to its fair value at the date when control is lost, with the change in carrying amount recognised in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are reclassified to profit or loss. Business combinations The group uses the acquisition method of accounting to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition- related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. On an acquisition-by-acquisition basis, the group recognises any non- controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets. Annual Financial Statements | 31 March 2015 21 Notes to the financial statements (continued) for the year ended 31 March 2015 2. Summary of significant accounting policies (continued) 2.2 Consolidation (continued) Business combinations (continued) Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated, but are considered an impairment indicator of the asset transferred. Accounting policies of subsidiaries have been adjusted where necessary, to ensure consistency with the policies adopted by the group. If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity interest in the acquiree is re-measured to fair value at the acquisition date; any gains or losses arising from such re-measurement are recognised in profit or loss. Any contingent consideration to be transferred by the group is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability is recognised in accordance with International Accounting Standard (IAS) 39 Financial instruments: recognition and measurement either in profit or loss or as a change to other comprehensive income. Contingent consideration that is classified as equity is not re-measured, and its subsequent settlement is accounted for within equity. Transactions with non-controlling interests The group treats transactions with non-controlling interests that do not result in a loss of control as transactions with equity owners of the group. For such purchases from non-controlling interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals of non-controlling interests are also recorded in equity. Joint arrangements A joint venture is an arrangement in which the group has joint control whereby the group has rights to the net assets of the arrangement, rather than direct rights to its assets and direct obligations for its liabilities. A joint operation is an arrangement in which the group has joint control whereby the group has direct rights to the assets and obligations for the liabilities relating to the arrangement. The group entity that is a joint operator of a joint operation accounts for its portion of the following in its separate financial statements: • assets, including its share of any assets held jointly • liabilities, including its share of any liabilities incurred jointly • revenue from the sale of its share of the output arising from the joint operation • share of the revenue from the sale of the output by the joint operation • expenses, including its share of any expenses incurred jointly Common control transactions The group accounts for common control transactions in the consolidated financial statements using the book value (predecessor) method of accounting. In applying the book value method, the acquirer in a common control transaction recognises the assets and liabilities acquired using the book values in the financial statements of the relevant entity. Any difference between the consideration paid and the book values of the assets and liabilities acquired is recognised directly in equity. Common control transactions, in which the company is the ultimate parent entity both before and after the transaction, are accounted for at book value in the company’s annual financial statements with no gain or loss recognised in profit or loss. The company also accounts for common control transactions in the separate financial statements using the book value method of accounting. In applying the book value method, the acquirer recognises the cost of its investment at the carrying amount of the investment recognised in the separate financial statements of the transferring entity. Any difference between the consideration paid and the cost of investment acquired is recognised directly in equity. Investment in equity-accounted investees Associates are all entities over which the group has significant influence but not control or joint control over the financial and operating policies, generally linked to a shareholding of 20% or more of the voting rights. Investments in associates and joint ventures are accounted for at cost less impairment losses in the separate financial statements of the company. These investments are accounted for using the equity method of accounting in the financial statements of the group. The group’s share of its associates’ and joint ventures’ post-acquisition profits or losses is recognised in profit or loss within share of profit of equity-accounted investees, and its share of post-acquisition movements in other comprehensive income is recognised directly in other comprehensive income. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the group’s share of losses in an associate or joint venture equals or exceeds its interest in the associate or joint venture, including any other unsecured receivables, the group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate or joint venture. Unrealised gains on transactions between the group and its associates or joint ventures are eliminated to the extent of the group’s interest in the associates or joint ventures. Unrealised losses are also eliminated, but are considered an impairment indicator of the asset transferred. Accounting policies of associates or joint ventures have been adjusted where necessary to ensure consistency with the policies adopted by the group. 22 Eskom Holdings SOC Ltd If the financial statements of the associate or joint venture are prepared as of a different date to that of the group, adjustments are made to the financial statements of the associate or joint venture for significant transactions and events that occur between the date of the financial statements of the associate or joint venture and the date of the financial statements of the group to enable the financial statements of the associate or joint venture to be used for the equity accounting of the associate or joint venture. The maximum time period between the date of the financial statements of the associate or joint venture and the date of financial statements of the group is three months. 2.3 Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the group’s executive management committee (Exco). An operating segment is a component of the group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the group’s other components. An operating segment’s results are reviewed regularly by Exco to make decisions about resources to be allocated to the segment and assess performance, and for which discrete financial information is available. 2.4 Foreign currency translation Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss, except when recognised in other comprehensive income for qualifying cash flow hedges. Changes in the fair value of monetary securities denominated in foreign currency classified as available-for-sale are analysed between translation differences resulting from changes in the amortised cost of the security, and other changes in the carrying amount of the security. Translation differences relating to changes in the amortised cost are recognised in profit or loss and other changes in the carrying amount are recognised in other comprehensive income within available-for-sale financial assets. Non-monetary items are measured at historical cost. Translation differences on non-monetary financial assets and liabilities, such as equities held at fair value through profit or loss, are recognised in profit or loss as part of the fair value gain or loss. Translation differences on non-monetary financial assets, such as equities classified as available-for-sale, are recognised in other comprehensive income within available-for-sale financial assets. Foreign loans are initially recognised at the exchange rate prevailing at transaction date and are translated at spot rate at every reporting date. Foreign exchange gains and losses that relate to loans and receivables, debt securities and borrowings are presented in profit or loss within net fair value gain/loss on financial instruments, excluding embedded derivatives. Foreign operations The assets and liabilities of foreign operations, including fair value adjustments arising on acquisition, are translated to rand at the prevailing exchange rates at the reporting date. The income and expenses of foreign operations, excluding foreign operations in hyperinflationary economies, are translated to rands at the average exchange rate. The group does not have any foreign operations in hyperinflationary economies. Foreign currency differences arising as a result of the above are recognised in other comprehensive income within the foreign currency translation reserve. 2.5 Property, plant and equipment Land and buildings comprise mainly office, power station, substation, workshop and related buildings. Property, plant and equipment is stated at cost less accumulated depreciation and impairment losses. Cost includes: • any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management • the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period • borrowing costs (refer to note 2.8) • transfers from equity of any gains or losses on qualifying cash flow hedges of foreign currency purchases of property, plant and equipment Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the group and the cost of the item can be measured reliably. When part of an asset is being replaced, the carrying amount of the replaced part is derecognised. Repairs and maintenance are charged to profit or loss during the financial period in which they are incurred. Annual Financial Statements | 31 March 2015 23 Notes to the financial statements (continued) for the year ended 31 March 2015 2. Summary of significant accounting policies (continued) 2.5 Property, plant and equipment (continued) Works under construction are stated at cost which includes cost of materials and direct labour and any other directly attributable costs incurred in bringing it to its present location and condition. Spare parts classified as strategic and critical spares are recognised as property, plant and equipment. Land is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows: Years Buildings and facilities 10 to 40 Plant • Generation 6 to 80 • Transmission 5 to 40 • Distribution 10 to 35 • Test, telecommunication and other plant 3 to 20 Equipment and vehicles 1 to 10 The depreciation method, residual values and useful lives of assets are reviewed, and adjusted if appropriate, at each reporting date. Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. Gains or losses on disposals are determined by comparing proceeds with the carrying amount. These gains or losses are included in profit or loss within other income or other expenses. Projects in works under construction that have been discontinued are written off and included in other expenses. 2.6 Intangible assets Licences Licences are shown at historical cost. Licences have a finite useful life and are carried at cost less accumulated amortisation and impairment losses. Amortisation is calculated using the straight-line method over a period of two to five years in order to allocate the cost of licences over their estimated useful life. Computer software Acquired computer software is capitalised on the basis of the costs incurred to acquire and bring to use the specific software. Amortisation is calculated using the straight-line method over a period of two to five years in order to allocate the cost of computer software over their estimated useful life. If software is integral to the functionality of related equipment, then it is capitalised as part of the equipment. Costs that are directly associated with the development of identifiable and unique software products controlled by the group, and that will probably generate economic benefits exceeding costs beyond one year, are recognised as intangible assets and amortised as above. Costs include employee costs incurred as a result of developing software, borrowing costs if relevant (refer to note 2.8) and other directly attributable costs. Costs associated with maintaining computer software programs are recognised as an expense as incurred. Rights Rights consist mainly of servitudes and rights of way under power lines. Rights are not amortised as they have an indefinite useful life. A servitude right is granted to Eskom for an indefinite period. The life of the servitude will remain in force as long as the transmission or distribution line is used to transmit electricity. Normally a servitude will only become impaired if the line to which the servitude is linked is derecognised. In practice, a derecognised line will be refurbished or replaced by a new line and therefore the likelihood of an impairment of a servitude right is remote. Concession assets Concession assets consists of rights to charge for the usage of the infrastructure under service concession arrangements. Concession assets are capitalised on the basis of the cost of capital expenditure incurred in respect of service concession arrangements (which is the fair value at initial recognition), including borrowing costs on qualifying capital expenditures (refer to note 2.8). Subsequent to initial recognition, the concession assets are measured at cost less accumulated amortisation and impairment losses. Concession assets are amortised over their estimated useful life, which is the concession period during which they are available for use (refer to note 2.9 and 22). Intangible assets arising from a service concession arrangement are included within intangible assets under concession assets. Research and development Research expenditure is recognised as an expense as incurred. Costs incurred on development projects (relating to the design and testing of new or improved products) are recognised as intangible assets when the following criteria are fulfilled: • it is technically feasible to complete the intangible asset so that it will be available for use or sale • management intends to complete the intangible asset and use or sell it • there is an ability to use or sell the intangible asset • it can be demonstrated how the intangible asset will generate probable future economic benefits • adequate technical, financial and other resources to complete the development and to use or sell the intangible asset are available • the expenditure attributable to the intangible asset during its development can be measured reliably 24 Eskom Holdings SOC Ltd Other development expenditure that does not meet these criteria is recognised in profit or loss within other expenses. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period. Capitalised development costs are recorded as intangible assets and amortised from the point at which the asset is ready for use on a straight-line basis over its useful life. Development costs previously capitalised that have been discontinued are written off and included in other expenses. 2.7 Impairment of non-financial assets The carrying amounts of the group’s non-financial assets, other than inventories, deferred tax assets and tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. These assets are also reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Assets that have an indefinite useful life (servitude rights) are not subject to amortisation or depreciation and are tested annually for impairment. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets that were subject to impairment are reviewed for possible reversal of the impairment at each reporting date. Impairment losses or reversals are recognised in profit or loss within net impairment loss. 2.8 Capitalisation of borrowing costs Borrowing costs attributable to the construction of qualifying assets are capitalised as part of the cost of these assets over the period of construction, until the asset is substantially ready for its intended use, to the extent that the assets are financed by borrowings. The capitalisation rate applied is the weighted average of the borrowing costs applicable to the borrowings of the entities in the group unless an asset is financed by a specific loan, in which case the specific rate is used. 2.9 Service concession arrangements A service concession arrangement is an arrangement involving an operator constructing and/or upgrading, operating and maintaining infrastructure used to provide a public service for a specified period of time. The operator is paid for its services over the period of the arrangement. The arrangement is governed by a contract that sets out performance standards, mechanisms for adjusting prices and arrangements for arbitrating disputes. The grantor (the party that grants the service arrangement) controls the infrastructure and the operator is required to return to the grantor the infrastructure at the end of the arrangement. Financial asset The group recognises a financial asset arising from a service concession arrangement to the extent that it has an unconditional right to receive cash or another financial asset from or at the direction of the grantor, for the construction, upgrade or operation services of concession assets. Financial assets recognised as a result of the service concession arrangement are measured at fair value upon initial recognition. Subsequent to initial recognition, the financial asset is accounted for in accordance with IAS 39 Financial instruments: recognition and measurement (refer to note 2.11). Financial assets arising from a service concession arrangement are included within trade and other receivables under other receivables (refer to note 17). Operation services The group accounts for revenue relating to operation services in accordance with IAS 18 Revenue whereby it is recognised in profit or loss within other income. Contractual obligations to maintain and restore the infrastructure The group accounts for the contractual obligations to maintain or restore the infrastructure in accordance with IAS 37 Provisions, contingent liabilities and contingent assets. The provision to restore the infrastructure is included within provisions. 2.10 Leases A lease is an agreement whereby the lessor conveys to the lessee, in return for a payment, or series of payments, the right to use an asset for an agreed period of time. An assessment in terms of International Financial Reporting Interpretation Committee (IFRIC) 4 Determining whether an arrangement contains a lease is made, as to whether the arrangement is dependent on the use of a specific asset and the arrangement conveys the right to use an asset to determine if an arrangement contains a lease (refer to note 6, 15 and 29). Finance leases – where the group is the lessee The group leases certain property, plant and equipment. Leases of property, plant and equipment where the group has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the lease’s commencement at the lower of the fair value of the leased asset and the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The corresponding rental obligations, net of finance charges, are included in other short-term and other long-term payables. The interest element of the finance cost is charged to profit or loss within finance cost over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The property, plant and equipment acquired under finance leases are depreciated or amortised over the shorter of the useful life of the asset and the lease term. Finance lease payables are derecognised in accordance with the derecognition requirements for financial liabilities. Derivatives embedded in leases are accounted for in accordance with the requirements for embedded derivatives. Refer to note 2.11. Annual Financial Statements | 31 March 2015 25 Notes to the financial statements (continued) for the year ended 31 March 2015 2. Summary of significant accounting policies (continued) 2.10 Leases (continued) Finance leases – where the group is the lessor When property, plant and equipment are leased out under a finance lease, the present value of the lease payments is recognised as a receivable. The difference between the gross receivable and the present value of the receivable is disclosed as unearned finance income within finance lease receivables. Lease income is recognised over the term of the lease using the net investment method, which reflects a constant periodic rate of return. Finance lease receivables are assessed for impairment and derecognised in accordance with the requirements for financial assets. Derivatives embedded in leases are accounted for in accordance with the requirements for embedded derivatives. Refer to note 2.11. Fair value The fair value of finance lease receivables and finance lease payables is determined by discounting the future cash flows with respect to the finance lease at the interest rate implicit in the lease. Operating leases Leases where substantially all of the risks and rewards of ownership are not transferred to the group are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to profit or loss within other expenses on a straight-line basis over the period of the lease. Leases where substantially all of the risks and rewards of ownership are not transferred to the lessee (ie the group is the lessor) are classified as operating leases. Payments received under operating leases are recognised in profit or loss within other income on a straight‑line basis over the period of the lease. 2.11 Financial instruments 2.11.1 Non-derivative financial instruments Recognition, measurement and derecognition of financial assets Non-derivative financial assets comprise investment in securities, financial trading assets, loans receivable, trade and other receivables, finance lease receivables and cash and cash equivalents. Cash and cash equivalents comprise balances with local and international banks, monies in call accounts, unsettled deals, short-term assets and money market assets with an original maturity of less than 90 days. Bank overdrafts are included within debt securities and borrowings in current liabilities on the statement of financial position. All non-derivative financial assets are recognised on the date of commitment to purchase (trade date). Financial assets are derecognised when the rights to receive cash flows from the investments have expired or the group has transferred substantially all the risks and rewards of ownership. Realised gains or losses on derecognition are determined using the last-in-first-out (LIFO) method. Non-derivative financial assets net of any directly attributable transaction costs are recognised initially at fair value. Directly attributable transaction costs related to financial assets at fair value through profit or loss are recognised in profit or loss on initial recognition when incurred. Subsequent to initial recognition, non-derivative financial assets are measured per asset category (as stated below). The appropriate classification of the financial asset is determined at the time of commitment to acquire the financial asset. When entering into a transaction, the financial instrument is recognised initially at the transaction price which is generally the best indicator of fair value. Where fair value of the financial instrument is different from the transaction price a day-one gain or loss may arise. The day-one gain or loss is immediately recognised in profit or loss (except for embedded derivatives and the subordinated loan from shareholder) within net fair value gain/(loss) on financial instruments, excluding embedded derivatives, provided that the fair value has been determined based on market-observable data. If the fair value has not been determined solely based on market-observable data, the day-one gain or loss is deferred in the statement of financial position and amortised over the term of the instrument in profit or loss. Financial assets at fair value through profit or loss (held-for-trading) Held-for-trading assets comprises financial trading assets. An instrument is classified at fair value through profit or loss if it is held-for- trading or is designated as such upon initial recognition. An instrument may only be designated at fair value through profit or loss when certain criteria are met. The group has elected not to designate financial assets at fair value through profit or loss. A financial asset is classified as held-for-trading if it is: • acquired for the purpose of selling it in the short term • part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent pattern of short-term profit taking • a derivative instrument Subsequent to initial recognition, changes in the fair value of these financial assets are recognised in profit or loss within net fair value gain/(loss) on financial instruments, excluding embedded derivatives. 26 Eskom Holdings SOC Ltd Loans and receivables Loans and receivables comprises trade and other receivables, loans receivable and cash and cash equivalents. The trade and other receivables of the group are classified as loans and receivables. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than: • those that management intends to sell immediately or in the short term, which are classified as held-for-trading • those that upon initial recognition are designated as available-for-sale • those for which the group may not recover substantially all of its initial investment, other than because of credit deterioration, which shall be classified as available-for-sale Subsequent to initial recognition, loans and receivables are measured at amortised cost using the effective interest method, less any accumulated impairment losses. Impairment A review for impairment indicators is carried out at each financial year end to determine whether there is any objective evidence that a financial asset not carried at fair value through profit or loss is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. In the case of equity securities classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost or adverse changes in the technological, market or economic environment in which the entity operates are considered to be indicators that the securities are impaired. An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate. Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics. All impairment losses are recognised in profit or loss within net impairment loss. An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised. For financial assets carried at amortised cost and available-for-sale financial assets that are debt securities, the reversal is recognised in profit or loss within net impairment (loss)/reversal. Where an asset has been impaired, the carrying amount of the asset is reduced through an allowance account. Loans and receivables that would otherwise have been impaired but have been renegotiated are initially accounted for as impaired debt immediately after having been renegotiated. Once a payment history in terms of the renegotiated agreement is established, the same impairment assessment as applicable to debt that has not been renegotiated is applied to assess whether the debt then should be impaired or not. Available-for-sale financial assets Available-for-sale assets comprises investment in securities. Available-for-sale financial assets are those assets that are designated as such or do not qualify to be classified as fair value through profit or loss, held-to-maturity or loans and receivables. Subsequent to initial recognition, available-for-sale financial assets are measured at fair value and changes therein, other than impairment losses and foreign exchange gains and losses (for monetary items), are recognised in other comprehensive income within available-for-sale financial assets. When the asset is derecognised, the cumulative gain or loss in equity is transferred to profit or loss. Impairment Impairment losses on available-for-sale financial assets are recognised by reclassifying the losses accumulated in the fair value reserve in equity, to profit or loss. The cumulative loss that is reclassified from equity to profit or loss is the difference between the acquisition cost, net of any principal repayment and amortisation, and the current fair value, less any impairment loss recognised previously in profit or loss. Changes in impairment provisions attributable to application of the effective interest method are reflected as a component of interest income. If, in a subsequent period, the fair value of an impaired available-for-sale debt security increases and the increase can be related objectively to an event occurring after the impairment loss was recognised in profit or loss, then the impairment loss is reversed, with the amount of the reversal recognised in profit or loss. However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognised in other comprehensive income. Fair value The fair values of trading assets and available-for-sale assets are based on quoted bid prices if available. For assets that are not quoted in an active market, valuation techniques are used. Where pricing models are used, inputs are based on market-related measures at the reporting date. Where discounted cash flow techniques are used, estimated future cash flows are based on management’s best estimates and the discount rate is a market-related rate for a financial asset with similar terms and conditions at the reporting date. The fair value of trade and other receivables is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date. Annual Financial Statements | 31 March 2015 27 Notes to the financial statements (continued) for the year ended 31 March 2015 2. Summary of significant accounting policies (continued) 2.11 Financial instruments (continued) 2.11.1 Non-derivative financial instruments (continued) Recognition, measurement and derecognition of financial liabilities Non-derivative financial liabilities comprise debt securities and borrowings, financial trading liabilities, finance lease payables and trade and other payables. Non-derivative financial liabilities are recognised initially at fair value net of any directly attributable transaction costs except for financial liabilities at fair value through profit or loss. Directly attributable transaction costs related to liabilities recognised at fair value through profit or loss are recognised in profit or loss on initial recognition when incurred. Subsequent to initial recognition, non-derivative financial liabilities are measured at amortised cost or fair value as per the relevant liability category. All non-derivative financial liabilities are recognised on the date of commitment (trade date) and are derecognised when the obligation expires, is discharged or cancelled, or there is a substantial modification to the terms of the liability. Realised gains and losses are determined using the LIFO method. Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw-down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a pre-payment for liquidity services. The capitalised fees are amortised from the date of first drawdown to final maturity of each facility. Financial liabilities at fair value through profit or loss (held-for-trading) Held-for-trading liabilities comprise financial trading liabilities. An instrument is classified at fair value through profit or loss if it is held- for-trading or is designated as such upon initial recognition. An instrument may only be designated at fair value through profit or loss when certain criteria are met. The group has not elected to designate financial liabilities at fair value through profit or loss. A financial liability is classified as held-for-trading if it is: • incurred principally for the purpose of selling or repurchasing it in the near term • part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent pattern of short-term profit taking • a derivative instrument Subsequent to initial recognition, financial liabilities at fair value through profit or loss continue to be measured at fair value. Financial liabilities at amortised cost Financial liabilities that are not held-for-trading are classified as financial liabilities at amortised cost. Debt securities and borrowings, including foreign loans, that are not held-for-trading are classified as held at amortised cost. Subsequent to initial recognition, these liabilities are measured at amortised cost using the effective interest method. The trade and other payables of the group are classified as financial liabilities at amortised cost. Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously. Fair value The fair value of financial trading liabilities is based on quoted offer prices if available. For liabilities that are not quoted in an active market, valuation techniques are used. Where pricing models are used, inputs are based on market-related measures at the reporting date. Where discounted cash flow techniques are used, estimated future cash flows are based on management’s best estimates and the discount rate is a market-related rate for a financial liability with similar terms and conditions at the reporting date. Market-making Eskom partakes in market-making activities in a bid to reduce the funding cost of the company. Most investors place a premium on the liquidity of bonds and are therefore prepared to accept a lower yield (relative to alternative bonds) to invest in bonds where the issue sizes are large and deemed to be liquid. Eskom bonds used for market-making are accounted for as financial liabilities at amortised cost. The risks of market-making include the anticipated loss on turnover, typically the bid/offer spread thereon, which is partially mitigated through repurchase agreement opportunities. In addition there is the potential negative impact on liquidity which Eskom believes is limited due to the strategy of holding sufficient liquidity buffers as well as a portfolio of liquid government bonds. 2.11.2 Financial guarantees Recognition Financial guarantees are contracts that require the group to make specified payments to reimburse the holder for a loss that may occur because a specified counterparty fails to make payment when due in accordance with the terms of a debt instrument. Financial guarantee liabilities are initially recognised at fair value, and the initial fair value is amortised over the life of the financial guarantee. The guarantee liability is subsequently carried at the higher of this amortised cost and the present value of any expected payment (when a payment under the guarantee has become probable). Financial guarantees are included within other liabilities. Fair value Financial guarantees are valued initially by taking into account discounted future cash flows adjusted according to the probability of occurrence of the trigger event. The resultant guarantee is raised as a liability, with the costs being charged to profit or loss. 28 Eskom Holdings SOC Ltd The unprovided portion is disclosed as a contingent liability. As a result of using discounted cash flows, interest rate risk may arise due to the possibility of the actual yields on assets being different from the rates assumed in the discounting process. 2.11.3 Derivative financial instruments and hedging activities Recognition A derivative is a financial instrument whose value changes in response to an underlying variable, requires little or no initial investment and is settled at a future date. All derivatives are classified as held-for-trading instruments, unless they meet the criteria for hedge accounting and have been designated for purposes of applying hedge accounting. Derivatives are initially recognised at fair value and re-measured subsequently at fair value. Fair values are obtained from quoted market prices, discounted cash flow models and options pricing models which consider current market and contractual prices for the underlying instruments as well as the time value of money. All derivative instruments of the group are included in the statement of financial position as derivatives held for risk management. Realised and unrealised gains or losses for derivatives used for economic hedging are recognised in profit or loss within net fair value gain/(loss) on financial instruments, excluding embedded derivatives. Realised and unrealised gains or losses for derivatives used for cash flow hedging are recognised in other comprehensive income within cash flow hedges. Hedge accounting The method of recognising the resulting gain or loss on the derivative depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged. Derivatives can be designated as: • hedges of the fair value of recognised liabilities and assets (fair value hedge) • hedges of a particular risk associated with a recognised liability, asset or a highly probable forecast transaction (cash flow hedge) • hedges of a net investment in a foreign operation (net investment hedge) The group applies only cash flow hedge accounting. Cash flow hedges The group documents, at the inception of the transaction, the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions. The group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. Movements on the hedging reserve are shown in other comprehensive income within cash flow hedges. The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining period of the hedged item is more than 12 months; it is classified as a current asset or liability when the remaining period of the hedged item is less than 12 months. Trading derivatives are classified as current assets or liabilities. Insignificant day-one gains and losses are expensed in profit or loss while significant day-one gains and losses are deferred in the statement of financial position (derivatives held for risk management) and then amortised over the term of the hedging instrument in profit or loss. Day-one gains and losses on hedging instruments are predominantly a function of the inclusion of credit, liquidity and basis risk in the terms of the trading instrument. These risks are not included in the determination of a hypothetical derivative used to measure fair value movements in a hedged item and are therefore excluded from any hedge accounting relationships. The effective portion of the changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income within cash flow hedges. The gain or loss relating to the ineffective portion and the forward points portion which is not designated (as part of the hedge) is recognised immediately in profit or loss within net fair value gain/(loss) on financial instruments, excluding embedded derivatives. When the forecast transaction occurs, any cumulative gain or loss existing in other comprehensive income at that time is included in the initial cost or other carrying amount of the asset or liability. When a hedging instrument expires, is sold or a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in other comprehensive income until the forecast transaction occurs. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in other comprehensive income is immediately transferred to profit or loss within net fair value gain/(loss) on financial instruments, excluding embedded derivatives. Economic hedging Certain derivative instruments do not qualify for hedge accounting and are used for economic hedging. Changes in the fair value of these derivative instruments are recognised in profit or loss within net fair value gain/(loss) on financial instruments, excluding embedded derivatives. 2.11.4 Repurchase and resale agreements Securities sold subject to repurchase agreements are disclosed in the financial statements as financial trading assets. The liability to the counterparty is recorded as repurchase agreements and is included in financial trading liabilities. Securities purchased under agreements to resell are recorded as repurchase agreements and are included in financial trading assets or in investments in securities. The difference between the sale and repurchase price or purchase and resale price is treated as interest accrued over the life of the repurchase or resale agreement using the effective-yield method. Annual Financial Statements | 31 March 2015 29 Notes to the financial statements (continued) for the year ended 31 March 2015 2. Summary of significant accounting policies (continued) 2.11 Financial instruments (continued) 2.11.5 Embedded derivatives Recognition An embedded derivative is a component of a hybrid (combined) instrument that also includes a non-derivative host contract, with the effect that some of the cash flows of the combined instrument vary in a way similar to those of a standalone derivative. An embedded derivative causes some or all of the cash flows that otherwise would be required by the contract to be modified according to a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, or other variable. The hybrid contract is the entire contract and the host contract is the main body of the contract excluding the embedded derivative. An embedded derivative is separated from the host contract and accounted for as a derivative if: • the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract • a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative • the combined instrument is not measured at fair value with changes in fair value recognised in profit or loss The determination of the host contract of an electricity contract (which includes an embedded derivative) is based on the standard electricity tariff specified in the contract and where no standard tariff is specified, the tariff that would best fit the profile of such a customer. Fair value Embedded derivatives are disclosed separately from derivatives held for risk management. The changes in fair value are included in net fair value gain/(loss) on embedded derivatives in profit or loss. The impact of the fair value gains or losses is taken into account in the calculation of current and deferred taxation. Embedded derivatives that are not separated are effectively accounted for as part of the hybrid instrument. Non-option based derivatives are separated on terms that result in a fair value at the date of inception of zero. Option-based derivatives are separated on the terms stated in the contracts and will not necessarily have a fair value equal to zero at the initial recognition of the embedded derivative resulting in a day-one gain/(loss). These day-one gains or losses are spread equally over the period of the agreement. The fair value will depend on the strike price at inception. The valuation at initial recognition is adjusted for cash flows since inception. The value of the embedded derivatives which involve a foreign currency is first determined by calculating the future cash flows and then discounting the cash flows by using the relevant interest rate curve and only then is the net present value of the cash flows converted at the relevant rand/foreign currency spot rate to the reporting currency. The fair value of the embedded derivative is determined on the basis of its terms and conditions. If this is not possible, then the value of the embedded derivative is determined by fair valuing the whole contract and deducting from it the fair value of the host contract. Where there is no active market for the embedded derivatives, valuation techniques are used to ascertain their fair values. Financial models are developed incorporating valuation methods, formulae and assumptions. The valuation methods include: • swaps: electricity tariff is swapped for a commodity in a foreign currency • forwards: electricity tariff or other revenue or expenditure is based on a foreign currency • options: electricity tariff or other revenue is based on an embedded derivative floor or cap on foreign consumer or production price indices or interest rates. A closed form analytic solution is used to produce various cap and floor strike prices The fair value of embedded derivatives is adjusted, where applicable, to take into account the inherent uncertainty relating to the future cash flows of embedded derivatives such as liquidity, model risk and other economic factors. The more important assumptions are obtained either with reference to the contractual provisions of the relevant contracts or from independent market sources where appropriate (refer to note 3(a)). 2.12 Inventories Coal, liquid fuel, maintenance spares and consumables Inventories are stated at the lower of cost and net realisable value. Cost is determined on the weighted average basis and includes expenditure incurred in acquiring inventories, production and conversion costs and other costs incurred in bringing inventory to present location and condition. Nuclear fuel Nuclear fuel is stated at the lower of cost and net realisable value. Cost is determined on the first-in-first-out (FIFO) basis. Nuclear fuel consists of raw materials, fabricated fuel assemblies and fuel in reactors. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. Costs of inventories include the transfer from equity of any gains/losses on qualifying cash flow hedges relating to purchases of raw materials. 2.13 Future fuel supplies Coal Non-refundable advances to suppliers, together with related borrowing costs thereon, are deferred in the statement of financial position within future fuel supplies and amortised against the cost of coal supplied on the basis of the estimated life of the asset procured by the suppliers. 30 Eskom Holdings SOC Ltd Repayable advances to suppliers are capitalised and the related interest earned is credited to profit or loss within finance income. Refunds are repaid in terms of the agreements. Nuclear Fuel assemblies in the process of fabrication are stated at cost within future fuel supplies, which includes the non-refundable advance payments made in terms of the agreement. Hedge accounting is applied to foreign exchange contracts entered into with respect to the purchase of nuclear fuel, with the effective portion being capitalised during the fabrication period. Advance payments in terms of agreements are capitalised. 2.14 Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares, net of any tax effects, are recognised as a deduction from equity. 2.15 Equity reserve The subordinated loan from the shareholder is held at amortised cost. The market value of the loan at inception is calculated for each tranche utilising the expected cash flows which are discounted at market rates to determine the effective interest rates. The effective interest rates for each tranche remain constant over the life of the loan tranche. The future cash flows are re-assessed annually and the loans are re-measured at each reporting period. Although the loan is interest bearing, the interest payment terms could potentially be favourable and are dependent on Eskom’s meeting of solvency and leverage conditions per the agreement. The change in the loan value with respect to interest amortised and the re-measurement is reflected in the profit or loss in finance cost and is eligible for capitalisation as borrowing costs. 2.16 Income tax Income tax expense comprises current and deferred tax. Income tax expense is recognised in profit or loss except to the extent that it relates to items recognised in other comprehensive income or equity, in which case it is recognised on that basis. Current tax is the expected tax payable on taxable income for the year, using tax rates (and laws) enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Tax on dividends declared after 1 April 2012 is withheld by the company on behalf of its shareholder at a rate of 15%. Amounts withheld are recognised in equity as part of dividends paid. Dividends received are recognised at the gross amount with the related withholdings tax recognised as part of tax expense. If the withholding tax is reimbursable it is recognised as an asset. 2.17 Deferred tax Deferred tax is recognised on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the statement of financial position. Deferred tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. However, deferred tax is provided in respect of the temporary differences arising on the assets and provisions created in respect of decommissioning and nuclear waste management and closure, pollution control and rehabilitation. Deferred tax is determined using tax rates (and laws) enacted or substantively enacted at the reporting date and that are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled. Deferred tax assets are recognised for unused tax losses, unused tax credits and deductible temporary differences to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred tax assets are reviewed at each reporting date and reversed if it is no longer probable that the related tax benefits will be realised. Deferred tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the group and it is probable that the temporary difference will not reverse in the foreseeable future. The measurement of deferred tax reflects the tax consequences that would follow from the manner in which the group expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities. 2.18 Payments received in advance Payments received in advance consist mainly of capital contributions received from customers for the construction of assets and government grants received for electrification and energy efficiency initiatives. Capital contributions are recognised in profit or loss within other revenue from 1 July 2009 when the customer is connected to the electricity network. Government grants for energy efficiency initiatives are recognised in profit or loss within other expenses when the related expenses are incurred. Government grants for electrification are recognised in deferred income when the related asset has been connected to the electricity network (refer to note 2.19). Annual Financial Statements | 31 March 2015 31 Notes to the financial statements (continued) for the year ended 31 March 2015 2. Summary of significant accounting policies (continued) 2.19 Deferred income Grants Government grants received relating to the creation of electrification assets are included in liabilities as deferred income and are credited to profit or loss within depreciation and amortisation expense on a straight-line basis over the expected useful lives of the related assets. Capital contributions received from customers Contributions received in advance from electricity customers up to 30 June 2009 for the construction of regular distribution and transmission assets (with a standard supply) are credited to profit or loss within other revenue when the customer is connected to the electricity network (refer to note 2.18). 2.20 Employee benefit obligations Annual and performance bonus The annual and performance bonus is a short-term employee benefit which is expensed as the related services are provided. A liability is recognised for the amount expected to be paid if the group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. A liability for annual bonuses is accrued on a proportionate basis as services are rendered. A liability for performance bonus is raised on the estimated amount payable in terms of the incentive scheme which is based on the business and employees’ performance in the applicable year. Occasional and service leave The liability for occasional and service leave is of a long-term nature as it is not expected to be settled wholly after 12 months after the reporting period. An actuarial valuation is performed on an annual basis for occasional and service leave. The accrued liabilities are determined by valuing all future leave expected to be taken and payments expected to be made in respect of benefits up to the valuation date. Allowance has been made in the calculations for the assumed benefit options employees will exercise, as well as salary increases and investment returns up to the date the benefit is received. All actuarial gains or losses and past service costs are recognised immediately in profit or loss within employee benefit expense. The present values of the benefit are determined by using the yield of long-dated corporate bonds (or government bonds where high quality corporate bonds are not available). In terms of IAS 1 Presentation of financial information there is no unconditional right to defer settlement of occasional and service leave for at least 12 months after the reporting period. The full provision is therefore presented as current in the statement of financial position. Pension benefits Pension benefits are provided for employees through the Eskom Pension and Provident Fund. Contributions to the fund are based on a percentage of pensionable emoluments and are expensed in the period in which they are incurred. The group accounts for its pension obligations as a defined contribution plan in line with IAS 19 Employee benefits. Post-employment medical benefits The liability for post-employment medical benefits is the present value of the obligation determined by using government bonds where high quality corporate bonds are not available (long-dated corporate bonds) which have maturities similar to the liability. Provision is made by accounting for the estimated cost over the expected period to retirement of the employees. The cost to the employer, in the form of employer contributions, is determined by using the projected unit credit method, with actuarial valuations being carried out at reporting date. Actuarial gains or losses are recognised in other comprehensive income within re-measurements of post-employment medical benefits immediately. Interest expense and other expenses related to these benefits are recognised in profit or loss. The entitlement to these benefits is usually conditional on the employee remaining in-service up to retirement. All employees qualify for post-employment medical benefits, except for new employees appointed on or after 1 June 2003 at a managerial level. The group accounts for its post-employment medical benefits obligations as a defined benefit plan in line with IAS 19 Employee benefits. If the benefits are changed or curtailed, the resulting change in benefits that relates to past service or the gain or loss on curtailment is recognised immediately in profit or loss. The group recognises gains or losses on the settlement of a defined benefit plan when the settlement occurs. A settlement occurs when payments are made to employees to eliminate any further liabilities. A curtailment will occur when the group significantly reduces the number of employees covered by the termination plan. Curtailment gains and losses are accounted for as past service costs, which are recognised in profit or loss immediately in the period when the termination plan is amended. Termination benefits A liability and expense for termination benefits is recognised by the group when the group can no longer withdraw the offer of those benefits. 2.21 Provisions Provisions are recognised when the group has a present legal or constructive obligation as a result of a past event, when it is probable that an outflow of resources will be required to settle the obligation and when the amount can be reliably estimated. Provisions are not recognised for future operating losses. Provisions are determined by discounting the expected future cash flows using a pre-tax discount rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. The increase in the provision due to the passage of time is recognised as finance cost. 32 Eskom Holdings SOC Ltd A provision is raised for the estimated decommissioning cost of nuclear and other generation plant and capitalised to the cost of nuclear or other generation plant when it is commissioned. The estimated cost of decommissioning at the end of the productive life of plant is based on engineering and technical estimates and reports from independent experts. Decommissioning costs capitalised to the cost of nuclear or other generation plant are written off on a straight-line basis over the estimated useful life of the plant. A provision is raised for the estimated cost of closure, pollution control and rehabilitation during and at the end of the life of the mines where a legal or constructive obligation exists to reimburse coal suppliers. Closure, pollution control and rehabilitation costs capitalised are written off over the estimated useful life of the related asset. The cost of current ongoing programmes to prevent and control pollution and to rehabilitate the environment is charged to profit or loss within primary energy as incurred, unless a present legal or constructive obligation exists to recognise such expenditure, in which case a provision is created based on the best estimates available. A provision is raised for the management of spent nuclear fuel assemblies and radioactive waste which is recognised and measured based on the latest available cost information and is charged to profit or loss within primary energy. A provision is raised for coal-related obligations which arise out of contractual obligations as a result of delays in commissioning of the related power stations which is recognised and measured based on the best estimate of the expenditure that would be required to settle the present obligation at the end of the reporting period and is charged to profit or loss within primary energy. Other provisions are raised based on contractual obligations and are recognised and measured based on the best estimate of the expenditure that would be required to settle the present obligation at the end of the reporting period and are charged to profit or loss within other operating expenses. Provisions that are capatilised are restated on an annual basis to reflect changes in measurement that result from changes in the estimated timing or amount of the outflow of resources embodying economic benefits required to settle the obligation, or a change in discount rate, which shall be accounted for as follows: • changes in the liability shall be added to, or deducted from, the cost of the related asset in the current period • the amount deducted from the cost of the asset shall not exceed its carrying amount. The excess shall be recognised in profit or loss • any additions to the cost of an asset shall be reviewed in terms of the normal impairment principles 2.22 Revenue recognition Eskom’s main revenue activity is the sale of electricity which is recognised when electricity is consumed by the user. The businesses of the subsidiaries support this main activity but are not considered to be part of the main revenue activity. The activities of the subsidiaries include financing home loans, insurance, maintenance and construction services. Revenue is recognised when significant risks and rewards of ownership have passed, the amount of revenue can be reliably measured and, it is probable that future economic benefits will flow to the group. Where it is assessed that there is a high probability that the economic benefits related to sales will not materialise, such sales are not recognised. 2.23 Other income Other income compromises, inter alia: • operating lease income recognised on a straight-line basis over the lease term • dividend income recognised when the shareholders’ right to receive payment is established • insurance proceeds recognised when compensation becomes receivable 2.24 Finance income Finance income comprises interest receivable on loans, advances, trade receivables, finance lease receivables and income from financial market investments. Interest income is recognised as it accrues in profit or loss, using the effective interest method. 2.25 Finance cost Finance cost comprises interest payable on borrowings and finance lease payables, interest resulting from derivatives held for risk management and interest from the unwinding of discount on liabilities. Borrowing costs which are not capitalised are recognised in profit or loss (refer to note 2.8). 2.26 Dividend distribution Dividend distribution to the shareholder is recognised as a liability in the financial statements of the group in the period in which the dividends are approved by the shareholder. 2.27 Non-current assets and liabilities held-for-sale Non-current assets and liabilities (or disposal groups) which meet the definition of held-for-sale under IFRS 5 Non-current assets held-for- sale and discontinued operations, except for items excluded from the scope of IFRS 5 for measurement purposes, are stated at the lower of their carrying amount and fair value less costs to sell if their carrying amount will be recovered principally through a sale transaction. Annual Financial Statements | 31 March 2015 33 Notes to the financial statements (continued) for the year ended 31 March 2015 2. Summary of significant accounting policies (continued) 2.28 Related-party transactions IAS 24 Related party disclosures provides government-related entities an exemption which eliminates the requirements to disclose information that is costly to gather and of less value to users. The group applies the exemption in respect of its relationship with government-related entities and local levels of government (refer to note 46). 2.29 Transfers of assets from customers If an item of property, plant and equipment is received from customers, an assessment is made as to whether that item of property, plant and equipment can be recognised in accordance with IAS 16 Property, plant and equipment. Any related revenue is recognised in accordance with IAS 18 Revenue. 2.30 Net debt The group manages its funding on a net basis by pooling funds. Net debt as disclosed in the statements of cash flows is calculated by totalling debt securities and borrowings, finance lease payables, derivatives held for risk management and netting off cash and cash equivalents, investments in securities and loans receivable. 3. Critical accounting estimates and judgements Estimates and judgements are evaluated continually and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The group makes judgements, estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Revisions to accounting estimates are recognised in the period in which they are revised and future periods they affect. (a) Embedded derivatives Eskom has entered into a number of agreements to supply electricity to electricity-intensive businesses where the revenue from these contracts is linked to commodity prices and foreign currency rates or foreign production price indices that give rise to embedded derivatives. The embedded derivatives have been divided into three categories: • commodity and/or foreign currency derivatives • foreign currency or interest rate derivatives • United States production price and foreign currency derivatives Valuation The fair value of embedded derivatives is determined by using a forward electricity price curve to value the host contract and the derivative contract is valued by using market forecasts of future commodity prices, foreign currencies rand exchange rate, interest rate differential, future sales volumes, production price and liquidity, model risk and other economic factors. The forecast cash flow is determined and then discounted at the relevant interest rate curve. The net present value of the cash flows is then converted at the rand/foreign currency spot rate to the reporting currency. The fair value of the embedded derivative is adjusted, where applicable, to take into account the inherent uncertainty relating to the future cash flows of embedded derivatives such as liquidity, model risk and other economic factors. The important assumptions are obtained either with reference to the contractual provisions of the relevant contracts or from independent market sources where appropriate. These assumptions are: • spot and forward commodity prices • spot and forward foreign currency exchange rates • spot and forward interest rates • forecasted sales volumes • spot and foreign production price indices • liquidity, model risk and other economic factors Embedded derivatives that are not separated are effectively accounted for as part of the hybrid instrument. Non-option based derivatives are separated on terms that result in a fair value zero at the date of inception. Option-based derivatives are separated on the terms stated in the contracts and will not necessarily have a fair value equal to zero at the initial recognition of the embedded derivative resulting in day-one gains or losses. These day-one gains or losses are recognised over the period of the agreement. The fair value will depend on the strike price at inception. The only significant unobservable input is the United States producer price index (PPI). Valuation assumptions The forward electricity curve used to value the embedded derivatives at 31 March 2015 is based on the current MYPD 3 approved tariff increase of 12.69% (8% MYPD 3 approved tariff increase and 4.69% relating to RCA adjustment) for 2015/16 and 8% for 2016/17 to 2017/18, whereafter a forecasted return on the regulatory asset base is used until maturity. 34 Eskom Holdings SOC Ltd The contracted electricity price used to value embedded derivatives is based on a combination of the factors in the table below over the contracted period. Forecast sales volumes are based on the most likely future sales volumes based on past trends and taking into account future production plans in consultation with industry specific experts and key customer executives. The fair value of embedded derivatives takes into account the inherent uncertainty relating to the future cash flows of embedded derivatives, such as liquidity, model risk and other economic factors. The following valuation assumptions for the future electricity price curve discussed above for the valuation of embedded derivatives were used and are regarded as the best estimates by the board: 2015 Year ended 31 March Input Unit 2015 1 20161 20171 20181 20191 20201 Aluminium USD per ton 1 792 1 826 1 883 1 940 1 985 2 035 Volatility Year-on-year (ratio) 0.19 0.19 0.19 0.19 0.19 0.19 Rand interest rates Continuous actual/365 days (%) 5.61 7.16 6.70 6.93 7.09 7.24 Dollar interest rates Annual actual/365 days (%) 0.09 0.92 0.81 1.13 1.38 1.57 United States PPI Year-on-year (%) (4.98) 2.11 1.87 2.01 1.90 2.33 Rand/USD Rand per USD 12.50 12.50 14.29 14.29 14.29 16.67 2014 Input Unit 20141 20151 20161 20171 20181 20191 Aluminium USD per ton 1 716 1 865 1 939 2 005 2 068 2 127 Volatility Year-on-year (ratio) 0.22 0.22 0.22 0.22 0.22 0.22 Rand interest rates Continuous actual/365 days (%) 5.57 6.74 6.84 7.28 7.55 7.79 Dollar interest rates Annual actual/365 days (%) 0.09 0.52 0.57 1.03 1.48 1.87 United States PPI Year-on-year (%) 3.27 2.20 2.33 2.20 2.41 2.32 Rand/USD Rand per USD 11.11 11.11 12.50 12.50 14.29 14.29 Sensitivity analysis The approximate change in the value of embedded derivatives if one of the inputs is changed is disclosed in note 4.2 Financial risk management – market risk under currency risk (note 4.2.1), commodity risk (note 4.2.2), interest rate risk (note 4.2.3) and other price risk (note 4.2.5). The carrying amount of the embedded derivative liabilities for the group is R8 022 million (2014: R9 332 million) and R8 021 million (2014: R9 331 million) for the company. Refer to note 25. (b) Post-employment medical benefits The group recognises a liability for post-employment medical benefits to qualifying retirees. The post-employment medical benefits plan is unfunded. Valuation The estimated present value of the anticipated expenditure for both in-service and retired members is actuarially valued using the projected unit method. This method treats the accrued service liability separately from the current cost liability. The accrued service liability (on the valuation assumptions) is based on the completed service to the valuation date and the current cost liability is the cost of providing the benefit over the next year. Valuation assumptions The principal actuarial assumptions used were: Group and company 2015 2014 Discount rate (%) 8.8 9.7 Medical aid inflation (%) 8.0 8.4 Mortality table Adjusted PA (90) Adjusted PA (90) tables rated tables rated down by two years down by two years 1. Forward curve based on financial years. Annual Financial Statements | 31 March 2015 35 Notes to the financial statements (continued) for the year ended 31 March 2015 3. Critical accounting estimates and judgements (continued) (b) Post-employment medical benefits (continued) Valuation assumptions (continued) Assumptions regarding future mortality have been based on published statistics and mortality tables. The current longevities underlying the values of the defined benefit obligation at the reporting date were: Group and company 2015 2014 Male Female Male Female years years years years Longevity 14.42 20.82 14.42 20.82 The weighted average duration of the defined benefit obligation for the group was 20.9 years (2014: 20.8 years) and for the company was 21.0 years (2014: 20.9 years). Sensitivity analysis The effect of an increase or decrease in the assumptions is: Group Company Change in 2015 2015 2014 2014 2015 2015 2014 2014 assumption increase decrease increase decrease increase decrease increase decrease Rm Rm Rm Rm Rm Rm Rm Rm Effect on aggregate current service cost and finance cost Discount rate 1% (177) 226 (154) 199 (174) 223 (152) 196 Medical aid inflation 1% 371 (285) 318 (242) 365 (280) 312 (238) Future mortality 1 year 48 (48) 40 (40) 47 (47) 39 (39) Effect on post-employment medical benefit obligation Discount rate 1% (1 780) 2 295 (1 432) 1 834 (1 739) 2 244 (1 398) 1 792 Medical aid inflation 1% 2 252 (1 778) 1 809 (1 436) 2 202 (1 737) 1 767 (1 402) Future mortality 1 year 361 (361) 285 (284) 353 (352) 278 (277) The carrying amount of the post-employment medical benefits liability for the group is R12 325 million (2014: R10 234 million) and R12 022 million (2014: R9 981 million) for the company. Refer to note 27. The above sensitivity analyses are based on a change in an assumption while all other assumptions remain constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation to significant actuarial assumptions, the present value of the defined benefit obligation is calculated with the projected unit credit method at the end of the reporting period which is recognised within the statement of financial position. The methods and types of assumptions used in preparing the sensitivity analysis did not change compared to the previous period. (c) Occasional and service leave The group recognises a liability for occasional and service leave. Valuation An actuarial valuation is done on an annual basis for occasional and service leave. The accrued liability is determined by valuing all future leave expected to be taken and payments to be made in respect of benefits up to the valuation date. The present value of the benefits is determined by using the yield of long-dated corporate bonds (or government bonds where high quality corporate bonds are not available). Valuation assumptions The principal actuarial assumptions used were: Group and company 2015 2014 % % Discount rate 8.8 9.7 General price inflation 6.0 6.4 Salary increases 7.5 7.9 Leave usage 4.0 4.0 The assumptions made in respect of resignation, death and retirement rates are the same as for the post-retirement medical benefit liability. Refer to note 3(b). Sensitivity analysis Based on current experience, only 4% (2014: 4%) of the leave is utilised. If the rate at which leave is taken is 8% (2014: 8%), then the liability will increase by R61 million (2014: R60 million). 36 Eskom Holdings SOC Ltd The carrying amount of the occasional and service leave liability for the group is R1 237 million (2014: R1 195 million) and R1 175 million (2014: R1 138 million) for the company. (d) Decommissioning, mine closure and rehabilitation Provision is made for the estimated decommissioning cost of nuclear and other generation plant and for the management of nuclear fuel assemblies and radioactive waste. Provision is made for the estimated mine-related closure, pollution control and rehabilitation costs at the end of the life of the mines, where a constructive and contractual obligation exists to pay coal suppliers. Valuation These provisions are determined by discounting the estimated future decommissioning and rehabilitation costs. Valuation assumptions The discount rate used for these provisions was 4.7% (2014: 5.0%) for the group and company. Estimated payment dates The estimated payment dates of the costs are: Group and company 2015 2014 Nuclear plant 2026 – 2041 2026 – 2041 Coal and pumped storage plants1 2018 – 2074 2018 – 2074 Spent nuclear fuel 2018 – 2105 2016 – 2105 Mine-related closure, pollution control and rehabilitation 2016 – 2073 2014 – 2073 Sensitivity analysis The carrying amount of the decommissioning, mine closure and rehabilitation provision would be an estimated R3 875 million (2014: R3 465 million) lower had the real discount rate used in the calculation of the provision increased by 1% and R4 885 million (2014: R4 527 million) higher had the real discount rate decreased by 1%. The carrying amount of the decommissioning, mine closure and rehabilitation liabilities for the group and company is R24 152 million (2014: R20 639 million). Refer to note 28. (e) Coal-related obligations Provision is made for coal-related obligations which arises out of contractual obligations as a result of delays in commissioning of the related power stations. Valuation These provisions are determined by taking consideration of the anticipated commissioning dates, future coal prices, coal utilisation and coal stock-piles. Valuation assumptions The discount rate used for these provisions was 4.7% (2014: 5.0%) for the group and company. The estimated payment dates of the costs are between 2015 and 2020. Sensitivity analysis The carrying amount of the coal-related obligations would be an estimated R268 million (2014: R75 million) lower had the anticipated commissioning dates been one month earlier than estimated and R283 million (2014: R79 million) higher had the anticipated commissioning dates been one month later than estimated. The carrying amount of coal-related obligations liabilities for the group and company is R7 954 million (2014: R2 215 million). Refer to note 28. (f) Subordinated loan from shareholder The government loan was provided in tranches where each tranche has a 30-year term with an early redemption option after 10 years. Interest on the facility is only payable for those financial years where the financial results at the end of the reporting period reflect a leverage ratio, as defined in the agreement, of better than 12.5% and where if, after paying interest on the facility, the interest multiple remains above 2.5 times. A loan remeasurement occurs when the carrying amount of the loan is adjusted where the cash flows (interest and capital repayment) are revised for a given tranche, based on the tranche’s original effective rate to reflect the actual and revised estimated cash flows. The value of the equity portion of the loan from the shareholder is the difference between the amount advanced and the calculated loan value on the day the tranches were drawn down. The loan value was calculated using Eskom’s long-term financial plan to forecast the leverage ratio and the interest cover to determine in which years interest will be payable over the period of the loan. These expected interest flows and the capital redemptions are discounted at the effective rate which was calculated at the inception of each tranche received to determine the loan amounts. Once the equity portion of a tranche is recorded it does not change. Refer to the statement of changes in equity. The interest payments and cash flows are determined based on Eskom’s long-term forecasts of the leverage ratio and the interest multiple, adjusted to include the potential interest on the government loan. The future cash flows are discounted using a zero curve constructed from money market and swap rates that reflect the credit worthiness of Eskom. 1. The timing of cash flows relating to water treatment and ground water monitoring have been re-estimated based on the latest studies. Annual Financial Statements | 31 March 2015 37 Notes to the financial statements (continued) for the year ended 31 March 2015 4. Financial risk management The group has an integrated risk management framework. The group’s approach to risk management is based on risk governance structures, risk management policies and standards that provide guidance on risk assessment, treatment, monitoring and reporting. Two types of risks are reported as part of the risk profile, namely enterprise and business risks. Enterprise risks are significant to the organisation’s ability to achieve and realise its core business strategy and objectives while business risks reflect the effect of uncertainty on business unit objectives. The risk assessment of these risks, as well as the treatment plans and monitoring thereof, are reported on a quarterly basis to the audit and risk committee. The financial risks, as defined by IFRS 7 Financial instruments: disclosures, and the management thereof, form part of this process. The board of directors (the board) has delegated the management of enterprise-wide risk to the audit and risk committee. One of the committee’s objectives is to ensure that the group is not unduly exposed to financial risks. Most of the financial risks arising from financial instruments are managed in the centralised treasury function of the group, except for instruments such as trade and finance lease receivables and trade and finance lease payables which are managed by the other divisions and subsidiaries. The group’s exposure to risk, its objectives, policies and processes for managing the risk and the methods used to measure it have been consistently applied in the years presented, unless otherwise stated. The exposure of the centralised treasury function to the major financial risks is unique to its activities and therefore different to those of the divisions and subsidiaries within the Eskom group. A distinction is therefore made between the treasury department and other divisions and subsidiaries in the group in respect of financial risk management where relevant. The group has exposure to the following risks as a result of its financial instruments: • credit risk (refer to note 4.1) • market risk (refer to note 4.2) • liquidity risk (refer to note 4.3) • capital management and going concern (refer to note 4.4) 4.1 Credit risk Credit risk is the risk of financial loss to the group if a customer or other counterparty (including government and financial institutions) to a financial instrument fails to meet its contractual obligations. Credit risk arises primarily from the sale of electricity and related services in the ordinary course of business and financial instruments managed in the centralised treasury activities. Credit risk includes counterparty risk and delivery or settlement risk. Counterparty risk is the risk that a counterparty is unable to meet its financial and/or contractual obligations during the period of a transaction. Delivery or settlement risk is the risk that a counterparty does not deliver on its contractual commitment on maturity date (including the settlement of money and delivery of securities). 4.1.1 Management of credit risk Financial instruments managed by the treasury function Credit risk arises from cash and cash equivalents, investment in securities, derivatives held for risk management, financial trading assets and deposits made with counterparties. Processes are in place to identify, measure, monitor, control and report credit risk. The objective of Eskom’s credit risk management framework is firstly to protect cash and investments and, secondly to project and maximise the rate of return of financial market investments. Responsibility and governance The treasury committee manages counterparty credit risk which arises from the treasury activities in the financial markets. This committee is chaired by the finance director and reports on a quarterly basis to Exco and subcommittees of the board. The activities of the committee are guided by the terms of reference that are updated and approved by the finance director. The terms of reference set out the minimum acceptable standards to be adhered to by those responsible for credit-related transactions within the treasury division. The terms of reference are aligned to the Exco credit risk governance standards and are supplemented by appropriate policies and procedures. The treasury committee: • assesses the credit quality of counterparties and types of instruments used • approves credit limits with such counterparties • facilitates and manages the issuing of financial guarantees by the group • ensures that transactions with counterparties are supported by trading agreements, where applicable • approves methodologies used for the management of counterparty exposure The portfolio assessment department of treasury provides feedback on all treasury credit risk-related matters to the treasury management, finance director, treasury committee and Exco. 38 Eskom Holdings SOC Ltd The management of credit risk is governed by the following policies: • trading in financial instruments is conducted and entered into with selected counterparties after credit limits have been authorised. Individual risk limits are set based on internal and external ratings in line with limits set by the board. All credit limits are approved by the treasury committee. The use of credit limits is regularly monitored • only financial institutions and/or counterparties with an independent minimum rating of A1 are accepted. If there are no independent ratings, the credit quality of the counterparty is assessed, taking into account its financial position, past experience and other factors • all exposures are mark-to-market. Transaction or close-out netting takes place in accordance with the terms and conditions of the underlying trading agreements • minimum credit-rating requirements for financial institutions are maintained to assess the risk categories by rating class and to ascertain the probability of default inherent in each rating class • approved concentration risk parameters and collateral management procedures are in place Concentration of credit risk is managed by setting credit risk limits at a counterparty-specific level. Concentration credit risk limits are used as second tier limits in relation to counterparty credit limits. Counterparty-specific exposure is monitored against a set concentration of credit risk limits in relation to the total credit risk exposure to all counterparties. Credit risk measurement, monitoring and reporting Risk is measured by determining a default probability per counterparty (using default probabilities assessed by rating agencies for various types of credit ratings) which is then applied to the market value of the investment placed to determine the capital at risk. The treasury division’s policies and practices are designed to preserve the independence and integrity of decision-making and ensure credit risks are accurately assessed, properly approved, continually monitored and actively managed. Aggregate credit risk exposure, hold-limit exceptions and risk profile changes are reported to Exco. There is regular detailed reporting of limits utilisation, limit breaches and concentrations to ensure these are appropriately managed and monitored. Impairment assessments are performed to evaluate the credit risk exposure. The assessments focus on the following areas: • significant financial difficulty of the issuer or counterparty • high probability of bankruptcy • breach of contract Financial instruments managed by other divisions and subsidiaries (a) Trade receivables (electricity) Eskom supplies electricity to customers in its licensed areas of supply. A large number of the residential customers are on a prepaid basis. Eskom’s exposure to credit risk is influenced by the individual characteristics of each customer. In monitoring credit risk, customers are grouped according to their credit characteristics, including whether they are large or small power users, geographic location, ageing profile, security (deposits and guarantees) held and payment history. The main classes of electricity receivables are international, local large and local small power users. Electricity supply agreements are entered into with key international customers who comprise utility companies and governments of neighbouring countries. These customers are not required to provide any security unless they default on their payment terms. Key large power users comprise mainly South African redistributors (municipalities), commercial, industrial and mining customers. Redistributors are not required to provide any security and are reassessed based on their payment history to determine if any security is necessary. Where a key large power user has an acceptable credit rating from an approved rating agency the provision of a security is waived. New customers (other than key large power users) are required to provide security equivalent to between one to three months consumption at the commencement of the supply agreement. The level of security is reviewed when a customer defaults on their payment obligation or requires additional electricity supply capacity. In these instances, additional security is required to cover between one to three months of recent consumption before supply will commence. Payment terms vary between customer classes as follows: • key international customers: 10 to 45 days • key and other large power users: individually negotiated up to a maximum of 15 days • small power users: 30 days Interest is charged at market-related rates on balances in arrears. The group has well-established credit control procedures that monitor activity on customer accounts and allow for remedial action should the customer not comply with payment terms. These procedures include an internal collection process, follow-up with the customer either telephonically or in person, negotiations of mutually acceptable payment arrangements and the issue of a notice of disconnection of supply and letters of demand. Non-payment will result in disconnection of supply and the customer’s account being closed. The legal collection process is pursued thereafter. Annual Financial Statements | 31 March 2015 39 Notes to the financial statements (continued) for the year ended 31 March 2015 4. Financial risk management (continued) 4.1 Credit risk (continued) 4.1.1 Management of credit risk (continued) Financial instruments managed by other divisions and subsidiaries (continued) (a) Trade receivables (electricity) (continued) Certain redistributors continue to fall into arrears during the course of the financial year. Monitoring of these redistribution payment levels continue to receive ongoing management attention and remains a high priority focus area. Interventions pursued included entering into special payment arrangements and following the Promotion to Administrative Justice Act of disconnections. Eskom continues to work closely with the Department of Co-operative Governance and Traditional Affairs and other government departments as well as relevant stakeholders to resolve the systemic challenges which have given rise to municipalities’ arrear debt. Interventions mandated by the inter-ministerial war room that are currently being investigated include: • restriction of supply to non-paying municipalities if set maximum demand levels are exceeded • prioritise load shedding to the non-paying municipalities when emergencies are declared, for stage 1 load shedding and during daily evening peak periods • limit electricity supply to the non-paying municipalities in line with what they are paying on a monthly basis • placing non-paying municipalities on a prepayment option The collection of revenue from small power users in Soweto remains a challenge. The enhancement of credit control strategies and monitoring of payment levels in this area continue to receive management attention. The payment level expressed as a percentage of billed revenue (excluding interest) for the year, was 16% (2014: 16%). Implementation of the residential revenue management strategy, which includes Soweto, has started and will be rolled out in the next couple of years. The strategy entails implementation of split metering technology and conversion of customers to prepayment. The following strategies are currently in operation in high risk areas of non-paying customers with varying levels of success. These include: • disconnections • conversion to prepayment • increased internal debt management capacity • use of debt collectors • payment arrangements • focus on early identification and letters of demand • increased securities • efficient internal process, for example system automation of credit and collections such as automated notices and letters of demand • adverse listing of defaulting customers As a result of the challenges encountered in recovering outstanding debt, especially from municipalities and Soweto, Eskom assessed the probability of cash flows materialising in terms of IAS 18 Revenue. As a result, revenue of R597 million (2014: Rnil) relating to these customers was not recognised. Eskom continues to actively pursue the recovery of these amounts through its own internal as well as external inter-ministerial processes. The decision to impair overdue amounts is assessed on the probability of recovery based on the individual customer’s credit risk profile and on the credit profile of the customer portfolio. The total cumulative allowance for impairment for electricity receivables at 31 March 2015 was R7 430 million (2014: R5 667 million) (refer to note 17). A substantial portion relates to outstanding debt in municipalities and Soweto. Progress on the collection process is reviewed on a regular basis and if it is evident that the amount will not be recovered, it is recommended for write-off in terms of the group policy and delegation of authority. The process of recovery continues unless it is confirmed that there is no prospect of recovery or the costs of such action will exceed the benefits to be derived. Amounts written off are determined after taking into account the value of the security held. (b) Other trade receivables The group’s credit exposure in respect of other trade receivables is considered to be insignificant and originates predominantly from Eskom Enterprises SOC Ltd (Eskom Enterprises). (c) Other receivables Other receivables include recoverable work, employee receivables, inter-company balances (company only), reinsurance receivables and sundry receivables. Recoverable work is mainly project work carried out by Eskom on behalf of external parties. The projects include repairing damaged power lines, moving power lines or underground cables and engineering-related work. 40 Eskom Holdings SOC Ltd (d) Finance lease receivables Finance lease receivables mainly comprise premium power supply equipment contracts. The supply of electricity to customers may be in the form of either standard or premium power supply. A standard power supply is the least life cycle cost technically acceptable solution as defined in the South African Grid Code and the Distribution Network Code whereas with a premium supply the customer’s connection requirement exceeds the specifications of a standard supply. This is achieved through the installation of premium supply equipment for which the customer is required to pay a connection charge. Connection charges for premium supply contracts are repayable on a monthly basis over a maximum period of 25 years. This payment option is no longer available for new premium supplies as the connection charges are payable upfront. The credit risk exposure resulting from premium supply contracts is managed in a similar manner as for the standard supply contracts. Security is required from customers for premium supply assets which covers irrecoverable costs in the event of early termination of the supply contract. Premium supply customers have maintained a good payment history with Eskom over the years. The standard payment terms are also applicable to the connection charge relating to the premium supply equipment which is billed monthly to the customer. (e) Loans receivable Home loans are made available to qualifying employees in the group via the Eskom Finance Company SOC Ltd (EFC) group. Credit risk policies, developed in line with the National Credit Act, are in place which require various criteria to be met prior to the approval of a loan. These criteria include the valuation of property, affordability and credit history of the employee. The amounts advanced are secured by first mortgages over the property purchased and are repayable over an average period of up to 27 years (2014: 27 years). The risk of default by the employee is reduced as the monthly instalments are deducted from the employee’s salary. Employees who are no longer in the employ of the group are required to settle their home loans with EFC within 90 days of leaving the group’s service. Loans are not extended where the purchase price of the property exceeds its open market value. The weighted average loan amount as a percentage of the total home loan book at 31 March 2015 was 0.01% (2014: 0.01%). Impairment assessments are performed to evaluate the credit risk exposure. The assessments focus on the following areas: • significant financial difficulty of the counterparty • high probability of bankruptcy • breach of contract In the event of default, the debtor is notified verbally and in writing. If payment has not been received for a period exceeding three months, a legal process to foreclose on the loan is initiated and the property is sold by public auction or repossessed. Should the property be sold by public auction, a reserve value is set that takes into account the value of the property, arrear rates and taxes, legal costs and commissions payable. If the reserve value is not achieved, the property is repossessed and is held for resale. EFC established a residential mortgage-backed securitisation programme that converts eligible loan assets into marketable securities traded on the Johannesburg Stock Exchange (JSE) debt market through the consolidated structured entity, Nqaba Finance 1 (RF) Ltd. The structured entity is consolidated in the annual financial statements of the EFC group. EFC is a preferential shareholder of Nqaba which entitles it to all the residual profits (residual cash after provision for secured creditors and noteholders). EFC provides a first-loss credit enhancement loan equal to 14.87% (2014: 14.87%) of the notes in issue. At 31 March 2015 the loan was R290 million (2014: R290 million). As the servicer of Nqaba, EFC earns a servicing fee equal to 0.15% (2014: 0.15%) of the quarterly outstanding loan book balance. At the end of the financial year, the net asset value of Nqaba was R42 million (2014: R28 million). Annual Financial Statements | 31 March 2015 41 Notes to the financial statements (continued) for the year ended 31 March 2015 4. Financial risk management (continued) 4.1 Credit risk (continued) 4.1.2 Credit exposure The carrying amount of financial assets represents the maximum credit exposure at the reporting date (refer to notes 12, 13, 14, 15, 17, 19 and 20). The following table represents an analysis per credit rating level (as determined by rating agencies) of the credit risk of financial assets, as indicated. Investment Loans Derivatives Finance Trade and Financial Cash and in securities receivable held for risk lease other trading cash management receivables receivables assets equivalents Rm Rm Rm Rm Rm Rm Rm 2015 Group AAA 2 562 – 2 443 – – – – AA 3 694 – 11 506 – – – – AA- 2 240 – – – – – – A1+ – – 385 – 2 838 3 913 5 042 A+ – – 5 304 115 – – – A1 – – 199 – 3 474 1 225 4 898 A- – – 106 – – – – BBB+ – – – 38 – – – A2 – – 8 – 1 420 – – BBB – – – 25 – – – BBB- – – – 3 – – – A3 – – – – 43 – – BB+ – – – 6 – – – B – – – – 8 – – Unrated – 8 915 – 333 11 815 5 24 No credit exposure1 – – – – – 1 179 (1 101) 8 496 8 915 19 951 520 19 598 6 322 8 863 Company AAA 2 562 – 2 443 – – – – AA – – 11 506 – – – – AA- 2 240 – – – – – – A1+ – 6 553 385 – 1 133 3 913 4 234 A+ – – 5 304 115 – – – A1 – – 199 – 2 258 1 225 4 850 A- – – 106 – – – – BBB+ – – – 38 – – – A2 – – 8 – 1 338 – – BBB – – – 25 – – – BBB- – – – 3 – – – A3 – – – – 43 – – BB+ – – – 6 – – – B – – – – 8 – – Unrated – – – 333 17 030 5 3 No credit exposure1 – – – – – – (1 101) 4 802 6 553 19 951 520 21 810 5 143 7 986 1. Instruments that do not expose the group to credit risk. 42 Eskom Holdings SOC Ltd Investment Loans Derivatives Finance Trade and Financial Cash and in securities receivable held for risk lease other trading cash management receivables receivables assets equivalents Rm Rm Rm Rm Rm Rm Rm 2014 Group AAA 8 160 – 465 – – – – AA+ – – – 3 – – – AA 2 747 – 7 110 – – – – A1+ – – 2 170 – 2 503 1 798 9 758 A+ – – 1 611 – – – – A – – 298 – – – – A1 – – 519 – 1 170 1 255 8 360 A- – – – 3 – – – A2 – – – – 164 – – BBB- – – – 6 – – – A3 – – – – 91 – 67 Unrated – 8 983 – 526 12 653 173 2 No credit exposure1 – – – – – 1 039 1 489 10 907 8 983 12 173 538 16 581 4 265 19 676 Company AAA 8 160 – 465 – – – – AA+ – – – 3 – – – AA – – 7 110 – – – – A1+ – 6 665 2 170 – 2 482 1 798 9 242 A+ – – 1 611 – – – – A – – 298 – – – – A1 – – 519 – 1 170 1 255 8 311 A- – – – 3 – – – A2 – – – – 219 – – BBB- – – – 6 – – – A3 – – – – 156 – – Unrated – – – 526 12 871 173 2 No credit exposure1 – – – – – – 1 489 8 160 6 665 12 173 538 16 898 3 226 19 044 Group Company 2015 2014 2015 2014 Note Rm Rm Rm Rm The maximum exposure to credit risk for trade and other receivables per class was: Electricity receivables 4.1.2 (a) 15 227 14 602 15 227 14 602 International 826 1 044 826 1 044 Local large power users 12 150 11 489 12 150 11 489 Local small power users 2 224 2 028 2 224 2 028 Service delivery framework 2 27 41 27 41 Other trade receivables Local 4.1.2 (b) 104 381 – – Other receivables 4.1.2 (c) 4 267 1 598 6 583 2 296 Recoverable work 149 193 149 124 Employee receivables 49 63 46 58 Inter-company receivables – – 5 210 1 040 Reinsurance receivables 2 755 – – – Concession receivables 31 28 – – Sundry receivables 1 283 1 314 1 178 1 074 17 19 598 16 581 21 810 16 898 The maximum exposure to credit risk for loans receivable was (refer to note 4.1.2 (d)): 13 8 915 8 983 6 553 6 665 The maximum exposure to credit risk for non-current assets 21 – 9 – – held-for-sale (trade and other receivables) was (refer to note 4.1.2 (e)): 1. Instruments that do not expose the group to credit risk. 2. Negotiated agreement with stakeholders in residential areas which is a specific initiative aimed at resolving the non-payment of accounts. Annual Financial Statements | 31 March 2015 43 Notes to the financial statements (continued) for the year ended 31 March 2015 4. Financial risk management (continued) 4.1 Credit risk (continued) 4.1.2 Credit exposure (continued) (a) Electricity receivables Group and company Carrying Not impaired1 Impaired2 amount Not past Days past due Not past Days past due due due 0-15 16-45 46-75 >75 0-15 16-45 46-75 >75 Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm 2015 Individually assessed for impairment International 826 764 62 – – – – – – – – Gross 841 764 62 – – – – – – – 15 Impairment (15) – – – – – – – – – (15) Local large power users 12 150 9 815 242 87 3 20 936 113 159 179 596 Gross 15 511 9 815 242 87 3 20 941 227 254 375 3 547 Impairment (3 361) – – – – – (5) (114) (95) (196) (2 951) Not past Days past due due 0-30 31-60 >60 Rm Rm Rm Rm Collectively assessed for impairment Local small power users 2 224 1 414 268 204 338 Gross 6 150 1 478 337 254 4 081 Impairment (3 926) (64) (69) (50) (3 743) Service delivery framework 27 – – – 27 Gross 155 – – – 155 Impairment (128) – – – (128) 15 227 Carrying Not impaired1 Impaired2 amount Not past Days past due Not past Days past due due due 0-15 16-45 46-75 >75 0-15 16-45 46-75 >75 Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm 2014 Individually assessed for impairment International 1 044 657 190 197 – – – – – – – Gross 1 058 657 190 197 – – – – – – 14 Impairment (14) – – – – – – – – – (14) Local large power users 11 489 9 033 255 101 8 34 363 246 254 303 892 Gross 13 527 9 033 255 101 8 34 371 252 265 310 2 898 Impairment (2 038) – – – – – (8) (6) (11) (7) (2 006) Not past Days past due due 0-30 31-60 >60 Rm Rm Rm Rm Collectively assessed for impairment Local small power users 2 028 1 275 291 290 172 Gross 5 498 1 361 390 376 3 371 Impairment (3 470) (86) (99) (86) (3 199) Service delivery framework 41 7 1 – 33 Gross 186 8 1 – 177 Impairment (145) (1) – – (144) 14 602 Electricity receivables include an amount of R194 million (2014: R169 million) relating to receivables that were renegotiated3. These electricity receivables would have been past due had their terms not been renegotiated. Interest is accrued on all arrear debts and R700 million (2014: R468 million) was credited to profit or loss within finance income. 1. Receivables past due but not impaired are receivables where contractual payment terms are past due but the group believes that impairment is not required on the basis of the level of security or collateral available and the stage of collection of amounts owed to the group. 2. Impaired receivables are receivables for which the group determines that it is probable that it will be unable to collect all amounts due in accordance with the contractual payment terms. 3. Receivables with renegotiated terms are receivables that have been restructured due to the deterioration in the customer’s financial position and where the group has made concessions that it would not otherwise consider. 44 Eskom Holdings SOC Ltd (b) Other trade receivables Group Carrying Not impaired1 Impaired2 amount Not past Days past due Not past Days past due due due 0-30 31-60 61-90 >90 0-30 31-60 61-90 >90 Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm Individually assessed for impairment 2015 Local 104 86 – 4 3 11 – – – – – Gross 114 86 – 4 3 11 1 – – – 9 Impairment (10) – – – – – (1) – – – (9) 104 2014 Local 381 119 53 48 5 156 – – – – – Gross 393 119 53 48 5 156 – – – – 12 Impairment (12) – – – – – – – – – (12) 381 (c) Other receivables Other receivables comprise mainly receivables for which there are no specific repayment terms. Group Company 2015 2014 2015 2014 Rm Rm Rm Rm Recoverable work 149 193 149 124 Gross 149 194 149 125 Impairment – (1) – (1) Employee receivables 49 63 46 58 Gross 49 63 46 58 Impairment – – – – Inter-company receivables – – 5 210 1 040 Gross – – 5 210 1 040 Impairment – – – – Reinsurance receivables 2 755 – – – Gross 2 755 – – – Impairment – – – – Concession receivables 31 28 – – Gross 31 28 – – Impairment – – – – Sundry receivables 1 283 1 314 1 178 1 074 Gross 1 336 1 359 1 228 1 116 Impairment (53) (45) (50) (42) 4 267 1 598 6 583 2 296 Long outstanding debt or amounts handed over to debt collectors were considered for impairment per class of sundry and employee receivables. 1. Receivables past due but not impaired are receivables where contractual payment terms are past due but the group believes that impairment is not required on the basis of the level of security or collateral available and the stage of collection of amounts owed to the group. 2. Impaired receivables are receivables for which the group determines that it is probable that it will be unable to collect all amounts due in accordance with the contractual payment terms. Annual Financial Statements | 31 March 2015 45 Notes to the financial statements (continued) for the year ended 31 March 2015 4. Financial risk management (continued) 4.1 Credit risk (continued) 4.1.2 Credit exposure (continued) (d) Loans receivable Group Company Carrying Not past Days past due Carrying Not past Days past due amount due amount due 0-30 31-60 >60 0-30 31-60 >60 Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm Collectively assessed for impairment 2015 Home loans 8 684 8 542 43 19 80 – – – – – Loan to subsidiary – – – – – 6 553 6 553 – – – Other 273 258 – 1 14 – – – – – Impairment (42) (17) (1) (1) (23) – – – – – 8 915 8 783 42 19 71 6 553 6 553 – – – 2014 Home loans 8 567 8 442 37 18 70 – – – – – Loan to subsidiary – – – – – 6 665 6 665 – – – Other 451 438 1 1 11 – – – – – Impairment (35) (18) (1) – (16) – – – – – 8 983 8 862 37 19 65 6 665 6 665 – – – Loans receivable include an amount of R64 million (2014: R65 million) relating to receivables that were renegotiated. These loans receivable would have been past due had their terms not been renegotiated. (e) Non-current assets held-for-sale Group Carrying Not past Days past due amount due 0-30 31-60 >60 Rm Rm Rm Rm Rm 2014 Trade and other receivables 9 9 – – – Gross 9 9 – – – Impairment – – – – – (f) Security relating to amounts receivable Group Company 2015 2014 2015 2014 Rm Rm Rm Rm Trade and other receivables The security held against trade and other receivables for the group comprises guarantees and deposits. The estimate of the fair value of the security held is: Electricity receivables 6 052 5 472 6 052 5 472 International 3 – 3 – Local large power users 4 421 4 028 4 421 4 028 Local small power users 1 626 1 442 1 626 1 442 Service delivery framework 2 2 2 2 The total amount of the security above includes R4 416 million (2014: R4 017 million) relating to electricity receivables (international and large power users) which were not impaired. Eskom has called upon security deposits and guarantees from customers who have defaulted on their accounts. Carrying amount of the security deposits and guarantees called upon 72 52 69 49 Loans receivable Loans receivable (home loans) secured by mortgage bonds 8 659 8 546 – – 46 Eskom Holdings SOC Ltd (g) Allowance for impairment Eskom establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables and loans receivable. This allowance consists of a specific loss component that relates to individual exposures, and a collective loss component established for groups of similar receivables in respect of losses that have been incurred but not yet identified. (h) Financial guarantees issued The group’s maximum exposure as a result of financial guarantees issued was R158 million (2014: R165 million) and R1 289 million (2014: R1 284 million) for the company (refer to note 44.1 for more information on financial guarantees issued). 4.2 Market risk Market risk is the risk that the fair value or future cash flows of financial instruments will fluctuate because of changes in foreign exchange rates, commodity prices, interest rates and equity prices. A significant part of the market risk encountered arises from financial instruments that are managed centrally within the treasury division of the group or from contracts containing embedded derivatives. The objective of the group’s market risk management policy is to protect and enhance the statement of financial position and profit or loss by managing and controlling market risk exposures and to optimise the funding of business operations and facilitate capital expansion. Financial instruments managed by the treasury division The treasury division is responsible for managing market risk within the risk management framework approved by Exco and the board. The overall authority for the management of market risks within the treasury division is vested in the asset and liability committee (Alco) and the treasury committee. Measurement and reporting occurs on a daily and/or monthly basis and is performed by an independent section within the treasury division. Financial derivatives are used to manage market risk. Financial instruments managed by other divisions and subsidiaries Market risk arises mainly from changes in foreign exchange rates and to a limited extent from changes in commodity prices and equity prices. The divisions and subsidiaries are responsible for identifying the exposure arising from these risks. They liaise with the centralised treasury division to hedge (economic and cash flow hedges) these exposures appropriately on their behalf. Embedded derivatives Eskom entered into a number of agreements to supply electricity to electricity-intensive industries where the revenue from these contracts is based on commodity prices and foreign currency rates (USD) or foreign production price indices. This gives rise to embedded derivatives that require separation as a result of the different characteristics of the embedded derivative and the host contract. The remaining contractual periods are between five and 14 years. The net impact on profit or loss because of changes in the fair value of the embedded derivatives for the group and company is a fair value gain of R1 310 million (2014: R2 149 million gain). At 31 March 2015, the embedded derivative liabilities were R8 022 million (2014: R9 332 million) for the group and R8 021 million (2014: R9 331 million) for the company. The valuation methods and inputs are discussed in the accounting policies (refer to note 2.11.5) and the valuation assumptions are disclosed under critical accounting estimates and judgements (refer to note 3(a)). Risks arising from these contracts are discussed under the relevant risk areas as follows: • currency risk (refer to note 4.2.1, page 47) • commodity risk (refer to note 4.2.2, page 49) • interest rate risk (refer to note 4.2.3, page 50) • other price risk (refer to note 4.2.5, page 52) Electricity contracts that contain embedded derivatives are considered for economic hedging. Hedging in respect of commodity risk and foreign currency exposure resulting from these embedded derivatives takes place on a short-term basis in terms of the South African Reserve Bank (SARB) regulations. Loans receivable Market risk arises in respect of loans receivable from changes in interest rates and market prices. Market risk is monitored and analysed through the treasury division and reported to the EFC finance, assurance and risk committee. A strategy aimed at protecting the EFC group from changes in market risk that may have a negative impact on earnings has been implemented. Funds to finance operations are raised over the short term, usually for periods of three to six months, but not exceeding one year. This enables the pricing of assets to be matched with changes in the pricing of liabilities. The cost of funding is based on prevailing conditions in the South African money market. Rates charged on outstanding loan receivables are based on movements in the SARB repurchase rate. 4.2.1 Currency risk Currency risk arises primarily from purchasing imported goods and services directly from overseas or indirectly via local suppliers, foreign sales and foreign borrowings. The group is exposed to foreign exchange risk arising from future commercial transactions and recognised assets and liabilities that are denominated in a currency other than the functional currency of the group. All transactions in excess of R150 000 are hedged (ie economic or cash flow hedges). Currency exposure is identified by the business and hedged and managed by the central treasury division. Hedging instruments consist principally of forward exchange contracts, most of which have a maturity of less than one year from the reporting date, but which are rolled over at maturity when necessary. The group also uses cross-currency swaps. The hedging instrument is entered into once the exposure is firm and ascertainable. Annual Financial Statements | 31 March 2015 47 Notes to the financial statements (continued) for the year ended 31 March 2015 4. Financial risk management (continued) 4.2 Market risk (continued) 4.2.1 Currency risk (continued) The major exposure to foreign currency risk at 31 March, based on notional amounts, was (in million): EUR USD GBP JPY SEK AUD CHF CAD NOK 2015 Group Liabilities Debt securities and borrowings (2 317) (4 969) – (14 930) – – – (1) – Trade and other payables (230) (37) (53) (15) (24) – – (1) (1) Gross statement of financial position exposure (2 547) (5 006) (53) (14 945) (24) – – (2) (1) Estimated forecast purchases1 (1 183) (227) (15) (860) (36) (1) (14) (2) – Gross exposure (3 730) (5 233) (68) (15 805) (60) (1) (14) (4) (1) Derivatives held for risk management 3 721 5 226 68 15 805 48 – 14 3 1 Net exposure (9) (7) – – (12) (1) – (1) – Company Liabilities Debt securities and borrowings (2 317) (4 969) – (14 930) – – – (1) – Trade and other payables (229) (37) (52) (15) (24) – – (1) (1) Gross statement of financial position exposure (2 546) (5 006) (52) (14 945) (24) – – (2) (1) Estimated forecast purchases1 (1 183) (227) (15) (860) (36) (1) (14) (2) – Gross exposure (3 729) (5 233) (67) (15 805) (60) (1) (14) (4) (1) Derivatives held for risk management 3 721 5 226 67 15 805 48 – 14 3 1 Group exposures covered by company (1) – (1) – – – – – – Net exposure (9) (7) (1) – (12) (1) – (1) – Group and company Derivatives held for risk management – rand equivalent 48 647 63 659 1 221 1 604 68 4 179 33 1 2014 Group Assets Trade and other receivables 1 – – – 3 – – – – Liabilities Debt securities and borrowings (2 309) (4 226) – (16 425) – – – – – Trade and other payables (232) (382) (60) (92) (11) – – (1) (1) Gross statement of financial position exposure (2 540) (4 608) (60) (16 517) (8) – – (1) (1) Estimated forecast purchases1 (1 359) (194) (39) (998) (37) (2) (2) (2) (5) Gross exposure (3 899) (4 802) (99) (17 515) (45) (2) (2) (3) (6) Derivatives held for risk management 3 832 4 801 99 17 525 48 2 2 2 3 Net exposure (67)2 (1) – 10 3 – – (1) (3) Company Assets Trade and other receivables 1 – – – 3 – – – – Liabilities Debt securities and borrowings (2 309) (4 226) – (16 425) – – – – – Trade and other payables (230) (382) (60) (92) (11) – – (1) (1) Gross statement of financial position exposure (2 538) (4 608) (60) (16 517) (8) – – (1) (1) Estimated forecast purchases1 (1 360) (194) (39) (998) (37) (2) (2) (2) (5) Gross exposure (3 898) (4 802) (99) (17 515) (45) (2) (2) (3) (6) Derivatives held for risk management 3 830 4 801 99 17 525 48 2 2 2 3 Group exposures covered by company (2) (1) – – – – – – – Net exposure (70)2 (2) – 10 3 – – (1) (3) Group and company Derivatives held for risk management – rand equivalent 55 828 50 728 1 747 1 793 79 18 26 17 4 1. Represents future purchases contracted for. 2. Certain foreign loans are hedged applying a present value strategy. As these loans are recognised at amortised cost, an exact offset will not occur when compared to the hedging instrument. 48 Eskom Holdings SOC Ltd The following significant exchange rates applied for the group and company during the year: One unit of the selected currency R1.00 to the selected currency to the rand Average Reporting date Average Reporting date mid-spot rate mid-spot rate 2015 2014 2015 2014 2015 2014 2015 2014 EUR 13.98 13.57 13.07 14.57 0.07 0.07 0.08 0.07 USD 11.07 10.12 12.18 10.57 0.09 0.10 0.08 0.09 GBP 17.81 16.10 18.01 17.58 0.06 0.06 0.06 0.06 CHF 11.91 11.04 12.51 11.95 0.08 0.09 0.08 0.08 JPY 0.10 0.10 0.10 0.10 10.00 10.00 10.00 10.00 SEK 1.52 1.55 1.41 1.63 0.66 0.65 0.71 0.61 CAD 9.73 9.60 9.57 9.58 0.10 0.10 0.10 0.10 AUD 9.65 9.42 9.26 9.77 0.10 0.11 0.11 0.10 NOK 1.66 1.69 1.50 1.76 0.60 0.59 0.67 0.57 Sensitivity analysis The group is mainly exposed to euros and United States dollars. The sensitivity analysis has been performed on the same basis as the prior year. The analysis assumes that all other variables, in particular interest rates, remain constant and are as follows: Group and company 2015 2014 1% 1% 1% 1% increase decrease increase decrease Rm Rm Rm Rm Profit/(loss), excluding embedded derivatives Total exposure 335 (335) 369 (369) Rand/euro exposure 231 (231) 273 (273) Rand/USD exposure 92 (92) 86 (86) Rand/other currency 12 (12) 10 (10) Equity, excluding embedded derivatives Total exposure 140 (140) 160 (160) Rand/euro exposure 125 (125) 142 (142) Rand/USD exposure 15 (15) 17 (17) Rand/other currency – – 1 (1) Profit/(loss) – embedded derivatives Rand/USD exposure 127 (123) 152 (156) 4.2.2 Commodity risk The group is exposed to commodity risk where commodities are used either directly (eg coal or liquid fuels) or indirectly as a component of plant, equipment or inventory (eg aluminium, copper or steel). The revenue from certain negotiated pricing arrangements is linked to commodity prices. The exposures are hedged economically by means of futures and/or options. Economic hedging is applied where it is practical (a relevant hedging instrument exists) based on the most optimal economic solution and in compliance with the SARB requirements. The underlying exposure to commodity price risk could result in embedded derivatives. Where the embedded derivatives are closely related to the host contracts, the embedded derivatives are not accounted for separately. Where the embedded derivatives are not closely related to the host contracts, the contracts have been valued and accounted for separately. The negotiated pricing arrangements gave rise to commodity-linked (aluminium) embedded derivatives (refer to note 3(a) on page 34). Commodities used directly Eskom purchases coal that is used in the generation of electricity from mines and is exposed to price and supply risks. Eskom has entered into long-term supply agreements with mines to ensure continuous supply of coal. In the fixed price contracts the price escalation is linked to an index, whereas Eskom pays for all the operational and other related costs of the collieries where the contracts are on a cost-plus basis. These contracts are monitored closely and managed to ensure costs are maintained within acceptable levels. Coal requirements above those of the fixed price and cost-plus long-term contracts are supplied via short- to medium-term contracts which could have a transport element included in the purchase price. Annual Financial Statements | 31 March 2015 49 Notes to the financial statements (continued) for the year ended 31 March 2015 4. Financial risk management (continued) 4.2 Market risk (continued) 4.2.2 Commodity risk (continued) There is also price risk exposure in the long-term primary energy water supply agreements entered into with the Department of Water Affairs (DWA) where Eskom pays for a portion of the operational costs incurred by DWA on certain of the water schemes. Eskom is exposed to price risk on the diesel that is used for the generation of electricity at its Open-Cycle gas turbine power stations. The price of diesel is a function of the crude oil and USD exchange rates. Commodities used indirectly There was no material exposure where commodities formed a part of plant, equipment or inventory at year end. Eskom currently does not hedge its exposure to steel as no economic viable hedging instruments exist. Sensitivity analysis The group is exposed mainly to changes in the aluminium price. The sensitivity analysis has been performed on the same basis as the prior year. The analysis assumes that all other variables remain constant and the possible impact on profit or loss is: Group and company 2015 2014 1% 1% 1% 1% increase decrease increase decrease Rm Rm Rm Rm Profit/(loss), including embedded derivatives1 Aluminium price 104 (104) 130 (130) The periods of the hedging instrument and that of the hedged item are not the same because of SARB regulations that limit the number of years which can be hedged. 4.2.3 Interest rate risk Interest rate risk is the risk that the group’s financial position may be adversely affected as a result of changes in interest rate levels, yield curves and spreads. The group’s interest rate risk arises mainly from debt securities, borrowings and forward exchange contracts. Borrowings and debt securities issued at variable rates expose the group to cash flow interest rate risk. Borrowings and debt securities issued at fixed rates expose the group to fair value interest rate risk. The group’s policy is to restrict the maximum effective portion of the external debt (excluding the trading portfolio which is managed within the constraints of the treasury policy and control manual) exposed to an interest rate reset within the next 12-month period to 40%. Refer to note 24 for the group’s quantitative exposure to interest rate risk. Sensitivity analysis The group analyses its interest rate exposure on a dynamic basis by conducting a sensitivity analysis. This involves determining the impact on profit or loss of defined interest rate shifts. For each simulation, the same interest rate shift is used for all currencies. The sensitivity analysis for interest rate risk assumes that all other variables, in particular spot foreign exchange rates, remain constant. The calculation excludes borrowing costs capitalised in terms of the group’s accounting policy. The analysis relates to variable-rate instruments and has been performed on the same basis as the prior year. The simulation is performed on a monthly basis to verify that the maximum loss potential is within the limit set by management. The results of the simulation are included in the table below. The ZAR and the USD interest rates are used in determining the fair value of embedded derivatives. The sensitivity analysis below indicates the impact on profit or loss if these rates change. The sensitivity analysis assumes that all other variables remain constant and has been prepared on the same basis as for the prior year. 1. Impact on profit or loss is before calibration adjustment. 50 Eskom Holdings SOC Ltd Group Company 2015 2014 2015 2014 +100 basis -100 basis +100 basis -100 basis +100 basis -100 basis +100 basis -100 basis points points points points points points points points Rm Rm Rm Rm Rm Rm Rm Rm Profit/(loss), excluding embedded derivatives Total exposure (44) 48 (66) 78 (53) 57 (66) 78 Rand interest rates 225 (238) 215 (221) 216 (229) 215 (221) EUR interest rates (59) 60 (86) 88 (59) 60 (86) 88 USD interest rates (195) 212 (185) 201 (195) 212 (185) 201 Other currency interest rates (15) 14 (10) 10 (15) 14 (10) 10 Equity, excluding embedded derivatives Total exposure (1 612) 1 951 (1 176) 1 291 (1 594) 1 933 (1 168) 1 283 Rand interest rates 1 742 (1 639) 1 648 (1 768) 1 760 (1 657) 1 656 (1 776) EUR interest rates (841) 889 (660) 717 (841) 889 (660) 717 USD interest rates (2 478) 2 671 (2 126) 2 302 (2 478) 2 671 (2 126) 2 302 Other currency interest rates (35) 30 (38) 40 (35) 30 (38) 40 Profit/(loss) – embedded derivatives1 Total exposure 223 (258) 300 (336) 223 (258) 300 (336) Rand interest rates 659 (709) 886 (950) 659 (709) 886 (950) USD interest rates (436) 451 (586) 614 (436) 451 (586) 614 Fixed and floating rate debt The fixed and floating rate debt at 31 March were: Group and company 2015 2014 fixed floating fixed floating % % % % Continuing operations 82 18 78 22 4.2.4 Equity price risk Equity price risk arises from investments listed on the JSE. Changes in the fair value of equity securities held by the group will fluctuate because of changes in market prices, caused by factors specific to the individual equity issuer, or factors affecting all similar equity securities traded on the market. The investment mandate is stipulated by the Eskom board and is monitored by the Escap investment committee. Exposure to market risk is limited through diversification and by applying strict investment criteria. The carrying value of investments made per sector is as follows: Group 2015 2014 Portfolio Portfolio Rm % Rm % Banks, financial services and insurance 298 25 234 23 Basic materials and resources 233 20 246 24 Consumer goods and services 465 39 317 31 Industrial 43 4 93 9 Telecommunications 76 6 104 10 Other 64 6 45 3 1 179 100 1 039 100 A 1% increase of the share price in the equity portfolio at the reporting date would have increased profit or loss by R12 million (2014: R10 million) after tax. An equal change in the opposite direction would have decreased profit or loss by R12 million (2014: R10 million). There will be no impact on equity. The analysis assumes that all other variables remain constant and is performed on the same basis as for the prior year. 1. Impact on profit or loss is before calibration adjustment. Annual Financial Statements | 31 March 2015 51 Notes to the financial statements (continued) for the year ended 31 March 2015 4. Financial risk management (continued) 4.2 Market risk (continued) 4.2.5 Other price risk Inflation price risk arises from embedded derivatives as discussed under note 3(a). The risk arises from movements in the electricity tariffs and the United States PPI. Refer to note 25 for the group’s quantitative exposure to other price risk. The following is the sensitivity analysis of the change in the value of the embedded derivatives (relating to customised pricing agreements) as a result of changes in electricity tariffs and the United States PPI. The analysis assumes that all other variables remain constant and the possible impact on profit or loss is: Group and company 2015 2014 1% 1% 1% 1% increase decrease increase decrease Rm Rm Rm Rm Profit/(loss) – embedded derivatives1 Total exposure (416) 400 (612) 590 Electricity tariffs (568) 553 (790) 765 United States PPI 152 (153) 178 (175) 4.3 Liquidity risk Liquidity risk is the risk that the group will not have sufficient financial resources to meet its obligations when they fall due, or will have to do so at excessive cost. This risk can arise from mismatches in the timing of cash flows from revenue and capital and operational outflows. Funding risk arises when the necessary liquidity to fund illiquid asset positions, such as building new electricity capacity, cannot be obtained at the expected terms and when required. The objective of the group’s liquidity and funding management is to ensure that all foreseeable operational, capital expansion and loan commitment expenditure can be met under both normal and stressed conditions. The group has adopted an overall statement of financial position approach, which consolidates all sources and uses of liquidity, while aiming to maintain a balance between liquidity, profitability and interest rate considerations. The management of consolidated liquidity and funding risk is centralised in the treasury department in accordance with practices and limits set by the Exco and the board. The group’s liquidity and funding management process includes: • projecting cash flows and considering the cash required by the group and optimising the short-term liquidity as well as the long-term funding • monitoring financial position liquidity ratios • maintaining a diverse range of funding sources with adequate back-up facilities • managing the concentration and profile of debt maturities • actively managing the funding risk by evaluating optimal entry points into the various markets per the official borrowing programme • maintaining liquidity and funding contingency plans Eskom has an established corporate governance structure and process for managing the risks regarding guarantees and contingent liabilities. All significant guarantees issued by Eskom are approved by the board, and are managed on an ongoing basis through the quarterly meetings of the treasury credit committee, and by the Exco and audit and risk committee of the board. Refer to note 44. The guarantees are administratively managed by the Treasury department. Updated guarantee schedules are compiled every month, taking cognisance of any changed risk factors, and are submitted to each of the committees for consideration and action, if necessary. Risk factors and assumptions affecting probability calculations are re-assessed twice a year and presented to the above committees. Eskom’s guarantees are diverse and unlinked, such that a trigger event for any one guarantee is unlikely to precipitate a trigger event in respect of other guarantees. Given that there would be forewarning of payments required in terms of the other guarantees, and considering the amounts of the guarantees, it is expected that Eskom will be able to raise the required liquidity to effect any required payments. Primary sources of funding and unused facilities The primary sources to meet Eskom’s liquidity requirements are cash generated from operations, cash inflows from maturing financial assets purchased, funds committed by government, signed and committed export credit agencies and development funding institution facilities, as well as local and foreign debt issued in the market. To supplement these liquidity sources under stress conditions, overdraft facilities (for which there was no requirement to use), undrawn loans, commercial paper facilities and unutilised government guarantees are in place as indicated in the table. All figures are quoted in millions based on national amounts. 1. Impact on profit or loss is before calibration adjustment. 52 Eskom Holdings SOC Ltd ZAR EUR USD JPY 2015 2014 2015 2014 2015 2014 2015 2014 m m m m m m m m Facilities available Export credit agencies – – 921 1 107 483 499 – 4 133 Japan Bank for International Cooperation – – – – – – – 4 133 Crédit Agricole Corporate and Investment Bank – Coface – – 44 108 – – – – BNP Paribas – Coface – – 231 236 – – – – BNP Paribas – Servizi Assicuratiri del Commercio Estero – – 261 263 – – – – Kreditanstalt für Wiederaufbau – Hermes – – 357 456 – – – – Deutsche Bank – Hermes – – 28 44 – – – – Export-Import Bank of the United States – – – – 483 499 – – Development financing institutions 7 377 7 049 503 531 2 214 2 980 – – World Bank – – – – 1 572 2 275 – – African Development Bank 316 316 331 431 256 261 – – Development Bank of South Africa 3 000 6 000 – – – – – – Clean technology fund – African Development Bank – – – – 65 95 – – Clean technology fund – World Bank – – – – 221 249 – – European Investment Bank – – 75 – – – – – Kreditanstalt für Wiederaufbau 3 935 – – – 100 100 – – Agence Française de Développement 126 733 97 100 – – – – Government guarantees1 191 189 206 339 – – – – – – Domestic multi-term note programme 49 774 9 950 – – – – – – General guarantees 141 415 196 389 – – – – – – General banking facilities 1 450 250 – – – – – – 200 016 213 638 1 424 1 638 2 697 3 479 – 4 133 Funds received during the year Export credit agencies – – 100 151 16 301 906 2 587 Japan Bank for International Cooperation – – – – – – 906 2 587 BNP Paribas – Coface – – – 30 – – – – BNP Paribas – Servizi Assicurativi del Commercio Estero – – – 37 – – – – Kreditanstalt für Wiederaufbau – Hermes – – 85 66 – – – – Deutsche Bank – Hermes – – 15 18 – – – – Export-Import Bank of the United States – – – – 16 301 – – Development financing institutions 3 607 2 600 103 173 766 341 – – World Bank 2 – – – – 703 331 – – African Development Bank 3 – 382 100 173 5 4 – – Development Bank of South Africa4 3 000 2 000 – – – – – – Clean technology fund – World Bank 5 – – – – 28 1 – – Clean technology fund – African Development Bank 5 – – – – 30 5 – – Agence Française de Développement 6075,6 2184 35,6 – – – – – 3 607 2 600 203 324 782 642 906 2 587 Government guarantees used during the year 15 151 10 819 – – – – – – Domestic multi-term note programme 10 176 10 819 – – – – – – General guarantees 4 975 – – – – – – – 1. The domestic multi-term note programme facility increased by R50 billion during 2015 with a corresponding decrease of R50 billion in the uncommitted facility. 2. All funds received were reimbursements on payments made by Eskom to various suppliers for goods and services supplied for the construction of the Medupi power station, Sere wind farm and Majuba rail projects. 3. All funds received were reimbursements on payments made by Eskom to various suppliers for goods and services supplied for the Medupi boilers and turbines and Sere wind farm. 4. Funds received were used as bridging finance for the capacity expansion programme. 5. Funds received were used for the Sere wind farm project. 6. Funds received were used for concentrated solar power projects. Annual Financial Statements | 31 March 2015 53 Notes to the financial statements (continued) for the year ended 31 March 2015 4. Financial risk management (continued) 4.3 Liquidity risk (continued) Key indicators used for liquidity management Duration Management has set minimum duration limits to help optimise returns for the group on its debt portfolio. Group policy is to ensure that the external debt portfolio (excluding the trade portfolio) has a minimum duration of five years, should it exceed R10 billion. The duration limits are independently monitored and reported to Alco on a monthly basis and to the Exco and the audit and risk committee on a quarterly basis. The duration (a weighted average term to maturity measure based on future cash flows) of the debt (including the shareholder loan, cross-currency swaps and interest rate swaps) measured at fair value at 31 March was: Group and company 2015 2014 years years Continuing operations 6.14 5.59 Liquid assets Liquid assets are investments identified as having the potential to be quickly converted into cash. These investments include the instruments as disclosed in investments in securities and cash and cash equivalents (refer to note 12 and 20). The liquid assets were: Group Company 2015 2014 2015 2014 Rm Rm Rm Rm Continuing operations 17 359 30 583 12 788 27 204 Capital expenditure ratio The capital expenditure ratio1 measures whether there are liquid funds available to invest in capital expenditure. The capital expenditure ratio for the period was: Group Company 2015 2014 2015 2014 % % % % Continuing operations 53 43 50 42 Contractual cash flows The table indicates the contractual undiscounted cash flows of the group’s financial assets and liabilities on the basis of their earliest possible contractual maturity. The undiscounted cash flows in respect of the group’s financial assets are presented net of impairment losses and include estimates where there are no contractual repayment terms or the receivable is past due. The cash flows of the group’s financial liabilities are indicated on a gross undiscounted basis. The cash flows for derivatives are presented as gross inflows and outflows even though physically they are settled simultaneously. Contractual cash flows are a function of forward exchange rates and forward interest rates and is a point in time calculation that is impacted by market conditions at that time. The table contains only cash flows relating to financial instruments and financial guarantees. It does not include future cash flows expected from the normal course of business and related commodity-linked pricing agreements. 1. The ratio is calculated as cash generated from operations divided by cash expenditure (excluding borrowing costs capitalised) on property, plant and equipment and intangible assets. 54 Eskom Holdings SOC Ltd Carrying amount Cash flows Non- Current Total Nominal 0-3 4-12 1-5 More than current inflow or months months years 5 years outflow Note Rm Rm Rm Rm Rm Rm Rm Rm 2015 Group Financial assets Investment in securities 12 2 481 6 015 8 496 8 906 573 5 744 2 589 – Loans receivable 13 8 646 269 8 915 21 065 264 785 3 790 16 226 Derivatives held for risk management 14 19 242 709 19 951 30 424 484 48 (3 129) 33 021 Finance lease receivables 15 500 20 520 1 078 21 64 339 654 Trade and other receivables 17 2 787 16 811 19 598 19 732 16 284 527 2 920 1 Financial trading assets1 19 – 6 322 6 322 6 339 5 065 1 184 18 72 Cash and cash equivalents 20 – 8 863 8 863 8 863 8 863 – – – 33 656 39 009 72 665 96 407 31 554 8 352 6 527 49 974 Financial liabilities Debt securities and borrowings 24 250 837 19 976 270 813 559 616 6 232 27 789 112 395 413 200 Subordinated loan from shareholder 24 26 621 – 26 621 146 356 – – – 146 356 Derivatives held for risk management 14 520 2 845 3 365 4 323 1 071 3 027 526 (301) Finance lease payables 29 474 14 488 1 267 25 74 390 778 Trade and other payables 30 1 015 27 404 28 419 28 658 23 744 3 657 901 356 Financial trading liabilities1 19 – 5 499 5 499 5 617 4 863 21 215 518 Financial guarantees 44 – 1 1 158 158 – – – 279 467 55 739 335 206 745 995 36 093 34 568 114 427 560 907 Company Financial assets Investment in securities 12 2 481 2 321 4 802 5 212 14 2 609 2 589 – Loans receivable 13 – 6 553 6 553 6 684 2 720 3 964 – – Derivatives held for risk management 14 19 242 709 19 951 30 424 484 48 (3 129) 33 021 Finance lease receivables 15 500 20 520 1 078 21 64 339 654 Trade and other receivables 17 3 257 18 553 21 810 21 990 17 224 1 329 3 436 1 Financial trading assets1 19 – 5 143 5 143 5 160 5 065 5 18 72 Cash and cash equivalents 20 – 7 986 7 986 7 986 7 986 – – – 25 480 41 285 66 765 78 534 33 514 8 019 3 253 33 748 Financial liabilities Debt securities and borrowings 24 249 333 22 176 271 509 560 313 12 432 23 790 111 035 413 056 Subordinated loan from shareholder 24 26 621 – 26 621 146 356 – – – 146 356 Derivatives held for risk management 14 520 2 845 3 365 4 323 1 071 3 027 526 (301) Finance lease payables 29 637 70 707 1 526 43 128 574 781 Trade and other payables 30 1 015 28 773 29 788 30 029 26 083 2 689 901 356 Financial trading liabilities1 19 – 5 499 5 499 5 617 4 863 21 215 518 Financial guarantees 44 – 2 2 1 289 1 289 – – – 278 126 59 365 337 491 749 453 45 781 29 655 113 251 560 766 1. The contractual cash flows for financial trading assets and liabilities have been disclosed based on the contractual maturity of the instrument. However, as these instruments are held-for-trading they may be sold or settled prior to contractual maturity. Annual Financial Statements | 31 March 2015 55 Notes to the financial statements (continued) for the year ended 31 March 2015 4. Financial risk management (continued) 4.3 Liquidity risk (continued) Contractual cash flows (continued) Carrying amount Cash flows Non- Current Total Nominal 0-3 4-12 1-5 More than current inflow or months months years 5 years outflow Note Rm Rm Rm Rm Rm Rm Rm Rm 2014 Group Financial assets Investment in securities 12 4 841 6 066 10 907 11 646 1 595 5 166 4 885 – Loans receivable 13 8 654 329 8 983 20 762 275 806 3 819 15 862 Derivatives held for risk management 14 9 361 2 812 12 173 23 902 2 268 591 (1 687) 22 730 Finance lease receivables 15 520 18 538 1 165 22 64 342 737 Trade and other receivables 17 27 16 554 16 581 16 580 16 522 31 27 – Financial trading assets1 19 – 4 265 4 265 5 438 3 478 306 212 1 442 Cash and cash equivalents 20 – 19 676 19 676 19 676 19 676 – – – 23 403 49 720 73 123 99 169 43 836 6 964 7 598 40 771 Financial liabilities Debt securities and borrowings 24 210 169 20 258 230 427 467 676 8 282 22 440 103 573 333 381 Subordinated loan from shareholder 24 24 393 – 24 393 146 356 – – – 146 356 Derivatives held for risk management 14 310 1 197 1 507 467 280 2 558 2 736 (5 107) Finance lease payables 29 488 12 500 1 367 25 73 396 873 Trade and other payables 30 1 037 28 229 29 266 29 498 27 294 931 1 268 5 Financial trading liabilities1 19 – 5 658 5 658 6 337 4 670 303 387 977 Financial guarantees 44 – – – 165 165 – – – 236 397 55 354 291 751 651 866 40 716 26 305 108 360 476 485 Company Financial assets Investment in securities 12 4 841 3 319 8 160 8 898 36 3 977 4 885 – Loans receivable 13 – 6 665 6 665 6 790 2 698 4 092 – – Derivatives held for risk management 14 9 361 2 812 12 173 23 902 2 268 591 (1 687) 22 730 Finance lease receivables 15 520 18 538 1 165 22 64 342 737 Trade and other receivables 17 16 16 882 16 898 16 897 16 850 31 16 – Financial trading assets1 19 – 3 226 3 226 4 398 2 438 306 212 1 442 Cash and cash equivalents 20 – 19 044 19 044 19 044 19 044 – – – 14 738 51 966 66 704 81 094 43 356 9 061 3 768 24 909 Financial liabilities Debt securities and borrowings 24 208 649 22 227 230 876 468 256 9 768 23 496 101 747 333 245 Subordinated loan from shareholder 24 24 393 – 24 393 146 356 – – – 146 356 Derivatives held for risk management 14 310 1 197 1 507 467 280 2 558 2 736 (5 107) Finance lease payables 29 705 64 769 1 698 43 130 642 883 Trade and other payables 30 1 073 29 849 30 922 31 154 28 914 931 1 304 5 Financial trading liabilities1 19 – 5 658 5 658 6 337 4 670 303 387 977 Financial guarantees 44 – 1 1 1 284 1 284 – – – 235 130 58 996 294 126 655 552 44 959 27 418 106 816 476 359 1. The contractual cash flows for financial trading assets and liabilities have been disclosed based on the contractual maturity of the instrument. However, as these instruments are held-for-trading they may be sold or settled prior to contractual maturity. 56 Eskom Holdings SOC Ltd 4.4 Capital management and going concern Eskom manages accumulated profit and the hedging, fair value and equity reserves as capital. The equity reserve comprises the day- one gains that result from the initial recognition of the subordinated loan tranches received from the shareholder. The day-one gains are included in equity as it is considered to be a contribution from the shareholder. Eskom is obliged to pay interest on the loan when the solvency and leverage conditions per the agreement are satisfied. Future projections result in the day-one gains. Refer to note 24. The table shows the amounts of the reserves which Eskom manages as capital: Group Company 2015 2014 2015 2014 Rm Rm Rm Rm Accumulated profit 89 777 90 786 83 587 85 666 Cash flow hedge reserve 5 699 6 178 5 699 6 178 Unrealised fair value reserve (3 771) (7 744) (3 771) (7 744) Equity reserve 30 520 30 520 30 520 30 520 122 225 119 740 116 035 114 620 The objective of capital management is to ensure that Eskom is sustainable over the long term. There were no changes to Eskom’s approach to capital management during the financial year. The major items that impact the equity of Eskom include: • the revenue received from electricity sales (which is a function of price and sales volumes) • the cost of funding the current business • the cost of operating the electricity business • the cost of expanding the business to ensure that capacity growth is in line with electricity sales demand (funding and additional depreciation) • taxation • dividends Eskom uses the Integrated Strategic Electricity Planning process which forecasts the growth in electricity demand for the long term and evaluates the alternative means to meet and manage that demand. This information flows into the planning process. The planning process will determine a forward electricity price curve which will be an indication of the size of the price increases which Eskom requires to be sustainable over the long term. The tariff increases for the electricity business are subject to the process laid down by the National Energy Regulator of South Africa (NERSA). The current regulatory framework applicable to Eskom is the multi-year five year determination ending on 31 March 2018. The electricity business is currently in a major expansion phase and the funding related to generating, transmitting and other capacity is envisaged to be obtained from cash generated by the business, shareholder support and funds borrowed on the local and foreign debt markets. The adequacy of price increases allowed by the regulator and the level and timing of shareholder support are key factors in the sustainability of Eskom. The financial sustainability is dependent on reaching cost reflective prices sooner rather than later. The government as the sole shareholder and the board have the responsibility to ensure that the group is adequately capitalised to ensure continuity of supply and that the business is attractive to investors to enable Eskom to fund the capacity expansion programme. Eskom did not receive a cost reflective tariff in the NERSA Multi-Year Price Determination (MYPD) 3 decision which created a revenue shortfall of R225 billion over the MYPD 3 period which has placed tremendous strain on the financial and operating sustainability of the group. The board has critically examined its activities and costs in order to balance its cash flow requirements through the Business Productivity Programme to identify cost saving and efficiency opportunities to reduce the revenue shortfall. NERSA decided in Eskom’s favour regarding an RCA adjustment application of a R7.8 billion variance between assumed and actual costs and revenues for year 3 of MYPD 2 (2013 financial year). This variance will be recovered in the 2016 financial year through an adjustment to the electricity price increase from 8% to 12.69%. Eskom submitted an RCA adjustment application for a R38 billion variance for year 1 of MYPD 3 (2014 financial year) in February 2015. NERSA will decide on the application after following their governance processes. Based on Eskom’s submission for a selective reopener relating to the Open-Cycle Gas Turbines and Short-Term Power Purchase Programme, NERSA announced in May 2015 their intention to conduct a public consultation process upon this application. A decision in this regard is expected on 29 June 2015. Eskom is calculating the RCA adjustment variance for the year 2 of MYPD 3 (2015 financial year). Eskom will also initiate a reopening for the remainder of the MYPD period. The board is pursuing alternative funding options, including potential government support. Annual Financial Statements | 31 March 2015 57 Notes to the financial statements (continued) for the year ended 31 March 2015 4. Financial risk management (continued) 4.4 Capital management and going concern (continued) In response to the financial position resulting from the NERSA MYPD 3 determination, Eskom will trade off its former objective of attaining a standalone investment grade rating and will instead aim to sustain this rating with sovereign uplift and is monitoring the relevant performance ratios as part of its financial policy. The free funds from operations (FFO) to total debt and total debt to earnings before interest, tax, depreciation and amortisation (EBITDA) ratios play an important role in the credit ratings given to Eskom which in turn influences the cost of funding. The board has given particular attention to the assessment of the going concern of the group and is of the view that the group has access to adequate resources to continue in operational existence for the foreseeable future and to complete its current committed capacity expansion programme. The following are closely managed: Group Unit 2015 2014 EBITDA Rm 25 201 25 115 FFO Rm 36 179 31 158 Interest cover ratio 0.49 0.79 Electricity revenue per kWh c/kWh 68.51 61.83 At standard tariffs c/kWh 67.91 62.81 Adjusted for impact of embedded derivatives c/kWh 0.61 (0.99) Cost per kWh c/kWh 66.68 60.61 Primary energy c/kWh 38.57 32.04 Net employee benefit expense c/kWh 10.26 10.27 Depreciation and amortisation expense c/kWh 6.47 5.48 Net impairment loss c/kWh 2.01 0.71 Net other expenses (including other revenue and other income) c/kWh 6.48 9.65 Net fair value (gain)/loss on financial instruments, excluding embedded derivatives c/kWh (0.25) 0.35 Net finance cost c/kWh 3.13 2.12 FFO as percentage of gross debt % 11.00 11.22 Gross debt: EBITDA ratio 13.05 11.06 Debt: equity ratio 2.37 1.94 Working capital ratio 0.81 0.71 Rating Outlook 2015 2014 2015 2014 Standard & Poor’s Foreign currency BB+ BBB Negative Negative Local currency BB+ BBB Negative Negative Moody’s Foreign currency Ba1 Baa3 Stable Negative Local currency Ba1 Baa3 Stable Negative Fitch Ratings National long-term (zaf) AAA AAA Stable Stable National short-term (zaf) F1+ F1+ Stable Stable 4.5 Accounting classifications and fair values Valuation processes The group has established a controlled framework with respect to the measurement of fair values. It includes a valuation team that ultimately reports to the finance director and has overall responsibility for all significant fair value measurements. The valuation team regularly reviews significant unobservable inputs and valuation adjustments. If third party information, such as broker quotes or pricing services, is used to measure fair value, then the valuation team assesses and documents the evidence obtained from the third parties to support their conclusion that such valuations meet the requirements of IFRS, including the level in the fair value hierarchy that the resulting fair value estimate should be classified to. Principal markets The group is involved in various principal markets because of the unique funding activities undertaken by the group. The fair value will be determined by each participant in the different principal markets. The principal markets are: • capital and money markets • development financing institutions • export credit agencies 58 Eskom Holdings SOC Ltd Held-for- Loans and Available- Liabilities at Other Total Total trading receivables for-sale amortised assets and carrying fair value cost liabilities amount Note Rm Rm Rm Rm Rm Rm Rm 2015 Group Financial assets Investment in securities 12 – – 8 496 – – 8 496 8 496 Government bonds – – 4 802 – – 4 802 4 802 Negotiable certificates of deposit – – 3 694 – – 3 694 3 694 Loans receivable1 13 – 8 915 – – – 8 915 7 474 Secured by mortgages – 8 659 – – – 8 659 7 315 Other – 256 – – – 256 159 Derivatives held for risk management 14 1 541 – – – 18 410 19 951 19 951 Foreign exchange derivatives 1 524 – – – 18 410 19 934 19 934 Commodity derivatives 8 – – – – 8 8 Credit default swap 9 – – – – 9 9 Finance lease receivables2 15 – – – – 520 520 520 Trade and other receivables2 17 – 19 598 – – – 19 598 19 598 Financial trading assets 19 6 322 – – – – 6 322 6 322 Repurchase agreements 5 084 – – – – 5 084 5 084 Listed shares 1 179 – – – – 1 179 1 179 Government bonds 59 – – – – 59 59 Cash and cash equivalents 20 – 8 863 – – – 8 863 8 863 Bank balances – 5 959 – – – 5 959 5 959 Unsettled deals – (1 101) – – – (1 101) (1 101) Fixed deposits – 4 005 – – – 4 005 4 005 7 863 37 376 8 496 – 18 930 72 665 71 224 Financial liabilities Debt securities and borrowings 24 – – – 297 434 – 297 434 269 195 Eskom bonds – – – 112 103 – 112 103 114 838 Promissory notes – – – 40 – 40 47 Commercial paper – – – 7 531 – 7 531 7 377 Eurorand zero coupon bonds – – – 3 942 – 3 942 3 594 Foreign bonds – – – 48 670 – 48 670 48 585 Development financing institutions – – – 62 447 – 62 447 49 691 Export credit facilities – – – 28 488 – 28 488 27 966 Subordinated loan from shareholder – – – 26 621 – 26 621 12 420 Other loans – – – 7 592 – 7 592 4 677 Embedded derivatives 25 – – – – 8 022 8 022 8 022 Derivatives held for risk management 14 1 330 – – – 2 035 3 365 3 365 Foreign exchange derivatives 830 – – – 2 035 2 865 2 865 Commodity derivatives 1 – – – – 1 1 Credit default swap 499 – – – – 499 499 Finance lease payables2 29 – – – – 488 488 488 Trade and other payables2 30 – – – 28 419 – 28 419 28 419 Financial trading liabilities 19 5 499 – – – – 5 499 5 499 Short-sold government bonds 493 – – – – 493 493 Repurchase agreements 5 006 – – – – 5 006 5 006 6 829 – – 325 853 10 545 343 227 314 988 1. The fair value of loans receivable is based on what a market participant would be willing to pay to acquire the loans. This participant would not have the ability to garnish salaries, thus increasing the probability of default resulting in a lower fair value than Eskom’s carrying value. 2. The fair values of these financial instruments approximate their carrying amounts. The effect of discounting is not expected to be material. Annual Financial Statements | 31 March 2015 59 Notes to the financial statements (continued) for the year ended 31 March 2015 4. Financial risk management (continued) 4.5 Accounting classifications and fair values (continued) Held-for- Loans and Available- Liabilities at Other Total Total trading receivables for-sale amortised assets and carrying fair value cost liabilities amount Note Rm Rm Rm Rm Rm Rm Rm 2015 Company Financial assets Investment in securities Government bonds 12 – – 4 802 – – 4 802 4 802 Loans receivable Loans to subsidiaries1 13 – 6 553 – – – 6 553 6 553 Derivatives held for risk management 14 1 541 – – – 18 410 19 951 19 951 Foreign exchange derivatives 1 524 – – – 18 410 19 934 19 934 Commodity derivatives 8 – – – – 8 8 Credit default swap 9 – – – – 9 9 Finance lease receivables1 15 – – – – 520 520 520 Trade and other receivables1 17 – 21 810 – – – 21 810 21 810 Financial trading assets 19 5 143 – – – – 5 143 5 143 Repurchase agreements 5 084 – – – – 5 084 5 084 Government bonds 59 – – – – 59 59 Cash and cash equivalents 20 – 7 986 – – – 7 986 7 986 Bank balances – 5 082 – – – 5 082 5 082 Unsettled deals – (1 101) – – – (1 101) (1 101) Fixed deposits – 4 005 – – – 4 005 4 005 6 684 36 349 4 802 – 18 930 66 765 66 765 Financial liabilities Debt securities and borrowings 24 – – – 298 130 – 298 130 269 890 Eskom bonds – – – 112 103 – 112 103 114 838 Promissory notes – – – 40 – 40 47 Commercial paper – – – 7 027 – 7 027 6 873 Eurorand zero coupon bonds – – – 3 942 – 3 942 3 594 Foreign bonds – – – 48 670 – 48 670 48 585 Development financing institutions – – – 62 447 – 62 447 49 691 Export credit facilities – – – 28 488 – 28 488 27 966 Subordinated loan from shareholder – – – 26 621 – 26 621 12 420 Other loans – – – 8 792 – 8 792 5 876 Embedded derivatives 25 – – – – 8 021 8 021 8 021 Derivatives held for risk management 14 1 330 – – – 2 035 3 365 3 365 Foreign exchange derivatives 830 – – – 2 035 2 865 2 865 Commodity derivatives 1 – – – – 1 1 Credit default swap 499 – – – – 499 499 Finance lease payables1 29 – – – – 707 707 707 Trade and other payables1 30 – – – 29 788 – 29 788 29 788 Financial trading liabilities 19 5 499 – – – – 5 499 5 499 Short-sold government bonds 493 – – – – 493 493 Repurchase agreements 5 006 – – – – 5 006 5 006 6 829 – – 327 918 10 763 345 510 317 270 1. The fair values of these financial instruments approximate their carrying amounts. The effect of discounting is not expected to be material. 60 Eskom Holdings SOC Ltd Held-for- Loans and Available- Liabilities at Other Total Total trading receivables for-sale amortised assets and carrying fair value cost liabilities amount Note Rm Rm Rm Rm Rm Rm Rm 2014 Group Financial assets Investment in securities 12 – – 10 907 – – 10 907 10 907 Government bonds – – 8 160 – – 8 160 8 160 Negotiable certificates of deposit – – 2 747 – – 2 747 2 747 Loans receivable 13 – 8 983 – – – 8 983 7 408 Secured by mortgages – 8 546 – – – 8 546 7 139 Other – 437 – – – 437 269 Derivatives held for risk management 14 2 344 – – – 9 829 12 173 12 173 Foreign exchange derivatives 2 289 – – – 9 829 12 118 12 118 Commodity derivatives 51 – – – – 51 51 Credit default swap 4 – – – – 4 4 Finance lease receivables1 15 – – – – 538 538 538 Trade and other receivables1 17 – 16 581 – – – 16 581 16 581 Financial trading assets 19 4 265 – – – – 4 265 4 265 Negotiable certificates of deposit 334 – – – – 334 334 Repurchase agreements 2 325 – – – – 2 325 2 325 Listed shares 1 039 – – – – 1 039 1 039 Government bonds 541 – – – – 541 541 Other money market securities 26 – – – – 26 26 Cash and cash equivalents 20 – 19 676 – – – 19 676 19 676 Bank balances – 10 757 – – – 10 757 10 757 Unsettled deals – 1 489 – – – 1 489 1 489 Fixed deposits – 7 361 – – – 7 361 7 361 Other – 69 – – – 69 69 6 609 45 240 10 907 – 10 367 73 123 71 548 Financial liabilities Debt securities and borrowings 24 – – – 254 820 – 254 820 240 646 Eskom bonds – – – 102 080 – 102 080 102 274 Promissory notes – – – 35 – 35 45 Commercial paper – – – 14 635 – 14 635 14 629 Eurorand zero coupon bonds – – – 3 484 – 3 484 3 711 Foreign bonds – – – 29 100 – 29 100 30 965 Development financing institutions – – – 49 256 – 49 256 41 910 Export credit facilities – – – 31 506 – 31 506 32 751 Subordinated loan from shareholder – – – 24 393 – 24 393 14 030 Other loans – – – 331 – 331 331 Embedded derivatives 25 – – – – 9 332 9 332 9 332 Derivatives held for risk management 14 840 – – – 667 1 507 1 507 Foreign exchange derivatives 837 – – – 667 1 504 1 504 Credit default swap 3 – – – – 3 3 Finance lease payables1 29 – – – – 500 500 500 Trade and other payables1 30 – – – 29 266 – 29 266 29 266 Financial trading liabilities 19 5 658 – – – – 5 658 5 658 Short-sold government bonds 752 – – – – 752 752 Commercial paper issued 762 – – – – 762 762 Repurchase agreements 4 144 – – – – 4 144 4 144 6 498 – – 284 086 10 499 301 083 286 909 1. The fair values of these financial instruments approximate their carrying amounts. The effect of discounting is not expected to be material. Annual Financial Statements | 31 March 2015 61 Notes to the financial statements (continued) for the year ended 31 March 2015 4. Financial risk management (continued) 4.5 Accounting classifications and fair values (continued) Held-for- Loans and Available- Liabilities at Other Total Total trading receivables for-sale amortised assets and carrying fair value cost liabilities amount Note Rm Rm Rm Rm Rm Rm Rm 2014 Company Financial assets Investment in securities Government bonds 12 – – 8 160 – – 8 160 8 160 Loans receivable Loans to subsidiaries1 13 – 6 665 – – – 6 665 6 665 Derivatives held for risk management 14 2 344 – – – 9 829 12 173 12 173 Foreign exchange derivatives 2 289 – – – 9 829 12 118 12 118 Commodity derivatives 51 – – – – 51 51 Credit default swap 4 – – – – 4 4 Finance lease receivables1 15 – – – – 538 538 538 Trade and other receivables1 17 – 16 898 – – – 16 898 16 898 Financial trading assets 19 3 226 – – – – 3 226 3 226 Negotiable certificates of deposit 334 – – – – 334 334 Repurchase agreements 2 325 – – – – 2 325 2 325 Government bonds 541 – – – – 541 541 Other money market securities 26 – – – – 26 26 Cash and cash equivalents 20 – 19 044 – – – 19 044 19 044 Bank balances – 10 194 – – – 10 194 10 194 Unsettled deals – 1 489 – – – 1 489 1 489 Fixed deposits – 7 361 – – – 7 361 7 361 5 570 42 607 8 160 – 10 367 66 704 66 704 Financial liabilities Debt securities and borrowings 24 – – – 255 269 – 255 269 241 095 Eskom bonds – – – 102 080 – 102 080 102 274 Promissory notes – – – 35 – 35 45 Commercial paper – – – 13 926 – 13 926 13 920 Eurorand zero coupon bonds – – – 3 484 – 3 484 3 711 Foreign bonds – – – 29 100 – 29 100 30 965 Development financing institutions – – – 49 256 – 49 256 41 910 Export credit facilities – – – 31 506 – 31 506 32 751 Subordinated loan from shareholder – – – 24 393 – 24 393 14 030 Other loans – – – 1 489 – 1 489 1 489 Embedded derivatives 25 – – – – 9 331 9 331 9 331 Derivatives held for risk management 14 840 – – – 667 1 507 1 507 Foreign exchange derivatives 837 – – – 667 1 504 1 504 Credit default swap 3 – – – – 3 3 Finance lease payables1 29 – – – – 769 769 769 Trade and other payables1 30 – – – 30 922 – 30 922 30 922 Financial trading liabilities 19 5 658 – – – – 5 658 5 658 Short-sold government bonds 752 – – – – 752 752 Commercial paper issued 762 – – – – 762 762 Repurchase agreements 4 144 – – – – 4 144 4 144 6 498 – – 286 191 10 767 303 456 289 282 1. The fair values of these financial instruments approximate their carrying amounts. The effect of discounting is not expected to be material. 62 Eskom Holdings SOC Ltd Fair value hierarchy Fair value measurements are categorised into the different levels in the fair value hierarchy based on the inputs to the valuation techniques used. There has been no change in the valuation technique applied. The hierarchy levels are defined as follows: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (ie as prices) or indirectly (ie derived from prices). Level 3: Inputs for the financial asset or financial liability that are not based on observable market data (unobservable inputs). The group recognises transfers between levels of the fair value hierarchy at the end of the reporting period during which the transfer has occurred. Eskom’s policy for determining when transfers between levels in the hierarchy have occurred includes monitoring of the following factors: • changes in market and trading activity (eg significant increases/decreases in activity) • changes in inputs used in valuation techniques (eg inputs becoming/ceasing to be observable in the market) There were no transfers between level 1, 2 or 3 of the fair value hierarchy during the year. The valuation techniques used are as follows: Level 1: Quoted prices (unadjusted) in active markets The fair value of financial instruments traded in active markets is based on quoted market prices at the reporting date. A market is regarded as active when it is a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. The quoted market price used for financial assets held by the group is the current bid price. For financial liabilities included in level 1 the current ask price is used. Instruments included in level 1 comprise listed investments classified as trading securities or available-for-sale. Level 2: Inputs other than quoted prices included within level 1 that are observable Level 2 fair values for debt securities are determined using a discounted cash flow technique, which uses expected cash flows and a market-related discount rate. Level 2 fair values for simple over-the-counter derivative financial instruments are based on broker quotes. These quotes are tested for reasonableness by discounting expected future cash flows using a market interest rate for a similar instrument at the measurement date. Fair values reflect the credit risk of the instruments and include adjustments for the credit risk of the group entity and counterparty when appropriate. The fair values are obtained from listed bond yields or using a discounted cash flow model for unlisted instruments. The future cash flows are discounted using a zero curve, which is adjusted to reflect the credit value adjustment (CVA) and debit value adjustment (DVA) that are constructed from money market and swap rates. Level 3: Inputs not based on observable market data (unobservable inputs) Level 3 items are fair valued using unobservable inputs (embedded derivatives for measurement and disclosure and government loan for disclosure). Refer to note 3(a) and 3(f) for information on the valuation techniques and assumptions used. Annual Financial Statements | 31 March 2015 63 Notes to the financial statements (continued) for the year ended 31 March 2015 4. Financial risk management (continued) 4.5 Accounting classifications and fair values (continued) Fair value hierarchy (continued) Group Company Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Note Rm Rm Rm Rm Rm Rm Rm Rm 2015 Assets measured at fair value Investment in securities 12 4 802 3 694 – 8 496 4 802 – – 4 802 Government bonds 4 802 – – 4 802 4 802 – – 4 802 Negotiable certificates of deposit – 3 694 – 3 694 – – – – Derivatives held for risk management 14 – 19 951 – 19 951 – 19 951 – 19 951 Foreign exchange derivatives – 19 934 – 19 934 – 19 934 – 19 934 Commodity derivatives – 8 – 8 – 8 – 8 Credit default swap – 9 – 9 – 9 – 9 Financial trading assets 19 1 238 5 084 – 6 322 59 5 084 – 5 143 Repurchase agreements – 5 084 – 5 084 – 5 084 – 5 084 Listed shares 1 179 – – 1 179 – – – – Government bonds 59 – – 59 59 – – 59 Assets not measured at fair value Loans receivable – 7 474 – 7 474 – 6 553 – 6 553 Secured by mortgages – 7 315 – 7 315 – – – – Loans to subsidiaries – – – – – 6 553 – 6 553 Other – 159 – 159 – – – – Finance lease receivables 15 – 520 – 520 – 520 – 520 Trade and other receivables 17 – 19 598 – 19 598 – 21 810 – 21 810 Cash and cash equivalents 20 – 8 863 – 8 863 – 7 986 – 7 986 Bank balances – 5 959 – 5 959 – 5 082 – 5 082 Unsettled deals – (1 101) – (1 101) – (1 101) – (1 101) Fixed deposits – 4 005 – 4 005 – 4 005 – 4 005 6 040 65 184 – 71 224 4 861 61 904 – 66 765 Liabilities measured at fair value Embedded derivatives 25 – – 8 022 8 022 – – 8 021 8 021 Derivatives held for risk management 14 – 3 365 – 3 365 – 3 365 – 3 365 Foreign exchange derivatives – 2 865 – 2 865 – 2 865 – 2 865 Commodity derivatives – 1 – 1 – 1 – 1 Credit default swap – 499 – 499 – 499 – 499 Financial trading liabilities 19 493 5 006 – 5 499 493 5 006 – 5 499 Short-sold government bonds 493 – – 493 493 – – 493 Repurchase agreements – 5 006 – 5 006 – 5 006 – 5 006 Liabilities not measured at fair value Debt securities and borrowings 24 114 838 141 937 12 420 269 195 114 838 142 632 12 420 269 890 Eskom bonds 114 838 – – 114 838 114 838 – – 114 838 Promissory notes – 47 – 47 – 47 – 47 Commercial paper – 7 377 – 7 377 – 6 873 – 6 873 Eurorand zero coupon bonds – 3 594 – 3 594 – 3 594 – 3 594 Foreign bonds – 48 585 – 48 585 – 48 585 – 48 585 Development financing institutions – 49 691 – 49 691 – 49 691 – 49 691 Export credit facilities – 27 966 – 27 966 – 27 966 – 27 966 Subordinated loan from shareholder – – 12 420 12 420 – – 12 420 12 420 Other loans – 4 677 – 4 677 – 5 876 – 5 876 Finance lease payables 29 – 488 – 488 – 707 – 707 Trade and other payables 30 – 28 419 – 28 419 – 29 788 – 29 788 115 331 179 215 20 442 314 988 115 331 181 498 20 441 317 270 64 Eskom Holdings SOC Ltd Group Company Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Note Rm Rm Rm Rm Rm Rm Rm Rm 2014 Assets measured at fair value Investment in securities 12 8 160 2 747 – 10 907 8 160 – – 8 160 Government bonds 8 160 – – 8 160 8 160 – – 8 160 Negotiable certificates of deposit – 2 747 – 2 747 – – – – Derivatives held for risk management 14 – 12 173 – 12 173 – 12 173 – 12 173 Foreign exchange derivatives – 12 118 – 12 118 – 12 118 – 12 118 Commodity derivatives – 51 – 51 – 51 – 51 Credit default swap – 4 – 4 – 4 – 4 Financial trading assets 19 1 580 2 685 – 4 265 541 2 685 – 3 226 Negotiable certificates of deposit – 334 – 334 – 334 – 334 Repurchase agreements – 2 325 – 2 325 – 2 325 – 2 325 Listed shares 1 039 – – 1 039 – – – – Government bonds 541 – – 541 541 – – 541 Other money market securities – 26 – 26 – 26 – 26 Assets not measured at fair value Loans receivable – 7 408 – 7 408 – 6 665 – 6 665 Secured by mortgages – 7 139 – 7 139 – – – – Loans to subsidiaries – – – – – 6 665 – 6 665 Other – 269 – 269 – – – – Finance lease receivables 15 – 538 – 538 – 538 – 538 Trade and other receivables 17 – 16 581 – 16 581 – 16 898 – 16 898 Cash and cash equivalents 20 – 19 676 – 19 676 – 19 044 – 19 044 Bank balances – 10 757 – 10 757 – 10 194 – 10 194 Unsettled deals – 1 489 – 1 489 – 1 489 – 1 489 Fixed deposits – 7 361 – 7 361 – 7 361 – 7 361 Other – 69 – 69 – – – – 9 740 61 808 – 71 548 8 701 58 003 – 66 704 Liabilities measured at fair value Embedded derivatives 25 – – 9 332 9 332 – – 9 331 9 331 Derivatives held for risk management 14 – 1 507 – 1 507 – 1 507 – 1 507 Foreign exchange derivatives – 1 504 – 1 504 – 1 504 – 1 504 Credit default swap – 3 – 3 – 3 – 3 Financial trading liabilities 19 752 4 906 – 5 658 752 4 906 – 5 658 Short-sold government bonds 752 – – 752 752 – – 752 Commercial paper issued – 762 – 762 – 762 – 762 Repurchase agreements – 4 144 – 4 144 – 4 144 – 4 144 Liabilities not measured at fair value Debt securities and borrowings 24 102 274 124 342 14 030 240 646 102 274 124 791 14 030 241 095 Eskom bonds 102 274 – – 102 274 102 274 – – 102 274 Promissory notes – 45 – 45 – 45 – 45 Commercial paper – 14 629 – 14 629 – 13 920 – 13 920 Eurorand zero coupon bonds – 3 711 – 3 711 – 3 711 – 3 711 Foreign bonds – 30 965 – 30 965 – 30 965 – 30 965 Development financing institutions – 41 910 – 41 910 – 41 910 – 41 910 Export credit facilities – 32 751 – 32 751 – 32 751 – 32 751 Subordinated loan from shareholder – – 14 030 14 030 – – 14 030 14 030 Other loans – 331 – 331 – 1 489 – 1 489 Finance lease payables 29 – 500 – 500 – 769 – 769 Trade and other payables 30 – 29 266 – 29 266 – 30 922 – 30 922 103 026 160 521 23 362 286 909 103 026 162 895 23 361 289 282 Annual Financial Statements | 31 March 2015 65 Notes to the financial statements (continued) for the year ended 31 March 2015 4. Financial risk management (continued) 4.5 Accounting classifications and fair values (continued) Fair value hierarchy (continued) The reconciliation for fair value measurements in level 3 of the fair value hierarchy is as follows: Group Company 2015 2014 2015 2014 Rm Rm Rm Rm Embedded derivatives Balance at beginning of the year 9 332 11 481 9 331 11 480 Net fair value gain on embedded derivatives (1 310) (2 149) (1 310) (2 149) Balance at end of the year 8 022 9 332 8 021 9 331 Refer to note 3(a) and 4.2 for more information on sensitivities and assumptions. 5. Segment information Management has determined the reportable segments based on the reports regularly provided, reviewed and used by Exco to make strategic decisions and assess performance of the segments. Exco assesses the performance of the operating segments based on a measure of profit or loss consistent with that of the financial statements. The amounts provided to Exco with respect to total assets and liabilities are measured in terms of IFRS. These assets and liabilities are allocated based on the operation of the segment and the physical location of the assets. The operations in each of the group’s reportable segments are as follows: Generation Consists of the generation and primary energy functions. These functions procure primary energy and generate electricity for sale. Transmission Consists of the transmission grids, systems operations and the Southern African Energy unit (international buyer). These functions operate and maintain the transmission network for transmitting electricity and also sell bulk electricity to international customers. Distribution Distribution consists of nine provincial operating units. These units provide, operate and maintain the distribution network for distributing electricity. Group customer services Group customer services consists of the customer service and integrated demand management functions and sells electricity to local key large, redistributors, large and small customers. Group capital Group capital is responsible for the planning, development and monitoring of all capital projects and the execution of capacity expansion projects. All other segments Relates to operating segments which are below the quantitative thresholds for determining a reportable segment in terms of IFRS 8 Operating segments. These include the group’s subsidiaries. Corporate and other Relates to all service and strategic functions which do not qualify as a reportable segment in terms of IFRS 8 Operating segments. Eskom’s main activity is the generation, transmission and distribution of electricity. To improve the relevance of information presented, the revenue earned by subsidiaries in the relevant segments has been reallocated to other income (excluding EFC) and finance income (EFC) in the group results. The revenue earned by subsidiaries is presented in the segment note in line with what has been reported in the respective subsidiary financial statements. Other income has been reallocated as it is more appropriate to present it with the related expenses. The prior year segment report has been restated in line with these changes in presentation. Inter-segment revenue and purchases of electricity are allocated between Generation, Transmission, Distribution and Group customer services segments based on cost recovery plus a uniform return on assets. 66 Eskom Holdings SOC Ltd The segment information provided to Exco for the reportable segments is as follows: Generation Transmission Distribution Group Group All other Corporate Reallocation Group customer capital segments and other and inter- services segment transactions Rm Rm Rm Rm Rm Rm Rm Rm Rm 2015 Continuing operations External revenue – 6 451 1 210 140 030 – 1 112 – (1 112) 147 691 Inter-segment revenue/ recoveries 101 954 12 522 19 097 (133 573) – 9 613 – (9 613) – Total revenue 101 954 18 973 20 307 6 457 – 10 725 – (10 725) 147 691 Other income 5 009 477 670 120 115 290 316 (2 553) 4 444 Primary energy (69 981) (13 133) – (309) (2) – – – (83 425) Net employee benefit expense (7 034) (1 441) (6 864) (1 414) (577) (3 725) (4 857) – (25 912) Depreciation and amortisation expense (8 029) (1 449) (2 904) (8) (57) (215) (1 553) 100 (14 115) Impairment loss (88) (4) (7) (2 701) (23) (23) (1 059) – (3 905) Impairment loss reversals and bad debt recovered 7 6 10 101 3 12 – – 139 Other expenses (17 365) (2 076) (8 675) (1 930) 197 (6 079) 7 701 12 456 (15 771) Profit/(loss) before net fair value (loss)/gain and net finance (cost)/income 4 473 1 353 2 537 316 (344) 985 548 (722) 9 146 Net fair value (loss)/gain on financial instruments, excluding embedded derivatives (54) 59 (31) (53) 1 073 96 (454) (6) 630 Net fair value gain on embedded derivatives – – – 1 310 – – – – 1 310 Profit before net finance (cost)/income 4 419 1 412 2 506 1 573 729 1 081 94 (728) 11 086 Net finance (cost)/income (5 476) (1 080) (851) 497 (26) 420 167 240 (6 109) Finance income 13 9 47 692 – 464 1 598 173 2 996 Finance cost (5 489) (1 089) (898) (195) (26) (44) (1 431) 67 (9 105) Share of profit of equity-accounted investees – – – – – 4 45 – 49 (Loss)/profit before tax (1 057) 332 1 655 2 070 703 1 505 306 (488) 5 026 Income tax – – – – – (63) (1 169) (134) (1 366) (Loss)/profit for the year from continuing operations (1 057) 332 1 655 2 070 703 1 442 (863) (622) 3 660 Discontinued operations Loss for the year from discontinued operations – – – – – (42) – – (42) (Loss)/profit for the year (1 057) 332 1 655 2 070 703 1 400 (863) (622) 3 618 Other information Segment assets 131 558 40 677 69 632 14 488 249 059 25 408 54 050 (22 336) 562 536 Investment in equity- accounted investees – – – – – 55 95 198 348 Total assets 131 558 40 677 69 632 14 488 249 059 25 463 54 145 (22 138) 562 884 Total liabilities 44 480 4 090 24 868 16 372 16 121 19 092 337 587 (21 973) 440 637 Capital expenditure (including borrowing costs capitalised) 15 890 7 539 7 072 9 39 055 437 1 687 (1 016) 70 673 Annual Financial Statements | 31 March 2015 67 Notes to the financial statements (continued) for the year ended 31 March 2015 5. Segment information (continued) Generation Transmission Distribution Group Group All other Corporate Reallocation Group customer capital segments and other and inter- services segment transactions Rm Rm Rm Rm Rm Rm Rm Rm Rm 2014 Continuing operations External revenue – 6 446 817 131 007 – 1 236 – (1 193) 138 313 Inter-segment revenue/ recoveries 97 303 6 932 20 623 (124 816) – 9 184 – (9 226) – Total revenue 97 303 13 378 21 440 6 191 – 10 420 – (10 419) 138 313 Other income 504 354 317 154 96 401 490 (875) 1 441 Primary energy (62 716) (6 577) – (350) (169) – – – (69 812) Net employee benefit expense (6 597) (1 480) (6 818) (1 407) (784) (3 271) (5 300) 35 (25 622) Depreciation and amortisation expense (6 436) (1 205) (2 809) (9) (70) (260) (1 402) 254 (11 937) Impairment loss (16) (18) (9) (1 508) (2) (8) (29) – (1 590) Impairment loss reversals and bad debt recovered 4 – 2 26 – 1 – – 33 Other expenses (16 694) (2 498) (8 726) (2 689) 31 (8 042) 6 195 13 246 (19 177) Profit/(loss) before net fair value gain/(loss) and net finance income/(cost) 5 352 1 954 3 397 408 (898) (759) (46) 2 241 11 649 Net fair value gain/(loss) on financial instrument, excluding embedded derivatives 691 – 206 46 (1 885) 126 190 6 (620) Net fair value gain on embedded derivatives – – – 2 149 – – – – 2 149 Profit/(loss) before net finance (cost)/income 6 043 1 954 3 603 2 603 (2 783) (633) 144 2 247 13 178 Net finance (cost)/ income (3 715) (744) (526) 268 (6) 309 106 250 (4 058) Finance income 15 54 48 439 – 353 2 067 213 3 189 Finance cost (3 730) (798) (574) (171) (6) (44) (1 961) 37 (7 247) Share of profit of equity-accounted investees – – – – – 16 27 – 43 Profit/(loss) before tax 2 328 1 210 3 077 2 871 (2 789) (308) 277 2 497 9 163 Income tax – – – – – 87 (1 521) (703) (2 137) Profit/(loss) for the year from continuing operations 2 328 1 210 3 077 2 871 (2 789) (221) (1 244) 1 794 7 026 Discontinued operations Profit for the year from discontinued operations – – – – – 63 – – 63 Profit/(loss) for the year 2 328 1 210 3 077 2 871 (2 789) (158) (1 244) 1 794 7 089 Other information Segment assets 116 066 34 784 65 070 13 658 210 439 26 009 62 249 (23 747) 504 528 Investment in equity- accounted investees – – – – – 51 95 172 318 Non-current assets held-for-sale – – – – – 147 – – 147 Total assets 116 066 34 784 65 070 13 658 210 439 26 207 62 344 (23 575) 504 993 Total segment liabilities 37 297 2 292 23 081 17 598 15 863 19 365 291 555 (21 842) 385 209 Capital expenditure (including borrowing costs capitalised) 14 634 6 440 11 596 – 37 186 455 3 310 (905) 72 716 68 Eskom Holdings SOC Ltd Group Revenue Non-current assets 2015 2014 2015 2014 Rm Rm Rm Rm Geographical information South Africa 141 246 132 302 471 178 416 013 Foreign countries 6 445 6 011 134 114 147 691 138 313 471 312 416 127 The group’s reportable segments operate mainly in South Africa, which is Eskom’s country of domicile. Revenue is allocated based on the country in which the customer is located after eliminating inter-segment transactions. There is no significant revenue derived from a single external customer by any of the reportable segments. Non-current assets disclosed for geographical information comprise non-current assets other than deferred tax assets and financial instruments. 2015 2014 Cost Accumulated Carrying Cost Accumulated Carrying depreciation value depreciation value and and impairment impairment losses losses Rm Rm Rm Rm Rm Rm 6. Property, plant and equipment Group Owned assets Land 1 775 – 1 775 1 698 – 1 698 Buildings and facilities 5 890 (1 428) 4 462 5 645 (1 376) 4 269 Plant – Generation 144 548 (53 789) 90 759 133 722 (47 627) 86 095 – Transmission 42 901 (10 971) 31 930 34 404 (9 420) 24 984 – Distribution 88 688 (32 519) 56 169 78 270 (29 183) 49 087 Regular distribution 65 004 (21 449) 43 555 56 775 (19 133) 37 642 Electrification 23 684 (11 070) 12 614 21 495 (10 050) 11 445 – Test, telecommunication and other plant 2 548 (1 044) 1 504 2 141 (1 112) 1 029 Equipment and vehicles 13 324 (8 134) 5 190 12 524 (7 162) 5 362 Total in commission 299 674 (107 885) 191 789 268 404 (95 880) 172 524 Works under construction 265 135 (1 131) 264 004 228 692 (40) 228 652 564 809 (109 016) 455 793 497 096 (95 920) 401 176 Leased assets Mining assets1 573 (389) 184 573 (376) 197 565 382 (109 405) 455 977 497 669 (96 296) 401 373 Company Owned assets Land 1 745 – 1 745 1 669 – 1 669 Buildings and facilities 5 731 (1 352) 4 379 5 481 (1 295) 4 186 Plant – Generation 145 801 (54 179) 91 622 134 714 (47 921) 86 793 – Transmission 42 941 (10 975) 31 966 34 459 (9 440) 25 019 – Distribution 88 884 (32 555) 56 329 78 447 (29 327) 49 120 Regular distribution 65 184 (21 482) 43 702 56 941 (19 145) 37 796 Electrification 23 700 (11 073) 12 627 21 506 (10 182) 11 324 – Test, telecommunication and other plant 2 548 (1 044) 1 504 425 (382) 43 Equipment and vehicles 11 547 (7 144) 4 403 10 472 (6 057) 4 415 Total in commission 299 197 (107 249) 191 948 265 667 (94 422) 171 245 Works under construction 266 168 (1 131) 265 037 230 481 (40) 230 441 565 365 (108 380) 456 985 496 148 (94 462) 401 686 Leased assets 1 035 (552) 483 1 033 (512) 521 Mining assets1 573 (389) 184 573 (376) 197 Plant 54 (36) 18 54 (34) 20 Equipment and vehicles 408 (127) 281 406 (102) 304 566 400 (108 932) 457 468 497 181 (94 974) 402 207 1. Mining assets include various long-term coal contracts whereby Eskom purchases all of the coal from specified mines. Eskom pays a fixed standing charge to cover the capital cost. Annual Financial Statements | 31 March 2015 69 Notes to the financial statements (continued) for the year ended 31 March 2015 6. Property, plant and equipment (continued) 2015 2014 Owned assets Leased assets Land Buildings Plant Equipment Works Mining Plant Equipment Total Total and and under assets and facilities vehicles construction vehicles Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm Reconciliation of movements Group Carrying value at beginning of the year 1 698 4 269 161 195 5 362 228 652 197 – – 401 373 341 429 Additions1 78 63 1 636 769 67 281 – – – 69 827 71 693 Transfers2 – 215 30 227 366 (30 808) – – – – – Transfers to non-current assets held-for-sale – – – – – – – – – (30) Change in discount rate of decommissioning provision and cost estimate – – 17 – – – – – 17 181 Disposals and write-offs (1) (4) (165) (50) (30) – – – (250) ( 207) Impairment losses3 – – (61) (1) (1 095) – – – (1 157) ( 46) Reversal of impairment losses – – 3 – 4 – – – 7 1 Depreciation – (81) (12 490) (1 256) – (13) – – (13 840) (11 648) Carrying value at end of the year 1 775 4 462 180 362 5 190 264 004 184 – – 455 977 401 373 Company Carrying value at beginning of the year 1 669 4 186 160 975 4 415 230 441 197 20 304 402 207 341 772 Additions1 77 61 1 913 595 66 021 – – 2 68 669 72 214 Common control asset transfer 4 – 6 1 508 196 64 – – – 1 774 – Transfers2 – 209 29 805 356 (30 370) – – – – – Change in discount rate of decommissioning provision and cost estimate – – 17 – – – – – 17 181 Disposals and write-offs (1) (4) (159) (47) (28) – – – (239) ( 199) Impairment losses4 – – (61) – (1 095) – – – (1 156) ( 40) Reversal of impairment losses – – 3 – 4 – – – 7 1 Depreciation – (79) (12 580) (1 112) – (13) (2) (25) (13 811) (11 722) Carrying value at end of the year 1 745 4 379 181 421 4 403 265 037 184 18 281 457 468 402 207 Group Company 2015 2014 2015 2014 Note Rm Rm Rm Rm Borrowing costs on general borrowings are capitalised at an average rate of 9.63% (2014: 9.57%). Borrowing costs on funds borrowed specifically for the purpose of obtaining a qualifying asset are capitalised at the actual rate obtained for the specific funds borrowed. The average specific rate excluding the government loan for the year was 8.40% (2014: 7.75%). The amounts capitalised during the year were: 41 17 389 13 290 17 389 13 290 Details of land and buildings are available for examination at the registered offices of the respective businesses. Leased assets include arrangements that contain finance leases in terms of IFRIC 4 Determining whether an arrangement contains a lease. None of the assets are encumbered or held as security. The total depreciation charge for property, plant and equipment is disclosed in profit or loss in the following categories: 13 840 11 648 13 811 11 722 Depreciation and amortisation expense 36 13 827 11 635 13 798 11 709 Primary energy 13 13 13 13 1. Included in additions are borrowing costs capitalised of R17 389 million (2014: R13 290 million) for the group and company. 2. Amounts are transferred from work under construction to the relevant asset class when the asset is available for use. 3. The impairment largely relates to the suspension of the underground coal gasification project which is housed within the corporate and other segment of the business. The project has been deferred as a result of the funding re-prioritisation due to funding shortfalls. Eskom is considering alternatives for the project’s future, and funding thereof, including an external partnering relationship. The recoverable amount of the asset was determined based on the company’s own internal assessment (level 3 fair value hierarchy). 4. Refer to note 9. 70 Eskom Holdings SOC Ltd 2015 2014 Cost Accumulated Carrying Cost Accumulated Carrying amortisation value amortisation value and impairment and impairment losses losses Rm Rm Rm Rm Rm Rm 7. Intangible assets Group Rights 2 012 (220) 1 792 1 720 (221) 1 499 Computer software1 5 857 (4 879) 978 5 395 (3 992) 1 403 Concession assets 215 (81) 134 176 (62) 114 8 084 (5 180) 2 904 7 291 (4 275) 3 016 Company Rights 2 012 (220) 1 792 1 718 (220) 1 498 Computer software1 5 527 (4 573) 954 5 030 (3 718) 1 312 7 539 (4 793) 2 746 6 748 (3 938) 2 810 2015 2014 Rights Computer Concession Total Total software assets Rm Rm Rm Rm Rm Reconciliation of movements Group Carrying value at beginning of the year 1 499 1 403 114 3 016 2 842 Additions and transfers 293 515 38 846 1 023 Disposals – (19) – (19) – Amortisation – (921) (18) (939) (849) Carrying value at end of the year 1 792 978 134 2 904 3 016 Company Carrying value at beginning of the year 1 498 1 312 – 2 810 2 629 Additions and transfers 294 501 – 795 953 Common control asset transfer – 14 – 14 – Disposals – (19) – (19) – Amortisation – (854) – (854) (772) Carrying value at end of the year 1 792 954 – 2 746 2 810 Amortisation of intangible assets of R939 million (2014: R849 million) for the group and R854 million (2014: R772 million) for the company is included within depreciation and amortisation expense in profit or loss. Refer to note 36. Rights have been assessed for impairment as they have an indefinite useful life. The recoverable amount of the rights is based on the fair value less costs of disposal. The fair value is based on current prices which have been derived from the most recent comparable market transactions for similar servitude rights (level 2 fair value hierarchy). There have been no impairments for the year ended 31 March 2015 (2014: Rnil). 1. Software licences have been included as part of computer software. Internally generated software development cost included in computer software is immaterial. Annual Financial Statements | 31 March 2015 71 Notes to the financial statements (continued) for the year ended 31 March 2015 Group Company 2015 2014 2015 2014 Rm Rm Rm Rm 8. Investment in equity-accounted investees Investment in joint ventures Balance at beginning of the year 318 296 95 95 Share of profit after tax 49 43 – – Dividends received (19) (21) – – Balance at end of the year 348 318 95 95 The group’s investments in the joint ventures are not considered to be individually material. The group’s share of the results of its significant joint ventures, all of which are unlisted, is: Name Main business Country of Interest held Post-tax profit incorporation for the year % Rm Group 2015 Directly held Motraco – Mozambique Transmission Company SARL1 Electricity transmission Mozambique 33 45 Indirectly held Trans Africa Projects (Pty) Ltd Engineering services South Africa 50 4 49 2014 Directly held Motraco – Mozambique Transmission Company SARL1 Electricity transmission Mozambique 33 27 Indirectly held Trans Africa Projects (Pty) Ltd Engineering services South Africa 50 16 43 SDR/United Engineers Joint Venture is in the process of being liquidated. The share capital of the group’s investment in joint ventures comprises ordinary shares. The joint ventures are structured as separate vehicles and the group has a residual interest in the net assets. The relevant activities are jointly controlled in accordance with the agreements under which the entities are established. The joint arrangements have therefore been classified as joint ventures. Investment in associates The carrying value of investment in associates is Rnil (2014: Rnil). The group has an investment in Uitenhage Electricity Supply Company (Pty) Ltd which ceased trading in 2008 and is in the process of being wound up and Western Power Corridor Company (Pty) Ltd is dormant. 1. Year end is 31 December. 72 Eskom Holdings SOC Ltd Company 2015 2014 Rm Rm 9. Investment in subsidiaries Shares at cost 384 384 Indebtedness 71 1 953 455 2 337 Name Main business Country of Issued/stated Interest Investment Indebtedness incorporation share capital held at cost R % Rm Rm Directly held 2015 Escap SOC Ltd Insurance South Africa 379 500 000 100 380 – Eskom Development Foundation NPC Corporate social investment South Africa – 100 – – Eskom Enterprises SOC Ltd Non-regulated electricity supply industry activities in South Africa and electricity supply and related services outside South Africa South Africa 99 000 100 –1 712 Eskom Finance Company Finance (employee housing SOC Ltd loans) South Africa 4 000 100 –1 – Natal Navigation Collieries and Estate Company SOC Ltd Property holding South Africa 771 425 100 – – PN Energy Services SOC Ltd Not trading South Africa 1 500 000 100 4 – 384 71 2014 Escap SOC Ltd Insurance South Africa 379 500 000 100 380 – Eskom Development Foundation NPC Corporate social investment South Africa – 100 – – Eskom Enterprises SOC Ltd Non-regulated electricity supply industry activities in South Africa and electricity supply and related services outside South Africa South Africa 99 000 100 –1 1 9532 Eskom Finance Company Finance (employee housing SOC Ltd loans) South Africa 4 000 100 –1 – Natal Navigation Collieries and Estate Company SOC Ltd Property holding South Africa 771 425 100 – – PN Energy Services SOC Ltd Not trading South Africa 1 500 000 100 4 – 384 1 953 2015 2014 Name Main business Country of Issued/stated Interest Issued/stated Interest incorporation share capital held share capital held R % R % Indirectly held Eskom Energie Manantali s.a3 Electricity supply Mali – – 1 000 100 Eskom Uganda Ltd3 Operations management Uganda 100 100 100 100 Golang Coal SOC Ltd4 Coal exports South Africa 1 000 67 1 000 67 Nqaba Finance 1 (RF) Ltd5 Residential backed mortgage securities South Africa 100 100 100 100 Pebble Bed Modular Reactor Reactor driven generation SOC Ltd project South Africa 100 100 100 100 Roshcon SOC Ltd6 Construction and abnormal load transportation South Africa 1 100 1 100 Rosherville Properties SOC Ltd Properties South Africa 1 100 1 100 Rotek Industries SOC Ltd Maintenance and services South Africa 4 000 100 4 000 100 South Dunes Coal Terminal SOC Ltd4 Coal exports South Africa 4 000 50 4 000 50 1. Nominal. 2. The equity loan of Eskom Enterprises SOC Ltd is interest free. 3. Issued/stated capital in foreign currency. Year end is 31 December. 4. Year end changed from 31 December to 31 March. 5. Nqaba is a securitisation vehicle. 6. The subsidiaries of Roshcon SOC Ltd have not been disclosed. They are all dormant and in the process of being wound up. Annual Financial Statements | 31 March 2015 73 Notes to the financial statements (continued) for the year ended 31 March 2015 9. Investment in subsidiaries (continued) The following subsidiaries are dormant: • Eskom Enterprises Global West Africa (process of liquidation) • Nempskom Communications Ltd (process of liquidation) • Technology Services International SOC Ltd (process of liquidation) All the subsidiaries continue to be accounted for as previously assessed as there has not been any change in the control assessment. Eskom Energie Manantali s.a has been liquidated during the year (refer to note 21). The group does not have any subsidiaries with a material non-controlling interest. The cash held in Pebble Bed Modular Reactor SOC Ltd (PBMR) is restricted. Refer to note 20 for details regarding this restriction. Common control transaction The telecommunication and aviation assets in Eskom Enterprises SOC Ltd were transferred into Eskom Holdings SOC Ltd during the year as a common control transaction. The equity loan was reduced with the amount transferred from assets and the deferred tax liability on the assets transferred has been recognised directly in equity. Group and company 2015 2014 Coal Nuclear Total Total Rm Rm Rm Rm 10. Future fuel supplies Balance at beginning of the year 7 763 981 8 744 8 121 Net additions 1 260 739 1 999 2 675 Change in discount rate of decommissioning provision and cost estimate 524 – 524 (213) Transfer from equity – (341) (341) (300) Transfer to inventories (815) (1 032) (1 847) (1 539) Balance at end of the year 8 732 347 9 079 8 744 Group Company 2015 2014 2015 2014 Note Rm Rm Rm Rm 11. Deferred tax Deferred tax assets Balance at beginning of the year 339 25 – – Transfer from profit or loss 42 (109) 314 – – Balance at end of the year 230 339 – – Comprising 230 339 – – Property, plant and equipment (29) (16) – – Provisions 90 15 – – Tax losses 169 340 – – Deferred tax liabilities Balance at beginning of the year 19 461 15 806 18 842 15 920 Transfer from profit or loss 42 1 128 2 258 1 169 1 520 Transfer from statement of comprehensive income 42 (458) 1 397 (451) 1 402 Common control transfer of assets – – 265 – Balance at end of the year 20 131 19 461 19 825 18 842 Comprising 20 131 19 461 19 825 18 842 Property, plant and equipment 44 367 37 789 43 936 36 927 Inventories 2 187 1 717 2 187 1 717 Provisions (14 800) (11 159) (14 700) (10 937) Tax losses (6 578) (3 936) (6 574) (3 933) Embedded derivative liabilities (2 246) (2 613) (2 246) (2 613) Available-for-sale financial assets 2 18 2 20 Cash flow hedges 2 264 2 450 2 264 2 450 Payments received in advance (4 844) (4 838) (4 843) (4 835) Post-employment medical benefits (221) 33 (201) 46 Unused tax losses available for offset against future taxable income 24 096 15 413 23 479 14 046 Unused tax losses of a subsidiary not recognised as it is uncertain whether future taxable profits will be available against which the unused tax losses can be used – 142 – – 74 Eskom Holdings SOC Ltd Group Company 2015 2014 2015 2014 Note Rm Rm Rm Rm 12. Investment in securities Government bonds 4 802 8 160 4 802 8 160 Negotiable certificates of deposit 3 694 2 747 – – 8 496 10 907 4 802 8 160 Maturity analysis 8 496 10 907 4 802 8 160 Non-current 2 481 4 841 2 481 4 841 Current 6 015 6 066 2 321 3 319 13. Loans receivable Gross receivable 8 957 9 018 6 553 6 665 Secured by mortgages 8 684 8 567 – – Loans to subsidiaries – – 6 553 6 665 Other 273 451 – – Allowance for impairment (42) (35) – – Secured by mortgages (25) (21) – – Other (17) (14) – – 8 915 8 983 6 553 6 665 Maturity analysis 8 915 8 983 6 553 6 665 Non-current 8 646 8 654 – – Current 269 329 6 553 6 665 Reconciliation of movements in allowance for impairment Balance at beginning of the year 35 28 – – Impairment loss 37 15 15 – – Reversal of impairment loss 37 (1) – – – Write-offs (7) (8) – – Balance at end of the year 42 35 – – Group and company 2015 2014 Assets Liabilities Notional Assets Liabilities Notional amount amount Rm Rm Rm Rm Rm Rm 14. Derivatives held for risk management Derivatives held for economic hedging 1 541 1 330 50 973 2 344 840 50 959 Foreign exchange derivatives 1 524 830 43 623 2 289 837 48 324 Foreign exchange contracts 500 824 43 623 1 950 833 45 355 Cross-currency swap 1 024 6 – 339 4 2 969 Commodity derivatives 8 1 482 51 – 855 Credit default swap 9 499 6 868 4 3 1 780 Derivatives held for cash flow hedging Foreign exchange derivatives 18 410 2 035 15 927 9 829 667 60 969 Foreign exchange contracts 84 1 530 15 927 685 165 15 904 Cross-currency swap 18 326 505 – 9 144 502 45 065 Total derivatives held for risk management 19 951 3 365 12 173 1 507 Maturity analysis 19 951 3 365 12 173 1 507 Derivatives held for economic hedging 1 541 1 330 2 344 840 Non-current 996 500 339 3 Current 545 830 2 005 837 Derivatives held for cash flow hedging 18 410 2 035 9 829 667 Non-current 18 246 20 9 022 307 Current 164 2 015 807 360 Annual Financial Statements | 31 March 2015 75 Notes to the financial statements (continued) for the year ended 31 March 2015 14. Derivatives held for risk management (continued) The hedging practices and accounting treatment are disclosed in note 2.11.3 in the accounting policies. The group uses forward exchange contracts, cross-currency swaps and interest rate swaps for cash flow hedging as follows: • foreign exchange contracts – used to hedge the changes in the cash flows resulting from the purchase of services and goods denominated mainly in US dollars, euro and yen • cross-currency swaps – used to hedge the currency and interest rate risk arising from the foreign fixed rate bonds and foreign fixed or floating borrowings (denominated in US dollar, euro and yen) issued by the group • interest rate swaps – used to hedge the interest expense variability of the issued floating rate notes During the year a gain of R57 million (2014: R254 million) was recognised in profit or loss as ineffectiveness arising from cash flow hedges (refer to note 39). There were no transactions for which cash flow hedge accounting had to be ceased in the current or comparative financial years as a result of highly probable cash flows no longer being expected to occur. Credit default swap The group has entered into credit default swap transactions that could result in the payment by one party to the other party on the occurrence of a credit event or an event of default by Eskom (includes bankruptcy, failure to pay, obligation acceleration, repudiation or moratorium or restructuring of any obligation on Eskom bonds). Cash flow hedges Contractual cash flows are a function of forward exchange rates and forward interest rates and is a point in time calculation that is impacted by market conditions at that time. This may result in future contractual cash outflows or inflows even though the fair value of the derivative may be reflected as an asset or liability. The periods in which the cash flows of derivatives designated as cash flow hedges are expected to occur are: Group and company Carrying Undiscounted 0 to 3 4 to 12 1 to 5 More than amount cash flows months months years 5 years Rm Rm Rm Rm Rm Rm 2015 Forward exchange contracts Assets 84 91 20 71 – – Liabilities (1 530) (1 498) (405) (1 093) – – Cross-currency swaps Assets 18 326 27 929 2 (193) (3 174) 31 294 Liabilities (505) (1 587) (143) (1 604) (289) 449 16 375 24 935 (526) (2 819) (3 463) 31 743 2014 Forward exchange contracts Assets 685 741 378 363 – – Liabilities (165) (149) (27) (122) – – Cross-currency swaps Assets 9 144 19 753 (15) (9) (1 466) 21 243 Liabilities (502) 719 (69) (1 707) (2 653) 5 148 9 162 21 064 267 (1 475) (4 119) 26 391 Gains or losses recognised in the hedging reserve in other comprehensive income are recognised in the initial cost of the carrying amount of the asset or liability when the forecast transaction results in the recognition of a non-financial asset or non-financial liability. Therefore, gains and losses recognised in the hedging reserve in other comprehensive income will affect profit or loss in the periods during which the relevant non-financial assets are depreciated or finance cost is recognised for the relevant financial liability. 76 Eskom Holdings SOC Ltd The periods in which the cash flows associated with derivatives are expected to impact profit or loss are: Group and company Carrying Undiscounted 0 to 3 4 to 12 1 to 5 More than amount cash flows months months years 5 years Rm Rm Rm Rm Rm Rm 2015 Forward exchange contracts Assets 84 91 20 71 – – Liabilities (1 530) (5 206) (405) (1 093) (118) (3 590) Cross-currency swaps Assets 18 326 27 929 2 (193) (3 174) 31 294 Liabilities (505) (1 587) (143) (1 604) (289) 449 16 375 21 227 (526) (2 819) (3 581) 28 153 2014 Forward exchange contracts Assets 685 741 378 363 – – Liabilities (165) (2 967) (27) (122) (130) (2 688) Cross-currency swaps Assets 9 144 19 753 (15) (9) (1 466) 21 243 Liabilities (502) 719 (69) (1 707) (2 653) 5 148 9 162 18 246 267 (1 475) (4 249) 23 703 Day-one gain/loss The group recognises a day-one gain/loss on initial recognition of cross-currency, credit default and interest rate swaps held as hedging instruments where applicable. Group and company 2015 2014 Rm Rm Gain/(loss) at beginning of the year 168 (252) Day-one gain recognised 560 329 Amortised to profit or loss (28) 91 Gain at end of the year 700 168 The remaining balance of the day-one gain/(loss) is included within derivatives held for risk management in the statement of financial position. Annual Financial Statements | 31 March 2015 77 Notes to the financial statements (continued) for the year ended 31 March 2015 Group and company 2015 2014 Rm Rm 15. Finance lease receivables Gross receivables 1 078 1 165 Unearned finance income (558) (627) Present value of minimum lease payments 520 538 Maturity analysis of gross receivables from finance leases Within one year 85 86 Between one and five years 339 342 After five years 654 737 1 078 1 165 Future finance charges (558) (627) 520 538 Maturity analysis of net receivables from finance leases Non-current 500 520 Between one and five years 109 99 After five years 391 421 Current Within one year 20 18 520 538 Average implicit rate (%) 13 13 Finance lease receivables mainly comprise premium power supply equipment contracts. Refer to note 4.1.1(d). 2015 2014 Payments Environmental Total Total made in rehabilitation advance trust fund Rm Rm Rm Rm 16. Payments made in advance Group Balance at beginning of the year 5 119 321 5 440 4 479 Expense recognised (533) – (533) (658) Transferred to the statement of financial position (1 464) – (1 464) (1 847) Payments made 1 630 436 2 066 3 466 Balance at end of the year 4 752 757 5 509 5 440 Maturity analysis 4 752 757 5 509 5 440 Non-current 2 247 757 3 004 2 676 Current 2 505 – 2 505 2 764 Company Balance at beginning of the year 4 949 321 5 270 4 369 Expense recognised (530) – (530) (652) Transfer to the statement of financial position (1 464) – (1 464) (1 847) Payments made 1 552 436 1 988 3 400 Balance at end of the year 4 507 757 5 264 5 270 Maturity analysis 4 507 757 5 264 5 270 Non-current 2 246 757 3 003 2 509 Current 2 261 – 2 261 2 761 Payments made in advance Payments made in advance comprises payments made to suppliers and to issuers of loan facilities. Payments made to suppliers are made to reserve manufacturing capacity for the future construction of assets and for future goods and services. These amounts will be used as partial settlement towards the future amounts payable to the suppliers. There is no contractual right to receive a refund in cash or another financial instrument from the suppliers. In the event of default or non-performance, there are performance bonds in place that can be used to recover outstanding payments in advance. Payments made to loan facility issuers are for commitment and issuing fees. These amounts are transferred to the loan balances when the loan is accessed. 78 Eskom Holdings SOC Ltd Environmental rehabilitation trust fund Payments made in advance also include contributions made by Eskom to an environmental rehabilitation trust fund. The fund was established to fund the financial obligation in respect of the rehabilitation of certain coal mines from which Eskom sources its coal for the generation of electricity. The fund is controlled by third parties to be solely utilised for the said environmental rehabilitation. Group Company 2015 2014 2015 2014 Note Rm Rm Rm Rm 17. Trade and other receivables Financial instruments Gross receivable 27 091 22 306 29 290 22 608 Trade receivables 22 771 20 662 22 657 20 269 Other receivables 4 320 1 644 6 633 2 339 Allowance for impairment (7 493) (5 725) (7 480) (5 710) Trade receivables (7 440) (5 679) (7 430) (5 667) Other receivables (53) (46) (50) (43) 19 598 16 581 21 810 16 898 Non-financial instruments VAT receivable 45 24 – – 19 643 16 605 21 810 16 898 Maturity analysis 19 643 16 605 21 810 16 898 Non-current 2 787 27 3 257 16 Current 16 856 16 578 18 553 16 882 Reconciliation of movements in allowance for impairment Balance at beginning of the year 5 725 4 278 5 710 4 245 Impairment loss 37 2 728 1 518 2 721 1 531 Reversal of impairment loss 37 (103) (16) (99) (16) Write-offs (857) (55) (852) (50) Balance at end of the year 7 493 5 725 7 480 5 710 Trade receivables of R597 million (2014: Rnil), excluding VAT, were not recognised as it was assessed that there was a high probability that the related economic benefits would not materialise. Despite this, Eskom continues to actively pursue recovery of these amounts. Refer to note 4.1. Group Company 2015 2014 2015 2014 Rm Rm Rm Rm 18. Inventories Coal and liquid fuel 6 492 5 276 6 492 5 276 Nuclear fuel 2 011 1 456 2 011 1 456 Maintenance spares and consumables 7 530 5 690 7 393 5 403 16 033 12 422 15 896 12 135 The group reversed R21 million (2014: R1 million) and the company reversed R14 million (2014: R1 million) of a previous inventory writedown. The amount reversed has been included in net impairment loss in profit and loss (refer to note 37). Annual Financial Statements | 31 March 2015 79 Notes to the financial statements (continued) for the year ended 31 March 2015 Group Company 2015 2014 2015 2014 Rm Rm Rm Rm 19. Financial trading assets and liabilities Financial trading assets Repurchase agreements 5 084 2 325 5 084 2 325 Negotiable certificates of deposit – 334 – 334 Listed shares 1 179 1 039 – – Government bonds 59 541 59 541 Other money market securities – 26 – 26 6 322 4 265 5 143 3 226 Financial trading liabilities Short-sold government bonds 493 752 493 752 Commercial paper issued – 762 – 762 Repurchase agreements 5 006 4 144 5 006 4 144 5 499 5 658 5 499 5 658 Encumbered assets Eskom has concluded sale and repurchase transactions of commercial paper, comprising Eskom bonds and government bonds, with approved counterparties. The group enters into transactions whereby it transfers assets recognised on its statement of financial position, but retains either all or substantially all of the risks and rewards of the transferred assets or a portion of them. If all or substantially all risks and rewards are retained, then the transferred assets are not derecognised. Transfers of assets with retention of all or substantially all risks and rewards include, for example, securities lending and repurchase transactions. At year end Eskom has sold and is committed to repurchase commercial paper after year end with a fair value of R5 084 million (2014: R4 144 million). Of this amount, R2 761 million (2014: R4 091 million) relates to government securities and R2 323 million (2014: R53 million) to Eskom bonds. Collateral held Eskom has concluded the purchase of commercial paper (Eskom and government bonds) from approved counterparties and has committed to sell this commercial paper back to the counterparties in the following financial year. Although Eskom has legal title to the commercial paper at year end, it has not been recognised on the statement of financial position as a result of the commitment to resell. This has also resulted in the recognition of a receivable with a fair value of R5 006 million (2014: R2 325 million) recorded in financial trading assets and cash and cash equivalents (depending on original maturity) at year end. Of this amount, R3 451 million (2014: R1 714 million) relates to government securities and R1 555 million (2014: R611 million) to Eskom bonds. The total receivable is secured by commercial paper of an equivalent fair value. Group Company 2015 2014 2015 2014 Rm Rm Rm Rm 20. Cash and cash equivalents Bank balances1 5 959 10 757 5 082 10 194 Unsettled deals2 (1 101) 1 489 (1 101) 1 489 Fixed deposits 4 005 7 361 4 005 7 361 Other – 69 – – 8 863 19 676 7 986 19 044 1. Includes an amount of R54 million (2014: R54 million) in PBMR that is subject to a restriction prohibiting the transfer of the cash within the group or to the shareholder. 2. The credit balance relates to unsettled short-term trading assets accounted for in terms of trade date accounting where the cash flow occurs after 31 March. 80 Eskom Holdings SOC Ltd 21. Non-current assets and liabilities held-for-sale A discontinued operation is a component which has been disposed of or is classified as held-for-sale as it is intended to be sold and it represents a separate major line of business or geographical area of operations. Indirectly held subsidiary – Eskom Energie Manantali s.a (EEM) The finalisation of the liquidation of EEM was resolved at an extraordinary meeting held on 12 February 2015. The completion of liquidation was registered at the Tribunal de Commerce de Bamako (in Mali) on 24 February 2015 and the final liquidation distribution was received in March 2015. A consolidated analysis of the assets and liabilities held-for-sale and operating results thereof are disclosed as follows: Group 2015 2014 EEM Aviation Total Total assets Rm Rm Rm Rm Income statements Revenue 66 – 66 117 Other income 12 – 12 29 Net employee benefit expense (76) – (76) (61) Depreciation and amortisation expense (13) – (13) (9) Other expenses (57) – (57) (40) (Loss)/profit before finance income (68) – (68) 36 Finance income 26 – 26 28 (Loss)/profit before tax (42) – (42) 64 Income tax – – – (1) (Loss)/profit for the year from discontinued operations (42) – (42) 63 Statements of financial position Assets Non-current assets Property, plant and equipment – – – 30 Current assets – – – 117 Inventories – – – 7 Trade and other receivables – – – 9 Cash and cash equivalents – – – 101 – – – 147 Liabilities Current liabilities – – – 113 Provisions – – – 10 Trade and other payables – – – 101 Taxation – – – 2 – – – 113 Statements of cash flows Net cash from operating activities (104) – (104) – Net cash from investing activities 16 1 17 7 Effect of disposal of EEM on the financial position of the group Non-current assets held-for-sale (14) – (14) – Consideration received, satisfied in cash 14 – 14 – Annual Financial Statements | 31 March 2015 81 Notes to the financial statements (continued) for the year ended 31 March 2015 22. Service concession arrangements The Eskom group operates service concessions for the generation and/or transmission of electricity, through its operations in Mali and Uganda. Uganda Eskom Uganda Ltd (Eskom Uganda) entered into an operation and maintenance agreement with Uganda Electricity Generation Company Ltd (UEGCL) in 2002, which is linked to a power purchase agreement concluded with Uganda Electricity Transmission Company Ltd (UETCL). In terms of the agreements, Eskom Uganda operates and maintains two hydro-electric power stations in Uganda, from which it supplies electricity to UETCL. The dams, powerhouses, related switchyard facilities, high voltage substation, land and movable property together constitute the ‘energy assets’ in terms of the agreement. The concession period is 20 years (ends in December 2023). Eskom Uganda is entitled to receive revenue from UETCL, based on electricity supplied at tariffs regulated by the Electricity Regulatory Authority of Uganda. It also receives a fee to cover it for investment in additional energy assets where required. This has been recognised as an intangible asset. The plant remains the property of UEGCL and will revert to UEGCL at the end of the concession period. At that point Eskom Uganda will have no further obligations in respect of the plant. Mali The investment in EEM has been liquidated on 24 February 2015. EEM entered into an operation and maintenance agreement with Société de Gestion de l’Energie de Manantali in 2001 to operate and maintain a 200MW hydro-electricity facility in Mali and supply power to the national electrical companies in Mali, Senegal and Mauritania. The dam, hydro-electric generating plant and eastern and western transmission networks together constitute the ‘energy assets’ in terms of the agreement. EEM was responsible for the day-to-day maintenance, repairs and replacement of the energy assets. Management determined in the 2014 financial year that the assets of EEM constitute non-current assets held-for-sale in terms of IFRS 5. The operations were classified as discontinued operations and were disposed of during 2015. Refer to note 21. Eskom Uganda EEM 2015 2014 2015 2014 Rm Rm Rm Rm Income statements Revenue 138 124 66 117 Profit/(loss) for the year before tax 12 29 (42) 64 Taxation (9) (10) – (1) Profit/(loss) for the year after tax 3 19 (42) 63 Statements of financial position Assets Property, plant and equipment – – – 29 Intangible assets 134 114 – – Inventories 26 25 – 7 Payments made in advance 6 16 – – Trade and other receivables 31 28 – 9 Cash and cash equivalents 22 19 – 101 219 202 – 146 Liabilities Debt securities and borrowings 21 35 – – Provisions 9 9 – 10 Trade and other payables 21 15 – 101 Other liabilities 28 5 – 2 79 64 – 113 The underlying assets are included in the respective asset categories in the statement of financial position. Group Company 2015 2014 2015 2014 R R R R 23. Share capital Authorised 1 000 ordinary shares of R1 each 1 000 1 000 1 000 1 000 Issued 1 ordinary share of R1 1 1 1 1 In terms of the memorandum and articles of association, the unissued share capital is under the control of the government of the Republic of South Africa, represented by the Department of Public Enterprises (DPE), as the sole shareholder. 82 Eskom Holdings SOC Ltd Group Company 2015 2014 2015 2014 Rm Rm Rm Rm 24. Debt securities and borrowings Eskom bonds 112 103 102 080 112 103 102 080 Promissory notes 40 35 40 35 Commercial paper 7 531 14 635 7 027 13 926 Eurorand zero coupon bonds 3 942 3 484 3 942 3 484 Foreign bonds 48 670 29 100 48 670 29 100 Development financing institutions 62 447 49 256 62 447 49 256 Export credit facilities 28 488 31 506 28 488 31 506 Subordinated loan from shareholder 26 621 24 393 26 621 24 393 Other loans 7 592 331 8 792 1 489 297 434 254 820 298 130 255 269 Maturity analysis 297 434 254 820 298 130 255 269 Non-current 277 458 234 562 275 954 233 042 Current 19 976 20 258 22 176 22 227 Group Company Currency Security Interest rate Nominal Maturity Carrying value Carrying value number date 2015 2014 2015 2014 2015 2014 2015 2014 % % m m Rm Rm Rm Rm Eskom bonds 112 103 102 080 112 103 102 080 ZAR ELI51 2.96 2.87 2 047 5 000 Jun 15 2 741 6 380 2 741 6 380 ZAR ESI51 7.77 7.79 2 224 4 684 Aug 15 2 239 4 713 2 239 4 713 ZAR ESI81 9.04 9.18 9 689 9 405 Apr 18 10 146 9 818 10 146 9 818 ZAR EI702 10.09 10.07 11 285 11 300 Aug 213 13 029 13 401 13 029 13 401 ZAR ES231 9.33 9.41 11 537 11 435 Jan 23 12 172 12 044 12 172 12 044 ZAR ES261 8.99 9.03 18 782 17 665 Apr 26 18 036 16 842 18 036 16 842 ZAR EL281 2.21 2.24 3 900 3 000 May 28 4 768 3 480 4 768 3 480 ZAR EL291 1.80 1.73 3 700 3 000 Nov 29 4 281 3 330 4 281 3 330 ZAR EL301 2.29 2.38 3 700 2 455 Jul 30 4 015 2 500 4 015 2 500 ZAR EL3I1 2.16 – 3 700 – Jun 31 3 824 – 3 824 – ZAR ES331 9.30 8.84 27 211 25 279 Sep 33 23 953 22 253 23 953 22 253 ZAR EL361 2.23 – 2 565 – Jan 36 2 585 – 2 585 – ZAR EL371 2.26 – 2 431 – Jan 37 2 438 – 2 438 – ZAR ES421 9.96 9.96 8 739 8 127 Apr 42 7 876 7 319 7 876 7 319 Promissory notes2 40 35 40 35 ZAR PN07 15.34 15.34 20 20 Aug 20 9 8 9 8 ZAR PN08 15.08 15.08 20 20 Aug 21 8 7 8 7 ZAR PN09 14.80 14.80 35 35 Aug 22 12 11 12 11 ZAR PN10 14.61 14.61 35 35 Aug 23 11 9 11 9 Commercial paper 7 531 14 635 7 027 13 926 ZAR n/a – 6.82 – 382 May 14 – 384 – – ZAR n/a 7.10 6.66 316 316 May 15 319 319 – – ZAR n/a3 6.43 5.69 7 190 14 229 Mar 16 4 5 857 12 962 7 027 13 926 ZAR n/a 7.29 6.86 429 429 May 16 432 432 – – ZAR n/a 7.16 – 382 – May 17 385 – – – ZAR n/a 7.27 6.84 400 397 May 18 400 400 – – ZAR n/a 10.58 10.58 131 131 May 20 133 133 – – ZAR n/a 9.35 8.93 5 5 May 20 5 5 – – Eurorand zero coupon bonds2 3 942 3 484 3 942 3 484 ZAR n/a 13.93 13.93 2 000 2 000 Dec 18 1 226 1 076 1 226 1 076 ZAR n/a 13.33 13.33 8 000 8 000 Aug 27 1 697 1 497 1 697 1 497 ZAR n/a 11.89 11.89 7 500 7 500 Dec 32 1 019 911 1 019 911 Balance carried forward to the next page 123 616 120 234 123 112 119 525 1. Government guaranteed. 2. Holders have a right to first charge against revenue and assets of Eskom in terms of section 7 of Eskom Conversion Act. 3. Includes, inter alia, instruments issued to subsidiaries. 4. Latest in a range of maturity dates is indicated for these instruments. Annual Financial Statements | 31 March 2015 83 Notes to the financial statements (continued) for the year ended 31 March 2015 24. Debt securities and borrowings (continued) Group Company Currency Security Interest rate Nominal Maturity Carrying value Carrying value number date 2015 2014 2015 2014 2015 2014 2015 2014 % % m m Rm Rm Rm Rm Balance carried forward from previous page 123 616 120 234 123 112 119 525 Foreign bonds 48 670 29 100 48 670 29 100 USD n/a 5.75 5.75 1 750 1 750 Jan 21 21 427 18 536 21 427 18 536 USD n/a 6.75 6.75 1 000 1 000 Aug 23 12 168 10 564 12 168 10 564 USD n/a 7.13 – 1 250 – Feb 25 15 075 – 15 075 – Development financing institutions1 62 447 49 256 62 447 49 256 ZAR n/a 2 7.45 7.03 1 800 1 933 Aug 28 1 815 1 949 1 815 1 949 EUR n/a 2.11 – 3 – Dec 28 39 – 39 – EUR n/a2 0.38 0.67 579 499 Aug 29 7 572 7 278 7 572 7 278 ZAR n/a2 6.24 5.81 9 970 10 314 Aug 29 10 069 10 408 10 069 10 408 ZAR n/a 9.90 9.67 12 000 9 000 Mar 30 12 221 9 200 12 221 9 200 ZAR n/a 8.73 8.78 855 248 Jun 31 872 249 872 249 USD n/a2 1.49 1.46 271 291 Aug 31 3 195 3 077 3 195 3 077 ZAR n/a 6.51 6.13 1 568 1 661 Mar 32 1 573 1 666 1 573 1 666 USD n/a2 0.63 0.62 68 875 May 38 835 9 245 835 9 245 ZAR n/a2 9.11 9.04 22 688 5 961 May 38 23 360 6 177 23 360 6 177 USD n/a2 0.25 0.25 29 1 May 51 352 7 352 7 USD n/a2 0.25 – 35 – Aug 51 544 – 544 – Export credit facilities1 28 488 31 506 28 488 31 506 JPY n/a 1.60 1.65 14 840 16 349 May 22 1 493 1 666 1 493 1 666 EUR n/a 1.02 1.02 112 113 Sep 23 1 446 1 627 1 446 1 627 EUR n/a 1.04 1.30 15 17 Jul 24 196 242 196 242 EUR n/a 5.07 5.07 845 909 Jan 27 10 529 12 685 10 529 12 685 EUR n/a 2.61 2.82 753 756 Jul 27 9 220 10 454 9 220 10 454 ZAR n/a 8.08 7.73 1 966 1 795 Jul 27 1 778 1 689 1 778 1 689 USD n/a 2.32 2.32 317 301 Mar 31 3 826 3 143 3 826 3 143 Subordinated loan from shareholder 26 621 24 393 26 621 24 393 ZAR n/a 7.52 7.52 5 000 5 000 Dec 38 2 542 2 364 2 542 2 364 ZAR n/a 8.95 8.95 5 000 5 000 Mar 39 2 294 2 106 2 294 2 106 ZAR n/a 9.43 9.43 7 500 7 500 Jun 39 3 215 2 938 3 215 2 938 ZAR n/a 9.15 9.15 7 500 7 500 Sep 39 3 319 3 041 3 319 3 041 ZAR n/a 9.57 9.57 7 500 7 500 Dec 39 3 182 2 904 3 182 2 904 ZAR n/a 9.52 9.52 7 500 7 500 Mar 40 3 230 2 949 3 230 2 949 ZAR n/a 9.54 9.54 5 000 5 000 Jun 40 2 176 1 986 2 176 1 986 ZAR n/a 8.58 8.58 5 000 5 000 Sep 40 2 344 2 159 2 344 2 159 ZAR n/a 9.03 9.03 5 000 5 000 Dec 40 2 233 2 048 2 233 2 048 ZAR n/a 9.81 9.81 5 000 5 000 Mar 41 2 086 1 898 2 086 1 898 Other loans 7 592 331 8 792 1 489 ZAR n/a 8.11 7.13 37 246 Jul 16 37 223 – – ZAR n/a 10.18 – 2 600 – Jul 20 2 647 – 2 647 – ZAR n/a 8.18 – 2 150 – Dec 21 2 154 – 2 154 – ZAR n/a 8.85 – 1 000 – Aug 23 1 013 – 1 013 – ZAR n/a 12.80 – 1 500 – Oct 24 1 588 – 1 588 – ZAR n/a3 5.61 5.41 1 390 1 489 On demand – – 1 390 1 489 ZAR n/a – – 153 108 On demand 153 108 – – 297 434 254 820 298 130 255 269 1. Latest in a range of maturity dates is indicated for these instruments. 2. Government guaranteed. 3. Instruments issued to subsidiaries. 84 Eskom Holdings SOC Ltd Subordinated loan from shareholder The subordinated loan from the shareholder of R60 billion has been fully drawn down in 2011. Eskom is obliged to pay interest on the loan when Eskom is solvent and the debt leverage conditions per the agreement are satisfied. The interest on the subordinated loan is not cumulative. The loan has been classified as a financial liability in accordance with IAS 32 Financial instruments: presentation and has been measured at amortised cost. The loan was initially measured at fair value and the difference between the fair valued amount and the advanced amount accounted for under borrowings gave rise to a day-one gain. This day-one gain is disclosed in equity, under equity reserve (refer to note 2.15). For details of the valuation of the subordinated loan from shareholder refer to note 3(f). Group Company 2015 2014 2015 2014 Rm Rm Rm Rm 25. Embedded derivatives Commodity and/or foreign currency 7 589 8 757 7 589 8 757 Foreign currency or interest rate 1 1 – – United States PPI and foreign currency 432 574 432 574 8 022 9 332 8 021 9 331 Maturity analysis 8 022 9 332 8 021 9 331 Non-current 6 647 7 871 6 646 7 870 Current 1 375 1 461 1 375 1 461 Included in the non-current balances above are the following amounts with maturities of greater than five years: Commodity and/or foreign currency 671 1 764 671 1 764 PPI and foreign currency 328 437 328 437 999 2 201 999 2 201 Refer to note 3(a) and 4.2 for information about sensitivities and assumptions relating to embedded derivatives. Group and company 2015 2014 Capital Government Total Total contributions grant received from customers Rm Rm Rm Rm 26. Deferred income Balance at beginning of the year 2 837 10 455 13 292 11 569 Income recognised (143) (651) (794) (690) Transfers from payments received in advance 78 2 342 2 420 2 413 Balance at end of the year 2 772 12 146 14 918 13 292 Maturity analysis 2 772 12 146 14 918 13 292 Non-current 2 617 11 438 14 055 12 518 Current 155 708 863 774 Group and company 2015 2014 Note Rm Rm The income recognised is disclosed in profit or loss in the following categories: 794 690 Revenue 32 143 143 Depreciation and amortisation expense 36 651 547 Refer to note 31 for information about the government grant and capital contributions received from customers and to note 2.19 for the accounting policy. Annual Financial Statements | 31 March 2015 85 Notes to the financial statements (continued) for the year ended 31 March 2015 2015 2014 Post- Leave Annual and Other Total Total employment performance medical bonus benefits Note Rm Rm Rm Rm Rm Rm 27. Employee benefit obligations Group Balance at beginning of the year 10 234 1 822 1 778 649 14 483 13 911 Raised to the income statement 1 497 767 1 383 38 3 685 4 466 Expense raised 473 767 1 383 2 2 625 3 561 Finance cost – unwinding of discount 41 1 024 – – 36 1 060 905 Raised to other comprehensive income 909 – – – 909 (882) Cash paid (315) (646) (2 228) (2) (3 191) (3 012) Balance at end of the year 12 325 1 943 933 685 15 886 14 483 Maturity analysis 12 325 1 943 933 685 15 886 14 483 Non-current 11 960 – – – 11 960 9 922 Current 365 1 943 933 685 3 926 4 561 Company Balance at beginning of the year 9 981 1 713 1 595 641 13 930 13 461 Raised to the income statement 1 463 714 1 256 36 3 469 4 214 Expense raised 465 714 1 256 – 2 435 3 328 Finance cost – unwinding of discount 41 998 – – 36 1 034 886 Raised to other comprehensive income 884 – – – 884 (912) Cash paid (306) (614) (2 037) – (2 957) (2 833) Balance at end of the year 12 022 1 813 814 677 15 326 13 930 Maturity analysis 12 022 1 813 814 677 15 326 13 930 Non-current 11 665 – – – 11 665 9 674 Current 357 1 813 814 677 3 661 4 256 Group Company 2015 2014 2015 2014 Note Rm Rm Rm Rm 27.1 Post-employment medical benefits The group has anticipated expenditure in terms of continued contributions to medical aid subscriptions in respect of qualifying employees who retire. The amounts recognised in profit or loss are: Net employee benefit expense 35 473 537 465 531 Finance cost 1 024 869 998 850 The amounts recognised in other comprehensive income are: Re-measurements of post-employment medical benefits (actuarial (gain)/loss) 909 (882) 884 (912) Demographic assumptions (88) 18 (87) – Financial assumptions 949 (831) 927 (845) Experience adjustments 48 (69) 44 (67) Measurement of post-employment medical benefits and key actuarial assumptions The estimated present value of the anticipated expenditure for both in-service and retired members was calculated by independent actuaries. The group expects to pay R365 million and the company R357 million in contributions to this plan in the 2016 financial year. 86 Eskom Holdings SOC Ltd Expected maturity analysis of undiscounted post-employment medical benefits: Group Company 2015 2014 2015 2014 Rm Rm Rm Rm Within one year 365 312 357 307 Between one and two years 393 346 384 338 Between two and five years 1 496 1 346 1 458 1 314 After five years 112 335 123 920 110 299 121 740 114 589 125 924 112 498 123 699 Risks The post-employment obligation is administered by funds that are legally separated from the group. The boards of the funds are required by law to act in the best interest of the plan participants and are responsible for setting certain policies including investment, contribution and indexation of the funds. These funds expose the group to a number of risks, the most significant of which are: • changes in bond yields: a decrease in corporate bond yields will increase plan liabilities • inflation risk: the post-employment obligations are linked to inflation, and higher inflation will lead to higher liabilities (although, in most cases, caps on the level of inflationary increases are in place to protect the plan against extreme inflation) • life expectancy: the majority of the plans’ obligations are to provide benefits for the life of the member, so increases in life expectancy will result in an increase in the plans’ liabilities The expected current service cost for the 2016 financial year is estimated at R583 million for the group and R573 million for the company. Refer to note 3(b) for the sensitivity analysis and principal actuarial assumptions used. Group Company 2015 2014 2015 2014 Note Rm Rm Rm Rm 27.2 Leave The group recognises a liability for annual, occasional and service leave (refer to note 3(c)). The total charge is disclosed in profit or loss in the net employee benefit expense 35 767 625 714 609 27.3 Annual and performance bonus The annual bonus equals one month’s salary for employees on Tuned Assessment of Skills and Knowledge (TASK) grading levels 1 to 13. Employees on TASK grading levels 14 to 26 can choose to spread their bonus amount over the year or take it as a thirteenth cheque. The performance bonus is based on the performance of the company and employees. The total charge is disclosed in profit or loss in the net employee benefit expense 35 1 383 2 397 1 256 2 188 27.4 Pension benefits The total contribution is disclosed in profit or loss in the net employee benefit expense 35 1 976 1 888 1 845 1 768 The net benefit asset at the reporting date is not accounted for in the financial statements. The rules of the Eskom Holdings SOC Ltd Pension and Provident Fund (EPPF) state that any deficit on the valuation of the fund will be funded by increases in future contributions or reductions in benefits. If there is a substantial surplus on the valuation of the fund, future contributions may be decreased or benefits may be improved as determined by the trustees of the fund. Annual Financial Statements | 31 March 2015 87 Notes to the financial statements (continued) for the year ended 31 March 2015 27. Employee benefit obligations (continued) 27.4 Pension benefits (continued) Group Company 2015 2014 2015 2014 Rm Rm Rm Rm The EPPF is registered in terms of the Pension Funds Act. All employees are members of the fund. Contributions comprise 20.8% of pensionable emoluments of which members pay 7.3%. The assets of the fund are held separately from those of the group in respect of funds under the control of the trustees. The fund was valued actuarially on the IAS 19 Employee benefits basis on 31 March 2015 (previous valuation at 31 March 2014). The actuarial present value of retirement benefits at 31 March 2015 was R99 820 million (2014: R80 837 million), while the fair value of the fund’s assets was R118 174 million (2014: R106 042 million). Valuation assumptions The principal actuarial assumptions used were: Long-term investment return before tax (%) 8.80 9.70 8.80 9.70 Future general salary increases (%) 7.50 7.90 7.50 7.90 Future pension increases (inflation) (%) 6.00 6.40 6.00 6.40 In-service mortality for group and company are the adjusted PA(90) tables rated down by two years. Pensioner mortality for group and company are the adjusted PA(90) tables rated down by two years. 2015 2014 Power station-related Mine-related Coal- Other 5 Total Total environmental restoration closure, related Nuclear Other pollution obligations4 plant1 generating control and plant 2 rehabilitation 3 Note Rm Rm Rm Rm Rm Rm Rm 28. Provisions Group Balance at beginning of the year 9 331 6 942 4 366 2 215 7 904 30 758 26 735 Expense (reversed)/raised to the income statement – (42) (54) 7 802 (256) 7 450 2 369 Capitalised to the statement of financial position 209 (123) 713 – 2 844 3 643 4 703 Property, plant and equipment 172 (123) 140 – 2 844 3 033 5 036 Inventories 37 – 49 – – 86 (120) Future fuel – – 524 – – 524 (213) Finance cost 1 442 928 440 65 2 2 877 1 456 Unwinding of discount 41 1 143 833 396 65 2 2 439 1 885 Change in discount rate applied to provision 41 299 95 44 – – 438 (429) Transfer from non-current assets held-for-sale – – – – – – (10) Cash paid – – – (2 128) (1 550) (3 678) (4 495) Balance at end of the year 10 982 7 705 5 465 7 954 8 944 41 050 30 758 Maturity analysis 10 982 7 705 5 465 7 954 8 944 41 050 30 758 Non-current 10 982 7 575 5 465 7 013 43 31 078 21 157 Current – 130 – 941 8 901 9 972 9 601 88 Eskom Holdings SOC Ltd 2015 2014 Power station-related Mine-related Coal- Other 5 Total Total environmental restoration closure, related Nuclear Other pollution obligations4 plant1 generating control and plant 2 rehabilitation 3 Note Rm Rm Rm Rm Rm Rm Rm Company Balance at beginning of the year 9 331 6 942 4 366 2 215 7 341 30 195 26 000 Expense (reversed)/raised to the income statement – (42) (54) 7 802 (12) 7 694 2 339 Capitalised to the statement of financial position 209 (123) 713 – 2 844 3 643 4 703 Property, plant and equipment 172 (123) 140 – 2 844 3 033 5 036 Inventories 37 – 49 – – 86 (120) Future fuel – – 524 – – 524 (213) Finance cost 1 442 928 440 65 – 2 875 1 452 Unwinding of discount 41 1 143 833 396 65 – 2 437 1 881 Change in discount rate applied to provision 41 299 95 44 – – 438 (429) Cash paid – – – (2 128) (1 433) (3 561) (4 299) Balance at end of the year 10 982 7 705 5 465 7 954 8 740 40 846 30 195 Maturity analysis 10 982 7 705 5 465 7 954 8 740 40 846 30 195 Non-current 10 982 7 575 5 465 7 013 4 31 039 21 093 Current – 130 – 941 8 736 9 807 9 102 Group Company 2015 2014 2015 2014 Rm Rm Rm Rm 29. Finance lease payables Gross payables 1 267 1 367 1 526 1 698 Future finance charges (779) (867) (819) (929) Present value 488 500 707 769 Maturity analysis of gross payables Within one year 99 98 171 173 Between one and five years 390 396 574 642 After five years 778 873 781 883 1 267 1 367 1 526 1 698 Future finance charges (779) (867) (819) (929) 488 500 707 769 Maturity analysis of net payables Non-current 474 488 637 705 Between one and five years 83 72 243 280 After five years 391 416 394 425 Current Within one year 14 12 70 64 488 500 707 769 Average implicit rate (%) 18 18 18 18 1. Provision is made for the estimated decommissioning cost of nuclear plant and for the management of nuclear fuel assemblies and radioactive waste (refer to note 3(d)). 2. Provision is made for the estimated decommissioning cost of all other generating plant (refer to note 3(d)). 3. Provision is made for the estimated cost of closure, pollution control, rehabilitation and mine employee benefits at the end of the life of the mines, where a constructive and contractual obligation exists to pay coal suppliers (refer to note 3(d)). 4. The provision relates to new build-related coal obligations (refer to note 3(e)). 5. Includes provision made for contractual obligations to maintain and restore the infrastructure under service concession arrangements, onerous contracts, compensation events and guarantees. Annual Financial Statements | 31 March 2015 89 Notes to the financial statements (continued) for the year ended 31 March 2015 Group Company 2015 2014 2015 2014 Rm Rm Rm Rm 30. Trade and other payables Financial instruments 28 419 29 266 29 788 30 922 Trade and other payables 21 335 20 824 22 146 21 924 Accruals 4 384 6 133 4 942 6 689 Deposits 2 700 2 309 2 700 2 309 Non-financial instruments VAT payable 580 302 494 213 28 999 29 568 30 282 31 135 Maturity analysis 28 999 29 568 30 282 31 135 Non-current 1 015 1 037 1 015 1 073 Current 27 984 28 531 29 267 30 062 Non-current trade and other payables consists mainly of retention payables that are payable after 12 months. 31. Payments received in advance 2015 2014 Upfront Grant Other Total Total capital funding contributions Rm Rm Rm Rm Rm Group Balance at beginning of the year 3 880 1 531 305 5 716 5 543 Income recognised (752) (191) (232) (1 175) (1 478) Transfers to the statement of financial position (78) (4 102) – (4 180) (2 414) Deferred income (78) (2 342) – (2 420) (2 414) Trade and other payables – (1 760) – (1 760) – Payments received 1 305 3 064 91 4 460 4 065 Balance at end of the year 4 355 302 164 4 821 5 716 Maturity analysis 4 355 302 164 4 821 5 716 Non-current 2 644 – 20 2 664 3 589 Current 1 711 302 144 2 157 2 127 Company Balance at beginning of the year 3 880 1 531 292 5 703 5 531 Income recognised (752) (191) (221) (1 164) (1 463) Transfers to the statement of financial position (78) (4 102) – (4 180) (2 414) Deferred income (78) (2 342) – (2 420) (2 414) Trade and other payables – (1 760) – (1 760) – Payments received 1 305 3 064 81 4 450 4 049 Balance at end of the year 4 355 302 152 4 809 5 703 Maturity analysis 4 355 302 152 4 809 5 703 Non-current 2 644 – 20 2 664 3 589 Current 1 711 302 132 2 145 2 114 Upfront capital contributions Contributions relating to the construction of electricity network assets were paid in advance by electricity customers. Refer to note 2.18 for the accounting policy. Grant funding The government’s transitional electrification programmes are managed by Eskom on behalf of the Department of Energy (DoE). The funding for the electrification of homes is provided by the DoE. Eskom retains ownership of and responsibility for the electrification assets created. 90 Eskom Holdings SOC Ltd Group Company 2015 2014 2015 2014 Note Rm Rm Rm Rm 32. Revenue Electricity revenue 146 268 136 869 146 268 136 869 Deferred income recognised 26 143 143 143 143 Other revenue1 1 280 1 301 1 280 1 301 147 691 138 313 147 691 138 313 Electricity revenue of R597 million (2014: Rnil) was not recognised as it was assessed that there is a high probability that the related economic benefits will not materialise. Despite this, Eskom continues to actively pursue recovery of these amounts. Refer to note 4.1. 33. Other income Insurance proceeds 2 732 – 5 111 384 Services income 213 362 – – Insurance premium income 116 117 – – Management fee income – – 261 751 Operating lease income 275 331 219 175 Dividend income 29 27 19 21 Sale of scrap 186 199 186 199 Other income 893 405 849 343 4 444 1 441 6 645 1 873 34. Primary energy Own generation costs 61 630 54 186 61 630 54 186 Environmental levy 8 353 8 530 8 353 8 530 International electricity purchases 3 679 3 311 3 679 3 311 Independent power producers 9 453 3 266 9 453 3 266 Other 310 519 310 519 83 425 69 812 83 425 69 812 Own generating costs relates to the cost of coal, uranium, water and liquid fuels that are used in the generation of electricity. Eskom uses a combination of short-, medium- and long-term agreements with suppliers for coal purchases and long-term agreements with the DWA to reimburse the department for the cost incurred in supplying water to Eskom. 35. Net employee benefit expense Salaries 18 681 17 372 17 446 16 390 Overtime 1 682 1 616 1 446 1 417 Post-employment medical benefits 27.1 473 537 465 531 Leave 27.2 767 625 714 609 Annual and performance bonus 27.3 1 383 2 397 1 256 2 188 Pension benefits 27.4 1 976 1 888 1 845 1 768 Direct costs of employment 24 962 24 435 23 172 22 903 Direct training and development 197 326 176 300 Temporary and contract staff costs 6 141 5 565 4 281 3 906 Other staff costs 1 016 998 962 960 Gross employee benefit expense 32 316 31 324 28 591 28 069 Capitalised to property, plant and equipment (6 404) (5 702) (6 404) (5 685) 25 912 25 622 22 187 22 384 1. Includes related electricity revenue such as upfront payments and connection fees. Annual Financial Statements | 31 March 2015 91 Notes to the financial statements (continued) for the year ended 31 March 2015 Group Company 2015 2014 2015 2014 Note Rm Rm Rm Rm 36. Depreciation and amortisation expense Depreciation of property, plant and equipment 6 13 827 11 635 13 798 11 709 Amortisation of intangible assets 7 939 849 854 772 Deferred income recognised (government grant on electrification) 26 (651) (547) (651) (547) 14 115 11 937 14 001 11 934 37. Net impairment loss Impairment 3 905 1 590 3 882 1 581 Property, plant and equipment 6 1 157 46 1 156 40 Inventories 5 11 5 10 Loans receivable 13 15 15 – – Trade and other receivables 17 2 728 1 518 2 721 1 531 Reversal (132) (18) (120) (18) Property, plant and equipment 6 (7) (1) (7) (1) Inventories 18 (21) (1) (14) (1) Loans receivable 13 (1) – – – Trade and other receivables 17 (103) (16) (99) (16) Bad debts recovered (7) (15) (7) (14) 3 766 1 557 3 755 1 549 38. Other expenses Managerial, technical and other fees 1 197 2 906 1 160 2 826 Direct research and development 35 35 35 35 Operating lease expense 1 397 1 272 753 587 Auditors’ remuneration1 97 126 84 105 Net loss on disposal of property, plant and equipment 111 179 103 176 Government grant – (43) – (43) Income (209) (312) (209) (312) Expenses incurred 209 269 209 269 Repairs and maintenance, transport and other expenses 12 934 14 702 19 948 20 654 15 771 19 177 22 083 24 340 39. Net fair value gain/(loss) on financial instruments, excluding embedded derivatives Net (loss)/gain on financial trading assets (89) 175 (209) 50 Net loss on financial trading liabilities (8) (36) (8) (36) Net gain on derivatives held for risk management 2 3 159 10 098 3 159 10 093 Net gain on trade and other receivables 15 9 13 10 Net gain on cash and cash equivalents 284 504 284 504 Net gain/(loss) on trade and other payables 141 (335) 172 (339) Net loss on debt securities and borrowings (2 929) (11 289) (2 929) (11 289) Ineffective portion of changes in fair value of cash flow hedges 57 254 57 254 630 (620) 539 (753) 1. There were no non-audit services rendered by the group’s statutory auditors. 2. Includes forward exchange contract premium of R3 602 million (2014: R2 909 million) for the company. 92 Eskom Holdings SOC Ltd Group Company 2015 2014 2015 2014 Note Rm Rm Rm Rm 40. Finance income Investment in securities 739 988 513 823 Loans receivable 799 719 422 353 Finance lease receivables 68 70 68 70 Trade and other receivables 677 468 676 468 Cash and cash equivalents 713 944 681 908 2 996 3 189 2 360 2 622 41. Finance cost Debt securities and borrowings 19 699 16 312 19 731 16 302 Eskom bonds 9 381 8 316 9 381 8 316 Promissory notes 5 – 5 – Commercial paper 677 697 627 586 Eurorand zero coupon bonds 458 405 458 405 Foreign bonds 2 041 1 507 2 041 1 507 Development financing institutions 3 192 1 865 3 192 1 865 Export credit facilities 1 345 1 304 1 345 1 304 Subordinated loan from shareholder 2 228 2 044 2 228 2 044 Other loans 372 174 454 275 Derivatives held for risk management 2 496 1 523 2 496 1 523 Employee benefit obligations 27 1 060 905 1 034 886 Provisions 28 2 877 1 456 2 875 1 452 Finance lease payables 87 89 107 116 Trade and other payables 275 252 275 252 Gross finance cost 26 494 20 537 26 518 20 531 Capitalised to property, plant and equipment 6 (17 389) (13 290) (17 389) (13 290) 9 105 7 247 9 129 7 241 42. Income tax Current tax 129 193 – – Deferred tax 11 1 237 1 944 1 169 1 520 Reversal of temporary differences 3 706 3 999 3 810 3 235 Tax losses (2 469) (2 055) (2 641) (1 715) 1 366 2 137 1 169 1 520 Annual Financial Statements | 31 March 2015 93 Notes to the financial statements (continued) for the year ended 31 March 2015 42. Income tax (continued) 2015 2014 Before Tax Net of Before Tax Net of tax tax tax tax Rm Rm Rm Rm Rm Rm Income tax recognised in other comprehensive income Group Available-for-sale financial assets Net change in fair value (63) 17 (46) (377) 106 (271) Cash flow hedges (665) 186 (479) 4 471 (1 252) 3 219 Effective portion of changes in fair value 471 (132) 339 5 697 (1 595) 4 102 Net amount transferred to initial carrying amount of hedged items (1 136) 318 (818) (1 226) 343 (883) Foreign currency translation differences 24 – 24 (23) – (23) Re-measurement of post-employment medical benefits (909) 255 (654) 882 (251) 631 (1 613) 458 (1 155) 4 953 (1 397) 3 556 Company Available-for-sale financial assets Net change in fair value (64) 18 (46) (376) 105 (271) Cash flow hedges (665) 186 (479) 4 471 (1 252) 3 219 Effective portion of changes in fair value 471 (132) 339 5 697 (1 595) 4 102 Net amount transferred to initial carrying amount of hedged items (1 136) 318 (818) (1 226) 343 (883) Re-measurement of post-employment medical benefits (884) 247 (637) 912 (255) 657 (1 613) 451 (1 162) 5 007 (1 402) 3 605 Group Company 2015 2014 2015 2014 % % % % Reconciliation of the effective tax rate Taxation as a percentage of profit before tax 27.18 23.34 29.48 21.89 Taxation effect of: Non-taxable income 4.90 4.80 3.32 6.27 Expenses not deductible for tax purposes (4.08) (0.14) (4.80) (0.16) Standard tax rate 28.00 28.00 28.00 28.00 94 Eskom Holdings SOC Ltd Group Company 2015 2014 2015 2014 Rm Rm Rm Rm 43. Cash generated from operations Profit before tax 5 026 9 163 3 965 6 944 Adjustments for: 31 370 21 194 32 132 21 601 Depreciation and amortisation expense 14 115 11 937 14 001 11 934 Depreciation expense – primary energy 13 13 13 13 Net impairment loss (excluding bad debts recovered) 3 773 1 572 3 762 1 563 Net fair value gain on financial instruments including embedded derivatives (1 940) (1 529) (1 849) (1 396) Net loss on disposal of property, plant and equipment 111 179 103 176 Dividend income (29) (27) (19) (21) Increase in employee benefit obligations 2 625 3 561 2 435 3 328 Increase in provisions 7 450 2 369 7 694 2 339 Decrease in deferred income (143) (143) (143) (143) Payments made in advance recognised in profit or loss 533 658 530 652 Payments received in advance recognised in profit or loss (1 175) (1 478) (1 164) (1 463) Finance income (2 996) (3 189) (2 360) (2 622) Finance cost 9 105 7 247 9 129 7 241 Share of profit of equity-accounted investees (49) (43) – – Non-current assets and liabilities held-for-sale (23) 67 – – 36 396 30 357 36 097 28 545 Changes in working capital: (8 868) (7 516) (10 647) (5 812) Increase in payments made in advance (913) (857) (835) (791) Decrease in inventories 894 544 831 569 Decrease in trade and other receivables (5 468) (2 669) (7 261) (3 256) Decrease in trade and other payables (2 642) (2 441) (2 984) (600) Expenditure incurred on employee benefit obligations (3 191) (3 012) (2 957) (2 833) Expenditure incurred on provisions (2 008) (3 146) (1 891) (2 950) Increase in payments received in advance 4 460 4 065 4 450 4 049 27 528 22 841 25 450 22 733 Annual Financial Statements | 31 March 2015 95 Notes to the financial statements (continued) for the year ended 31 March 2015 Group Company Unit 2015 2014 2015 2014 44. Guarantees and contingent liabilities Eskom issues guarantees for strategic and business purposes to facilitate other business transactions. 44.1 Financial guarantees Long-term debt raised by Motraco Motraco, a private joint venture company between Eskom, Electricidade de Mocambique and Swaziland Electricity Board, owns transmission lines connecting the South African, Mozambican and Swaziland national grids to establish a secure source of electrical power for the Mozal aluminium smelter in Maputo, Mozambique. Motraco has raised debt as part of these operations maturing on 30 April 2019. Eskom has guaranteed a portion of this debt. The guarantees would be triggered if Motraco was unable to meet its obligations in terms of the long-term debt. The risk of default resulting from the political risk in Mozambique is mitigated through a guarantee arranged with an established international insurance company, which specialises in facilitating investments in high risk, low income countries. Guarantee issued USDm 13 16 13 16 Default probability % 0.43 0.20 0.43 0.20 Financial guarantee Rm 158 165 158 165 Unprovided portion, disclosed as a contingent liability Rm 157 165 157 165 Provision (refer to note 28) Rm 1 – 1 – The default probability trend into the future is seen to be positive, and changes in variables will not have a significant impact on profit or loss. No payments have been made in terms of these guarantees since their inception in 1999. EFC loans to group employees EFC has granted loans (secured by mortgage bonds on the properties) to qualifying employees of the group. Eskom has issued guarantees to EFC to the extent to which the loan values of employees exceed the current value of the mortgage security. Historically EFC has absorbed any losses incurred, and has not called up any guarantee payments. Eskom’s guarantee exposure is therefore governed by the default probability of EFC, which is influenced by the risk of significant fluctuations in interest rates that might cause employees to default on their repayments. The risk adjusted credit exposure of EFC is calculated by applying a rating agency’s annual default probabilities. Unsecured portion of loan book % – – 2 3 Default probability of secured portion of loan book % – – 27.00 27.00 Secured portion of loan book % – – 98.00 97.00 Default probability of unsecured portion of loan book % – – 0.01 0.01 Financial guarantee Rm – – 1 131 1 119 Unprovided portion, disclosed as a contingent liability Rm – – 1 130 1 118 Provision (refer to note 28) Rm – – 1 1 Changes in variables will not have a significant impact on profit or loss. Summary of financial guarantees Unprovided portion, disclosed as a contingent liability Rm 157 165 1 287 1 283 Long-term debt raised by Motraco Rm 157 165 157 165 EFC loans to group employees Rm – – 1 130 1 118 Amounts provided in other provisions Rm 1 – 2 1 Long-term debt raised by Motraco Rm 1 – 1 – EFC loans to group employees Rm – – 1 1 Total guarantees Rm 158 165 1 289 1 284 96 Eskom Holdings SOC Ltd Group Company Unit 2015 2014 2015 2014 44.2 Other guarantees Guarantees to South African Revenue Services (SARS) for customs duty Customs duty and import VAT are normally due upon declaration of imported goods at the port of entry (harbour or airport). The SARS allows Eskom up to a maximum of 37 days after declaration date before the customs duty and import VAT must be settled on the deferment account. SARS requires Eskom to provide a bank guarantee to secure the debt when it becomes due. All conditions of the deferral of the customs duty and import VAT have been met. The total amount disclosed as a contingent liability amounted to Rm 183 183 183 183 Eskom Pension and Provident Fund Eskom has indemnified the EPPF against any loss resulting from negligence, dishonesty or fraud by the fund’s officers or trustees. 44.3 Other contingent liabilities Legal claims Legal claims are in process against Eskom as a result of contractual disputes with various parties. On the basis of the evidence available it appears that no obligation is present. The claims are disclosed as a contingent liability and amounted to Rm 34 50 34 50 Group Company 2015 2014 2015 2014 Rm Rm Rm Rm 45. Commitments 45.1 Capital expenditure Estimated capital expenditure 147 831 175 255 143 587 171 089 Contracted 65 163 59 718 64 507 59 579 Approved, not yet contracted 82 668 115 537 79 080 111 510 The expenditure is expected to be incurred as follows: 147 831 175 255 143 587 171 089 Within one year 57 297 60 855 55 450 58 967 Between one and five years 79 626 112 161 77 229 109 883 After five years 10 908 2 239 10 908 2 239 This expenditure will be financed through debt and internally generated funds. The capital programme will be reviewed and reprioritised by management in line with the funds available. 45.2 Operating leases As lessee The future minimum lease payments payable under non-cancellable operating leases are: 213 261 214 262 Within one year 131 134 132 134 Between one and five years 82 127 82 128 As lessor The future minimum lease payments receivable under non-cancellable operating leases are: 212 356 213 358 Within one year 50 47 50 49 Between one and five years 162 309 163 309 Annual Financial Statements | 31 March 2015 97 Notes to the financial statements (continued) for the year ended 31 March 2015 46. Related-party transactions The group is wholly owned by its shareholder, the government, represented by the DPE. Eskom (and its subsidiaries) are classified as Schedule 2 public entities in terms of the PFMA. Eskom’s government-related parties include national departments (including the shareholder), constitutional institutions, public entities (schedule 1, 2 and 3) and local government (including municipalities). Eskom’s transactions with local government (with the exception of municipalities) are not individually significant when compared to the total value of the transactions between Eskom and other government-related parties and are therefore not disclosed separately. These include, among others, transactions as a result of services provided to government hospitals and libraries. Related parties also comprise subsidiaries of Eskom, associates and joint ventures of the group and post-retirement benefit plans for the benefit of employees. It also includes key management personnel of Eskom or its shareholder and close family members of these related parties. The list of public entities in the national sphere of government is provided by National Treasury on its website www.treasury.gov.za. It also provides the names of subsidiaries of public entities. Key management personnel for Eskom include the group’s board of directors and the Exco. Disclosure of related party transactions with key management personnel is included in note 49. The following transactions were carried out with related parties: Group Company 2015 2014 2015 2014 Note Rm Rm Rm Rm Transactions Sales of goods and services1 79 641 72 639 84 769 73 950 National departments 983 608 974 599 Local government 70 344 64 644 70 344 64 644 Public entities 5 509 4 689 5 492 4 623 Eskom subsidiaries – – 5 154 1 386 Joint venture in which Eskom is a partner 2 805 2 698 2 805 2 698 Government grant funding received for electrification National departments 3 064 2 887 3 064 2 887 Purchases of goods and services2 10 573 9 717 18 278 18 676 National departments 1 740 1 331 1 738 1 330 Local government 1 159 1 138 1 148 1 130 Public entities 5 436 5 027 5 372 4 948 Eskom subsidiaries – – 7 913 9 167 Joint venture in which Eskom is a partner 262 333 262 333 Other related parties 35 1 976 1 888 1 845 1 768 Finance income 1 243 1 371 1 665 1 724 National departments 472 773 472 773 Local government 585 303 585 303 Public entities 186 295 186 295 Eskom subsidiaries – – 422 353 Finance cost3 7 095 6 047 7 265 6 168 National departments 2 304 2 046 2 304 2 046 Local government 16 – 16 – Public entities 4 677 3 923 4 677 3 923 Eskom subsidiaries – – 170 121 Other related parties 98 78 98 78 Lease income 55 75 59 78 Public entities 55 75 55 75 Eskom subsidiaries – – 4 3 Lease expenses 4 – 3 – National departments 2 – 2 – Public entities 2 – 1 – Finance lease finance cost Eskom subsidiaries – – 20 26 Environmental levy Public entities 34 8 353 8 530 8 353 8 530 1. Goods and services are sold to related parties on an arm’s length basis at market-related prices. 2. Goods and services are bought from related parties on an arm’s length basis at market-related prices. 3. Bonds are bearer instruments and it is therefore unknown if the initial counterparty still holds the bonds. Transactions in the secondary market where Eskom is not the counterparty are therefore excluded. 98 Eskom Holdings SOC Ltd Group Company 2015 2014 2015 2014 Note Rm Rm Rm Rm Outstanding balances (due by related parties) Receivables and amounts owed by related parties 11 689 8 447 16 754 9 569 National departments 96 21 93 19 Local government 9 974 6 927 9 974 6 927 Public entities 1 367 1 181 1 222 1 132 Eskom subsidiaries – – 5 213 1 173 Joint venture in which Eskom is a partner 252 318 252 318 Payments made in advance 34 30 37 35 Public entities 34 30 34 30 Eskom subsidiaries – – 3 5 Loans receivable Eskom subsidiaries1 – – 6 553 6 665 Indirect transactions – assets at nominal value National departments 4 580 8 094 4 580 8 094 Total due by related parties 16 303 16 571 27 924 24 363 Cash and cash equivalents Public entities – 7 835 – 7 835 Outstanding balances (due to related parties) Debt securities and borrowings 153 531 144 410 156 090 146 863 National departments 60 152 60 066 60 152 60 066 Subordinated loan from shareholder 24 60 000 60 000 60 000 60 000 Other 152 66 152 66 Local government 27 412 27 412 Public entities 90 675 82 248 90 675 82 248 Eskom subsidiaries2 – – 2 559 2 453 Other related parties 2 677 1 684 2 677 1 684 Payables3 and amounts owed to related parties 4 074 2 325 6 268 5 529 National departments 1 922 113 1 922 112 Local government 73 80 73 79 Public entities 1 888 1 955 1 751 1 866 Eskom subsidiaries – – 2 331 3 295 Joint venture in which Eskom is a partner 50 44 50 44 Other related parties 141 133 141 133 Payments received in advance National departments 301 1 531 301 1 531 Indirect transactions – liabilities at nominal value National departments 534 805 534 805 Total due to related parties 158 440 149 071 163 193 154 728 Guarantees Guarantees received and used Guarantees received National departments 350 000 350 000 350 000 350 000 Domestic multi-term note programme 150 000 100 000 150 000 100 000 General guarantees 200 000 250 000 200 000 250 000 Guarantees used National departments 158 811 143 661 158 811 143 661 Domestic multi-term note programme 100 226 90 050 100 226 90 050 General guarantees 58 585 53 611 58 585 53 611 Guarantees still available 4.3 191 189 206 339 191 189 206 339 Guarantees issued 340 348 1 470 1 466 National departments 44.2 183 183 183 183 Eskom subsidiaries 44.1 – – 1 130 1 118 Joint venture in which Eskom is a partner 44.1 157 165 157 165 Commitments Eskom does not have any material commitments with its related parties. 1. The effective interest rate on the loans to subsidiaries is 6.03% (2014: 5.48%). 2. Refer to note 24 for effective interest rate and maturity date relating to intercompany instruments. 3. Purchase transactions with related parties are on an arm’s length basis with payment terms of 30 days from invoice date. Annual Financial Statements | 31 March 2015 99 Notes to the financial statements (continued) for the year ended 31 March 2015 47. Events after the reporting date There were no significant events after the reporting date. 48. Restatement of comparatives The following restatements and reclassifications which had an impact on the financial statements, were made: Reclassification of revenue and other income The main business activity of the Eskom group is the generation, transmission and distribution of electricity. The business activities of the subsidiaries while different are to support the electricity business. To improve the relevance of information presented the revenue earned by subsidiaries has been presented as other income (excluding EFC) and finance income (EFC) to only reflect revenue from the main business activity as revenue. Other income has been reallocated as it is more appropriate to present it with the related expenses. Reclassification of statements of cash flows An overall review of the nature and classification of cash flows in the statements of cash flows was undertaken to better reflect the nature of cash flow items. This was considered relevant as a consequence of the group’s changing operational environment and circumstances, including the material increases in debt financing and capital investment. This resulted in revised classifications for some cash flow streams which better reflect their nature. Cash flow classification is dependent upon the specific circumstances of the entity for which they are being presented at a point in time and as such is reviewed where the circumstances of the entity change. The revised classifications provide the user with a better reflection of the source and destination of cash balances acquired and used within the business. The impact of the restatements are as follows: Group Company Previously Adjustments Restated Previously Adjustments Restated reported reported Rm Rm Rm Rm Rm Rm Income statements for the year ended 31 March 2014 Continuing operations Revenue 139 506 (1 193) 138 313 138 313 – 138 313 Other income 962 479 1 441 1 873 – 1 873 Primary energy (69 812) – (69 812) (69 812) – (69 812) Net employee benefit expense (25 622) – (25 622) (22 384) – (22 384) Depreciation and amortisation expense (11 937) – (11 937) (11 934) – (11 934) Net impairment loss (1 557) – (1 557) (1 549) – (1 549) Other expenses (19 177) – (19 177) (24 340) – (24 340) Profit before net fair value loss and net finance income 12 363 (714) 11 649 10 167 – 10 167 Net fair value loss on financial instruments excluding embedded derivatives (620) – (620) (753) – (753) Net fair value gain on embedded derivatives 2 149 – 2 149 2 149 – 2 149 Profit before net finance cost 13 892 (714) 13 178 11 563 – 11 563 Net finance cost (4 772) 714 (4 058) (4 619) – (4 619) Finance income 2 475 714 3 189 2 622 – 2 622 Finance cost (7 247) – (7 247) (7 241) – (7 241) Share of profit of equity-accounted investees, net of tax 43 – 43 – – – Profit before tax 9 163 – 9 163 6 944 – 6 944 Income tax (2 137) – (2 137) (1 520) – (1 520) Profit for the year from continuing operations 7 026 – 7 026 5 424 – 5 424 Discontinued operations Profit for the year from discontinued operations 63 – 63 – – – Profit for the year 7 089 – 7 089 5 424 – 5 424 100 Eskom Holdings SOC Ltd Group Company Previously Adjustments Restated Previously Adjustments Restated reported reported Rm Rm Rm Rm Rm Rm Statements of cash flows for the year ended 31 March 2014 Cash flows from operating activities Cash generated from operations 20 633 2 208 22 841 19 150 3 583 22 733 Net cash flows used in financial trading assets (1 471) 1 471 – (1 250) 1 250 – Net cash flows from financial trading liabilities 4 383 (4 383) – 4 383 (4 383) – Net cash flows from derivatives held for risk management 10 278 (9 602) 676 10 278 (9 602) 676 Net cash flows used in non-current assets held-for-sale (23) 23 – – – – Interest received – 445 445 – 443 443 Interest paid – (136) (136) – (136) (136) Income taxes paid (184) – (184) – – – Net cash from operating activities 33 616 (9 974) 23 642 32 561 (8 845) 23 716 Cash flows used in investing activities Proceeds from disposal of property, plant and equipment 28 – 28 23 – 23 Acquisitions of property, plant and equipment (52 137) – (52 137) (52 658) – (52 658) Acquisitions of intangible assets (1 023) – (1 023) (953) – (953) Expenditure on future fuel supplies (2 675) – (2 675) (2 675) – (2 675) Decrease/(increase) in trade and other receivables 434 (434) – (6) 6 – Increase in payments made in advance – (2 088) (2 088) – (2 088) (2 088) Expenditure incurred on provisions – (1 349) (1 349) – (1 349) (1 349) Net cash flows from derivatives held for risk management – 2 747 2 747 – 2 747 2 747 Increase in investment in securities – (310) (310) – – – Net cash flows used in financial trading assets – (221) (221) – – – Increase in loans receivable (229) (230) (459) – (442) (442) Decrease in finance lease receivables 17 – 17 17 – 17 Net cash flows from non-current assets held-for-sale 7 – 7 – – – Dividends received 27 – 27 21 – 21 Dividends received – investment in equity-accounted investees 21 – 21 – – – Interest received – 954 954 – 394 394 Decrease in trade and other payables (1 677) 1 677 – (369) 369 – Net cash used in investing activities (57 207) 746 (56 461) (56 600) (363) (56 963) Cash flows from financing activities Debt securities and borrowings raised 44 142 – 44 142 43 681 474 44 155 Payments made in advance to secure balances raised – (521) (521) – (521) (521) Debt securities and borrowings repaid (8 014) – (8 014) (7 488) – (7 488) Net cash flows from net loans to subsidiaries – – – 32 (32) – Net cash flows from derivatives held for risk management – 7 751 7 751 – 7 751 7 751 Decrease in investment in securities 5 748 310 6 058 6 058 – 6 058 Decrease in finance lease liabilities (11) – (11) (58) – (58) Net cash flows used in financial trading assets – (1 250) (1 250) – (1 250) (1 250) Net cash flows from financial trading liabilities – 4 383 4 383 – 4 383 4 383 Interest received 2 768 (685) 2 083 2 884 (837) 2 047 Interest paid (11 838) (1 264) (13 102) (11 856) (1 264) (13 120) Net cash from financing activities 32 795 8 724 41 519 33 253 8 704 41 957 Net increase/(decrease) in cash and cash equivalents 9 204 (504) 8 700 9 214 (504) 8 710 Cash and cash equivalents at beginning of the year 10 620 – 10 620 9 830 – 9 830 Foreign currency translation (23) – (23) – – – Net gain on cash and cash equivalents arising from exchange rate changes – 504 504 – 504 504 Cash and cash equivalents at beginning of the year attributable to non-current assets held-for-sale (125) – (125) – – – Cash and cash equivalents at end of the year 19 676 – 19 676 19 044 – 19 044 Annual Financial Statements | 31 March 2015 101 Notes to the financial statements (continued) for the year ended 31 March 2015 49. Directors’ remuneration1 Remuneration philosophy Eskom links management remuneration to the performance of the organisation and an individual’s contribution. Market factors are also crucial as rewards and remuneration must be kept at levels that will assist Eskom in retaining key leadership skills. Basic salary is augmented by short- and long-term incentives. International and local benchmarks are considered to ensure executive packages are aligned with those offered by companies of similar stature to Eskom. Eskom aims to remunerate in line with the median of the market to recruit and retain the best management team to lead the business. The executive remuneration strategy is constantly reviewed to stay aligned with the DPE remuneration guidelines and abreast with best practices. People and governance committee The people and governance committee assists the board to apply policy relating to the remuneration of directors and executives as set by Eskom’s shareholder. The policy also covers the nomination of executives for senior positions and conditions of service. The committee enhances business performance by: • approving, guiding and influencing key human resources policies and strategies • monitoring compliance with the Employment Equity Act • guiding strategies to achieve equity in Eskom • approving the principles governing reward and incentive schemes Non-executive directors Remuneration of non-executive directors is benchmarked against the norms for companies of similar size and is in line with guidelines issued by the shareholder. Remuneration proposals from the people and governance committee regarding non-executive directors’ remuneration are forwarded to the board. The board then makes recommendations to the shareholder. Non-executive directors receive a fixed monthly fee and are reimbursed for out-of-pocket expenses incurred in fulfilling their duties. Executive management committee members The committee makes recommendations to the board concerning the remuneration of the chief executive, and approves the remuneration of the other Exco members (group executives). The remuneration is considered in accordance with a framework approved by the shareholder. The board recommendation on the remuneration of the chief executive has to be approved by the shareholder. Factors influencing the remuneration of the Exco members include level of skill, experience, contribution to organisational performance and success of the group. Remuneration includes a basic package and short- and long-term incentives. Every year, the people and governance committee reviews the structure of these packages to ensure there is an appropriate balance between fixed and variable remuneration and short- and long-term incentives and rewards. The chief executive, finance director and group executives have permanent employment contracts based on Eskom’s standard conditions of service. Remuneration structure The remuneration of the Exco members includes the following components: Guaranteed amount They receive a guaranteed pay package with remuneration based on cost to company. This comprises a fixed cash portion and compulsory benefits (medical aid, life cover and pension). The guaranteed amount is reviewed annually to keep remuneration in line with the market. Short-term incentives These reward the achievement of individual predetermined performance objectives and targets (these are linked to the shareholder compact) as set by the chief executive in performance contracts with each Exco member. The people and governance committee approves the targets set for the chief executive. The short-term incentive scheme is calculated as a percentage of pensionable earnings. Long-term incentives These are designed to attract, retain and reward the Exco members for meeting the organisational objectives set by the shareholder. A market benchmarked long-term incentive scheme has been approved by the shareholder effective from 1 April 2005. 1. Includes remuneration of the chief executive, finance director and Exco members (group executives who are senior executives but not directors of Eskom). 102 Eskom Holdings SOC Ltd Long-term incentive scheme A number of performance shares (award performance shares) were awarded to the Exco members on 1 April 2011, 2012 and 2013. The value of the performance shares is deemed to be R1 at grant date, and is escalated at a money market rate to determine the value at reporting date. The board has set performance conditions in line with the Eskom corporate plan and shareholder compact over a three-year performance period. Performance covers financial and non-financial targets in areas such as ensuring business sustainability of Eskom, ensuring reliability of supply to all South Africans, ensuring that future power needs for South Africa are adequately provided for and supporting the developmental objectives of South Africa, with an agreed weighting in each category. Awards only vest if, and to the extent that, these targets are met. Potential vesting percentages range from 0% to 100%. A threshold and a stretch target are set for each measure, with an expected (on target) vesting of 50%. Performance parameters aligned with the shareholder compact and corporate plan are complemented by a set of gatekeeper conditions. If gatekeeper requirements are not met, the board at its discretion may adjust the vesting percentages even though targets have been met. The following gatekeeper conditions trigger a review of vesting percentages: • if the lost-time injury rate is greater than 0.35 • if the sustainability committee gives an unfavourable safety report • if Eskom’s audited financial statements show a financial loss • if the auditors qualify Eskom’s financial statements • if a significant PFMA contravention occurs The vesting period for award performance shares is three years from the date of grant. At the end of that period, the people and governance committee decides on the amounts to be paid in line with: • the percentage of award performance shares that vest, based on the performance conditions achieved • the value of the award performance shares based on the grant value, escalated at a money market rate In addition to the performance conditions, vesting of award performance shares is dependent on the scheme participant remaining in Eskom’s employment throughout the vesting period. The award lapses if employment ceases during the vesting period (other than for permitted reasons). Share awards – vested Award performance shares awarded on 1 April 2012 vested on 31 March 2015 with an expected vesting rate over the three-year period of 47.06% due to the achievement of non-financial performance conditions. The cash value of the vested shares is payable in June 2015 at R1.20 per share based on the money market rate. Shares awarded on 1 April 2011 were redeemed during the year. Shares vested on 31 March 2015 (with comparative status at 31 March 2014) are: Award Award Award Award Award Award performance performance performance performance performance performance shares vested on shares vested on shares payable at shares vested on shares vested on shares payable at 31 March 2015 31 March 2015 R1.20 per share 31 March 2014 31 March 2014 R1.19 per share at a rate of 47.06% at a rate of 53.48% Name Number Number R’000 Number Number R’000 BA Dames – – – 8 972 308 4 486 154 5 201 TBL Molefe 1 829 776 861 093 1 033 1 734 385 927 549 1 104 BE Bulunga – – – 1 871 100 1 000 664 1 191 T Govender 2 185 983 1 028 724 1 234 2 072 022 1 108 117 1 319 EL Johnson – – – 2 662 934 1 424 137 1 695 SJ Lennon 2 109 869 992 904 1 191 1 999 876 1 069 534 1 273 DL Marokane 2 658 316 1 251 004 1 501 2 519 731 1 347 552 1 604 A Noah 2 171 168 1 021 752 1 226 2 057 980 1 100 608 1 310 MM Ntsokolo 2 488 574 1 171 123 1 405 2 358 838 1 261 507 1 501 Share awards – vesting The current estimated vesting values of the award performance shares are R1.21 per share for the 1 April 2013 awards (vesting 31 March 2016) and R1.22 for the April 2014 awards (vesting 31 March 2017). The value of the performance shares allocated does not take into account the impact of performance conditions over the applicable three-year performance periods. The vesting percentage of 50% for the 1 April 2013 and 50% for the 1 April 2014 awards, are estimates. Annual Financial Statements | 31 March 2015 103 Notes to the financial statements (continued) for the year ended 31 March 2015 49. Directors’ remuneration (continued) Long-term incentive scheme (continued) Share awards – vesting (continued) Shares awarded on 1 April 2014 Shares awarded on 1 April 2013 Outstanding Award Award Outstanding Award Award award performance performance award performance performance performance shares vesting on shares payable in performance shares vesting on shares payable in shares vesting on 31 March 2017 June 2017 at shares vesting on 31 March 2016 June 2016 at 31 March 2017 at a rate of 50% R1.22 per share 31 March 2016 at a rate of 50% R1.21 per share Name Number Number R’000 Number Number R’000 TBL Molefe – – – 1 829 776 914 888 1 107 T Govender – – – 2 185 983 1 092 992 1 323 EL Johnson – – – 2 809 394 1 404 697 1 700 SJ Lennon – – – 2 109 869 1 054 935 1 276 DL Marokane – – – 2 658 316 1 329 158 1 608 A Noah – – – 2 171 168 1 085 584 1 314 MM Ntsokolo – – – 2 488 574 1 244 287 1 506 The details of the schemes are: Long-term Long-term incentive plan incentive plan Date of grant 1 April 2014 1 April 2013 Number of shares awarded – 16 253 080 Contractual life Three years Three years Vesting conditions Variable vesting Variable vesting depending on depending on the achievement the achievement of performance of performance conditions conditions Method of settlement Cash Cash Expected attrition of employee (%) – – Expected outcome of performance conditions (%) 50% 50% Long-term Long-term incentive plan incentive plan 2015 2014 Number Number Reconciliation of performance share movements Outstanding at beginning of the year 58 755 334 70 478 960 Granted during the year – 16 253 080 Forfeited during the year (5 618 788) (9 231 581) Settled during the year (26 249 174) (18 745 125) Outstanding at end of the year 26 887 372 58 755 334 Carrying amount of liability (R’000) 12 678 26 419 Intrinsic value of liabilities relating to vested rights (R’000) 12 678 26 419 104 Eskom Holdings SOC Ltd Details of emoluments paid The following schedule sets out the emoluments due to the directors of Eskom for the current year: 2015 2014 Directors’ Salaries Short-term Long-term 1 Other Total Total fees bonus bonus payments4 payment 2 payment3 Name R’000 R’000 R’000 R’000 R’000 R’000 R’000 Non-executive directors 9 497 – – – 501 9 998 7 077 BS Ngubane 5,6 180 – – – – 180 – ZA Tsotsi7,8 1 152 – – – 438 1 590 1 789 NT Baloyi5 172 – – – – 172 – N Carrim5 172 – – – 6 178 – BL Fanaroff 9 351 – – – – 351 487 RMQ Gungubele9 328 – – – – 328 437 ZW Khoza 5,10 180 – – – – 180 – VJ Klein5 180 – – – 3 183 – R Kumalo5 143 – – – – 143 – N Lesela9 370 – – – – 370 437 B Luthuli9 407 – – – – 407 551 C Mabude7 587 – – – – 587 468 Y Masithela9 351 – – – – 351 468 MC Matjila9,11 2 989 – – – 54 3 043 493 B Mehlomakulu9 370 – – – – 370 493 ME Mkwanazi9 370 – – – – 370 493 DV Naidoo5 172 – – – – 172 – P Naidoo5 180 – – – – 180 – MV Pamensky5 122 – – – – 122 – SPQ Sedibe9 370 – – – – 370 493 DEL Zondo9 351 – – – – 351 468 Executive directors – 6 766 – 1 104 67 7 937 24 428 BA Dames 12 – – – – – – 15 367 TJ Matona13 – 3 000 – – 33 3 033 – TBL Molefe14 – 3 766 – 1 104 34 4 904 3 170 PS O’Flaherty15 – – – – – – 5 891 Exco members (group executives) – 21 031 – 9 714 512 31 257 31 060 BE Bulunga 16 – – – – – – 3 294 T Govender – 2 975 – 1 319 102 4 396 4 152 EL Johnson17 – 2 182 – 1 695 22 3 899 4 826 M Koko18 – 2 704 – 1 012 45 3 761 2 415 SJ Lennon19 – 3 112 – 1 273 83 4 468 3 674 DL Marokane – 3 716 – 1 604 117 5 437 4 737 A Noah – 2 955 – 1 310 72 4 337 3 776 MM Ntsokolo – 3 387 – 1 501 71 4 959 4 186 Total directors and group executives 9 497 27 797 – 10 818 1 080 49 192 62 565 Total acting Exco members20 – 1 418 – – – 1 418 1 033 1. Includes medical aid and pension fund contributions. 14. Appointed finance director on 14 January 2014. Previously group executive: Group customer 2. Short-term incentive bonus awarded for the 2015 financial year. services. 3. Long-term incentive bonus scheme – Grant 6, which vested on 31 March 2014, was paid in 15. Resigned on 10 July 2013. June 2014. 16. Retired on 31 January 2014. 4. Fees related to security services and operating vehicle expenditure. 17. Resigned on 31 October 2014. 5. Appointed on 11 December 2014. 18. Appointed on 1 December 2014. Previously acting group executive: Commercial and 6. Currently acting as the chair of the board from 31 March 2015. technology. 7. Re-appointed to the board on 11 December 2014. 19. Retired on 31 March 2015. 8. Resigned on 30 March 2015. 20. Acting Exco members during the year included the following: 9. Conclusion of board term on December 2014. • ET Mabelane – acting group executive: Commercial and technology from 10. Acted as the chief executive from 11 March 2015 to 17 April 2015. 12 March 2015. 11. Acting interim chief executive from 1 April 2014 to 30 September 2014. • AA Masango – acting group executive: Group capital from 12 March 2015. 12. Resigned on 31 March 2014. Final termination benefits of R5.2m paid during the year. • EM Pule – acting group executive: Human resources from 1 November 2014. 13. Appointed as chief executive and executive director on 1 October 2014. • NS Veleti – acting chief financial officer from 12 March 2015. Annual Financial Statements | 31 March 2015 105 Notes to the financial statements (continued) for the year ended 31 March 2015 49. Directors’ remuneration (continued) Details of emoluments paid (continued) 2015 2014 R’000 R’000 Housing loans to Exco members at 31 March T Govender 1 773 2 906 DL Marokane – 4 563 1 773 7 469 The interest rate on the loan from EFC at 31 March 2015 was 7.50% (2014: 7.25%). The loans are repayable over a maximum period of 30 years.1 The following board and Exco members were directors of Eskom directly held subsidiary companies. Fees paid for attendance of meetings were all paid to Eskom. Eskom Enterprises SOC Ltd2 T Govender3 – – DL Marokane – – TBL Molefe3 – – MM Ntsokolo – – Escap SOC Ltd4 EL Johnson5 – – TBL Molefe6 36 12 Eskom Finance Company SOC Ltd4 TBL Molefe6 5 5 PS O’Flaherty 7 – 5 50. New standards and interpretations 50.1 Standards, interpretations and amendments to published standards that are not yet effective The following new standards, interpretations and amendments to existing standards have been published that are applicable for future accounting periods but have not been adopted early by the group. The group is currently in the process of evaluating the detailed requirements of the following amendments to assess the possible impact on the group’s financial statements: Annual improvements 2012 (effective 1 July 2014) These improvements amend standards from the 2010-2012 reporting cycle. The changes affect IFRS 2 Share based payments, IFRS 3 Business combinations, IFRS 8 Operating segments, IFRS 13 Fair value, IFRS 16 Property, plant and equipment and IAS 24 Related party disclosures. Annual improvements 2013 (effective 1 July 2014) These improvements amend standards from the 2011-2013 reporting cycle. The changes affect IFRS 1 First time adoptions of IFRSs, IFRS 3 Business combinations, IFRS 13 Fair value and IAS 40 Investment property. Amendment to IAS 19 Employee benefits regarding employee or third party contributions to defined benefit plans (effective 1 July 2014) The amendment applies to contributions from employees or third parties to defined benefit plans and clarifies the treatment of such contributions. The objective of the amendment is to simplify the accounting for contributions that are independent of the number of years of employee service. Amendment to IFRS 11 Joint arrangements regarding acquisition of an interest in a joint operation (effective 1 January 2016) The amendment provides guidance on how to account for the acquisition of an interest in a joint venture operation that constitutes a business. The amendments require an investor to apply the principles of business combination accounting when it acquires an interest in a joint operation that constitutes a business. Amendment to IAS 16 Property, plant and equipment and IAS 38 Intangible assets regarding depreciation and amortisation (effective 1 January 2016) The amendment clarifies that the use of revenue-based methods to calculate the depreciation of an asset is not appropriate because revenue generated by an activity that includes the use of an asset generally reflects factors other than the consumption of the economic benefits embodied in the asset. Revenue is generally presumed to be an inappropriate basis for measuring the consumption of the economic benefits embodied in an intangible asset. Amendments to IFRS 10 and IAS 28 regarding the sale or contribution of assets between an investor and its associate or joint venture (effective 1 January 2016) The amendments address an inconsistency between IFRS 10 and IAS 28 in the sale or contribution of assets between an investor and its associate or joint venture. A full gain or loss is recognised when a transaction involves a business. A partial gain or loss is recognised when a transaction involves assets that do not constitute a business, even if those assets are in a subsidiary. Amendment to IAS 1 Disclosure initiative (effective 1 January 2016) The amendment introduces changes to be considered in the disclosure of the annual financial statements. 1. On resignation the terms and conditions of the loan are renegotiated. 5. Resigned on 31 October 2014. 2. Paid by Eskom. 6. Appointed on 11 March 2014. 3. Appointed on 3 July 2014. 7. Resigned on 31 January 2014. 4. Fees paid to Eskom. 106 Eskom Holdings SOC Ltd Amendment to IAS 27 Separate financial statements regarding the equity method (effective 1 January 2016) The amendment allows entities to use the equity method to account for investments in subsidiaries, joint ventures and associates in their separate financial statements. IFRS 14 Regulatory deferral accounts (effective 1 January 2016) This standard permits first-time adopters of IFRS to continue to recognise amounts related to rate regulation in accordance with their previous GAAP requirements when they adopt IFRS. However, to enhance comparability with entities that already apply IFRS and do not recognise such amounts, the standard requires that the effect of rate regulation must be presented separately from other items. Annual improvements 2014 (effective 1 January 2016) The improvements amend standards from the 2012-2014 reporting cycle. The changes affect IFRS 5 Non-current assets held-for-sale and discontinued operations, IFRS 7 Financial instruments: disclosure, IAS 19 Employee benefits and IAS 34 Interim financial reporting. IFRS 15 Revenue from contracts with customers (effective 1 January 2017) IFRS 15 replaces the two main revenue recognition standards, IAS 18 Revenue and IAS 11 Construction contracts and their related interpretations. IFRS 15 provides a single control-based revenue recognition model and clarifies the principles for recognising revenue from contracts with customers. The core principle is that an entity should recognise revenue to depict the transfer of promised goods or services to customers at an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods or services. Revenue is recognised when a customer obtains control of a good or service. A customer obtains control when it has the ability to direct the use of and obtain the benefits from the good or service. IFRS 15 also includes a cohesive set of disclosure requirements that will result in an entity providing users of financial statements with comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts with customers. IFRS 15 will be applied retrospectively subject to the application of the transitional provisions. IFRS 9 Financial instruments (effective 1 January 2018) IFRS 9 replaces IAS 39. It retains, but simplifies, the mixed measurement model and establishes three primary measurement categories for financial assets: amortised cost, fair value through other comprehensive income and fair value through profit or loss. The basis of classification depends on the entity’s business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are required to be measured at fair value through profit or loss with the irrevocable option at inception to present changes in fair value in other comprehensive income. IFRS 9 also replaces the rule-based hedge accounting requirements in IAS 39. It requires an economic relationship between the hedged item and hedging instrument and for the hedged ratio to be the same as the one management actually uses for risk management purposes. IFRS 9 includes an expected credit loss model for calculating impairment on financial assets that replaces the incurred loss model used under IAS 39. The adoption of IFRS 9 will require a review of the current measurement and classification of financial assets and liabilities. Any changes will be applied retrospectively. 50.2 Standards, interpretations and amendments to published standards that are effective and applicable to the group The group has adopted the following new standards, interpretation and amendments to existing standards for the first time for the financial year ended 31 March 2015. The nature and effect of the changes are as follows: Amendments to IAS 32 Financial instruments: presentation (effective 1 January 2014) The amendment clarify some of the requirements for offsetting financial assets and financial liabilities on the balance sheet. The effect of this amendment is regarded as being immaterial. IFRS 7 Financial instruments: disclosure (effective 1 January 2014) The amendments to IFRS 7 require additional disclosure on transfer transactions of financial assets, including the possible effects of any residual risks that the transferring entity retains, if a disproportionate amount of transfer transactions are undertaken around the end of a reporting period. The amendments also requires additional disclosure on offsetting financial assets and financial liabilities. The effect of this amendment is regarded as being immaterial. Amendments to IAS 36 Impairment of assets (effective 1 January 2014) The amendment addresses the disclosure of information about the recoverable amount of impaired assets if that amount is based on fair value less costs of disposal. The effect of this amendment is regarded as being immaterial. IFRIC 21 Levies (effective 1 January 2014) IAS 37 sets out criteria for the recognition of a liability, one of which is the requirement for the entity to have a present obligation as a result of a past event (known as an obligating event). IFRIC 21 clarifies that the obligating event that gives rise to a liability to pay a levy is the activity described in the relevant legislation that triggers the payment of the levy. IFRIC 21 sets out the accounting for an obligation to pay a levy that is not income tax. The effect of this interpretation is regarded as being immaterial. Annual Financial Statements | 31 March 2015 107 Notes to the financial statements (continued) for the year ended 31 March 2015 51. Information required by the Public Finance Management Act Losses through criminal conduct and irregular or fruitless and wasteful expenditure In terms of the significance and materiality framework agreed with the shareholder, any losses due to criminal conduct or irregular or fruitless and wasteful expenditure, that individually (or collectively where items are closely related) exceed R25 million, must be reported. 51.1 Irregular expenditure Group and company 2015 2014 Note Rm Rm Balance at beginning of the year – – Current year expenditure 712 83 Back 2 Basics Programme (a) 310 – Land purchase (b) 108 – Breach of PPPFA1 (c) 287 83 The New Age Media (d) 4 – Various immaterial instances 3 – Amounts condoned The New Age Media – condoned by board (d) (4) – 708 83 Amounts recoverable (not condoned) – – Amounts not recoverable (not condoned) (290) (83) Breach of PPPFA (c) (287) (83) Immaterial/minor incidence – preventive and corrective measures in place (3) – Irregular expenditure awaiting condonation 418 – Consisting of 418 – Land purchase – to be condoned by Exco investment and capital assurance committee 108 – B2B Engineering Tools – to be condoned by shareholder 310 – Age analysis 418 – Current year 418 – Prior years – – (a) Back 2 Basics Programme engineering tools The Back 2 Basics Programme (B2B) is an overarching strategic initiative to simplify, optimise and standardise business operations in order to achieve excellence and become a high-performance organisation. The engineering tools project is one of four major components of the programme. The board supported the extension of the engineering tools project subject to approval by the shareholder. Subsequent to the board decision, approximately R310 million was spent by extending commitments beyond the initial design phase. Eskom disclosed the unauthorised expenditure in its application for approval to the shareholder. The shareholder noted the importance of the project; but requested a new application that includes, inter alia, updated information and explanations concerning the broader B2B programme. Eskom is in the process of finalising the revised PFMA application. Disciplinary action has not as yet been instituted. (b) Purchase of land without investment committee approval During the year land was purchased at a market-related value of R108 million by following the procurement process, but without first obtaining the necessary capital expenditure approval. Disciplinary procedures are being instituted. Ratification of the transaction will be considered by the relevant investment committee. (c) Preferential Procurement Policy Framework Act (PPPFA) Eskom’s exemption from the PPPFA expired on 7 December 2012. Eskom paid R287 million (2014: R83 million) for the year ended 31 March 2015 on contracts that were entered into between 8 December 2012 and 31 March 2013 that were inconsistent with the requirements of the PPPFA. These contracts were not recalled or corrected and Eskom will continue to meet its obligations under these contracts until they expire. All these transactions took place in the normal course of business and were subject to Eskom’s approved procurement policy in force at that time. 1. The 2014 number was restated as additional payments were identified that were not reported previously. 108 Eskom Holdings SOC Ltd (d) The New Age Media (TNA) The external auditors raised a reportable irregularity in November 2014 in respect of the signing of a media sponsorship contract with TNA in April 2014 by the then interim chief executive, who was previously a non-executive director of Eskom prior to his appointment as interim chief executive. The reportable irregularity arose from a forensic review commissioned by Eskom which found that the interim chief executive had acted improperly in signing the TNA contract. The new board appointed on 11 December 2014 considered all documents pertaining to the contract as well as the representations made by the interim chief executive and ratified the TNA contract, thus closing the matter. Expenditure of R4 million was incurred under the contract prior to the board’s decision. This amount was paid to TNA after the board ratification. (e) PN Energy Services SOC Limited (PNES) PNES is a wholly owned subsidiary of Eskom. The operations of the company were closed down in 2010, and it did not operate from 2011 to 2015. The board of PNES investigated potential irregular and fruitless and wasteful expenditure suffered by the company during the 2009 and 2010 financial years. Eskom is taking further action against all the parties involved into the alleged breach of fiduciary duties and conflict of interests. The matter is currently being heard in the Western Cape High Court. (f) Incidents of irregular expenditure below the materiality threshold There were 11 (2014: 6) incidents of irregular expenditure, other than those reported above, totalling R3.4 million (2014: Rnil). Management has instituted preventive and corrective measures, including disciplinary action, as considered appropriate. (g) Irregular expenditure under investigation There is currently one incident of alleged irregular expenditure under investigation which, based on current information, does not exceed the materiality threshold of R25 million. It is possible that this matter may not qualify as irregular expenditure once confirmed by the conclusion of the investigation. 51.2 Fruitless and wasteful expenditure There were no (2014: Rnil) incidents of fruitless and wasteful expenditure incurred by the group during the year that exceeded the materiality threshold of R25 million. (a) Incidents of fruitless and wasteful expenditure below the materiality threshold Total fruitless and wasteful expenditure which individually or collectively (where items are closely related) were below the materiality threshold was R51 million (2014: R47 million) comprising 606 (2014: 354) incidents of which 18 incidents accounted for R28 million. In all instances management has instituted preventive and corrective measures, including disciplinary action, as considered appropriate. (b) Fruitless and wasteful expenditure under investigation There are currently 53 incidents of alleged fruitless and wasteful expenditure under investigation, of which four incidents may exceed the materiality threshold of R25 million. The nature and extent of potential losses incurred cannot be reasonably ascertained at this stage. It is important to note that these are allegations, and many of these occurrences may not qualify as fruitless and wasteful expenditure upon conclusion of the investigations. 51.3 Criminal conduct (a) Theft of conductors, cabling and related equipment Losses due to conductor theft, cabling and related equipment totalled R102 million (2014: R68 million), involving 5 680 incidents (2014: 7 166 incidents). Actions to combat these losses are managed by the Eskom network equipment crime committee in collaboration with affected state owned enterprises and the South African Police Services. The combined effort resulted in 297 (2014: 316) arrests and R11 million (2014: R7 million) worth of stolen material was recovered. (b) Fraud Eskom concluded 23 (2014: 4) investigations into fraud during the reporting period involving R40 million (2014: R7 million). The existing internal control measures in the affected areas as well as similar areas have been reviewed and enhanced. Disciplinary, criminal as well as civil proceedings have been instituted against those involved. Annual Financial Statements | 31 March 2015 109 Notes to the financial statements (continued) for the year ended 31 March 2015 52. Pro forma revaluation of property, plant and equipment (unaudited) The group currently accounts for its property, plant and equipment using the cost model under IAS 16 Property, plant and equipment. The cost model requires that property, plant and equipment should be measured at cost (including borrowing cost capitalised in respect of qualifying assets), less accumulated depreciation and impairment. However, the cost model does not reflect the true economic value of the group’s property, plant and equipment and the basis on which our tariff is calculated by NERSA. Therefore, a summary has been provided below reflecting what the impact on the financial statements would be if the group’s property, plant and equipment was measured using the depreciated replacement cost (DRC) model. Borrowing costs were not included in the carrying amount of property, plant and equipment when determining the increase or decrease in the revaluation surplus and have therefore been expensed. The fair values determined using the DRC model were reviewed for possible impairment loss in order to determine whether or not the net future cash inflows related to the use of property, plant and equipment are less than the calculated fair value of property, plant and equipment. The fair values disclosed below are net of the adjustment made for the tariff shortfall in the first few years of R206 billion (2014: R190 billion). This shortfall is expected to be eliminated once the electricity price determined in terms of the regulatory methodology, which is based on the depreciated replacement values, is fully phased in by NERSA. 2015 2014 Historical Adjustments After Historical Adjustments After cost revaluation cost revaluation Rm Rm Rm Rm Rm Rm Summarised group statements of financial position at 31 March 2015 Assets Property, plant and equipment 455 977 181 551 637 528 401 373 164 836 566 209 Deferred tax 230 39 962 40 192 339 32 231 32 570 Other assets 106 677 – 106 677 103 281 – 103 281 562 884 221 513 784 397 504 993 197 067 702 060 Equity and liabilities Total equity 122 247 130 717 252 964 119 784 118 682 238 466 Deferred tax liabilities 20 131 90 796 110 927 19 461 78 385 97 846 Other liabilities 420 506 – 420 506 365 748 – 365 748 562 884 221 513 784 397 504 993 197 067 702 060 Summarised group income statements for the year ended 31 March 2015 Profit before depreciation and amortisation expense, net impairment loss and other expenses 44 738 – 44 738 45 849 – 45 849 Depreciation and amortisation expense (14 115) (10 119) (24 234) (11 937) (13 887) (25 824) Net impairment loss (3 766) 1 149 (2 617) (1 557) 45 (1 512) Operating expenses (15 771) (102) (15 873) (19 177) (85) (19 262) Profit/(loss) before net finance cost 11 086 (9 072) 2 014 13 178 (13 927) (749) Net finance cost (6 109) (17 389) (23 498) (4 058) (13 290) (17 348) Share of profit of equity-accounted investees, net of tax 49 – 49 43 – 43 Profit/(loss) before tax 5 026 (26 461) (21 435) 9 163 (27 217) (18 054) Income tax (1 366) 7 409 6 043 (2 137) 7 621 5 484 Profit/(loss) for the year from continuing operations 3 660 (19 052) (15 392) 7 026 (19 596) (12 570) Profit for the year from discontinued operations (42) – (42) 63 – 63 Profit/(loss) for the year 3 618 (19 052) (15 434) 7 089 (19 596) (12 507) 110 Eskom Holdings SOC Ltd Appendix – Abbreviations and acronyms Accounting, audit and other financial terms CVA Credit Value Adjustment DRC Depreciated Replacement Cost DVA Debit Value Adjustment EBITDA Earnings Before Interest, Tax, Depreciation and Amortisation FIFO First-In-First-Out FFO Free Funds from Operations IAS International Accounting Standard/(s) IFRIC International Financial Reporting Interpretations Committee IFRS International Financial Reporting Standard/(s) ISA International Standards of Auditing LIFO Last-In-First-Out PA Pensioners Amounts PPI Producer Price Index R Rand Rm Rand Millions VAT Value Added Tax Currencies AUD Australian Dollar CAD Canadian Dollar CHF Swiss Franc EUR Euro GBP Pound Sterling (United Kingdom) JPY Japanese Yen NOK Norwegian Krone SEK Swedish Krona USD United States Dollar ZAR South African Rand Entities company Eskom Holdings SOC Ltd EEM Eskom Energie Manantali s.a EFC Eskom Finance Company SOC Ltd EPPF Eskom Pension and Provident Fund Escap Escap SOC Ltd Eskom Eskom Holdings SOC Ltd Eskom Enterprises Eskom Enterprises SOC Ltd Eskom Uganda Eskom Uganda Ltd group Eskom Holdings SOC Ltd and its subsidiaries Motraco Mozambique Transmission Company SARL Nqaba Nqaba Finance 1 (RF) Ltd PBMR Pebble Bed Modular Reactor SOC Ltd PNES PN Energy Services SOC Ltd Roshcon Roshcon SOC Ltd Rosherville Rosherville Properties SOC Ltd Rotek Rotek Industries SOC Ltd UEGCL Uganda Electricity Generation Company Ltd UETCL Uganda Electricity Transmission Company Ltd Legislation PAA Public Audit Act PFMA Public Finance Management Act PPPFA Preferential Procurement Policy Framework Act Annual Financial Statements | 31 March 2015 111 Appendix – Abbreviations and acronyms (continued) Measures GWh Gigawatt Hour kg Kilogram km Kilometre kWh Kilowatt Hour L Litre Mt Million tons MVA Mega volt ampere MW Megawatt MWh Megawatt Hour TWh Terawatt Hour Other Alco Asset and Liability Committee B-BBEE Broad-Based Black Economic Empowerment BPP Business Productivity Programme DoE Department of Energy DPE Department of Public Enterprises DWA Department of Water Affairs EAF Energy Availability Factor EME Exempted micro enterprises Exco Executive Management Committee ISO International Standards Organisation JSE Johannesburg Stock Exchange KPI Key Performance Indicator LTIR Lost Time Injury Rate MoU Memorandum of Understanding MYPD Multi-Year Price Determination NERSA National Energy Regulator of South Africa RCA Regulatory Clearing Account RFP Request for proposal SAIDI System Average Interruption Duration Index SAIFI System Average Interruption Frequency Index SARB South African Reserve Bank SARS South African Revenue Services TASK Tunes Assessment of Skills and Knowledge TMPS Total measured procurement spend UCLF Unplanned Capability Loss Factor 112 Eskom Holdings SOC Ltd Contact details Telephone numbers Websites and email addresses Eskom head office +27 11 800 8111 Eskom website www.eskom.co.za Contact@eskom.co.za Eskom Corporate Affairs +27 11 800 2323 Eskom integrated results www.eskom.co.za/IR2015 Eskom Media Desk +27 11 800 3304 Eskom Media Desk MediaDesk@eskom.co.za +27 11 800 3309 +27 11 800 3343 +27 11 800 3378 +27 82 805 7278 Eskom Development Foundation +27 11 800 6128 Eskom Development Foundation www.eskom.co.za/csi CSI@eskom.co.za Investor Relations +27 11 800 2775 Investor Relations Lerato.Mashinini@eskom.co.za Ethics Office Advisory Service +27 11 800 2791 Ethics Office Advisory Service Ethics@eskom.co.za +27 11 800 3187 +27 11 800 3189 Toll-free Crime Line 0800 112 722 Eskom Environmental Envhelp@eskom.co.za National Sharecall number 08600 ESKOM Promotion of Access to PAIA@eskom.co.za (08600 37566) Information Act Customer SMS line Vodacom IDM IDMHelpdesk@eskom.co.za +27 82 941 3707 MTN +27 83 647 1951 CellC +27 84 655 5778 CS (customer service) mobile Dial *120*6937566# or Customer Service CSOnline@eskom.co.za *120*myeskom# MyEskom app and MyEskom mobi-site www.myeskom.co.za MyEskom Customer app Eskom_SA Facebook EskomSouthAfrica Twitter Eskom_MediaDesk Physical address Postal address Eskom Megawatt Park 2 Maxwell Drive Sunninghill PO Box 1091 Johannesburg 2000 Sandton 2157 Company Secretary Company registration number Mr Malesela Phukubje Eskom Holdings SOC Ltd Eskom Holdings Secretariat 2002/015527/30 PO Box 1091 Johannesburg 2000 1036