Contents About this report Our business 4 Our mandate, vision and values 4 Our strategy: Stabilise, re-energise, grow 7 Nature of our business and customer base 8 Our business model 13 Legal and operating structure Our strategy 16 Chairman’s statement 18 Our Board profiles 20 Key Board activities 22 Stakeholder engagement and material matters 26 Management of risks and opportunities 32 Performance against the shareholder compact Operating performance 35 Chief Executive’s review 40 Our Exco profiles 42 Safety and security 45 Operational sustainability 58 Revenue and customer sustainability 64 Sustainable asset creation 70 Environmental sustainability 75 Building a sustainable skills base 77 Transformation and social sustainability 81 Building a solid reputation Financial review 84 Chief Financial Officer’s report 86 Condensed annual financial statements 91 Key accounting policies, significant judgements and estimates 93 Financial sustainability Our leadership and governance 103 Governance Framework 104 King III application 105 Board of Directors and subcommittees 108 Executive Management Committee 109 Responsible and ethical leadership 109 Combined assurance 110 Risk management and internal controls 111 IT governance 111 Remuneration and benefits Supplementary information 115 List of fact sheets 116 Abbreviations 117 Glossary of terms 119 Independent sustainability assurance report 122 Contact details Integrated report 31 March 2015 Navigation icons The following navigation icons are used About this report throughout this report to link material matters, risks, key performance indicators and performance to sustainability dimensions and strategy: This integrated report aligns with best practice in integrated reporting. It includes the principles Although some stakeholders may require information Assurance approach of integrated reporting contained in the International Integrated Reporting Framework (the on topics not classified as material matters, a wide Our combined assurance model recognises three International Framework), published by the International Integrated Reporting Council (IIRC) range of targeted communications are employed lines of defence, namely review by management, Safety and security to address those needs. Moreover, information supplemented by internal and external assurance in December 2013, and takes into account other guidelines published in this regard. considered material or otherwise pertinent, previously in order to optimise governance oversight, risk contained in the supplementary and divisional report, management and control. The Audit and Risk has been addressed either in this integrated report or Committee and the Board rely on combined Financial sustainability Board responsibility and approval the accompanying fact sheets. assurance in forming their view of the adequacy of The Board, assisted by the Audit and Risk Committee and the Social, Ethics and Sustainability Committee, our risk management and internal controls. The content is further guided by legal and regulatory is ultimately responsible for the integrity and completeness of the integrated report and any supplementary requirements, such as the Companies Act, 2008 We have applied a combined assurance approach Operational sustainability information. The Board has applied its collective mind to the preparation and presentation of the integrated and the King Code on Corporate Governance in in the preparation of this report. Although the report and has concluded that it is presented in accordance with the International Framework. South Africa (King III), as well as global best practice, report as a whole has not been externally assured, The Board approved the 2015 integrated report, together with the annual financial statements and not least of which the International Framework. those sustainability KPIs contained in the shareholder Revenue and customer We are assessing the requirements of the new compact and reported on in this report were subject supplementary information, taking into consideration the completeness of the material items it deals with sustainability GRI G4 guidelines. We aim to report in accordance to external assurance, and have received either and the reliability of information presented, in line with the combined assurance process followed, on 28 May 2015: with GRI G4: Core in our 2016 integrated report. reasonable or limited assurance. These are marked with an “RA” or “LA” in the statistical tables. Reporting boundary and frameworks Sustainable asset creation This integrated report reviews our economic, The independent sustainability assurance report, with an indication of the KPIs which have been assured, can be found on pages 119 to 121 technical, social and environmental performance for Dr Ben Ngubane Ms Chwayita Mabude Ms Venete Klein the year from 1 April 2014 to 31 March 2015, with Environmental sustainability Acting Chairman Chairman: Audit and Risk Chairman: Social, Ethics two years’ comparative information as well as short- Committee and Sustainability Committee and medium-term future targets presented. Material Forward-looking statements events up to the date of approval have been included. Certain statements in this report regarding Building a sustainable skills It follows our 2014 integrated report, as well as Eskom’s business operations may constitute base an interim integrated report for the period 1 April forward-looking statements. These include all Our integrated reporting journey Basis of preparation to 30 September 2014, issued in December 2014. statements other than statements of historical We actively participated in the IIRC’s Pilot This report seeks to provide a transparent and fact, including those regarding the financial Transformation and social This report examines our performance in relation Programme since its inception in 2011. Although balanced appraisal of our value creation story, position, business strategy, management plans and sustainability to the sustainability dimensions which underpin the Pilot Programme came to an end during 2014, considering both qualitative and quantitative matters objectives for future operations. Forward-looking our strategy, taking into account our operating we remain committed to integrated reporting and that are material to our operations and strategic statements can be identified by words such as environment, our long-term goals, the risks that continue on the journey to improving both our objectives, and which may influence the decision- “believes”, “estimates”, “anticipates”, “expects”, might prevent us from achieving those goals and the Building a solid reputation integrated reporting, guided by best practice, and making of our stakeholders. Matters important to “intends”, “may”, “will”, “plans”, “outlook” and measures put in place to mitigate those risks. We integrated thinking. External and internal reviews of stakeholders are determined through extensive other words of similar meaning in connection believe that the information presented is comparable our 2014 integrated report identified a number of consultation with and consideration of the concerns with a discussion of future operating or financial to that of prior years, with no significant restatements, ways in which it could be improved, which we have raised by our stakeholders, taking account of our performance. unless otherwise indicated. considered when compiling this report. strategic objectives, assessment of risk and the way in Forward-looking statements are necessarily which our value chain operates. Material matters are Refer to our business model on pages 8 and 9 for more detail on An integrated report focuses on value creation dependent on assumptions, data or methods those that are both of high concern to stakeholders our operations over the short, medium and long term. It uses the that may be incorrect or imprecise and that may and which could have a significant impact on our six capitals in the International Framework be incapable of being realised, and as such, are ability to create value. As our integrated report includes only condensed as a guide to ensure that a company considers not intended to be a guarantee of future results, all resources and how they interact with each annual financial statements, it should be read in but constitute our current expectations based For more information on our stakeholder engagement process and the conjunction with our full set of annual financial other. The integrated report should indicate how determination of material matters, refer to pages 22 to 23 on reasonable assumptions. Actual results could the company’s value creation process is impacted statements for a comprehensive overview of differ materially from those projected in any by its internal and external environment, together our performance. Unless otherwise stated, the forward-looking statements due to various events, This is our primary report to stakeholders, and information in this report refers to the business of risks, uncertainties and other factors. Eskom with the connectivity between strategy, governance, although it is aimed at providers of financial capital, it Eskom Holdings SOC Ltd, which operates in South neither intends to nor assumes any obligation to performance and future outlook, as well as the impact provides information of interest to all stakeholders. In Africa, excluding its major subsidiaries. update or revise any forward-looking statements, Refers to Shows where Indicates of the organisation’s activities on the six capitals and supplementary additional that more prior years, we produced both an integrated report whether as a result of new information, future the trade-offs that influence value creation over time. information information can information and a supplementary and divisional report. This Our group structure and information on our subsidiaries are provided events or otherwise. available in a be found in this is available on year, in an attempt to produce a more concise and on page 13 fact sheet report our website relevant report, we have produced only one report, In an effort to reduce our environmental footprint, this report has been printed on Camelot Offset which seeks to address mainly material matters, both A list of abbreviations and glossary of terms are Cartridge paper, which is FSCTM certified. positive and negative. available at the back of this report We have also challenged ourselves to reduce the length of our report. Request for feedback Throughout this integrated report, performance against target is indicated as follows: We welcome your feedback on the usefulness of this report and ways in which we could improve our report in future, to ensure that it continues to provide relevant information. Please send any suggestions to Actual performance met or exceeded target IRfeedback@eskom.co.za Actual performance almost met target Actual performance did not meet target About this report continued Our business Our suite of reports 4 Our mandate, vision and values 4 Our strategy: Stabilise, re-energise, grow Our 2015 suite of reports comprises the following, all of which are available online: 7 Nature of our business and customer base 8 Our business model Integrated report and fact sheets 13 Legal and operating structure The integrated report, which provides an overview of our performance, is prepared in accordance with the IIRC’s International Framework, and subjected to combined assurance, with those KPIs included in the shareholder compact being externally assured. In addition, a number of fact sheets provide pertinent information to interested stakeholders; these can be downloaded from Integrated report 31 March 2015 our website, together with the integrated report Annual financial statements The group and company financial statements of Eskom Holdings SOC Ltd have been prepared in accordance with International Financial Reporting Standards as well as the requirements of the Public Finance Management Act, 1999 and Companies Act, 2008, and audited by our independent auditors, SizweNtsalubaGobodo Inc. whose unmodified audit opinion can be found on Annual Financial Statements 31 March 2015 pages 13 to 15 of the annual financial statements Foundation report The Eskom Development Foundation NPC (the Foundation) is responsible for the coordination and execution of our corporate social investment strategy in support of our business imperatives. This report details the operations and activities of the Foundation for the 2014/15 year Foundation report 31 March 2015 Eskom Factor report the Eskom factor The Eskom Factor is a collective term explaining our footprint in South Africa, which was quantified through a comprehensive assessment of our economic, social and environmental impact on the country, both positive and negative, within the financial year ended 31 March 2011. The report is due to be updated in 2017 to represent a five-year assessment www.eskom.co.za 2 Integrated report | 31 March 2015 Our business continued Our mandate, vision and values Values Our strategy, aimed at addressing these constraints effective cost management to create a platform for Our annual Corporate Plan outlines our strategic The following values underpin our vision, and guide and uncertainties without compromising our growth. Key in this stage is the creation of a clear and operational direction and captures the necessary us in our everyday activities and how we do business: long-term sustainability focus, is to stabilise the industry roadmap. Customer retention is expected Our business financial, operational and resource plans to support business and thereafter re-energise for longer term to become a key performance metric. this direction. The Corporate Plan therefore becomes sustainability and growth. The primary driver of the stabilisation phase is the successful implementation In order to position the organisation for growth, an engagement document for discussion with our Zero Harm six strategic shifts have been identified in order to stakeholders. The latest approved plan spans the of our Turnaround Strategy, the success of which depends on solid governance, focused stakeholder reposition our business model: five-year period from 1 April 2015 to 31 March 2020 • Exploring new revenue sources to improve financial with a focus on our Turnaround Strategy, which engagement, rigorous cash management, sustainable Integrity operations and targeted and implementable sustainability supports the Cabinet-approved five-point plan and turnaround actions. • Upstream initiatives, such as diversifying our fuel mix the nine-point plan outlined by the President in and gaining access to new primary energy resources, the February 2015 State of the Nation Address, to As part of the stabilisation phase, we will refocus Innovation as well as securing additional capacity and energy address the current electricity challenge. on revenue protection and ensure that revenues due • Downstream initiatives, by extending the value chain Eskom was incorporated in accordance with the are collected timeously. We also need to create space with energy service products to grow revenue Eskom Conversion Act, 2001 and continues to exist Sinobuntu (Caring) of at least 3 000MW for maintenance to recover the • Partnerships to enable growth and unlock performance as a state-owned company (SOC) as defined in the health of the Generation fleet, through an aggressive bottlenecks where we are constrained by skills, policy, Companies Act, 2008. As an SOC, Eskom’s purpose pursuit of Integrated Demand Management (IDM) mandate or funding is to deliver on the strategic intent mandated by and demand response programmes, as well as other Customer satisfaction • Technology to exploit opportunities and improve Government and detailed in our Memorandum of supply-side options such as cogeneration and short- performance Incorporation. term IPPs. Funding still remains a challenge and we need certainty on the path to a cost-reflective price • Adapting to different pathways towards a cost- Excellence reflective price Mandate of electricity. Our mandate is to provide electricity in an efficient Sustainability dimensions in support of After the stabilisation phase, we will focus on and sustainable manner, including its generation, our strategy re-energising and growing the business. As part of the transmission, distribution and sales. Eskom is a critical In order to give effect to our strategy and deliver on re-energisation phase, the focus will be on building and strategic contributor to Government’s goal of Our strategy: our mandate, we aim to ensure that the organisation staff morale to support the growing business, moving ensuring security of electricity supply to the country Stabilise, re-energise, grow from financial and operational recovery to financial is sustainable along eight distinct dimensions, which as well as economic growth and prosperity. As an asset intensive long-term business, we adopt a collectively aim to stabilise and sustain the business and operational sustainability, as well as building a Purpose long-term planning view to influence the organisation’s solid reputation. We will focus on improving the in the short, medium and long term. ongoing sustainability, which will support the long- overall performance of the energy value chain with As set out by the Strategic Intent Statement issued term initiatives of the country, such as the NDP, by the Department of Public Enterprises (DPE) in over the next 20 years or more. Our overall strategic April 2014, Eskom’s key role is to provide electricity direction is aligned to the Strategic Intent Statement, in an efficient and sustainable manner, including its determined by the shareholder, which has set the generation, transmission and distribution, and within Sustainability dimensions following five strategic objectives: acceptable benchmark standards, thereby ensuring security of supply to assist in lowering the cost • Achieving and ensuring security and reliability of of doing business in South Africa and to enable electricity supply economic growth. • Achieving and ensuring the business and financial sustainability of Eskom In fulfilling our obligations, we acknowledge that • Reducing our carbon footprint and environmental we have a developmental role and will promote impact by, among other actions, setting out and transformation, economic development and broad- implementing a clear roadmap towards compliance Revenue and customer based black economic empowerment through our with environmental legislation and pursuing low Financial sustainability Operational sustainability sustainability Sustainable asset creation activities. Furthermore, we may support relevant carbon-emitting opportunities national initiatives as outlined in the New Growth • Supporting and aligning with Government’s strategic Environmental sustainability Building a sustainable Transformation and social Building a solid reputation Path, the National Development Plan (NDP) and skills base sustainability initiatives, such as facilitating the introduction of other development documents. independent power producers (IPPs) and pursuing Safety and security Vision regional integration of the energy sector Our vision statement is “Sustainable power for a • Driving industrialisation and transformation of the better future”. The Corporate Plan sets out activities economy and the procurement landscape aimed at protecting the present so as to have Significant operational constraints and uncertainties sufficient options for the future. face us in the short term. These are centred on the Mission trade-offs between meeting the country’s electricity demand while operating our Generation fleet in Eskom’s mission is to provide sustainable electricity a sustainable manner, as well as meeting legal and solutions to assist the economy to grow and to regulatory requirements and remaining financially improve the quality of life of people in South Africa viable. and the region. 4 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 5 Our business continued The following sustainability dimensions underpin our to improve our occupational health and safety (OHS) and The table below depicts the link between the six capitals and our sustainability dimensions. From this, it is evident operations: security performance, thereby ensuring our sustainability that our sustainability dimensions are integrated and incorporate all aspects of our business and the value that we • Financial sustainability strives to move the as well as reducing the likelihood of legal liability or create over time. Our business organisation towards a state where the rate of return production, financial and reputation risks. on assets is equal to the cost of capital, and to ensure Six capitals The Turnaround Strategy will focus on the “Big Four” that Eskom remains a going concern, able to meet Social and dimensions, namely the core areas of financial Sustainability dimensions Financial Manufactured Intellectual Human relationship Natural short-term liquidity requirements as well as service sustainability, operational sustainability, revenue and long-term debt and financial commitments Financial sustainability customer sustainability and sustainable asset creation, • Operational sustainability aims to deliver effective which are considered to be of strategic importance in and efficient operation of all assets in the value the short to medium term, supported by enablers such Operational sustainability chain throughout their lifespan. It is enabled by the as Human Resources and Stakeholder Engagement. Generation Sustainability Strategy, as well as improving Revenue and customer sustainability The remaining four dimensions are important in performance levels in Transmission, Distribution and the medium to long term. This integrated report Sustainable asset creation Group Customer Services is structured along the sustainability dimensions, • Revenue and customer sustainability pursues and will therefore focus on the “Big Four” core Environmental sustainability an optimised sales profile, which supports South dimensions. Africa’s economic growth, together with a focus Building a sustainable skills base on achieving value-added market growth and aptly Although strategies to move Eskom forward in serviced, loyal customers. The aim is to protect our all sustainability dimensions will be prioritised Transformation and social sustainability revenue stream and achieve growth to secure an against resource availability and the capability of the organisation, with the resultant focus on the core Building a solid reputation appropriate return on our infrastructure and other investments dimensions, our vision remains a key foundation, in Safety and security • Sustainable asset creation seeks to ensure place for the longer term. renewed focus on delivering all capital expansion Interaction with the six capitals projects on time, within budget and to the right We are confronted by significant challenges along all of gas-fired, 600MW hydro and 1 400MW pumped The capitals, as defined in the International quality, as well as managing contractor risks and cost of the core sustainability dimensions. The dimensions storage stations, as well as the recently commissioned Framework, are resources or “stocks of value” increases through lessons learnt during the current are very closely integrated which means that 100MW Sere Wind Farm. The 3MW Klipheuwel on which businesses depend as inputs to their build programme any adverse shift in one dimension inadvertently Wind Farm was impaired during the year as it had business model. The capitals are increased, decreased • Environmental sustainability focuses on the or transformed through an organisation’s business influences another. This requires a concerted effort reached the end of its useful life. Although Medupi linkages between environmental management and activities and outputs. For the purpose of the to balance competing priorities in an appropriate Unit 6 has been synchronised to the grid, it has not operational sustainability. It includes environmental International Framework, the six capitals are manner – the need to do maintenance, manage the yet been commissioned and therefore not included impact assessments, as well as the management of categorised and described as follows: financial constraints and ensure sustainability in the in the total. We maintain 368 331km of power air quality, land, biodiversity, water, waste (including longer term. We cannot do this on our own and we lines and substations with a cumulative capacity of • Financial capital: The pool of funds that is available nuclear waste) and ash. Environmental compliance rely on partnerships with all stakeholders, as well as 239 490MVA. to an organisation for use in the production of goods is critical to ensure that we maintain our licence to various demand side management interventions to or the provision of services, which is obtained Further information on power station capacities, power lines and operate, keep the lights on and meet our principle help us succeed. through financing or generated through operations substation capacities, is provided as fact sheets of “zero harm” to the environment. It also considers or investments Nature of our business and how we plan to reduce our greenhouse gas emissions • Manufactured capital: Manufactured physical objects customer base We are also building new power stations and high- and manage related financial penalties, as well as (as distinct from natural physical objects) that are voltage power lines to meet South Africa’s growing prepare for the impact of the inevitable changes to We operate as a vertically integrated company across available to an organisation for use in the production energy demand. This capacity expansion programme the climate on our infrastructure, thereby ensuring a value chain that supplies electricity to both South of goods or the provision of services. It is often is expected to be completed in 2021. To ensure operational sustainability Africa and the SADC region. Traditionally, as the main created by other organisations, but includes assets that we are able to meet demand and create the • Building a sustainable skills base sees us manufactured by the reporting organisation, either supplier of generation, transmission and distribution endeavouring to recruit, develop and retain space for crucial infrastructure maintenance while for sale or retained for its own use capacity, we supply to industrial, mining, commercial, appropriately skilled, committed, engaged and new generating capacity is being built, we run a • Intellectual capital: Organisational, knowledge- agricultural and residential customers in South Africa. accountable employees. We are committed to building range of demand management and energy efficiency based intangibles, including intellectual property We also supply to redistributors (municipalities and a sustainable skills base, both internally and within programmes. and “organisational capital” such as tacit knowledge, metros), who in turn redistribute electricity to the communities in which we operate businesses and households within their areas. During 2014/15, we sold 216 274GWh of electricity systems, procedures and protocols • Transformation and social sustainability supports to 804 municipalities in bulk, as well as to 2 773 • Human capital: People’s competencies, capabilities We purchase electricity from local IPPs and economic development and transformation in South industrial, 1 034 mining, 50 613 commercial, 83 136 and experience, as well as their motivations to electricity generating facilities beyond the country’s Africa and focuses on core development objectives, agricultural, 508 rail and 11 international customers, innovate and improve processes, goods and services borders, in terms of various agreement schemes. including the transformation of our workforce. It and to 5 338 723 residential customers, which includes • Social and relationship capital: The institutions We acknowledge the country’s need for electricity includes the activities of the Eskom Development prepaid customers. and relationships within and between communities, generation capacity from the private sector as soon as Foundation groups of stakeholders and other networks, and the possible, in order to strengthen the system adequacy The number of customers, together with sales volumes and values, are • Building a solid reputation aims to improve our ability to share information to enhance individual and and meet the growing power demand, which is provided in a fact sheet current reputation and position the company as a collective wellbeing intrinsically linked to our ability to keep the lights on. key driver of economic growth • Natural capital: All renewable and non-renewable We operate 23 power stations with a total nominal Safety and security will continue to be the foundation environmental resources and processes that provide capacity of 42 090MW, comprising 35 721MW of coal- of all our operations and are central to our performance. goods or services that support the past, current or fired stations, 1 860MW of nuclear power, 2 409MW The focus on safety and security provides clear direction future prosperity of an organisation 6 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 7 Our business model The IIRC’s International Framework describes a company’s business model as its “system of transforming inputs through its business activities into outputs and outcomes that aims to fulfil the organisation’s strategic purposes and create value over the short, medium and long term”. This system is affected by internal and external factors, which together make up the company’s operating environment. Wind RENEWABLE Water Agriculture Wind turbines Rail Hydro IPPs Solar Mining Distribution line NON-RENEWABLE High-voltage transmission line Nuclear plant Substation Coal mine Industrial Commercial DIESEL DIESEL Municipalities DIESEL DIESEL DIESEL Residential OCGT Coal-fired plant Substation PRIMARY ENERGY POWER GENERATION TRANSMISSION DISTRIBUTION CUSTOMERS INPUTS PROCESS OUTPUTS 121.67MtCoal purchased 226 300GWh Electricity generated 34.4Mt Ash produced 6 022GWh IPP purchases 216 274GWh Total sales 1 178.6MഢLiquid fuel burnt Unplanned losses (UCLF) 15.22% 119.2Mt Coal burnt 10 731GWh Electricity imported 42.1% Municipalities 5.4% Residential 313 078Mഢ Water used Energy availability (EAF) 73.73% 82.34kt Particulate emissions 171.5MW Demand savings 24.7% Industrial 4.5% Commercial 8.79% Total energy losses 13.8% Mining 2.5% Agriculture 5.6% International 1.4% Rail OUTCOMES 51 days Coal stock 0.33 LTIR 1 294 disabled employees Cost of electricity R610.43/MWh Interest cover 0.44 33.62% Local sourcing in new build 41 787 Eskom employees Racial equity in Capital expenditure (excluding capitalised borrowing Debt/equity ratio 2.70 senior management 61.58% costs) R54.4 billion 88.89% Procurement from B-BBEE Learners – engineers (1 315), FFO as % of total debt 2.37% compliant suppliers technicians (826), artisans (1 752) Gender equity in Electrification 159 853 households senior management 29.83% 6.61% Procurement from black CSI committed spend women-owned suppliers R115.5 million Our business continued Our operating environment Shareholder mandate those involved in building new power stations, and Legislation, regulations and policies The electricity supply industry in South Africa consists As mentioned earlier, our mandate is to provide therefore has the potential to further delay the Eskom is subject to numerous laws and regulations of the generation, transmission, distribution and sales, electricity in an efficient and sustainable manner, capacity expansion programme. Moreover, it raises regarding our operations, including conditions Our business as well as the importing and exporting of electricity. including its generation, transmission, distribution concerns about contractor and employee safety. relating to tariffs, expansion activities, environmental Eskom is a key player in the industry, as we operate and sales, while also supporting Government’s compliance as well as regulatory and licence Inflation of 5.4% is expected in 2015, although most of the base-load and peaking capacity. As noted developmental initiatives. conditions, such as water usage and atmospheric expectations for 2016 and 2017 are higher, with earlier, we sell electricity to a variety of customers, emissions licences that govern our operations. Our annual Corporate Plan gives effect to our expectations ranging from 5.6% to 6.2% in 2016 and including to municipalities, who distribute power to Current licensing conditions place stringent limits on medium-term strategic objectives, while the annual 5.3% to 6.3% in 2017. end users under licence. plant emissions to reduce the country’s current and shareholder compact sets out annual key performance future environmental footprint. The Rand appreciated against the Euro, despite IPPs have been invited to participate through a indicators in support of our mandate and strategic having depreciated against the US dollar. The Rand renewable energy programme run by the Department objectives. The Corporate Plan and shareholder Important legislation that influences our governance exchange rate continues to be the main upside risk of Energy (DoE). Potential players were shortlisted compact are submitted to the Minister of Public include the Electricity Regulation Act, 2006, to the inflation outlook and remains highly vulnerable and successful bidders have been contracted to supply Enterprises (the Minister) for approval before the Companies Act, 2008, Public Finance Management Act, to the timing and pace of the US monetary policy energy into the national grid owned by Eskom. All start of each financial year. 1999, Preferential Procurement Policy Framework normalisation, which is expected to put the currency grid planning is done by us, lines are constructed Act, 2000, Promotion of Access to Information Economic, social and environmental climate under further pressure. Wage and salary increases under specific licensing criteria and conform to a Act, 2000, Promotion of Administrative Justice Act, The electricity that we produce is a major driver of in excess of inflation and productivity growth also National Grid Code which is overseen and regulated 2000, Occupational Health and Safety Act, 1993, and the economy – about 2.2% of the country’s gross pose an upside risk to inflation, with the possibility by NERSA, South Africa’s energy regulator. Employment Equity Act, 1998. The King Code on domestic product can be attributed to the electricity, of further electricity price increases accentuating Corporate Governance in South Africa (King III), The Integrated Resource Plan 2010-2030 (IRP 2010) gas and water cluster. The pace at which the country’s this risk. Protocol on Corporate Governance in the Public sets out South Africa’s long-term energy needs and energy needs grow is linked to the pace at which the Sector and various international guidelines direct us The current adverse economic climate has the discusses the generating capacity, technologies, timing economy grows, and determines the pace at which regarding best practice in governance and reporting. potential to further increase non-payment by and costs associated with meeting that need. generating capacity needs to expand to meet demand. customers, as well as illegal connections and theft of Infrastructure capital investment has historically electricity and equipment, all of which have a technical Our declaration in terms of Section 32 of PAIA is available as a fact The electricity market is regulated by NERSA in sheet – the nature, volume and complexity of PAIA requests, together not kept up with economic growth, resulting in an and financial impact on our ability to ensure security terms of the National Energy Regulatory Act, 2004. with the percentage of refusals, prevents comprehensive disclosure in electricity supply situation which is constrained in the of supply and remain sustainable. NERSA issues licences, regulates all tariff increases, the integrated report short to medium term. provides national grid codes, etc. Just as electricity generation inevitably affects the The global economic outlook remains uncertain, with environment, the environment also has an effect on Our internal operating environment The National Nuclear Regulator (NNR) ensures that a moderate slowdown in the US and China, and an Eskom. Our operating licence depends on various The internal cornerstones of our business are individuals, society and the environment are adequately improvement in the outlook and performance of the legislative requirements, including keeping our water leadership and governance, our values, our policies, protected against radiological hazards associated with Euro area and Japan. Despite this, real economic usage and atmospheric emissions within legislative procedures and systems as well as technology. the use of nuclear technology, and in our case, activity in South Africa expanded at a faster pace requirements. Furthermore, severe changes to regulates Koeberg, our nuclear power station. Leadership and governance guided by than anticipated, with growth in real gross domestic climatic conditions could have a significant impact on product accelerating to 4.1% in the fourth quarter our values The Independent System Market Operator (ISMO) our infrastructure. Bill was a proposal to restructure the existing of 2014 due to a rebound in both the primary and Eskom’s Board is responsible for governing the market, with one dominant player within a regulated secondary sectors, but falling to 2.1% in the first Integrated Resource Plan 2010-2030 company. The Executive Management Committee market managing the overall value chain of electricity quarter of 2015. Looking ahead, the International (IRP 2010) (Exco) and a broader Management Operations generation, transmission and the bulk sale of electric Monetary Fund’s view of South Africa’s growth has As noted, the IRP 2010 sets out South Africa’s Committee (Manco Ops), which includes line and power. A proposed independent system operator, been reduced to 2.1% in 2015 from 2.3% previously, long-term energy needs and discusses the generating functional leaders, implement the decisions made with or without transmission assets being incorporated and from 2.8% to 2.5% in 2016. capacity, technologies, timing and costs associated at governance level on a day-to-day basis. There into the structure, was considered in terms of with meeting that need. In November 2013, DoE is a clear distinction of roles and responsibilities The lacklustre performance of the South African between the Board, Exco and Manco Ops. Exco legislation, but the ISMO Bill has since been retracted. issued a draft update of the IRP for public comment. economy over the past year can be attributed to the provides overall guidance while Manco Ops focuses We support Government’s proposal of drafting a new This draft reflects the effect of the sustained lower adverse impact of the platinum mining labour strike on monitoring performance and operations at a more Electricity Bill, which will replace the ISMO Bill and than anticipated economic growth on projected and industrial action in the steel and engineering operational level. will accommodate the entry of IPPs while allowing electricity demand as well as changes in the sector, combined with the impact of electricity the System Operator to manage the current supply committed build programme. Public comment on supply interruptions, lower prices of key export Our leadership and governance is underpinned by our situation without extraneous distractions, thereby the update has been gathered. DoE is now consulting commodities, subdued business and consumer values, which were discussed earlier in this section. minimising potential interruptions to supply. with other Government departments and is expected confidence levels and flat global economic growth. to submit the approved updated plan to Cabinet for Policies, procedures and systems The Southern African Power Pool (SAPP) is made On average, annual growth amounted to 2.4% in the promulgation by the end of 2015. Systems play an important role in Eskom, affecting up of South Africa, Botswana, Lesotho, Mozambique, five-year period from 2010 to 2014, compared to an average of 3.6% per year in the ten years prior every aspect of our operations, from safety to the Namibia, Swaziland, Zambia and Zimbabwe, connected Government is in the process of allocating generating to 2010. efficiency of our power stations to the experience of through an integrated grid. capacity to power producers, based on the IRP 2010 our customers. Standardised processes, policies and requirements. The number of megawatts required External factors influencing our business An increase in labour action is one element of procedures have been developed for all aspects of the and technology allocated to Eskom will substantially Eskom is affected by a number of key external the social landscape which significantly affects our business and are regularly updated to ensure good influence our expansion plans after the completion factors, which form the framework within which we operations, as it impacts our customers, particularly governance and implement efficiency improvements. of Kusile, especially if that allocation includes nuclear operate. These factors are the shareholder mandate, in the mining industry, ultimately reducing their power. No Cabinet decision has yet been taken We use key performance indicators to measure the economic, social and environmental climate, electricity usage and thereby our revenue. It also regarding new nuclear power stations, although business performance. These measures are the IRP 2010 and relevant legislation, regulations impacts our contractors and suppliers, particularly Government is developing strategies for the envisaged documented and approved in terms of our Enterprise and policies. new nuclear build programme. Performance Management process. 10 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 11 Our business continued We achieved ISO 9001:2008 certification on The people and companies we sell electricity to, both of initiatives to address the R225 billion revenue expansion programme to reduce unemployment, 31 March 2013. During subsequent surveillance locally and beyond South Africa’s borders, are our shortfall created by the MYPD 3 determination – to improve the country’s skills pool, stimulate the local audits, the certification bodies did not identify any primary partners. The quality of these relationships introduce cost reductions, increase productivity and economy and increase economic equity by supporting Our business significant findings or risks that would lead to us losing is very important to us and is therefore constantly improve operational efficiencies. broad-based black economic empowerment (B-BBEE). our certification. We have further implemented ISO monitored and enhanced. Our customers are Workforce We have been implementing DoE’s Integrated 14001:2004, OHSAS 18001:2007, ISO 31000:2009 important partners in assisting us in ensuring security and AA1000 in specific divisions or business units Our operations are supported by a highly skilled National Electrification Programme in our licensed of supply by reducing their electricity demand. This within Eskom, to regulate environmental management, workforce that executes our core operations and areas of supply since April 2001. Since commencement is done through demand management and energy occupational health and safety, risk management and provides supporting business services such as human in 1991, we have electrified more than 4.6 million efficiency programmes such as the televised Power stakeholder engagement respectively. resources management, information technology households within our supply areas. Alerts, IDM programme and 49M energy efficiency services, procurement, research, etc. Technology campaign. Eskom’s energy wheel Technology, which is a key enabler of our operations, We have a rigorous transformation programme in The energy wheel, or energy flow diagram, shows Strong partnerships with Government, suppliers includes telecommunications, information technology, place to ensure equity in the workplace, and have the volume of electricity that flowed from local and and contractors are vital in meeting current and research and innovation. We are constantly scanning put in place skills development programmes to train international power stations and IPPs to Eskom’s future electricity needs. This group includes various the technology environment for new ways to improve engineers, technicians and artisans to meet our future distribution and export points during the past two Government departments, coal mines, water our operations. need for skilled workers. Our employees receive years, including the losses incurred in reaching authorities, IPPs, fellow members of the Southern required training on an ongoing basis. customers. We run focused research programmes to improve African Power Pool, Original Equipment Manufacturers our processes and technologies as well as reduce our (OEMs) and contractors working on the capacity Procurement The energy flow diagram is available as a fact sheet impact on the environment. If research indicates that a expansion programme. We have also established We have a centre-led procurement and supply chain technology is promising, we invest in a pilot project to partnerships with other state-owned entities such as process. We use our procurement partnerships to Legal and operating structure investigate the feasibility of larger scale rollout. These Transnet, Alexkor, PetroSA and Broadband Infraco to stimulate black economic empowerment, particularly capitalise on our complementary strengths, thereby among black women and black youth, in line with Legal structure technologies include new methods for generating electricity, such as the concentrated solar power (CSP) enhancing the economic contribution of state-owned our supplier development and localisation aspirations. Our head office is based in Johannesburg, but we have plant in Upington, and smart grid technology. entities. operations across South Africa. We also maintain a Corporate social investment and development small office in London, primarily for quality control Our value chain Our regional development strategy involved creating The Eskom Development Foundation NPC of the equipment being manufactured for the capacity We are committed to providing and maintaining a the Southern African Energy Unit, through which we (the Foundation) administers our corporate social expansion programme. Our group is structured safe, healthy working environment for all employees import electricity from Lesotho, Mozambique and investment activities. We are leveraging the capacity as follows: and contractors, and have made safety a key focus Namibia, and sell electricity to Botswana, Lesotho, area within the company. Our value chain consists of Mozambique, Namibia, Swaziland, Zambia and core operations, supported by a number of support Zimbabwe, on either firm or unfirm agreements. and strategic functions. Eskom Holdings SOC Ltd Refer to “Operational sustainability – Cross border sales and Eskom Pension Core operations purchases of electricity” on page 56 for more information on firm and and Provident unfirm agreements Fund Our core operations are the generation, transmission, Eskom Enterprises Eskom Finance Eskom Development Escap SOC Ltd SOC Ltd Company SOC Ltd Foundation NPC distribution and sales of electricity. The primary Capacity expansion programme energy resources that our power stations need to operate – coal, liquid fuels, uranium and water – must We are busy with a capacity expansion programme to be sufficient, delivered on time at optimal cost, and expand our generation and transmission capacity. This be of the required quality. programme, which will increase our generating capacity The Eskom group consists of the Eskom business and Eskom Finance Company SOC Ltd (EFC) by 17 384MW by 2021, includes building two coal-fired a number of operating subsidiaries, including: EFC was established in 1990 primarily to enable Coal is procured in terms of long-term cost-plus and one pumped storage power stations, a wind facility, Eskom’s employees to have access to home loan contracts, long-term fixed-price contracts and which was completed this year, as well as a concentrated Eskom Enterprises SOC Ltd group finance whilst optimising home ownership costs for medium- and short-term contracts. Cost-plus solar thermal station. It also involves strengthening and Through the Rotek and Roshcon businesses, Eskom both Eskom and its employees. We are in the process contracts are long-term agreements whereby a substantially extending the Transmission grid. Enterprises (EE) provides lifecycle support, plant of finding an appropriate disposal solution for this mine’s coal reserves are dedicated to Eskom and maintenance and support for the capacity expansion subsidiary at the request of the shareholder. It has coal is bought at a cost that covers the mine’s full Finance programme to Eskom’s line divisions. During the not been classified as a discontinued operation in our capital investment, its operating cost and a return Our funding model consists of equity, in the form financial year, EE sold its operating assets to Eskom, and now functions as an investment holding company. financial statements, as it currently does not meet on investment. The fixed-price mines produce both of both investment by the shareholder or retained the requirements of International Financial Reporting export-quality coal for sale on international markets earnings, and debt funding, with strong Government EE also has a subsidiary in Uganda; it has an interest in an electricity operating and maintenance concession. Standards (IFRS). and Eskom-quality coal, which is sold to us at the support. Our credit rating is affected by our own contracted price. Kusile will be the first of our financial position as well as the credit rating of the Eskom Energie Manantali s.a (EEM), a subsidiary of Escap SOC Ltd power stations to use limestone in its flue gas Sovereign. EE, used to operate an operating and maintenance Eskom’s wholly-owned insurance captive company desulphurisation plant. concession with Société de Gestion de l’Energie de manages and insures the business risk of Eskom We periodically apply to NERSA through multi-year and our subsidiaries, excluding nuclear and aviation Manantali (SOGEM). As reported at 31 March 2014, Generating electricity requires a significant amount of price determinations for our revenue requirement exit options were being pursued and as a result, EEM liabilities. water and also results in atmospheric emissions, ash and to sustainably operate our business; the resultant was classified as a discontinued operation in our 2014 nuclear waste. We aim to minimise our impact on the revenue is determined by NERSA. The third revenue Eskom Development Foundation NPC financial statements. Subsequently, agreement was environment by reducing atmospheric emissions and application, MYPD 3, is currently in effect and reached between EEM and SOGEM for the sale of The Foundation is a wholly-owned non-profit company fresh-water usage by transitioning to a cleaner energy covers the five-year period from 1 April 2013 to assets and mutual discharge from the operating and that manages our corporate social investment in mix and continuing with research and development to 31 March 2018. We have embarked on the Business maintenance concession. The liquidation of EEM was support of our transformation objective. explore improved energy technologies. Productivity Programme (BPP) – one of a number registered on 24 February 2015. 12 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 13 Our business continued Our strategy Eskom Pension and Provident Fund The EPPF is an independent legal entity, governed by The Eskom Pension and Provident Fund (EPPF) is a Board of Trustees, and is not part of the Eskom group. However, as the EPPF plays a key role in 16 Chairman’s statement a defined benefit pension fund that is registered as a self-administered pension fund in terms of creating value for Eskom’s employees, both current 18 Our Board profiles the Pension Funds Act, 1956 and approved as a and retired, it has been included here. 20 Key Board activities pension fund in terms of the Income Tax Act, 1962. 22 Stakeholder engagement and Operating structure The EPPF is the second largest pension fund in the material matters country in terms of assets, with a market value of Eskom’s operating structure, shown below, comprises 26 Management of risks and opportunities over R112 billion as at 30 June 2014. It provides line functions that operate the business, service 32 Performance against the shareholder retirement, withdrawal and disability benefits to its functions that service the operations and strategic functions that develop the enterprise. Members of compact members, as well as death benefits for its in-service members, pensioners and deferred pensioners, which Exco are assigned to take accountability for each of are paid to their qualifying beneficiaries. As at 30 June the areas. 2014, the EPPF had 45 377 in-service members and 35 491 pensioners. Line functions Service functions Strategic functions Generation Group Finance Group Sustainability Transmission Human Resources Strategy and Risk Management Distribution Group Commercial Group IT Group Customer Services Group Technology Corporate Affairs Group Capital Regulation and Legal For Exco profiles and portfolios, refer to pages 40 and 41 Materiality and contribution to financial performance As mentioned above, the Eskom group consists of the Eskom business and a number of operating subsidiaries. Each of the companies contributes to the financial performance and position as follows: Eskom Eliminations Eskom R million company EE group Escap EFC Foundation and other group Revenue 147 691 8 162 1 780 783 – (10 725) 147 691 Operating profit 8 885 555 279 155 (1) (727) 9 146 Net profit after tax 2 796 769 510 122 – (579) 3 618 Total assets 557 768 6 517 9 852 8 955 88 (20 296) 562 884 Total liabilities 441 728 2 322 8 421 8 261 88 (20 183) 440 637 Capital expenditure 54 427 439 – – – (1 789) 53 077 As can be seen from the information above, the Eskom Holdings SOC Ltd, unless information about Eskom business is by far the most significant to the the subsidiaries is relevant to understanding Eskom’s performance of the group. Therefore, in the interests performance. As noted earlier, the main function of of materiality and conciseness, the balance of this our subsidiaries is to support our business operations integrated report, when discussing key performance as well as our employees. indicators and operating performance, will focus on 14 Integrated report | 31 March 2015 Chairman’s statement The delay in delivering on the new build programme The South African coal sector requires substantial Our strategy is aimed at addressing the constraints has placed additional pressure on the ageing generating investment and recapitalisation to meet anticipated and uncertainties we currently face without plant at a time when there is little spare capacity to domestic and export requirements, as current compromising our long-term operational and financial do maintenance. Medupi is only expected to be fully capacity is insufficient to meet growing demand. We sustainability focus, in order to stabilise the business operational by 2019, with six units providing total are contractually required to fund the recapitalisation and to re-energise for longer term sustainability additional capacity of 4 764MW. The six units at of the cost-plus mines; failure to recapitalise the and growth. The five-year business renewal journey Kusile will provide an extra 4 800MW but they are mines will result in reduced coal production from will lead the company through these stages. Our expected to be fully operational only by 2021. The these collieries, leading to higher costs incurred in Turnaround Strategy falls within this framework and four units of 1 332MW at Ingula Pumped Storage purchasing the required coal from other third party focuses on the “business unusual” initiatives that will Scheme are anticipated to be fully operational only suppliers. Given our current financial constraints, drive distress recovery and stabilisation. by 2017. no capital has yet been allocated for the required recapitalisation. As part of the stabilisation phase, we will refocus on NERSA’s third multi-year price determination of an revenue protection and ensure that revenues due 8% annual tariff increase has resulted in significant The management of the electricity and related are collected timeously. We also need to create Our strategy pressure on our liquidity and going concern status. challenges requires cooperation between a number space of at least 3 000MW for required maintenance We have implemented the Business Productivity of Government departments and Eskom, therefore to recover the health of the Generation fleet. Dr Ben Ngubane Programme (BPP) with the aim of delivering cost Cabinet created an Inter-Ministerial War Room. After the stabilisation phase, we will focus on Acting Chairman savings of R61.9 billion over the MYPD 3 period. The War Room identified a number of short-term re-energising and growing the business. As part of the Furthermore, we have submitted an application for constraints and policy challenges where Government re-energisation phase, the emphasis will be on a revenue adjustment to the value of R38 billion to support is required to facilitate progress. These moving from financial and operational recovery to NERSA relating to the first year of the MYPD 3 period include a predictable electricity price path that financial and operational sustainability. In order to (2013/14); this is currently under review. If approved, migrates to cost-reflectivity, the anticipated equity position the organisation for growth, six strategic Stabilise, re-energise, grow the outcome of this application is expected to impact injection by the shareholder of about R23 billion, shifts are required to reposition our business model, the electricity price commencing in 2016/17. declaring coal a strategic resource and regulating among which are diversifying our fuel mix, gaining the volume and pricing thereof, our role in future access to new resources and adapting to different A further application was made to NERSA, for the generation projects, demand management options, pathways towards cost-reflective prices. selective reopening of the MYPD 3 decision for the solutions to arrear municipal debt and the ability to 2015/16 to 2017/18 period. The selective reopener grow the business. The Board commissioned an independent enquiry application covers the recovery of costs for OCGTs into current technical, commercial and structural of R32.9 billion and R19.9 billion for the Short-Term In order to achieve energy security in South Africa, issues within the company. The enquiry is progressing Power Purchase Programme (STPPP), as well as the we need an energy sector which supplies enough and is expected to be finalised within three months. liquidation of the R8.1 billion equity return which was electricity at prices that cover the cost of supply, yet postponed during MYPD 2. remains affordable. To put the electricity sector on On behalf of the shareholder and the Board, I would the path to sustainability, as South Africa we need like to thank the previous Chairman, Mr Zola Tsotsi, We are facing further challenges, most of which relate to add additional generating capacity, ensure the the interim Chief Executive, Mr Collin Matjila, the to environmental matters, which have the potential to financial sustainability of Eskom and other industry former Chief Executive, Mr Tshediso Matona and the severely impact our future operational sustainability. players, and obtain clarity on the long-term end-state previous Board members for their contribution and In February 2015 the Department of Environmental of the sector. dedication. I would further like to welcome the new Affairs issued its decision on our Minimum Emission Board members who will be guiding Eskom during the Standards postponement application, which allows The Integrated Energy Plan (IEP) is fundamental exciting journey ahead. Our overall strategic direction is aligned with our stations to continue operating. However, to our long-term planning as it is a multi-faceted the decision is contingent upon us executing an policy with multiple objectives which describes the The Board also thanks Exco for its continued vigilance the Strategic Intent Statement determined by the emissions reduction programme by 2025 that will recommended energy roadmap of South Africa. It is and determination in confronting the challenges shareholder. This includes the strategic objectives significantly increase the cost of our emissions retrofit important for our planning to understand where we currently facing Eskom. of security and reliability of supply of electricity, business and financial sustainability, reduction of our programme, to approximately R134 billion. fit in. We understand that the Department of Energy We extend a note of appreciation to the new carbon footprint and environmental impact, alignment plans to submit the final updated IEP, which will shareholder representative, the Honourable Minister Moreover, the new emissions abatement technology replace the IRP 2010 currently in effect, to Cabinet with Government’s strategic initiatives and driving Lynne Brown, who is supporting and guiding Eskom required to meet the minimum emission standards for promulgation by the end of 2015. We welcome industrialisation, transformation of the economy and on the path to sustainable growth. at our existing coal-fired power stations requires this move, given that the decisions around and the procurement landscape. additional water resources which are currently implementation of the allocation of future generating The Board is dedicated to fulfilling our mandate. We The practice of keeping the lights on at all costs not available. The trade-offs between meeting the plant is already behind, irrespective of whether we are committed to working with Government and by delaying critical maintenance, other essential air quality standards with our country’s limited are included in the plans or not. other stakeholders towards a sustainable electricity refurbishment and replacement of generating and scarce water resources and the need for us industry which assists in growing the economy and equipment has caused an escalation in breakdowns to reduce water consumption require alignment A predictable electricity price path migrating to cost- improving the lives of our people. of our Generation plant. A short-term Generation between different Government departments, or a reflectivity is of utmost importance to our future recovery strategy has been developed to reduce feasible plan to achieve both objectives of emissions financial sustainability. DoE is expected to submit the unplanned maintenance to below 7 000MW (or reduction and water conservation. We are in talks price path to Cabinet for approval by the end of this approximately 16%) by 2015/16 and to less than with the Departments of Environmental Affairs and calendar year. It is important to note that a substantial 4 000MW (approximately 8.8%) by 2021/22. This Public Enterprises as well as other stakeholders to increase in the price of electricity will be required to Dr Ben Ngubane drive towards predictability and sustainability aims to find a balanced solution between the need for cleaner restore our financial sustainability and strengthen our Acting Chairman achieve plant availability of 80% by 2021/22. power and the need for security of supply. financial position. 16 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 17 Board of Directors at 28 May 2015 P&G RBP SES ARC TC IFC P&G TC IFC P&G SES ARC IFC ARC P&G TC RBP SES TC ARC RBP SES IFC Dr Ben Ms Nazia Mr Zethembe Ms Venete Mr Romeo Ms Chwayita Dr Pat Ms Viroshini Mr Mark Ngubane (73) Carrim (34) Khoza (57) Klein (56) Kumalo (43) Mabude (45) Naidoo (55) Naidoo (42) Pamensky (42) Acting Chairman Independent Independent Independent Independent Independent Independent Independent Independent Independent non-executive non-executive non-executive non-executive non-executive non-executive non-executive non-executive non-executive Ben, former Minister of Nazia is an admitted Zethembe, the former Venete is a chartered Romeo, the current CEO Chwayita is a practising Pat is a registered Viroshini joins the Board Mark is a chartered Arts, Culture, Science attorney, conveyancer head of Customer director, and the of Vodacom International, accountant with a professional engineer, a as an admitted attorney accountant with and Technology and also and notary, with a strong Services at Telkom, heads Chairman of the Institute is an accomplished background in financial specialist consultant and with High Court right experience in effecting ambassador to Japan, focus on business. She up his own investment of Directors of Southern executive, with over management. She has an Adjunct Professor of of appearance and over turnaround strategies. has vast experience in heads up her own legal company, specialising Africa. She heads up 20 years’ experience served on the Eskom Power Engineering at nine years’ experience in He serves as the Group the health sector, both practice and also serves in consulting, civil her own management in the information Board since June 2011, the Durban University of private practice as well as Chief Operations Officer local and international. as a Commissioner at the construction work and consultancy firm. She has and communications and also serves on the Technology. He has three corporate legal counsel of Blue Label Telecoms He has served on the CCMA. building maintenance. completed numerous technology industry. board of the Airports decades of experience roles with Telkom and Limited. Boards of various child He is experienced in senior executive He is a commercial Company South Africa. in the electricity industry, Mpact Limited. and community- infrastructure planning programmes at top strategy expert, with with both Eskom and based organisations, and commercialisation. business schools both a proven track record the Southern African as well as on the Zethembe acted as Chief locally and internationally, of building successful Power Pool. He serves board of the South Executive from 12 March and holds various teams and turning on the Council of the African Broadcasting to 17 April 2015. directorships. around underperforming South African Institute Corporation. businesses. of Electrical Engineers Ben was appointed as and is a member of the acting Chairman of the executive committee of Board on 30 March 2015, the Institute of Electrical until a permanent and Electronics Engineers replacement is found. South Africa and Cigre SA. Further information, such as the qualifications and significant directorships of Board members, are provided as a fact sheet ARC Audit and Risk Committee IFC Investment and Finance Committee P&G People and Governance Committee The acting Chief Executive and acting Chief Financial Officer are not members of the Board. Ms Mariam Cassim and Mr Giovanni Leonardi were appointed to the Board on 25 May 2015. As a result of these appointments, the constitution of the RBP Board Recovery and Build Programme SES Social, Ethics and Sustainability Committee TC Board Tender Committee Board subcommittees will be revised. Committee The former Chief Executive, Mr Tshediso Matona, has resigned effective 31 May 2015. Denotes chairmanship of a committee Ages shown are as at 28 May 2015. 18 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 19 Key Board activities The Board of Directors is responsible for the • Approved the application of Selective Load During March 2015, the Board commissioned After the suspension of the executives, strategic direction of the company. At its breakaway Curtailment, which authorises the suspension, an independent enquiry into current technical, Mr Zethembe Khoza, a non-executive director, was held at the beginning of the 2014/15 financial year, reduction or termination of supply to selected commercial and structural issues within the company. appointed as acting Chief Executive, Ms Nonkululeko the Board decided that security of supply could no customers or groups of customers as a viable As part of the process, the following executives Veleti as acting Chief Financial Officer, Mr Abram longer be maintained at all costs, and that we cannot option to manage supply constraints. The were suspended to ensure that the process is as Masango as acting Group Executive: Group Capital compromise on compliance and sustainability in terms Board further approved dealing with non-paying transparent and uninhibited as possible: and Mr Edwin Mabelane as acting Group Executive: of people, plant, safety, the environment and financial municipalities in an assertive manner, for instance • Mr Tshediso Matona, Chief Executive Group Technology and Commercial. However, the sustainability. Our going concern status would not be through application of load shifting and load • Ms Tsholofelo Molefe, Finance Director Minister announced the appointment of Mr Brian compromised in support of operational sustainability interruptability Molefe (Chief Executive of Transnet SOC Ltd) as • Mr Dan Marokane, Group Executive: Group or balancing supply and demand. • Approved the implementation of a number of full-time acting Chief Executive from 20 April 2015, Capital measures to manage the arrear municipal debt after which Mr Khoza would return to membership As in the prior year, balancing security of supply and • Mr Matshela Koko, Group Executive: Group of the Board. Given Zethembe’s brief tenure as (refer “Revenue and customer sustainability – ensuring our financial sustainability were two of the Technology and Commercial part-time acting Chief Executive, his independence Revenue and debtor management” for more detail) most material items the Board had to deal with this is considered not to have been substantially affected. as well as the disconnection of all non-paying Our strategy year. In addition, the Board also applied its mind On 30 March 2015, the Chairman of the Board, municipalities in accordance with Eskom’s revenue Mr Zola Tsotsi, resigned and the Board elected to the following significant matters during the year See glossary of terms for the definition of an independent non-executive management procedure Dr Ben Ngubane as acting Chairman, a decision which under review: director • Review of progress on the new build programme, was approved by the Minister. • Real challenges faced by the electricity supply and consideration of an alternative control and industry which are partly due to delays in policy On 17 April 2015 it was announced that the Board On 18 May 2015, Mr Tshediso Matona and Eskom instrumentation (C&I) supplier at Kusile decisions, as well as delays in obtaining the had appointed an external service provider to lead reached a mutual agreement to part ways on an go-ahead for major projects, together with an • Progress on the disposal of EFC, and consideration amicable basis. No misconduct or wrongdoing is the independent enquiry, and that the terms of acknowledgement that we face challenges that of alternative options for disposal alleged against Tshediso, who believes that the reference had been finalised. The enquiry is expected cannot always be reconciled and that trade-offs are • Decision that no risk should be taken on unfunded to be finalised within three months and will consider agreement is in the best interests of Eskom, to allow necessary projects, as the business could not afford to the following issues: the Board to pursue its plans for the company under • Agreement that the strategy of keeping the lights proceed with unfunded mandates the current leadership. The independent enquiry • Liquidity position and cash flow challenges on adversely impacted financial and operational • Confirmed that the intention of the BPP programme initiated by the Board into the state of affairs at • Poor performance of Generation plant sustainability, resulting in an urgent need to was to strengthen the balance sheet and improve Eskom will continue as planned. The separation is • Escalation of primary energy costs relating to coal perform adequate maintenance in order to protect long-term sustainability by doing more with less by no means an anticipation of the outcome of the and diesel long-term plant health. This led to the approval of • No short-term incentive bonuses were to be paid enquiry, which is aimed at enabling the organisation • New build delays and overruns to deal with the current challenges. the Generation recovery strategy, which covers to executive management during the 2013/14 both immediate actions and those required over and 2014/15 financial years, given the company’s the medium term, with an emphasis on the fact performance that we will not sacrifice our plant in order to • Circumstances surrounding the reportable ensure short-term security of supply irregularity reported in the interim financial • Alternatives to manage declining coal qualities, statements and actions to address the matter which manifests through coal-related partial • Consideration of risk management and enterprise load losses, including options such as short- risks term purchasing of higher specification coal, • Consideration of candidates for the position of using washing plants at collieries, modification Chief Executive of coal handling plant, Generation plant design • Approval of the following matters: adaptations as well as changes in our maintenance and operations philosophy – Integrated report and annual financial statements, as well as the interim integrated • Approval of OCGT expenditure beyond the report and interim financial statements original budget for the year to 31 March 2015, with an instruction that the amount should be tightly – The five-year Corporate Plan, which, among controlled and be applied only to ensure stability other matters, sets out our strategy of the power system, coupled with consideration – Appointment of the external auditors and the of opportunities for procuring diesel in bulk at Company Secretary lower prices – Ethics policies and associated procedures • Gas strategy, including the exploration of local – Terms of reference of subcommittees and cross-border gas opportunities, as well as the funding mechanism, with approval of amounts for In addition to the items mentioned above, the Board, through its exploratory studies subcommittees, considered a host of other matters. Refer to pages 106 to 108 in “Our leadership and governance” for further information on • Requirement for a protocol to manage peak the activities of the Board committees demand in a predictable manner • Negative impact of escalating arrear municipal and residential debt on liquidity and financial sustainability, with consideration of alternative options for collecting arrear municipal debt, such One of the turbine masts at the 100MW Sere Wind Farm, our first utility-scale renewable energy project, which was placed into commercial operation on 31 March 2015 as payment of the debt by National Treasury using the municipalities’ equity share 20 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 21 Stakeholder engagement and material matters We strive to create a corporate culture that fosters stakeholders as part of their daily activities. Similarly, Focus areas for future engagements Material stakeholder matters collective responsibility and shared accountability for the Group Customer Services Division continually Although engagements have been variable over the Our integrated report aims to address the impact of stakeholder engagement, in order to manage risk and engages with key industrial customers, partly to last year, we are geared up to re-energise our stakeholder matters on our ability to create value, reputation, with the key objective of building strong contract demand reduction over critical hours, which relationship with all stakeholders and partnering with within the context of our sustainability dimensions relationships. assists in reducing load shedding over critical times. them to effect the Turnaround Plan. The following and risk management strategies. The Board has delegated the management of The Stakeholder Relations Department sets the plans have been put in place to aid this strategy: Stakeholder matters – both qualitative and quantitative stakeholder relationships to Exco, with oversight by stakeholder engagement plan, and reports progress • Focused stakeholder management in effecting the – are determined through extensive consultation with the Social, Ethics and Sustainability Committee. to Exco on a regular basis. Turnaround Plan, which includes creating and and consideration of concerns raised by stakeholders. maintaining the confidence of all stakeholders. The We operate within a complex stakeholder landscape, The management of stakeholder relationships Material matters are those that are both of high stakeholder plan is being developed as part of the consisting of multi-faceted stakeholder groups with follows an inclusive approach, whereby the legitimate concern to stakeholders and could have a significant broader Turnaround Plan differing needs and objectives. Our approach to needs and interests and material concerns of key impact on the business. Matters ranked as having a • Continuous engagement with stakeholders medium to high impact on Eskom have the potential stakeholder relations is guided by the principles of the stakeholders are identified and considered, and their to identify sustainable solutions towards debt to significantly affect the achievement of our strategic Our strategy King Report on Corporate Governance (King III), to expectations managed. This approach guides the collection, including working with national and objectives and consequently, our ability to create value. ensure that the relationship between Eskom and our development of a relationship which is based on a provincial stakeholders such as Cooperative stakeholders is managed ethically and in compliance with shared understanding of our business model and the Overall, most of the material matters described in Governance and Traditional Affairs and National relevant legislation and best practice. impact thereof on the various stakeholder groups, the 2014 integrated report remain relevant, although Treasury, to manage the arrear debt and financial whilst providing a platform for informed decision- the level of importance to stakeholders or impact Our interaction with stakeholders recovery process making in the best interests of all stakeholders, on Eskom may have changed. Some new issues have without compromising the future sustainability of • Partnering with stakeholders through a proactive Engagement with stakeholders is a two-way street, been raised, while other issues increased in their Eskom. and collaborative approach to contribute to and occurs on a consistent basis through various level of importance to all stakeholder groups over national energy efficiency objectives platforms. Engagements are carefully planned in terms the last year. All engagements are based on a commitment to • Building resilient relationships with future resource of scope, the intended outcome of the interaction and adhere to the underlying principles of accountability, providers, such as IPPs, to ensure a sustainable Eskom’s Integrated Report Steering Committee the engagement approach. Some business units, such inclusivity, materiality, responsiveness, completeness, supply of electricity assessed and prioritised the concerns identified as Treasury, have direct access to their respective following due process and integrated reporting. • Intensifying engagements with Mozambican through the stakeholder engagement process. The stakeholder groups and consistently engage with stakeholders to advance the gas strategy stakeholder materiality matrix that follows depicts the relationship of the stakeholder matters to the impact on Eskom. We regularly engage the following stakeholders: Although the material matters have been numbered, this is merely to facilitate cross-referencing and does Government Lenders Parliament Analysts Employees Public Suppliers not indicate the level of importance of an item. Organised labour Media Contractors Regulators Investors Customers Civil society Organised business Environmental organisations Industry We engage these stakeholders in the following ways: • One-on-one meetings and teleconferencing • Interviews • Presentations and Q&A • Training interventions • Collective bargaining • Partnerships with key stakeholders • Industry task teams • Development programmes • Reports to stakeholders • Special publications and articles • Social media • Eskom website • Media briefings • Site visits • Public hearings • Roadshows • Open days • Workshops • Employee engagements • Conferences and forums • Wellness campaigns We strive to foster strong relationships with These engagements are aimed at ensuring that there our stakeholders. The relationship with financial is effective and transparent two-way communication market stakeholders for example, is managed by with our stakeholders. We aim to provide investors our Treasury Department. Engagements with these with sufficient information about the business to stakeholders take place on a bilateral basis through make mutually beneficial investment decisions. meetings, teleconferences and video conferences as These engagements assist in maintaining and growing well as multi-lateral engagements. Meetings, such relationships, thereby informing and building support as local and international roadshows, are either for our investment case. requested by the stakeholder or proactively arranged by us. Engagements also take place through speaking Refer to pages 58 to 59 under “Revenue and customer sustainability” for the nature and quality of relationships with our customers opportunities at forums and events. We engage with customers to educate them on energy efficiency, safety, free basic electricity, inclining block tariffs, buying of prepaid power through legal vendors, as well as the need for household budgeting to provide for electricity purchases 22 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 23 Stakeholder engagement and material matters continued Stakeholder materiality matrix Material matter Associated risk Reference in this report Impact on Eskom Financial performance, liquidity and going concern Lower High In light of the NERSA MYPD 3 tariff determination of 8% coupled Pressure on financial sustainability, Financial with the rising cost of energy production, the company’s financial liquidity and going concern sustainability 2. Business continuity and disaster management 3. Going concern status and overall financial High performance NEW health, in terms of both long-term financial sustainability and the Pages 93 to 101 short-term liquidity position, has come under scrutiny. 5. Liquidity position Stakeholders have engaged Eskom on concerns related to: 8. Technical performance of Distribution and 7. Technical performance of Generation plant, • Going concern status and the liquidity position Transmission plant including the maintenance backlog and incidents • Impact of the Government support package at Duvha and Majuba Power Stations • Savings to be realised through the BPP programme 10. Coal stock procurement and handling at power • Increasing amounts spent on OCGTs and coal stations 9. Security of supply Technical performance of Generation plant 13. Impact of increased tariffs on businesses and 12. Impact of load shedding and load curtailment on This matter has become increasingly important to stakeholders, Declining generating plant performance Operational customers customers particularly given the Duvha Unit 3 incident, the collapse of the with inadequate space and funding for sustainability – 16. Customer dissatisfaction with quality of service 18. Arrear customer debt Our strategy coal silo at Majuba and the backlog in planned maintenance, as it maintenance Generation delivery directly impacts security of supply. performance 17. Probability of a national blackout NEW Page 49 to 52 25. Scarcity of water 20. Progress on installing new Generation capacity Security of supply Following consistent communication by Eskom, stakeholders have Declining generating plant performance Operational 21. New build project delays and the escalating cost responded with robust engagement on this matter. The following with inadequate space and funding for sustainability – to completion topics, and how they affect our ability to stabilise the system, maintenance Managing supply- 34. Changes in and stability of leadership NEW were of particular interest to stakeholder groups: and-demand 29. Employee salaries and benefits Insufficient capital investment in network • International sales and purchases of electricity constraints Level of importance to stakeholders strengthening and refurbishment due to • Use of OCGTs Page 54 to 57 31. Transformation of employment equity, financial constraints • Restrictions imposed by legislation, particularly as it relates to procurement equity and supplier localisation and emissions limitations Inadequate supplies of coal and liquid fuel, in development • IPP participation and connection terms of either volumes or quality, may 32. Electrification connection challenges impact the security of supply Connection of IPPs to the grid may be 35. Remuneration of directors and executives delayed by Eskom due to financial 26. Environmental impact of nuclear power 1. Safety of the workplace, employees, contractors constraints, affecting the security of supply generation and nuclear waste management and the public and resulting in deemed energy payments 30. Socio-economic contribution 4. Impact of credit ratings downgrades NEW Arrear customer debt Stakeholders have expressed their concern at debt collection Pressure on financial sustainability, Revenue and customer 33. Governance concerns around tender processes 6. Move to attaining cost-reflective prices NEW practices in place to address the escalating arrear customer debt, liquidity and going concern sustainability – Revenue as well as the impact on our liquidity and financial sustainability. Late and non-payment of outstanding debt and debtor management 11. Private-sector participation and connection of IPPs to the grid by municipalities and Soweto contributing Page 60 to 62 to cash flow constraints 14. Declining electricity sales volumes 15. Impact of energy losses, theft of equipment and Impact of load shedding and load curtailment on illegal connections on supply to customers customers During the latter part of the financial year, numerous Declining generating plant performance Management of risks and 19. New capacity post Kusile in terms of Integrated engagements around load shedding events and the effect on all with inadequate space and funding for opportunities – Resource Plan 2010-2030 stakeholders, customers in particular, were held. Matters raised maintenance Readiness for a national included: Insufficient capital investment in network blackout 22. Reducing our carbon footprint by procuring • Communication by Eskom strengthening and refurbishment Page 30 renewable energy • Predictability of interruptions Inadequate supplies of coal and liquid fuel Revenue and customer 23. Impact of carbon tax • Reliability of load shedding schedules sustainability – may impact the security of supply • Possibility of a national blackout Load shedding and the 24. Environmental concerns, such as contraventions, Connection of IPPs to the grid may be particulate emissions and water use impact on customers delayed by Eskom, affecting the security of Page 59 27. Energy efficiency programmes and incentives supply 28. Shortage of skills and retention of skilled Delivering capital expansion: progress on delivering employees new capacity and impact of delays Stakeholders have expressed concern about the effect of the Delivery delays due to labour unrest, Sustainable asset delays in bringing online new capacity on the constrained supply. safety incidents, late capacity allocations, creation The full list of stakeholder matters, grouped according to the sustainability dimensions and indicating which matters were raised by which stakeholders, Additional concerns raised include the quality of contractor contractor performance and skills, lack of Page 64 to 68 is available as a fact sheet performance, strike action, possible skills shortages, cost funds and project cost escalations could overruns and the overall safety on construction sites. place further pressure on the constrained At the same time, stakeholders were able to celebrate with us power system While we consider all matters raised by stakeholders, not all of those have been addressed in this report. The on milestones achieved, such as the first synchronisation of following table sets out the material matters, found in the top right quadrant of the preceding stakeholder materiality Medupi Unit 6 and the completion of the Sere Wind Farm, our matrix, together with the associated risks, which are discussed in the section that follows, and an indication of where first utility-scale renewable project. in the integrated report the matter is discussed in more detail. Changes in and stability of leadership The organisation has been subject to numerous changes affecting Lack of adequate skills to support Eskom’s Key Board activities The enterprise risks, with the associated risk rating and mitigating response, as well as the relevant key performance indicators are set out on pages 27 to 29 our leadership and the composition of the top decision-making technology intensive operations in certain Page 20 to 21 structures over the past year. Stakeholders have cited their worries areas of the business Our leadership and regarding the effect of the following on Eskom and its operations: governance – Board • Executive vacancies, resignations and acting appointments and Exco • Appointment of a new Board and Chairman Page 105 to 108 • Suspension of executives 24 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 25 Management of risks and opportunities Risk is about the effect of uncertainty on objectives an Eskom risk profile, which cuts across the whole In line with our integrated risk management and therefore a clearly defined, time-based objective is business, has been developed. methodology, inherent risks are continuously crucial to successful risk management. An enterprise reviewed with a particular focus on the effectiveness risk focus is not intended to identify every risk facing We have implemented a risk management system of controls. an organisation but to identify those that are most to respond appropriately to all significant risks. significant to its ability to achieve and realise its core Risk management is done at departmental, regional, We are required to comply with the relevant business strategy and objectives supporting value operating unit and subsidiary level and is reported provisions of the Disaster Management Act, 2002 creation. upwards to our centralised Risk and Resilience and the associated National Disaster Management Department. The risks are consolidated into an Framework; we are focusing on improving the Continuous scanning of the external and internal integrated risk report focusing on the top risks processes around this requirement. 1 environments in which we operate allows for the impacting us at enterprise level, which are reviewed 3 identification of emerging events or risks that may by Exco and the Audit and Risk Committee. Risk Our top risks, reported to the Audit and Risk 2 pose opportunities or threats to our current and controls and treatment plans are put in place to Committee, relate to our sustainability dimensions as future business. To fully comprehend the complexity manage risks within our approved appetite and set out alongside: Our strategy of our enterprise risk profile, it is important to tolerance levels. recognise that our environment is dynamic, posing challenges, threats and opportunities, and to Our risk management process can be set out as acknowledge the integrated risk landscape in which follows: The following table details the enterprise risks and provides the associated risk rating, reference to the associated Communicate and consult material matters, as well as the mitigating response to these risks and key performance indicators used to monitor Who are our stakeholders, what are their objectives and how will we involve them? performance. The enterprise level risks, plotted on the Eskom Risk Matrix in terms of their risk rating, which is a combination of the expected impact and likelihood, are shown on page 30 Establish context Identify the risks Analyse the risks Evaluate the risks Treat the risks What do we What might What will this Which risks need How should we Associated need to take into happen? mean for our treating and best deal with Risk material Key performance account and what How, when objectives? our priority for them? Enterprise risk rating matters Mitigating response and controls indicators are our objectives? and why? attention? Safety and security 1. Health and safety risks to employees, 5D • Eskom’s Zero Harm initiative, including • Number of contractors and the public our life-saving rules fatalities • Integrated crime prevention plan • LTIR Monitor and review Inherent electricity business risks, and the potential inability to adequately • Interventions to improve motor vehicle • Near misses implement occupational health and safety • Safety safety requirements, could pose health • Security drive to protect employees, inspections and safety risks to employees, contractors and infrastructure Eskom’s management is responsible for managing The business risk profile gives Exco and the Board contractors and the public. our risk and resilience in order to provide greater a robust and holistic bottom-up view of key risks Financial sustainability security for our employees, our customers and facing the divisions, as well as a view of the level of other stakeholders. They evaluate the risk profile to effectiveness of the management of those risks, in 2. Pressure on financial sustainability, 6E Going concern • Constant monitoring of the funding • Financial and liquidity and going concern status and and liquidity position liquidity ratios determine the enterprise and business risk profiles. order to increase the likelihood that divisional and overall financial • Monitoring by the Board Recovery and • Daily cash company objectives are achieved. The revenue gap resulting from the performance Build Programme Committee position and An enterprise risk profile gives Exco and the Board MYPD 3 tariff determination, the • Reprioritisation of capital expenditure monthly cash a robust and holistic top-down view of key risks facing We consider certain risks inherent to our operations, significant increase in primary energy Liquidity flow forecast the organisation. This makes it possible to manage such as: costs and the high cost of operating position • Monitoring of cash flows and the OCGTs due to the shortage of compliance with loan covenants those risks strategically and to increase the likelihood • Risks that will have a significant consequence Arrear other generating capacity are impacting • Business Productivity Programme value that our objectives will be achieved. Enterprise risks should they materialise, but that may not be our liquidity and compromising our customer debt packages and savings targets are one or a combination of the following: consistently listed on the risk register because of financial sustainability. This could lead • Revenue adjustment applications to • Risks emanating from external factors, such as the perceived adequacy of the controls or due to to insufficient funds available to meet NERSA financial obligations, thereby negatively • Refer to note 4 in the annual financial climate change, and/or enterprise events that are their perceived low likelihood impacting operations and the new build statements for more information strategic challenges which may affect our ability to • Risks which by their nature fall into the realm of programme. The lack of a predictable regarding our financial risk achieve our objectives business continuity management, being related to electricity price path towards management policies cost-reflectivity affects future planning • Risks associated with our ability to develop and the continuity of critical products and services in the and impacts our credit ratings. Further execute strategy, achieve strategic objectives and event of a disruption to processes providing these. credit ratings downgrades could impact build and protect value The focus here is not on the cause of the disruption loan covenants and hamper prospects but on the time-critical impact on the process if of securing future funding, thereby • Business risks may not be recognised as material in resulting in increased borrowing costs. any one division but occur across multiple divisions buildings, equipment, systems, technologies, human and, when integrated and aggregated, become resources or suppliers are affected significant and impact our objectives • Risks that fall into the category of disaster risks, • A single business risk may be material enough to i.e. with a potentially significant impact on the impact our strategic objectives and as such may be country if our products and services are disrupted reported as a corporate risk (if business continuity is not adequate), and if we do not have the capability to respond 26 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 27 Management of risks and opportunities continued Associated Associated Risk material Key performance Risk material Key performance Enterprise risk rating matters Mitigating response and controls indicators Enterprise risk rating matters Mitigating response and controls indicators Operational sustainability Revenue and customer sustainability 3. Declining generating plant performance 6D Technical • Generation Sustainability Strategy • UCLF 7. Late and non-payment of outstanding 5E Arrear • Managing the increase and collection of • Arrear debt with inadequate space and funding for performance focusing on improvement of plant • EAF debt by municipalities and Soweto customer debt outstanding electricity debt write-off as a maintenance of Generation performance, prioritisation of critical • Maintenance contributing to cash flow contraints • Installation of split meters and percentage of plant, including outages and creating capacity for backlog conversion to prepaid meters revenue Insufficient available capacity to the maintenance maintenance by using OCGTs and IPPs execute maintenance may delay • Disconnection and load management of • Average debtors backlog and and doing weekend maintenance defaulting municipalities days improvements in plant performance, incidents at • Additional ash dumps included in and combined with partial load losses • Eskom KeyCare Duvha and technical plans and MaxiCare arising from poor coal quality and Majuba Power restrictions in available ashing space, Stations Sustainable asset creation this may prolong energy constraints Our strategy and impact security of supply, thereby Security of 8. Delivery delays due to labour unrest, 5D Progress on • Monitoring by the Board Recovery and • Generation increasing the risk of load shedding. supply safety incidents, late capacity installing new Build Programme Committee capacity, allocations, contractor performance Generation • Medupi improvement centre and transmission Impact of load and skills, lack of funds and project capacity lines and commercial and contract management shedding and cost escalations could place further transmission load curtailment New build • Kusile contractor and schedule pressure on the constrained power management, with focus on execution capacity installed on customers system project delays and quality issues, control and • Generation and the capacity 4. Insufficient capital investment in 4D Security of • Transmission network strengthening • System minutes escalating cost instrumentation recovery, coal network strengthening and supply and increase in strategic spares lost (for events transport and contract negotiations milestones to completion (Medupi, Kusile refurbishment due to financial • Monitoring of supply from HCB <1 minute) • Supplier development and localisation constraints Impact of load and Ingula) • Distribution Sustainability Strategy • Number of major • Integrated risk management on mega shedding and incidents focusing on prioritised interventions projects Significant incidents impacting load curtailment networks and equipment may impair on customers towards refurbishment, reliability • SAIDI • Appropriate insurance portfolio operations and performance, and lead improvement and maintenance • SAIFI • Employee engagement strategy and to the loss of supply to customers. • Security of supply recovery project and • Integrated employee satisfaction surveys Incidents could include the theft of system emergency preparedness, demand • Monitoring labour environment and electricity and equipment, ageing plant, NERSA-approved NRS 048-9 load management and strike prevention mechanisms a lack of funding for maintenance and curtailment protocols, load shedding, energy efficiency • Engagement with Government network strengthening, equipment black start readiness and disaster risk intelligence agencies and environmental failure and network unavailability. planning through national disaster scanning management structures • Load curtailment agreements with Environmental sustainability large customers • Protection systems and operating 9. Deteriorating emissions performance 5E • Climate change strategy in place • Specific water standards together with national Minimum • Emissions treatment plans in response usage Emission Standards and inadequate to Minimum Emission Standards • Relative • Controls to limit the theft of ashing space may impact security postponement application are in place particulate electricity and equipment of supply but cannot always be executed due to emissions • Operation Khanyisa together with • Environmental the postponement of outages prosecution of perpetrators The emissions performance could legal further deteriorate and jeopardise the • Kusile will be fitted with flue gas • Power Alerts and quarterly state of contraventions in security of supply should generating desulphurisation (FGD) technology and the system media briefings terms of the plant have to be wholly or partially Medupi retrofitted six years after commissioning of units Operational 5. Inadequate supplies of coal and liquid 5D Security of • Contracting alternative coal and diesel • Coal stock days shut down. The risk is negatively Health fuel, either in terms of either volumes supply suppliers to make up shortfalls impacted by a lack of funds and • Ongoing reviews to ensure compliance Dashboard or quality, may impact the security of • Capital expenditure at cost-plus mines available generating capacity to do with water-use licences supply Impact of load to be approved and initiated maintenance and upgrades where • Investment in renewable energy shedding and required. projects by both Eskom and IPPs This is exacerbated by the lack of load curtailment • Extension of certain existing long-term coal supply agreements • Energy efficiency programmes in place capital allocated for recapitalisation on customers Failure to embed the climate change • Miner Development Fund to develop to reduce demand and associated required at cost-plus mines. strategy and sustainable development black emerging miners environmental impact in our operations, as well as our access • Coal to be designated a strategic to natural resources and licence to resource operate, may jeopardise the reliability of electricity supply. 6. Connection of IPPs to the grid may be 5E Security of • Engagement with DoE and NERSA on • IPPs connected delayed due to financial constraints, supply the development of a national policy to the grid Building a sustainable skills base affecting the security of supply and for the funding of future IPP projects • Deemed energy resulting in deemed energy payments Impact of load • Expediting the connection of IPPs to payments 10. Lack of adequate skills to support 4D Changes in and • Skills development initiatives and skills • Number of shedding and the grid through our Grid Access Unit Eskom’s technology intensive stability of development through the capacity technical learners load curtailment • IPP purchases operations in certain areas of the leadership expansion programme • Learner on customers business • Skills transfer throughput or • Training through Eskom Academy of qualifying Learning and learner programmes • Training • Succession planning expenditure as a percentage of gross employee benefit costs 28 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 29 Management of risk and opportunities continued Sere Wind Farm The enterprise level risks can be plotted on the Eskom Risk Matrix as follows: Readiness for a national blackout Sere South Africa’s infrastructure, of which the power system forms an essential part, is Located near Vredendal in Western Cape 6 3 2 exposed to a wide variety of threats, such as extreme weather and the impact of climate 1 6 change, wilful damage (including vandalism 5 and sabotage), network and plant failures, the 5 8 7 9 Total project value Construction time impact of a sequence of unforeseen events, the potential failure of barriers and protection R2.5 billion 24 months 4 4 10 systems, as well as sustained stresses due to Impact generation and network infrastructure capacity shortages. Unlike countries that are more Area of site Number of people involved 3 regularly exposed to the impacts of some 37km 2 Our strategy of these threats, South African society has in construction at peak been relatively unprepared for the associated 560 2 disruptions and therefore, when these threats Length of turbine blade materialise, the resulting impact on society and the economy can be significant. This 53m Height of turbine implies a need for deliberate measures to be 1 implemented to enhance the resilience of the 115m Weight of wind turbine country in the face of such threats. A B C D E 470t Likelihood A national blackout is a very low probability but high impact disaster scenario. The likelihood of Lifting capacity of a national blackout occurring remains low, given largest crane Clean wind energy In summary, our key risks relate to our ability to generated per year sustain operations and improve our deteriorating the various layers of protection in place, such as: 800t financial performance. We face critical challenges • Scheduled rotational load shedding in terms of the National Code of Practice for Emergency 298GWh regarding poor quality of coal, extensive use of Load Reduction (NRS 048-9) is one of several diesel in our OCGT stations, the current state of Standard households manual response measures in place to prevent Carbon emissions to be the generating assets, delays in commissioning new a national blackout powered by this project avoided over 20 years plant, delays in performing maintenance and adequacy of a skilled workforce. These challenges call for • Should the system constraint exceed the scheduled load reduction stages in 124 000 6Mt immediate action, but require funding. Furthermore, the electricity supply industry is at risk of having NRS 048-9, we will implement unscheduled insufficient generating capacity in future due to delays load shedding in issuing an update to the IRP 2010. • Should a blackout occur, we have a blackout restoration plan in place; various components of this are tested through physical and simulation exercises. We are fully compliant with the Grid Code requirement for both of our black start facilities, namely Kendal and Drakensberg, to be fully tested every six years • Generation unit islanding has been implemented on some of our power stations to reduce the time required to restart the national power system. Units undergo physical testing to retain their certification for islanding We plan to undertake one national blackout exercise and one regional exercise per province in each financial year. These exercises address the requirements of the Grid Code to test grid emergency preparedness plans. They also test the integrated response structures in a particular province. Operation Breaking Dawn, an exercise which simulated a national blackout, was conducted on 23 March 2015. The exercise highlighted certain shortcomings in the readiness in each of the divisions involved, which we are addressing. 30 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 31 Performance against the shareholder compact Each year, in consultation with the shareholder, we agree on our performance objectives, measures and indicators, Target Target Actual Actual Actual Page as well as our annual targets, in line with the Public Finance Management Act, 1999. Key performance indicator and unit 2014/15 met? 2014/15 2013/14 2012/13 ref The table that follows sets out our performance for the year ended 31 March 2015 in terms of the shareholder Ensure financial sustainability compact. All KPIs in the compact refer to the Eskom company only. Commentary on performance is contained in the Cost of electricity (excluding depreciation), “Operating performance” and “Financial review” sections of this report, where SC indicates that a key performance R/MWh 532.63 610.43 541.92 496.24 96 indicator is included in the shareholder compact. Interest cover, ratio 0.69 0.44 0.65 0.27 96 Throughout this report, unless otherwise indicated, performance against target is indicated as follows: Debt/equity (including long-term provisions), ratio 2.48 2.70 2.21 1.96 100 FFO as % of total debt, % 7.63 2.37 9.21 8.55 100 Performance for the year met or exceeded target Performance for the year almost met target Maximise socio-economic contribution: Procurement equity Performance for the year did not meet target Local content contracted (Eskom-wide), % 65.00 25.13 40.80 – 79 Target Target Actual Actual Actual Page Local content contracted (new build), % 65.00 33.62 54.60 80.20 79 Our strategy Key performance indicator and unit 2014/15 met? 2014/15 2013/14 2012/13 ref Percentage of broad-based black economic empowerment spend, % of TMPS 75.00 88.89 93.90 86.30 79 Focus on safety Procurement spend with black-owned suppliers, % of TMPS 12.50 34.91 32.70 22.10 79 Employee lost-time injury rate (LTIR), index 0.35 0.33 0.31 0.40 44 Procurement spend with black women-owned Sustainable asset base whilst ensuring security of supply (BWO) suppliers, % of TMPS 6.00 6.61 7.20 4.70 79 Procurement spend with black youth-owned (BYO) Maintenance backlog, number 1 1 2 5 – 50 suppliers, % of TMPS 2.00 0.64 1.00 1.00 79 Demand savings, MW 246.0 171.5 409.6 595.0 57 Procurement spend with suppliers owned by black people living with disabilities (BPLwD), % of TMPS 1.00 0 0 – 79 Internal energy efficiency, GWh 10.0 10.4 19.4 28.9 57 Procurement spend with qualifying small enterprises Put customer at the centre (QSE) and exempted micro enterprises (EME), % of TMPS 12.50 11.86 11.90 – 79 Eskom KeyCare, index 102.0 108.7 108.7 105.8 59 Maximise socio-economic contribution: Employment equity Enhanced MaxiCare, index 96.0 99.8 92.7 93.2 59 Disability equity in total workforce, % 2.50 3.12 2.99 2.59 80 Improve operations Racial equity in senior management, % black employees 60.00 61.58 59.50 58.30 80 Normal unplanned capability loss factor (UCLF), %2 13.00 15.22 12.61 12.12 50 Racial equity in professionals and middle Less: Constrained unplanned capability loss factor, %2 3.00 1.00 1.63 3.41 50 management, % black employees 70.00 72.28 71.20 69.60 80 Underlying unplanned capability loss factor, %2 10.00 14.22 10.98 8.71 50 Gender equity in senior management, % female Energy availability factor (EAF), % 80.00 73.73 75.13 77.65 50 employees 31.00 29.83 28.90 28.20 80 System average interruption frequency index (SAIFI), Gender equity in professionals and middle events 22.0 19.7 20.2 22.2 53 management, % female employees 37.00 36.10 35.80 34.60 80 System average interruption duration index (SAIDI), hours 43.0 36.2 37.0 41.9 53 Build strong skills Total system minutes lost for events <1 minute, Training spend as % of gross employee benefit costs 5.00 6.18 7.87 – 76 minutes 3.80 2.85 3.05 3.52 53 Learner throughput or qualifying, number4 1 200 424 – – 76 Deliver capital expansion Notes to the shareholder compact Generation capacity installed: first 1 The maintenance backlog in the shareholder compact is based on the 36 outages that informed the 2011 PFMA application, which has since been reduced to 35. Of the synchronisation, units3 1 1 – – 65 35 outages, five remained at 31 March 2014. The KPI in 2013/14 was tracking the nine outages that had been approved by the Technical Governance Committee and all Generation capacity installed and commissioned, MW 433 100 120 261 65 nine were completed. As the KPI definition has changed for the current year, the comparative as at 31 March 2014 has been restated. 2. The shareholder compact UCLF KPI refers to underlying UCLF, which is the difference between normal and constrained UCLF, and represents the UCLF that is still Transmission lines installed, km 315.1 318.6 810.9 787.1 65 within Generation’s control. The target was approved at 10%, which incorporates OCLF of 1%. Constrained UCLF results from emissions and short-term related UCLF due to system constraints to meet the objective of keeping the lights on. Transmission capacity installed and 3. Only Medupi Unit 6 was contracted for first synchronisation in the 2014/15 financial year. Eskom and DPE will, in subsequent years, contract on first synchronisation for commissioned, MVA 2 090 2 090 3 790 3 580 65 Unit 5 of Medupi and Units 1 and 2 of Kusile. The subsequent units of Medupi and Kusile will then be contracted on capacity installed and commissioned. 4. The learner throughput or qualifying target includes only engineer, technician and artisan learners and refers to learners in their final year, less those who fail and less Reduce environmental footprint in existing fleet those who left the pipeline. Other learners are not included in the target. Relative particulate emissions, kg/MWh sent out 0.35 0.37 0.35 0.35 71 Specific water consumption, ഢ/kWh sent out 1.39 1.38 1.35 1.42 71 Implementing coal haulage and the road-to-rail migration plan Migration of coal delivery from road to rail (additional tonnage transported on rail), Mt 11.50 12.59 11.60 10.10 46 32 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 33 Chief Executive’s review Operating performance The year to 31 March 2015 was an unusually challenging year, in which the financial and operational 35 Chief Executive’s review health of the business deteriorated. We struggled to 40 Our Exco profiles meet the electricity demand and often had to utilise 42 Safety and security expensive supply-side options, such as the open- 45 Operational sustainability cycle gas turbine (OCGT) plant to balance supply 58 Revenue and customer sustainability and demand. At times we had to resort to rotational 64 Sustainable asset creation load shedding in order to protect the system and 70 Environmental sustainability also, more recently, to create space for critical 75 Building a sustainable skills base maintenance. Our cash reserves declined due to large amounts spent on diesel for the OCGTs as well as a 77 Transformation and social sustainability significant increase in arrear municipal and residential 81 Building a solid reputation customer debt, particularly Soweto. Added to that, two ratings agencies reduced our credit rating to sub-investment grade. The new build projects remain Brian Molefe behind schedule, partly due to poor contractor performance and strike action. Acting Chief Executive We have also seen a number of changes in our governance structures. A new Minister of Public Enterprises was appointed, after which she made a number of changes to the Board. We saw three Sustainable power for people in the role of Chief Executive, the Chairman Operating performance a better future resigned and there were several changes to Exco. The Board commissioned an enquiry to investigate the liquidity, Generation performance, diesel and coal supply challenges as well as the new build delays and overruns, which led to the suspension of two executive Board members and two members of Exco for the period of the enquiry. Despite this, it was not all doom and gloom. Although later than planned, the first synchronisation of Medupi Unit 6 took place on 2 March 2015, with full power of 794MW achieved on 26 May 2015, while the 100MW Sere Wind Farm, our first utility-scale renewable energy project, was placed in commercial operation on 31 March 2015. The Government financial support package is an important and welcome intervention, although we still face an immediate and complex combination of significant and interrelated problems, the consequence of which is visibly manifesting in the form of regular rotational load shedding. The urgent resolution of our problems is essential to prevent the development of a protracted crisis for both Eskom and the country. In this regard, additional power stations and transmission power lines are being built to meet South Africa’s rising demand for electricity and to diversify our energy sources, as well as replace existing assets. In 2005, we embarked on a capacity expansion programme, the largest in our history, which will increase generation capacity by 17 384MW, transmission lines by 9 756km and substation capacity by 42 470MVA. From inception to 31 March 2015, a large amount of construction work has been completed, adding 6 237MW of generation capacity, 5 816km of transmission lines and 29 655MVA of substation capacity. 34 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 35 Chief Executive’s review continued During November 2014, we developed a Turnaround station recovery teams and additional specialised Operating performance Overall coal stock stood at 51 days as at Strategy to arrest the operational and financial contractor resources have been mobilised to work 31 March 2015, against a target of 42 days. The coal decline and stabilise the business. Furthermore, around the clock to repair and return units to service, In memoriam rail performance achieved 12.59Mt against a target in December 2014 an Inter-Governmental Task with the key objective of bringing the units back of 11.5Mt. Particulate emissions performance for the We extend our sincere and heartfelt condolences Team developed a five-point plan to address online as quickly as possible and to arrest the negative year was 0.37kg/MWhSO, worse than the target of to the family, friends and colleagues of the three power system constraints and assist us in finding trend of unplanned outages. 0.35kg/MWhSO, reflecting the impact of running the employees and seven contractors who lost solutions to our current challenges. The Turnaround plant at unsustainable levels, while water performance In terms of our existing Generation Sustainability their lives in the line of duty this year. We Strategy incorporates the initiatives from the Inter- of 1.38ഢ/kWhSO for the year was better than the Strategy, our aim is to achieve 80% plant availability, cannot tolerate even one death as a result of Governmental Task Team and Exco Strategic Indaba target of 1.39ഢ/kWhSO, although it deteriorated 10% planned maintenance and 10% unplanned our operating activities, and we are working and focuses on four key areas, namely financial compared to the prior year. maintenance over the medium term. The adherence tirelessly to ensure the safety of all our people. sustainability, operational sustainability, revenue and customer sustainability and sustainable asset creation. to regular scheduled maintenance is set to limit Excellent network performance was achieved unplanned maintenance to below 7 500MW in summer During the 2014/15 financial year, we focused on with system minutes lost for events <1 minute Operating challenges and 5 500MW in winter. In the short to medium four core sustainability dimensions in support of our measured at 2.85, against the target of less than term, we need a buffer of between 3 000MW and strategic objectives: 3.80. Investments made in our Distribution network The delay in delivering on the new build programme 5 000MW of reserve generating capacity, obtained continue to yield good performance, with the SAIDI has created additional pressure on the ageing fleet of Operational sustainability either through supply-side or demand-side options, to and SAIFI technical measures exceeding target for power stations to perform at a time when most are enable the maintenance backlog to be closed within The performance of the generating plant is under the year to 31 March 2015. The SAIDI and the SAIFI due for major refurbishment. Plant availability (EAF) three to five years and, at the same time, to avoid the serious pressure, especially as we try to focus performance measures have improved by more than has decreased from 85.21% to 73.73% over the last need for load shedding into the future. on driving sustainability through the execution of 33% and 20% respectively over the last five years. five years. As a result of the tightness of the system, normal planned maintenance, while also catering for the opportunity for maintenance has reduced. Almost We are determined to clear the Generation Actual OCGT production for the year was 3 709GWh short-duration corrective maintenance opportunities. two-thirds of the current base-load power stations maintenance backlog, created by the previous compared to a target of 2 092GWh, while the average This is shown by the unplanned maintenance Operating performance are past their midlife, requiring longer maintenance commitment to keep the lights on, to enable our actual OCGT load factor amounted to 17.58% against (UCLF) performance of 15.22% for the year ended outages and extended restoration time. With more plant performance to improve in the medium to long a target of 9.91%, reflecting the extensive utilisation of March 2015 which deteriorated significantly from plant requiring major refurbishment, we do not term. We are fully aware of the negative impact load OCGTs in order to balance supply and demand. We 12.61% in 2013/14. The higher UCLF percentage is have an adequate operating margin, or generation shedding has on our customers and the economy, expect to continue using the OCGT fleet extensively, an indication of the deteriorating plant health of our capacity in reserve, to make up the shortfall when but we are now bearing the brunt of the earlier although this is subject to the availability of funding. ageing power station fleet. The deterioration in UCLF units are taken out of service for maintenance. As strategy of keeping the lights on at all costs. While further resulted in a decline in plant availability of We purchased 6 022GWh from IPPs at a cost of a result, generating units that should be maintained load shedding is regrettable, we are committed to 73.73% for the year to 31 March 2015 compared to R9.5 billion during the year. Capacity of 5 701MW has are worked harder and longer as there is no reserve performing the necessary maintenance to improve 75.13% in the previous year. been contracted with IPPs as at 31 March 2015. Of this, to allow them to be taken offline. Running the the long-term health of our plant, even if this requires plant in this manner means there is a high risk of additional load shedding for some time. We are implementing appropriate levels of planned 3 887MW relates to contracts under the Department plant breakdowns or unplanned outages, as well as maintenance in line with the Generation Sustainability of Energy’s renewable energy programme. To date, a operating with sustained partial load losses, which Nonetheless, we continue to meet our mandate of Strategy to ensure long-term plant health, while total of 1 795MW of renewable energy capacity has we have seen happen over the past year, although supplying electricity – even when load shedding is remaining cognisant of current system constraints, been connected and is providing power to the grid, we have seen an improvement during the last three implemented in stage 3, we are still able to supply compliance, safety and statutory requirements as with an average load factor of 30.85% for the year. months of the year, indicating that our recovery approximately 90% of the electricity demand in well as the financial constraints. This has resulted in South Africa at any given time. As we continue IPPs play an important role in ensuring security of strategy is working. an improvement in unplanned maintenance and the with our planned maintenance, albeit at lower levels supply at a time when our generating capacity is number of UAGS trips over the last three months of closely matched or exceeded by electricity demand, We have communicated for an extended period compared to summer, and demand peaks in winter, the year, positively impacting plant availability. by providing space for maintenance and reducing that the national power system is constrained and there is a very real possibility of load shedding during vulnerable due to the lack of available generation winter. The current deficit will remain until new Last year we reported an over-pressurisation incident the need for load shedding. IPPs also provide much capacity. Therefore, in order to balance and protect generating capacity from all our new build projects on 30 March 2014 in the boiler of the 575MW needed renewable energy to our energy mix. the power system, we have to apply demand is brought online. Duvha Unit 3, which accounted for 1.37% UCLF in Demand savings of 171.5MW were substantially management practices, which include both supply-side the current year. The incident investigation has been The revenue gap resulting from the MYPD 3 tariff lower than the target of 246MW due to funding and demand-side options. Supply-side options include completed and a common cause report issued. The determination, the significant increase in primary constraints. Given the current supply constraints, utilising the OCGTs, the pumped storage schemes, project team is finalising the way forward for the energy costs and the high cost of running the additional funding for IDM programmes was released infeeds from IPPs, as well as international power recovery process. OCGTs during periods of constrained capacity are towards the end of the year, the savings from which imports. Demand-side options rely on the support putting pressure on our liquidity and compromising A coal storage silo at Majuba Power Station collapsed are expected to be realised over the next three of customers, including interruptible load agreements our financial sustainability. Furthermore, the arrear on 1 November 2014, contributing 0.26% UCLF. financial years. The demand response programme has with large customers, as well as load curtailment debt from municipalities and residential customers, A short-term solution has been implemented with a combined certified capacity of 1 356MW available by key industrial customers and energy efficiency specifically Soweto, increased significantly during the coal being fed through an elevated mobile boom to the System Operator for its control and evening efforts by other customers. When sufficient demand past year. We require a predictable electricity price feeder, which enabled the power station to run at full peak reduction requirements. savings are not realised, then we resort to controlled, rotational load shedding and load curtailment. path migrating to cost-reflectivity to enable planning load on all six units during the morning and evening Revenue and customer sustainability to ensure long-term financial sustainability. peak and at an average of 85% load during non-peak Municipal arrear debt increased from R2.6 billion at To counter the current constrained power supply, a periods. A second elevated mobile boom feeder was 31 March 2014 to R5 billion at 31 March 2015. We short-term Generation recovery strategy has been installed at the end of March 2015 to further ramp had numerous meetings with National and Provincial put in place. Key engineering personnel have been up plant performance; the station was operating at Treasury and the Department of Cooperative dispatched to sites that needed assistance to expedite 100% load at all times by the end of May 2015. The Governance and Traditional Affairs (CoGTA) on the the return of the generation units out of service; short-term solution is expected to be replaced by a increasing municipal debt. more cost-effective interim coal handling system in September 2015. 36 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 37 Chief Executive’s review continued In March 2015, we approved various load management Sustainable asset creation Sere Wind Farm, our first utility-scale renewable finalising the Majuba interim solution. Cogeneration interventions with respect to the top defaulting Medupi achieved first synchronisation of Unit 6 on energy project with a generating capacity of 100MW, contracts expiring at the end of March 2015 were municipalities, to limit our financial risk exposure. 2 March 2015. The completion and optimisation of has been feeding power into the national grid renewed for another year, including 250MW from We notified the top 20 defaulting municipalities in Unit 6 is proceeding to plan, with full load achieved since the first wind turbines were energised during the Medium-Term Power Purchase Programme and April 2015 of our intention to interrupt supply during on 26 May 2015, and commercial operation expected October 2014. Sere was placed into commercial another 870MW in IPP and municipally generated morning and evening peak time, from 5 June 2015. The during August 2015. operation on 31 March 2015. The project was capacity. Lastly, we will focus on making use of majority of the above defaulting municipalities have completed on time and within budget, with a safety integrated demand management options to reduce now signed agreements with us to settle their debt Until recently, labour instability was not the record in line with our Zero Harm policy, and electricity demand. and we are in discussion with other municipalities. predominant risk on the project. Towards the end without any environmental legal contraventions or Their supply will not be interrupted unless they fail of March 2015, the labour situation escalated to a incidents of industrial action – truly a significant In the medium to long term, we will focus on to meet their payment agreements. point where it may seriously impact the construction achievement! bringing online new generating capacity to alleviate activities on the remainder of the units at Medupi. the constrained system and accommodate demand We make every effort to ensure that customers pay A total of 318.6km of transmission lines were installed growth. their accounts. We constantly monitor payments The second unit of Medupi is expected to be and 2 090MVA substation capacity was commissioned and are willing to enter into reasonable payment synchronised in the first half of 2017 and all six units during the year. Gas will not be able to provide additional capacity in agreements that take into account defaulting of 4 764MW are expected to be fully operational the short term. The focus will be on accelerating the customers’ circumstances. Disconnection of by 2019. Notable progress was made at the Majuba Rail conversion of OCGTs so as to run on both diesel and electricity supply is a measure of last resort. project. The construction of the Vaal River Bridge is gas. Most of the supply-side interventions are likely to At Kusile, we signed a mutual termination agreement progressing well and only the last segment still needs be realised over the medium to long term. Residential debt, particularly Soweto, continues to with Alstom regarding the C&I works, after which to be constructed. The 88kV overhead power line escalate. Soweto payments received during the year a contract was awarded to ABB to supply the C&I bids, the last of the packages, have been received from In conclusion, our priorities are to resolve the amounted to R119 million, compared to billing for systems for all units at Kusile. This is considered to be the market, the evaluations have been completed and current Generation challenges and thereby reduce the same period of R730 million, creating a shortfall an important step in mitigating one of the largest risks will be submitted to the lender funding the project. load shedding in the short term, increase efficiencies on the project. A number of important milestones on from our coal-fired plant in the medium term, and in Operating performance of R611 million, reflecting an average payment level Commercial operation of the first train at Majuba of 16%. Unit 1 have been achieved over the past year. Good Rail is scheduled for the second half of 2017 and the longer term, to reduce the reliance on coal and progress has also been made on civil works for all the project is expected to be completed within its diversify our energy mix. The residential revenue management strategy, which units, with the boilers of Units 1 to 5 in various stages estimate-to-completion of R4.2 billion. includes Soweto, is driving energy protection and The challenges we face are immense, but not dissimilar of construction. energy loss programmes such as Switch OVA!, and Financial sustainability to those faced by other developing and developed improving debt collection among small power users. The first unit of Kusile is expected to be synchronised economies alike; I believe that we have many factors Please refer to the Chief Financial Officer’s report on pages 84 to counting in our favour. I am convinced that with the Two important steps are the installation of split in the first half of 2017; the six units totalling 86 for the performance on financial sustainability and steps taken to metering and the conversion of the meters of non- 4 800MW are expected to be fully operational improve liquidity right policy choices we can go a long way towards paying credit metering customers to prepaid meters. by 2021. successfully addressing South Africa’s triple challenges As at year end, a total of 4 209 customers of the of structural unemployment, poverty and inequality. Limited progress was made at Ingula during the past Future outlook targeted 18 000 households in Soweto have been year, due to the Section 54 work stoppage imposed Exco changes switched to prepaid, although community protests A Cabinet-appointed Inter-Ministerial War Room, following the fatal accident in October 2013. The comprising representatives from DPE, DoE, CoGTA, are hampering our efforts. date of the first synchronisation of Unit 3 has been Exco was impacted by a number of resignations and other movements. National Treasury, the Economic Development Refer to page 108 in “Our leadership and governance” for further The Eskom KeyCare index for customer satisfaction revised to the second half of 2016, with the final unit Department and Eskom, identified a five-point plan information achieved a score of 108.7 for the year to anticipated to be in commercial operation by the with regard to short-term constraints to aid our 31 March 2015, reflecting our extensive interaction first half of 2017, with the pumped storage scheme turnaround. Key outcomes of these interactions Ms Erica Johnson and Dr Steve Lennon left us after and interventions held with key industrial customers. supplying a total of 1 332MW. include the following initiatives: many years of service to Eskom. I would like to thank • DoE issued a request for proposal regarding the them both for their leadership and considerable The performance of energy losses for both proposed 2 500MW coal IPP; commissioning of contribution to Eskom’s success over many years. Transmission and Distribution continued to improve, with total energy losses at 8.79% for the year, better the new capacity is expected by early 2019 Above all, I would like to thank our Eskom Guardians, than the target of 9.65%. • DoE also issued a request for information for whose commitment and hard work saw us through a demand management interventions challenging year. I am confident that together we can • A Memorandum of Understanding has been signed return to financial and operational sustainability and between Eskom, PetroSA, Strategic Fuel Fund and rebuild an Eskom that our country can be proud of. Transnet Ports Authority regarding the supply of diesel Key initiatives in the short term include the sourcing of funding to support liquidity and diesel costs, reduction of UCLF through structured planned Brian Molefe maintenance, operational efficiency to reduce Acting Chief Executive unpredictable plant breakdowns, as well as reducing partial load losses and outage slips, addressing the technical skills capacity to perform maintenance and In order to accelerate progress on the Medupi Power Station Project, additional shifts were introduced, 24 hours a day, seven days week. Unit 6 reached its full load of 794MW on 26 May 2015 38 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 39 Executive Management Committee at 28 May 2015 IFC P&G RBP SES IFC RBP TC Mr Brian Molefe (49) Ms Nonkululeko Veleti (41) Mr Thava Govender (47) Mr Edwin Mabelane (53) Mr Abram Masango (46) Ms Ayanda Noah (48) Mr Mongezi Ntsokolo (54) Ms Elsie Pule (47) Acting Chief Executive Acting Chief Financial Group Executive: Acting Group Executive: Acting Group Executive: Group Executive: Group Executive: Acting Group Executive: Officer Transmission and Group Technology and Group Capital Distribution and Group Generation Human Resources Sustainability Commercial Customer Services Seconded from Transnet Years in Eskom: 14 Years in Eskom: 25 Years in Eskom: 20 Years in Eskom: 23 Years in Eskom: 23 Years in Eskom: 24 Years in Eskom: 17 Appointed to Exco in Appointed to Exco in Appointed to Exco in Appointed to Exco in Appointed to Exco in Appointed to Exco in Appointed to Exco in Appointed to Exco in April 2015 March 2015 September 2010 March 2015 March 2015 June 2007 October 2003 November 2014 Brian is an accomplished Nonkululeko is a chartered Thava joined Eskom as an Edwin, a mechanical Abram is a skilled engineer Ayanda joined Eskom as Mongezi joined Eskom as Elsie has a background in executive, having served as accountant. She started engineering graduate-in- engineer, joined Eskom as a and has managed maintenance an engineer-in-training, an engineer. He has gained social work and academia the Chief Executive of both in Eskom as a corporate training, and has since gained mechanical manager. Since his and capital projects in Eskom and has worked in various experience across the business and started her career in Transnet (since February management accountant experience covering the appointment as Power Station for over 20 years. Prior to fields primarily in the Wires enhancing his engineering skills, Eskom as an organisational 2011) and Public Investment and worked her way up to full electricity supply value Manager of Tutuka, he held his acting position, he was business, including engineering, also gaining skills in other fields development advisor. She held Corporation (2003 to 2010). Senior General Manager of chain. He has held senior numerous senior positions the General Manager on the training and development, as including sales and customer senior positions in Human the Shared Services Unit, a management positions with in the company. Prior to his Kusile Power Station Project well as substation and line services, customer relations, Resources in both Eskom and position she occupied for four the utility and its subsidiaries acting position, Edwin was since 2011. design and application. Since capital projects, commercial SARS, including that of Senior years prior to serving as acting since April 2000, most recently Senior General Manager of her appointment as Western and business support. He General Manager, prior to her Chief Financial Officer. As as the Group Executive of the Outage Management Unit, Region General Manager in headed up the Transmission acting appointment. the head of Shared Services, Generation Division from where he was responsible for 2005, she has been part of the Division for seven years, she managed the integration 2008 to 2014. outages of the Generation leadership of the Distribution and took on the position of of Shared Services Finance, fleet and maintenance Division and at the helm as Group Executive for Human Thava was previously a Revenue Management, Fleet standardisation across all Group Executive since 2013. Resources in an acting capacity Governor on the Board of Management Services, Eskom assets. in 2014. the World Association of Human Resources, Master Nuclear Operators (WANO) Data Management and Service Atlanta Centre. Management. Further information, such as the qualifications and significant directorships of members of Exco, are provided as a fact sheet ARC Audit and Risk Committee IFC Investment and Finance Committee P&G People and Governance Committee The acting Chief Executive and acting Chief Financial Officer are not members of the Board, but serve on selected Board committees due to the nature of their roles. RBP Board Recovery and Build Programme SES Social, Ethics and Sustainability Committee TC Board Tender Committee The former Chief Executive, Mr Tshediso Matona, has resigned effective 31 May 2015. Committee Ages shown are as at 28 May 2015. 40 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 41 Operating performance Safety and security Zero Harm means that no operating condition or Fatalities urgency of service justifies exposing anyone to risk as Target Target Target Actual Actual Actual Target a result of exposure to Eskom’s business or causing Measure and unit 2019/20 2015/16 2014/15 2014/15 2013/14 2012/13 met? them injury, or damage to the environment. Fatalities (employees and Zero Harm is an Eskom committed value, and forms contractors), number 0 0 0 10 23 19 the foundation of all our operations. Zero Harm Fatalities (public), number 0 0 0 28 33 29 means sustaining a work environment which supports the health and safety of all people. It involves building strong relationships with contractors, the community 1 1 2 and our supply chain, as well as enhancing the organisation in a sustainable way. The aspiration for 1 1 7 Zero Harm goes beyond compliance. 4 Exco sets the direction for Zero Harm and is committed to caring for and protecting all people exposed to our operations, through the belief that 1 any workplace injury or disease is preventable. Looking back on 2014 7 A gradual improvement in safety performance is 2 HIGHLIGHTS visible. The Ingula incident in October 2013 had a significant impact on the previous year’s safety 3 3 Operating performance OHSAS 18001:2007 certification achieved at all performance, although lessons learnt from the 3 sampled Group Capital sites, and 94% business investigation have been embedded in the organisation. Causes of employee and contractor fatalities Causes of employee and contractor fatalities units in Generation Division Following this tragic incident, the importance of 2014/15 2013/14 Our security operations and assurance Zero Harm, and the related impact on sustainable Vehicle accidents Falls Vehicle accidents Falls functions remain resilient operations, is clearer than ever. Electrical contact Electrical contact Assaults/gunshot Caught between or under objects Plans to extend road safety campaigns have progressed Caught between or under objects Contact with heat Struck by an object Struck by an object PROGRESS well. A road safety week was hosted during the year, focusing on driver and pedestrian safety, vehicle roadworthiness and the adverse effects of texting Public fatalities, although reduced from 2013/14, Improvement in LTIR, from its highest recent level of 0.54 in 2009/10 to 0.33 whilst driving. A general decline in employee and remain a concern. Electrical contact from criminal Update on the Ingula Pumped Storage contractor vehicle accident-related fatalities was seen activities (largely through illegal connections) and construction site incident Public safety initiatives resulted in a reduction over the past year. motor vehicle accidents remain the biggest causes of The investigation into the cause of the tragic in the number of public fatalities fatalities. We remain committed to the Public Safety incident at Ingula on 31 October 2013, Over 400 supervisors trained in safety Programme, which aims to eliminate public incidents which resulted in the untimely deaths of six leadership and reduce public liability risks. contractors, has been concluded. Development of a roadmap and implementation strategy to ensure compliance with the 2014 In memoriam As previously reported, the investigation in Construction Regulations We remember the following people who lost their terms of Section 60 of the Mine Health and lives in the line of duty. To their families, friends and Safety Act (MHSA) was converted into a formal colleagues we convey our heartfelt condolences. The enquiry in terms of Section 66(1) of the MHSA. CHALLENGES contribution of each person to the success of Eskom The evidence-gathering enquiry was conducted has not gone unnoticed. at Ingula from 21 July to 2 September 2014. Industrial action and community protests The Presiding Officer requested written closing jeopardising the safety of employees and Employees contractors on site submissions to be made relative to the evidence Mr Pierre Liebenberg collected. The process was completed on Mr Kaizer Kangelani Pekiso 15 October 2014. A report from the Presiding LOWLIGHTS Mr Dawid Petrus Venter Officer in terms of Section 72 of the MHSA is awaited. Contractors Public fatalities related to electrical contact remain unacceptably high Mr Trynos Dube Mr Ayanda Jack Lost-time injuries Mr Mziwempi Maseko The progressive lost-time injury rate (LTIR), which Mr Mncedisi Simangaliso Mndebele is a proportional representation of the occurrence Mr Laurenti Mochela Mochela of lost-time injuries over the past 12 months per Mr Conty Mojeremane Sebetha 200 000 working hours, has deteriorated slightly over Mr Lebogang Matule Seerane the past year. The maintenance of over 48 000km of distribution power lines across South Africa requires strict adherence to safety regulations 42 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 43 Operating performance Safety and security continued Operational sustainability Target Target Target Actual Actual Actual Target Measure and unit 2019/20 2015/16 2014/15 2014/15 2013/14 2012/13 met? Employee lost-time injury rate, including occupational diseases, index SC 0.20 0.31 0.35 0.33 0.31 0.40 Motor vehicle accidents, falls on the same level Nuclear safety oversight has been enhanced through (referred to as slips, trips and falls), being caught the introduction of a Nuclear Safety Review Board between or under objects and being struck by objects which includes independent international experts. The remain the major causes of lost-time injuries of both safety and technical performance of Koeberg Nuclear employees and contractors. An increase in lost-time Power Station for 2014/15 reflects improvements in incidents related to occupational diseases (increasing many areas. The improvements are partly attributed from 12 to 35) was the biggest contributor to the to benchmarking against international best practice, increase in LTIR in the current year. Despite that, the undergoing frequent peer reviews by the World LTIR performance for the year was within target, as Association of Nuclear Power Operators (WANO) a result of the implementation of safety improvement and scrutiny by the different safety oversight bodies in initiatives and significant efforts to manage the safety Eskom. This performance resulted in the highest ever of employees and contractors more effectively, WANO index (previously referred to as the INPO including the continued focus on compliance with index) score for the station during 2014/15. OHS requirements. Benchmarking of Koeberg Nuclear Power Station is included as a fact Management of contractor safety sheet Operating performance Overall contractor safety performance has shown significant improvement, showcasing the effect that Security the safety initiatives we have implemented have The implementation of the Eskom Security Recovery had on the general attitude towards safety. These Programme has progressed well, with interventions initiatives include: aimed at improving security conditions across Eskom • Development of a roadmap and implementation having been set up. strategy to ensure compliance with the 2014 Construction Regulations, promulgated by the The relationship between Eskom and other security Minister of Labour in February 2014, which agencies has improved over the last year. These HIGHLIGHTS CHALLENGES imposed additional safety compliance agencies include the South African Police Service responsibilities on clients and contractors in the (SAPS), the National Police Commissioner, the Secured adequate water supply for Medupi’s Financial constraints restricting capital construction sector and which, if not adhered Government Sector Regulator and National and production requirements and half of the flue gas expenditure at cost-plus mines, which may Provincial Joint Operations Committees (JOCs) for desulphurisation retrofit requirements impact future coal supply to, could hamper our operations. Training on the regulations was conducted across all provinces disaster management. A full black start test was conducted successfully Coal-related energy losses at Tutuka and Matla with an estimated 500 people being trained in March 2015 due to poor coal quality continue The Eskom Network Equipment Crime Work Group, • Revision of the Eskom standard “SHE Requirements established in October 2014, commenced with Excellent transmission network performance, Balancing a constrained electricity supply for the Eskom Commercial Process”, which various meetings and interventions to address the and both SAIDI and SAIFI technical measures system remained a challenge throughout performed better than target the year requires that safety evaluations are conducted on scourge of network and related crimes against Eskom. all new supplier registrations before acceptance. These crime prevention interventions and security Sustaining and improving the operating By the end of the year, 1 298 applications had investigations resulted in the following breakthroughs performance in light of significant financial been assessed, of which 360 were rejected due PROGRESS constraints in combating security threats against Eskom over the to suppliers not meeting our safety requirements past year: Two major Transmission system incidents due Improved performance on UCLF, with the (2013/14: 1 203 assessed and 512 rejected) • The recovery and confiscation of a container to plant failures at substations number of boiler tube failures and UAGS trips • Execution of third party contractor management carrying 25 tons of copper valued at R3.6 million at reducing since January 2015 Network risks remain, with ageing assets and compliance audits at sample sites across the the Durban harbour through a joint operation by vulnerabilities due to network unfirmness Energy losses were contained below target organisation and implementing safety improvement Eskom, SARS (Customs), the Hawks and Transnet plans • Detecting and stopping a cyber-security threat, Renewable IPP capacity of 1 795MW has been • Development of a Contractor SHE Management whereby organised criminals, along with two connected to the grid since inception LOWLIGHTS Handbook and induction DVD as a communication contractors, attempted to defraud Eskom by Given current power system constraints, and awareness tool sufficient funding was released in February 2015 Load curtailment and load shedding was infiltrating the payroll system required on numerous occasions to allow IDM programmes previously put on Nuclear safety hold to continue Investigations into illegal electricity sales are Unpredictable plant performance and a low Safety of operations at Koeberg Nuclear Power Station conducted on an ongoing basis. operating margin necessitated the deferral of a is of paramount importance. Unit 1 celebrated 30 years number of planned outages of safe operation in April 2014. The replacement of Future focus areas Funding constraints may result in critical the steam generators on both units, scheduled for • Implementing and monitoring compliance with the maintenance being deferred 2018, will enable continued safe operation for at least 2014 Construction Regulations another 30 years. • Guiding the constant development and competence enhancement of contractors 44 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 45 Operational sustainability continued Operational sustainability focuses on security of performance, and the number of boiler tube failures To make up the production shortfall at cost- Implementing coal haulage and the road-to-rail supply, as well as balancing the supply and demand of and UAGS trips reducing, since January 2015. plus mines, there is a corresponding increase in migration plan electricity. Security of supply remains a key concern, production by more expensive short- or medium- For the rail solution, coal is transported in containers with the focus on the Generation plant health and There was a continued focus on Distribution term coal contracts, which have a higher cost base by train. At the power station, the rail tippler system the ability to generate sufficient electricity to meet sustainability through prioritised interventions and include the added cost of transporting the coal is used to tip the containers, feeding the coal onto our customers’ expectations while containing costs. towards refurbishment, reliability improvements and to the affected stations. conveyors to the coal stockyard. Despite the capital This calls for an integrated perspective on demand addressing maintenance backlogs, as evidenced by outlay to set up the tippler system infrastructure, the the good SAIDI and SAIFI performance during the Coal supply strategy management and energy conservation, as well as the rail solution is more economical in the long term than need to use the expensive open-cycle gas turbines year. These, together with network strengthening We continue to give effect to the coal supply strategy road transport. (OCGTs) and other supply-side options. It is enabled to achieve N–1 Grid Code compliance for the implemented in January 2013. Some of the actions Transmission network, as well as the integration of undertaken include the following: The tonnage of coal delivered by rail for the year by the Generation Sustainability Strategy and, as a new generation sources, will continue to be focus • We continue to work closely with Transnet Freight exceeded the target, despite challenges which included regulated business, has to comply with environmental areas going forward. Rail (TFR) and the Department of Water and numerous tippler and conveyor belt breakdowns. The and regulatory requirements. Sanitation (DWS) to develop funding models for problem was exacerbated by the coal silo collapse Accessing alternative funding for Eskom’s IDM at Majuba, resulting in the suspension of tippler Looking back on 2014 the development of rail and water infrastructure programme and developing low cost energy saving operations for almost a month. The draft Mineral and Petroleum Resources to access the Waterberg coalfields programmes in view of financial constraints remain a Development Amendment Bill, which included a challenge. Although IDM achieved some success during • A full-scale combustion test of the Waterberg The construction of the Majuba heavy-haul railway line proposal that coal be declared a strategic resource, the year, this was limited by the funding constraints. coal from Exxaro was successfully completed at is progressing according to schedule. Once completed has been referred back to the National Assembly for Going forward, sufficient funding has been allocated, Majuba Power Station. Further studies are to be in 2017, this dedicated line will transport 14Mt of reconsideration. This may have implications for the allowing projects to resume. undertaken on other Waterberg coal seams, as coal a year from Ermelo to Majuba. In addition, TFR future availability of coal to our power stations. well as the ability of the ash handling facilities at implemented a temporary offloading terminal at the Securing Eskom’s resource Majuba to handle the ash from these coal sources Balfour station, while the process to create a permanent As reported previously, we implemented the five- Operating performance requirements Coal and limestone contracting status for Kusile terminal at Grootvlei Power Station has commenced. year Generation Sustainability Strategy during the prior year. Therefore our aim of achieving a Our aim is to safely and sustainably identify, develop, Anglo American Inyosi Coal (AAIC) has agreed The dynamic coal environment has resulted in some predictable and sustainable Generation performance source, procure and deliver the necessary amounts to meet the PFMA conditions set by DPE, and rail projects no longer being deemed financially viable until 2017/18 in terms of the strategy remains valid of primary energy – coal, nuclear fuel, liquid fuels and signed a Memorandum of Understanding (MoU) on as there have been a number of changes in the factors for the current year, although it is expected to take water – of the required quality to our power stations, 21 November 2014. The MoU will allow AAIC to that underpinned the initial road-to-rail migration longer than originally anticipated. Over the course at the right time and at optimal cost. Ultimately, proceed with a feasibility study for the New Largo approach. of the year, Generation performance continued to our goal is to enable an efficient, reliable and secure Mine, which is to supply Kusile Power Station, on worsen, although performance started to improve electricity supply, which forms the backbone of the basis of Mine Plan 7, which has limited impact on The assumption of anticipated coal shortages towards the end of the year with improved UCLF economic development. wetland areas, compared to Mine Plan 6, which would from the tied collieries at Hendrina and Duvha have impacted some of the wetland areas. This trade- Power Stations is no longer valid. These collieries, off with environmental sustainability negatively impacts Optimum and Middelburg Mines, have proven to Target Target Target Actual Actual Actual Target have enough reserves at required qualities to meet Measure and unit 2019/20 2015/16 2014/15 2014/15 2013/14 2012/13 met? our operational sustainability. Mine Plan 6 would allow Kusile to be supplied for a period of 51 years with a the power stations’ burn requirements. As such, the Coal burnt, Mt1 n/a 120.60 121.28 119.18 122.42 122.95 total supply of 550Mt; Mine Plan 7 will have a reduced rail projects linked to these power stations are no Coal purchased, Mt1 n/a n/a 126.21 121.67 121.98 126.44 environmental footprint, but will reduce the accessible longer necessary. Coal stock days 31 37 42 51 44 46 coal reserves by 100Mt, including a reduction of the We have requested TFR to provide additional rail Road-to-rail migration (additional better quality coal reserves. This reduces the contract solutions, such as installing a tippler system at Tutuka tonnage transported on rail), Mt SC 21.30 13.60 11.50 12.59 11.60 10.10 duration to 45 years, with a peak production period Power Station. At Arnot Power Station, the tied of 38 years. In addition, the loss of the better quality 1. Future targets are dependent on system requirements. colliery is no longer performing at the required reserves will result in the washing plant being required level to meet the power station’s burn requirement, from the start of the contract and not only after 10 Securing our coal requirements availability of the coal stockyard stacker following the and Arnot has an existing rail infrastructure. Minor years, as it would have been in terms of Mine Plan 6. Coal stock collapse of the coal silo. modifications to the rail infrastructure can be done The significantly higher than targeted stock days is In the interim, four multi-year coal supply contracts at minimal capital cost to create a viable rail coal Primary energy costs terminal. Collaboration with TFR will enable us to largely due to more coal than that required being have been signed to meet the coal needs by the As a result of construction delays, contracted coal planned commissioning date of Kusile Unit 1. make progress towards our strategy of supplying delivered by the cost-plus mines to the Lethabo and could not be delivered to Medupi, as its stockyard 32Mt per annum to our power stations by rail. Kendal Power Stations, where there is no financial Negotiations for the limestone supply to Kusile was not ready to receive the coal, leading to a cost benefit to Eskom in reducing the coal production. Power Station have been concluded and the contract Securing our water requirements of R8 billion in terms of the take-or-pay coal supply However, Tutuka, Duvha and Majuba Power Stations is expected to be signed in the first quarter of The bulk of the water requirements for our coal-fired agreement. ended the year with coal stock below their minimum 2016, once the Kusile commissioning dates are power stations have been secured until 31 March 2017 levels. Coal stock at Tutuka was below the minimum Almost all the cost-plus mines require significant fixed. Limestone will be used in Kusile’s flue gas through an extension of the existing Memorandum of level due to the underperforming tied colliery investments or recapitalisation in order to increase desulphurisation (FGD) plant, which will assist in Agreement with DWS. The extension allows sufficient and reduced coal stockpile as a result of the rail production and/or maintain existing production; this reducing particulate emissions. time for a new water supply agreement to be negotiated infrastructure challenges; Duvha’s low stock was a will put further strain on our financial resources. and concluded, which is dependent on DWS gazetting result of reduced offtake from the mine due to the Lower production from these mines is expected the revised National Water Pricing Strategy. coal conveyer being out of service following the fire until the collieries can be recapitalised. Although damage, as well as lower utilisation after the Duvha production at some cost-plus mines has reduced, Unit 3 incident; at Majuba, stock levels were impacted we still pay all the operating and ongoing capital by the poor rail tippler performance and the non- requirements of these collieries, resulting in an increase in the cost per ton. 46 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 47 Operational sustainability continued We have an authorised bulk water abstraction licence awaiting final capacity commitments by end users and • OCGT conversion • Deteriorating plant health, resulting in reduced for our coal-fired power stations. The water supply Government, therefore the size of the pipeline to be The focus is on accelerating the conversion of our plant availability and reliability. We need to do augmentation infrastructure to support existing and installed is still to be decided. The project is expected existing OCGTs from using diesel fuel only into more plant maintenance, but the constrained new coal-fired power stations’ requirements has been to be completed by the end of 2022. combined-cycle gas turbines (CCGTs) able to use system does not allow for sufficient planned commissioned and declared operational by DWS, either gas or diesel outages to do so. Furthermore, potential delays Outstanding water-use licences for coal mines with the exception of the Mokolo Crocodile Water in commissioning new generating capacity means Augmentation Project. We regularly engage with DWS to address the In addition to the abovementioned gas projects, we that the power system remains too constrained backlog in water-use licences for coal mines supplying are considering a number of other energy projects to enable sufficient planned maintenance to be Mokolo Crocodile Water Augmentation Project Eskom. As at 31 March 2015, we were supplied by outside South Africa, including the Grand Inga Project Phases 1 and 2 performed on our existing plant, resulting in plant 39 coal sources, 34 of which had valid licences, while on the Congo River in the Democratic Republic health deteriorating even further The Mokolo Crocodile Water Augmentation the remaining five have submitted applications and are of the Congo. We conducted a workshop with Project (MCWAP) Phase 1 is in the final stages of • Poor quality coal results in inefficient energy awaiting approval. stakeholders to explore funding and ownership commissioning, and the pipeline is currently delivering production, placing further strain on generating structures for regional projects. The Grand Inga water from the Mokolo Dam to Medupi, Matimba and Deteriorating quality of raw water plant and negatively affecting our environmental Transmission Integration Project (a joint Eskom Exxaro’s Grootegeluk coal mine. MCWAP Phase 1 The deteriorating quality of raw water from DWS footprint. Although measures are in place to and SNEL project) was used as a case study in this is expected to be declared fully operational by the water sources requires collective action by the DWS ensure that suppliers provide us with coal of process. We participated in the Minister of Energy’s end of June 2015 and will provide adequate water and water users, including Eskom, to protect water suitable quality and in sufficient quantity, Matla and visit to Kinshasa to mark the Grand Inga Treaty, for Medupi’s full production requirements and half resources and deal with polluters. Treatment plans Tutuka continue to receive poor quality coal ratified on 14 November 2014, coming into effect and of the station’s water requirements for the required are currently being implemented to manage this risk. to discuss the way forward for the project. • The financial constraints on capital expenditure FGD retrofits. will negatively affect the execution of Technical Plan Water for future power stations Generation performance projects, which may compromise the execution of Medupi Power Station will have a water requirement of The development of new power stations beyond our the Generation Sustainability Strategy 15.4 million cubic metres per annum at full load. The current new build programme will need to take into We aim to optimally operate and maintain our account available water resources and lead times for electricity generating assets for the duration of their We are therefore implementing appropriate levels of Operating performance available water from Mokolo Dam is 43.8 million cubic metres per annum, of which 10.9 million cubic metres the development of new water supply infrastructure. economic life. We operate 23 base-load, peaking necessary planned maintenance. This requires space per annum is licensed to Medupi under MCWAP and renewable power stations with a total nominal of 3 000MW for the foreseeable future, in order to Securing our nuclear fuel requirements capacity of 42 090MW, including 100MW of wind ensure long-term plant health and reduce unplanned Phase 1. However, the water shortfall will be made up with the implementation of MCWAP Phase 2. The existing uranium and enriched uranium contracts power commissioned on 31 March 2015. outages or breakdowns, even if this gives rise to a are sufficient for Koeberg Nuclear Power Station’s shortfall in the overall supply to the country, resulting MCWAP Phase 2, which would provide the necessary requirements until 2017, while the current fuel Generation Sustainability Strategy in load shedding. While load shedding is regrettable, water capacity for the coal mines required to support fabrication contracts are sufficient to cover Koeberg’s The previous strategy of deferring maintenance we will continue with the necessary maintenance on our Waterberg coal supply strategy, comprises a demand until 2015/16. in order to keep the lights on, combined with our plant to improve performance for the medium pipeline to be constructed from a new weir in the operating the plant at unacceptably high load factors, to long term – while remaining cognisant of current Crocodile River at Thabazimbi to directly supply end Once these contracts come to an end, normal has exacerbated the degraded plant condition and system constraints, compliance, safety and statutory users in the Waterberg area. Excess water exists in commercial processes will be followed to enter into resulted in a backlog of necessary preventative requirements, as well as financial constraints – even the Crocodile River catchment area due to the high appropriate contracts for the supply of nuclear fuel. maintenance, as well as an increasing incidence of if this requires additional load shedding for some return flows from treated effluent from sewerage The contracting and pricing strategy will depend on plant breakdowns, requiring unplanned maintenance. time. The alternative is further deterioration in plant treatment works in Gauteng. MCWAP Phase 2 is the market and policies applicable at that time. The focus of the Generation Sustainability Strategy health, which will result in an increase in breakdowns. is now to ensure that adequate preventative or The only way to arrest the downward trend in plant Nuclear fuel balances at 31 March 2015 philosophy-based maintenance is performed to availability seen over a number of years is to perform ensure sustainable improvement of the generating adequate levels of planned maintenance. Actual Actual Actual 2014/15 2013/14 2012/13 plant performance whilst making every effort to Generation technical performance ensure an adequate supply of electricity. This is Plant performance Nuclear fuel (inventory balance) 2 011 1 456 856 supported by specific actions and programmes to Future fuel balance (nuclear portion) 347 981 1 023 Generation’s technical operations are assessed in support improvement in three areas, namely people, terms of the following: plant, as well as systems and processes. Eskom’s gas strategy We continue to engage with the proposed • Unplanned capability loss factor (UCLF), We are currently pursuing the option of gas as a developers regarding the project development We have to constantly consider the following trade- which measures the lost energy due to unplanned fuel source, to be facilitated through the following cost, budget and timelines; it is anticipated that offs when attempting to balance capacity constraints energy losses resulting from equipment failures and projects: the feasibility studies will commence shortly. with the need to do maintenance: other plant conditions • Gasnosu pipeline project The feasibility studies are envisaged to take • Fluctuating electricity demand. We aim to • Planned capability loss factor (PCLF), which approximately six months, whereafter a decision ensure that there is enough supply to meet measures energy losses because of planned The Gasnosu pipeline initiative involves a will be taken on whether or not to advance the demand, as an undersupply of electricity would shutdowns during the period possible north-south gas pipeline from northern projects have negative economic consequences for both • Energy availability factor (EAF), which measures Mozambique through the load centre around ourselves, in terms of lost revenue, and more plant availability and takes account of planned and Maputo and into South Africa. Associated with this • Buzi gas project severely, for the country and our customers unplanned unavailability and energy losses not pipeline is the construction of around 5 000MW ENH (the national gas and petroleum company of gas-fired power stations along the pipeline, • System reserve requirements. Over and above under the control of plant management of Mozambique) has yet to respond with specific meeting the expected demand for electricity, we with half the capacity in each country. We are developments regarding the drilling at the Buzi site. engaging with EDM (the national electricity utility need to have sufficient generation capacity in The project is currently on hold, as the recent reserve to cater for an unforeseen increase in of Mozambique) regarding the joint development drop in international oil and gas prices has made of the capacity required in Mozambique. demand, or unplanned plant breakdowns where the project less attractive additional plant capacity will need to kick in to replace the generation capacity lost 48 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 49 Operational sustainability continued Generation technical performance for the year ended 31 March 2015 While there is significant commitment to adhering The focus is now on post-outage UCLF, which is to the maintenance outage plan, the unpredictable measured up to 60 days after the unit synchronises to Target Target Target Actual Actual Actual Target Measure and unit 2019/20 2015/16 2014/15 2014/15 2013/14 2012/13 met? performance of plant and tight operating reserve the grid after returning from maintenance. The year- margins required that some outages be deferred. end post-outage UCLF – for units that implemented EAF, % SC 78.20 74.10 80.00 73.73 75.13 77.65 The result is a further delay in the turnaround of interim repairs, as well as mini-general overhaul Normal UCLF, % SC 10.10 13.90 13.00 15.22 12.61 12.12 plant performance. Some short-duration maintenance and general overhaul philosophy outages – stood at Less: Constrained UCLF, % SC, 1 n/a n/a 3.00 1.00 1.63 3.41 interventions only provide temporary gains, as longer 17.74%, which is significantly worse than the target of term benefits require that the units be taken out of 10%. A number of initiatives are being implemented Underlying UCLF, % SC, 1 n/a n/a 10.00 14.22 10.98 8.71 service for extended periods. to bring post-outage UCLF measures within the Normal PCLF, % 10.40 10.60 10.00 9.91 10.50 9.10 target range. Maintenance backlog reduction, number SC, 2 n/a 0 1 2 5 – Maintenance schedule for coal-fired power stations 1. Constrained and underlying UCLF will no longer be monitored from 2015/16, as the strategy of keeping the lights on is no longer pursued. 2. The maintenance backlog reduction as identified in the 2011 PFMA application will have been completed, so this KPI is not applicable for 2019/20. Coal-fired generating units need to be taken out of service regularly to conduct routine repairs and inspections. While these units are down, the rest of the generating fleet has to compensate for the commensurate decrease in generating capacity. The types of required maintenance, together with the frequency and duration of the The performance of the generating plant is under The main contributors to the system UCLF of 15.22% outages, are shown below: serious pressure, especially as we try to focus on were as follows: driving sustainability through the execution of normal Frequency Duration planned maintenance, while catering for short- 1.37 Activity (years) (days) duration corrective maintenance opportunities. This General overhaul 6 – 12 40 – 60 is shown by the unplanned maintenance (unplanned 1.27 Interim repairs 2–3 14 – 35 capability loss factor or UCLF) performance for Operating performance Mini general overhaul 6 28 the year ended 31 March 2015 which deteriorated 5.64 Boiler inspection 1 – 1.5 7 – 14 significantly to 15.22% (2013/14: 12.61%), an indication 1.37 of the deteriorating plant health of our ageing power Statutory inspection and test 6 35 station fleet. The deterioration in UCLF, coupled with Main steam pipe work As needed 120 planned maintenance (planned capability loss factor 0.95 or PCLF) of 9.91% (2013/14: 10.50%) resulted in decreased plant availability (energy availability factor Update on significant events The investigation into the cause of the collapse is or EAF) of 73.73% for the year to 31 March 2015 Duvha Unit 3 over-pressurisation incident being finalised and is expected to be presented to (2013/14: 75.13%). 2.54 On 30 March 2014, we experienced an over- Board in June 2015. 2.08 pressurisation incident in the boiler of Unit 3 at Duvha As nearly two-thirds of our coal-fired power stations A short-term solution has been implemented, which Power Station, taking the 575MW unit out of service. are beyond the mid-point of their expected lifespan, entails the relocation and repair of the incline coal This has had a material impact on UCLF during the the technical performance has been declining over the Breakdown of system UCLF, % conveyors with coal being fed through an elevated year, contributing 1.37% to the system UCLF. past few years, requiring an increased maintenance mobile boom feeder. This enabled the power station effort to keep the plant operating at desired levels. Outage slips Other full load losses The incident investigation has been completed and a to run at full load on all six units during the morning Unit trips Boiler tube failures report issued. A process is underway to address all and evening peak and at an average of 85% load The target for planned maintenance is 10%, which Duvha Unit 3 incident Partial load losses the recommendations from the report; the project during non-peak periods. A second elevated mobile should include at least 8% for philosophy-based Other major or significant incidents team is finalising the way forward for the recovery of boom feeder was installed at the end of March 2015 outages, which is the level required to return the the boiler. We are currently engaging with potential to further ramp up plant performance. Towards the plant to sustainability. Although we came close to boiler suppliers to place a contract in the next six end of May 2015, coal supply to the station was fully achieving the required levels of planned maintenance UAGS trips per 7 000 operating hours for the year months for the repair or replacement of the boiler. restored, enabling the station to operate at 100% for the year, less than 6% of that was for philosophy- to 31 March 2015, which is considered a leading load at all times. based outages, due to the need for high levels of indicator for plant reliability, was 5.63 (2013/14: 5.24), The insurance claim, which is estimated at R4.2 billion, unplanned corrective maintenance. against a target of 4. There were 575 UAGS trips including business interruption costs, is being finalised. The short-term solution is expected to be replaced during the year to 31 March 2015. The loss adjuster presented a common cause report by a more cost-effective interim coal handling system In support of the strategy, we are focusing on the to the insurers and Eskom. Settlement options in September 2015. The interim solution entails the following areas: Maintenance backlog and post-outage UCLF were tabled for consideration by the business and construction of a temporary conveyor system to • Unplanned capability loss factor (UCLF) We are employing proactive planned maintenance deliberations are still in progress. feed coal from the coal stockyard to the boilers. • Unplanned automatic grid separations (UAGS) practices to reduce unplanned outages. Planned The designs for the mechanical, civil, structural • Planned capability loss factor (PCLF) for philosophy- maintenance levels have increased to between Collapse of Majuba coal silo and electrical works have been completed, while based outages 11% and 13% since January 2015, indicating our A coal storage silo at Majuba Power Station in the procurement and manufacturing of mechanical commitment to continue with maintenance on our Mpumalanga collapsed on Saturday, 1 November 2014. components for the interim solution are at an • Post-outage UCLF, which refers to unplanned ageing plant so that the recovery to sustainable and The generating capacity was reduced to just over advanced stage. losses within 60 days of returning a unit to service reliable power generation is expedited. 600MW, down from a full load of 3 843MW, as the after an outage (either planned or unplanned) coal supply to the boilers of five of the units was The feasibility study for a permanent solution has interrupted. Load shedding was implemented on commenced. The insurance claim is estimated at Sunday, 2 November 2014 to preserve coal at Majuba R150 million, which excludes business interruption and water at our pumped storage plant, in order costs. to meet demand during the following week and to prevent the power system suffering a total blackout. 50 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 51 Operational sustainability continued Full black start test carried out • The availability of the top performing stations Transmission and Distribution performance The various defence systems in place to protect the in the VGB benchmark has historically been Transmission plans, operates and maintains the transmission assets throughout their economic life. The transmission power system are frequently tested to ensure the consistent, but a decline was observed in 2012 grid comprises approximately 31 107km of transmission lines and 160 substations totalling 139 610MVA of installed effectiveness of their response capability to prevent and 2013, and the availability of the benchmark transformer capacity. a total system blackout. Notwithstanding this, regular stations in the median and worst quartiles has also black start tests are required to be performed, in been declining Our distribution network relays electricity from the high-voltage transmission network to customers, including terms of both the Grid Code as well as the practices • Our units are on a par with the VGB benchmark municipalities that manage their own distribution networks, via infrastructure consisting of 48 278km of distribution of a prudent system operator. A full black start test with respect to planned maintenance in the median lines, 281 510km of reticulation lines and 7 436km of underground cables, as well as 99 880MVA of installed was successfully carried out during the year, which and low quartiles, while the planned maintenance transformer capacity. tested the ability of a black start generation facility of our best performing units was significantly to start up without any external electrical supply, better than that of the VGB benchmark units Target Target Target Actual Actual Actual Target Measure and unit 2019/20 2015/16 2014/15 2014/15 2013/14 2012/13 met? energise a portion of the transmission system and • Since 2012, our UCLF performance showed a supply load. significant deterioration compared to the VGB Total system minutes lost for events <1 minute, minutes SC 3.80 3.80 3.80 2.85 3.05 3.52 Koeberg performance benchmark on all quartiles; this trend continues Number of major incidents >1 Koeberg Unit 1 remained online for a continuous • With respect to the use of available plant minute, number 2 2 2 2 – 3 run of 398 days after returning to service from its (measured by energy utilisation factor or EUF), System average interruption previous refuelling outage on 29 December 2013. The all of our coal-fired units are performing at a level frequency index (SAIFI), events SC 20.0 21.0 22.0 19.7 20.2 22.2 unit tripped on 1 February 2015 due to a transformer close to, and in many cases above the VGB best System average interruption earth fault, one week before a planned shutdown quartile, an indication that we are operating our duration index (SAIDI), hours SC 39.0 41.0 43.0 36.2 37.0 41.9 for a 98 day scheduled refuelling outage, which power station units at much higher levels than the also included ten-yearly maintenance. The outage VGB benchmark units Transmission achieved an excellent technical Benchmarking commenced as planned on 9 February 2015 and is performance for system interruption incidents of less Operating performance Koeberg Nuclear Power Station Transmission expected to be completed at the end of May 2015, than one system minute as well as line faults. Two Eskom is a member of the World Association Transmission took part in a benchmarking exercise although the unit will be offline slightly longer than major incidents occurred at the Prospect and Vulcan of Nuclear Operators (WANO) and the Institute with 27 other international transmission companies planned, due to an outage slip. substations following plant failures, which impacted of Nuclear Power Operations (INPO), and South in 2012/13. The study focused on maintenance Koeberg Unit 2 has remained on full load after Africa is a member of the International Atomic City Power and industrial customers in eMalahleni and plant performance and identified international returning to service from a refuelling outage on Energy Agency (IAEA). These affiliations enable us respectively. However, performance risks still remain, best practices for the transmission industry. These 17 May 2014, although it was offline for 11 days to benchmark performance, conduct periodic safety with ageing assets and vulnerabilities due to network results have been used to identify opportunities with longer than planned, due to an outage slip. reviews, define standards, disseminate best practice unfirmness. the development of objectives and strategies for and train personnel at our nuclear plant, Koeberg. continuous improvement. Koeberg Steam Generator Replacement Project Previous investments to refurbish and strengthen Eskom signed a contract with Areva in September 2014 A WANO peer review of Koeberg was carried out the Distribution network, coupled with continued The results of the 2012/13 study indicated that for the manufacture and replacement of Koeberg’s in July 2014, followed by a WANO corporate peer managerial focus on network performance, continue Transmission’s substation and line asset performance steam generators. Manufacturing activities have review in February 2015. Following the Fukushima to yield good results, as evidenced by the above- were marginally below the benchmark average. commenced, and the project is currently on track event in Japan in March 2011, corporate peer reviews target performance of the technical measures, SAIDI Internal benchmarking performed this year has for installation during the refuelling outages in 2018. have been introduced by WANO to determine the and SAIFI. The utilisation of mobile computing devices confirmed the previous results. Benchmarking is adequacy of corporate support for nuclear power assisted the business to deal with reducing restoration conducted every second year, with the next study Benchmarking stations. times while increasing field staff utilisation. Over the scheduled for 2015/16, based on 2014/15 information. Coal-fired stations past five years, the SAIDI performance has improved During the review period, Koeberg’s performance by more than 33% while the SAIFI performance has Distribution Generation benchmarks the performance of its coal- fired power stations against those of the members has generally been better than median for the suite improved by more than 20%. However, the ability to The business has not conducted an external of VGB (Vereinigung der Großkesselbesitzer e.V), a of WANO performance indicators. sustain this network performance within the current benchmarking study during this financial year, European-based technical association for electricity financial constraints remains a risk. but continues to reference data from a previous Through INPO, we have maintained our accreditation benchmarking study for planning purposes. and heat generation industries. VGB’s objective is from the National Nuclear Training Academy in to provide support and facilitate the improvement the United States for our systematic approach to In 2012, the then Distribution and Customer Services of operating safety, environmental compatibility and the training of licensed and non-licensed nuclear Division participated in a benchmarking study which the availability and efficiency of power plants for operators at Koeberg. We are the only non-US utility used North American utility data for benchmarking electricity and heat generation, either in operation to receive such accreditation. purposes. Our network interruption performance or under construction. is historically impacted by our long radial overhead For the benchmarking graphs relating to our coal-fired and nuclear power lines for rural electrification customers, with limited When interpreting the results of the benchmarking stations, refer to the fact sheet study, it must be noted that the operating regimes ring feeds in the event of supply interruptions, which of other utilities contributing to the VGB database limits the opportunity to build redundancy into the may not be the same as those of Eskom. The results networks. In South Africa, urban areas are largely indicate that: supplied by municipalities, which are in turn supplied in bulk by Eskom. • The trend in the performance of our coal-fired plant across all indicators continues to be worse At the time of the study, the Distribution SAIDI than the VGB benchmark and SAIFI performance was categorised as fourth or bottom quartile. Since the 2012 benchmark exercise, we have substantially improved our SAIDI and SAIFI Regular maintenance of meters is undertaken to ensure accurate billing performance. 52 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 53 Operational sustainability continued Distribution has developed an internal resource and substantial new generating capacity has been The actual OCGT production for the year to to strengthen the system adequacy and meet the model which models workforce demand based on commissioned. While there is a very real possibility 31 March 2015 was 3 709GWh compared to a growing power demand. operating standards and underlying asset data, which of further load shedding in the foreseeable future, target of 2 092GWh (2013/14: 3 621GWh). The provides comparative benchmarking data used for even when load shedding is implemented in stage 1, average actual OCGT load factor for the year Total capacity of 5 701MW has been contracted planning purposes by all the Operating Units. we still supply electricity to 96% of the country at to 31 March 2015 amounted to 17.58% against a with IPPs as at 31 March 2015, of which 3 887MW any given time. targeted load factor of 9.91% (2013/14: 17.16%). The relates to contracts under DoE’s renewable energy Distribution is currently preparing to benchmark expectation is that the OCGT fleet will continue to (RE-IPP) programme. At 31 March 2015, a total technical and operational performance against During 2014/15, a substantial number of load be used extensively, although this is subject to the of 1 795MW of renewable IPP generation capacity international utilities. reduction events occurred when the available supply availability of funding. has been connected and is providing power to the was insufficient to meet the demand. While only three grid. An average load factor of 30.85% was achieved For benchmarking information relating to Transmission and Distribution, events occurred over evening peak during winter, Purchasing and installing IPP capacity during the year. Short- and medium-term contracts refer to the fact sheet we had to implement load shedding and/or load which were expiring at the end of March 2015 were We acknowledge the role that IPPs must play in curtailment on 34 days between 1 November 2014 the South African electricity market, and remain renewed for another year, so they can continue to Managing supply-and-demand and 31 March 2015. committed to facilitating the entry of IPPs, contribute to reducing the supply shortage. constraints Use of open-cycle gas turbines IPPs contracted and connected (by province) Role of the System Operator The diesel powered OCGTs continued to be used The System Operator provides an integrative function extensively at higher than expected load factors in for the operation and risk management of the order to ease the strain on electricity supply and to interconnected power system by balancing supply and reduce the impact of load shedding, which resulted Limpopo demand in real time, trading energy internationally from continued generating capacity constraints and Polokwane and buying energy from IPPs, which assists us in tight operating margins. However, the high demand implementing our mandate of supplying electricity. on the OCGT stations, together with local diesel 94 58 Operating performance constraints in the Western Cape and the logistics In order to balance and protect the power system, associated with delivering fuel to Ankerlig Power we have to apply demand management practices, Station in particular, have constrained operations at Pretoria Mpumalanga which include supply-side and demand-side options. these stations. Rustenburg 18 eMalahleni Supply-side options focus on increasing electricity North West Johannesburg supply, including utilising our open-cycle gas turbines Actual OCGT expenditure for the year amounted to Gauteng (OCGTs), our pumped storage schemes, supply R9.5 billion (2013/14: R10.6 billion) compared to an 7 by IPPs as well as international power imports. original budget of R6 billion, although Board approved Northern Cape Demand-side options, which are contingent upon the an additional amount of R4.3 billion to ensure system 65 134 KwaZulu-Natal support of customers, focus on reducing demand, sustainability until the end of March 2015; part of the 761 842 and include demand response programmes which additional amount had to be made up by savings in Upington Free State Richards Bay utilise interruptible load agreements, demand side other areas of the business. While the OCGTs were Kimberley 16 800 management, energy efficiency initiatives as well as originally intended to provide only peaking power, 10 Bloemfontein the “5pm to 9pm” demand reduction campaign and they have continued to exceed targeted production 620 85 higher winter tariffs. as a means of closing the power supply gap. This Durban raises concerns over the financial sustainability of Power system emergency declarations and Eskom, as a megawatt of power produced by an load shedding OCGT station costs almost nine times as much as the 680 515 When sufficient demand savings are not realised, we equivalent produced by a coal-fired power station. 400 apply load curtailment and controlled rotational load Eastern Cape shedding to protect the power system. While load NERSA has provided a preliminary prudency approval 80 shedding is regrettable, we have to continue with the of up to 450GWh per month from OCGT generation 100 necessary maintenance of our Generation plant to for the last quarter of the 2014/15 year; any usage 64 352 East London improve performance for the medium to long term, over and above this would be subject to a further even if this requires additional load shedding for some prudency and efficiency review if claimed as a variance Cape Town Western Cape Port Elizabeth time. The relatively flat (or “Table Mountain”) daily through the Regulatory Clearing Account (RCA) Mossel Bay load profile during summer increased the energy mechanism. We will therefore be able to apply to requirements from the OCGTs as well as the duration NERSA for the clawback of additional OCGT costs Connected 1 795MW Contracted, not yet connected 3 906MW Total contracted 5 701MW of load reduction when required. The current deficit within this preliminary approval undertaken in the of approximately 3 000MW is expected to continue 2014/15 financial year, although if approved, this Hydro Wind Solar Biomass Gas Town until the availability of the existing fleet is increased clawback would only flow to us in future years. Target Target Target Actual Actual Actual Target The average cost of energy purchased from all IPPs R300/MWh). However, IPPs provide much needed Measure and unit 2019/20 2015/16 2014/15 2014/15 2013/14 2012/13 met? is R1 570/MWh, while the average cost of renewable renewable energy to the energy mix; they also play OCGT production, GWh 590 1 180 2 092 3 709 3 621 1 905 IPPs is R2 172/MWh. Although this is cheaper a vital role in balancing supply and demand, as well OCGT diesel usage, R million 2 246 2 885 6 019 9 546 10 561 4 993 than the cost of generating from OCGTs (at about as providing space for maintenance and reducing the R2 573/MWh), it is still significantly more than the need for load shedding. cost of our base-load power stations (at about 54 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 55 Operational sustainability continued The table below summarises the actual energy procured under various IPP programmes for the year ended Verified demand side management and internal energy efficiency savings 31 March 2015. Target Target Target Actual Actual Actual Target Target Target Target Actual Actual Actual Target Measure and unit 2019/20 2015/16 2014/15 2014/15 2013/14 2012/13 met? Measure and unit 2019/20 2015/16 2014/15 2014/15 2013/14 2012/13 met? Demand savings (evening peak), Total energy purchased, GWh1 n/a n/a 5 106 6 022 3 671 3 516 MWSC 304.0 187.0 246.0 171.5 409.6 595.0 Total spent, R million1 n/a n/a 7 473 9 454 3 266 2 941 Energy savings, GWh 1 862.0 763.0 592.0 816.2 1 363.0 2 244 Weighted average cost, c/kWh n/a n/a – 157 88 83 Internal energy efficiency, GWhSC, 1 n/a 1.2 10.0 10.4 19.4 28.9 1. Future targets are not available, as figures are dependent on system requirements. 1. Target not set, as funds have not yet been allocated. Deemed energy payments totalling R129 million for • Discretionary agreements (Zimbabwe and Zambia) Demand side management costs for the year ended 31 March 2015 the year (2013/14: RNil) were made to two IPPs due are declined in advance in anticipation of a tight Target Target Target Actual Actual Actual Target to delays in connecting them to the grid, caused by supply situation R million 2019/20 2015/16 2014/15 2014/15 2013/14 2012/13 met? delays in project approvals, site access and delivery of • International industrial end-use customers (Mozal materials due to labour action. Total energy efficiency demand and Skorpion Zinc) are interrupted in line with the side management1 n/a n/a 949 656 1 314 2 851 terms of their agreements Power buybacks2 n/a n/a – – 87 2 808 Cross-border sales and purchases of electricity • Non-firm agreements (Botswana and Namibia) are Demand market participation1 n/a n/a 688 309 262 283 reduced in proportion to our local large customers We are aware that our responsibilities to supply in the event of an emergency, and reduced to zero Total (excluding transfer pricing) n/a n/a 1 637 964 1 663 5 942 our neighbouring countries may create an apparent if rotational load shedding is required conflict when the domestic supply-demand balance 1. Target not set. is constrained. To reduce the impact of exports, • Firm supply agreements (Swaziland and Lesotho) 2. Power buybacks are no longer funded by NERSA and therefore not utilised. continue to be supplied, but they are urged to Operating performance we have ensured that power suppply agreements with SAPP trading partners are sufficiently flexible to reduce consumption. However, if rotational load IDM runs a number of programmes to manage Future focus areas allow for the following controls during emergency shedding is required in South Africa, they are demand and improve energy efficiency: • Manage coal quality to reduce coal-related load situations in South Africa: required to undertake proportional load shedding Demand response losses and coal costs within approved regulatory The Demand Response Programme has a combined constraints and approved tariffs Target Target Target Actual Actual Actual Target certified (instantaneous, supplemental and standby • Conclusion of long-term coal and limestone supply GWh 2019/20 2015/16 2014/15 2014/15 2013/14 2012/13 met? generation) capacity of 1 356MW of dispatchable agreements International sales1 5 626 6 317 11 262 11 911 12 378 13 791 load, which can be reduced or completely switched • Conclusion of water supply agreements with DWS International purchases 3 712 3 717 11 266 10 731 9 425 7 698 off on a scheduled day, if requested by the System to ensure long-term water security for Medupi and Operator. Matimba Power Stations Net sales/(purchases) 1 914 2 600 (4) 1 180 2 953 6 093 Residential sector • Facilitate the investment required to recapitalise 1. International sales for 2014/15 and 2013/14 exclude sales made by Distribution International to Lesotho, of 89GWh and 91GWh respectively. existing cost-plus mines to meet contractual The focus in the residential sector was the rollout of obligations whilst meeting Government’s Exports of electricity by Eskom, referred to as Integrated Demand Management Phase 3 of compact fluorescent lamps (CFLs), which transformational objectives international sales, for the year to 31 March 2015 commenced in February 2014. A total of 251 000 CFLs Integrated Demand Management (IDM) plays a key • Continued implementation of the Generation were down 4% compared to the previous year were installed up to August 2014, when the programme role in assisting us to balance power supply and Sustainability Strategy, with a focus on the quality due to lower exports to Namibia and Botswana. was put on hold due to financial constraints. A total demand during periods of generation constraints. of planned philosophy-based outages, post-outage In contrast, international purchases, or imports of of 390 643 CFLs have been installed inception-to-date, Demand side management interventions encourage UCLF and outage slips performance, together with electricity by Eskom, for the year to 31 March 2015 against a target of 500 000. customers to use electricity more efficiently, thereby the improvement of UCLF performance and trips. increased by 14% year-on-year. The increase in reducing the gap between supply and demand in the Eskom internal energy efficiency (IEE) saving This will require space of about 3 000MW for the imports was due to the replacement of a smoothing short to medium term. initiatives required maintenance, even during winter reactor at Hidroeléctrica de Cahora Bassa (HCB) We aim to improve the internal energy efficiency As no funding was available for new projects from • Transmission network strengthening to achieve in Mozambique that had been out of service for a of our facilities by undertaking energy audits and October 2013 until January 2015, no new projects N–1 Grid Code compliance, as well as the lengthy period in the preceding year. Nevertheless, implementing efficiency programmes that focus on were implemented, and therefore verified demand integration of new generation sources line and equipment faults on the high-voltage direct lighting, heating, ventilation and air-conditioning. current transmission line from HCB meant that savings are significantly below target. Although • Connection of IPPs to the Eskom grid within the targeted imports from HCB could not be achieved. sufficient funding was allocated to IDM in February Power Alert and other campaigns contracted timeframes as they come online, to 2015, savings from projects will only be realised over Our Power Alert and “5pm to 9pm” campaigns avoid deemed energy payments A power purchase agreement entered into with the next three financial years. continue to reduce power demand during the evening • Continued focus on Distribution sustainability Aggreko in Mozambique, for 148MW of mid-merit peak. The average impact for the red flightings in the through prioritised interventions towards supply, was extended from July 2014 to August 2015, evening peak was 339MW on the worst-constrained refurbishment, reliability improvements and with the option to extend for a further two months days, in April and July 2014. addressing maintenance backlogs to secure continued supply. • Exploring further options to manage power demand, including demand response programmes • Aggressively pursuing the implementation of IDM projects to meet the demand savings target of 975MW over the next three years 56 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 57 Operating performance Revenue and customer sustainability We aspire to consistently satisfy our customers with Target Target Target Actual Actual Actual Target the level of service they receive. In order to measure Measure and unit 2019/20 2015/16 2014/15 2014/15 2013/14 2012/13 met? this, we focus on customer service performance in Eskom KeyCare, index SC, 1 n/a 102.0 102.0 108.7 108.7 105.8 terms of a number of metrics, as well as revenue Top Customer KeyCare, index1 n/a 104.0 104.0 110.5 110.8 107.5 and debt management, primarily through the average number of debtors days. Enhanced MaxiCare, index SC 94.0 93.7 96.0 99.8 92.7 93.2 CustomerCare, index1 n/a 8.2 8.2 8.0 8.3 8.4 For the number of customers by customer segment and electricity sales, both volume and revenue, refer to the fact sheet 1. Target not set. The sustained above-target scores on Eskom KeyCare and Top Customer KeyCare for large industrial customers, Looking back on 2014 despite numerous occurrences of load shedding, are attributed to extensive interactions and interventions with Last year, we said that we would focus on improving customers through various forums, where we provide information on the system status, capacity expansion debt collection and implementing processes in terms programme, IDM programmes and the like. Regional Account Managers and their teams frequently visit these of the revenue management strategy, approved in customers to share information and detect service-related issues. Our engagement with key industrial customers 2013/14, to enhance energy protection and energy regarding load curtailment over critical hours allows customers to plan effectively and also minimise the need for loss programmes. The problem has worsened load shedding. significantly, particularly in the area of debt collection, The significant improvement in Enhanced MaxiCare reflects the impact of our customer service improvement although progress is being made in implementing the programme on residential, small and medium customers. Customers also continue to rate delivery on normal revenue management strategy, albeit slower than services highly, although load shedding has impacted call centre volumes and thereby service levels, causing the slight anticipated. decrease in the CustomerCare score since last year. HIGHLIGHTS Customer service performance Load shedding and the impact on customers experience, until such time as we have recovered Operating performance We measure customer satisfaction through a number Excellent performance on customer The National Code of Practice for Emergency the health of our plant. The following issues were of perception- and interaction-based customer satisfaction measures Load Reduction (NRS 048-9) was developed by a raised during our engagements with customers on surveys, which are conducted by independent multi-stakeholder task team after the load shedding load shedding-related issues: research organisations. The measures include: experienced in 2008, and was approved by NERSA • The impact of load shedding on different sectors, PROGRESS • Eskom KeyCare , which measures the satisfaction as a regulatory licence requirement in 2010. The such as industrial, mining, commercial, agricultural, of our large industrial customers, while Top Code was applied operationally for the first time transport and residential, with particular reference Demand reduction contracted with key Customer KeyCare concentrates on those on 19 November 2013 and then again on 20 and to the economic cost and socio-political industrial customers reduced the need for load customers who consume more than 100GWh 21 February 2014, although in both cases only large implications shedding per year customers were called on to curtail load. On 6 • Type of reduction, being load shedding versus load Load management interventions to be • Enhanced MaxiCare , which assesses the March 2014, both load curtailment and load shedding curtailment implemented at the top 20 defaulting satisfaction of our residential, small and medium in stage 3 were called on for the first time since • Predictability of load shedding, which talks to municipalities if no payment agreement is customers on a perception, rather than a 2008, when a coal supply incident affected all units planned or ad hoc load shedding, advance warning concluded transactional, basis at Kendal Power Station. Significant experience had of ad hoc load shedding, availability of load • CustomerCare , which evaluates customer since been gained with the application of the Code, shedding schedules and adherence to schedules satisfaction on a transactional basis, based on in particular to minimise the economic and social by Eskom and municipalities CHALLENGES impact. This experience has been used to modify the • Design of the load shedding time slots, in terms recent interaction with our contact centres or the resolution of service requests by our operating units application through a formal agreement with NERSA. of duration and frequency of the time slots, Debtors days for all customer segments are A revised Edition 2 of NRS 048-9 has been drafted, together with consideration of rotational versus worse than target which is expected to be finalised by March 2016. fixed time slots Residential debt, particularly Soweto, continues • Time of day of load shedding to escalate The initial objective of NRS 048-9 was to deal with ad hoc power system emergencies only, as the intention Contrary to popular belief, South Africa is not Ongoing management of energy protection and was to also put in place an Energy Conservation the only country that has had to implement load revenue losses Scheme (ECS). The Eskom Energy Conservation shedding. Many developing countries, particularly in Scheme was developed in 2008, in response to Africa and Asia, as well as some developed countries, Government’s Power Conservation Programme. have experienced load shedding, or even a total LOWLIGHTS Through the application of high tariffs, the ECS blackout. aims to penalise electricity customers that do not Numerous instances of load shedding, As evidenced in countries that have experienced negatively impacting all customer segments reduce their consumption by an allocated percentage. a total blackout, extricating a country from that For industrial customers, the expected target was a Arrear municipal debt increased to situation is significantly more expensive and disruptive reduction of 10% compared to their historical baseline R4 953 million (2013/14: R2 593 million) than enduring load shedding for a few hours a day. consumption profile. The necessary legislation to Without minimising the impact that load shedding support this programme has not yet been put in place. has on businesses and the daily life of all South We acknowledge the crippling effect that load Africans, it is important to remember that, even shedding has on our customers, both large and small. when load shedding is implemented in stage 3, we We are constantly working with customers to better still supply electricity to about 90% of the country understand how we can improve the load shedding at any given time. 58 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 59 Revenue and customer sustainability continued Revenue and debtor management provision for impairment increased to R7 430 million Arrear municipal and Soweto debt (excluding interest) at 31 March 2015 We make every effort to ensure that customers (2013/14: R5 667 million). The increase in the R million 2014/15 2013/14 2012/13 pay their accounts on time. We constantly monitor provision for impairment is largely due to an increase payments and are willing to enter into reasonable in arrear municipal debt, coupled with a decision to Municipal debt payment arrangements that take into account provide for all overdue debt over 15 days – being Total municipal debt (including current amounts) 9 849 6 928 5 142 defaulting customers’ circumstances. Considerable the contractual due date – for certain defaulting Municipal arrear debt (>15 days) 4 953 2 593 1 202 effort also goes into building stronger relationships municipalities, as well as those not honouring their Percentage arrear debt to total debt 50.3% 37.4% 23.4% with these customers. Disconnection of supply is a payment plan agreements. Soweto debt last resort. Previously, we recognised revenue and thereafter Total Soweto debt (including current amounts) 4 182 3 622 3 159 In terms of their contracts, customers have a impaired the debtor if the amount was later deemed Soweto arrear debt (>30 days) 4 022 3 442 3 078 predetermined number of days within which they not to be collectable. In the current year, due to the Average Soweto payment level, % 16% 20% 16% are expected to settle their accounts. If payment is materiality of the amounts now involved, we applied not made within the required number of days, the the IAS 18 principle of not recognising revenue if it After the disconnection of three Free State We have made cross-functional teams available to amount payable is referred to as arrear debt. In other is deemed not to be collectable at the date of sale. municipalities, namely Maluti-a-Phofung, Ngwathe and municipalities to share best practices in managing words, arrear debt refers only to overdue amounts, As the revenue and corresponding debtor is never Dihlabeng, was suspended following interventions by electricity portfolios and offered prepayment options excluding interest, and not the total amount due. accounted for, there is no need to impair the debtor. the Ministers of Public Enterprises and of Cooperative to all municipalities to limit the growth of arrear debt. At year end, this has resulted in external revenue Governance and Traditional Affairs (CoGTA), the Arrear customer debt has increased across all and debtors of R597 million being derecognised, Judgement was issued in February 2015 against outstanding debt of Free State municipalities has segments over the past year, with approximately 38% and impairment amounting to R566 million being Matjhabeng in the Free State, with a six-month increased significantly. At 31 March 2015, Free State of debt being outstanding for more than 60 days reversed. Despite this, we continue to actively pursue sentence being handed to the municipal manager, municipalities contributed 39% to total municipal (2013/14: 35%); the most significant increase was recovery of these amounts. The amounts mentioned suspended on certain conditions that centred around arrear debt, with Mpumalanga municipalities seen in arrear municipal debt. Electricity debtors earlier are net of the adjustment. payment of their electricity account. Matjhabeng has Operating performance contributing 30% and North West municipalities 14%. (before provision for impairment) increased to since made some payment with their equitable share. R22 657 million (2013/14: R20 269 million), while the The worsening situation across the board can be seen Historically, payments by municipalities were strongly in the table below. Furthermore, we announced during April that we correlated to them receiving their quarterly equitable share payment from National Treasury. Previously have notified the top 20 defaulting municipalities Key debt management indicators at 31 March 2015 across the country that we would be interrupting this funding was sufficient to settle outstanding Target Target Target Actual Actual Actual Target electricity debt, although this is no longer the case, their bulk electricity supply from 5 June 2015, should Measure and unit 2019/20 2015/16 2014/15 2014/15 2013/14 2012/13 met? as municipalities face increased electricity prices they not settle their accounts or make payment and reduced funding. A number of other issues also arrangements by then, as we can no longer continue Arrear debt as % of revenue, % 1.16 1.68 0.75 2.17 1.10 0.82 supplying electricty without receiving payment in contribute to non-payment by municipalities, such Debtors days – municipalities, as inadequate skills and competencies to manage return. The interventions include the following: average debtors days1 n/a n/a 25.0 47.6 32.7 22.4 • Implementing load shedding during daily morning municipal functions, poor management of revenue Debtors days – large power top and evening peak periods to avoid incurring OCGT customers excluding disputes, management processes, misalignment of tariffs average debtors days 14.5 14.5 14.5 16.8 14.5 12.3 between Eskom and the municipalities, as well as cost and also to restrict the increase in arrear debt Debtors days – other large power cash flow challenges. • Prioritising load shedding to defaulting users (<100GWh p.a.), average municipalities, both during emergencies and when debtors days2 16.5 16.5 16.0 17.0 16.9 18.3 In order to manage the problem we enforce our small loads are required in stage 1 Debtors days – small power users revenue management policy and procedures, such (excluding Soweto), average • Restricting supply to notified maximum demand as issuing disconnection letters, and conform to the debtors days 46.0 46.0 46.0 49.1 50.2 48.2 (NMD) and tripping bulk points if NMD is exceeded relevant legal and regulatory requirements (such 1. Target being reviewed, pending interventions with municipalities. as PFMA, MFMA and PAJA) should no corrective • Limiting supply to municipalities in line with their 2. Provisional target, currently under discussion by the relevant approval bodies. action be taken. We also consult with National current payment trend Arrear debt and Provincial Treasury and CoGTA to address the Since the announcement, the majority of municipalities systemic causes of arrear municipal debt. have made payment arrangements, therefore they will Debt collection from municipalities and small power users, particularly in Soweto, remains a concern. At 31 March 2015, ten municipalities had total overdue debt greater than R100 million each; the top 20 defaulting On 6 March 2015, National Treasury issued a not have their bulk electricity supply interrupted. It municipalities contributed approximately 80% of the total arrear municipal debt. cautionary procedure to all municipalities advising should be noted that the interruption of supply is the them to pay the current bulk service accounts and initial step to ensure payment of overdue accounts. Total Soweto debt, including interest was R8 611 million at 31 March 2015 (2013/14: R7 020 million). In the event that we cannot reach a satisfactory honour their payments by 13 March 2015. Failure to comply would result in National Treasury withholding solution with a municipality, it will be permanently the payment of their quarterly equitable shares. disconnected until its debt is paid in full. The Minister National Treasury duly withheld the March equitable of Public Enterprises has agreed not to intervene in share payments to 60 defaulting municipalities for the disconnection process. It should be noted that failing to settle their accounts or honour their there are litigation processes underway with certain payments to Eskom and water boards. municipalities in the Free State. 60 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 61 Revenue and customer sustainability continued Residential revenue management (at R300 per customer per month). Although the Losses performance in both Transmission and The fight against network equipment theft is The residential revenue management strategy, which programme is still being disrupted by community Distribution was better than target, with the being addressed by means of intelligence driven includes Soweto, drives energy protection and energy protests, as well as technical issues and data performance in Distribution improving markedly from investigations by the Hawks, a division of SAPS, which loss programmes, such as Switch OVA!, to enhance challenges, steady progress is being made through the prior year. encompasses aggressive policing of the scrap metal safety, improve quality of supply and reduce energy community and stakeholder engagements, and our market for stolen goods. The courts are also taking normal credit management process. Specific interventions aimed at reducing energy and this crime seriously and significant sentences are being theft. It also aims to improve debt collection among revenue losses are being pursued with the support handed out to perpetrators. small power users through the following initiatives: The project is currently live in Dobsonville Ext. 3, of the social marketing campaign Operation Khanyisa, • Installation of split metering with protective Meadowlands, Protea North, Kagiso and Orlando aimed at promoting the legal use of electricity A joint industry working group, formed by Eskom, enclosures to prevent tampering West, while Dobsonville Ext. 1 and 2 have been by customers. Moreover, as part of the Business Transnet, Telkom, SAPS, the National Prosecuting • Converting the meters of non-paying credit completed. Productivity Programme, a savings aspiration of Authority, Business Against Crime and the South metering customers to prepaid meters, with new R2.1 billion has been set over the MYPD 3 period, African Chamber of Commerce and Industry supply group codes to eliminate ghost vending Energy losses and theft to be achieved through the reduction of energy (SACCI), continues to contribute positively in the • Focused credit management process, together Utilities throughout the world struggle with energy losses and recovery of revenue. Planned interventions fight against this crime. with disconnections, to recover outstanding debt losses, which can be divided into two broad categories: include: Operation Khanyisa • Driving other recoveries in a structured approach • Technical energy losses , which are a natural • Energy balancing at reticulation feeder level to through the Business Productivity Programme identify and prioritise high loss hotspots for action Following a successful pilot in Limpopo, the Customer result of transferring electrical energy from one Compliance Approach (CCA) has been expanded point to another, with some of the energy being • Meter audit programmes across all customer The programme was approved late in the 2013/14 with the rollout extended to various sites in dissipated as heat. The further the energy has to categories to identify and correct tampered and financial year. Implementation commenced Mpumalanga, Free State and North West. Further travel, the bigger the losses faulty meters, together with the issuing of tamper in Soweto in July 2014 and was expanded since rollouts to hotspot areas and townships within these • Non-technical energy losses , which refers to fines and recovery of revenue by the calculation 1 November 2014, with 18 000 households targeted areas will commence in 2015, with implementation in losses caused by theft, including illegal connections, and billing of energy unaccounted for in the past to be converted to prepaid. As part of the process, other provinces planned for the latter part of 2015. meter tampering and illegal vending of prepaid Operating performance we engage with customers to educate them on • Prosecution of customers for tampering with The localised approach taken by the CCA has led to energy efficiency, safety, free basic electricity, inclining electricity, as well as billing errors metering installations the issuing of over R2.7 million in fines to date, with block tariffs, buying of prepaid power through legal Transmission experiences only technical energy • Similar strategies to those employed in residential R1.4 million from the Free State and over R0.5 million vendors, as well as the need for household budgeting losses, while in Distribution, technical losses are revenue management, such as the installation each from Mpumalanga and North West. It has also to provide for electricity purchases. estimated at between 60% and 75% of total energy of split metering and protective enclosures to led to 19 arrests and 18 criminal cases being opened losses in the distribution networks. The actual prevent tampering, as well as the conversion to date. As at year end, a total of 4 209 customers have of customers to prepaid meters coupled with been switched, against the year-end target of 7 000 percentage is influenced by factors such as network Operation Khanyisa concluded a new partnership design, network topology, load distribution and prevention of the use of illegal prepaid vouchers customers, with the balance targeted for conversion with SACCI, while engagements with existing partners in the 2015/16 financial year. Project data indicates network operations. In other words, between 25% Some of the successes as a result of the continuous Crime Line, SALGA and Proudly SA to unlock that 93% of customers chose prepaid, and the and 40% of Distribution energy losses, which amounts focus on energy and revenue losses are: opportunities are ongoing. Operation Khanyisa aims balance conventional metering. The potential revenue to between 3 730GWh and 5 968GWh (or between • R122.5 million revenue recovered from large and to induct additional influencers into the programme unlocked is estimated at R1.26 million per month 1.57% and 2.52% of total energy sent out), relate to small power customers with conventional meters over the coming year. non-technical losses. during 2014/15 • Fines realised from prepaid customers tampering Future focus areas Total energy losses for the year ended 31 March 2015 with their electricity meters amounted to • Ensuring our financial sustainability by managing Target Target Target Actual Actual Actual Target R23 million for the year and reducing arrear debt, by accelerating debt 12-month moving average, % 2019/20 2015/16 2014/15 2014/15 2013/14 2012/13 met? • As a result of Operation Khanyisa, over 2 700 collection in the municipal, residential and other tipoffs were received from the public during large and small customer segments Loss through Distribution 7.36 7.18 7.12 6.78 7.13 7.12 the year • Continued management of energy protection and Loss through Transmission 3.45 3.41 3.30 2.53 2.34 2.80 revenue losses, through Operation Khanyisa and Total Eskom losses 10.28 10.00 9.65 8.79 8.88 9.08 Equipment theft other initiatives Eskom is plagued by network equipment theft (generally referred to as conductor, cable or copper theft). This includes the theft of overhead lines, underground cables, airdac and bundle conductors, earthing equipment, transformers, pylon support lattices and so forth. The value of material stolen remains a serious concern, as it is indicative of organised, syndicate- driven criminal activity in the conductor theft environment, which is also experienced by other state-owned enterprises. Theft of steel members from transmission towers is an ongoing occurrence, even though this is being mitigated by security and line inspection patrols. Non-technical losses, which include illegal connections, theft of equipment and vandalism, amounted to between 3 730GWh and 5 968GWh for 2014/15. Installation of split metering with protective enclosures is one of the interventions undertaken to reduce these losses 62 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 63 Operating performance Sustainable asset creation Our capital expansion strategy focuses on new build Target Target Target Actual Actual Actual Target projects, infrastructure upgrades aimed at generation Measure and unit 2019/20 2015/16 2014/15 2014/15 2013/14 2012/13 met? sustainability and environmental compliance, Generation capacity installed: first transmission strengthening, customer connections, as synchronisation, unitsSC, 1 n/a 0 1 1 – – well as asset maintenance and replacement projects. Generation capacity installed and We strive to deliver projects on time, within budget commissioned, MWSC, 2 1 594 794 433 100 120 261 Generation capacity milestones and to the right quality. (Medupi, Kusile and Ingula), days delay 30.00 30.00 30.00 59.56 48.90 43.48 Looking back on 2014 Transmission lines installed, km SC 836.0 310.0 315.1 318.6 810.9 787.1 The single biggest commitment we made last year Transmission capacity installed and was to achieve the first synchronisation of Medupi commissioned, MVA SC 8 915 2 120 2 090 2 090 3 790 3 580 Unit 6 in the second half of 2014, with a target date of 24 December 2014. However, first synchronisation 1. Eskom and DPE will, in subsequent years, contract on first synchronisation of Unit 5 of Medupi and Units 1 and 2 of Kusile. The subsequent units will then be contracted on capacity installed and commissioned. was delayed to 2 March 2015, due to labour unrest 2. Target for 2015/16 refers to Medupi Unit 6 being put into commercial operation. during 2014, as well as a number of technical challenges experienced during the ramp-up period. The target of 433MW for generation capacity previously were successful and the technical issues installed and commissioned was not met – although surrounding welding on the Unit 6 boiler reported The first wind turbines of the 100MW Sere Wind the 100MW Sere Wind Farm was commissioned on last year were resolved. The weld procedure Farm were energised in October 2014 as planned, 31 March 2015 in line with the target, Ingula Unit 3 requalification exercise was completed, with all weld and Sere was placed in commercial operation on (333MW) is currently forecast to be commissioned procedures verified and accepted by both Eskom and 31 March 2015. only during the second half of 2016, as a result of the authorised inspection authority. Furthermore, HIGHLIGHTS delays due to the work stoppage following the tragic a number of key milestones were achieved during Delivering capacity expansion Operating performance First synchronisation of Medupi Unit 6 on incident on 31 October 2013. the past year, all leading up to first synchronisation 2 March 2015, the first coal-fired unit to be We started the capacity expansion programme in of the unit: brought online since 2001 2005 to build new power stations and high-voltage The delays in meeting generation capacity milestones • Successful completion of the boiler chemical clean, transmission power lines to meet South Africa’s are caused by technical delays at Medupi and Kusile, Sere Wind Farm in full commercial operation the draught group test run and the site integration rising demand for electricity and also to diversify our as well as the delays at Ingula due to the MHSA on 31 March 2015 tests for Unit 6 and the balance of plant, as well as energy mix. The programme, which started with the Section 54 work stoppage. the water treatment plant return-to-service (RTS) programme and is currently Medupi • First coal was delivered to the coal stockyard, Coal PROGRESS expected to be completed by 2021, will increase First synchronisation (or first power) of Medupi Stacker 1 was safety cleared and commissioning of generation capacity by 17 384MW, transmission lines Unit 6 was achieved on 2 March 2015, with full the coal stacker and coal mills is progressing well Work at Ingula Pumped Storage Scheme by 9 756km and substation capacity by 42 470MVA. load achieved on 26 May 2015, at which time the • First oil fire of Unit 6 on 17 October 2014, recommenced after MHSA Section 54 work stoppage was lifted Since inception, the capacity expansion programme unit delivered full power of 794MW to the national followed by first coal fire on 27 November 2014, has resulted in additional generation capacity of grid. Commercial operation is anticipated during boiler blow-through on 2 January 2015 and steam 6 237MW, mainly through the RTS programme, August 2015. The unit is the biggest coal-fired unit to set on 12 February 2015 5 816km of transmission lines and 29 655MVA of its kind in Africa, and the first coal-fired unit to be CHALLENGES of substation capacity. The programme has cost brought online since the last unit of Majuba in 2001. The Transmission integration implementation is ready R265 billion to date (excluding capitalised borrowing for the synchronisation of all six units to the Eskom Labour instability impacting progress on new costs), while the total cost-to-completion of the During the testing phase, while combustion grid, and all required auxiliary services for the whole build projects optimisation of the unit continues, output from the power station are ready to deliver power to the grid, programme is currently estimated at R361 billion Recovering schedule at remaining units at (excluding capitalised borrowing costs). unit is variable. The testing phase ensures that all as and when the remaining units come online. Medupi, impacted by delays at Unit 6 systems are fully operable and reliable for handover, and the unit is safe to operate and perform as Although labour stability has been acceptable over Completion of construction and turnover of the past year, matters erupted on 25 March 2015, systems at Kusile designed for the next 50 years. Normal commissioning and optimisation issues are being resolved as they when a NUMSA delegation of contractor employees, arise, without any significant holdups to reaching bypassing all labour partnership agreed processes and LOWLIGHTS commercial operation expected. site-specific undertakings, handed a Memorandum of Demands to Medupi site leadership, during which Additional resources were mobilised to Unit 6 by workers were intimidated and damage caused to Delays at Medupi resulted in R8 billion due under the take-or-pay coal supply agreement both the boiler and C&I (control and instrumentation) Eskom property. The site was able to identify 1 772 contractors to mitigate any resource-driven delays. perpetrators who were put on final warning, although Additional shifts were introduced 24 hours a day, we agreed to hearings where participants could seven days a week in order to accelerate progress make representations as to why they should not be on site. We continue to work with contractors to dismissed. Extensive meetings between Eskom, union resolve any issues that could affect the schedule. leaders and contractors culminated in an apparent agreement to proposals, expected to lead to the The critical path to first synchronisation included return to work of employees on 15 April 2015. the delivery, installation, testing and integration of However, a certain faction of NUMSA rejected the the boiler protection system, together with the proposals, and a number of demonstrations took distributed control system. The recovery strategies place in Lephalale, with massive intimidation of those that were put in place to implement solutions to The light on top of Unit 6 of Medupi Power Station was turned wishing to return, as well as further damage to Eskom the post-weld heat treatment that were reported on when the unit was first synchronised on 2 March 2015 property. 64 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 65 Sustainable asset creation continued A court interdict was since issued to compel Good progress has been made on the civil works for However, industrial action has led to delays in employees to return to work. Although some Eskom decided to locate Medupi in Lephalale all units, with the boilers of Units 1 to 5 in various installation of the heating, ventilation and air- employees responded, most defied the court for a number of carefully considered reasons, stages of construction. Boiler erection, already conditioning (HVAC) ducting for the control room. interdict. Violence and intimidation were experienced such as: completed at Unit 1, is expected to drive the critical Delays have also been experienced in the main in the accommodation areas where these contractor • Availability and accessibility of primary energy path for Units 2 to 6. Work necessary to support underground civil works. employees reside, as well as en route to the project sources, such as water and coal first coal delivery to the coal stockyard is targeted site, which has resulted in employees who want for completion in the second half of 2015. First synchronisation of Unit 3 is currently planned • Ease of connecting the new power station to for the second half of 2016, with the final unit to return to work being intimidated or prevented the existing Eskom network from doing so. The unprotected industrial action has With effect from 1 September 2014, the Kusile expected to be in commercial operation by the first • Environmental acceptability Execution Team and contractors began implementing half of 2017. resulted in further construction delays at the project. • Favourable cost of production productivity improvement plans that include working Towards the end of May 2015, more than 5 000 additional shifts, more weekends, as well as selected The cumulative cost incurred on the project is The Waterberg coalfields and the Lephalale area R22.8 billion (2013/14: R19.4 billion) against a workers returned to site, a positive move which paves crews and contractors working critical areas during was ranked as the most favourable option for total budget of R25.9 billion. All amounts exclude the way for the recovery of the lost production time. the traditional builders’ break in December. The the establishment of a new coal-fired power capitalised borrowing costs. ramp-up to commissioning of Unit 1 will include A number of site-wide productivity enhancements, station, due to land availability in close proximity strategies to support around-the-clock commissioning Renewables incorporating lean construction techniques, have been to the primary coal source, properties of coal activities. The project team remains focused on critical implemented in an effort to recover the schedule on in the area being well known because of the Eskom’s first utility-scale renewable energy project, activities necessary to achieve the earliest possible the remaining units, which were negatively impacted experience acquired through the existing the Sere Wind Farm near Vredendal in the Western first synchronisation of Unit 1, as well as improving by the delays at Unit 6; these were generally showing Matimba Power Station located in the vicinity, Cape, has been completed and was put into productivity and clawing back schedule on all six units. satisfactory results, prior to the unprotected competitive coal prices and low environmental commercial operation on 31 March 2015, after industrial action. impact on the chosen site. First synchronisation of Unit 1 is currently planned achieving Grid Code compliance. The new Skaapvlei for the first half of 2017, with the final unit expected substation and the 44km 132kV line to the existing Originally, the commissioning of the next unit, Unit 5, Operating performance to be in commercial operation by the second half Juno substation, both required to connect Sere to was forecast to occur within six months of bringing Kusile the national grid, were energised on 11 July 2014. of 2021. Unit 6 online. However, due to the challenges Eskom signed a mutual termination agreement with The first seven wind turbines were synchronised to experienced at Unit 6 this will not be possible, Alstom regarding the C&I works, after which a The cumulative cost incurred on the project is the grid on 10 October 2014, with the last of the as resources were redeployed from Unit 5 in an contract was awarded to ABB to supply the C&I R78.7 billion (2013/14: R66.6 billion) against a 46 turbines being energised in December 2014. attempt to recover the schedule at Unit 6. First systems for all units at Kusile. This is considered to total budget of R118.5 billion. All amounts exclude synchronisation of Unit 5 is currently planned for be an important step in mitigating one of the largest capitalised borrowing costs. Although Sere has been feeding available power the first half of 2017, with the final unit expected to risks on the project. into the grid since October 2014, it achieved the be in commercial operation by the first half of 2019. Ingula target nominal generating capacity of 100MW on A number of important milestones on Unit 1 have The MHSA Section 54 work stoppage was lifted 27 January 2015. The project was completed on The cumulative cost incurred on the project is been achieved over the past year, including successful completely in September 2014, allowing underground time and within budget, with a safety record in R84.7 billion (2013/14: R77 billion) against a total completion of the steam turbine lube oil system flush, works to resume, although the Presiding Officer’s line with our Zero Harm policy, and without any budget of R105 billion. All amounts exclude capitalised setting the generator step-up transformer into place report has not yet been received. Since the tragic environmental legal contraventions or incidents of borrowing costs. and the unit being placed on electrical barring. Work incident on 31 October 2013, progress was industrial action. It demonstrates our commitment related to the flue gas desulphurisation scope of significantly impacted resulting in limited progress for to renewable energy, diversifying our energy mix and work was also completed recently. Unit 1’s boiler air a period of approximately 12 months. However, the reducing our carbon footprint. leak test and hydrotest were successfully conducted lifting of the work stoppage will enable acceleration during April 2015. of the construction schedule. Development work continues on the photovoltaic (PV) rollout at existing administration buildings, Despite the delays, the operation floors of Units 3 power stations and transmission substations, and also and 4 have been completed and handed over to on solar augmentation where existing power stations mechanical and electrical contractors; the machine are hybridised with solar thermal energy. Project hall of Unit 1 was also completed and handed over. Ilanga, the PV project, is expected to add 150MWp In addition, diesel generator safety clearance and cold by 2017/18, of which 2.35MWp has been installed. commissioning were achieved in September 2014, while all four generator-transformers have been installed underground, with the gas-insulated switchgear systems connected on the high-voltage side of the transformers. To date, two of the transformers have been filled with 83 000ഢ of oil each. Environmental authorisation and water-use licences have also been received. Kusile Power Station in Mpumalanga, once completed, will be one of the largest dry-cooled coal-fired power stations in the world 66 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 67 Sustainable asset creation continued Power lines and substation capacity commissioned Investing in appropriate technologies Smart off-grid energy solutions During the current year, we installed 318.6km of high-voltage transmission lines and commissioned 2 090MVA of Due to financial constraints, the research budget A test site has been established in Kroonstad, Free substation capacity under the new build programme, bringing the total since inception of the capacity expansion for the year was reduced from R194.7 million to State, and we are working with DoE and Anglo programme to 5 816km of transmission lines and 29 655MVA of substation capacity. R130.2 million. Actual expenditure for the year was Platinum on hybrid solutions to sustainably provide R138.4 million (2013/14: R156.2 million), with 69% energy access to remote communities. Our Transmission projects as at 31 March 2015 or R95.7 million being spent on renewables and Majuba Underground Coal Gasification the environment, power system technologies and (UCG) improving Generation performance. Eskom, in partnership with Sasol, explored synergies We remain focused on delivering high impact regarding strategic opportunities for UCG gas, aiming Polokwane solutions in high value areas of our business model. to leverage Sasol’s gas handling and clean-up expertise. High priority projects are on track to deliver benefits Improved particulate removal technologies were within the coming financial year. These include: commissioned, which showed continued indications of improved performance in particulate removal at Pretoria High frequency electrostatic precipitator the test site. However, due to budget constraints, we pilot at Lethabo Power Station have approved the closure and rehabilitation of the The purpose of the project is to improve the initial pilot plant, which has resulted in an impairment Johannesburg particulate capture efficiency of the existing of R1.05 billion. infrastructure at Lethabo Power Station, in order to improve particulate emissions performance. Future focus areas The unit was installed and has proved effective in • Managing the new build projects within the Upington lowering cost and reducing particulate emissions. The MYPD 3 capital allocations remains a challenge, but Richards Bay rollout of the technology to other power stations is teams are actively exploring options to execute the Operating performance Kimberley being considered as part of our emissions reduction projects within existing funding allocations Bloemfontein strategy. • General construction attention at Medupi is being Durban Waterberg coal suitability analysis focused on Units 5 to 1, and on bringing back the Waterberg coal samples were analysed to determine schedule for first synchronisation of Unit 5 as far the suitability for use in the Mpumalanga power as possible stations, to inform procurement and transport • The Kusile project is aggressively driving significant strategies when sourcing coal for these power performance improvements by all principal stations. Successful testing and characterisation of contractors to achieve the required overall site the samples have been completed. A strategy for the production and productivity, in order to claw back East London use of Waterberg coal in Mpumalanga power stations schedule on all six units Port Elizabeth is being finalised. • Site stability is an imperative, and considerable Cape Town attention is being focused on stabilisation of worker Mossel Bay Low-loss distribution transformers unrest and demonstrations, with a recommitment A total of 1 000 transformers with a lower internal to the labour partnership agreements impedance will be installed (with 140 already • As reported in the prior year, servitude acquisition Existing Interconnection substation Nuclear power station installed), with the potential to improve efficiencies remains a critical priority, causing delays in Not yet complete Town Future gas station on the Distribution network by reducing network Transmission project execution. We will continue Possible future grid system Future renewables Gas power station losses and thereby reducing the constraints on the engaging with the Government departments Future hydroelectric power station Renewables Future substation system. Provisional savings on network losses of up responsible to assist in dealing with the challenges to 83% have been recorded during initial tests. If the Future thermal power station Thermal power station technology is implemented throughout Eskom, the Hydroelectric power station Future interconnection substation energy savings would exceed R500 million per annum. Large-scale energy storage Capital expenditure (excluding capitalised borrowing costs) per division for the year ended A facility for the testing and evaluation of different 31 March 2015 technology batteries for use in Eskom applications Target Actual Actual Actual and for integration of renewables to the grid is Division, R million 2014/15 2014/15 2013/14 2012/13 under construction in Rosherville. Installation and Group Capital 28 822 31 691 33 475 37 690 commissioning is expected to occur in the first half Generation 9 998 10 555 10 326 8 512 of the next financial year. Transmission 1 180 1 121 1 516 893 Distribution 7 706 6 073 10 265 8 317 Subtotal 47 706 49 440 55 582 55 412 Future fuel 4 893 1 651 2 675 2 634 Eskom Enterprises 0 439 453 376 Other areas including intergroup eliminations 2 721 1 547 1 093 1 711 Total Eskom group funded capital expenditure1 55 320 53 077 59 803 60 133 1. Capital expenditure includes additions to property, plant and equipment, intangible assets and future fuel, but excludes construction stock and capitalised borrowing costs. 68 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 69 Operating performance Environmental sustainability Environmental compliance, in terms of air quality, Environmental performance for the year ended 31 March 2015 land, biodiversity, water, waste (including nuclear Target Target Target Actual Actual Actual Target waste) and ash management, impacts operational Measure and unit 2019/20 2015/16 2014/15 2014/15 2013/14 2012/13 met? sustainability. It is critical to maintaining our licence to operate, thereby ensuring security of supply. It Relative particulate emissions, kg/MWh sent out SC, 1 0.30 0.35 0.35 0.37 0.35 0.35 also underpins our principle of Zero Harm to the Specific water consumption, environment, while operating under complex and ഢ/kWh sent out SC 1.34 1.39 1.39 1.38 1.35 1.42 evolving environmental requirements. Environmental legal contraventions in terms of the Operational Health Looking back on 2014 Dashboard, number2 0 0 0 1 2 2 Work continued for certification by the Department 1. The volume of water consumed per unit of generated power from commissioned power stations. of Water and Sanitation (DWS) in terms of its 2. In defined circumstances where the management of a legal contravention indicates specific management issues or failings, it is recorded on the Eskom Operational Health Dashboard. Blue Drop and Green Drop programmes, aimed at promoting environmental and human health Provisions for environmental restoration and rehabilitation in respect of drinking water and sewerage plant Provision is made for the estimated decommissioning cost of nuclear plant, including the rehabilitation of the land, management. Five stations have been audited by as well as for the management of nuclear fuel assemblies and radioactive waste. Provision is also made for the DWS and the results from these audits are awaited. decommissioning of other generating plant and the rehabilitation of the associated land. The planned certification date of March 2016 may be delayed based on DWS’s certification plan. Where a constructive or contractual obligation exists to pay coal suppliers, provision is made for the estimated cost of closure at the end of the life of the mine, together with pollution control and rehabilitation of the land. Reducing our environmental footprint The following provisions for environmental restoration and rehabilitation have been raised at year end: HIGHLIGHTS Operating performance Our overall environmental performance is assessed in Actual Actual Actual terms of relative particulate emissions, specific water R million 2014/15 2013/14 2012/13 Received the 2014 Sunday Times Top Brands consumption or water usage by all commissioned Survey Green Grand Prix Award for our efforts Power station-related environmental restoration – nuclear plant 10 982 9 331 7 177 in preserving the environment and harnessing power stations, as well as the number of environmental Power station-related environmental restoration – other power plant 7 705 6 942 6 762 the country’s natural resources legal contraventions. Relative emissions entail the Mine-related closure, pollution control and rehabilitation 5 465 4 366 4 309 measurement of emissions intensity, which is the amount of emissions per unit of output. PROGRESS Refer to note 28 in the annual financial statements for more information Refer to the fact sheet for information on the environmental impact of using or saving electricity The Minimum Emission Standards Reducing particulate and Minimum Emission Standards postponement decision allows our power stations to continue operating gaseous emissions In February 2015, the Department of Environmental Particulate emissions performance for the year was Affairs (DEA) issued their decision on our Minimum Environmental legal contraventions for the 0.37kg/MWhSO, which is worse than both the target Emission Standards postponement application. The year down to 18, from 34 last year decision allows power stations to continue operating and last year’s performance of 0.35kg/MWhSO, primarily due to slow progress in the installation from 1 April 2015 when the standards came into or maintenance of the necessary emissions control effect, but is contingent on the following: CHALLENGES measures at high emitting stations. The necessary • We must execute an emissions reduction work can only be performed when the station is programme at nine power stations, involving flue Particulate emissions performance at 0.37kg/MWhSO was worse than target offline for a sufficient period of time, allowing the gas desulphurisation retrofits at Kusile, Medupi and and prior year work to be done. Only six of our 13 coal-fired Kendal Power Stations, fabric filter plant retrofits stations achieved their emissions targets in 2014/15. at Grootvlei, Tutuka, Kriel, Matla and Duvha Several power stations are reaching the capacity limits of their ashing storage facilities Power Stations, and low-NOx burner retrofits at An ash incident occured at Lethabo Power Station Majuba, Matla and Tutuka Power Stations, all to be Funding constraints may result in critical in November 2014, due to a breakdown in the ash completed by 2025. The additional requirements environmental projects being deferred handling process, resulting in a build-up of ash which will increase the cost of our emissions retrofit Retrofitting of emissions control equipment at damaged the electrostatic precipitators, leading to programme to approximately R134 billion, several power stations is required by 2025, at a significantly higher emissions during the second half of previously estimated at R72 billion cost of R134 billion the year. In contrast, Majuba Power Station reported • We are required to implement air quality offsets excellent emissions performance, as its fabric filter for all Highveld power stations and submit a plan bags are exceptional barriers to emissions. However, in this regard to DEA by 31 March 2016 Majuba had very low load factors after the coal silo incident in November 2014. As a result, other higher emitting stations contributed proportionately more to the mix and thereby negatively impacted the overall emissions performance. 70 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 71 Environmental sustainability continued There is a high risk that execution of the retrofit plan will be delayed due to prevailing financial constraints, Eskom’s drive for cleaner air lengthy procurement processes and delays in designs Our efforts to improve air quality focused on reducing emissions of particulates or ash. The relative particulate for Tutuka and Kriel Power Stations. Installation emissions from coal-fired power stations have reduced by more than 90% over the last 35 years, as can be of the retrofits requires outages of 120 to 150 seen in the graph below. days per unit, which will only be available if the 6.0 operating margin is significantly higher by 2018. The Matla requirements remain an onerous challenge for us to Simunye meet. If we fail to execute as planned, we will be 5.0 Duvha non-compliant with emission licences, an offence that could result in our licence to operate being revoked. Completion 4.0 Arnot 4-6 of five-year enhancement investigation Kriel Flue gas desulphurisation (FGD), which reduces Hendrina Duvha 4-6 Lethabo 3.0 Majuba SO2 emissions by more than 90%, will be Hendrina 1-5 installed at Kusile Power Station prior to Tutuka Lethabo commissioning and at Medupi Power Station 2.0 Hendrina Arnot 1-3 Matla 6-10 between 2021 and 2024. In addition, Kusile Camden, Grootvlei, Komati, Ingagane, Duvha 1-3 Kriel Kendal and Medupi will both be fitted with fabric filter Salt River Kendal Camden plant, which reduces particulate emissions by 1.0 Colenso, Klip, Umgeni, Hexriver, Vaal, Vierfontein, more than 99.9%, as well as low-NOx burners, The dry ash dam at Tutuka Power Station – we continue to Wesbank, Wilge Matimba Matla which reduce NOx emissions. As a result, explore ways to recycle the large amounts of ash produced by 0.0 the commissioning of the new power stations our coal-fired stations 1982 1985 1990 1995 2000 2005 2010 2015 Operating performance will not cause a significant deterioration in ambient air quality or a significant increase in continuously progress into virgin land without being Relative particulate emissions, kg/MWhSO health risks. lined. While work to resolve the issues and submit the required licence applications is ongoing, the limitation Stations commissioned Stations decommissioned SO3 plant installed Fabric filter plant retrofits installed of land for ashing purposes and the availability of NEMA Section 30 performance funding to implement ashing projects are significant The Atmospheric Emission Licences state that risks to security of supply, since a power station Reduction in relative particulate minimum emissions from Eskom’s power stations from 1982 to the present, due to the decommissioning of older power stations and commissioning of more efficient technology. power stations can continue operating legally even if cannot continue operating without an ashing facility. emissions are high, provided they report the incident DEA has legislated national Minimum Emission them as the benefits are expected over a longer Kendal and Majuba Power Stations have submitted in terms of Section 30 of the National Environmental Standards which came into effect in April 2015, period. A five-year postponement of the emission environmental impact assessments and water-use Management Act, 1998 (NEMA), which came into with more stringent limits to be implemented in standards for selected limits was granted by DEA in licence applications for extension of their ashing effect in April 2014. NEMA requires an investigation February 2015. The first upgrade – a fabric filter plant facilities. As part of the applications, these stations 2020. These limits pertain to particulates, sulphur of reported incidents, whereby authorities can visit retrofit to reduce ash emissions – will commence at have requested transitional arrangements permitting dioxide and nitrogen oxides and take into account the site to check whether the incident has been Grootvlei Power Station by June 2015. them to continue ashing while preparation for lining is emissions reductions that can be achieved by adequately addressed. They can also issue a directive underway. However, they are at risk if the proposed employing best available technology. The 2020 limits if they are not satisfied. Our emissions reduction retrofits will be transitional arrangements are not agreed to by DEA require upgrades to our power stations estimated at complemented by the rollout of air quality offsets , There were 42 such incidents reported in the twelve and DWS. approximately R134 billion and require outages of which aim to reduce the burning of coal and wood in months to 31 March 2015, all of which have been 120 to 150 days per unit for 93 units, as well as a 20% Reducing water consumption low income settlements in the vicinity of our power investigated and reported according to the legislated increase in water consumption, negatively impacting stations. Studies have shown that domestic burning process. Water performance of 1.38ഢ/kWhSO for the year was both operational performance and environmental is by far the largest cause of air quality-related health better than the target of 1.39ഢ/kWhSO, but worse performance in terms of water usage. Given our Ashing facilities problems in South Africa, both because it occurs than the performance of 1.35ഢ/kWhSO in the prior current financial and capacity constraints and the Several power stations are reaching the limits of in people’s homes where it is directly inhaled, and year. Water performance has been negatively affected fact that there are currently no new or unallocated their current ashing areas. Majuba, Kendal, Kriel and because the temperature inversions at night trap the by excessive water leaks on systems and an increased water resources in Mpumalanga, it is simply not Camden are the power stations most impacted in pollution at the surface. number of unit trips, which require additional water feasible to fully comply with the emission standards the short term. Additional land in the vicinity of the during start-up. Opportunities for improvement in We are conducting a pilot study in KwaZamokuhle, by 2020. However, non-compliance comes at the risk respective power stations is required for new ashing water use are limited in the current constrained near Hendrina in Mpumalanga, where the of criminal prosecution and our licence to operate facilities to ensure continued operation of the power electricity supply environment; we have to wait for effectiveness of the offsets will be tested on 120 being revoked. stations in the longer term. Engagements with mining units to be taken out of service for maintenance to households. The interventions include the installation companies and the Department of Mineral Resources repair these leaks. Our approach to cleaner air is to focus our emissions of better thermal insulation, replacement of coal- (DMR) to address risks relating to the availability reduction efforts on the newer and/or higher burning stoves with more efficient, low-emission of land for the extension of ashing facilities at the Collieries decanting mine-affected water emitting power stations, and to request leniency for stoves, provision of an LPG heater and an electricity affected stations are ongoing. The Kilbarchan Colliery, a closed-down colliery owned the smaller, older power stations. While the newer subsidy. It is anticipated that the offsets will achieve a by a subsidiary of Eskom, is currently decanting mine- stations possess more efficient abatement technology, Furthermore, the nature of operations of the dry much greater improvement in air quality, and thereby affected water. We have commenced development ash stations (i.e. Kendal, Majuba and Tutuka) renders their capacities are also larger, with higher emissions improve people’s quality of life, at a fraction of the of an interim water treatment project and immediate them non-compliant to the National Environmental in terms of tonnages. In addition, they have a longer cost of the emissions reduction programmes at our interventions are in the process of being authorised. Management: Waste Act, 2008 as their ashing facilities remaining life, so it makes more sense to invest in power stations. 72 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 73 Operating performance Environmental sustainability continued Building a sustainable Reducing environmental legal We are participating in the DEA-led process to skills base Building strong skills contraventions determine carbon budgets (or greenhouse gas This strategy focuses on driving a culture of emission limits) and looking at a possible phased performance and creating a productive workforce, One Operational Health Dashboard contravention approach for implementation. We are continuing which includes building a strong learner pipeline. In was declared against Distribution Division for discussions with National Treasury regarding the order to sustain our business, we aim to recruit, the cutting of a tree without the required licence carbon tax proposed for implementation in June 2016. develop and retain appropriately skilled, committed, in the uMkhanyakunde Municipality in northern KwaZulu-Natal. Investing in renewable energy engaged and accountable employees. The number of environmental legal contraventions We continue to complement our commitment to We have reviewed our learner numbers and realigned decreased to 18, against 34 in 2013/14. There were environmental sustainability and reduce our carbon the learner pipeline aspiration from 14.5% of our eight water-related contraventions (pipeline leaks, footprint with purchases of renewable energy from staff complement to a more sustainable level of spills and sewerage spills), three cases of tree cutting IPPs. Renewable energy sources include wind, 6%, to be phased in over the next five years. The without the necessary approvals, three cases of solar power, biomass, landfill gas and small hydro shareholder compact target of learner throughput failure to obtain or comply with other required technologies. was not achieved mainly due to our inability to fund authorisations, two ash spillages, one non-compliance The 100MW Sere Wind Farm has been completed and the appointment of interns. However, we have been with waste legislation and one case of exceeding is now in commercial operation. The concentrated granted approval in principle by the National Skills particulate emissions limits. solar plant (CSP) project has advanced with the four Fund for an amount of R173 million to enhance the bids received having been evaluated in January 2015. skills development programme in the area of artisan The improvement in legal contraventions compared training. We plan to recruit 1 250 artisans in 2015/16. to the previous year is a result of increased efforts While the revised World Bank procurement process to ensure compliance, as well as changes in legislation has caused some delays, the plant is expected to be We have also partnered with basic education and with regard to atmospheric emissions contraventions in commercial operation in the 2017/18 financial year. higher learning institutions to promote access to resulting in fewer contraventions. HIGHLIGHTS quality education, particularly in the maths and science Operating performance Refer to pages 31 and 55 for further information on Sere and IPPs fields. Because of this, we have received a platinum Reducing our carbon footprint Exceeded targets for engineering and technician award from the University of KwaZulu-Natal for our Climate Change Strategy Other programmes include: learners support of their engineering faculty. We continue to promote a culture that recognises • Completion of the basic engineering work for Received a platinum award from the University sustainable development in all activities. Our Climate a ground-mounted PV project with an installed of KwaZulu-Natal for our support of their capacity of approximately 8MW at Grootvlei engineering faculty Change Strategy is now in place and is founded on the following six pillars: Power Station in June 2015 • Diversification of the Generation mix to lower • Finalising the Public-Private Partnerships (PPP) model to take the solar augmentation project at PROGRESS carbon-emitting technologies four power stations through the definition and • Energy efficiency measures to reduce demand, as National Skills Fund approved in principle an execution phases well as greenhouse gases and other emissions amount of R173 million to enhance the skills • A new business model for the Renewables development programme for artisan training • Adaptation to the negative impacts of climate Business has been proposed, which will assist change A two-year wage agreement for bargaining us in participating in the current DoE RE-IPP unit employees was concluded at 8.5% per • Innovation through research, demonstration and programme, through the formation of an Eskom annum, after the matter had been referred development Renewables Company (RENCO) to the CCMA • Investment through carbon market mechanisms • Expanding the RENCO mandate to include small- • Progress through advocacy, partnerships and scale embedded generation, small-scale renewables collaboration and a net metering market CHALLENGES Eskom has been invited to present this strategy Future focus areas Labour action delaying progress at new build at international meetings and has participated in sites, the latest of which was an extended work discussions to prepare business views on the issue. • Execution of local air pollutant emissions reduction stoppage at Medupi We have obtained approval for our COP 21 Strategy retrofit programmes activities, which ensures that we are prepared to • Implementation of the Exco-approved strategies influence the COP 21 climate change negotiations in to reduce our emissions, water and environmental LOWLIGHTS December 2015. footprint • Development and implementation of an air quality Learner throughput target not met because of We also continued our work with the following offset plan for all Highveld power stations as our inability to fund the appointment of interns business organisations concerned with sustainable required in terms of the response to the Minimum development: Emission Standards postponement application • World Business Council for Sustainable • Developing an Eskom view of technology choices, Development (WBCSD), which develops medium- with the aim of influencing and aligning to the future term business solutions to ensure a sustainable IRP allocation of lower carbon-emitting technologies planet by 2050 • Determining a carbon budget (emissions limit) Skills development and training remain internal priorities; • Global Sustainable Electricity Partnership, through appropriate for Eskom in the medium to long term, contracts with all key suppliers contain skills development targets which we hosted two workshops with the Southern with the aim of contributing to the Government African Power Pool on financing electrification process in a positive way 74 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 75 Operating performance Building a sustainable skills base continued Transformation and Learner numbers at 31 March 2015 social sustainability This dimension supports economic development and supplier transformation. It also covers people Target Target Target Actual Actual Actual Target Measure and unit 2019/20 2015/16 2014/15 2014/15 2013/14 2012/13 met? transformation and managing our corporate social investment initiatives. Engineering learners 391 521 1 086 1 315 1 962 2 144 Technician learners 652 869 652 826 815 835 Looking back on 2014 Artisan learners 1 434 1 912 2 390 1 752 2 383 2 847 The Employment Equity Plan and targets for the Learner throughput or one-year plan ending in March 2016 have been qualifying SC,1,2 n/a 1 200 1 200 424 – – approved by the Chief Executive and trade unions 1. This is a new measure effective from 1 April 2014, therefore comparative information is not presented. It is a cumulative year-to-date measure of learners completing consulted. Solidarity is the only trade union that has their studies. not endorsed the Employment Equity Plan. 2. The measure is expected to be replaced by a new measure, learner appointments, by 2019/20, although no target has yet been set. The CSI impact study was completed and the Eskom Training Development Foundation NPC obtained a score of The mandate of the Eskom Academy of Learning (EAL) is to close competency gaps by coordinating, integrating 73%, which reflects a high level of recognition and and addressing all learning needs of employees, as well as enhancing performance throughout our company, by visible impact that our contributions have on the focusing on business needs and catering for all facets of the learning value chain and learning operations. Because community. Going forward, we will use the results of of financial constraints, we will focus on skills development with a bias towards closing competency gaps for our the impact study to align our CSI strategy. specific requirements. Maximising our socio-economic Training spend for the year ended 31 March 2015 contribution Target Target Target Actual Actual Actual Target We aim to transform society through our HIGHLIGHTS supplier localisation drive, as well as corporate Operating performance Measure and unit 2019/20 2015/16 2014/15 2014/15 2013/14 2012/13 met? social investment in community education, health Training spend as % of gross Achieved second place in the community employee benefit costs SC 5.00 5.00 5.00 6.18 7.87 – and developmental projects. Our most direct upliftment category of the 2014 Sunday Times contribution to transformation is through the rollout Top Brands Survey of Government’s electrification programme. We acknowledge the importance of training and progress of the workgroups is positive. Although the Annual Business Investment Competition and continue to ensure that our employees are suitably industrial relations climate at the Sere project was Business Opportunities and Franchise Expo, Corporate social investment helping small and medium enterprises to The Foundation carries out our corporate social equipped for their roles. Even with the emphasis stable, the situation at the new build sites, particularly showcase their business, improve their business on cost savings through the BPP programme, we Medupi, remains sensitive. We have implemented skills and network investment mandate to promote transformation have exceeded the training spend target. We have site-specific agreements at all sites. and social sustainability. The Foundation focuses on Sustained good performance on procuring from initiatives to develop small and medium enterprises, embarked on practical ways to achieve savings, B-BBEE compliant and black-owned suppliers for instance security compliance training is now The Workplace Skills Plan and Annual Training education, health, food security, community completed in-house; this has resulted in substantial Report were submitted to the Energy and Water development, energy and the environment. During savings. In addition, through our learning committees, Sector Education and Training Authority (EWSETA) this financial year, our CSI activities have impacted after being approved by organised labour. To date PROGRESS 25 courses will be developed and implemented 323 882 beneficiaries, with a committed spend of in-house. we have received R31 million in mandatory grants. R115.5 million. However, financial constraints have Completed 159 853 electrification connections resulted in the Foundation having to reprioritise and Employee relations Future focus areas during the current year defer pipelined initiatives. Subsequent to the 2014 Central Bargaining Forum • Advancing learning and development aimed at Established the State-Owned Company’s negotiations being referred to the CCMA, a two-year closing competency gaps whilst developing skills DPE Forum in collaboration with DPE and The Foundation successfully completed five further Department of Trade and Industry to explore education and training (FET) college projects, salary and conditions of service settlement agreement for specific requirements, despite the current synergies in public sector procurement was reached and implemented. An increase of 8.5% financial constraints including Sekhukhune FET in Limpopo, Majuba FET was effected, substantially higher than the budgeted and Mnambithi FET in KwaZulu-Natal, West Coast • Working towards a cohesive organisational FET in Western Cape and Ekurhuleni West FET increase of 5.6%, which has negatively impacted development and leadership transformation CHALLENGES in Gauteng, as well as seven rural development the implementation of relevant BPP initiatives. response that will support the sustainability of Nevertheless, we view this multi-year agreement as projects, which include Ambadzifhele Primary School, leadership behavioural change Financial constraints resulted in the an opportunity for Eskom and the unions to start reprioritisation and deferral of pipelined CSI Rekhutjitje Secondary School, Pitsi Primary School • Stabilisation of worker unrest and demonstrations and Thabanapitsi Primary School, all in Limpopo, focusing on building relationships. initiatives with recommitment to the labour partnership Nthebe Primary School and Wisani Community The parties affected have also agreed to establish agreements at new build sites, as well as enhancing Accounting for supplier development and Centre in Mpumalanga and Macingwane High stakeholder management after an increase in localisation elements on awarded contracts workgroups to consider the pension fund, medical impacted by system challenges School in KwaZulu-Natal. Work done includes the aid, housing and recognition agreements as well as community-related issues affecting industrial construction of administration blocks, additional disciplinary and grievance procedures. They have relations stability at these sites classrooms, walkways and ablutions for boys and since established sound working relationships and the LOWLIGHTS girls, external works, the supply of water pumps and Jojo tanks, as well as wiring and electrical connection Below-target performance on attributable of classrooms. spend on BYO, BPLwD, QSE and EME suppliers The Mpumalanga Operating Unit launched the Kusile mobile health bus on 13 March 2015, which will continue to provide health support to local residents. 76 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 77 Transformation and social sustainability continued Socio-economic performance for the year ended 31 March 2015 Localisation, job creation and skills development through our capacity expansion programme Target Target Target Actual Actual Actual Target Target Target Target Actual Actual Actual Target Measure and unit 2019/20 2015/16 2014/15 2014/15 2013/14 2012/13 met? Measure and unit 2019/20 2015/16 2014/15 2014/15 2013/14 2012/13 met? Corporate social investment Local content contracted committed, R million 150.7 118.2 112.0 115.5 132.9 194.3 (Eskom-wide), % SC 70.00 65.00 65.00 25.13 40.80 – Total electrification connections, Local content contracted (new number1 255 000 195 000 193 151 159 853 201 788 139 881 build), % SC 70.00 65.00 65.00 33.62 54.60 80.20 1. The reporting boundary for the number of connections was changed in March 2014, to exclude farm dweller connections. The exclusion for the financial year ended Job creation, number 1 2 000 8 317 16 334 25 875 25 181 35 759 31 March 2015 was 1 080; for the financial years ended 31 March 2014 and 2013 it was 992 and 876 respectively. The March 2015 year-end target for the number of DoE funded connections was reduced by 564 to exclude the targeted farm dweller connections for the year (31 March 2014: 551). 1. Reduction in target due to reduced activity in new build projects. This year the Foundation produced a total of Electrification of grid schools and clinics To ensure a sustainable contribution to transformation, (2013/14: 547 contracts worth R5.6 billion), were 156 graduates from the Contractor Academy The Department of Basic Education continues to our contracts with key suppliers include targets for awarded within the capacity expansion programme and impacted 44 100 learners and teachers with fund the electrification of schools. However, the skills development and job creation. Our business has and of these, the local content committed amounted its maths and science programmes. In addition, DoE household electrification programme electrifies created 25 875 jobs as at 31 March 2015 through to R2.7 billion, representing 33.62% of the total DPE and the Foundation launched the Zikode and schools that are found within villages with 20Amp the capacity expansion programme at the Medupi, contract value. Harding Telematics Programme on 14 March 2015, supplies. Kusile and Ingula new build sites and Power Delivery as part of an ongoing commitment to addressing the Projects. The below-target performance of local content challenges of education and poverty in South Africa. With a capital outlay of R29 million, 44 schools were contracted is largely attributable to the decrease The telematics system, owned by the University of electrified for the first time. The main reason for A total of 2 390 contracts, worth R45.8 billion, in the number of contracts awarded with supplier Stellenbosch, provides a satellite-based interactive not electrifying all 57 targeted schools during the were awarded Eskom-wide during this financial year. development and localisation obligations, since the platform for learners to access education support in current year was the delayed signing of contracts with Approximately 25.13% of the contracted value was majority of the larger contracts were awarded during relevant departments. Operating performance various subjects such as maths and science with the identified as committed to local content. Of the 2 390 the early stages of the new build programme. aim of improving their performance. The programme contracts awarded, 465 contracts, worth R7.9 billion Universal access to electricity for identified clinics was aims to support learners from disadvantaged and achieved previously, therefore there is no target for underperforming schools across the country. Our B-BBEE attributable expenditure performance the electrification of clinics in the current year. The For more information on our CSI initiatives, please refer to the focus in future will be the electrification of new clinics Target Target Target Actual Actual Actual Target Foundation’s report for the 2014/15 year, which is available online and connecting them to the grid as quickly as possible. Measure and unit 2019/20 2015/16 2014/15 2014/15 2013/14 2012/13 met? Procurement from B-BBEE compliant suppliers, % of TMPS SC 90.00 80.00 75.00 88.89 93.90 86.30 Electrification Procurement from black-owned (BO) suppliers, In partnership with DoE, we have connected more % of TMPS SC 50.00 40.00 12.50 34.91 32.70 22.10 than 4.6 million households to the Distribution Procurement from black women-owned (BWO) network since 1991. Although DoE funds the suppliers, % of TMPS SC 9.00 7.00 6.00 6.61 7.20 4.70 connections, we carry the ongoing operational costs Procurement from black youth-owned (BYO) suppliers, % of TMPS SC 2.00 2.00 2.00 0.64 1.00 1.00 and receive revenue for electricity sold. Procurement spend with suppliers owned by The National Census of 2011/12 identified 3.4 million black people living with disabilities (BPLwD), % of TMPS SC 1.00 1.00 1.00 0 0 – South Africans who were still without electricity; the Procurement spend with qualifying small majority are found in the Limpopo, Eastern Cape enterprises (QSE) and exempted micro and KwaZulu-Natal provinces. In order to achieve enterprises (EME), % of TMPS SC 20.00 15.00 12.50 11.86 11.90 – the United Nations’ Millennium Development Goal of universal access to electricity by 2025, DoE has The attributable spend targets are in line with the by black people living with disabilities, qualifying small accelerated the Universal Access Programme. Codes of Good Practice, which prescribe a minimum enterprises and exempted micro enterprises is below The electrification programme is now being of 50% for the first five years that the Codes are target. This below-target performance is attributed to implemented in more remote areas, where the in effect. We have performed well in procuring the implementation of the Preferential Procurement construction of network infrastructure is more from B-BBEE compliant and black-owned suppliers, Policy Framework Act, 2000 (PPPFA), which places expensive due to the distances involved and, in including black women-owned suppliers. certain restrictions on the awarding of contracts and some cases, the difficult terrain encountered. As a therefore limits the ability to achieve the targets. Our total measured procurement spend (TMPS) Moreover, the majority of contracts placed with consequence, we did not achieve the targeted number was R136 billion for the financial year (2013/14: BYO, BPLwD, QSE and EME suppliers have been of of national electrification connections, because of the R133.5 billion), with a total attributable spend lower values. significant infrastructure investment required in these of R120.8 billion. The actual spend on B-BBEE provinces. We successfully completed 5 620 self- compliant suppliers amounted to R99 billion. The Together with DPE and the Department of Trade funded electrification connections as well as 1 080 procurement spend with B-BBEE compliant vendors, and Industry (dti), we have set up the State-Owned farm dweller connections, not included above. black-owned and black women-owned suppliers have Company’s DPE Forum and hosted a boot camp to Due to capital restrictions for the 2015/16 year, Since 1991, Eskom has connected over 4.6 million households to exceeded targets for the 2014/15 financial year, explore where we could collaborate with other SOCs the number of electrifications which we can fund the Distribution network although the performance on procurement spend in procuring identified commodities. ourselves will be limited. with black youth-owned suppliers, suppliers owned 78 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 79 Operating performance Transformation and social sustainability continued Building a solid Improving internal transformation reputation Building a solid reputation We continue our commitment to cultivating a balanced workforce that will support and further our organisation in We strive to be an organisation which is reputable, the most efficient and effective manner. The Employment Equity Plan is being implemented, although the objectives trusted and valued by all stakeholders. We aim of the plan have already been implemented in collaboration with the National Employment Equity and Skills to improve our current reputation and position Development Committee. ourselves as a key driver of economic growth. For Employment equity performance for the year ended 31 March 2015 this reason, we improve and safeguard our reputation by proactively educating our stakeholders. Target Target Target Actual Actual Actual Target Measure and unit 2019/20 2015/16 2014/15 2014/15 2013/14 2012/13 met? We are committed to effective communication around load shedding and we have extended our Employment equity – disability, % SC 2.50 2.50 2.50 3.12 2.99 2.59 communication platforms to more accessible platforms Racial equity in senior management, % black like Facebook and Twitter. Likewise our “MyEskom” employees SC 88.90 63.00 60.00 61.58 59.50 58.30 mobile application enables our customers to view Racial equity in professionals and middle account information, request updates to personal management, % black employees SC 88.90 73.00 70.00 72.28 71.20 69.60 details and check system as well as load shedding Gender equity in senior management, % female status in real time. It also provides recommendations employees SC 45.70 32.00 31.00 29.83 28.90 28.20 on how to reduce consumption. Gender equity in professionals and middle management, % female employeesSC 45.70 38.00 37.00 36.10 35.80 34.60 Our Power Alert and “5pm to 9pm” campaigns continue to reduce power demand during the evening peak. Cooking contributes significantly towards the Eskom had 41 787 employees at 31 March 2015, The disability ratio has stabilised as the number of HIGHLIGHTS residential evening peak consumption, contributing including both permanent staff and full-time new employees with disabilities identified matched approximately 8% of electricity use on an individual Operating performance contractors, while Rotek and Roshcon had 4 703 the number of disabled employees that terminated Improved our communication platforms household level, therefore the energy efficient cooking employees, for a total group headcount of 46 490. their employment. We have identified that not to better utilise social media platforms like campaign focuses on promoting energy efficient We reduced our company and divisional headcount all our facilities can suitably accommodate people Twitter and Facebook behaviour and cooking methods as well as alternative targets due to BPP initiatives, while manpower with disabilities. To address this, we established Launch of the “MyEskom” mobile application, energy sources. The energy efficiency recipe book, budgets were decreased based on the expected a disability charter to drive the initiative towards available in leading applications stores produced in partnership with the 49M campaign and savings from the relevant BPP value packages. more disability-friendly facilities and have launched a Pick n Pay, provides energy saving cooking hints and Release of an energy efficiency recipe book disability drive, which includes an accessibility audit to in partnership with the 49M campaign and tips and promotes the use of energy efficient cooking A key concern for our organisation was to ensure ensure a disability-friendly environment. In addition, Pick n Pay methods and appliances. skills availability and business continuity, accordingly 60 employees with disabilities will be identified and the voluntary separation packages were stopped. put on an accelerated programme for promotion. We completed the repackaging of IDM resources on We have however established a project to explore energy for Grade R to Grade 6 to ensure that the PROGRESS further opportunities to achieve manpower-related Future focus areas resources are Curriculum Assessment Policy (CAPs) efficiencies and ensure that targeted savings are compliant; the National Department of Education • Driving focused and heightened efforts on strategic We continually increase awareness on realised. has approved loading the resources on their official industrialisation in partnership with dti and other energy efficiency and the legal and safe use stakeholders, particularly in the procurement of of electricity website, Thutong. The employment equity targets on race representation for the year were achieved. Even though gender transformers equity targets were not met, prioritisation of • Finding innovative funding solutions for our CSI underrepresented groups during recruitment and spend LOWLIGHTS promotions is likely to address the gender target • Delivering on the DoE gazetted electrification Load shedding as well as financial sustainability gap, although the capping of headcount numbers and connections targets and leadership stability concerns negatively budgets could negatively affect future performance • Development of tools to measure the value of impacted our reputation against these targets. socio-economic development activities We actively pursue equitable employment in an effort to be representative of the landscape in which we operate 80 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 81 Building a solid reputation continued Financial review Awarding of the Eskom trophy for best Honours student in Energy Studies at the University of Johannesburg 84 Chief Financial Officer’s report 86 Condensed annual financial statements 91 Key accounting policies, significant judgements and estimates 93 Financial sustainability Operating performance Front: Mr Greg Tosen (General Manager: Operations, Eskom Research & Development Department); Mr Paul Vermeulen (winner of the Eskom Energy Award); Mrs Caron Vermeulen (wife of winner); Dr Isaac Rampedi (Deputy Head, Department of Geography, Environmental Management & Energy Studies, University of Johannesburg) Back: Prof John Ledger (Associate Professor of Energy Studies, Department of Geography, Environmental Management & Energy Studies, University of Johannesburg); Mr Dave Lucas (Eskom Corporate Specialist, Environmental Management) For the third year, Eskom sponsored a trophy and prize for the highest achieving student in the Energy Studies Honours programme at the University of Johannesburg, started in 1979. It comprises three modules – Energy Economics, Energy Technology and International Aspects of Energy – in the first year, and two modules – Energy Modelling and Energy Policy Formulation – plus a project in the second year. In 2014 there were 54 Honours students registered for the degree. The programme gives them an insight into the rapidly changing world of energy technology, and includes field trips to our Lethabo Power Station, Sasol I and II at Secunda, Johannesburg’s City Power facilities, MTN headquarters, NECSA and others. Future focus areas • Implementation of Operation Khanyisa’s Customer Compliance Approach in the Mmabatho and Rustenburg areas of North West, which entails door-to-door education of customers on the legal, safe and efficient use of electricity as well as free basic electricity and inclining block tariffs • Continue the 49M Know Your Number campaign, which offers a calculator aimed at assisting South Africans to calculate and understand their energy consumption 82 Integrated report | 31 March 2015 Integrated report Eskom | 31Holdings March 2015 SOC Ltd 83 Chief Financial Officer’s report I am proud to present my financial report for the year Review of our financial performance Liquidity and financial sustainability ended 31 March 2015. The group net profit for the year ended 31 March 2015 We are working on the following steps to address was R3.6 billion (2013/14: R7.1 billion), and R2.8 billion the liquidity and financial sustainability concerns we This year presented us with a number of challenges, for the company. currently face: emanating from the revenue shortfall that resulted from NERSA’s MYPD 3 determination of 8% instead • Migration to a cost-reflective electricity price, to Overall, our financial performance at an operating achieve a return on assets at least equal to the cost of the 16% we applied for, which left a significant level deteriorated over the last year. Electricity sales gap that we need to close. At the same time, we of capital declined by 0.7% in 2014/15, with the impact of continued with the build programme, the biggest of • Initiating a further revenue adjustment application load shedding contributing 548GWh to the decline, its kind in Africa – the total spent on the project since for the second year of the MYPD 3 period effectively 34% of the loss in sales. Although the 2005 is R265 billion. (2014/15), together with a selective reopener to electricity price increased by 8%, the above-inflation increase revenues to a more realistic level Financial health of the business increase in costs borne by Eskom is not sustainable. Primary energy costs for the year increased by • Recovery of arrear customer debt, particularly The financial health of the organisation has R13.6 billion, driven by the increased use of IPPs from defaulting municipalities and Soweto deteriorated to such an extent that the net cash to reduce the effect of load shedding, as well as the • Realisation of targeted cost savings under the BPP from operations, which is cash available after debt amount of R8 billion due in terms of the Medupi take- programme Nonkululeko Veleti and interest repayments, will soon be insufficient to or-pay coal supply agreement as a result of delays. • Continuing with our borrowing programme to Acting Chief Financial Officer support both continued operations and growth in source additional funding the business. Income of R4.2 billion from the Duvha Unit 3 • With Government support, we aim to avoid insurance claim and the fair value gains recognised The financial position has deteriorated as a result of further credit ratings downgrades and ultimately, on financial instruments and embedded derivatives the following: regain an investment grade credit rating provided some relief. However, arrear municipal Today’s constraint is tomorrow’s • Earning an inadequate pre-tax real rate of return debt increased by R2.4 billion, resulting in a significant For further information on cost-reflective prices, refer to pages 94 and 95 opportunity as the current price of electricity is not cost- increase in the provision for impairment. under “Financial sustainability” reflective, as required by Government’s Electricity Pricing Policy Cash and cash equivalents for the company decreased from R19 billion in 2013/14 to R8 billion Managing outstanding electricity debt • Additional costs incurred to balance the constrained supply-and-demand equation by using at 31 March 2015. Net cash from operating activities We continue to make every effort to ensure the expensive OCGT stations and IPPs significantly of R25.4 billion was not sufficient to cover the debt that customers pay their accounts, by constantly more than anticipated repayments due and interest payable of R15.3 billion monitoring the payments and entering into reasonable and R17.1 billion respectively. A total of R53.2 billion payment agreements depending on the circumstances In terms of Government’s Electricity Pricing Policy, was spent on property, plant and equipment, intangible of defaulting customers. In March 2015, we approved we are entitled to recover prudent operating assets and future fuel; this was largely funded by new various load management interventions with respect costs and earn a reasonable rate of return on our debt of R50.6 billion. to the top defaulting municipalities, to limit our assets. Retrospective recovery of prudent costs as financial risk exposure. This included communicating Financial review determined by NERSA is available by means of a As a result of the above, we experienced a our intention to interrupt supply to the top 20 revenue adjustment through the Regulatory Clearing deterioration in all of the company’s critical financial defaulting municipalities with effect from 5 June 2015 Account (RCA) mechanism, although we have to solvency ratios. Interest cover decreased from during morning and evening peak times if they did not finance the shortfall until it is recovered through tariff 0.65 to 0.44, the debt-to-equity ratio worsened from settle their debt or make payment arrangements. The increases in future years. 2.21 to 2.70, the debt service cover ratio decreased majority of the defaulting municipalities have since from 1.22 to 0.82 and the gross debt-to-EBITDA ratio signed agreements to settle their debt. Refer to page 99 under “Financial sustainability” for an update on the deteriorated from 11.84 to 13.32. revenue applications submitted to NERSA The residential revenue management strategy, A positive rate of return is required to be financially which includes Soweto, continues to drive energy sustainable in the long term; currently the pre-tax protection and energy loss programmes, such as The current situation is exacerbated by the fact that real rate of return is 0.57% (2013/14: negative 0.26%). we are busy with an extensive build programme Switch OVA!, and improving debt collection among and a maintenance drive, both of which require The way forward small power users. Two important steps are the funding. The latest capital budget for the build installation of split metering and the conversion of The future of our company is dependent on a solid meters of non-paying customers to prepaid meters. programme per the Corporate Plan for the five-year financial foundation. During this stabilisation phase, Although we have encountered protests against the period to 31 March 2020 amounts to R293 billion, we are focused on financial recovery on the way to installation of prepaid meters, we are determined to while the borrowing plan over the same period is achieving financial sustainability. The Board Recovery continue with the project. only R237 billion. Unless we are able to raise an and Build Programme Committee is focused on, additional R50 billion, it may be necessary to delay Savings through BPP amongst other things, the financial recovery of the some of the planned capital projects. business. This involves achieving cost-reflectivity in We implemented the BPP programme, which We are cognisant of the fact that the recent credit our price, being more cost efficient in our operations focuses on the reduction of our cost base, increased ratings downgrades to sub-investment grade will in and regaining the confidence of stakeholders, productivity, operational efficiencies and revisions future result in increased interest payments and make particularly our customers and providers of funding, of our business model and strategy, to assist in the implementation of funding initiatives more difficult. to secure our sustainability and future growth. closing the MYPD 3 revenue shortfall. Cash savings 84 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 85 Chief Financial Officer’s report Condensed statements of financial position continued at 31 March 2015 opportunities to the value of R61.9 billion over the Conclusion Group Company five years to 31 March 2018 have been identified During this turnaround period, we remain focused through the development of various value packages. 2015 2014 2015 2014 on improving business efficiencies, arresting the trend Rm Rm Rm Rm At the end of the year, cash savings of R9 billion have in outstanding debt and improving the Generation been banked. performance. Specific recovery plans are being Assets implemented and monitored on a continuous basis Non-current assets 505 198 439 869 498 326 433 440 Although the targeted savings for 2014/15 were not achieved, we will continue to be more efficient and to mitigate the effects of the new build programme Property, plant and equipment and intangible assets 458 881 404 389 460 214 405 017 spend more prudently. Although critical, a reduction challenges and to accelerate the schedules as far as Investment in equity-accounted investees 348 318 95 95 in costs, in terms of estimated savings to be realised possible to avoid further delays. Future fuel supplies 9 079 8 744 9 079 8 744 Investment in securities 2 481 4 841 2 481 4 841 under the BPP programme, may be difficult to achieve. I wish to convey my gratitude and appreciation to Loans receivable 8 646 8 654 – – Government support package every Eskom employee and contractor for working Derivatives held for risk management 19 242 9 361 19 242 9 361 The R23 billion equity injection is expected to be together with our leadership to move us toward Other assets 6 521 3 562 7 215 5 382 received from Government over the two financial financial sustainability. Current assets 57 686 64 977 59 442 66 862 years ending 31 March 2017. The first amount We are committed to operating within our financial Inventories 16 033 12 422 15 896 12 135 of R10 billion is expected to be received around means and in a way that does not compromise Investment in securities 6 015 6 066 2 321 3 319 June 2015. In addition, Government will give the sustainability of the power system, the natural Loans receivable 269 329 6 553 6 665 consideration to converting part of the existing environment, the safety of our people or surrounding Derivatives held for risk management 709 2 812 709 2 812 R60 billion subordinated loan to equity. communities. Our new Board has reiterated that Trade and other receivables 16 856 16 578 18 553 16 882 our financial sustainability and going concern status Financial trading assets 6 322 4 265 5 143 3 226 Funding Other assets 2 619 2 829 2 281 2 779 will not be compromised in support of operational Total funding from debt securities and borrowings Cash and cash equivalents 8 863 19 676 7 986 19 044 sustainability or balancing supply and demand. increased by R42.9 billion during the year, bringing the Together with Government, we will continue to seek Non-current assets held-for-sale – 147 – – total balance to R298.1 billion as at 31 March 2015. financial solutions to ensure that we remain financially Total assets 562 884 504 993 557 768 500 302 Notwithstanding the financial and operational sustainable and able to deliver on our mandate. constraints and our sub-investment grade status, we Equity managed operations and capital requirements within Capital and reserves attributable to the owner of the company 122 247 119 784 116 040 114 671 both the current liquidity and longer term funding requirements. Plans are in place for the execution of Liabilities the approved borrowing programme of R237 billion Non-current liabilities 366 002 310 915 364 020 308 716 for 2015/2016 to 2019/2020. Debt securities and borrowings 277 458 234 562 275 954 233 042 Nonkululeko Veleti Embedded derivatives 6 647 7 871 6 646 7 870 Avoiding further credit ratings downgrades and Acting Chief Financial Officer Derivatives held for risk management 520 310 520 310 ultimately, regaining investment grade status, with Deferred tax 20 131 19 461 19 825 18 842 Financial review support from our shareholder, is critical at this point. Deferred income 14 055 12 518 14 055 12 518 We have engaged with the ratings agencies to clarify Employee benefit obligations 11 960 9 922 11 665 9 674 their concerns; we aim to work on addressing those Provisions 31 078 21 157 31 039 21 093 to regain their confidence. Other liabilities 4 153 5 114 4 316 5 367 Current liabilities 74 635 74 181 77 708 76 915 Debt securities and borrowings 19 976 20 258 22 176 22 227 Embedded derivatives 1 375 1 461 1 375 1 461 Condensed annual financial statements Derivatives held for risk management 2 845 1 197 2 845 1 197 Employee benefit obligations 3 926 4 561 3 661 4 256 Provisions 9 972 9 601 9 807 9 102 The company and group financial results have The consolidated financial statements have been Trade and other payables 27 984 28 531 29 267 30 062 been extracted from the Eskom Holdings SOC Ltd audited by the group’s independent auditors, Financial trading liabilities 5 499 5 658 5 499 5 658 consolidated financial statements for the year SizweNtsalubaGobodo Inc. in accordance with the Other liabilities 3 058 2 914 3 078 2 952 ended 31 March 2015 that have been prepared in Public Audit Act of South Africa, 2008, the General accordance with International Financial Reporting Notice issued in terms thereof and International Non-current liabilities held-for-sale – 113 – – Standards (IFRS) and in the manner required by the Standards on Auditing, who issued an unmodified Total liabilities 440 637 385 209 441 728 385 631 Companies Act, 2008. opinion. Total equity and liabilities 562 884 504 993 557 768 500 302 The consolidated financial statements have been The consolidated financial statements, with the unmodified audit opinion prepared under the supervision of the acting Chief issued by the independent auditors, are available online Financial Officer, Ms Nonkululeko Veleti CA(SA) and were duly approved by the Board of Directors on Any reference to future performance plans and/or 28 May 2015. strategies included in the integrated report has not been The consolidated financial statements may be reviewed or reported on by the group’s independent inspected at Eskom’s registered office. auditors. 86 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 87 Condensed income statements Statements of comprehensive income for the year ended 31 March 2015 for the year ended 31 March 2015 Group Company Group Company Restated1 Restated1 2015 2014 2015 2014 2015 2014 2015 2014 Rm Rm Rm Rm Rm Rm Rm Rm Profit for the year 3 618 7 089 2 796 5 424 Continuing operations Other comprehensive (loss)/income (1 155) 3 556 (1 162) 3 605 Revenue 147 691 138 313 147 691 138 313 Items that may be reclassified subsequently to profit or loss (501) 2 925 (525) 2 948 Other income 4 444 1 441 6 645 1 873 Primary energy (83 425) (69 812) (83 425) (69 812) Available-for-sale financial assets – net change in fair value (63) (377) (64) (376) Net employee benefit expense (25 912) (25 622) (22 187) (22 384) Cash flow hedges – effective portion of changes in fair value 471 5 697 471 5 697 Depreciation and amortisation expense (14 115) (11 937) (14 001) (11 934) Changes in fair value 528 5 951 528 5 951 Net impairment loss (3 766) (1 557) (3 755) (1 549) Ineffective portion of changes in fair value reclassified to profit or loss (57) (254) (57) (254) Other expenses (15 771) (19 177) (22 083) (24 340) Net amount transferred to initial carrying amount of hedged items (1 136) (1 226) (1 136) (1 226) Profit before net fair value gain/(loss) and net finance cost 9 146 11 649 8 885 10 167 Foreign currency translation differences on foreign operations 24 (23) – – Net fair value gain/(loss) on financial instruments excluding embedded derivatives 630 (620) 539 (753) Income tax thereon 203 (1 146) 204 (1 147) Net fair value gain on embedded derivatives 1 310 2 149 1 310 2 149 Items that may not be reclassified subsequently to profit Profit before net finance cost 11 086 13 178 10 734 11 563 or loss (654) 631 (637) 657 Net finance cost (6 109) (4 058) (6 769) (4 619) Remeasurement of post-employment medical benefits (909) 882 (884) 912 Finance income 2 996 3 189 2 360 2 622 Income tax thereon 255 (251) 247 (255) Finance cost (9 105) (7 247) (9 129) (7 241) Total comprehensive income for the year 2 463 10 645 1 634 9 029 Share of profit of equity-accounted investees, net of tax 49 43 – – Attributable to: Profit before tax 5 026 9 163 3 965 6 944 Owner of the company 2 463 10 645 1 634 9 029 Income tax (1 366) (2 137) (1 169) (1 520) Profit for the period from continuing operations 3 660 7 026 2 796 5 424 Discontinued operations (Loss)/profit for the period from discontinued operations (42) 63 – – Condensed statements of changes in equity for the year ended 31 March 2015 Profit for the period 3 618 7 089 2 796 5 424 Attributable to: Group Company Owner of the company 3 618 7 089 2 796 5 424 2015 2014 2015 2014 Rm Rm Rm Rm Financial review 1. Refer to note 48 in the annual financial statements for details of the restatement of comparatives. Balance at the beginning of the year 119 784 109 139 114 671 105 642 Total comprehensive income for the year 2 463 10 645 1 634 9 029 Common control transfer – – (265) – Balance at the end of the year 122 247 119 784 116 040 114 671 Comprising: Share capital – – – – Equity reserve 30 520 30 520 30 520 30 520 Cash flow hedge reserve 5 699 6 178 5 699 6 178 Available-for-sale reserve 4 50 5 51 Unrealised fair value reserve (3 771) (7 744) (3 771) (7 744) Foreign currency translation reserve 18 (6) – – Accumulated profit 89 777 90 786 83 587 85 666 122 247 119 784 116 040 114 671 88 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 89 Condensed statement of cash flows Key accounting policies, significant judgements and estimates for the year ended 31 March 2015 Group Company Key accounting policies Determination of fair value Certain of our key accounting policies are set out Fair values are based on quoted bid prices if available, Restated 1 Restated 1 below. otherwise valuation techniques are used. 2015 2014 2015 2014 Rm Rm Rm Rm Refer to note 2 in the annual financial statements for full details of all Embedded derivatives Cash flows from operating activities accounting policies applied in their preparation An embedded derivative is an element of a combined Profit before tax 5 026 9 163 3 965 6 944 instrument that also includes a non-derivative host Adjustment for non-cash items 31 370 21 194 32 132 21 601 Our summarised annual financial results do not contract, with the effect that some of the cash Changes in working capital (8 868) (7 516) (10 647) (5 812) include all the information required for full financial flows of the combined instrument vary in a way Cash generated from operations 27 528 22 841 25 450 22 733 statements and should be read in conjunction with similar to those of a standalone derivative. Embedded Net cash flows (to)/from derivatives held for risk management (751) 676 (751) 676 the annual financial statements for the year ended derivatives are disclosed separately from hedging Interest received 697 445 696 443 31 March 2015, which have been prepared on the instruments. Embedded derivatives that are not Interest paid (10) (136) (10) (136) going concern basis. separated are effectively accounted for as part of the Income taxes paid (153) (184) – – hybrid instrument. The separate and consolidated financial statements Net cash from operating activities 27 311 23 642 25 385 23 716 are prepared on the historical cost basis except for Provisions certain items that are measured at fair value. We recognise a provision when we have a present Cash flows from investing activities legal or constructive obligation as a result of a past Proceeds from disposal of property, plant and equipment 139 28 136 23 We have consistently applied the accounting policies event, when an outflow of resources is probable Acquisitions of property, plant and equipment and intangibles (52 424) (53 160) (51 204) (53 611) to all periods presented, except for the new or and the amount can be reliably estimated. We also Expenditure on future fuel supplies (1 999) (2 675) (1 999) (2 675) revised statements and interpretations implemented provide for the estimated decommissioning cost of Increase in payments made in advance (966) (2 088) (966) (2 088) during the year, the impact of which is detailed in the nuclear and other generating plant, as well as for Expenditure incurred on provisions (1 670) (1 349) (1 670) (1 349) full set of annual financial statements. spent nuclear fuel and mine-related closure, pollution Increase in investment in securities and financial trading assets (966) (531) – – control and rehabilitation. Interest received 1 068 954 465 394 Foreign currency translation Other cash flows from investing activities 432 2 360 446 2 343 Foreign currency transactions are translated into Rand Revenue Net cash used in investing activities (56 386) (56 461) (54 792) (56 963) using the exchange rates prevailing at the dates of the We earn revenue through the sale of electricity transactions. Non-monetary items are measured at to customers. Revenue is recognised when the Cash flows from financing activities historical cost. Foreign loans are remeasured to spot electricity is consumed by the customer, but only to Debt securities and borrowings raised 49 500 44 142 50 559 44 155 rate at every reporting date. the extent that it is considered recoverable. Debt securities and borrowings repaid (14 429) (8 014) (15 251) (7 488) Net cash flows (to)/from derivatives held for risk management (1 982) 7 751 (1 982) 7 751 Property, plant and equipment Capital contributions received from Increase in investment in securities and financial trading assets and liabilities 778 9 191 778 9 191 Property, plant and equipment is stated at cost less customers Interest received 1 449 2 083 1 417 2 047 accumulated depreciation and impairment losses. Contributions received in advance from electricity Interest paid (17 064) (13 102) (17 106) (13 120) Land is not depreciated whilst other assets are customers to construct infrastructure dedicated to Financial review Other cash flows from financing activities (298) (532) (350) (579) depreciated using the straight-line method to allocate them are recognised as other revenue once the Net cash from financing activities 17 954 41 519 18 065 41 957 their cost to their residual values over their estimated customer is connected to the electricity network. useful lives. Spare parts classified as strategic and Net (decrease)/increase in cash and cash equivalents (11 121) 8 700 (11 342) 8 710 critical spares are treated as property, plant and Government grants Cash and cash equivalents at the beginning of the year 19 676 10 620 19 044 9 830 equipment. Repairs and maintenance is charged to Government grants received for the creation of Foreign currency translation 24 (23) – – profit or loss during the financial period in which it electrification assets are first recognised in liabilities Effect of movements in exchange rates on cash held 284 504 284 504 is incurred. as deferred income and thereafter credited to profit Cash and cash equivalents at the beginning of the year attributable to or loss within depreciation and amortisation expense non-current assets held-for-sale – (125) – – Financial assets on a straight-line basis over the expected useful lives Cash and cash equivalents at the end of the year 8 863 19 676 7 986 19 044 Non-derivative financial assets are initially recognised of the related assets. at fair value net of any directly attributable transaction 1. Refer to note 48 in the annual financial statements for details of the restatement of comparatives. costs and subsequently measured per asset category. Impairment of non-financial assets Thereafter, held-for-trading financial assets are The carrying amounts of property, plant and recognised at fair value through profit or loss whilst equipment and intangibles are reviewed at each loans and receivables are measured at amortised reporting date to determine if there is any indication cost using the effective interest rate method less of impairment, or when events indicate that the accumulated impairment losses. carrying amount may not be recoverable. Servitude rights, that are considered to have an indefinite useful Financial liabilities life, are not subject to amortisation or depreciation Non-derivative financial liabilities are initially but are tested annually for impairment. recognised at fair value net of any directly attributable transaction costs. Thereafter, held-for-trading Finance income financial liabilities are recognised at fair value through Finance income comprises interest receivable on profit or loss whilst those financial liabilities that are loans, advances, trade receivables, finance lease not held for trading are measured at amortised cost receivables and income from financial market using the effective interest rate method. investments, and is recognised as it accrues using the effective interest method. 90 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 91 Financial review Key accounting policies, significant judgements and estimates continued Financial Finance cost Post-employment medical benefits sustainability Looking back on 2014 Finance cost comprises interest payable on borrowings, We recognise a liability for post-employment medical In the previous report we highlighted the looming interest resulting from hedging instruments and benefits to qualifying retirees. The post-employment liquidity concerns resulting from the revenue shortfall interest from the unwinding of discount on liabilities. medical benefits plan is unfunded. following the MYPD 3 determination, coupled with the To the extent that assets are financed by borrowings, increasing costs of ensuring security of supply. During certain borrowing costs are capitalised to the cost Occasional and service leave the year under review we focused on addressing the of assets over the period of construction until the We recognise a liability for occasional and service growing financial constraints using the tools at our asset is substantially ready for its intended use. The leave, based on an actuarial valuation performed disposal, which include the Business Productivity weighted average of borrowing costs applicable to all annually. Programme and the NERSA RCA mechanism, which borrowings is used, unless an asset is financed by a will provide some relief during the coming year. Provisions for decommissioning, mine specific loan, in which case the specific rate is used. closure and rehabilitation The stability of the power system has deteriorated over Significant judgements and estimates Provision is made for the estimated decommissioning the past year, and in an attempt to avoid the negative cost of nuclear and other generating plant and for impact of load shedding, we relied on OCGTs and We make judgements, estimates and assumptions the management of spent nuclear fuel assemblies supply from IPPs to supplement generating capacity, concerning the future. The resulting accounting and radioactive waste. Provision is also made for the albeit at prices that are not sustainable. estimates will, by definition, seldom equal the actual estimated mine-related closure, pollution control and results. Estimates and judgements are evaluated rehabilitation costs at the end of the life of certain continually and are based on historical experience coal mines, where a constructive and contractual and other factors, including expectations of future obligation exists to pay coal suppliers. events that are believed to be reasonable under the circumstances. Revisions to accounting estimates are Provision for coal-related obligations recognised in the period in which they are revised and We provide for coal-related obligations which arise HIGHLIGHTS the future periods they affect. out of contractual obligations as a result of delays The items that follow are those that have a significant in commissioning of the related power stations, Additional revenue of R7.8 billion allowed risk of causing a material adjustment to the carrying which are determined by taking into account the through NERSA revenue adjustment for anticipated commissioning dates, future coal prices, 2015/16 year amounts of assets and liabilities within the next financial year. coal utilisation and coal stockpiles. Successful international bond issue of USD1.25 billion The estimates and assumptions are set out in detail in note 3 in the annual financial statements PROGRESS Embedded derivatives Government support of R23 billion secured We have entered into a number of agreements to from 2015/16 to ease liquidity pressure Financial review supply electricity to electricity-intensive businesses, where the revenue from these contracts is linked BPP cash savings of R9 billion banked to commodity prices and foreign currency rates or foreign production price indices, giving rise to embedded derivatives. CHALLENGES Arrear customer debt, particularly municipalities and Soweto, continues to escalate Expenditure on OCGTs of R9.5 billion exceeded original budget by R3.5 billion Operating under liquidity constraints LOWLIGHTS Downgraded to sub-investment grade by both Moody’s and Standard & Poor’s 92 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 93 Financial sustainability continued Financial sustainability: the Eskom context Overnight cost of construction was used to value Even when considering historical asset values, the may hamper the sourcing of future funding or Financial sustainability is the ability to cover Generation assets, adjusted for the specific plant rate of return is substantially below the cost of significantly increase the cost thereof. operating costs from revenue and secure stable configuration to ensure a like-for-like valuation. capital, resulting in the deterioration of the balance Transmitting and distributing assets were valued sheet, evidenced by the weak performance on most Our financial position will improve only once the and sufficient returns to fund future growth, while using the latest market prices at the time of of the financial ratios. price of electricity is cost-reflective. The graph maintaining and replacing the current asset base. the valuation. Revaluations are not undertaken below depicts the average price of electricity Financial sustainability, in our context as an asset each year but are subjected to inflation-linked The situation is exacerbated by the ambitious compared to a cost-reflective price based on assets intensive state-owned entity, requires a return on adjustments for the intervening years. These capital expansion programme we embarked on valued using the historical cost, as well as using assets which is at least equal to the cost of capital. revalued or inflation-adjusted values are then to supplement our ageing infrastructure and to a replacement value and in most cases, assuming Funding of capital can be sourced from either used to calculate depreciation and the rate of allow for growth. Although the programme has normal operating conditions. It is apparent that borrowings or equity, in the form of investment by return on assets. added to the asset base, it has been funded from the price has not been cost-reflective since at the shareholder or retained earnings. The level of a weak balance sheet. To address this, we have least 2006; it is estimated that the cumulative borrowings we are able to raise is dependent on The price of electricity will only be cost-reflective secured support from our shareholder, in the form revenue shortfall over this period is in excess of the extent of our current and future profitability once we earn a return on assets equal to the cost of guarantees and a subordinated loan. Ratings R176 billion. This shortfall was funded by debt, with and the strength of our balance sheet. Earning an of capital. NERSA has calculated our current pre- agencies, namely Moody’s and Standard & Poor’s Government support in the form of guarantees and appropriate return will enable us to accumulate tax real weighted average cost of capital (WACC) (S&P) have reacted to the current position by a subordinated loan. sufficient equity to strengthen the balance sheet to be 7.65%, which implies that we should earn a downgrading us to sub-investment grade, which and raise additional debt to fund the capacity return on assets of at least 7.65%. Historically, the expansion programme. actual pre-tax return on assets has been below the 120 target real and calculated nominal thresholds; even To this end, the price of electricity has to reaching negative levels in some years. The graph be cost-reflective to ensure a fair return and below illustrates our normalised rate of return 100 thereby financial sustainability. The lack of a cost- based on the regulatory methodology, assuming reflective price, as is currently the case, hampers normal operating conditions. the recovery of efficient costs, as well as the 80 maintenance and replacement of existing assets to 16 allow for growth in the business. 14 60 NERSA applies the following equation to determine our revenue requirement: Revenue requirement = primary energy + 12 40 operating costs + depreciation + return on assets 10 Afterwards, the RCA mechanism reconciles the Financial review 20 variance between the MYPD decision, which is 8 based on projections and assumptions, and actual revenue and certain costs. The mechanism allows us 0 2005/6 2006/7 2007/8 2008/9 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 to adjust for the over- or underrecovery of some of 6 the preceding years’ regulated costs and revenues through the electricity price in subsequent years, as 4 approved by NERSA. Cost-reflective prices, c/kWh When considering the application, NERSA applies 2 Historic valuation method Replacement valuation method Actual average annual price the principle of prudency in terms of capital expenditure, operating costs and costs related to 0 primary energy. It is our responsibility to ensure that we operate efficiently and that operating costs In line with the Electricity Pricing Policy, our A substantial increase would be required to migrate include only those that would have been incurred -2 revenue applications to NERSA have been based to cost-reflectivity, which will have a significant 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 under normal conditions. on a gradual migration towards cost-reflective impact on customers. Certainty on the electricity prices, even though the present financial difficulties price path towards cost-reflectivity will provide The Electricity Pricing Policy issued by DoE requires Return on assets (ROA), % highlight that the rate of migration is too slow. assurance to investors. An immediate increase that NERSA base its revenue determination on the alone will not address the liquidity concerns as depreciated replacement value of assets, not the ROA – historical valuation method Pre-tax nominal WACC the balance sheet will only be restored over a historical cost. This method has an impact on ROA – replacement valuation method Pre-tax real WACC period of time. the depreciation and return components of the revenue requirement equation. We have undertaken a revaluation of our assets considering the expected useful life of our plant of up to 80 years, using replacement cost and taking into account the estimated remaining life. 94 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 95 Financial sustainability continued Financial results of operations Primary energy staff-related expenses significantly reduced as a result We have made a profit for the financial year, but the actual financial performance, especially at an operating level, The primary energy cost for the year was R83.4 billion of BPP cost savings initiatives. Employee benefits to reflects the financial challenges that we currently face. Commentary on performance and planned actions to address (2013/14: R69.8 billion). The impact of the amount the value of R6.4 billion (2013/14: R5.7 billion) were the current reality is set out below. due in terms of the Medupi take-or-pay coal supply capitalised to the cost of the build programme. agreement due to delays and energy purchases from Other operating expenses Refer to the annual financial statements available online, which detail the financial performance of the company and group IPPs led to an increase of R13.6 billion compared to Net impairment the previous year. A breakdown of the total cost for The net impairment expense for the year was Company profit for the year was R2.8 billion, down 48% from the R5.4 billion reported in the previous year. the year is depicted below: R2.2 billion higher than that recognised in 2013/14 Insurance proceeds of R4.2 billion, R1.5 billion of which was borne by Escap and the balance by our reinsurer, 8 353 310 due to: together with gains of R1.8 billion from fair value adjustments on financial instruments and embedded derivatives • Impairment of R1.05 billion raised on the Majuba provided a swing towards profitability which does not fully reflect the underlying performance. Underground Coal Gasification Project. As a 9 453 result of funding constraints, a capital project Target Target Actual Actual Actual Target Measure and unit 2019/20 2014/15 2014/15 2013/14 2012/13 met? reprioritisation was undertaken, leading to approval of the closure and rehabilitation of the project Electricity revenue per kWh (including 3 679 environmental levy), c/kWh1 117.42 67.48 67.91 62.81 58.49 51 554 • Impairment of arrear customer debt. The arrear Electricity operating cost per kWh (including debt balance increased significantly during the depreciation and amortisation), c/kWh1 69.76 63.71 67.52 59.67 54.15 year and the likelihood of recovery became less 9 546 probable. Arrear municipal debt alone increased Cost of electricity (excluding depreciation), R/MWhSC, 2 819.08 532.63 610.43 541.92 496.24 from R2.6 billion at 31 March 2014 to R5 billion 530 at 31 March 2015. Accordingly, a R2.6 billion Interest cover, ratioSC, 2 1.01 0.69 0.44 0.65 0.27 impairment of trade receivables (2013/14: Working capital, ratio1 1.07 0.98 0.82 0.70 0.67 R1.5 billion) was raised, equating to 1.79% of Primary energy cost breakdown 2014/15, electricity revenue 1. A review of the nature and classification of balances, cash flows and related ratios was undertaken and updates were made to some classifications and definitions to better reflect their nature. Performance indicators for 2013/14 have been updated for ease of comparison. R million 2. Shareholder compact measures for 2014/15 have been calculated on the same basis as the targets set by the shareholder. Billing to Soweto customers amounted to 519 Sales and revenue Operating costs 8 350 R730 million for the year to 31 March 2015, Electricity revenue increased by 7% Electricity operating costs increased by 13% although payments of only R119 million were received, reflecting a payment level of 16%. The increase in electricity revenue was aligned to 67.52 3 266 the expected growth as a result of the effective 150 000 3 311 average price increase of 8% determined by NERSA 59.67 Depreciation and amortisation for MYPD 3. Sales volumes, however, were down 54.15 13 398 42 354 More capital projects were completed and transferred 0.7% on the prior year, reflecting the downward to commercial operation in the current financial 12 440 Financial review 12 972 trend witnessed in electricity sales over the past few 120 000 10 561 year, thus the depreciation and amortisation charge years, as well as the impact of prolonged strikes, 41.28 15 341 12 917 14 001 increased by R2 billion compared to the prior year. particularly in the mining industry. Several incidents of load shedding led to sales totalling approximately 10 602 11 934 Repairs and maintenance 22 187 1 271 548GWh being foregone. Electricity revenue was 90 000 10 979 The following table sets out the cost of repairs and 9 787 barely sufficient to cover our operating costs. 22 384 maintenance (net of costs capitalised) across the 9 098 20 776 business. The deferral of planned maintenance over 8 681 Primary energy cost breakdown 2013/14, In December 2014, the collectability of customer debt the past year was the biggest contributor to the slight R million previously recognised as revenue was reassessed. 60 000 17 722 decline in repairs and maintenance expenditure. Due to the materiality of the amounts now involved, Coal and gas IPPs a decision was made to apply the IAS 18 principle of 83 425 Nuclear fuel Environmental levy R million 2014/15 2013/14 69 812 OGCT fuel only recognising revenue if it is deemed collectable 60 748 Other Generation 7 535 7 932 30 000 Electricity imports at the date of sale, as opposed to recognising 46 314 Transmission 712 688 the revenue and then impairing the customer debt Distribution 4 194 4 297 when conditions change. External revenue to the Employee benefits Gross employee benefit costs, which includes pension Total repairs and maintenance 12 440 12 917 value of R597 million was thus not recognised at 0 31 March 2015. Despite this, we continue to actively 2011/12 2012/13 2013/14 2014/15 and medical benefits, overtime and training expenses, pursue recovery of these amounts. Nevertheless, increased by 1.8% in 2015. Salary increases of 8.5% Other expenses the energy was supplied, and therefore the amount Electricity operating expenses, R million granted to bargaining unit employees, increased Other operating expenses were down R1 billion from not recognised caused a reduction in year-on-year overtime costs from maintenance undertaken 2013/14, as a result of the BPP cost savings initiatives revenue of 0.43%. Primary energy Repairs and maintenance and increased contractor labour costs added to implemented, which included reductions in travel and Employee benefit expense Other operating expenses, the increase. Headcount, inclusive of fixed-term subsistence allowances, consulting fees, marketing, as including impairments Depreciation and Electricity operating contractors (FTCs), reduced by 1 136 employees, well as reduced expenditure on training and food and amortisation expense cost, c/kWh which helped to contain the cost. A total of 258 beverages. Insurance premiums, however, increased FTCs are currently employed by Eskom, more over the past year as a result of the Duvha Unit 3 than half of which are working on the new build incident, and due to insurance repairs required programme. This number reduced from 422 as at following breakages and fire incidents at power 31 March 2014. Direct training costs, performance stations. Expenditure on IDM initiatives was down by awards, bursaries and scholarships as well as other R660 million due to project reprioritisation. 96 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 97 Financial sustainability continued Other income Taxation Liquidity Performance on BPP cost savings value Insurance proceeds from the settlement of the Duvha The effective tax rate for the year ended packages Cash and cash equivalents, together with liquid Unit 3 claim contributed R4.2 billion to other income 31 March 2015 was 29.48% compared to an effective investment in securities, amounted to R12.8 billion as The Business Productivity Programme (BPP) was recognised for the year under review. At group level, tax rate of 21.89% in the prior year, attributable at 31 March 2015 (2013/14: R27.2 billion). The liquid established in 2013/14 to deliver cost savings the amount receivable from the external reinsurer is to an increase in non-temporary differences arising funds consist of R2.9 billion of RSA Government opportunities to assist in closing the revenue gap R2.7 billion, after deducting the insurance deductible from non-deductible expenditure and a decrease in bonds with the balance in money market assets and that resulted from NERSA’s MYPD 3 electricity of R1.5 billion borne by Escap. non-taxable income. call deposits. price determination of 8% per annum. The programme focuses on the reduction of the Net fair value gain on financial Notwithstanding the decline in liquid funds, we cost base, increased productivity, operational instruments and embedded derivatives Update on revenue applications submitted to NERSA managed to maintain operations and capital efficiencies and revisions of our business model A large portion of our funding is sourced from commitments within the current liquidity constraints and strategy. international counterparties; due to the amounts The Regulatory Clearing Account (RCA) is a and funding initiatives. required to fund the build programme, we regularly monitoring mechanism which tracks the actual Cash savings opportunities of R61.9 billion over revenue and cost results compared to the Cash generated from operations increased from source funding from foreign lenders. In addition, a the MYPD 3 period have been identified, to be determination from the MYPD decision. Certain R22.7 billion in 2013/14 to R25.5 billion. The significant portion of our purchases, for both the new released through various value packages. regulatory rules are applied to determine working capital ratio was 0.82, compared to 0.70 at build programme and ongoing operations, are made in foreign currency. Our hedging strategy is to cover all whether the RCA computation is in favour of 31 March 2014, but still lower than target. 20 18.9 foreign currency risk above R150 000. The fair value Eskom, resulting in amounts due to Eskom, or in favour of the consumer, with amounts that must Cash flows related to acquisitions of property, plant 17.0 gain on financial instruments contributed R539 million and equipment and intangible assets and expenditure to profit in 2014/15. In 2013/14, a loss of R753 million in effect be paid back to the customer. The RCA mechanism results in a time lag between when on future fuel supplies included therein, excluding 16 was recognised. capitalised borrowing costs, amounted to R53.2 billion costs are incurred, to when the revenue inflows 13.4 The fair value gain on embedded derivatives amounted occur, currently in the region of two years. (2013/14: R56.3 billion). to R1.3 billion for the year ended 31 March 2015. 12 This is significantly less than the gain of R2.1 billion The first application for a revenue adjustment For detail on the capital expenditure incurred, refer to the table on page 68 recognised in 2013/14, and is mainly attributable to through the RCA mechanism for the MYPD 2 9.8 the decline in both US and local interest rates and period (2012/13) was finalised. The outcome, a the NERSA-approved increase in the electricity price R7.8 billion revenue adjustment in our favour, The raising of borrowings and issuing of securities 8 for 2015/16 of 12.69% which affects the forward resulted in an average increase of 4.69% in have been managed in a manner that matches the price curve. The closure of the Bayside smelter addition to the original determination of 8%, anticipated capital expenditure. Gross debt of in June 2014 resulted in a gain, which offset the bringing the total price increase for the year to R50.6 billion (2013/14: R44.2 billion) was raised during losses recognised from the variables mentioned above. 12.69%, effective from 1 April 2015. the year while R15.3 billion (2013/14: R7.5 billion) 4 2.7 The embedded derivative liability at 31 March 2015 was repaid. Interest payments for the year were In relation to the first year of the MYPD R17.1 billion (2013/14: R13.1 billion). for the Hillside Potlines 1&2 and Hillside Potline 3 3 period (2013/14), we have submitted an Financial review contracts, maturing in 2020 and 2028 respectively, application for a revenue adjustment to NERSA Net cash flows from operating activities were not 0 2013/14 2014/15 2015/16 2016/17 2017/18 was R8 billion (2013/14: R9.3 billion). The valuation which is currently under review. If approved, sufficient to cover the interest and debt repayments of embedded derivatives is most sensitive to changes the outcome of this application is expected or to finance investment activities, which are funded Annual BPP cost savings targets, R billion in local interest rates, such that for every 1% change to impact the electricity price commencing in from borrowings. in the interest rate there is an approximate impact of 2016/17. R700 million on the fair value of embedded derivatives. The outlook on liquidity indicates that we will be A further application was made to NERSA, operating below the R20 billion liquidity buffer over The savings target for 2014/15 comprised Net finance cost for the selective reopening of the MYPD 3 the next 12 months, even when considered with operating cost savings of R5.1 billion (inclusive Gross finance cost for the year was R26.5 billion, a decision for the 2015/16 to 2017/18 period. the anticipated R23 billion equity injection from the of R0.5 billion other income), R2.4 billion savings substantial increase from the R20.5 billion recognised The selective reopener application covers the Government support package. through reduced working capital and R2.3 billion in 2013/14, driven mainly by the growth in debt recovery of cost of OCGTs of R32.5 billion from savings on capital expenditure. securities and borrowings of R50.6 billion raised in and R17.5 billion for the Short-Term Power the current year. During the year, finance cost of Purchase Programme (STPPP) over this period. Cash savings of R9 billion were banked for the R17.4 billion (2013/14: R13.3 billion) was capitalised. This application, if approved, will result in year to 31 March 2015, and included additional As units from the capacity expansion programme a further price increase of 9.5%, together savings from value packages that performed come online, the impact of the finance cost line with a 2.51% increase through the 2c/kWh beyond the original targeted savings (stretch), on the income statement will become increasingly environmental levy increase, bringing the total as well as from additional saving initiatives more severe, as less interest will be capitalised. identified. Leakage – where targets were not increase to 24.7% for 2015/16. The increase The cost of the discount changes and the unwinding in the environmental levy has not yet been met – on one value package was compensated of environmental, employee and other provisions for by a stretch on another value package. promulgated; the latest indications are that it amounted to R4.3 billion (2013/14: R2.7 billion) may not be promulgated this year. Additional and stretched performance value for the year. Included in this is the impact of packages amounting to R3.8 billion have been the change in discount rate applied to mining and On 13 May 2015, NERSA announced that it identified to counteract those value packages decommissioning provisions, from 4.99% in 2013/14 will conduct a public consultation process for that recorded a leakage. to 4.73%, amounting to R705 million. the selective reopener relating to the cost of OCGTs and STPPP, indicating that the decision Finance income from interest earned on trade and will be announced on 29 June 2015. other receivables, investment of surplus funds and investment securities held amounted to R2.4 billion. 98 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 99 Financial sustainability continued Credit ratings and solvency Funding initiatives for the year ahead include: Solvency ratios at 31 March 2015 • Draw down on a loan agreement with Kreditanstalt für Wiederaufbau (KfW) for an amount of R3.9 billion that will be used for the integration of renewable IPPs (RE-IPPs) as well as other transmission strengthening and grid Target Target Actual Actual Actual Target integration projects Measure and unit 2019/20 2014/15 2014/15 2013/14 2012/13 met? • Negotiations to conclude loan facilities with various development financing institutions and export credit agencies Debt/equity (including long-term provisions), ratioSC, 2 2.75 2.48 2.70 2.21 1.96 in support of the build programme • Initiate domestic and international bond issues and loan facilities FFO as % of total debt, % SC, 2 7.96 7.63 2.37 9.21 8.55 The execution of the borrowing programme will impact our cash flows for many years to come. The anticipated Gross debt/EBITDA, ratio1 6.43 15.38 13.32 11.84 15.37 outflows of capital repayments and interest payments on our debt book are indicated in the graph below. Debt service cover, ratio1 1.19 2.19 0.82 1.22 2.05 45 1. A review of the nature and classification of balances, cash flows and related ratios was undertaken and updates were made to some classifications and definitions to better reflect their nature. Performance indicators for 2013/14 have been updated for ease of comparison. 2. Shareholder compact measures for 2014/15 have been calculated on the same basis as the targets set by the shareholder. 40 Eskom’s credit ratings were downgraded to sub- development financing institutions without guarantees 35 investment grade by both Moody’s and S&P during the to ensure that we meet the obligations of the loan financial year, with S&P citing concerns such as poor covenants. 30 operational performance, a weak financial profile due to the lack of cost-reflective pricing and the lack of We continue to monitor the effects of funding 25 leadership stability. initiatives and operational challenges on the ratios which impact our credit rating; these continue to 20 Summary of Eskom’s credit ratings as at reflect our highly leveraged financial profile. 31 March 2015 Funding activities 15 Standard Fitch: local Rating & Poor’s Moody’s currency The implementation of funding initiatives continued 10 during the year and included the issue of a Foreign currency BBB- to BB+ Ba1 – USD1.25 billion 10-year bond in February 2015 as 5 Local currency BBB- to BB+ Ba1 BBB+ well as raising R17.2 billion from the domestic bond market, through the issuance of bonds listed under Standalone b- to ccc+ b3 B 0 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2052 the R150 billion Domestic Multi-Term Note (DMTN) Outlook Negative Stable Negative programme. Action date 19 Mar 2015 7 Nov 2014 18 Jun 2014 Anticipated capital and interest cashflows (including swaps) of the strategic and trading portfolio Market holdings of Eskom commercial paper, which at 31 March 2015, R billion Affirmation date 19 Mar 2015 7 Nov 2014 28 Oct 2014 is issued for a period up to one year, decreased from Financial review R15 billion in 2013/14 to R7.2 billion. Capital Interest The negative ratings outlook is foreseen to impact us As at 31 March 2015, 80% of our borrowings had a in the following ways in the short to medium term: fixed rate and 20% a floating rate. • Cost of funding is expected to increase, while the Future focus areas availability thereof may decline In the spirit of BPP, a number of strategies have been • Realise the potential benefits from BPP • Potential investor base could decrease due to implemented to achieve savings on our debt portfolio, which translate into real savings of R1.2 billion over • Alleviate rating agencies’ concerns regarding our highly leveraged financial profile, the inadequate electricity investor or trustee mandates not allowing them the MYPD 3 period. price and extensive funding requirements in order to avoid further ratings downgrades and ultimately, regain an to invest in a company with our ratings profile, or investment grade credit rating reduced volumes available for investment where The borrowing programme remains focused their mandates do allow it • Continue to raise funding for the new build programme on funding the balance of the committed build • Stricter loan covenants required by lenders programme. The Board has approved a revised The downgrades have triggered covenants with borrowing programme of R237 billion, covering the certain financing institutions. We have engaged with period 1 April 2015 to 31 March 2020. Remaining MYPD 3 period Post MYPD 3 1 April 2015 – 31 March 2020 R billion 2015/16 2016/17 2017/18 2018/19 2019/20 Total Domestic bonds 8.0 9.0 10.0 12.0 12.0 51.0 International bonds/loans 16.5 11.5 11.5 12.0 12.0 63.5 Commercial paper1 10.0 10.0 12.0 15.0 15.0 62.0 DFI financing 2 7.2 12.7 8.2 3.2 2.2 33.5 ECA financing3 10.6 4.3 4.6 3.3 1.2 24.0 DBSA 3.0 – – – – 3.0 Total 55.3 47.5 46.3 45.5 42.4 237.0 1. Gross issuance and redemptions of commercial paper are included in borrowing requirements. 2. Development financing institutions (DFI) financing includes existing and new loans. 3. Export credit agency (ECA) financing includes existing and new loans. 100 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 101 Our leadership and governance Effective corporate governance is essentially about Executive authority over the company is vested in ethical leadership. Especially during this turnaround the Minister of Public Enterprises, the Honourable 103 Governance Framework period, effectively integrating sustainability concerns Ms Lynne Brown, MP. 104 King III application with decision-making is of paramount importance. 105 Board of Directors and subcommittees The Board of Directors (the Board) guides the 108 Executive Management Committee This section portrays the governance structures of strategic direction of the group, and monitors progress 109 Responsible and ethical leadership Eskom Holdings SOC Ltd, and notes the value added in executing the business strategy. The Board ensures 109 Combined assurance through each in guiding the business to achieve our that the utility and its subsidiaries comply with the 110 Risk management and internal controls objectives. requirements of the Companies Act and PFMA, as 111 IT governance well as National Treasury regulations, together with 111 Remuneration and benefits Governance Framework any other legislative requirements and documents Eskom was founded in 1923, although the company as within the ambit of the Governance Framework. it exists today was incorporated in accordance with The Governance Framework, which regulates the the Eskom Conversion Act, 2001. We adhere to the relationship with the shareholder and guides the way statutory responsibilities imposed by the Companies we do business, is depicted below: Act, 2008 and the Public Finance Management Act, 1999. As a state-owned company, Eskom’s purpose is to deliver on the strategic intent mandated by Government and detailed in our Memorandum of Incorporation. Governance Framework Memorandum Shareholder Strategic Intent of Incorporation Department of Public Enterprises Statement, which sets out sets out agreed powers of the Board of Directors mandate and shareholder and strategy the Board ARC IFC Investment and Finance Audit and Risk Committee Relevant policies Committee and procedures Codes of good governance such as King III and the Protocol on Corporate People and Governance Board Recovery and Build RBP P&G The Corporate Governance in Committee Programme Committee Plan, which the Public Sector details the basis of operations and outlines our Social, Ethics and Sustainability purpose, values Board Tender Committee and strategic Committee Relevant objectives Our leadership and governance legislation SES TC including the Electricity Responsible and ethical leadership Regulation Act, Companies The shareholder Company Act, PFMA, compact, which Secretary National Treasury sets out annual regulations, key performance regulations of Eskom Holdings SOC Ltd indicators and NERSA and the targets in support National Nuclear Executive Management of our mandate Exco Regulator Committee The materiality framework sets out the requirements for those matters needing approval in terms of the PFMA and, together with the Delegation of Authority Framework, guides the referral of matters from executive level to committees to Board, and where applicable to DPE and National Treasury One of the essential components of the Governance Framework is the clarity of roles between the shareholder, the Board and the management of Eskom, as provided by the Strategic Intent Statement and the shareholder compact with the company. 102 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 103 Our leadership and governance continued King III application Board of Directors and At that time, Ms Chwayita Mabude and Mr Zola In the spirit of good corporate governance, we endeavour to apply the principles and practices of the King Code subcommittees Tsotsi (as Chairman) were reappointed as members of Corporate Governance (King III). However, as a state-owned company, a few of these are not applicable and, in of the Board. Governance of the group and the responsibility for such instances, we have adopted alternative practices to those recommended by King III. driving good corporate citizenship is vested in a Refer to pages 18 and 19 for the profiles and committee memberships unitary board, which is supported by several Board of the current Board We utilise the web-based Governance Assessment Instrument (GAI) of the Institute of Directors of Southern Africa committees and the Company Secretary. The Board, (IoDSA) to assess our governance profile. The results of the assessment, based on a chapter view, are indicated in through its committees, provides the company’s the table below: On 30 March 2015, Mr Zola Tsotsi resigned as director strategic direction, while the Chief Executive, assisted and Chairman of the Board, and Dr Ben Ngubane was King III governance register for the year ended 31 March 2015 by the Executive Management Committee (Exco) and elected acting Chairman by the other members of its subcommittees, is accountable to the Board for Applied/ the Board. implementing the strategy. IoDSA Partially applied/ Eskom Holdings SOC Ltd (2002/015527/30) GAI score Not applied Mr Norman Baloyi, appointed as a non-executive Company Secretary director on 11 December 2014, was removed from Chapter 1: Ethical leadership and corporate citizenship AAA Applied The Company Secretary is responsible for coordinating the Board by the Minister of Public Enterprises on Chapter 2: Boards and directors AAA Partially not applied meetings of the Board and its committees, and 22 April 2015 due to a breach of fiduciary duties in providing guidance to directors. Mr Malesela Phukubje terms of Section 76 of the Companies Act. Chapter 3: Audit committees AAA Applied was appointed as Company Secretary on 1 July 2014, Chapter 4: The governance of risk AAA Partially not applied replacing Ms Annamarie van der Merwe, who had On 18 May 2015, it was announced that been acting in the role from September 2013. With Mr Tshediso Matona would be leaving Eskom effective Chapter 5: The governance of information technology AAA Applied over 14 years’ experience in the legal industry, 31 May 2015, to allow the Board to pursue its plans Chapter 6: Compliance with laws, rules, codes and standards AA Partially not applied Malesela is suitably qualified to serve the Board and for the company under the current leadership. This Chapter 7: Internal audit AAA Applied its committees in this role. is in no way an anticipation of the outcome of the independent enquiry, which will continue. Chapter 8: Governing stakeholder relationships AAA Applied Board constitution and appointments Non-executive directors are appointed to the Board The current Board consists of a majority of Chapter 9: Integrated reporting and disclosure AAA Applied by the shareholder for a period of three years, independent non-executive directors and possesses Overall score AAA reviewable annually. The People and Governance diverse skills and experience in the fields of science, Committee assists the shareholder by identifying engineering, law, finance, accounting and auditing, AAA Highest application AA High application BB Notable application B Moderate application the necessary skills, qualifications and experience business and enterprise risk management. C Application to be improved L Low application required by the Board to achieve the company’s Qualifications and significant directorships of the members of the Board Disclaimer objectives. are available in a fact sheet The assessment criteria of the web-based tool, the Governance Assessment Instrument (GAI), have been based on the practice recommendations of the King III report. These criteria are intended to assess quantitative aspects of corporate governance only and not qualitative governance. As such, the results are proposed to serve as an indication of the structures, systems and processes in place and are not intended to include an indication of the governance culture of an entity. The Board identifies, evaluates and nominates potential The responsibility for the input of data in order to attain a result through the use of this is that of the user and the entity in respect of which the user subscription has candidates for the positions of Chief Executive and Induction and orientation of directors been granted. The Global Platform for Intellectual Property (Pty) Ltd (TGPIP), or the IoDSA, as Licensor of the content of the GAI, makes no warranty or representation as to the accuracy Finance Director. The shareholder appoints the Chief A director on-boarding plan is in place, which or completeness of either the assessment criteria or the results. Neither TGPIP, nor the IoDSA, nor any of its affiliates, nor the software developer shall be held responsible Executive, whereas the Finance Director is appointed comprises a formal induction and site visits for all for any direct, indirect, special, consequential or other damage of any kind suffered or incurred, as a result of reliance on the results produced through the use of the GAI. by the Board provided that the shareholder approves. directors. The full report on Eskom’s King III exceptions and alternative practices is available as a fact sheet Changes in Board composition The reconstitution of the Board resulted in the As detailed in the 2014 integrated report, the first appointment of nine new directors in December 2014. three-year term of office of the non-executive Following their appointment to the Board and its directors of the Board expired in July 2014. various committees, a comprehensive induction The Minister approved a five-month extension of this programme was undertaken over a period of two Our leadership and governance term at the annual general meeting on 11 July 2014. days. The induction covered the following: On 11 December 2014, the Minister announced • The Governance Framework, including the that Cabinet had approved a reconstituted Board of Delegation of Authority Directors, thereby retiring the following directors • Overview of legislation, regulations and compliance from the Board: requirements Dr Bernie Fanaroff Appointed May 2010, • Eskom’s business, in terms of strategic direction, reappointed July 2011 operational overview and safety Ms Queendy Gungubele Appointed July 2011 • Strategies around stakeholder engagement, IT Ms Neo Lesela Appointed July 2011 governance, risk management and combined Ms Bajabulile Luthuli Appointed July 2011 assurance Ms Yasmin Masithela Appointed July 2011 Continuous training and updates on the Mr Collin Matjila Appointed July 2011 abovementioned items, as well as other relevant Dr Boni Mehlomakulu Appointed April 2010, matters, are provided on a regular basis to ensure reappointed July 2011 that all directors remain informed. Time is set aside at Mr Mafika Mkwanazi Appointed July 2011 each scheduled Board meeting to address the training needs of the Board or individual directors, and to Mr Phenyane Sedibe Appointed July 2011 brief directors on any new legislation or regulations Ms Lily Zondo Appointed July 2011 which may be applicable. 104 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 105 Our leadership and governance continued Meetings Board appoints members to the various committees, Meetings held in Meetings of the Board and its committees are with due consideration of the necessary skills and Board committee 2014/15 Some key activities for 2014/15 scheduled annually in advance. Special meetings are experience required by members of the different P&G People and Governance Committee convened as and when required to address specific committees. material issues. The committee provides oversight on governance 5 • Disallowed the payment of short-term incentive All Board committees are chaired by an independent matters and is responsible for: bonuses to F-band executives in 2013/14 as savings The Board held four scheduled and 15 special non-executive director and consist of a majority of • Nomination of executive directors and prescribed targets were not met meetings during the year. Furthermore, the induction independent non-executive directors, who exercise officers • Approved the phased-in implementation of the DPE their authority in accordance with Board-approved • Recommending remuneration and other human Remuneration Guidelines of the new directors was held in January 2015. resource-related policies • Approved the allocation of Grant 10 of the long-term terms of reference; these are reviewed each year and • Determining and recommending individual incentive scheme, based on the DPE standards of Attendance of Board, Exco and committee meetings is available as a define their composition, role, responsibilities and 60% allocation of total guaranteed remuneration, and fact sheet remuneration packages for executive directors and authority. These terms of reference are aligned with prescribed officers a vesting percentage for on-target performance of the Delegation of Authority Framework, legislative • Succession planning 100% Board evaluation requirements and best practice. • Induction, training and evaluation of the Board and • Recommended to the Board the appointment of its committees Mr Malesela Phukubje as Company Secretary While an independent evaluation of the performance Deliberations of the committees do not reduce the • Monitoring the effectiveness of the Ethics • Provided a shortlist of candidates for the position of and effectiveness of the Board, individual directors Chief Executive to the shareholder and tabled a individual and collective responsibilities of directors Management Programme and Board committees is usually undertaken in line comprehensive CE induction programme at Board regarding their fiduciary duties and responsibilities. with Eskom practice, such an evaluation could not be The Chief Executive is an ex officio member of the • Recommended to the Board the approval of the Directors are required to exercise due care and committee, but recuses himself during discussions of Continuous Director Training and Development conducted for the period under review due to the judgement in accordance with their statutory his remuneration, or at any time when there is an Programme reconstitution of the Board. The new Board will be obligations. actual, perceived or potential conflict of interest. • Recommended to the Board the approval of the evaluated over a longer period of 15 months in the Ethics Policy and Procedure, the Conflict of Interest 2015/16 financial year. The Audit and Risk Committee and Social, Ethics and Policy and the Declaration of Interest Procedure Sustainability Committee are statutory committees as • Disallowed the payment of short-term incentive Board committees bonuses to E- and F-band executives in 2014/15 as prescribed by the Companies Act. These committees The effectiveness of the Board is improved through the fulfil their duties as recommended by King III. new build, savings and recovery targets were not met use of six Board subcommittees to which it delegates RBP Board Recovery and Build Programme Committee authority without diluting its own accountability. The The Board Build Programme Review Committee was 14 • Guiding the development of enhanced strategies to established in April 2013 as an ad hoc committee to (combined total) aid in the recovery of the organisation. These Meetings held in oversee progress on the build programme. In include: Board committee 2014/15 Some key activities for 2014/15 March 2015 this committee was combined with the – Revenue risk management and recovery strategy Eskom Emergency Task Team, and renamed the Board – Bad debt recovery strategy ARC Audit and Risk Committee Recovery and Build Programme Committee. Responsibilities of the committee include: – Cost recovery and business productivity The committee performs a statutory function as set 7 • Recommended to the Board for approval the 2014 • Ensuring that financial sustainability is secured, • Monitoring performance and progress on the Medupi, out in the Companies Act, assisting the Board with year end and interim financial statements and demand for electricity is reliably met and that Kusile, Ingula and Transmission projects, relative to oversight over financial reporting and disclosure, integrated reports applicable legislation and regulations are the locked-down dates, cost estimates and other internal control and risk management systems, • Recommended to the Board the appointment of a complied with milestones combined assurance functions and IT governance. consortium of SizweNtsalubaGobodo Inc. as the • Monitoring progress on the recovery of the Majuba external auditors for Eskom Holdings SOC Ltd and • Providing an oversight role over the build programme, in terms of governance, monitoring coal silo and Duvha Unit 3 The committee also serves as the Audit and Risk its subsidiaries, with effect from the 2014 annual Committee for Eskom’s wholly-owned subsidiaries. general meeting and review • Reviewed the appropriateness of the going concern SES Social, Ethics and Sustainability Committee Refer to the report of the Audit and Risk Committee assumption on pages 3 to 4 in the annual financial statements for • Approved the Internal Audit Plan for the three-year The committee is a statutory committee as set out in 4 • Considered the 2014 integrated report, and more information. period to 2017/18 the Companies Act. It assists the Board in carrying out confirmed that the report accurately reflected the • Monitored progress on the implementation of BPP, its functions in regard to social and economic social, ethics, financial and sustainability results for Our leadership and governance considering the impact of risks on overall development, stakeholder relations, environment, the year ended 31 March 2014, and was presented in performance and evaluating critical success factors health and safety practices and good corporate accordance with the International Framework for overall programme delivery citizenship. Responsibilities of the committee include: • Endorsed the Nuclear Safety Oversight IFC • Monitoring the ethical culture of the organisation, reporting strategy Investment and Finance Committee and ensuring that the group strategy and the ethical • Monitored the following: The committee oversees our investment strategy, 14 • Approved the initial reduction of the capital implementation thereof promotes its – Stakeholder engagement: the committee including the capital expansion programme and the programme for the remainder of the MYPD 3 period overall sustainability supported the need for enhanced communication funding thereof, and is also responsible for the Treasury from R337 billion to R251 billion and noted the • Monitoring safety and environmental practices and engagement with stakeholders aligned to the function and the health of the company‘s capital associated risks. Subsequently further revised the relating to Eskom’s operations to ensure compliance advocacy plan and strategy structure. Responsibilities of the committee include: approved amount to R260 billion with regulatory and internal requirements, and – Operational and environmental sustainability: • Reviewing and approving business cases for new • Approved, subject to PFMA approval, the investment alignment with international best practice recommended for discussion at Board the high investments or projects within its in a Miner Development Fund in support of future • Monitoring nuclear safety, and making risk items and key challenges affecting operational delegated authority coal and limestone security and transformation of the recommendations on policies, strategies and sustainability, particularly involving the • Overseeing the borrowing programme and mining industry guidelines relating to nuclear issues Generation assets, and ensured that these were approving financial budgets • Approved, and referred to Board for consideration, • Monitoring performance, recommending targets and factored into the Corporate Plan and risk a contingency of R4.3 billion for diesel for OCGTs to key performance indicators and ensuring the registers ensure security of supply to the end of March 2015 integrity of information presented in the integrated • Approved the impairment of the Majuba report Underground Coal Gasification (UCG) project as part of the capital project reprioritisation The committee also serves as the Social, Ethics and Sustainability Committee for Eskom’s wholly-owned • Monitored progress made on BPP value projects and subsidiaries. savings banked 106 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 107 Our leadership and governance continued Meetings held in Responsible and ethical leadership • Conducting forensic investigations and taking Board committee 2014/15 Some key activities for 2014/15 The Board and Exco recognise the need to integrate corrective action where applicable TC Board Tender Committee strategy, governance and sustainability. As a signatory A detailed forensic report is tabled at the Audit to the United Nations Global Compact LEAD initiative, and Risk Committee quarterly, describing incidents The committee ensures that Eskom’s procurement 14 • Finalised the Koeberg Steam Generator Replacement system is fair, equitable, transparent, competitive and tender, valued at R4 billion. Installation is scheduled which includes a clause related to anti-corruption and cases relating to fraud, corruption and other cost effective, as required by PFMA and PPPFA. for 2018 behaviour, as well as to the World Economic Forum’s economic crimes. The information assists management Responsibilities include approving tenders and • Approved the extension of power purchase Partnership Against Corruption initiative, Eskom in taking appropriate business decisions in relation to contracts above R750 million within its delegated agreements for the provision of 755MW base-load strives to embed these ethical principles. authority. energy from 31 May 2014 to 31 March 2015 economic crime-related risks. The report further • Approved the extension of the Memorandum of Our Code of Ethics, titled “The Way”, outlines details the progress on incident investigations, trends Agreement between Eskom and Department of our ethical culture and provides guidance on the and observations stemming from these, as well as Water and Sanitation for the supply of raw water to losses and recoveries recorded. our power stations in Mpumalanga for a further two expected behaviour of each and every director and years to 31 March 2017 employee. Policies regarding managing conflicts of A total of 144 investigations were undertaken interest and governing the declaration of interests during the year, consisting of incidents related assist directors and employees to avoid situations to irregularities (66), fraud (47), corruption (25) Executive Management Committee • Mr Matshela Koko was appointed Group where they have, or are perceived to have a direct and sexual harassment (6). Four employees were Exco is established by the Chief Executive and assists Executive: Group Technology and Commercial or indirect interest that conflicts with the company’s dismissed during the year as a result of the outcome him in guiding the overall direction of the business in December 2014, after acting in this role from interests. Directors declare all conflicts of interest of forensic investigations and disciplinary action. and exercising executive control in managing day-to- May 2014 and these are adequately raised in meetings and day operations. minuted for the record. Employees are required to The proactive identification of incidents is critical At the same time, the portfolios of the following perform a declaration of interest annually, or as soon to ensuring that exposure is mitigated and losses executives were reshuffled: Refer to pages 40 and 41 for the profiles of the Exco members and as their circumstances change. prevented. The number of reported incidents has their areas of responsibility • Mr Thava Govender, former Group Executive: reduced significantly over the last four years, proving Generation was moved to the role of Group The Board ensures that the Ethics Management that preventative actions such as fraud awareness Executive: Transmission and Group Customer Programme is effectively implemented, and receives training are starting to show results. A total of 995 Group Executives are appointed by the Board and Services in November 2014 quarterly ethics status reports on the ethical culture employees attended fraud awareness and ethics are full-time employees of Eskom, subject to our conditions of service. • Mr Mongezi Ntsokolo, former Group Executive: and any associated issues. training during the year. Transmission and acting Group Executive: Human Resources, was moved to the role of Group We have adopted a zero tolerance approach to Combined assurance Exco members’ qualifications, significant directorships and appointment dates are available as a fact sheet Executive: Generation in November 2014 fraud, corruption and other forms of economic crime or dishonest activity. We aim to reduce these The combined assurance model introduced by Following the commissioning of the independent incidents by: King III is an essential and fundamental element Exco held 27 meetings during the year. relied on by the Audit and Risk Committee and the enquiry on 12 March 2015 and the suspension of four • Continuously fostering ethical standards and executives, the following acting appointments were Board in forming their view of the adequacy of risk Changes in Exco in 2014/15 raising ethics awareness in the organisation made to ensure business stability and continuity: management and internal control in the organisation. Exco underwent numerous changes over the past through training, reporting and through the Ethics The combined assurance model recognises three lines year. Following the departure of Mr Brian Dames, our • Mr Zethembe Khoza, as acting Chief Executive Advisory Service Helpdesk of defence, which are split as follows: former Chief Executive, at the end of March 2014, • Ms Nonkululeko Veleti, as acting Chief Financial • Encouraging whistle-blowing through mechanisms Mr Collin Matjila, a non-executive director, acted in Officer such as the fraud and corruption hotline on the role while the recruitment process was underway • Mr Abram Masango, as acting Group Executive: 0800 112 722 to ensure continuity and an adequate handover. The Group Capital Minister announced the appointment of Mr Tshediso • Mr Edwin Mabelane, as acting Group Executive: Line management is Assurance over the adequacy of Matona, former Director-General of DPE, as Chief Group Technology and Commercial operational risk management, effective responsible for managing Level 1 Executive with effect from 1 October 2014. Operations management and risk and performance Our leadership and governance adherence to control processes and As a result of these changes, and in order to ensure specialised review functions delivery against business operational Oversight by Group The following executives resigned during the year: stability and continuity of operations, the following sustainability objectives Executives • Mr Kannan Lakmeeharan, acting Group Executive: changes were made to the portfolios of the remaining Group Technology and Commercial, resigned with Exco members: Management is effect from 30 April 2014 • Sustainability was assigned to Mr Thava Govender, Development and maintenance of internal control supported in executing Combined assurance • Ms Erica Johnson, Group Executive: Enterprise in addition to Transmission Specialised control functions frameworks and policies, review of suitability and its duties; provides a monitoring application layer of control over risk Level 2 Division and acting Group Executive: Group • Ms Ayanda Noah, Group Executive: Distribution management Customer Services, resigned with effect from was assigned Group Customer Services, with the Risk, resilience and Assurance over the implementation of risk, resilience and 31 October 2014 compliance management compliance management policies and processes Oversight by Exco, ARC exception of Grid Access Unit, Integrated Demand and SESC • Dr Steve Lennon, Group Executive: Sustainability, Management and Key Industrial Customers, which resigned effective 31 March 2015 remained with Thava as part of Transmission Independent of Assurance over the adequacy and effectiveness of the network of risk management After his appointment, Tshediso made the following Refer to page 14 for the operating structure of the company management, control and governance processes, including key financial Internal audit appointments: controls as represented by management Final oversight by ARC • Mr Dan Marokane was appointed Group Executive: Level 3 The shareholder and Board have reiterated that Independent reasonable assurance that the financial statements are free from Group Capital in November 2014 filling executive vacancies remains a priority. The External material misstatement and are prepared, in all material respects, in accordance • Ms Elsie Pule was appointed acting Group secondment of Mr Brian Molefe from Transnet to audit with IFRS. Provides business insights on internal financial controls and financial Executive: Human Resources in November 2014 Eskom as full-time acting Chief Executive has brought reporting stability to the executive leadership. 108 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 109 Our leadership and governance continued the combined assurance activities and reports back Remuneration and benefits The integrated report is subject to combined to the Audit and Risk Committee. The committee The Audit and Risk Committee has concluded, Our remuneration philosophy assurance. The report is reviewed by receives reports on the status of governance, based on the information and explanations Our approach to remuneration and benefits is management and Exco and internally assured by risk management, compliance and the adequacy given by management and the Assurance and designed to attract and retain skilled, high-performing Assurance and Forensic, while the shareholder of preventative and corrective controls from the Forensic Department, as well as through employees. To achieve this, we apply the following compact KPIs are externally assured. Both the various levels of assurance. discussions with the external auditors, that the remuneration principles: Audit and Risk Committee and the Social, Ethics system and process of risk management and and Sustainability Committee consider the compliance are adequate and that the internal • Business requirements determine our market Independent quality assessment of report and recommend its approval to Board. internal audit accounting controls are adequate to ensure that positioning The internal audit function is subjected to an the financial records can be relied on for the • Maintain external competitiveness to attract and independent quality review every five years, preparation of financial statements. retain key skills, by providing market-related Combined assurance assists management in identifying remuneration structures, benefits and conditions or more frequently if required by the Audit duplication in assurance work or potential assurance of service and Risk Committee. The most recent review, shortfalls, and developing improvement plans for • Follow a lead-lag market approach. The guaranteed which was conducted two years ago, assessed Refer to the report of the Audit and Risk Committee on pages 3 to 4 those areas identified. The model guides assurance in the annual financial statements for the full assessment of the internal package will typically be leading the market just the function as generally compliant. The next providers to reach consensus on the key risks faced control environment after the annual increases have been implemented scheduled review will take place in 2017/18. by the company and aids in reducing the likelihood and lagging the market two to three months before that significant risks remain unidentified. IT governance the next increases are due The following key principles guide and inform our Risk management and internal The Board has delegated responsibility of IT • Remunerate employees in accordance with their combined assurance approach: controls governance to the Chief Information Officer within job grade, and at least at the minimum of the • Identification of significant risks needing assurance Group IT. Further oversight is provided by the IT applicable salary scale The Board, through the Audit and Risk Committee, • Identification of assurance providers most suited ensures that there is an effective risk management Steering Committee, an advisory committee to the • Ensure internal equity through defensible to provide adequate assurance process in place and that internal controls are Audit and Risk Committee, and the IT Oversight differentials in pay and benefits and resolving effective and adequately reported on for auditing Committee, a subcommittee of Exco. unjustifiable race- and gender-based income • Delivering quality assurance results which the and regulatory purposes. The combined assurance differentials when they arise Board can rely on An independent assessment of IT governance was • Reporting and escalating assurance results to the model provides the Audit and Risk Committee performed by KPMG Inc. during 2013/14. The results International and local benchmarks are considered in required level, thus ensuring the required attention with an overview of significant risks, as well as indicated that we have made considerable progress determining executive remuneration, to ensure that and focus to address significant matters the effectiveness of critical controls to mitigate towards achieving the required maturity levels for executive packages are aligned to those offered by these risks. each of the seven principles of King III related to companies of similar stature. We aim to remunerate The Combined Assurance Forum, established in 2014, in line with the median of the market to recruit and IT governance. The assessment also indicated that has been successful in implementing and embedding The enterprise risks, with the associated risk rating and mitigating retain the best management team to lead the business. response, as well as the relevant key performance indicators are set out we have made progress in addressing several of the Combined Assurance Framework principles Cognisance must be taken of the responsibilities and on pages 27 to 29 the internal audit findings raised previously. Specific within the organisation. risks that directors and executives bear, given their improvement was noted in the formal development, The Audit and Risk Committee is ultimately Assurance and Forensic performs bi-annual approval and implementation of an IT Governance broad accountability. responsible for providing oversight over the assessments on the design, implementation and Framework. Our employee engagement model aims to encourage combined assurance activities and approved the effectiveness of the risk management process, IT employee participation and involve employees The following key observations were noted: Combined Assurance Framework to guide these. controls as well as internal financial and operational and executives in conversations around strategy, Operational accountability for combined assurance • The strategy and innovation function is perceived controls. The outcome of the assessments, based performance and people. We have developed more has been delegated to the Assurance and Forensic as being advanced within the context of our on the results of audit work planned and completed productive, sustainable relationships with organised Department, which performs our internal audit operating environment and when compared to by both internal and external assurance providers, labour through a partnering model which guides our function, facilitates and coordinates the execution of general trends in the industry concluded the following: interactions. We continue to further strengthen our Our leadership and governance • The IT disaster recovery planning processes are mature and testing of critical systems is performed relationship with the trade unions. Risk management Internal financial Internal operational periodically Remuneration structure IT controls process controls controls Key areas for improvement identified include: Our remuneration structure for bargaining unit • Board monitoring of progress against the IT employees, managerial level employees, non-executive A risk management IT controls form a The internal financial The design of manual and strategy directors and executive directors is set out below. system for identifying, reasonable basis for the controls form a automated operational managing and reporting preparation of reliable reasonable basis for the controls is deemed • Clearer mandates are needed for the IT Steering Bargaining unit risks is in place. financial statements. preparation of reliable adequate. Challenges Committee and IT Oversight Committee Bargaining unit employees (all those below middle Improvements in the financial statements. in the organisation • Improved monitoring of benefits realisation and management) receive a basic salary plus benefits. Improvements related have impacted the to the adequacy of risk stability of the operational Isolated areas of effectiveness of the return on investment for IT projects Major benefits include membership of the Eskom management have been technology control improvement, which Pension and Provident Fund, medical aid, a housing environment have been operating controls. noted. do not have a major recommended. allowance and an annual bonus (thirteenth cheque). impact on the financial statements, have been Basic salaries and conditions of service are reviewed identified. annually through a collective bargaining process. Bargaining unit employees also participate in an annual short-term incentive scheme. Interventions designed to address and improve the control environment have been implemented and benefits are expected to be realised in the medium to long term. Improvements have already been seen in some areas where these have been implemented. 110 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 111 Our leadership and governance continued Managerial level The employment contracts of executive directors and • The People and Governance Committee reviews Long-term incentives Managerial level employees are remunerated on members of Exco are subject to a six months’ notice the key performance areas and key performance A number of performance shares (award performance a cost-to-company basis. The package includes period. Other executives have to serve one month’s indicators of Exco members’ compacts annually to shares) were awarded to the Exco members on pensionable earnings, compulsory benefits and a notice in terms of our standard conditions of service. ensure alignment with the shareholder compact 1 April 2010, 2011, 2012 and 2013. The value of the residual cash component. Managerial employees also and the Corporate Plan performance shares is deemed to be R1 at grant date, The Board approves the remuneration of the Finance participate in an annual short-term incentive scheme, • Targets include both company and division- and thereafter escalated at a money market rate to Director and Group Executives. The Chief Executive’s consisting of rewards for achieving objectives set by specific priorities (key performance areas and key determine the value at the reporting date. remuneration is approved by the shareholder. Our the Chief Executive and approved by the People and performance indicators) which link directly to the remuneration strategy is aligned with the DPE The Board has set performance conditions in line with Governance Committee. shareholder compact and Corporate Plan Remuneration Guidelines, and the balance between the shareholder compact and Corporate Plan over a fixed and variable remuneration (short- and long-term • Individual performance is reviewed annually and three-year performance period. Performance covers Short-term incentive scheme for incentives) is reviewed annually. is based on a performance contract between the financial and non-financial targets, such as ensuring the bargaining unit and managerial level Group Executive and Chief Executive business sustainability of Eskom, ensuring reliability We have a short-term incentive scheme in place Executive remuneration is based on the organisation’s • Compacts for all other executives are aligned with of supply to all South Africans, ensuring that South that aims to align individual performance with performance, as assessed through performance on the Exco compacts Africa’s future power needs are adequately provided organisational strategic objectives by setting key indicators, as well as the individual’s contribution Exco compacts rely on three elements to determine for and supporting the country’s developmental targets for key performance indicators that to that performance, including the executive’s level bonuses for executives: objectives, with an agreed weighting in each category. contribute to these objectives. of skill and experience. It consists of a basic salary augmented by short- and long-term incentives. • Qualifiers need to be reached to qualify for Awards only vest if, and to the extent that, these The key performance indicators are linked bonus. If qualifiers are not reached, then there will targets are met. Moreover, the vesting percentage to our strategic objectives and cascade down The remuneration of Exco members consists of the be no bonus at all can be reduced by the People and Governance from the organisational level to individual level. following: • Modifiers determine the performance score Committee if certain gatekeepers are not met, even Employees are contracted to achieve targets • A guaranteed amount, consisting of a fixed cash if targets have been met. of between 60% and 120%, depending on the for selected key performance indicators and portion and compulsory benefits, such as medical achievement of set targets are rewarded for meeting or exceeding these aid, life cover and pension. This is reviewed Potential vesting percentages range from 0% to targets. All permanent employees participate • Gatekeepers reduce the performance score if 100%, with an expected (on-target) vesting rate of annually in the scheme. The value of the bonus not reached and can decrease the performance 50%, based on a threshold and stretch targets for • Short-term incentives, consisting of rewards score by up to 82%, depending on how many itself depends on the organisation’s overall for achieving predetermined performance each measure. The long-term incentive vesting rate performance and the individual’s performance. gatekeepers are not reached for shares awarded on 1 April 2012 and vesting on objectives and targets, linked to the shareholder compact, set by the Chief Executive and approved Short-term incentives 31 March 2015 was 47.06% (31 March 2014: 53.48%; The key performance areas are weighted as 31 March 2013: 48.23%). The cash value of the shares follows: safety (15%), technical (50%), customer by the People and Governance Committee. It is Short-term incentives, consisting of rewards for calculated as a percentage of pensionable earnings achieving set objectives over a 12-month period, are is payable in June 2015 at R1.20 per share, based on service (10%) and achievement of new build the money market rate. milestones (25%). • Long-term incentives, designed to attract, based on company and division-specific priorities. retain and reward Exco members for achieving Executive compact key performance areas include: Refer to note 49 in the annual financial statements for detailed When the gatekeepers are not met, Exco can organisational objectives set by the shareholder • Operating safely remuneration information reduce the incentive payable to the bargaining over a period of three years. In addition to the • Financial performance unit and managerial level by a maximum of 40%. performance conditions, it is dependent on the • Group key priorities Furthermore, the achievement of targeted BPP individual remaining in our employment throughout savings of R9.8 billion is a qualifier in 2014/15, • Chief Executive’s discretion the vesting period and if not achieved, no bonus will be paid. The weight allocated to each person for each of the In terms of their performance contracts, only 18% of An on-target bonus equates to 10% of basic compact areas will depend on the responsibilities of executives’ performance rating is based on individual salary of bargaining unit employees, and 16.67% the specific individual. performance; Eskom’s collective performance Our leadership and governance of pensionable earnings (or 10% of cost-to- accounts for the remaining 82% and is based on a No short-term incentive bonus was awarded to company) of managerial level employees. loss-score if on-target performance based on the executives for the year under review, as we did shareholder compact is not met. not achieve the agreed-upon qualifiers, namely the target date for commercial operation of Medupi Non-executive directors Incentives for executives Unit 6, the targeted BPP savings of R9.8 billion or Non-executive directors’ fees are paid as a fixed Our formal remuneration plan links executive certain technical measures related to plant recovery monthly fee, in accordance with the shareholder’s remuneration to organisational performance and initiatives. approval. Non-executive directors are reimbursed for individual contribution. All key performance areas company-related expenses incurred. and key performance indicators in the shareholder compact are included in the Exco performance Executive remuneration contracts (compacts). The compact is in essence a The Chief Executive, Finance Director and Group performance agreement. Executives have permanent employment contracts • Compacts of Exco members are focused on the based on our standard conditions of service. None of implementation of the Corporate Plan and as such, the executives have extended employment contracts linked to our strategic objectives or special termination benefits. No restraints of trade are in place. 112 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 113 Our leadership and governance continued Supplementary information The following table sets out directors’ and Group Executives’ total remuneration for the year, and includes disclosure of the remuneration of the three highest paid individuals in Eskom, as required by King III. 116 Abbreviations Directors’ and Group Executives’ remuneration 117 Glossary of terms 2014/15 2013/14 119 Independent sustainability assurance Name R 000 R 000 report Non-executive directors 9 497 7 077 122 Contact details Zola Tsotsi (Chairman)1 1 152 1 789 Collin Matjila 2 2 989 493 Other non-executives 5 356 4 795 Executive directors 7 937 24 428 Brian Dames (former Chief Executive)3 – 15 367 Tshediso Matona (Chief Executive)4,5 3 033 – Tsholofelo Molefe (Finance Director)5 4 904 3 170 Paul O’Flaherty (former Finance Director)6 – 5 891 Other Exco members 31 257 31 060 Bhabhalazi Bulunga 7 – 3 294 Thava Govender 4 396 4 152 Erica Johnson 8 3 899 4 826 Matshela Koko5,9 3 761 2 415 Steve Lennon10 4 468 3 674 Dan Marokane5 5 437 4 737 Ayanda Noah 4 337 3 776 Mongezi Ntsokolo 4 959 4 186 Acting Exco members11 1 418 – List of fact sheets Total remuneration 50 610 62 565 1. Resigned as Chairman on 30 March 2015. 2. Interim Chief Executive from 1 April to 30 September 2014. • Statistical tables, which include: 3. Resigned on 31 March 2014. 4. Appointed on 1 October 2014. – Ten years’ information for technical KPIs 5. Suspended on 12 March 2015. 6. Resigned on 10 July 2013. and five years for non-technical KPIs 7. Retired on 31 January 2014. – Power station capacities at 31 March 2015 8. Resigned on 31 October 2014. 9. Appointed on 1 December 2014; previously acting Group Executive: Group Technology and Commercial. – Information on power lines and substations 10. Retired on 31 March 2015. 11. Acting Exco members include Edwin Mabelane (acting Group Executive: Group Technology and Commercial from 12 March 2015), Abram Masango (acting Group – Customer information such as number of Executive: Group Capital from 12 March 2015), Elsie Pule (acting Group Executive: Human Resources from 1 November 2014) and Nonkululeko Veleti (acting Chief customers, electricity sales and revenue per Financial Officer from 12 March 2015). customer category – Environmental implications of using or saving electricity • Eskom’s energy flow diagram Our leadership and governance • Full Eskom benchmarking information • Leadership activities, including Board and Exco members’ qualifications, significant directorships and meeting attendance • Full list of stakeholder issues mapped to who raised them • King III checklist noting exceptions or partial application • Declaration in terms of Section 32 of PAIA All fact sheets are available on our website, www.eskom.co.za/IR2015 114 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 115 Abbreviations Glossary of terms B-BBEE Broad-based black economic empowerment 49M The 49M initiative aims to inspire and rally all South Africans behind a common goal: to save electricity and create a better economic, social and environmental future for all BPP Business Productivity Programme Base-load plant Largely coal-fired and nuclear power stations, designed to operate continuously CoGTA Department of Cooperative Governance and Traditional Affairs Cost of electricity (excluding depreciation) Electricity-related costs (primary energy costs, employee benefit costs plus impairment DEA Department of Environmental Affairs loss and other operating expenses) divided by total electricity sales in GWh multiplied by 1 000 DoE Department of Energy Daily peak Maximum amount of energy demanded by consumers in one day DPE Department of Public Enterprises Debt/equity including long-term provisions Net financial assets and liabilities plus non-current retirement benefit obligations and DWS Department of Water and Sanitation non-current provisions divided by total equity EAF Energy availability factor (see glossary) Debt service cover ratio Cash generated from operations divided by (net interest paid from financing activities EBIT Earnings before interest and taxation plus debt securities and borrowings repaid) EBITDA Earnings before interest, taxation, depreciation and amortisation Decommission To remove a facility (e.g. reactor) from service and store it safely EUF Energy utilisation factor (see glossary) Demand side management Planning, implementing and monitoring activities to encourage consumers to use electricity more efficiently, including both the timing and level of demand GRI Global Reporting Initiative Electricity EBITDA margin Electricity revenue (excluding electricity revenue not recognised due to uncollectability) GW Gigawatt = 1 000 megawatts as a percentage of EBITDA GWh Gigawatt-hour = 1 000MWh Electricity operating costs per kWh Electricity-related costs (primary energy costs, employee benefit costs, depreciation and amortisation plus impairment loss and other operating expenses) divided by total IDM Integrated demand management electricity sales in kWh multiplied by 100 IIRC International Integrated Reporting Council Electricity revenue per kWh Electricity revenue (including electricity revenue not recognised due to uncollectability) divided by total kWh sales multiplied by 100 IPP Independent power producer (see glossary) Embedded derivative Financial instrument that causes cash flows that would otherwise be required by IRP 2010 Integrated Resource Plan 2010-2030 modifying a contract according to a specified variable such as currency King III King Code of Corporate Governance in South Africa 2009 Energy availability factor (EAF) Measure of power station availability, taking account of energy losses not under the kt Kiloton = 1 000 tons control of plant management and internal non-engineering constraints kV Kilovolt Energy efficiency Programmes to reduce energy used by specific end-use devices and systems, typically without affecting services provided kWh Kilowatt-hour = 1 000 watt-hours (see glossary) Energy utilisation factor (EUF) Utilisation of the available plant LTIR Lost-time injury rate (see glossary) Forced outage Shutdown of a generating unit, transmission line or other facility for emergency reasons Mഢ Megalitre = 1 million litres or a condition in which generating equipment is unavailable for load due to unanticipated breakdown mSv Millisievert Free basic electricity Amount of electricity deemed sufficient to provide basic electricity services to a poor Mt Million tons household (50kWh/month) MVA Megavolt-ampere Free funds from operations Cash generated from operations adjusted for working capital MW Megawatt = 1 million watts Gross debt Debt securities and borrowings plus finance lease liabilities plus the after-tax effect of provisions and employee benefit obligations MWh Megawatt-hour = 1 000kWh Gross debt/EBITDA ratio Gross debt divided by earnings before interest, taxation, depreciation and amortisation MYPD Multi-year price determination Independent non-executive director Someone who is: NERSA National Energy Regulator of South Africa • Not a full-time salaried employee of the company or its subsidiary OCGT Open-cycle gas turbine • Not a shareholder representative • Has not been employed by the company and is not a member of the immediate OCLF Other capability loss factor family of an individual who is, or has been in any of the past three financial years, OHS Occupational health and safety employed by the company in any executive capacity • Not a professional advisor to the company PAIA Promotion of Access to Information Act, 2000 • Not a significant supplier or customer of the company PAJA Promotion of Administrative Justice Act, 2000 Independent power producer (IPP) Any entity, other than Eskom, that owns or operates, in whole or in part, one or more independent power generation facilities PCLF Planned capability loss factor Interest cover EBIT divided by (gross finance cost less gross finance income) PFMA Public Finance Management Act, 1999 Supplementary information Kilowatt-hour (kWh) Basic unit of electric energy equal to one kilowatt of power supplied to or taken from PPPFA Preferential Procurement Policy Framework Act, 2000 an electric circuit steadily for one hour RCA Regulatory Clearing Account Load Amount of electric power delivered or required on a system at any specific point SAIDI System average interruption duration index Load curtailment Typically larger industrial customers reduce their demand by a specified percentage for SAIFI System average interruption frequency index the duration of a power system emergency. Due to the nature of their business, these customers require two hours’ notification before they can reduce demand UAGS Unplanned automatic grid separations UCLF Unplanned capability loss factor (see glossary) 116 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 117 Glossary of terms Independent sustainability assurance report continued Load management Activities to influence the level and shape of demand for electricity so that demand Sustainability assurance statement conforms to the present supply situation, long-term objectives and constraints The sustainability key performance indicators set out within this report measure performance on issues material Load shedding Scheduled and controlled power cuts that rotate available capacity between all to stakeholders. The key performance indicators reported have been guided mainly by the shareholder compact, customers when demand is greater than supply in order to avoid blackouts. supported by our internal reporting guidelines. Distribution or municipal control rooms open breakers and interrupt load according to predefined schedules The King Code on Corporate Governance advocates that sustainability reporting and disclosure should be Lost-time injury (LTI) A work injury, including any occupational disease/illness or fatality, which arises out of independently assured. SizweNtsalubaGobodo Inc. provided reasonable and limited assurance on selected sustainability and in the course of employment and which renders the injured employee or key performance indicators marked with an “RA” or “LA” in the statistical tables. contractor unable to perform his/her regular/normal work on one or more full calendar days or shifts other than the day or shift on which the injury occurred The Board has applied its collective mind to the preparation and presentation of the integrated report and has concluded that it is presented in accordance with the International Framework. Lost-time injury rate (LTIR) Proportional representation of the occurrence of lost-time injuries over 12 months per 200 000 working hours The Board believes the integrated report is a fair presentation of the integrated performance of the company, taking Maximum demand Highest demand of load within a specified period into consideration the completeness of the material items it deals with and the reliability of data and information presented, in line with the combined assurance process followed. Off-peak Period of relatively low system demand Open-cycle gas turbine (OCGT) Liquid fuel turbine power station that forms part of peak-load plant and runs on kerosene or diesel. Designed to operate in periods of peak demand Outage Period in which a generating unit, transmission line or other facility is out of service Peak demand Maximum power used in a given period, traditionally between 07:00–10:00 as well as 18:00–22:00 in summer or 17:00–21:00 in winter Dr Ben Ngubane Ms Venete Klein Acting Chairman Chairman: Social, Ethics and Sustainability Committee Peaking capacity Generating equipment normally operated only during hours of highest daily, weekly or seasonal loads 28 May 2015 28 May 2015 Peak-load plant Gas turbines, hydroelectric or pumped storage schemes used during periods of peak demand Primary energy Energy in natural resources, e.g. coal, liquid fuels, sunlight, wind, uranium and water Independent assurance provider’s report to the directors of Eskom on selected Pumped storage scheme A lower and an upper reservoir with a power station/pumping plant between the two. key performance indicators disclosed in the integrated report During off-peak periods the reversible pumps/turbines use electricity to pump water from the lower to the upper reservoir. During periods of peak demand, water runs back into the lower reservoir through the turbines, generating electricity Introduction Subject matter and assurance We have been engaged to perform an independent We are required to provide reasonable and limited Reserve margin Difference between net system capability and the system’s maximum load requirements (peak load or peak demand) assurance engagement for Eskom Holdings SOC assurance on the following key performance Ltd (Eskom) on selected sustainability information indicators, which include all the indicators contained Return on assets EBIT divided by the regulated asset base, which is the sum of property, plant and reported in Eskom’s integrated report for the year in the Eskom Holdings SOC Ltd shareholder compact. equipment, trade and other receivables, inventory and future fuel, less trade and other payables and deferred income ended 31 March 2015. The King Code on Corporate a) Reasonable assurance (RA) Governance advocates that sustainability reporting System minutes Global benchmark for measuring the severity of interruptions to customers. One and disclosure should be independently assured. The following selected sustainability information in system minute is equivalent to the loss of the entire system for one minute at annual the integrated report was selected for an expression peak. A major incident is an interruption with a severity * 1 system minute We provided limited and reasonable assurance on selected sustainability key performance indicators of reasonable assurance: Technical losses Naturally occurring losses that depend on the power systems used outlined in this report and this report is produced • Unplanned capability loss factor (UCLF) Unit capability factor (UCF) Measure of availability of a generating unit indicating how well it is operated and in accordance with the terms of engagement with • Energy availability factor (EAF) maintained Eskom Holdings SOC Ltd. • Planned capability loss factor (PCLF) * Unplanned capability loss factor (UCLF) Energy losses due to outages are considered unplanned when a power station unit has Independence, expertise and quality • System minutes <1 to be taken out of service and it is not scheduled at least four weeks in advance control • Number of outstanding maintenance backlog Used nuclear fuel Nuclear fuel irradiated in and permanently removed from a nuclear reactor. Used We have complied with the Code of Ethics for requests as approved by the Technical Governance nuclear fuel is stored on-site in used fuel pools or storage casks Professional Accountants issued by the International Committee Watt The watt is the International System of Units' (SI) standard unit of power. It specifies Federation of Accountants (IFAC), which includes • System average interruption duration index (SAIDI) the rate at which electrical energy is dissipated (energy per unit of time) comprehensive independence and other requirements • System average interruption frequency index (SAIFI) Working capital ratio (Inventory plus the current portion of payments made in advance, trade and other founded on fundamental principles of integrity, • Migration of coal delivery volume from road to rail receivables and taxation assets) divided by (the current portion of trade and other objectivity, professional competence and due care, • Specific water consumption (ഢ/unit sent out) payables, payments received in advance, provisions, employee benefit obligations and confidentiality and professional behaviour. Our taxation liabilities) • Relative particulate emissions (kg/MWh sent out) engagement was conducted by a multi-disciplinary • Lost-time injury rate (LTIR) (employee) Supplementary information team of health, safety, social, environmental and assurance specialists with extensive experience in • Demand savings sustainability reporting. • Internal energy efficiency: energy savings non- essential consumption We maintain a comprehensive system of quality • Learners throughput or qualifying control including documented policies and procedures regarding compliance with ethical requirements, • Training expenditure as a percentage of gross professional standards and applicable legal and employee benefit costs regulatory requirements. 118 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 119 Independent sustainability assurance report continued • Disability information for reasonable assurance has been • Reviewed the process that Eskom has in place for acceptable measurement techniques which can result • Racial equity in senior management prepared, in all material respects, in accordance with determining material selected key performance in materially different measurements and can impact • Gender equity in senior management the policies, procedures and specification documents, indicators to be included in the report comparability. Qualitative interpretations of relevance, including the shareholder compact, governing this • Applied the assurance criteria in evaluating the materiality and the accuracy of data are subject to • Racial equity in professional and middle management information within the organisation. data generation and reporting processes individual assumptions and judgements. The precision • Gender equity in professional and middle management thereof may change over time. It is important to read We further have a responsibility to form an • Tested the processes and systems to generate, • Percentage of broad-based black economic the report in the context of the reporting criteria. independent conclusion, based on our limited collate, aggregate, monitor and report on the empowerment spend against TMPS assurance procedures, on whether anything has selected key performance indicators In particular, where the information relies on factors • Generation capacity installed – first synchronisation come to our attention to indicate that the selected • Performed a controls walkthrough derived by independent third parties, our assurance • Generation capacity installed and commissioned sustainability information for limited assurance • Conducted interviews with senior management to work has not included examination of the derivation • Transmission lines installed has not been prepared, in all material respects, evaluate reporting processes against the GRI G4 of those factors and other third party information. • Transmission transformers capacity installed and in accordance with the policies, procedures and Core guidelines commissioned specification documents governing this information Conclusions • Evaluated the reasonableness and appropriateness • Generation capacity milestones * within the organisation. Reasonable assurance of significant estimates and judgements made • Cost of electricity (excluding depreciation) by management in the preparation of the key Based on the results of our reasonable assurance We conducted our reasonable and limited assurance procedures, in our opinion the selected sustainability • Debt/equity (including provisions) performance indicators engagement in accordance with International information for the year ended 31 March 2015 has • Interest cover Standard on Assurance Engagements: Assurance • Performed site work at the coal-fired power been prepared, in all material respects, in accordance • Free funds from operations as percentage of Engagements Other than Audits and Reviews of stations (Arnot, Majuba, Grootvlei, Lethabo, with the reporting criteria. gross debt Historical Financial Information (ISAE 3000), issued by Komati, Tutuka, Matimba, Matla, Hendrina, • Capital expenditure excluding IDC * the International Auditing and Assurance Standards Camden and Kendal), Transmission Operating Limited assurance Board. These standards require that we comply with Units (Gauteng and North West), Distribution Based on the results of our limited assurance b) Limited assurance (LA) Operating Units (Northern Cape, Western Cape, procedures, nothing has come to our attention that ethical requirements and that we plan and perform The following selected sustainability information in the assurance engagement to obtain either reasonable North West, Free State, KwaZulu-Natal, Limpopo causes us to believe that the selected sustainability the integrated report was selected for an expression or limited assurance on the selected sustainability and Gauteng), and the subsidiaries Roshcon information for the year ended 31 March 2015 of limited assurance: information as per the terms of our engagement. and Rotek has not been prepared, in all material respects, in • Local content contracted (new build) • Evaluated whether the selected key performance accordance with the reporting criteria. Summary of work performed indicators presented in the integrated report • Percentage of black youth-owned spend Other matters against TMPS Our work included examination, on a test basis, are consistent with our overall knowledge and of evidence relevant to the selected sustainability experience of sustainability management and Our report does not extend to any disclosures • Total electrification connections * or assertions relating to future performance plans information. It also included an assessment of performance at Eskom * Not included in the shareholder compact. the significant estimates and judgements made by and/or strategies disclosed in the report. the directors in the preparation of the selected A limited assurance engagement is substantially less We refer to this information as the “selected in scope than a reasonable assurance engagement The maintenance and integrity of Eskom’s website sustainability information for reasonable assurance” sustainability information. We planned and performed under ISAE 3000. Consequently, the nature, timing is the responsibility of Eskom’s management. Our and “selected sustainability information for limited our work so as to obtain all the information and and extent of procedures for gathering sufficient procedures did not involve consideration of these assurance” respectively, and collectively as the explanations that we considered necessary in order appropriate evidence are deliberately limited relative matters and accordingly we accept no responsibility “selected sustainability information”. to provide us with sufficient evidence on which to a reasonable assurance engagement and, therefore, for any changes to either the information in the to base our conclusion in respect of the selected less assurance is obtained with a limited assurance integrated report or our independent assurance We have not conducted any work outside of the sustainability information. engagement than in respect of a reasonable assurance report that may have occurred since the initial date agreed scope and therefore restrict our opinion to Our procedures included the understanding of risk engagement. of presentation on the Eskom website. the selected sustainability information. assessment procedures, internal control, and the The procedures selected depend on our judgement, Restriction of liability Directors’ responsibilities procedures performed in response to the assessed risks. The procedures we performed were based on including the assessment of the risk of material Our work has been undertaken to enable us to The directors are responsible for the selection, our professional judgement and included inquiries, misstatement of the selected sustainability information, express the conclusions on the selected sustainability preparation and presentation of the sustainability observation of processes performed, inspection whether due to fraud or error. In making those risk information to the directors of Eskom in accordance information. This responsibility includes the of documents, analytical procedures, evaluating assessments, we consider internal control relevant with the terms of our engagement and for no other identification of stakeholders and stakeholder the appropriateness of quantification methods and to Eskom’s preparation of the selected sustainability purpose. To the fullest extent permitted by law, we requirements and material issues, commitments with reporting policies, and agreeing or reconciling with information in order to design procedures that are do not accept or assume liability to any party other respect to sustainability performance, and the design, underlying records. appropriate in the circumstances. than Eskom, for our work, for this report, or for the implementation and maintenance of internal control conclusions we have reached, save where terms are relevant to the preparation of the report that is free We believe that the evidence we have obtained is Given the circumstances of the engagement, in expressly agreed and with our prior consent in writing. from material misstatement, whether due to fraud sufficient and appropriate to provide a basis for our performing the procedures listed above we: or error. The selection was guided mainly by the conclusions. • Interviewed management and senior executives Supplementary information shareholder compact. to obtain an understanding of the internal control Inherent limitations Eskom’s performance against the shareholder compact is provided on environment, risk assessment process and Non-financial performance information is subject to pages 32 and 33 information systems relevant to the sustainability Vonani Chauke CA(SA) more inherent limitations than financial information, reporting process Director given the characteristics of the subject matter and the • Inspected documentation to corroborate the Registered Auditor Our responsibility method used for determining, calculating, sampling statements obtained from management and senior and estimating such information. The absence of a SizweNtsalubaGobodo Inc. Our responsibility is to form an independent executives in our interviews significant body of established practice on which to 28 May 2015 conclusion, based on our reasonable assurance procedures, on whether the selected sustainability draw allows for the selection of certain different but 120 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 121 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 Integrated Demand Toll-free Crime Line 0800 112 722 Eskom Environmental Envhelp@eskom.co.za Management National Sharecall number 08600 ESKOM (08600 37566) Promotion of Access to Information Act PAIA@eskom.co.za REMEMBER YOUR POWER Make the Eskom Energy Efficiency Customer SMS line Vodacom +27 82 941 3707 MTN IDM IDMHelpdesk@eskom.co.za Small Change, Big Difference Call To make a difference +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 Prevent, detect and report Physical address Postal address Eskom Megawatt Park 2 Maxwell Drive Sunninghill Sandton 2157 PO Box 1091 Johannesburg 2000 Will you partner with us Company Secretary Mr Malesela Phukubje Company registration number Eskom Holdings SOC Ltd to protect our electricity grid? Eskom Holdings Secretariat 2002/015527/30 PO Box 1091 Johannesburg 2000 "T&TLPN(VBSEJBOTJUJT PVSSFTQPOTJCJMJUZUPTFUUIFFYBNQMFBOEDIBOHF PVSFMFDUSJDJUZDPOTVNQUJPOCFIBWJPVS Let’s make the call to make a difference… BOEVTFMFTTFMFDUSJDJUZ Issued by Corporate Affairs Division November 2014 122 Integrated report | 31 March 2015 Eskom Holdings SOC Ltd 123