The group’s condensed interim financial statemens are available on Eskom’s website at www.eskom.co.za/IR2017 Group audited condensed financial results for the year ended 31 March 2017 Revenue increased by 7.9% to R177.1 billion Generation plant availability increased from 71.1% Kusile Unit 1 synchronised to the national grid on Own generation cost decreased by 8.5% to R60.1 billion, to 77.3% 26 December 2016 with IPP expenditure up 30.8% to R19.8 billion Medupi Unit 5 in commercial operation since Medupi Unit 4 synchronised on 31 May 2017 Total primary energy cost down by 2.3% 3 April 2017, adding installed capacity of 794MW Electrification connections increased by 31% EBITDA increased by 14.4% to R37.5 billion All Ingula units in commercial operation since year-on-year to 207 189, with universal access at January 2017, adding installed capacity of 1 332MW approximately 90% Cash flow from operating activities increased by 23.1% to R45.8 billion Business overview In its first year of implementation, the Design-to-Cost (DTC) strategy delivered significant success as On 16 August 2016, the North Gauteng High Court set aside NERSA’s decision regarding the 2013/14 On 6 June 2017, the High Court ruled that Mr Molefe may not return to work until such time as the Eskom achieved the required stability to navigate changing industry dynamics. However, the resuscitation RCA and remitted it back to NERSA. NERSA and Eskom were granted permission in November 2016 Labour Court has ruled. On 4 July 2017, the Labour Court postponed the hearing of Mr Molefe’s of the business financially will be tested by the 2.2% increase for 2017/18. to appeal the High Court decision. The appeal was heard on 4 May 2017; the Supreme Court of Appeal challenge to his dismissal, pending the outcome of the High Court application by opposition parties for upheld NERSA and Eskom’s appeal on 6 June 2017. Eskom is now awaiting feedback from NERSA on his reappointment to be ruled invalid and set aside. Eskom will build on recent performance and efficiency improvements and become a more customer- the way forward regarding the outstanding RCA applications for 2014/15 and 2015/16. NERSA granted centric organisation that partners with key sectors to stimulate industrial activity, thereby increasing Subsequent to year end, Ms Venete Klein resigned as a director on 12 May 2017. Dr Baldwin Ngubane Eskom a tariff increase of only 2.2% for 2017/18. electricity consumption to enable economic growth and job creation. resigned on 12 June 2017, after which Mr Zethembe Khoza was appointed as interim Chairman. NERSA has supported Eskom’s request for a single-year application for 2018/19. Eskom submitted a The business is targeting a number of key improvements over the next five years: Mr Johnny Dladla was appointed as acting Group Chief Executive and executive director on 22 June 2017. one-year tariff application on 19 April 2017 for consultation to National Treasury and SALGA. Eskom • Encouraging increased electricity demand to support economic growth, by achieving annual growth At the annual general meeting held on 23 June 2017, the Minister of Public Enterprises appointed four made a formal application for a 19.9% increase to NERSA on 9 June 2017 and is expecting NERSA’s of 2.1% in local demand and 8% in export sales interim non-executive directors (pending Cabinet approval): Dr Pulane Molokwane, Mr Simphiwe determination by December 2017 for implementation on 1 April 2018. • Reducing primary energy spend by R43 billion through greater efficiencies and industry restructuring Dingaan, Ms Banothile Makhubela and Mr Sathiaseelan Gounden. Ms Chwayita Mabude’s second term • Optimising planned capital expenditure by R25 billion and adding a private sector partnership strategy We will continue to moderate the tariff trajectory to stimulate economic growth. However, we face a came to an end and was not renewed. The remaining non-executive directors were reappointed. • Driving efficiencies by applying advanced analytics, to deliver R6 billion EBITDA improvement number of challenges such as doubt about revenue determination and RCAs. • Releasing R105 billion in Government guarantees, while maintaining a moderate electricity price path Outlook Operating performance The group has access to adequate resources and facilities to continue as a going concern for the Financial performance The energy availability factor (EAF) improved significantly from 71.1% for the year to March 2016 to foreseeable future. Revenue amounted to R177.1 billion (2016: R164.2 billion, restated), an increase of 7.9%, due to the 77.3% for the year to March 2017, exceeding the year-end target of 72%. We are well placed to achieve an Our financial position, Generation performance and new build delivery have improved over the past few NERSA-approved price increase in 2016. EAF of 80% by 2019/20. As a result of this increased availability and additional generating capacity added, years and are expected to improve further, given successful implementation of our strategy. The main the reliance on open-cycle gas turbines (OCGTs) has reduced considerably. Diesel usage decreased by Electricity sales of 214 121GWh were 0.2% lower than the previous year, although export sales volumes focus over the medium term will be to increase sales volumes and reduce costs, in order to improve R8.4 billion compared to the previous year. have increased by 12.1% to 15 093GWh (2016: 13 465GWh) mainly due to the drought in Southern profitability. The biggest challenge will be to moderate the electricity price increase while strengthening Africa. Eskom took advantage of this situation to utilise its excess capacity. A strategy to address the A total of 13.2Mt coal was transported by rail (2016: 13.6Mt). our financial position. decline in local sales volumes has commenced, and will address both the retention of sales to existing customers and the stimulation of sales growth. The strategy covers both local demand stimulation and Particulate emissions performance at 0.30kg/MWhSO is an improvement on last year’s performance cross-border sales. of 0.36kg/MWhSO. Water usage related to power station operations for the year was 1.42ℓ/kWhSO, Condensed group annual financial information better than last year’s performance of 1.44ℓ/kWhSO. In order to grow export sales, new agreements have been concluded with a number of regional trading Condensed income statement partners, ranging between 50MW and 200MW. Agreements have already been concluded with BPC of At 31 March 2017, total IPP capacity of 5 027MW was available to the system (2016: 3 392MW). for the year ended 31 March 2017 Botswana, NamPower of Namibia, ZESA of Zimbabwe and Copperbelt Energy Corporation of Zambia. Renewable IPPs delivered energy at an average load factor of 30.7% (2016: 30.7%) over the year, at an Restated Agreements are being finalised with SNEL of the Democratic Republic of Congo and ZESCO of Zambia. average cost of 209c/kWh (2016: 223c/kWh). March March Long-term agreements with LEC of Lesotho and SEC of Swaziland are in place. The combination of stagnant demand growth, improved plant performance and an increase in IPP 2017 2016 % Rm Rm change Primary energy costs of R82.8 billion are 2.3% lower than the previous year (2016: R84.7 billion) capacity, is expected to result in excess generation capacity over the medium term. We will manage the compared to an average increase of 18.8% over the last five financial years, reversing a significantly surplus capacity by placing units in cold reserve or lean preservation, growing local and export sales, Continuing operations and consider decommissioning coal-fired power stations, but in a way that optimises coal, people and Revenue 177 136 164 239 8 negative trend. Own generation costs (including environmental levy) of R60.1 billion (2016: R65.7 billion) capital costs across our fleet. We will only decommission power stations after completion of a thorough Other income 1 573 2 390 (34) generated 215 358GWh (2016: 215 933GWh) and reflects a decrease of 8.5% compared to the previous impact study on people and the community. Primary energy (82 760) (84 728) (2) year. The increase in coal purchase cost per ton was contained to 3.5% which is well below inflation Net employee benefit expense (33 178) (29 257) 13 of about 6%. Eskom spent R2.7 billion on international electricity purchases and R0.2 billion on other The transmission system minutes lost <1 performance target of 3.8 was attained notwithstanding the Net impairment loss (1 669) (1 170) 43 primary energy costs (2016: R3.7 billion and R0.2 billion respectively). To ensure optimal generation Other expenses (23 570) (18 663) 26 negative impact of a few relatively large incidents involving plant failures which occurred in the first half costs we will continue to apply the least-cost merit order dispatch of power stations. of the financial year (2016: 2.41) and an excellent 1.60 line faults per 100km performance was achieved Profit before depreciation and amortisation and net fair value loss (EBITDA) 37 532 32 811 14 Independent power producers (IPPs) generated 11 529GWh (2016: 9 033GWh) at a cost of R19.8 billion against a target of 2.2 (2016: 1.51). The frequency and duration of distribution network incidents was Depreciation and amortisation expense (20 300) (16 633) 22 (2016: R15.1 billion), reflecting an increase of 30.8% compared to the previous year. The average IPP better than target, with interruption frequency showing an improvement on last year. Net fair value loss on financial instruments (1 731) (455) 280 unit cost increased to 188c/kWh (2016: 171c/kWh), as proportionately more energy was procured from Net finance cost (14 377) (7 919) 82 Eskom KeyCare and Top Customer KeyCare, which measure the satisfaction of our large industrial renewable IPPs (RE-IPPs) at a higher cost than other IPPs. This cost is much higher than Eskom’s short- Share of profit of equity-accounted investees, net of tax 35 43 (19) customers, both improved over the year. run marginal cost and the average price of electricity. We will continue to engage with Government, Profit before tax 1 159 7 847 (85) also collaborating closely with DoE and NERSA, to manage IPP programme risks and mitigate any Eskom’s safety performance remains a concern, particularly in light of the number of fatalities and Income tax (271) (2 696) (90) unintended negative operational and financial impacts on Eskom. serious injuries suffered by employees, contractors and the public. Contractor and public fatalities reduced compared to the prior year. Unfortunately, despite our intense commitment to safety, we Profit for the year 888 5 151 (83) The increase in operating expenditure to R58.4 billion (2016: R49.1 billion) is driven largely by an increase of 13.4% in employee benefit costs and other operating expenses. Other operating expenses suffered four employee fatalities (2016: four) and six contractor fatalities (2016: 13). Our heartfelt were negatively impacted by a 26.3% increase in respect of decommissioning provisions for dedicated condolences to the families, friends and colleagues of the people who lost their lives in the line of duty. Condensed group statement of financial position coal mines. Eskom spent R14.1 billion (2016: R13.3 billion) on repairs and maintenance during the year. at 31 March 2017 Capacity expansion programme Eskom implemented the Business Productivity Programme (BPP) in 2013; it aims to deliver cost Restated Eskom is building new power stations and high-voltage power lines to meet South Africa’s growing saving opportunities to assist in closing the MYPD 3 revenue shortfall. Savings of R20.2 billion (2016: March March energy demand. The capacity expansion programme will increase Eskom’s generating capacity by 2017 2016 % R17.5 billion) were achieved this year against a target of R17 billion. The savings were achieved mainly 17 384MW by 2022, and includes one pumped storage and two coal-fired power stations. Rm Rm change from cash savings from coal operational expenditure, employee benefit costs and other expenses. Inception-to-date savings amount to R48.7 billion against a target of R43 billion. Ingula Units 2 and 1 were synchronised to the grid on 21 May and 16 June 2016 respectively. Units 4, 2, Assets and 1 were successfully commissioned on 10 June, 22 August and 30 August 2016 respectively, all ahead Property, plant and equipment and intangibles 592 848 523 659 13 The group EBITDA of R37.5 billion shows a healthy 14.4% increase (2016: R32.8 billion, restated). The Cash and cash equivalents and investment in securities 32 503 38 680 (16) of schedule. The fourth and final generating unit became operational on 31 January 2017, when Unit 3, electricity EBITDA margin has improved further to 21.44% (2016: 20.29%, restated). This is largely due Working capital 43 954 43 615 1 which had been damaged during testing in April 2016, was brought into commercial operation. In total, to the 9.4% price increase and lower primary energy costs. The group achieved a net profit after tax of Other assets 40 704 57 216 (29) R0.9 billion (2016: R5.2 billion, restated) for the year. 1 332MW installed peaking capacity was added to the national grid. Total assets 710 009 663 170 7 Depreciation has increased to R20.3 billion (2016: R16.6 billion) due to new plant of R64 billion being Medupi Unit 5 was successfully synchronised to the national grid on 8 September 2016, ahead of the planned schedule and reached full load (794MW) on 17 December 2016. After completing performance, Equity 175 942 182 352 4 commissioned. The net fair value loss for the group on financial instruments, including embedded reliability and compliance tests, Unit 5 attained commercial operation on 3 April 2017, ahead of schedule. Liabilities derivatives, was R1.7 billion (2016: R1.5 billion), and arose from foreign exchange rate movements and Debt securities and borrowings 355 300 322 658 10 fair value adjustments, as well as premium and volume variances on forward exchange contracts due to Kusile Unit 1 was synchronised to the grid on 26 December 2016 and achieved full load (800MW) on Working capital 51 860 52 360 (1) the ongoing hedging of interest and capital repayments on foreign borrowings. 10 March 2017. Medupi Unit 4 was synchronised to the grid on 31 May 2017. Other liabilities 126 907 105 800 20 An increase in the gross interest expense and a reduction in borrowing cost being capitalised under Four OCGT units at Ankerlig and two units at Gourikwa have now been converted to dual-fuel Total liabilities 534 067 480 818 11 IAS 23 due to plant being brought into use, resulted in an increase in net finance cost of 81.6% to capability. The remaining eight units will be converted by the end of the 2017/18 financial year. R14.4 billion (2016: R7.9 billion). Total equity and liabilities 710 009 663 170 7 During the year, 585.4km of high-voltage transmission lines were installed and substation capacity Funding of 2 300MVA was installed and commissioned under the new build programme, bringing the total since inception of the capacity expansion programme to 6 747km transmission lines and 34 390MVA Condensed group statement of cash flows The group’s net cash inflow from operating activities was R45.8 billion for the year (2016: R37.2 billion), for the year ended 31 March 2017 reflecting an increase of 23.1%. Cash flows used in investing activities were R62.3 billion for the year substation capacity. Restated (2016: R58.6 billion). Empowerment March March The group’s liquidity position, comprising cash and cash equivalents plus investment in securities, was 2017 2016 % Procurement from B-BBEE compliant suppliers achieved 98.3% of total measured procurement spend Rm Rm change R32.5 billion at 31 March 2017. Eskom secured the revised funding requirement of R58 billion, reduced (2016: 81.7%) which included spend with black-owned suppliers of 41.5% (2016: 33.6%). from the original requirement of R68.8 billion due to expected cash savings realised in the business. Net cash from operating activities 45 841 37 242 23 At 31 March 2017, 65.8% of senior management were black (2016: 61.1%), while 36.6% of senior Net cash used in investing activities (62 286) (58 590) (6) Eskom also has committed banking facilities of R6.25 billion available. A total of 53%, including the management were female (2016: 29.8%). Eskom has developed an ambitious and rigorous gender Net cash from financing activities 7 855 40 927 (80) committed facilities, of the funding requirement of R71.7 billion for the 2018 financial year has already equalisation plan which strives to close the gender gap by 2020, through the Eskom Women Advancement Cash and cash equivalents at the beginning of the year 28 454 8 863 221 been secured. National Treasury has extended the current Government guarantee framework agreement Programme (EWAP). Employees with disabilities constituted 2.93% of the workforce, and we had 4 844 Foreign currency translation (45) 21 – from 31 March 2017 to 31 March 2023. At this stage no further credit enhancement mechanisms are learners in the pipeline. Effect of movements in exchange rates on cash held 647 75 762 expected from Government. Cash and cash equivalents transferred to non-current assets held-for-sale (41) (84) (51) Eskom electrified 207 189 households during the year (2016: 158 016), an increase of 31.1%. The During the financial year, Standard & Poor’s (S&P) downgraded Eskom’s foreign and local currency implementation of the new performance centre, which focuses solely on the delivery of electrification, Cash and cash equivalents at the end of the year 20 425 28 454 (28) credit ratings and Fitch downgraded Eskom’s local currency credit rating. Since year end, S&P, Fitch and has enabled the significant increase in connections. Investment in securities 12 078 10 226 18 Moody’s downgraded Eskom’s credit ratings. The downgrades are not expected to negatively impact the Liquid assets at the end of the year 32 503 38 680 (13) borrowing programme except for an increase in the cost of debt. Corporate social investment The Board approved a revised borrowing programme of R338 billion, covering the period 1 April 2017 to Eskom committed R225.3 million to corporate social investment during the year (2016: R103.6 million), 31 March 2022. We have to repay interest of R213 billion over the next five years, with debt repayments impacting 841 845 beneficiaries (2016: 302 736). of R200 billion, with a peak of R63 billion in 2020/21. Cash interest cover and debt service cover ratios Group annual financial statements Disclaimer will both come under pressure as debt servicing increases over the medium term. Nevertheless, cash Governance The group annual financial statements have been This announcement does not constitute an flow from operations is expected to be sufficient to cover debt and interest payments. The Board proactively embarked on a comprehensive review of the various reports and matters raised prepared under the supervision of the Group offer to sell or an invitation of any offer to buy pertaining to perceived governance issues (including the State of Capture, PwC, National Treasury and Debt management Chief Financial Officer, Mr Anoj Singh CA(SA), securities of Eskom Holdings SOC Ltd (Eskom) Dentons reports amongst others). Concerns broadly relate to procurement, contract management and and audited by the group’s independent auditors, or any of its subsidiaries in any jurisdiction. Municipal arrear debt increased from R6 billion at 31 March 2016 to R9.4 billion at 31 March 2017 and governance. Management, under the oversight of the Audit and Risk Committee, has and will continue SizweNtsalubaGobodo Inc. who issued a qualified Certain statements in this announcement remains unacceptably high, despite numerous interventions. to implement the action plan to improve the control environment. The Board is confident that significant opinion relating to compliance with PFMA and regarding Eskom’s business operations and progress has been made in addressing findings and recommendations. During January and February 2017, supply was interrupted to four municipalities in the North West completeness of irregular expenditure. The financial position may constitute forward- Province, two in the Northern Cape and two in Mpumalanga. In response to concerns raised by Mr Romeo Kumalo and Ms Mariam Cassim resigned as directors effective from 12 and 14 April 2016 consolidated annual financial statements are looking statements which are not intended to municipalities and SALGA, we have tabled a number of proposals to various Parliamentary committees. respectively. Ms Nazia Carrim and Ms Viroshini Naidoo resigned as directors effective from 30 June 2016. fairly presented, except for the qualification. The be a guarantee of future results but instead The proposals are being considered by our Board, and if approved, external approvals will be obtained Mr Mark Pamensky resigned as director effective from 25 November 2016. audited annual financial statements of the group constitute Eskom’s current expectations where required. are available for inspection at Eskom’s registered based on reasonable assumptions. Actual Ms Elsie Pule was appointed as Group Executive: Human Resources, and Mr Sean Maritz was appointed office and on www.eskom.co.za/IR2017. results could differ materially from those We are involving municipalities to implement a pilot project in two provinces to install prepaid as Group Executive: Information Technology, both effective from 1 June 2016. projected in our forward-looking statements electricity meters for their customers. The project aims to improve revenue collection on behalf of The group annual financial statements were due to risks, uncertainties and other factors. Mr Brian Molefe went on early retirement as Group Chief Executive and executive director effective approved by the Board of Directors on 15 June 2017. these municipalities and enable settlement of municipal electricity bills. 31 December 2016, after which Mr Matshela Koko, previously Group Executive: Generation, was There were no significant events after the reporting Soweto arrear debt (excluding interest) increased to R5.3 billion at 31 March 2017 (R4.7 billion at appointed as Interim Group Chief Executive with effect from 1 December 2016. This was followed by the date which impact these results. 31 March 2016). We will continue to implement technologies to prevent tampering with meters, appointment of Mr Willy Majola as acting Group Executive: Generation with effect from 1 January 2017. and facilitate the conversion of customers to prepaid. Eskom is currently installing prepaid meters Mr Abram Masango, previously Group Executive: Group Capital, was appointed as Group Executive in Eskom Holdings SOC Ltd in Sandton, Midrand, Soweto and Kagiso. This is in order to increase revenue collection and address the Office of the Chief Executive. Mr Prish Govender was appointed as acting Group Executive: Group Reg No 2002/015527/30 Eskom’s debt collection challenges. Eskom installed 29 599 smart meters during the year in those areas. Capital in his stead, both with effect from 22 March 2017. During the same period, 13 528 meters were converted to prepaid metering. Head office The Board rescinded their decision approving the early retirement of Mr Molefe and he returned as Megawatt Park Maxwell Drive Sunninghill Sandton Economic regulation Group Chief Executive on 15 May 2017. Subsequently, the Board rescinded that decision and Mr Molefe PO Box 1091 Johannesburg 2000 Eskom submitted the 2014/15 Regulatory Clearing Account (RCA) application of R19.2 billion to NERSA was asked to step down as Group Chief Executive on 2 June 2017. Mr Molefe approached the Labour Tel +27 11 800 2775 www.eskom.co.za in May 2016, while the 2015/16 RCA application of R23.6 billion was submitted in July 2016. Court on the basis that overturning his reappointment was unlawful. The case has been postponed. HKLM 1189