Notes to the financial statements continued for the year ended 31 March 2023 FOR THE YEAR ENDED 31 MARCH 2023 ANNUAL FINANCIAL STATEMENTS ANNUAL FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2023 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Contents Directors’ report 2 18. Finance lease receivables 94 Nature of the business 2 19. Payments made in advance 94 Overview of the year 2 20. Trade and other receivables 95 Operational performance 3 21. Investments and financial trading instruments 96 Financial performance 4 22. Cash and cash equivalents 96 Governance and compliance 7 23. Service concession arrangements 96 Human resources 10 24. Share capital 97 Shareholder compact performance 10 25. Debt securities and borrowings 97 Reportable irregularities 13 26. Payments received in advance and contract liabilities and 100 deferred income Events after the reporting date 13 27. Employee benefit obligations 101 Approval 13 28. Provisions 104 Report of the audit and risk committee 14 29. Lease liabilities 106 Statement by company secretary 18 30. Trade and other payables 106 Independent auditor’s report to Parliament and the 19 shareholder on Eskom Holdings SOC Ltd and its subsidiaries 31. Revenue 107 Statements of financial position 32 32. Other income 107 Income statements 33 33. Primary energy 107 Statements of comprehensive income 33 34. Employee benefit expense 108 Statements of changes in equity 34 35. Impairment and writedown of assets 108 Statements of cash flows 35 36. Other expenses 108 Notes to the financial statements: 36 37. Depreciation and amortisation expense 108 1. General information 36 38. Net fair value and foreign exchange loss 109 2. Summary of significant accounting policies 36 39. Finance income 109 3. Capital management and going concern 48 40. Finance cost 109 4. Critical accounting estimates and assumptions 52 41. Income tax 110 5. Financial risk management 56 42. Cash generated from operations 111 6. Accounting classification and fair value 73 43. Net debt reconciliation 112 7. Segment information 77 44. Guarantees, contingent liabilities and assets 112 8. Property, plant and equipment 80 45. Commitments 113 9. Intangible assets 83 46. Related-party transactions and balances 114 10. Future fuel supplies 84 47. Events after the reporting date 116 11. Investment in equity-accounted investees 84 48. Restatement of comparatives 117 12. Investment in subsidiaries 85 49. Directors’ remuneration 118 13. Inventories 86 50. New standards and interpretations 119 14. Deferred tax 87 51. Information required by the Public Finance Management Act 122 15. Loans receivable 88 52. Reportable irregularities and matters under investigation 127 16. Embedded derivatives 88 Appendix – Abbreviations, acronyms and definitions 132 17. Derivatives held for risk management 89 Contact details 134 The annual financial statements were prepared under the supervision of the acting chief financial officer, JM Buys CA(SA). The financial statements have been audited in compliance with section 30 of the Companies Act and approved by the board of directors (board) on 30 October 2023. The audited financial statements of the group and Eskom as at and for the year ended 31 March 2023 are available for inspection at the company’s registered office and were published on 31 October 2023. The full suite of the group’s externally published reports, including the financial statements and integrated report, are available at www.eskom.co.za. 1 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Directors’ report for the year ended 31 March 2023 The directors are pleased to present their report for the year ended 31 March 2023. Operational performance Operational performance remains a concern due to the prolonged, high stages of loadshedding during the financial year necessitated by various Nature of the business factors such as the aging coal fleet being utilised at abnormally high utilisation factors, prolonged outages and production from renewable energy Eskom Holdings SOC Ltd (Eskom) is South Africa’s primary electricity supplier that generates, transmits and distributes electricity to local industrial, IPPs not being available as planned. An added concern is the additional costs of alternate as well as more expensive sources of energy incurred to mining, commercial, agricultural, redistributor (metropolitan and other municipalities) and residential customers and to international customers in support the power system given the current financial and system constraints. southern Africa. Eskom also purchases electricity from independent power producers (IPPs) and international suppliers in southern Africa. Loadshedding was required on 280 days (2022: 65 days) during the year. Loadshedding and load curtailment were as a result implemented for Eskom is a state-owned company, with the Minister of the Department of Public Enterprises (DPE) as the shareholder representative. The state 5 557 hours (2022: 1 011 hours), reducing supply by an estimated 13 476GWh (2022: 1 605GWh). is the only shareholder in Eskom. The OCGT load factor for the year increased to 14.3% (2022: 8.7%) against a target of 7%. Eskom and IPP-owned OCGTs had to be utilised Eskom’s head office is in Johannesburg. The nature of the business of the significant operating subsidiaries is set out in note 12 in the annual extensively during the year due to the poor performance of the coal-fired generation fleet as well as lower production by renewable energy IPPs. financial statements. The business objective of these subsidiaries is mainly for the sole benefit of Eskom. Technical performance Overview of the year Generation performance The information in this report covers the group performance of Eskom and its major operating subsidiaries, unless otherwise stated. A high-level The EAF of the generating plant deteriorated to 56.03% (2022: 62.02%) which is below the target of 65% for the year, largely due to an increase summary of the pertinent issues that characterised the year under review, as well as any material developments after year end, is presented in this report. in unplanned partial and full load losses (UCLF) to 31.92% (2022: 25.35%). Additional information, where relevant, is contained in relevant sections of the directors’ report, annual financial statements and integrated report. Eskom continues to operate the plant far outside acceptable norms to avoid or minimise loadshedding. The energy utilisation factor (EUF) for The President announced the appointment of Dr KS Ramakgopa as the new Minister of Electricity in March 2023 and transferred to him certain the entire generation fleet has increased to 81.48% (2022: 79.78%). The high average fleet EUF was largely due to coal-fired stations running at powers and functions contained in the Electricity Regulation Act that were previously under the Minister of Mineral Resources and Energy. an average EUF of 95.59% (2022: 93.98%), with all 15 coal-fired stations recording EUF above 90%. Given the age of the fleet, coal EUF levels His focus is on solving the power crisis at Eskom with his primary task to reduce the severity and frequency of loadshedding and to oversee the remain substantially above the international norm of around 75% over the long term, which will have negative long-term technical consequences. electricity crisis response. The Generation recovery plan aims to achieve a step change in improving generation performance and plant reliability by improving availability to Operational performance during the year significantly deteriorated marked by a low energy availability factor (EAF) and the higher number of an EAF level of 65% for March 2024 and at least 70% for March 2025. The purpose of the recovery plan is to: loadshedding days required. Performance was further negatively impacted by continuous breakdowns of Eskom’s aging fleet, theft and vandalism of Eskom infrastructure, financial constraints on maintenance and capital expenditure, and the loss of critical skills through attrition. • drive the implementation of key enablers to expedite plant recovery and ensure that recovered performance is sustained • evaluate risks and ensure timely implementation of risk mitigation measures The group recorded a net loss after tax of R23.9 billion for the year (2022: R11.9 billion restated) and earnings before interest, tax, depreciation • track implementation plans of emerging plant risks and station recovery plan progress at eight stations and amortisation (EBITDA) of R38.0 billion (2022: R53.0 billion restated). The EBITDA margin decreased to 14.7% (2022: 21.4% restated) mainly because of a substantial increase in primary energy costs due to reliance on expensive open cycle gas turbine (OCGT) production coupled with • perform analysis and assessments affecting recovery, and expedite plans accordingly a 5% decline in sales volume as a result of loadshedding, load curtailment and general decline in the economy. • have a holistic appreciation of the integrated business requirements • evaluate the effectiveness of the recovery plan and strategy optimisation/realignment Eskom’s liquidity remains a challenge and key focus area. Eskom restricted organisational cash requirements by limiting capital expenditure and • integrate responses from across the business on operational fleet level risks achieving operating expenditure savings of R27.8 billion against a target of R21.4 billion mainly attributable to containing growth in primary energy expense other than OCGTs, through optimising coal inventory and pricing to help improve liquidity. Eskom achieved a combined savings of • optimise, enhance and innovate business process R78.5 billion over the last four years against an original target of R61.8 billion by 2023. Progress has been made on the execution of the plan, even though the actual EAF performance of 55.3% during the first two quarters of 2024 The Eskom debt relief arrangement as announced by the Minister of Finance in February 2023, was promulgated into the Eskom Debt Relief remains below the target of 65%, with most of the gains targeted for the remainder of 2024. Act, 7 of 2023 on 7 July 2023. The arrangement will provide debt relief of R254 billion to Eskom over the next three years, consisting of liquidity Progress has been made on the long-term operational activities to operate the Koeberg power station for another 20 years beyond 2024. support of R78 billion in 2024, R66 billion in 2025 and R40 billion in 2026, together with the takeover of R70 billion in Eskom debt (principal and A request to separate the long-term operations license for the two units has been made to the National Nuclear Regulator to mitigate possible interest) in 2026 to support Eskom’s debt and interest payments as they fall due. The support is subject to certain conditions as outlined in note delays in the regulatory process. Koeberg unit 1 has been on a planned long-duration outage where the three steam generators are being replaced 47 and will take the form of subordinated loan that will be settled in Eskom ordinary shares upon complying with the conditions. Eskom received with commercial operation targeted for November 2023 while unit 2 will undergo a similar long-duration outage scheduled to start after unit 1 debt relief of R16 billion on 3 August 2023, R12 billion on 26 October 2023 and R8 billion on 30 October 2023. returns from outage. The sale of Eskom Finance Company (EFC) is being prioritised and managed as a condition of the debt relief from government as the amount available for drawdown in 2024 and 2025 would be impacted if the company is not disposed of. Eskom is also working with the National Nuclear The graph below reflects the inter-relationship of unplanned, planned and other capability loss factors with the EAF and coal EUF. Regulator to finalise the details of making annual deposits into a ringfenced nuclear decommissioning fund as directed by the regulator. % % 50 100 The board considered that there are uncertainties and dependencies relating to the going-concern assessment of Eskom that exist both from a timing of intervention perspective as well as whether the plans will materialise as anticipated. 40 80 The life extension of the nuclear plant is also dependent on several key challenges which, individually or collectively, may have a further material impact on the current operational challenges. 30 60 The events, conditions and assumptions described in note 3.2 inherently include material uncertainties that may cast significant doubt on the going 20 40 Coal energy utilisation factor (%) (right axis) concern. Energy availability factor (%) (right axis) 10 20 Other capability loss factor (%) (left axis) The board has a reasonable expectation that the risks will be satisfactorily addressed with the mitigation strategies in place. The board continues Planned capability loss factor (%) (left axis) to manage these strategies as a priority as it is important that they materialise as envisaged. The board assessed the current cash flow projections 0 0 Unplanned capability loss factor (%) (left axis) considering that future capital expenditure will be funded from cash from operations. The board concluded after carefully considering the progress of the 2019 2020 2021 2022 2023 initiatives outlined in note 3.2 and the continued financial support from the government through the debt relief arrangement, that there is a reasonable expectation that the group has access to adequate resources and facilities to be able to continue its operations and fund the capital programme for Network performance the foreseeable future as a going concern. The consolidated and separate financial statements have therefore been prepared on a going-concern basis. System minutes lost <1 minute performance deteriorated to 4.7 minutes (2022: 2.9 minutes) with an abnormal number of interruptions occurring due to various factors. These include switchgear failures arising from frequent operation for loadshedding, cable theft at substations, increased The legal separation process of Eskom has been delayed due to various key external dependencies. The only remaining condition to give effect to the line faults, protection maloperations as well as restoration delays. Maintenance practices are in the process of being reviewed to improve system suspensive sale agreement of National Transmission Company South Africa SOC Ltd (NTCSA) is to obtain the required lender consent. Discussions reliability performance. are ongoing with lenders from whom consent is required and requests for consent have been made. Bilateral engagements were held with lenders and they are supportive of the process. The granting of the requisite operating licences to NTCSA was one of the key dependencies required to enable the Distribution network performance remained stable. Energy losses increasing slightly to 9.74% (2022: 9.62%), totalling 19.2TWh (2022: 19.8TWh) operationalisation of the NTCSA. The National Energy Regulator of South Africa (NERSA) approved the licence for NTCSA to operate the transmission with an increase in estimated non-technical losses to R5.6 billion (2022: R5.3 billion restated) for the year. Refer to note 51.3. system on 28 July 2023 and the trading and import/export licences on 14 September 2023. The licences are expected to be issued in due course. Plant health and reliability is impacted by loadshedding with premature equipment failure and depletion of resources at the expense of normal A new company, the National Electricity Distribution Company of South Africa SOC Ltd (NEDCSA), has been registered during the 2023 financial events. Additional interruptions occurred due to unauthorised connections, overloading of the network, theft and vandalism of electrical year for the envisaged legal separation of the distribution division. The Minister of Public Enterprises granted approval of the Public Finance equipment and difficulty in restoring power to hazardous areas. Management Act, No. 1 of 1999 (PFMA) application in terms of section 54(2)(a) and 54(2)(d) on 7 August 2023 for the transfer of the distribution business to NEDCSA, subject to further discussions on the preferred model and financial sustainability of the new distribution company. It is The distribution loss curtailment strategy is being executed through meter refurbishment and audits of all customer categories, installing smart expected that NTCSA will be operationalised in the 2025 financial year with NEDCSA in the year thereafter. and prepaid meters as well as exploring options for a new vending platform and enhancing controls around the platform. Legal action is pursued against those who supply illegal prepaid meters. 2 3 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Directors’ report continued for the year ended 31 March 2023 Operational performance continued Primary energy expenses increased to R154.9 billion (2022: R132.9 billion restated) for the year although there was a decrease in production of Technical performance continued 12.2TWh. The main contributing factors were the growth in Eskom and IPP OCGT costs as well as gas and fuel oil used for combustion support and the start-up of coal-fired units after outages or trips. Primary energy expenses also include R3.5 billion (2022: R3.6 billion) relating to refunds Environmental performance on diesel use that were disallowed by the South African Revenue Services (SARS). The administrative appeal regarding the refunds was rejected The generation division is driving a culture towards achieving environmental compliance and renewed focus on the importance of compliance for by the South African Revenue Services (SARS). Eskom is now pursuing dispute resolution proceedings and remedies available in this regard. sustainable asset management. Eskom own generation costs increased to R106.7 billion (2022: R92.4 billion restated) for the year. Expenditure on Eskom-owned OCGTs Relative particulate emissions performance deteriorated to 0.70kg/MWh sent out (2022: 0.34kg/MWh sent out) due to ash plant issues as increased to R21.4 billion (2022: R10 billion) due to higher diesel prices and the increase in OCGT production to 3 018GWh (2022: 1 826GWh). well as poor performance of electrostatic precipitator and sulphur trioxide plant. The power station contributing most significantly to the poor IPP expenditure increased to R41.8 billion (2022: R35.2 billion) due to more extensive use of IPP OCGTs together with higher diesel prices. performance continues to be Kendal with half of the total emitted particulate matter. Emission recovery actions are being implemented at power stations as part of the generation recovery plan for effective plant management to improve emission performance. Employee costs declined by R0.7 billion to R32.3 billion (2022: R33.0 billion) for the year, representing a 1.2% decrease when compared to the prior year largely due to a 2% decline in headcount, mostly through natural attrition, offset by annual increases. Eskom received approval in June 2023 from the Department of Forestry, Fisheries and the Environment to operate the temporary stacks at Kusile power station at increased sulphur dioxide emissions levels while repairs to the failed west stack chimney are under way. Repairs to the temporary Other expenses increased by R6.0 billion to R34.8 billion (2022: R28.8 billion) for the year largely due to additional repairs and maintenance stack structures and permanent repairs to the west stack will be completed by November 2023 and December 2024 respectively. as well as plant operating costs, such as ash handling activities, because of the poor plant performance and writeoffs on property, plant and equipment that was previously capitalised. Specific water usage of 1.39ℓ/kWh sent out (2022: 1.45ℓ/kWh sent out) met the target for the year even though water performance across the fleet was negatively affected by poor water management practices. The impairment on financial assets amounted to R1.0 billion (2022: R0.6 billion), mainly relating to trade and other receivables. The writedown on other assets amounted to R1.2 billion (2022: R0.8 billion) of which R0.8 billion (2022: R0.8 billion) resulted from the continued Safety clean-up to address shortcomings in the internal control of consumable inventory management. Eskom is committed to safety and Zero harm. There was one employee fatality (2022: four), three contractor fatalities (2022: two) and 16 public fatalities (2022: 21) during the year. Depreciation increased by R0.4 billion to R32.5 billion (2022: R32.1 billion restated) in 2023 primarily due to the commissioning of Kusile unit 4 during the year and a full year of depreciation for Medupi unit 1. Capacity expansion programme The capacity expansion programme, which commenced in 2005 and is expected to be completed by 2028, aimed to build new power stations and The group recorded a net fair value and foreign exchange loss on financial instruments, excluding embedded derivatives, of R0.2 billion reinstate mothballed power stations to increase installed generation capacity by 17 134MW, high-voltage transmission power lines by 9 756km (2022: R4.7 billion) for the year. Financial instruments are largely impacted by interest rate and exchange rate movements as well as credit risk and and transmission substation capacity by 42 470MVA. Eskom continued to make progress with the programme with installed generation capacity hedge effectiveness adjustments. The Rand weakened significantly against major currencies during the year due to global macro-economic factors, of 15 529MW, transmission lines of 8 548km and transmission substation capacity of 39 505MVA from inception to 2023. resulting in a fair value loss on the translation of foreign borrowings and a corresponding fair value gain on derivative hedging instruments. A net fair value loss of R0.1 billion was recorded on embedded derivatives (2022: R1.6 billion net fair value gain). The focus at Medupi power station remains on completing the remaining scope on the balance of plant work, executing major plant defect repairs and resolving contractual and commercial matters towards project close-out. There are five units in commercial operation, connected and supplying energy Net finance costs increased to R37.0 billion (2022: R33.1 billion) in 2023 largely due to higher interest rates on inflation-linked borrowings and to the national grid while unit 4 is expected to be offline until August 2024 for turbine repairs following the generator explosion in August 2021. the increase in debt securities and borrowings. Commercial operation was achieved earlier than expected on 31 May 2022 for Kusile unit 4. Kusile units 1 to 3 have been offline since October 2022 The financial solvency ratios deteriorated mainly due to a decline in EBITDA. The net debt to equity ratio deteriorated to 1.69 (2022: 1.64 after the failure of the flue-gas duct. The repairs to the temporary stack structures were completed ahead of schedule with Kusile unit 3 returned restated) at year end with net debt increasing to R398.8 billion (2022: R389.1 billion). The net debt cash service cover ratio deteriorated to 0.58 to service on 30 September 2023 and unit 1 on 16 October 2023. The permanent solution to repair the flue-gas duct is planned to be completed (2022: 0.76) and remains well below investment grade levels. Liquidity remains under pressure given Eskom’s financial and operational challenges. by December 2024. Commercial operation of Kusile unit 5 is targeted for April 2024 and Kusile unit 6 is targeted for February 2025, with the final Cash and cash equivalents decreased to R7.5 billion (2022: R15.9 billion), mainly due to settling of Eskom’s debt obligations. completion of Kusile power station expected in May 2027. The graph below reflects the movement in net debt as well as the debt-to-equity and net debt cash service cover ratios over the last few years. The first phase of the correction of the major plant defects at Medupi and Kusile, mainly for the rollout of the milling plant at Medupi, is targeted Rbn Ratio for December 2023. Additional plant defect corrections are forecasted for completion after 2027. 500 4 High-voltage transmission lines of 326.1km were installed and commissioned during the year. Performance was significantly better than the target 400 of 140km due to excellent contractor performance. Eskom also connected 102 590 households to the grid during the year. 3 A total of 89 renewable energy IPP projects with a capacity of 6 106MW (2022: 5 826MW) are in operation. Eskom also procured energy from 300 two peaker IPP OCGT with a capacity of 1 005MW. 2 200 Refer to page 98 of the integrated report for more information. 1 Net debt-to-equity (ratio) 100 Financial performance Net debt cash service cover (ratio) Performance 0 2019 2020 2021 2022 2023 0 Net debt (Rbn) The Eskom group recorded a net loss after tax of R23.9 billion (2022: R11.9 billion restated) for the year, reflecting a further deterioration in performance of R12.0 billion compared to the previous year. EBITDA performance decreased by R15.0 billion to R38.0 billion (2022: 53.0 billion Gross debt securities and borrowings increased by R27.6 billion to R423.9 billion (2022: R396.3 billion) for the year mainly because of the restated) mainly due to higher primary energy costs. weakening of the rand relating to foreign denominated borrowings. Eskom repaid R39.1 billion and raised R29.6 billion of debt during the year. Revenue increased by R11.9 billion to R259.5 billion (2022: R247.6 billion restated), mainly due to the standard tariff increase of 9.61% Total debt servicing of debt securities and borrowings amounted to R72.2 billion for the year. Net cash from operating activities of R41.5 billion allowed by NERSA, offset by a year-on-year decline in total sales volumes of 9 880GWh to 188 401GWh (2022: 198 281GWh). Revenue was (2022: R54.0 billion) remains inadequate to meet debt servicing requirements and fund general capital expenditure requirements. negatively impacted by the revenue not recognised of R15.8 billion (2022: R14.2 billion) where collectability criteria were not met, offset by R7.6 billion (2022: R6.5 billion) revenue recognised from customers on the cash basis. The average electricity price amounted to 141.38c/kWh The graph below shows the movement in cash from operating activities as well as the cash interest cover and net debt service cover ratios over (2022: 127.32c/kWh) for the year. the last few years. The graph below reflects the comparison between sales volumes and electricity revenue over the last few years. Rbn Ratio 60 2.0 Rbn TWh 300 250 50 1.5 250 40 200 200 30 1.0 150 150 20 100 0.5 Cash interest cover (ratio) 100 10 Net debt service cover (ratio) 50 Cash from operating activities (Rbn) 50 0 0.0 Sales volume (TWh) 2019 2020 2021 2022 2023 0 0 Electricity revenue (Rbn) 2019 2020 2021 2022 2023 4 5 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Directors’ report continued for the year ended 31 March 2023 Financial performance continued Eskom’s borrowing programme was increased to R60 billion for 2023 from the originally envisaged R44.5 billion of which R59.9 billion (2022: R35.8 billion) was raised during the year, including R16 billion relating to funding concluded on 31 March 2023 with cash received on Performance continued 4 April 2023. The total overdue electricity receivables from customers increased by R12.1 billion to R64.3 billion (2022: R52.2 billion) in 2023, of which municipalities accounted for 91.0% and Soweto 3.5%. The total gross municipal overdue debt increased to R58.5 billion (2022: R44.8 billion) at The repayment profile of debt remains pressured over both the short and long term, with interest payments of R195 billion (2022: R118.9 billion) year end, with 32.2% owed by Free State, 29.1% by Mpumalanga and 15.5% by Gauteng municipalities. and debt repayments of R135 billion (2022: R176.9 billion) over the next five years. The debt relief support from government will assist with the Eskom continues to execute its municipal debt management strategy by enhancing existing revenue and debt management processes, enforcing repayment of these commitments when they become due. legal action and working with government on related interventions. The focus is on the top 20 defaulting municipalities as a priority as they The conditions relating to the debt relief restricts Eskom from raising new borrowings from 1 April 2023, unless approved by the Minister of constitute approximately 78% of total gross municipal overdue debt. Finance. All operational and relevant capital expenditure spending will be financed through operational cash flows and drawdowns from existing The municipal debt relief programme that was announced in the National Budget Speech in February 2023 supports Eskom’s municipal debt project related loan agreements. Eskom’s credit rating improved to a stable outlook after the enactment of the Eskom Debt Relief Act. strategy and is intended to assist with Eskom electricity receivable arrear debt challenge. Eskom, in consultation with National Treasury, will The amounts available under the government guarantee facility of R350 billion expired on 31 March 2023 in line with the debt-relief arrangement. Existing write off a municipality’s arrear debt balance at 31 March 2023, including interest and penalties and excluding any current amounts, over three guarantees issued in terms of the government guarantee facility were not impacted and will remain in place until settlement of the guaranteed debt. financial years subject to the municipality’s compliance with the conditions as determined by National Treasury, including but not limited to the continuous payment of their current account. The reconciliation and monitoring of the first five municipalities that were approved for the debt Refer to page 82 of the integrated report for more information. relief arrangement commenced on 1 June 2023. A total of 28 municipalities have been approved by National Treasury by 30 September 2023. The closing date for the debt relief arrangement has been extended to 31 October 2023. Governance and compliance Eskom strives to entrench sound corporate governance practices across the business, based on accountability, transparency, ethical behaviour The graph below reflects the increase in the gross overdue municipal debt per province and the breakdown between the net impairment, interest and fairness. and revenue not meeting collectability criteria over the last few years. Rbn The board remains committed to remedying all issues related to past corporate governance breaches. The board is focussing on emergency 60 agenda items to prevent the challenge of criminality in the form of fraud, corruption, theft and sabotage including appointing of senior executives in key functions, enhancing critical internal controls (enhanced safeguarding of assets, end to end control of coal supply chain and procurement 50 processes). The audit and risk committee is actively overseeing and monitoring the process of addressing audit findings and observations raised by internal and external assurance providers to improve the internal control environment. 40 Investigations into allegations of criminality in Eskom resulting from the Judicial Commission of Inquiry into Allegations of State Capture led 30 Other (Rbn) by Deputy Chief Justice Raymond Zondo (Zondo Commission), Special Investigating Unit (SIU) and other internal and external investigations Gauteng (Rbn) continue during the year. The outcome of investigations, when available, has been considered for a possible impact on the financial statements. 20 Mpumalanga (Rbn) As a result of the outcome of these investigations property, plant and equipment that was previously capitalised has been expensed during the Free State (Rbn) year and reported in terms of PFMA. 10 Net impairment (Rbn) Eskom is taking allegations regarding criminality seriously and is cooperating with related investigations and inquiries. Eskom continues to provide Interest and revenue not meeting collectability criteria (Rbn) 0 2019 2020 2021 2022 2023 the necessary support to external organisations where follow up actions are not within Eskom’s control to ensure the successful prosecution of implicated suppliers, former employees and directors as well as associated perpetrators. Recent developments include the arrest of nine people at NERSA tariff and Regulatory Clearing Account decisions Kusile power station for theft of coal and fraud with more arrests to be made as investigations continue. A coal truck driver and two weighbridge Revenue growth by migrating towards cost reflective tariffs remains a focus area for Eskom. clerks were arrested for fraud and coal theft relating to delivery of coal at the Majuba power station. A sub-contractor of Eskom Rotek industries at Camden power station was arrested for bribery related to coal deliveries. Developments on the various NERSA determinations include: The environmental, social and governance framework has been enhanced to incorporate broader legal and governance issues, including Eskom’s • Revenue decision for 2023 to 2025 (MYPD 5) response to state capture and criminality. Key focus areas to support the eradication of fraud and corruption include civil recoveries, consequence Eskom submitted a court review application to address NERSA’s incorrect treatment of the regulatory asset base in which NERSA awarded Eskom management for implicated suppliers, former employees and former directors as well as conducting an in-depth crime risk assessment and review a standard tariff increase (including the Regulatory Clearing Account (RCA)) of 9.61% for 2023, significantly lower than the 20.5% that Eskom applied of structures, policies and procedures. for. The High Court set aside NERSA’s decision in respect of the valuation of the regulatory asset base, although no retrospective adjustment was granted. NERSA was ordered to apply its Multi Year Price Determination (MYPD) methodology for redetermination of the valuation of The first phase of a crime landscape risk assessment by an independent service provider, aimed at identifying risks related to bribery and the regulatory asset base to form the basis for the revenue decisions for 2024 and 2025. NERSA subsequently awarded an average standard corruption, financial crime, physical asset crime, cybercrime and money laundering, is in progress. The assessment will assist with enhancing tariff increase of 18.65% for 2024 and 12.74% for 2025. The Democratic Alliance, the Tebeila Institute and the South African Local Government controls relating to crime risk and implementation of a crime risk management programme in Eskom’s standard operating procedures. Association separately reviewed NERSA’s determination for 2024 and 2025, and an interdict was submitted to stop the implementation thereof. A fraud prevention plan was established and progress was made in the implementation thereof. Key actions taken to address the risk of fraud The Tebeila Institute subsequently withdrew its application. The hearings took place in September 2023 and a court outcome is awaited. and corruption include: • Revenue decision for 2020 to 2022 (MYPD 4) Action Progress The Supreme Court of Appeal issued an order in June 2022 on the timing of the recovery of the remaining R59 billion due to Eskom arising from the R69 billion Government support incorrectly deducted by NERSA in its revenue determination for MYPD 4. In terms of the court Use of independent service providers to evaluate allegations of fraud and Implemented order, NERSA is required to include an additional R15 billion in allowable revenue per year from 2024 to 2026 and R14 billion in 2027. NERSA corruption in support of a broader investigative process and to determine complied with the court order in its MYPD 5 revenue decision for 2024 and 2025. appropriate plan of action. • RCA decision for 2020 (MYPD 4) Completion of several forensic investigations and assessments on reported Ongoing process, backlog reduced NERSA approved R3.5 billion against Eskom’s application of R8.4 billion to be recovered through the RCA mechanism. NERSA made a incidents which assisted in reducing the backlog into outstanding forensic determination on the timing of the liquidation of the RCA, with R3.3 billion to be recovered equally over three years from standard tariff investigations. customers and the remaining R0.1 billion to be recovered from local special pricing arrangement customers and international customers. Implementation of a single investigative unit to enhance effectiveness and In the progress, approved by board Eskom accepted the decision although the court review application relating to the RCA decision is still under way. response to allegations of crime and other unethical behaviour. • RCA decision for 2021 (MYPD 4) NERSA communicated a RCA decision of approximately R0.2 billion in March 2023 in favour of the consumer against Eskom’s application of Implementation of enhanced fraud awareness and training. Enhanced training material and compulsory training ongoing R10.7 billion in favour of Eskom. The reasons for the decision were published in May 2023 and Eskom reviewed NERSA’s decision on a similar Use of independent service providers to assist Eskom in identifying possible Several overpayments identified, legal action instituted with basis as previous RCA decisions. The case was lodged in October 2023. overpayments relating to construction contracts with the objective to ongoing investigations • RCA decision for 2022 (MYPD 4) recover such overpayments. Eskom submitted a RCA application of R23.9 billion in April 2023 for 2022 mainly resulting from revenue, primary energy and operating cost Use of independent service providers to assist Eskom with the management Several claims reviewed with successful outcome and ongoing variances. The RCA application was delayed because of the late release of the Eskom 2022 annual financial statements. Based on the published of compensation claims from construction service providers. support being received in the management of claims timelines NERSA is expected to make its decision by December 2023. Enhanced control measures relating to coal supply being implemented, Pilot project implemented to track movement of trucks, testing coal • Other court review applications under way including the coal automation project to monitor the end-to-end coal quality at source and enhanced weighbridge controls There have been no developments relating to court review applications in respect of the RCA decisions for 2015 to 2017 (MYPD 3), the RCA supply chain. decision for 2018 (MYPD 3), the revenue and RCA decisions for 2019 as well as the RCA decision for 2020 (MYPD 4). The legal processes for these review applications are still under way which collectively relate to the recovery of an estimated R50 billion. Planned expanded roll out of artificial intelligence capabilities to improve Fragmented approach being addressed, procuring assistance from controls, including the ongoing monitoring of identified exceptions. external service provider for initial assistance while developing Funding in-house capability. Formalising regular feedback on actions taken The group has a centralised treasury function. The funding and liquidity activities are overseen by a general manager, Mr R Vaughan, the group Rollout of pilot smart metering to test the controls over meter tampering Service provider appointed and rollout in progress treasurer who is Eskom’s debt officer and has the relevant experience and expertise for this role. and ghost vending as well as managing connections remotely. 6 7 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Directors’ report continued for the year ended 31 March 2023 Governance and compliance continued Irregular expenditure Eskom completed its review of the Zondo Commission report and is addressing the recommendations and ensuring appropriate legal remedies Irregular expenditure incurred during the year amounted to R5.0 billion (2022: R10.4 billion restated). New transgressions amounted to R2.6 are being pursued. There are currently no outstanding disciplinary actions against individuals highlighted in the Zondo Commission report and no billion consisting of 37 incidents in the current year, whilst the remaining R2.4 billion relates to ongoing expenditure on 52 incidents previously implicated individuals are currently employed by Eskom in relation to consequence management for delinquent employees. Several civil recovery classified as irregular. proceedings have been launched by both the SIU and Eskom. Eskom is actively implementing various initiatives to address matters relating to irregular expenditure as well as improve operational processes Eskom provided the first batch of dossiers of charges related to four former Eskom directors to the Companies and Intellectual Property including: Commission for consideration and prepared detailed evidence packs relating to all implicated directors. • ringfencing of historical irregular expenditure and recording of all irregular expenditure in a central condonation register for preliminary investigation and determination, and subsequently submitting for approval New contracts for all implicated suppliers are provisionally blocked while awaiting the outcome of related court cases whereafter relevant • training interventions with the support of regulatory organisations on various legislative and regulatory requirements to eliminate any ambiguity suppliers are formally blacklisted. Eskom’s state capture task team is focussing on the backlog of supplier disciplinary cases and addressing new that might arise due to different interpretations of governance frameworks and prescripts cases as they arise. An external service provider is assisting Eskom in closing out these matters. • monitoring and engaging with divisional executives by the loss control function to close out outstanding items Investigations continue to reveal instances of improper contract management, general procurement irregularities and fraud. Non-compliance with Eskom’s policies and procedures, employee dishonesty as well as circumvention of controls remain the most prevalent themes in these Fruitless and wasteful expenditure and criminal conduct cases. A total of 278 (2022: 128) new cases involving employees and suppliers were registered for internal investigation during the year, Fruitless and wasteful expenditure incurred during the year amounted to R105 million (2022: R3 million restated) for the group. There is a risk that with 227 (2022: 113) forensic investigations concluded during the year and 305 (2022: 253) cases under investigation at year end. the reported information could be understated due to various challenges relating to identification, review and finalisation of instances of fruitless and wasteful expenditure. There is continued focus on efforts to address shortcomings and improve reporting. Disciplinary action was recommended for 223 employees and 54 suppliers were recommended for review through the supplier review process. Confirmed cases of fraud and corruption registered with the South African Police Services (SAPS) amounted to 158 cases of which 10 are at trial Losses due to criminal conduct of R6.0 billion (2022: R5.7 billion restated) were reported during the year for the group. stage at various magistrate and specialist commercial crimes courts. A further 41 have been through the criminal proceedings provided for under the Criminal Procedure Act. Board and executive committee changes The board should consist of a minimum of three and maximum of 15 directors, with the majority being non-executive directors, in terms of Consequence management processes are being improved. These include the establishment of a disciplinary tribunal consisting of internal the memorandum of incorporation. The current board comprises 15 directors of which 13 are independent non-executive directors and two and external experts to expedite disciplinary action and address the backlog of cases as well as training of disciplinary chairpersons and case executive directors. presenters. An agreement was reached with trade unions on the amended disciplinary and grievance procedures for bargaining unit employees where Eskom will undertake disciplinary action within three months from the date that it becomes aware of any misconduct. Consultation on the The following changes to the board occurred during the year: disciplinary and grievance procedures applicable to managerial employees are in progress. Non-executive directors Comment Compliance with and monitoring of the annual declaration of interest process has improved. Employees are subject to disciplinary processes PM Makwana (chairman) Appointed on 1 October 2022 where business-related interests were not declared or private work performed without prior approval. Potential non-compliance with Eskom’s FBB Gany-Ahmed Appointed on 1 October 2022 conflict of interest policy were investigated where directorships were not appropriately disclosed. LL Goqwana Appointed on 1 October 2022 CR le Roux Appointed on 1 October 2022 Appropriate screening of applicants has been incorporated in the recruitment of employees, including identifying and excluding employees who APZ Mafuleka Appointed on 1 October 2022 previously resigned before disciplinary or investigative processes could be concluded. The process to withhold pension benefits and the recovery MW Makgoba Term ended on 30 September 2022 of losses or damages to Eskom from flagged employees has also been clearly outlined. BCE Makhubela Term ended on 30 September 2022 Eskom’s overall assessment of the implementation of the King IV TM principles and practices remains partially effective for 2023. The board B Mavuso Resigned on 27 September 2022 acknowledged that not all of the King IV TM principles have been fully or effectively applied, even though many of the required practices have been L Mkhabela Appointed on 1 October 2022 in place for many years. Initiatives are underway to address focus areas. PE Molokwane Term ended on 30 September 2022 TH Mongalo Term ended on 30 September 2022 PFMA compliance TL Mthombeni Appointed on 1 October 2022 Eskom has unfortunately again received a qualified audit opinion relating to the completeness and accuracy of PFMA information disclosed in B Ntshalintshali Appointed on 1 October 2022 note 51 of the annual financial statements as associated financial records were not complete or accurately maintained in line with legislative M Nyati Appointed on 1 October 2022 requirements. T Ramano Appointed on 1 October 2022 B Vilakazi Appointed on 1 October 2022 The board remains committed to enhancing systems, controls, resources, policies and procedures as well as reporting structures to address this C von Eck Appointed on 1 October 2022 significant focus area. These enhancements are not yet effective as there are still areas that require significant improvement. The National Treasury Instruction 4 of 2022/23 was issued in January 2023 effective from 3 January 2023. The instruction note is applicable Dr R Crompton remained as an independent non-executive director from the previous board. The chairman of the board, Mr PM Makwana, to all state-owned companies and specifies the information required in terms of section 55(2)(b)(i) of the PFMA that must be reported in the resigned effective from 30 October 2023. Dr M Nyati was appointed as chairman of the board effective from 31 October 2023. annual financial statements and the integrated report. Certain particulars relating to irregular expenditure, fruitless and wasteful expenditure and material losses due to criminal conduct which were previously included in the annual financial statements were reported in the integrated report Mr AM de Ruyter resigned from Eskom effective 28 February 2023. Mr C Cassim is acting as the group chief executive and Mr JM Buys is acting in 2023 in line with the requirements of the instruction note. All information reported previously are, as a result, still reported in the integrated as the chief financial officer. report and annual financial statements. The recruitment process for the position of group chief executive is progressing. Eskom submitted the names of three candidates to the Eskom requested a partial exemption from National Treasury to allow it to disclose the required PFMA information in the integrated report and shareholder on 25 October 2023 for consideration. not in the annual financial statements for 2023, 2024 and 2025. The partial exemption granted by the Minister of Finance in March 2023 was The following changes to Exco occurred after year end: withdrawn in April 2023. The issuance of the National Treasury Instruction 4 is assisting Eskom with dealing with its PFMA reporting as it allows for the ringfencing and separate management of challenges that arose in prior periods with only current year expenditure that has to be reported Executive committee members Comment in the annual financial statements. JA Oberholzer Retired as group chief operating officer on 30 April 2023 and was on a fixed-term contract until 31 July 2023 The PFMA reporting procedure has been revised so that all assessments and determinations are performed by the Eskom loss control function. M Govender Resigned as group executive: legal and compliance on 30 June 2023 There is focus on improving the effectiveness of the loss control function, including evaluating its mandate and related capacity. The roles, W Madonsela Acting as group executive: legal and compliance from 1 July 2023 responsibilities and reporting process of the business versus the loss control function also need to be clearly defined and enhanced. Training on N Minyuku Resigned as group executive: government and regulatory affairs on 30 April 2023 the PFMA reporting procedure was rolled out to managerial level employees during the year. S Nassiep Acted as group executive: government and regulatory affairs from 1 June 2023 until 9 August 2023 N Sithole Acting as group executive: government and regulatory affairs from 10 August 2023 The divisional executives for generation, transmission and distribution, Mr BJ Nxumalo, Mr SM Scheppers and Mr ML Bala respectively, are attending Exco in a participating role from 1 April 2023. Refer to page 56 of the integrated report for more information. 8 9 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Directors’ report continued for the year ended 31 March 2023 Human resources Actual performance against the year end target is indicated as follows: Eskom remains committed to ensuring a skilled and diverse workforce is in place to achieve Eskom’s mandate and strategic objectives. The human Actual performance for the year met or exceeded the target Actual performance for the year did not meet the target resource strategy aims to address various human capital challenges which is being implemented. Key performance indicator Ref Unit Target Actual Actual Workforce 2023 2023 2022 Eskom’s headcount reduced by 820 to 39 601 (2022: 40 421) at year end, mainly through natural attrition of 2 705 employees offset by external Focus on safety recruitment of 1 885 employees to address the skills needs across critical workforce segments. Headcount is expected to increase during the Lost-time injury rate (employee)1 rate 0.30 0.26 0.24 next five years with targeted headcount of 41 837 by 2028 to replenish skills lost through natural attrition in support of the legal separation and Just Energy Transition. Improve plant operations2 Energy availability factor (a) % 65.00 56.03 62.02 Industrial relations Post-philosophy outage unplanned capability loss factor (b) % 14.00 35.75 29.74 A cost of living increase of 7% was implemented for bargaining unit employees from July 2022 and professional, middle management, professionally Outage readiness indicator at T-33 (c) % 80.00 70.25 67.45 qualified and senior management employees from October 2022. Top management received no increases. The Commission for Conciliation, Boiler tube failure rate (12-month moving average)3 (d) number 1.80 2.17 2.44 System minutes lost (e) minutes 3.53 4.71 2.88 Mediation and Arbitration awarded an additional 1.5% salary adjustment backdated to July 2021 for bargaining unit employees in respect of the Transmission lines installed4 km 140.00 326.10 180.54 outcome of the 2021 wage negotiations. Transmission transformers capacity installed and commissioned 4 MVA – – 1 065 A collective agreement with trade unions was reached for a period of three years after three rounds of negotiations. The agreement includes a Payment levels excluding Soweto interest (f ) % 95.70 95.03 95.97 7% salary increase per year for all bargaining unit employees, applicable from 1 July 2023 to 30 June 2026, a 7% increase in the housing allowance Distribution total energy losses (g) % 9.44 9.74 9.62 per year over the three-year period and a once-off taxable payment of R10 000 for the first two years. Total electrification connections number 101 899 102 590 97 947 System average interruption duration index (SAIDI) hours 38.00 35.51 35.46 Eskom subsequently approved a 7% increase in managerial remuneration costs from 1 October 2023, of which a 4% cost-of-living adjustment was Focus on the system guaranteed for all managerial employees and the remaining 3% was made available for managers to utilise their discretion and award to employees Loadshedding implemented3 (h) number of days 63 280 65 based on performance, correcting income differentials and retaining high performers. Reduce environmental footprint in existing fleet Building and retaining strong skills Relative particulate emissions (i) kg/MWh sent out 0.30 0.70 0.34 Eskom has implemented various initiatives which demonstrates commitment to upskilling and reskilling of its workforce. These initiatives are in Specific water usage ℓ/kWh sent out 1.39 1.39 1.45 response to the changing world of work, Just Energy Transition and the evolving energy industry as well as to stabilise and maintain the constrained Compliance with atmospheric emission licences 5 (j) % 90.00 87.40 89.00 electricity network. An implementation plan is being developed to address the identified skills gaps identified in a skills audit. Primary energy optimisation Migration of coal delivery volume from road to rail (k) Mt 4.70 2.51 2.49 The learner pipeline programme aims to address some of the future skills needs and creates a foundation for balancing the ageing workforce Coal purchase rand/ton % increase 10.00 9.24 2.08 profile with an appropriate talent pipeline. The learner pipeline represented 4.6% (2022: 3.6%) of the permanent company workforce against a target of 2.5% for the year. There were 1 568 learners at year end. Deliver capital expansion Generation capacity installed and commissioned (commercial operation) (l) MW 800 799 794 Training spend of R1.1 billion (2022: R0.9 billion) was incurred in 2023, representing 3.4% (2022: 2.6%) of gross employee benefit costs. Ensure financial sustainability EBITDA (m) R million 51 929 38 045 52 9546 Eskom continues to support further study programmes where employees seek to obtain qualifications related to their line of work, thereby Cash interest cover (n) ratio 1.33 1.29 1.696 building skills and expanding the leadership potential within the workforce. A total of 795 (2022: 843) employees were enrolled in further studies Debt service cover ratio 0.55 0.58 0.76 during the year. Savings from turnaround initiatives R million 21 400 27 765 20 047 Improving internal transformation Legal separation Eskom continues to make progress in building a more diverse and inclusive workforce that reflects the demographics of the country. Eskom’s Business separation key milestones – Generation is a legal operating (o) date 31 Dec No n/a diversity goals reach beyond race, gender and disability to cultural, generational and other diversity needs. subsidiary of Eskom7 2022 Business separation key milestones – Distribution is a legal operating (p) date 31 Dec No n/a Group disability equity improved marginally to 3.0% (2022: 2.9%) below the internal target of 3.3% as a result of the reduction in overall headcount. subsidiary of Eskom7 2022 The number of employees with disabilities regrettably reduced to 1 171 (2022: 1 188). Initiatives to improve awareness and accessibility, including Socio-economic impact: human capital the use of virtual platforms and physical equipment for persons with disabilities, are underway to improve the indicator in 2024. Learner intake: artisans number 100 135 106 Eskom’s overall gender ratio improved marginally to 65:35 (2022: 66:34) male to female employees against the target of 50:50 representation by Learner intake: engineers number 50 144 58 2030. Gender equity remains at five out of nine Exco members being female at 31 March 2023. Initiatives to improve gender equity include learning Learner intake: technicians number 50 105 51 and development programmes, the Eskom Women Advancement Programme and the development of the Women Accelerator Programme. Learner intake: sector specific3 number 90 90 – Training spend as % of budgeted gross employee benefit expense (q) % 3.75 3.57 2.70 Refer to page 132 of the integrated report for more information. Corporate social investment (CSI) CSI committed/spend (r) R million 131.00 63.00 75.10 Shareholder compact performance The table sets out Eskom’s performance measured against the shareholder compact that was subject to audit by the external auditors. The Industrialisation and localisation Preferential procurement (s) % of total measurable 80.00 73.44 73.35 external audit opinion relating to this audit is detailed on page 25. One key performance indicator (KPI), namely outage readiness indicator at procurement spend (TMPS) T-3, was qualified as the external auditors were not able to substantiate the value reported due to a lack of adequate supporting documentation. Local content (t) % 80.00 59.09 36.63 All the KPIs in the compact refer to the Eskom company, except for the lost-time injury rate and the finance measures which reflects the group. B-BBEE score number 6 4 4 Enterprise development8 (u) R million 5.00 0.13 n/a Supplier development8 (v) R billion 5.00 3.67 n/a National industrial participation programme % 100.00 100.00 100.00 Research and development % of NERSA-allocated spend 90.00 123.64 123.40 1. Includes occupational disease. 2. The key performance area for improve plant operations in the 2022 shareholder compact included measures for planned capability loss factor, unplanned partial load losses as well as unplanned automatic grid separations trips. These KPIs were no longer included in the 2023 shareholder compact. Performance against these KPIs was still reported to DPE in the quarterly shareholder reports. Performance on the KPIs was reported and subject to reasonable assurance in the integrated report. 3. New KPI included in the 2023 shareholder compact. The performance for 2022 has been included for comparative purposes and has not been audited. 4. KPI previously reported under deliver capital expansion in 2022. Restated to be disclosed under improve plant operations in line with the key performance areas in the 2023 shareholder compact. 5. The 2022 shareholder compact required Eskom to develop and pilot a new KPI by 1 September 2021 to measure compliance with atmospheric emission limits. Eskom has been measuring performance in terms of this internally developed KPI since then. The performance for 2022 has been included for comparative purposes and has not been audited. 6. Prior year information has been restated. Refer to note 48 in the annual financial statements. 7. The 2022 shareholder compact included a measure for functional separation of transmission, distribution and generation which was achieved in the prior year. The legal separation of distribution and generation were not included in the 2022 shareholder compact and the prior year actual is therefore reported as not applicable. The legal separation of transmission, which was included in the 2022 shareholder compact, has not yet been achieved. 8. The 2022 shareholder compact included a combined measure for enterprise and supplier development. The prior year actual for the combined measure was R7.21 billion. 10 11 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Directors’ report continued for the year ended 31 March 2023 Shareholder compact performance continued Ref Key performance indicator Target Actual Reason A key performance area, focused on modernising the power system, was incorporated into the shareholder compact for the 2023 financial year. 2023 2023 Initiatives for the utilisation of data analytics as well as investigations into the use of blockchain and artificial intelligence technologies to optimise the Deliver capital expansion end-to-end supply chain are under way. These initiatives are still maturing and did not form part of the scoped in audit areas for the 2023 financial year. (l) Generation capacity 800 799 Commercial operation was achieved for Kusile unit 4 on 31 May 2022, earlier than the scheduled date. The measures for the 2023 financial year included data analytic KPIs specific to outage readiness indices with the focus on an integrated outage installed and Kusile unit 4 has been operating with an average of about 158MW unavailable since commercial solution platform as well as improved data quality through the utilisation of a central data warehouse. commissioned operation due to absorber clogging which also caused the flue-gas duct failure at the other three (commercial operation) units. This is being addressed by planned interventions. The output remains constrained until a Data analytic KPIs specific to plant operations with the focus on plant data actionable insights through the tracking of diagnostic alerts to plant permanent solution is identified. maintenance work orders and the tracking of outage and preventative work orders to inspections conducted through alerts as well as enhanced access to self-service tools for access to plant information. The commissioning test results of the unit confirms its capability of reaching its full load of 799MW. Although the final rated capacity of the unit is 1MW lower than planned, the unit is The blockchain technology KPIs relate to feasibility assessments on the use of blockchain technology and other assessment technologies in specific considered to have been delivered in line with the shareholder compact expectation. areas and to determine use cases to be prototyped to enable digitalisation at Eskom. Ensure financial sustainability DPE and Eskom agreed on the streamlined KPIs for the 2024 financial year which measure the diffusion rate of data analytics technologies across (m) EBITDA 51 929 38 045 Sales volumes were negatively affected by generation and IPP supply constraints as well as the Eskom’s divisions, with a focus on enabling generation’s turnaround plan, as well as the adoption rate of blockchain technology in Eskom. overall poor performance of the economy despite an average standard tariff increase of 9.61% for the year. Primary energy costs increased due to higher utilisation of Eskom and IPP OCGTs, The reasons for the targets that were not achieved are discussed below: as well as higher fuel oil for restarting coal-fired units due to more frequent plant breakdowns. Ref Key performance indicator Target Actual Reason This was exacerbated by an increase in repairs and maintenance and additional operating costs 2023 2023 to address poor plant performance. Improve plant operations (n) Cash interest cover 1.33 1.29 Cash interest cover was negatively impacted by high finance costs, relating mostly to debt securities and borrowings, and insufficient operating cash flows due to poor plant performance, (a) Energy availability factor 65.00 56.03 The energy availability factor was negatively affected by an increase in unplanned maintenance non-payment by some customer categories and a lack of cost-reflective tariffs. due to high levels of both full and partial unplanned load losses. Specific unplanned incidents, such as the boiler explosion at Medupi unit 4 and the flue-gas duct stack failure at Kusile units Legal separation 1, 2 and 3 as well as the planned outage at Koeberg unit 1, negatively affected the generation (o) Business separation key Yes No The legal separation of the generation division was delayed by a number of critical external performance for an extended period. milestones – Generation decisions and key dependencies, including the establishment of a new Eskom holding company. (b) Post-philosophy outage 14.00 35.75 The main contributors to post-philosophy outages that occurred within 60 days after a unit is a legal operating unplanned capability loss returned from an outage include turbine, generator, boiler, draught plant and mill-related losses. subsidiary of Eskom factor (p) Business separation key Yes No The legal separation of the distribution division was delayed by a number of critical external (c) Outage readiness 80.00 70.25 Outage readiness is scored based on internal reviews and assessments of various indicators. The milestones – Distribution decisions and key dependencies, including obtaining PFMA approval to operate the newly indicator at T-3 performance readiness was negatively affected by the late release of funds, leading to delays in is a legal operating established NEDSCA. the ordering of spares, issuing of task orders and finalisation of the integrated outage schedule. subsidiary of Eskom Eskom’s ability to plan successfully and order long-lead materials was hindered by the constrained Socio-economic impact: human capital liquidity position, exacerbated by high fuel oil and OCGT fuel consumption, which has impacted (q) Training spend as % of 3.75 3.57 Performance was negatively affected by the underutilisation of training and development budgets the budget available for capital projects. budgeted gross employee by various divisions, despite an improvement in spend from the prior year. (d) Boiler tube failure rate 1.80 2.17 Performance was negatively affected by Eskom’s maintenance backlog, which arose due to benefit expense (12-month moving reduced capital investment. This contributed to outage deferrals and deferred midlife Corporate social investment (CSI) average) refurbishments. Philosophy maintenance ceased at Komati, Grootvlei and Hendrina power stations since 2018, aligned to the generation shutdown plan for these stations, to lower costs. (r) CSI committed/spend 131.00 63.00 Less expenditure on CSI initiatives than planned was incurred by the Eskom Development Foundation, largely due to inadequate technical oversight on infrastructure-related initiatives as (e) System minutes lost 3.53 4.71 The transmission network has experienced an abnormal number of interruptions due to well as insufficient resources. switchgear failures brought on by loadshedding, control cable theft at substations, increased line faults, protection maloperations as well as restoration delays. Industrialisation and localisation (f ) Payment levels excluding 95.70 95.03 Performance was negatively affected by lower average payment levels from municipalities as well (s) Preferential procurement 80.00 73.44 Preferential procurement was negatively affected by spend on IPP contracts which are not Soweto interest as late payments from metros. The top defaulting municipalities have contributed significantly to B-BBEE compliant. The calculation of TMPS includes spend on IPP contracts over which Eskom the decline in payment levels and growth in arrear municipal debt for the year. has no control as they were concluded in terms of the Department of Mineral Resources and Energy (DMRE) renewable energy IPP programme. (g) Distribution total energy 9.44 9.74 Non-technical losses resulted largely from electricity theft, while technical losses were impacted by losses ageing distribution networks which are constrained, overloaded and exposed to equipment theft. (t) Local content 80.00 59.09 Local content was negatively affected by a reduction in the number of contracts with local content obligations. The methodology for determining the split between technical and non-technical losses has been (u) Enterprise development 5.00 0.13 Enterprise development was negatively affected by a lack of funding to implement meaningful revised. Refer to note 51 of the annual financial statements for further information. interventions, such as incubations for small- and medium-sized enterprises. Focus on the system (v) Supplier development 5.00 3.67 Supplier development is largely dependent on subcontracting from contracts by main suppliers (h) Loadshedding 63 280 Poor generation plant performance and lower than budget energy supplied by IPPs contributed to small- and medium-sized enterprises. Performance was negatively affected by limited implemented to capacity constraints, thereby requiring the implementation of prolonged, high stages of subcontracting opportunities. loadshedding to ensure the stability of the national grid. Eskom and IPP OCGTs were utilised frequently to support the power system and avoid or minimise loadshedding. Reportable irregularities Reduce environmental footprint in existing fleet Progress has been made in clearing some of the reportable irregularities raised in previous years. Some new reportable irregularities were raised for 2023, while some matters raised previously remained open. Given the complex nature of some of these matters they will remain open until all (i) Relative particulate 0.30 0.70 Relative particulate emission performance has deteriorated significantly due to poorly emissions performing plant and system constraints. Emissions continue to exceed target due to poor related aspects are concluded. Detailed progress on reportable irregularities can be found in note 52 of the annual financial statements. performance, mostly at Kendal, Kriel, Matla, Duvha, Lethabo and Tutuka power stations because of ash plant challenges, electrostatic precipitator performance and sulphur trioxide plant failures. Events after the reporting date Events after the reporting date are discussed in note 47 of the annual financial statements. (j) Compliance with 90.00 87.40 Compliance is scored based on: average emission limit compliance; number of emergency atmospheric emission incidents reported to authorities in terms of section 30 of the National Environmental Approval licences Management Act (NEMA); emission monitor status; gaseous monitor reliability; and general The group annual financial statements for the year ended 31 March 2023 were prepared under the supervision of the acting chief financial officer, atmospheric emission licence compliance based on internal reviews and assessments completed. JM Buys CA(SA), and approved by the board and signed on its behalf by: Performance was negatively affected by poor emissions performance and challenges with managing emission monitoring systems. Primary energy optimisation (k) Migration of coal delivery 4.70 2.51 Less coal was transported by rail due to cable theft and vandalism of rail infrastructure at Majuba PM Makwana C Cassim JM Buys volume from road to rail power station, contractual delays impact coal offloading at Grootvlei power station and coal Chairman Acting group chief executive Acting chief financial officer demand being met by conveyor from the tied colliery at Tutuka power station. 30 October 2023 30 October 2023 30 October 2023 12 13 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Report of the audit and risk committee Mandate and terms of reference Significant matter Committee review and conclusion The audit and risk committee (the committee) presents its report in terms of the requirements of the PFMA, the Companies Act (section 94(7)(f)) and other applicable regulatory requirements as well as in accordance with the King IV TM Report on Corporate Governance for South Africa for the The committee concluded, after examining the forecast and stress-tested scenarios, that the going-concern basis of accounting financial year ended 31 March 2023. was appropriate with support from government in the form of the debt relief arrangement to address the related material uncertainties. The role of the committee is defined in its mandate. It covers, among others, its statutory duties and assistance to the board with the oversight The committee recommended the adoption of the going-concern basis of preparation by the group and company to the of financial and non-financial reporting and disclosure, internal control systems, risk management, compliance with legal and regulatory provisions, board based on the critical factors as disclosed in note 3.2. forensics (significant portion of the year), internal and external audit functions as well as combined assurance, including technology and information governance. The committee also performs the functions required by the Companies Act on behalf of the wholly owned subsidiaries of the group, Governance The priority of the leadership remains to turn Eskom around. The new board, appointed by the shareholder effective from except for Escap SOC Ltd (Escap), Nqaba Finance 1 (RF) Ltd and Eskom Uganda Ltd which have independent audit committees. Information 1 October 2022, brought a broad range of experience and the necessary expertise and skills to provide stability and strategic about the mandate, membership composition and attendance of meetings of the committee is set out in the 2023 integrated report under the direction to Eskom. governance, leadership and ethics as well as supplementary information sections. The committee notes that certain key roles are currently being fulfilled by acting appointments, including the group chief The committee has adopted appropriate formal terms of reference as its audit and risk committee charter, has regulated its affairs in compliance executive, chief financial officer as well as the heads of legal, internal audit, forensics, security and loss control, and that this is with this charter and has discharged all its responsibilities contained therein. a key focus area that is being addressed. The committee continued its focus on monitoring the status and action taken on addressing key matters arising from allegations The group is applying a combined assurance model to ensure coordinated assurance activities. The committee oversees the assurance activities of criminality in the form of fraud, corruption, theft and sabotage, investigations thereof, reportable irregularities and past and the establishment of effective systems of internal control to provide reasonable assurance that the group’s financial and non-financial corporate governance breaches. objectives are achieved and that the preparation of the group’s suite of externally published reports (as detailed in the integrated report) are in accordance with the frameworks and standards set out within those reports. The committee met with internal and external assurance service providers and acknowledged their findings and observations raised. The committee challenged management’s assessment of the root causes and immediate actions taken and also made Execution of functions recommendations for improvement. The committee has now implemented processes to actively oversee and monitor the Oversight of financial and non-financial reporting and disclosure progress and will continue to do so until matters are satisfactorily progressed. In the conduct of its duties the committee has, inter alia: The establishment of an Eskom single investigative unit that brings together the security, forensics and loss control functions • considered whether the annual financial statements met the fair presentation requirements of the PFMA, Companies Act and International is currently underway to manage all investigative matters. This unit will initially report to the group chief executive and will Financial Reporting Standards (IFRS) enhance the effectiveness and response to allegations of crime and other unethical behaviour. Refer to the directors’ report • considered the appropriateness of key judgements, estimates and the accounting treatment applied to significant transactions in the annual for further information. financial statements • sought the input and views of the internal audit and forensic departments as well as the external auditors and encouraged rigorous challenging The committee noted the writedown to property, plant and equipment during the year as a result of the outcome of internal of control, accounting and disclosure matters and external investigations into fraud and corruption that indicated overcapitalisation to assets of past expenditure incurred. • considered matters relating to liquidity, cost savings, budgeting and forecasting, future funding and taxation The committee acknowledged that there could be further adjustments to the carrying value of property, plant and equipment • overseen the risk management function, including the process of identifying significant risks and opportunities and the resulting mitigation strategies and identification of undetected irregular expenditure and losses due to criminal conduct in the future. Refer to note 2.4. • considered progress on forensic investigations, legal matters and other internal and external investigations into allegations of fraud and The committee considered the reportable irregularities that were raised by the external auditors and the action taken to corruption address these matters and preventative measures taken to prevent any re-occurrence thereof. The committee acknowledged • considered the expertise, resources and experience of the finance function under the leadership of the chief financial officer that some irregularities would remain open until all related aspects have been concluded. Refer to note 52 for further information on reportable irregularities. The following significant matters were considered: The committee noted that Eskom’s overall assessment of the implementation of the King IV TM principles and practices remains Significant matter Committee review and conclusion partially effective. Initiatives are underway to address focus areas where some of the principles have not been fully or effectively Going-concern The committee continued to monitor the group and company’s liquidity and solvency closely because of the financial position applied. assessment and related challenges and concluded that it was not trading recklessly at any time during the year. The committee Completeness and The committee is not satisfied that the prior year qualification issues have been adequately addressed as the audit qualification acknowledged the ongoing and continued support from government, including the debt relief arrangement. accuracy of certain regarding the PFMA records that were not complete or accurately maintained in line with legislative requirements relating to The committee considered the key aspects as well as the material uncertainties that might impact the going-concern financial records in irregular expenditure, fruitless and wasteful expenditure and losses due to criminal conduct continued in 2023. assessment as discussed in note 3.2. The going-concern assessment evaluated the liquidity of Eskom based on the latest cash terms of the The committee considered the implications of the National Treasury Instruction 4 of 2022/23 relating to PFMA reporting flow forecasts, including servicing of debt in the 12 months after the sign-off of the annual financial statements and included requirements of the that is effective from 3 January 2023. The instruction allows for the ringfencing and separate management of challenges that stress-tested scenarios using higher use of OCGTs, increased operating costs and changes to capital activities. PFMA and arose in prior periods and requires that only current year expenditure (with comparative information) must be reported in Companies Act, and The committee considered that there has been a deterioration in some of the group’s financial indicators compared to the the annual financial statements with detailed information disclosed in the integrated report. Refer to note 51. the impact thereof prior year, including the EBITDA and EBITDA margin, mainly due to higher primary energy cost because of increases in the on the audit opinion The committee continued to place significant focus on addressing the shortcomings in the accuracy and completeness of usage of OCGTs (Eskom and IPP owned) and production from renewable IPPs. information required by the PFMA and acknowledged that there are still significant internal control deficiencies in the PFMA The committee considered the R254 billion debt relief arrangement by government over the next three years (R184 billion reporting process, even though there has been considerable effort by management to address the shortcomings. Reporting loan convertible to equity upon meeting specified conditions and R70 billion debt (principal and interest) takeover). The structures, systems, controls, resources, policies and procedures continue to be enhanced to address the challenges, with committee acknowledged that no new borrowings are allowed (except for drawdowns on existing facilities) from 1 April 2023 specific focus on the loss control function and the execution of its mandate. Refer to the directors’ report for further unless approved by the Minister of Finance. The committee acknowledged that compliance to the debt relief conditions is information. critical to manage liquidity. The committee also considered the restatement of the comparative information in the annual financial statements relating to The committee considered the potential impact of the recent communication from the Minister of Finance relating to further the expensing of pre-commissioning electricity proceeds and generating costs previously capitalised and is comfortable that delays in the sale of EFC and the possible impact on the timing of debt relief and note that the sale is being prioritised and it arose because of a change in IFRS requirements. managed as a condition of the debt relief from government. Internal control over The committee monitored the effectiveness of the control environment through feedback on the results of the combined The committee acknowledged that Eskom must create a ring-fenced financial nuclear decommissioning fund and considered financial reporting, assurance activities from management, the internal audit and forensics departments as well as the external auditors and other the impact on projected future cash flows of annual deposits into the fund. including information external assurance providers. technology general The committee accepted that all other operational and relevant capital expenditure will be funded through operational cash The committee scrutinised the significant risk areas and their associated remediation plans and mitigating controls controls flows and drawdowns from existing project related loan agreements. The committee is satisfied that the cash from operations implemented, including those relating to segregation of duties, system access management, security of confidential data, cyber will be sufficient for this purpose. risk, information technology infrastructure, application issues and third-party supplier management. The committee acknowledged that the government guarantee facility of R350 billion expired on 31 March 2023 and that The committee concluded that the design of internal controls is generally adequate, although the application and monitoring existing guarantees issued were not impacted and will remain in place until settlement of the guaranteed debt. thereof continues to require improvement in most areas. The committee noted identified control deficiencies relating to weaknesses in the adherence to internal controls involving compliance with contract, supply chain, inventory and plant The committee acknowledged that there are various dependencies and uncertainties that exist both from a timing of management as well as operational technology procedures. Ongoing improvements are being implemented to the control intervention perspective as well as whether the plans to address the risks to manage the going concern will materialise as environment where control deficiencies were identified. anticipated. The events, conditions and assumptions to manage the going concern inherently include material uncertainties that may cast significant doubt on the going-concern status. 14 15 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Report of the audit and risk committee continued Execution of functions continued The committee considered the progress of the legal separation and will continue to monitor and appropriately address the relevant aspects Oversight of financial and non-financial reporting and disclosure continued thereof that will have an impact on the role of the committee. Significant matter Committee review and conclusion Internal control, management of risks and compliance with legal and regulatory requirements The committee considered the following: Internal control over The committee considered the independent auditors’ report and the qualified opinion relating to the accuracy and • effectiveness of internal control systems and governance processes financial reporting, completeness of information disclosed in terms of the PFMA and that, except for this qualification, the consolidated annual • legal matters that could have a material impact on the group including information financial statements are fairly presented in terms of IFRS. The committee is satisfied that the system of internal financial controls technology general and compensating measures to combat a breakdown in these controls provide a reasonable basis for the preparation of the • reportable irregularities raised by the external auditors controls continued annual financial statements. • effectiveness of the system and process of risk management including the following specific risks: – financial reporting Consideration of The committee considered the appropriateness of the CGUs for the group. The committee is comfortable that Eskom cash generating unit company has been identified as a single CGU, as it is a vertically integrated regulated business and the segments do not – internal financial controls (CGU) and generate largely independent cash flows, and that the possible impact of the legal separation has been considered in the – fraud risks relating to financial reporting assessment of determination of the CGU. – information technology risks relating to financial reporting and internal control possible impairment – the effectiveness of the entity’s compliance with legal and regulatory requirements The committee is satisfied that management contemplated impairment indicators, such as damaged and high unavailability of plant in the significant CGU of the group (Eskom company), which have been appropriately considered in the impairment assessment. The committee contemplated management’s underlying assumptions and estimates used in the calculation of the Internal and external audit recoverable amount of the CGU and is comfortable, considering the results of the key sensitivity analysis, that there is no The committee considered the following: impairment as the recoverable amount (determined based on the higher of fair value less costs of disposal and value in use) • internal audit charter, three-year rolling audit plan, independence, effectiveness, coordination with external auditors and performance of the is higher than the carrying value. Refer to note 3.3 for further information on the impairment assessment. internal audit and forensic departments that report functionally into the audit and risk committee • appointment of the external auditors in terms of the Companies Act, Johannesburg Stock Exchange Listings’ Requirements and all other Valuation of The committee considered management’s feedback regarding the nature and quantum of costs capitalised to property, plant applicable legal and regulatory requirements property, plant and and equipment and that the costs were necessary in bringing the asset to the condition necessary for it to operate in the equipment manner intended by management. • decision letters, findings and remedial explanations issued by the Independent Regulatory Board for Auditors (IRBA) as well as any summaries and explanations made available by the external auditors to the committee The committee also considered management’s feedback that an appropriate methodology has been applied to determine • the quality of the external audit as well as the independence and objectivity of the external auditors including the tenure of the audit firm and the useful lives of assets based on Eskom’s experience of the performance of the assets in line with Eskom’s operating and the rotation of the engagement partner maintenance regimes as well as the physical conditions and circumstances under which the assets operate. • external audit plan, audit budget, actual fees and terms of engagement of the external auditors including adherence to the policy of not allowing Recovery of the The committee considered the reasonability of the recognition of the deferred tax asset for the group and is satisfied that it the external auditors to provide any non-audit services deferred tax asset is probable that the business will generate sufficient future taxable profits. It is expected that Eskom will be in a profitable • accounting, sustainability and auditing concerns identified as a result of the internal and external audits, including reportable irregularities position by 2026 based on the 2024 to 2028 financial plan mainly because of tariff increases that move towards cost reflectivity • restructuring of the assurance and forensic department into separate functions (implemented for the 2024 financial year) and the debt relief arrangement from government. The return to profitability and the reversal of taxable temporary differences will result in the use of the current tax losses in future years. Conclusion Recovery of overdue The committee considered the actions taken by Eskom to address the arrear debt challenge, including enhancing of existing The committee concluded, based on the information and explanations provided by management and the internal audit and forensic departments trade receivables revenue and debt management processes, enforcing Eskom’s rights through legal action and the implementation of the active as well as discussions with the independent external auditors, that: (arrear debt) partnering solution for municipalities. • The expertise and experience of the finance function under the leadership of the chief financial officer (acting) are adequate but recognised The committee, however, recognises that the challenges regarding the recovery of outstanding receivables cannot be solved that there is still a need for additional financial resources, particularly expert technical skills as well as process control monitoring skills to by Eskom alone. The continued support and cooperation from government and other stakeholders are crucial to address the improve the internal control environment, in view of the additional expertise and output required from finance resources to deal with the root causes of the problem. complex and stressful challenges of Eskom’s current operating environment. There is also a need for improved and aligned finance business partnering, especially given the imminent legal separation of Eskom. The committee acknowledged that the municipal debt relief programme, as announced by the Minister of Finance, is intended • The system and process of risk management is adequate, even though the effectiveness thereof needs to be improved. to reduce the challenge of arrear municipal debt. The committee considered the possible impact of the debt relief arrangement on Eskom and is satisfied that it has been adequately dealt with in the financial statements based on the progress of the • The compliance framework requires continued focus to ensure application thereof, especially in terms of PFMA requirements and contract implementation thereof. Refer to note 5.1.1. management. • The internal accounting controls with compensating measures are adequate to ensure that the financial records may be relied upon for Valuation of financial The committee is satisfied that management has adequately considered the valuation of financial instruments, in particular the preparation of the financial statements and accountability for assets and liabilities is maintained. Improvements are required to ensure instruments the derivatives held for risk management. Management made use of independent experts to assist with the valuation of these the controls operate effectively. The monitoring of the implementation and continuous adherence to policies, process control manuals and financial instruments to ensure alignment of the valuation curve methodology in determining the fair values of the financial procedures remains a focus area of the process control and assurance function. instruments to market practice. The committee acknowledges that the valuation of these instruments is complex and that it • Consequence management remains a focus area for improvement to address instances of non-compliance with generally well-documented is important that Eskom has access to valuation professionals with the required specialised skills and knowledge. policies, process control manuals and procedures. The committee noted that its request to review the economic effectiveness of the group’s hedging strategy has not yet been • Responsibilities per the approved internal audit charter were fulfilled. finalised. • The expertise, resources and experience of the internal audit and forensic departments were considered. There is still a need for filling of key Valuation and The committee considered the briefings on provisions, including the movement in provisions over time, the key assumptions vacancies as well as additional resources and skills. adequacy of and discount rates applied. • The management of the internal audit and forensic departments have been separated. The departments are operating effectively, even though provisions, including further improvement is needed in the execution of mandates and proactive addressing of control deficiencies by the business to prevent any The committee considered the adequacy of the decommissioning provisions and noted that detailed annual reviews are done employee benefit re-occurrence of findings. by external experts (coal, OCGT and pumped storage power station provisions are updated annually based on the results obligations • The combined assurance model is adequate. However, the monitoring and assessment of the execution of controls at levels lower than level 3 of external reviews performed yearly for five power stations on a rotational basis) to re-assess the relevant decommissioning and rehabilitation liabilities against the latest international practices and benchmarks as well as compliance to legislation. (external and internal audit) of the combined assurance model remains an area for further enhancement. • The information contained in the integrated and sustainability reports is reliable and does not contradict the information in the annual financial The committee is satisfied that management has adequately considered the provision for compensation events as assessed statements. by experts and legal advisors based on the latest available information. The committee acknowledged that the provision is based on Eskom’s past experience regarding the finalisation and outcome of compensation events and that the outcome of • Eskom company and group have access to adequate resources and support from government to be able to continue their operations for the open compensation events, which are subject to a contractual adjudication process, could be different to management’s foreseeable future, supporting the going-concern assumption. assessment thereof. The committee noted that the potential financial impact of compensation events claims cannot be precisely • It is satisfied with the audit quality of the external audit as well as the independence and objectivity of the external auditors having considered determined and that developments related to contingencies are continuously monitored. Refer to note 44.2. the matters set out in section 94(8) of the Companies Act. Deloitte & Touche was appointed as external auditors for the 2022 and 2023 financial years with Mr AJ Dennis as the lead engagement partner. The committee considered the adequacy of the employee benefit obligations and noted that the liabilities are based on values calculated annually by external experts in terms of market practise in line with IAS 19. The committee is satisfied, notwithstanding the aspects considered in relation to the annual financial statements regarding the PFMA reporting challenges, control deficiencies, findings and observations identified and ongoing investigations, that nothing significant has come to the attention The matters listed above are key focus areas for the committee and will be monitored and reported on in future. of the committee to indicate a material breakdown in the functioning of the controls, procedures and systems and that the controls are appropriate with compensating measures to ensure compliance with the requirements of the Companies Act, the PFMA and IFRS. 16 17 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Report of the audit and risk committee continued Independent Auditor’s report to Parliament on Eskom Recommendation of the annual financial statements Holdings SOC Ltd and its subsidiaries The committee has evaluated the annual financial statements of Eskom and the group for the year ended 31 March 2023 and, based on the Report on the audit of the consolidated and separate financial statements information provided to it, considers that they comply, in all material respects, with the requirements of the Companies Act, the PFMA and IFRS. Qualified opinion The committee concurs that the adoption of the going-concern premise in the preparation of the annual financial statements is appropriate. We have audited the consolidated and separate financial statements of Eskom Holdings SOC Ltd and its subsidiaries (the group) set out on pages The committee has therefore, at its meeting held on 29 October 2023, recommended the adoption of the financial statements by the board. 32 to 131 which comprise the consolidated and separate statements of financial position as at 31 March 2023, the consolidated and separate income statements, statements of comprehensive income, statements of changes in equity and statements of cash flows for the year then ended, as well as notes to the consolidated and separate financial statements, including a summary of significant accounting policies. In our opinion, except for the effects and possible effects of the matters described in the basis for qualified opinion section of this auditor’s report, FBB Gany-Ahmed the consolidated and separate financial statements present fairly, in all material respects, the consolidated and separate financial position of the Chair group as at 31 March 2023, and their financial performance and cash flows for the year then ended in accordance with International Financial 30 October 2023 Reporting Standards (IFRS) and the requirements of the Public Finance Management Act 1 of 1999 (PFMA) and the Companies Act, 2008 (Act No. 71 of 2008). Basis for qualified opinion Irregular expenditure The public entity did not fully and accurately record irregular expenditure in note 51.1 to the consolidated and separate financial statements, as required by section 55(2)(b)(i) of the PFMA. This was due to inadequate systems of internal control to timeously detect and record this expenditure in the consolidated and separate financial statements, as well as inadequate controls to ensure appropriate assessment of potential irregular expenditure arising from non-compliant supply chain management processes, various investigation reports, and tracking of forensic Statement by the company secretary report findings. Payments on certain contracts were made to parties who are not party to the original agreement. The value of irregular expenditure disclosed in the annual financial statements did not agree to underlying registers. As a result of the weaknesses identified and described above, we were unable to determine the full extent of the misstatement of irregular expenditure disclosed in terms of section 55(2)(b)(i) of the PFMA stated at R5 030 million (2022: R10 402 million) and R4 681 million In terms of section 88(2)(e) of the Companies Act of South Africa, I certify that the company has filed with the Companies and Intellectual (2022: R8 832 million) in note 51.1 to the consolidated and separate financial statements respectively, as it was impracticable to do so. Property Commission all such returns and notices in terms of this Act, and all such returns appear to be true, correct and up to date. Fruitless and wasteful expenditure The public entity did not fully record fruitless and wasteful expenditure in note 51.2 to the consolidated and separate financial statements, as required by section 55(2)(b)(i) of the PFMA. This was due to inadequate systems of internal control to timeously detect and record this M Manjingolo expenditure in the financial statements, including the inappropriate assessment of possible fruitless and wasteful expenditure logged, and where Company secretary items were detected, such items were not recorded as fruitless and wasteful expenditure. 30 October 2023 As a result of the weaknesses identified and described above, we were unable to determine the full extent of the misstatement of fruitless and wasteful expenditure disclosed in the financial statements stated at R105 million (2022: R3 million) and R104 million (2022: R1 million) disclosed in note 51.2 to the consolidated and separate financial statements respectively, as it was impracticable to do so. Losses due to criminal conduct The public entity did not fully record losses due to criminal conduct in note 51.3 to the consolidated and separate financial statements, as required by section 55(2)(b)(i) of the PFMA. This was due to inadequate systems of internal control to timeously detect and record these losses in the financial statements. Certain costs included in primary energy expenses include potential losses associated with weighbridge manipulation for the delivery of fuel oil and coal due to inadequate systems of internal control and oversight. Certain items of inventory (reworks and transfers) were written off as unexplained losses included in impairment and writedown of assets in note 35 to the consolidated and separate financial statements. As a result of the combined impact of these weaknesses identified and described above, we were unable to determine the full extent of the understatement of losses due to criminal conduct disclosed in the financial statements stated at R6 032 million (2022: R5 727 million) and R6 031 million (2022: R5 722 million) disclosed in note 51.3 to the consolidated and separate financial statements respectively, as it was impracticable to do so. Context for the opinion We conducted our audit in accordance with the International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the auditor’s responsibilities for the audit of the consolidated and separate financial statements section of our report. We are independent of the group in accordance with the Code of professional conduct for auditors of the Independent Regulatory Board for Auditors (IRBA) and other independence requirements applicable to performing audits of financial statements in South Africa. We have fulfilled our other ethical responsibilities in accordance with the IRBA code and in accordance with other ethical requirements applicable to performing audits in South Africa. The IRBA code is consistent with the corresponding sections of the International Ethics Standards Board for Accountants’ International code of ethics for professional accountants (including International Independence Standards). We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified opinion. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated and separate financial statements of the current period. These matters were addressed in the context of our audit of the consolidated and separate financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In addition to the matter described in the Basis for qualified opinion and the material uncertainty related to going concern sections, we have determined the matters described below to be the key audit matters to be communicated in our report. The key audit matters identified are applicable to the consolidated and separate financial statements. 18 19 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Independent Auditor’s report to Parliament on Eskom Holdings SOC Ltd and its subsidiaries continued Report on the audit of the consolidated and separate financial statements continued Key audit matters continued Key audit matters How the matter was addressed in the audit Key audit matters How the matter was addressed in the audit Valuation of complex financial instruments and hedge accounting Valuation of the compensation events provisions and the writeoff of overpayments relating to mega-build projects The group and company accounts for complex financial • Evaluated the design and tested the operating effectiveness of certain internal As disclosed in note 2.18, note 29 and note 44 to the Our audit procedures included the following: instruments in accordance with IAS 39: Financial controls over the group and company's valuation of derivative financial instruments consolidated and separate financial statements, the • We assessed the design and implementation of controls operating, and the Instruments: Recognition and Measurement and and hedge accounting process. group recognises provisions for compensation events. appropriateness of the oversight performed by the compensation events IFRS 9: Financial Instruments, which prescribes the • Reviewed and assessed the appropriateness of the hedge accounting policies adopted. committee, the responsible contract managers and Eskom executives to ensure principles for recognition and measurement of the • Involved valuation professionals with specialised skills and knowledge, who assisted These provisions are recognised based on contractual that compensation events settled are valid and that appropriate provision is raised financial instruments and hedge accounting. The in the evaluation of the group and company's hedge documentation for certain obligations and measured based on the best estimate for outstanding claims. derivatives held for risk management are not managed on contracts, for the purposes of determining whether the related accounting treatment of the expenditure required to settle the present obligation at the end of the repor ting period. The • For a sample of claims submitted by contractors we performed the following: a held-to-collect and/or for sale business model and the was in accordance with the requirements of the prevailing accounting standards. amount of the provisions is based on the directors’ – Assessed the validity of each claim with reference to contract documentation. default classification and measurement is therefore at fair • Assessed the competence, qualifications and objectivity of group and company’s value through profit or loss unless they meet the criteria external specialists used in the valuation of the derivative financial instruments. assessment of the most likely amounts due based on – Reviewed the reports of and held discussions with Eskom’s internal experts for and have been designated as cash flow hedges. • For a sample of instruments, with the assistance of our valuation specialists we: the current information available. The group expects and, where applicable, our external experts, to obtain an understanding of – Challenged the appropriateness of the valuation methodology and technique to settle the majority of these provisions within the significant assumptions, judgements and methods used in determining the Significant judgment is exercised by the group in the used by the group and company in the valuation of the instruments. 12 months although there are some provisions that assumptions, the outcome of their estimates and the basis of their conclusions. recognition and valuation of the derivative financial – Reperformed the valuation using an independent model and compared the fair may have continuing effects that ex tend over – Considered the reasonableness of estimates made in recognising the provision instruments and cash flow hedges. As per note 6.2, the value results to group and company’s valuation to assess the reasonableness of 12 months. The liability is disclosed as current as for compensation events, through inspection of claim submissions, quantity group’s valuations of cross-currency swaps include the the model methodology and the output of model calculations. management expect that these will be settled in the surveyor reports, and correspondence between the contractor and Eskom. credit risk of Eskom (known as debit value adjustment – Reperformed curve testing for curves used in the valuation of the derivatives. shor t term. – Assessed completeness of claims raised with reference to minutes of “DVA”) and counterparties (known as credit value – Reperformed the valuation of commodity forwards used to hedge various compensation event claims meetings by reconciled our assessment to the claim adjustment “CVA”) where appropriate. The quantum of the final obligation is dependent on commodities. a number of factors which may be outside the control registers. The recognition and measurement of these financial of the group. This includes the contractual – Assessed the competence, capabilities and objectivity of Eskom’s internal and Across the above procedures, we identified various misstatements due to the following: instruments significantly affects the measurement of the consultation, dispute adjudication and ultimately where applicable, external experts, through inspection of their qualifications • The group and company, in applying cross-currency swap hedge accounting, did consolidated and separate profit or loss for the year and arbitration processes. This impacts the timing and and their membership of professional organisations. not incorporate credit risk through quantification of CVA/DVA on the hedging disclosures of financial risks in the consolidated financial instrument as part of the regression analysis performed when the daily points quantum of the settlement of these claims. – Considered the historical accuracy of previous provisions raised and statements. Given the combination of inherent were considered. settlements ultimately made. subjectivity and judgement involved in estimating the The group relies on its contract managers, internal • The regression analysis excluded certain data points which resulted in the – For a sample of material claims in dispute resolution, we involved an auditor’s values of these financial instruments and the material and external engineers and quantity surveyors and incorrect hedge effectiveness result. expert to assist in assessing the reasonability of management's judgements and nature of the balance as well as the audit effort which where necessary, other exper ts, in the determination • The determined x-Value Adjustments(xVA), which is used in financial derivative estimates relating to the selected claims. involved the use of professionals with specialised skill and of the provision for compensation events. Each claim valuation models, erroneoulsy excluded certain instruments, resulting in an is assessed individually to determine culpability and to – We updated our understanding of claims in progress to the date of signing the knowledge, the valuation of the derivative financial overstatement of the xVA results. financial statements and updated our understanding of subsequent rulings and instruments and application of hedge accounting was conclude on the merit of the claim. whether these should be adjusted as at 31 March 2023. considered to be a matter of significance to the current Certain misstatements identified during the audit were corrected, and the related As disclosed in accounting policy note 2.4, the group year audit of the consolidated and separate financial disclosures reflected in the annual financial statements are appropriate. and company acknowledge cer tain overpayments on With regards to the assessment of overpayments on the mega-build, we performed statements. the mega-build projects that are currently under the following: Primary energy costs and inventory management investigation. In the current year, the directors • Engaged with the directors’ external experts on the quantification of the recognised R2 078 million (including borrowing costs) overpayments. Our external audit has confirmed that significant control Our overall audit approach was designed to take into account the results of these deficiencies exist over the management of the coal risks and the impact of a higher fraud risk on our audit. in writeoffs due to overpayments identified on mega- • Assessed the competence, capabilities and independence of the directors’ expert. supply chain, fuel oil, consumables and spares and build projects. • Reviewed the directors’ external experts valuation reports. primary energy costs. We also identified deficiencies in Our procedures to address this key audit matter included: • Agreed the total overpayments to the reports noted. • Involvement of our internal forensics specialists to assess risk in the potential fraud The estimation of the amount required to settle the directors’ own control processes. These identified claims arising from compensation events requires • Recalculated the borrowing costs relating to the overpayment taking into account deficiencies included: areas, identify the fraud schemes and assist in designing appropriate procedures. signif icant judgement. Due to the high level of the period in which the payments were made. • Interactions with the group’s internal forensics experts. • Weighbridge controls at certain sites. judgement and estimation required in determining the • Assessed the split between adjustments made between assets under construction • Assessment of weighbridge controls and systems by our forensic and IT specialists. • Quality assessment of the coal and fuel oil delivered, and • Attendence of the year end inventory counts by senior audit personel. provision for compensation events, it is considered to and commissioned assets, on the basis of status of completion of the affected units. at certain stations the monitoring of fuel oil usage. • Performing weighbridge analytics to identify anomalies with respect to fuel oil and be a key audit matter. Whilst, we did not identify material discrepancies in directors’ judgements and • The performance of inventory cycle counts. coal deliveries recorded at the coal power stations. conclusions with respect to compensation events, we did note a material breakdown • The recording of the outcomes of the inventory cycle • Deploying benchmark analytics on the costs of consumables paid at power in the communication of the progress of overpayments investigations, which resulted counts performed. stations as it relates to the catalogued consumables. in material late adjustments which had to be corrected in the financial statements. • Investigation and reconciliation of inventory losses. • Selecting a sample of the purchases and inspecting supporting documents such • The maintenance of accurate and complete inventory as the service level agreements, proof of delivery, proof of payments and the The resultant disclosures made in the financial statements are appropriate. valuation reports. invoices, in order to determine the validity and existence thereof. There remains signficant control weakness relating to management’s cycle count In light of the above observed control deficiencies and procedures across the coal power stations. This included some stations not performing the existence of fraud and corruption being widely counts in line with the group policies, failure to process and investigate stock count reported both internally and externally of Eskom, we differences and inadequate operational controls over the receipt and issuance of have concluded that there has been a significant inventory at the power stations. breakdown in the controls over the management of coal, Certain costs included in primary energy expenses included potential losses associated fuel oil, consumables and spares. This is considered to with weighbridge manipulation for the delivery of fuel oil and coal due to inadequate be a key audit matter due to the significant and pervasive systems of internal control and oversight. impact this has had on the overall timing, level of expertise and effort associated with the current audit of There were material adjustments to consumables and spares, with Grootvlei and the financial statements. Medupi power stations recognising the most material differences, which required correction. Following certain adjustments we can conclude that the existence of coal, fuel oil and consumables and spares as reflected on the statement of financial position is appropriate. 20 21 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Independent Auditor’s report to Parliament on Eskom Holdings SOC Ltd and its subsidiaries continued Report on the audit of the consolidated and separate financial statements continued Key audit matters continued Key audit matters How the matter was addressed in the audit Key audit matters How the matter was addressed in the audit Impairment assessment of property, plant, and equipment and indefinite useful life intangible assets Material breakdown in internal controls over financial reporting and the impact on the audit of the financial statements The consolidated statement of financial position includes In evaluating the impairment assessment model of property, plant and equipment and Strong internal controls over the financial reporting The primary response to the audit engagement has been the use and deployment of property, plant and equipment amounting to R669 398 intangible asset balances within the CGU, we reviewed the value in use calculation process are key to ensuring the reliability and integrity senior audit personnel, internal specialists, both locally and international, with skill in million, and intangible assets of R3 370 million. The prepared by the directors, with a particular focus on the assumptions with the most of financial information. In addition, internal controls are areas of complexity and judgement. In addition, we adopted mostly a substantive audit separate statement of financial position includes significant impact. This included the forecasted sales price and volumes, the forecasted designed to safeguard assets, promote accountability approach to the audit of the separate and consolidated financial statements. property, plant and equipment of R671 483 million and available generation capacity, the increase in primary energy costs from OCGTs and and to prevent fraud and error. R3 367 million of intangible assets, as disclosed in note IPPs, the implementation of carbon tax, discount rates, the long-term growth rate and Additionally, we introduced the use of sophisticated analytical tools to better 8 and 9, as at 31 March 2023. consistent implementation of the NERSA pricing methodology. Internal control is defined as the process designed, understand and respond to the risks of fraud. implemented and maintained by those charged with The group and company’s financial position continues to Our procedures included the following: governance, management and other personnel to While the audit procedures we have performed have provided us with sufficient be impacted by constrained generation capacity on the provide reasonable assurance about the achievement of and appropriate audit evidence for our opinion, and our opinion is not modified in • Testing of the key controls relating to the preparation and review of the group’s back of plant performance challenges and resultant an entity's objectives with regard to reliability of financial respect of these significant deficiencies except to the extent outlined in the basis cash flow forecasts used in the respective impairment models. energy capacity. This increases the reliance on more reporting, effectiveness and efficiency of operations, and for qualified opinion above, the significant control deficiencies resulted in significant • Assessing the mathematical accuracy of the respective cash flow models and management effort to appropriately address the matters identified and delayed the expensive generation capacity from the use of open agreed relevant data to the latest long-term business plans used by management compliance with applicable laws and regulations. cycle gas turbines (OCGTs) and Independent Power audit process and the resultant reporting on the financial statements. to manage and monitor the performance of the business, whilst also performing Our audit confirmed that the group had developed policies Producers (IPP), thus resulting in material impairment a retrospective comparison of forecasted cash flows to actual past performance The following are the primary procedures we performed to address this key audit indicators. and procedures, to ensure a sound control environment, and previous forecasts. however, these are not always adhered to nor are there matter: The recoverable amount of a group of assets, or cash- • Given that the assumptions with the most significant impact are the forecasted monitoring procedures and controls to assess and enforce • We applied auditor judgement to plan the nature, timing, and extent of our audit generating unit (CGU), is to be measured whenever sales price and volumes, and the forecasted available generation capacity the implementation of the policies and procedures. procedures to be performed over financial statement account balances. there is an indication that the value of the group of assets identified by the directors, we • We altered the timing of the audit procedures and completed these closer to the or the CGU may be impaired. Significant judgement is – Challenged the expectation as to the electricity price path with a focus on The decentralised nature of the group’s operations has balance sheet date. required by the directors in assessing the possible the longer term assumptions as the shorter term assumptions are confirmed. resulted in ineffective lines of communication and • The audit process was delayed to allow management, the directors and the impairment of the group of assets or the CGU, which is authority in executing the group’s directives. No clear – Challenged the model assessing the generation capacity, specifically the auditors sufficient time to close out on the key areas of judgement. determined with reference to the fair value less cost to lines of responsibility exist, resulting in an inability to assign energy wheel. • We re-assessed certain critical judgements and reviewed critical decisions taken sell and the value in use cash flow models, underpinned accountability. In certain instances, a number of matters • We engaged our internal valuation and engineering specialists to perform the identified and decisions taken by middle management or on certain estimates and judgements in the prior year. by the cash flow forecast for the CGU. following: at an operational level, which could have a material impact • We evaluated our scoping thresholds and control risk assessments, considering The directors performed impairment assessments and – Critically evaluate whether the directors’ assertion regarding a single cash- on the financial results, were not appropriately considered the material breakdowns in controls. the key assumptions with the most significant impact on generating unit and the value in use and fair value less cost of disposal for their impact on areas of financial reporting. These • We increased the number of sample selections compared to what we would the cash flow forecasts were: calculations to derive a recoverable amount complies with the requirements of were not timeously communicated to management and have otherwise made had the public entity’s controls been properly designed and • Forecasted revenue which is dependent on electricity IAS 36: Impairment of assets. the board and appropriately accounted for in the financial operated effectively. sales volumes and generation capacity as well as the – Assess the logic and mathematical accuracy of the valuation models against statements (including PFMA disclosures). • We evaluated the sufficiency of audit evidence obtained by assessing the results forecasted price of electricity, which path is based best practice. of procedures performed, including the appropriateness of the nature and extent A number of key roles within the organisation’s on tariff increases to be determined by the National – Benchmark the growth rates and forecasted sustainable EBITDA margin. of such evidence. investigative and monitoring functions are without Electricity Regulator of South Africa (NERSA). – Assess the weighted average cost of capital (discount rate) and the permanent leadership resulting in strategic decisions not Based on the audit procedures performed and the level of expertise and effort • The discount rate which is based on the regulatory determination of this rate. being taken, and limited progress being noted where associated with the current year audit, we are satisfied that our audit procedures electricity pricing methodology where the rate of – Assess the forecasted available generation capacity and evaluated this against improvement is required. were sufficient to mitigate the impact of the material breakdown in financial controls. return on the entity’s assets should equate to its the 2035 Just Energy Programme. weighted average cost of capital. The determination – Stress-tested the future projected cash flows specifically in relation to the key In addition, there is a lack of accountability and of the weighted average cost of capital is highly assumptions of price and energy availability factor inputs. consequence management in areas where errors and complex. writeoffs occurred, resulting in recurring errors and • Analysed the future projected cash flows used in the models to determine • Longer term growth rates and EBITDA margins. significant control deficiencies. whether they are reasonable and supportable given the current macroeconomic • The expected levels of municipal debt. climate and expected future performance of the CGU against external market The impact of the above leads us to conclude that various • The impact of carbon tax from 2026 results in data, historical performance and forecasts. This assessment further considered material breakdowns in internal controls over financial material increases in primary energy costs from 2027. the expected growth in the municipality debt and the impact of carbon taxes. reporting exist. The extent to which these significant • Recalculated the value in use and fair value less cost of disposal of the CGU. deficiencies are linked to a likelihood of material Based on the outcome of the respective cash flow • Considered the appropriateness of the disclosures and sensitivity analyses misstatement including the risk of fraud and error, had an models, the directors did not record an impairment presented. impact on the overall timing, level of expertise and effort charge for the current year. associated with the current year audit of the financial Due to the significant estimation uncertainty and The discount rate and other assumptions were within independently determined statements and thus is a key audit matter. subjective nature of the assumptions used in these acceptable ranges. estimates, this was considered a key audit matter. For the determination of an appropriate recoverable amount for the CGU, the Material uncertainty related to going concern respective models assume a consistent future application of the current NERSA tariff We draw attention to the matter below: methodology. In addition, the respective models are heavily dependent on the availability We draw attention to note 3.2 in the consolidated and separate financial statements which indicates that the group incurred a net loss of of energy, which in itself, is dependent on the utilisation of available plant in the short R23 939 million (2022: R11 930 million), and the company incurred a net loss of R24 214 million (2022: R13 912 million) for the year ended to long term, and the ability to continue with nuclear generation into the future. 31 March 2023. In addition, the group’s current liabilities exceed current assets at year end by R33 866 million (2022: R29 222 million), and the We considered the related disclosures of the key dependencies and the sensitivities company’s current liabilities exceed current assets at year end by R51 300 million (2022: R51 866 million). in the impairment model to be appropriate. As disclosed in note 3.2, the group and company are faced by significant challenges that is evidenced by: • the continued financial operating losses experienced by the group and company; • the declining generation capacity on the back of plant performance challenges resulting in increased fuel spend on Eskom OCGT and IPP OCGT generating capacity; • contracting sales volumes; • above inflation cost increases; 22 23 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Independent Auditor’s report to Parliament on Eskom Holdings SOC Ltd and its subsidiaries continued Report on the audit of the consolidated and separate financial statements continued Report on other legal and regulatory requirements Material uncertainty related to going concern continued In accordance with our responsibilities in terms of sections 44(2) and 44(3) of the Auditing Profession Act, we report that we have identified • the extent of requirements in the capital programme to maintain and improve the existing generating capacity and increasing the transmitting reportable irregularities in terms of the Auditing Profession Act. We have reported such matters to the IRBA. The matters pertaining to the capacity; reportable irregularities have been described in note 52.1 to the consolidated and separate financial statements. • the need for continued support for the energy plan and Eskom’s financial obligations, including National Treasury commitments in terms of the Eskom Debt Relief Act (Act No. 7 of 2023) and Eskom’s ability to meet the conditions thereof; Report on the audit of the annual performance report • the potential impact of a delay in the sale of Eskom Finance Company on the drawdown of debt relief in 2024 and 2025; Introduction and scope In accordance with the Public Audit Act 25 of 2004 (PAA) and the general notice issued in terms thereof, we must audit and report on the • new funding that can only be obtained with the approval of the Minister of Finance; usefulness and reliability of the reported performance against predetermined objectives for selected key performance areas presented in the • the extension of the Koeberg licence expiring in June 2024, following the directive issued by the National Nuclear Regulator, requiring annual shareholders compact performance section of the directors’ report. The accounting authority is responsible for the preparation of this annual deposits in a ring-fenced financial nuclear decommissioning fund to have been made; performance report. • the continuous increase in overdue electricity receivables, most notably municipal debt; and • the protracted court proceedings against NERSA, due to the application of the revenue determination methodology. We selected the following key performance areas presented in the shareholders compact performance section of the directors’ report for the year ended 31 March 2023 for auditing. We selected key performance areas that measures the entity’s performance on its primary mandated There are several mitigating strategies and actions disclosed in note 3.2, however, there are various dependencies and internal and external functions and that are of significant national, community or public interest. uncertainties which could impact the ability to deliver against these strategies. This is indicative of the existence of a material uncertainty that may cast significant doubt on the group and company’s ability to continue as a going concern. Our opinion is not modified in respect of this matter. Key performance area Page Purpose Improve plant operations 11 Measurement and monitoring of key indicators specific to the operational efficiency within Emphasis of matter electricity generation, transmission, and distribution. We draw attention to the matters below. Our opinion is not modified in respect of these matters. • Generation key indicators include energy availability at a power station level, planned and unplanned energy losses. Readiness for planned maintenance outages and the success of Restatement of corresponding figures - non-technical energy losses generation units returning to service post planned maintenance outages. Included in notes 48 and 51.3 to the consolidated and separate financial statements, is the restatement to the corresponding figures for March 2022 relating to losses due to criminal conduct, due to an error in the prior year. This restatement corrects the prior year qualification on non-technical • Transmission key indicators include the measurement of transmission interruptions energy losses that is disclosed under losses due to criminal conduct in note 51.3 to the consolidated and separate financial statements. The non- experienced as well as transmission infrastructure expansion and strengthening projects. technical losses disclosure included in losses due to criminal conduct was qualified in the prior year audit report. • Distribution key indicators include the measurement of distribution energy losses, the average duration of distribution interruptions experienced by customers during a year, Investigations into possible corruption and related impact on capital projects the progress on new electricity connections of previously disadvantaged households and We draw attention to note 2.4 in the consolidated and separate financial statements, which discloses the group and company’s accounting policy the level of customer debt recovery of invoiced electricity supplied. on the impact of corruption on the valuation of capital projects which states that once an investigation on the overpayment on capital projects Focus on the system 11 Measurement and monitoring of scheduled and controlled power cuts that rotate available is finalised and if required, an adjustment is made to the carrying value. In note 8, in the current year, Eskom wrote off R2 078 million (including capacity between all customers when demand is greater than supply in order to protect the capitalised borrowing costs) in overpayments to several contractors involved in the construction of the Kusile power station. For PFMA disclosure, integrity and stability of the grid to avoid a blackout. the amounts have been restated in the year they were paid, and thus only R105 million is included in fruitless and wasteful expenditure in note 51.2 for the current year. The rest of the balance has been included in the prior year opening balance of fruitless and wasteful expenditure, as Reduce environmental footprint 11 Measurement and monitoring of the mass of particulates emitted from Eskom’s coal-fired disclosed in the Eskom Integrated Report. in existing fleet power stations, the amount of raw water used for power generation and various indicators emanating from the atmospheric emissions license compliance requirements imposed per Events after the reporting period power station. We draw attention to note 47 in the consolidated and separate financial statements, which discloses several material non-adjusting events. Deliver capital expansion 11 Measurement and monitoring of the creation of new assets to support the expansion of the Other matter current generation capacity and improve the ratio of electricity supply in relation to We draw attention to the matter below. Our opinion is not modified in respect of this matter. electricity demand. Ensure financial sustainability 11 Measurement and monitoring of key financial sustainability indicators focused on operational National Treasury Instruction Note No. 4 of 2022/23: PFMA Compliance and Reporting Framework profitability, operating cash flow availability to service net interest on borrowings as well On 23 December 2022, National Treasury issued Instruction Note No. 4: PFMA Compliance and Reporting Framework of 2022/23 in terms of interest and capital repayments on borrowings, and progress in identified and targeted section 76(1)(b), (e) and (f ), 2(e) and (4)(a) and (c) of the PFMA which came into effect on 3 January 2023. The PFMA Compliance and Reporting operational and capital cost savings initiatives and/or other income initiatives against Framework also addresses the disclosure of unauthorised expenditure, irregular expenditure, and fruitless and wasteful expenditure. Among established baselines through Eskom’s turnaround plan. the effects of this framework is that irregular and fruitless and wasteful expenditure incurred in previous financial years and not addressed is no longer disclosed in the disclosure notes of the annual financial statements, only the current year and prior year figures are disclosed in We evaluated the reported performance information for the selected key performance areas against the criteria developed from the performance note 51 to the financial statements. The movements in respect of irregular expenditure and fruitless and wasteful expenditure are no longer management and reporting framework, as defined in the general notice. When an annual performance report is prepared using these criteria, it disclosed in the notes to the annual financial statements of Eskom Holdings SOC Limited. The disclosure of these movements (eg, condoned, provides useful and reliable information and insights to users on the public entity’s planning and delivery on its mandate and objectives. recoverable, removed, written off, under assessment, under determination and under investigation) are now required to be included as part of other information in the annual report of the auditees. We performed procedures to test whether: • the indicators used for planning and reporting on performance can be linked directly to the public entity’s mandate and the achievement of We do not express an opinion on the disclosure of irregular expenditure and fruitless and wasteful expenditure in the annual report. its planned objectives. Responsibilities of the accounting authority for the consolidated and separate financial statements • the indicators are well defined and verifiable to ensure that they are easy to understand and apply consistently and that we can confirm the The board of directors, which constitutes the accounting authority, is responsible for the preparation and fair presentation of the consolidated methods and processes to be used for measuring achievements. and separate financial statements in accordance with IFRS, the requirements of the Companies Act and PFMA, and for such internal control as • the targets can be linked directly to the achievement of the indicators and are specific, time bound and measurable to ensure that it is easy to the accounting authority determines is necessary to enable the preparation of consolidated and separate financial statements that are free from understand what should be delivered and by when, the required level of performance as well as how performance will be evaluated. material misstatement, whether due to fraud or error. • the indicators and targets reported on in the annual performance report are the same as what was committed to in the approved initial or revised planning documents. In preparing the consolidated and separate financial statements, the accounting authority is responsible for assessing the group and company’s ability to continue as a going concern, disclosing, as applicable, matters relating to going concern and using the going-concern basis of accounting unless the • the reported performance information is presented in the annual performance report in the prescribed manner. accounting authority either intends to liquidate the group and company or to cease operations, or has no realistic alternative but to do so. • there is adequate supporting evidence for the achievements reported and for the reasons provided for any underachievement of targets. Responsibilities of the auditor for the audit of the consolidated and separate financial statements We performed the procedures for the purpose of reporting material findings only and not to express an assurance opinion. Our objectives are to obtain reasonable assurance about whether the consolidated and separate financial statements as a whole are free from The material findings on the performance information of the selected key performance areas are as follows: material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated and separate financial statements. A further description of our responsibilities for the audit of the consolidated and separate financial statements is included in the annexure to this auditor’s report. 24 25 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Independent Auditor’s report to Parliament on Eskom Holdings SOC Ltd and its subsidiaries continued Report on the audit of the annual performance report continued We were unable to obtain sufficient appropriate audit evidence that the preference point system was applied in some procurement of goods Improve plant operations and services as required by section 2(a) of the Preferential Procurement Policy Framework Act (PPPFA) and 2017 Preferential Procurement Outage Readiness Indicator (ORI) at T-3: We were unable to substantiate the reported value of 70.25%. The ORI at T-3 measures the readiness Regulation. of the planned philosophy outage 3 months before the relevant units are released for philosophy maintenance. This Key Performance Indicator We were unable to obtain sufficient appropriate audit evidence that some contracts and quotations were awarded to suppliers based on (KPI) is reported as a percentage calculated from the overall average percentage score of the respective T-3 readiness assessments conducted preference points which were allocated and calculated in accordance with the requirements of the PPPFA and 2017 Preferential Procurement across the relevant units for the year under review in terms of the KPI scope. The scoring within the assessment involves physical inspection of Regulation. A non-compliance was reported in the prior year. infrastructure, replacement parts and system information at the time of the assessment being conducted. The documentation and inspection of information by the assessment team is viewed at the specific point in time, however, the relevant supporting documentation was not maintained. We were unable to obtain sufficient appropriate audit evidence that some contracts and quotations were awarded to bidders who scored the In addition, judgement is applied to scoring certain elements of the assessment from the discussions held between the assessment team and site highest points in the evaluation process as required by section 2(1)(f ) of PPPFA and 2017 Preferential Procurement Regulation. A non-compliance management. This judgement applied was not comprehensively documented by the assessment team. As a consequence, we were unable to was reported in the prior year. obtain sufficient and appropriate evidence to confirm the reliability and to determine whether any adjustments were needed to the ORI at T-3 and therefore unable to conclude on the KPI figure reported. We were unable to obtain sufficient appropriate audit evidence that some contracts and quotations were awarded to bidders based on points given for criteria that was stipulated in the original invitation for bidding and quotations, as required by the 2017 Preferential Procurement Other matter Regulation 5(1) and (3). A non-compliance was reported in the prior year. We draw attention to the matter below. We were unable to obtain sufficient appropriate audit evidence that some contracts and quotations, which failed to achieve the minimum Achievement of planned targets qualifying score for functionality criteria, were not disqualified as unacceptable in accordance with the 2017 Preferential Procurement Regulation The annual performance report, which is included in the directors’ report, includes information on reported achievements against planned targets 5(6). A non-compliance was reported in the prior year. and provides explanations for under achievements. This information should be considered in the context of the material findings on the reported We were unable to obtain sufficient appropriate audit evidence that some contracts and quotations which achieved the minimum qualifying score performance information. for functionality criteria, were not evaluated further in accordance with the 2017 Preferential Procurement Regulation 5(7). A non-compliance was reported in the prior year. Material misstatements We identified material misstatements in the financial sustainability key performance area of the annual performance report submitted for audit We were unable to obtain sufficient appropriate audit evidence that some contracts and quotations were awarded to bidders based on pre- resulting from corrections to the underlying financial statements submitted for audit. Management subsequently corrected the misstatements. qualification criteria that was stipulated in the original invitation for bidding and quotations, in contravention of the 2017 Preferential Procurement We did not include any material findings in this report. Regulation 4(1) and 4(2). A non-compliance was reported in the prior year. Report on the audit of compliance with legislation We were unable to obtain sufficient appropriate audit evidence that some tender requirements for some contracts above R30 million included a Introduction and scope condition for mandatory subcontracting to advance designated groups, as required by the 2017 Preferential Procurement Regulation 9(1). In accordance with the PAA and the general notice issued in terms thereof, we must audit and report on compliance with applicable legislation We were unable to obtain sufficient appropriate audit evidence that procurement requirements on some commodities designated for local relating to financial matters, financial management and other related matters. The accounting authority is responsible for the public entity’s content and production, were procured from suppliers who comply with the requirements of the 2017 Preferential Procurement Regulation 8(2). compliance with legislation. We performed procedures to test compliance with selected requirements in key legislation in accordance with the A non-compliance was reported in the prior year. Auditor-General of South Africa (AGSA) findings engagement methodology. This engagement is not an assurance engagement. Accordingly, we do not express an assurance opinion or conclusion. Consequence management We were unable to obtain sufficient appropriate audit evidence that disciplinary steps were taken against officials who had incurred irregular Through an established AGSA process, we selected requirements in key legislation for compliance testing that are relevant to the financial and expenditure and fruitless and wasteful expenditure as required by section 51(1)(e)(iii) of the PFMA. This was due to some investigations into performance management of the public entity, clear to allow consistent measurement and evaluation, while also sufficiently detailed and readily irregular and fruitless and wasteful expenditure not being performed. A similar limitation was reported in the prior year. This limitation resulted available to report in an understandable manner. The selected legislative requirements are included in the annexure to this auditor’s report. in a reportable irregularity as reported in 2022 and 2023 on the report on other legal and regulatory requirements. The material findings on compliance with the selected legislative requirements, presented per compliance theme, are as follows: Where investigations were performed, disciplinary steps were not taken against some of the officials who had permitted irregular and fruitless Annual financial statements and wasteful expenditure, as required by section 51(1)(e)(iii) of the PFMA. A similar non-compliance was reported in the prior year. This non- The financial statements submitted for auditing were not fully prepared in accordance with the prescribed financial reporting framework (IFRS) compliance is included in the reportable irregularity (referred above) as reported in 2022 and 2023 on the report on other legal and regulatory as required by section 55(1)(b) of the PFMA. The submitted financial statements contained material misstatements on primary energy, plant requirements. and equipment, impairments and writedown of assets, insurance investments, inventories, cash and cash equivalents and borrowings, identified Allegations of financial misconduct against some members of the accounting authority were not properly investigated in accordance with the by the auditors which were subsequently corrected. Furthermore, the note disclosure relating to going concern, impairment, restatement on requirements of treasury regulation 33.1.3. A similar non-compliance was reported in the prior year. This non-compliance resulted in a reportable technical energy losses and deferred tax was not provided and subsequently updated. This non-compliance resulted in a reportable irregularity as irregularity as reported in 2022 and 2023 on the report on other legal and regulatory requirements. described in the report on other legal and regulatory requirements. A similar non-compliance was reported in the prior year. We were unable to obtain sufficient appropriate audit evidence that investigations were conducted into all allegations of financial misconduct Expenditure management committed by officials, as required by treasury regulation 33.1.1. The non-compliance was reported in the prior year. This limitation resulted in a Effective and appropriate steps were not taken to prevent irregular expenditure, as required by section 51(1)(b)(ii) of the PFMA. As reported in reportable irregularity as reported in 2022 and 2023 on the report on other legal and regulatory requirements. the basis for the qualified opinion, the amount of irregular expenditure disclosed in note 51.1 of the separate financial statements does not reflect the full extent of the irregular expenditure incurred. The majority of the irregular expenditure disclosed in the financial statements was caused by We were unable to obtain sufficient appropriate audit evidence that disciplinary hearings were held for confirmed cases of financial misconduct non-compliance with section 51(1)(a)(iii) of the PFMA. Similar non-compliance was reported in the prior year. committed by officials, as required by treasury regulation 33.1.1. The non-compliance was reported in the prior year. This limitation resulted in a reportable irregularity as reported in 2022 and 2023 on the report on other legal and regulatory requirements. Effective steps were not taken to prevent fruitless and wasteful expenditure, as required by section 51(1)(b)(ii) of the PFMA. As reported in the basis for qualified opinion, the amount of fruitless and wasteful expenditure disclosed in note 51.2 of the separate financial statements does not Due to inadequate processes of management of cases and investigations, we are unable to obtain sufficient evidence that allegations of corruption reflect the full extent of the fruitless and wasteful expenditure incurred. The majority of the fruitless and wasteful expenditure disclosed in the or theft, fraud, extortion, forgery, uttering a forged document which exceeded R100 000 were reported to the South African Police Service (SAPS), financial statements was caused by poor procurement and project management. Similar non-compliance was reported in the prior year. as required by section 34(1) of the Prevention and Combatting of Corrupt Activities of South Africa. A similar limitation was also reported in the prior year. This non-compliance is included in a reportable irregularity (referred above) as reported in 2022 and 2023 on the report on other legal Resources of the public entity were not utilised economically, as required by section 57(b) of the PFMA. and regulatory requirements. Revenue management Other information Effective and appropriate steps were not taken to collect all revenue due from local large power users (municipalities) and local small power users, The accounting authority is responsible for the other information. The other information comprises the information included in the document as required by section 51(1)(b)(i) of the PFMA. Similar non-compliance was reported in the prior year. titled Eskom annual financial statements 31 March 2023 which includes the directors’ report, the report of the audit and risk committee and statement by the company secretary as required by the Companies Act, and the document entitled Eskom Integrated Report, which were Procurement and contract management obtained prior to the date of this report. The other information does not include the consolidated and separate financial statements, our auditor’s We were unable to obtain sufficient appropriate audit evidence that, in all instances, contracts and quotations were awarded in accordance with report and those selected key performance areas presented in the shareholder compact performance section of the directors’ report that have the legislative requirements as proper record keeping was not maintained. Similar limitations were also reported in the prior year. been specifically reported on in this auditor’s report. Some of the goods, works, or services were not procured through a procurement process which is fair, equitable, transparent, and competitive, Our opinion on the financial statements and our findings on the reported performance information and the report on compliance with legislation as required by section 51(1)(a)(iii) of the PFMA. A similar non-compliance was reported in the prior year. do not cover the other information and we do not express an audit opinion or any form of assurance conclusion on it. Some of the contracts were not awarded in an economical manner and the prices of the goods or services were not reasonable as required by PFMA section 57(b). 26 27 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Independent Auditor’s report to Parliament on Eskom Holdings SOC Ltd and its subsidiaries continued Other information continued Management did not in all instances adequately implement review and monitoring controls to prevent non-compliance with applicable laws and In connection with our audit, our responsibility is to read the other information and, in doing so, consider whether the other information regulations relating to supply chain management. In addition, the lack of related internal controls on certain of these areas were also highlighted is materially inconsistent with the consolidated and separate financial statements and the selected key performance areas presented in the to management as potential fraud risk indicators. Where controls did not prevent non-compliance with supply chain management legislation, shareholder compact performance section of the directors’ report, or our knowledge obtained in the audit, or otherwise appears to be materially detection controls were also deficient as not all irregular expenditure and fruitless and wasteful expenditure were identified and disclosed. The misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required audit process is used by management as a mechanism to identify the procurement irregularities but there is no follow through to address the to report that fact. external audit findings. The matters included in the Basis of Qualification will materially impact the other information and in addition, we describe below that we have Management has developed categories for various compliance requirements on the ERP system, however the discipline to complete system inputs concluded that a material misstatement of the other information exists as it relates to the disclosure of fruitless and wasteful, irregular expenditure adequately, highlighting the nature of procurement process being followed, was not adequately reviewed, and monitored to ensure the matter and losses due to criminal conduct. raised in the prior year were addressed. This results in compliance related matters not being supported by complete and accurate registers. Furthermore, payments on certain contracts were made to parties that are not registered with the appropriate regulatory authorities, nor were The opening balances for irregular, fruitless and wasteful expenditure were subjected to audit in the prior year and were qualified on the basis they party to the original agreement. of accuracy and completeness of these disclosures. In addition, taking into account, the qualifications above relating to current year expenditure and disclosure, and the fact that inadequate progress has been made to address the control deficiencies that gave rise to these conclusions, we Leadership did not act on a timely basis on various assurance and forensic report findings and investigation reports, thus contributing to the lack highlight that the information presented on page 177 to 182 of the Eskom Integrated Report omits to acknowledge the completeness and accuracy of compliance with the company’s internal policies and procedures and resulting in a less than satisfactory control environment. issues of such disclosures. The disclosure further does not highlight the lack of progress made by the accounting authority to address such matters. Leadership did not provide adequate oversight to address the significant backlogs in forensic matters not timeously investigated and ensuring Based on this knowledge obtained in the audit, there is a material misstatement of the other information as it relates to irregular, fruitless and disciplinary processes are timeously affected on matters that were investigated. This results in non-adherence of legislation. wasteful expenditure as disclosed in the Eskom Integrated Report. The ageing of matters still under determination for disclosure as either irregular expenditure and fruitless and wasteful expenditure is on average 1.72 years, coupled with the reportable irregularity on delay in investigations in The accounting authority did not exercise adequate oversight over the financial statements before submitting them for audit. We identified material note 52.1, means that any findings on irregular expenditure and fruitless and wasteful expenditure would not be timeously disclosed and will be misstatements to the financial statements submitted for audit. Although there is a notable improvement from the prior year restatements, the adjusted in the prior year opening balance. These matters indicate that the cumulative irregular expenditure and fruitless and wasteful expenditure group’s financial reporting controls were not adhered to by component financial management to ensure the reporting of IFRS compliant financial disclosed in the integrated report may not be complete and accurate. information that is based on accurate and complete financial records. This has highlighted the lack of ownership and accountability for accurate and complete financial records and financial reporting at a component level and further indicates a lack of financial oversight, monitoring, and Internal control deficiencies review of component financial information. We considered internal control relevant to our audit of the consolidated and separate financial statements, annual performance report and compliance with applicable legislation; however, our objective was not to express any form of assurance on it. Management did not implement proper record keeping in a timely manner to ensure that complete, relevant, and accurate information is accessible and available to support credible compliance reporting. This resulted in delays in submission of information impacting the audit process and ultimately The matters reported below are limited to the significant internal control deficiencies that resulted in the basis for the qualified opinion, the the audit outcome on compliance with laws and regulations and in certain instances we could not confirm the contract management principles. findings on the annual performance report and the material findings on the compliance with legislation included in this report. The consistent performance by management of routine key financial controls such as inventory cycle counts, review of stock obsolescence, As previously reported, the accounting authority has embarked on an action plan to address the internal control deficiencies as part of exercising asset verification and supplier creditor reconciliations were not always adequately performed during the year. There were instances of inventory its oversight responsibility regarding compliance with applicable legislation and internal control. Although policies and procedures exist and are writeoffs that could not be adequately substantiated. communicated, there is a lack of discipline in the business to adhere to these policies and procedures. This, together with the lack of adequate monitoring and effective consequence management procedures, resulted in a lack of accountability at the operational level and a less than Management did not implement appropriate weighbridge controls which is critical for inventory management at certain sites. Although identified satisfactory control environment. by management, the control procedures to adequately assess coal quality in terms of the contractual arrangements, were not implemented effectively at all sites. Management did not implement appropriate controls over monitoring and measurement of fuel oil usage at certain sites. The accounting authority, in the past, established a loss control function in an effort to reduce the occurrences of irregular and fruitless and These significant control deficiencies result in ineffective inventory management, the inability to respond to inventory losses and excessive usage wasteful expenditure as part of initiatives to address the compliance with the applicable legislation. However, management did not adequately variances and the inability to take action against delinquent employees and/or suppliers where proven. The controls over inventory and primary implement the continuous review and monitoring controls relating to self-assessment for supply chain management, irregular, fruitless and wasteful energy at certain sites are lacking and this could result in loss to the public entity as evidenced by the growing trends on unexplained variances expenditure, nor did they implement the mechanism of effective collaboration between the internal audit, and forensic, and loss control functions from the prior year to the current year. to identify PFMA related issues. This resulted in not all PFMA related matters being identified and investigated timeously to act as a deterrent for future perpetrators. This further results in an ineffective assurance and consequence management process. The inventory matters described above result in potential losses due to criminal conduct and points to uneconomic use of resources of the public entity. The accounting authority did not exercise adequate oversight over those responsible for compliance and the implementation of effective action Although the executive authority filled vacant board and board subcommittee positions during the year, there remains certain key executive plans to ensure that all significant prior year audit findings are remediated and that the backlogs of transgressions were investigated and concluded positions filled in acting capacities. This has created instability in the executive team and also a lack of critical strategic decisions being taken and timeously, as the remediation dates of prior year findings were extended to the next financial year. actioned. This has negatively affected the effective governance and oversight role of the board and the related subcommittees. Management did not address the recurring backlog relating to alleged possible irregular and fruitless and wasteful expenditure within the specified We have identified instances of conflict of interest not being appropriately disclosed by employees. Furthermore, a prescribed officer of the public timeframe as required by the National Treasury frameworks and instruction notes. This poses a risk that items of irregular expenditure with potential entity did not fully declare an interest in a contract awarded by the entity to a related party, and as such a reportable irregularity was raised. fraud and losses are not addressed to prevent further non-compliances and losses and does not promote a culture of compliance in the entity. Significant fraud matters highlighted in the Zondo Commission report had not yet been adequately addressed in the current year, although plans Leadership did not ensure that adequate entity and process level controls were designed, implemented, and monitored to prevent, identify, and are in place to address these matters. There is slow traction in ensuring that these matters are addressed and root causes that led to these lapses correct non-compliances within the supply chain management environment and quantify the full extent of irregular expenditure, fruitless and in governance are properly addressed. wasteful expenditure, and losses due to criminal conduct, thereby addressing the repeat qualification. There was no comprehensive process to Management did not implement adequate internal controls for the collection of supporting evidence and the documentation of applied judgments address the prior year qualifications and findings related to irregular, fruitless and wasteful expenditure. These matters have been re-reported. in the assessment and scoring of Outage Readiness assessments across the relevant units for the year under review. This resulted in the material The accounting authority did not ensure that there were adequate controls in place to ensure that amounts included in the annual financial finding reported within the Report on the audit of the annual performance report. statements and PFMA disclosure notes are supported by registers which are complete and accurate. Some underlying information supporting Management did not timeously consider the revised model used to determine non-technical energy losses as well as the information from the registers were not always recorded, values were not always accurate, and information was not always sufficient and appropriate and format of underlying studies to determine when the change in circumstances and pattern of energy losses occurred. Management failed to conclude that underlying registers at times made it impracticable to allow for an efficient audit process. this represents a prior year error, so as to ensure that the financial statement disclosures were updated appropriately to reflect the correct non- In the prior year, we reported that we were unable to obtain sufficient appropriate audit evidence that, in all instances, contracts and quotations were technical energy losses for comparative period affected by the revised model. awarded in accordance with the legislative requirements. This matter was again reported in the current year. Management did not exercise adequate oversight over those responsible for the implementation of effective action plans to follow up, investigate and address these prior year audit findings. Other reports This results in not all audit findings being investigated and remediated timeously to act as a deterrent for future possible non-compliance. We draw attention to the following engagements conducted by various parties which had, or could have, an impact on the matters reported in the consolidated and separate financial statements, reported performance information, compliance with applicable legislation and other related Consumables were purchased at inflated prices which were above the approved price lists without substantiation for some construction contracts. matters. These reports did not form part of our opinion on the financial statements or our findings on the reported performance information This was due to a lack of internal controls over the inventory purchases, which resulted in wastage of the public entity resources. Furthermore, or compliance with legislation. overpayments were made in some major contracts, but where management identified these overpayments, they were still not investigated. Matters under investigation Leadership and management developed forward looking action plans as part of addressing current and prior year issues related to consequence The Zondo Commission dedicated an entire report to the alleged contract maladministration and corruption within the Eskom environment management for irregular, fruitless and wasteful expenditure, and qualifications. The implementation of these action plans has been extended in the context of state capture. As disclosed in note 52.2 and note 2.4 to the financial statements, various matters are reported to be under into the future financial periods with limited progress being made in the current year. The public entity has not implemented adequate processes investigation. to address consequences of historic transgressions, and other non-compliance identified. This is evidenced in the management’s reporting on the audit findings status and progress. 28 29 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Independent Auditor’s report to Parliament on Eskom Holdings SOC Ltd and its subsidiaries continued Other reports continued • evaluate the overall presentation, structure, and content of the consolidated and separate financial statements, including the disclosures, and Matters under investigation continued determine whether the consolidated and separate financial statements represent the underlying transactions and events in a manner that During the financial year under review, the regulatory authorities and the accounting authority conducted investigations into alleged irregularities, achieves fair presentation. fraud and corruption within the procurement environment and other areas of the entity. In addition, internal and external investigations referenced • obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group to express findings of maladministration associated with supply chain management, improper conduct, inferences of organised crime cartels and allegations of an opinion on the consolidated financial statements. We are responsible for the direction, supervision, and performance of the group audit. syndicates operating in the coal value chain, in addition to the matters associated with state capture that have been brought to the attention of the We remain solely responsible for our audit opinion. accounting authority. The sophisticated nature and complexity of the fraud schemes impacts the time it takes to investigate such matters resulting in a backlog, which needs to be investigated. The directors have employed the services of forensic firms to assist in these investigations. As at the Communication with those charged with governance reporting date, investigations remain ongoing, and we could not determine the extent of the impact of the outcomes of these investigations to the We communicate with the accounting authority regarding, among other matters, the planned scope and timing of the audit and significant audit consolidated and separate financial statements. The actions noted by the directors to evaluate, investigate, and design appropriate procedures to findings, including any significant deficiencies in internal control that we identify during our audit. prevent the continuance of corruption is not yielding return due to the low levels of traction achieved in the investigation of these matters, coupled We also provide the accounting authority with a statement that we have complied with relevant ethical requirements regarding independence, with the leadership vacuum created from vacancies in various governance functions such as legal, loss control, forensics, and security. We refer you and to communicate with them all relationships and other matters that may reasonably be thought to have a bearing on our independence and, to the accounting policies note 2.4 where the policies regarding recognition, measurement and disclosure of investigations have been discussed. where applicable, actions taken to eliminate threats or safeguards applied. Limited assurance and agreed upon procedures engagements From the matters communicated to those charged with governance, we determine those matters that were of most significance in the audit of At the date of this report, we have commenced/completed the following engagements: the consolidated and separate financial statements of the current period and are therefore key audit matters. We describe these matters in this auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine • Agreed upon procedures on net sent out power megawatt hours, gross sent out power megawatt hours and actual sent out power production that a matter should not be communicated in this auditor’s report because the adverse consequences of doing so would reasonably be expected figures to NERSA for the year ended 31 December 2022. The report was issued to the accounting authority on 9 May 2023. to outweigh the public interest of such communication. • Agreed upon procedures on the group’s generation, transmission and distribution activities regulatory financial report as issued to NERSA. This engagement is in progress at the date of our audit report. Compliance with legislation • Agreed upon procedures on the National Treasury consolidation template that covered the period from 1 April 2022 to 31 March 2023. This The list of selected legislative requirements are as follows: engagement is in progress at the date of our audit report. Selected legislation and regulations Consolidated firm level requirements   • Limited assurance reports on the compliance of the issue of the Domestic Multi-Term Note with the relevant provisions of the commercial paper exemption notice. The reports were issued on 23 January 2023 and 9 February 2023. Public Finance Management Act No.1 of 1999 (PFMA) Section 50(3); 50(3)(a); 50(3)(b) Section 51(1)(a)(ii); 51(1)(a)(iii); 51(1)(a)(iv); 51(1)(b); 51(1)(b)(i); Auditor tenure 51(1)(b)(ii); 51(1)(e)(iii) In terms of the IRBA rule published in Government gazette number 39475 dated 4 December 2015, we report that Deloitte & Touche has been Section 52(b) the auditor of Eskom Holdings SOC Ltd and its subsidiaries for two years. Section 53(4) Section 54(2)(c); 54(2)(d) Section 55(1)(a); 55(1)(b); 55(1)(c)(i) Section 56 Section 57(b); 57(d) Section 66(3)(a) Deloitte & Touche Treasury Regulations for departments, trading entities, constitutional Regulation 29.1.1; 29.1.1(a); 29.1.1(c); 29.2.1; 29.2.2; 29.3.1 Registered Auditor institutions and public entities Regulation 31.2.5; 31.2.7(a) Regulation 33.1.1; 33.1.3 Per: André J. Dennis Partner Companies Act No.71 of 2008 Section 30(3)(b)(i) Section 33(1)(a) 30 October 2023 Section 45(2); 45(3)(a)(ii); 45(3)(b)(i); 45(3)(b)(ii); 45(4) 5 Magwa Crescent Section 46(1)(a); 46(1)(b); 46(1)(c) Waterfall City Section 72(4)(a) Waterfall Section 75(6) 2090 Section 86(1); 86(4) Section 88(2)(d) Annexure – Auditor’s responsibility for the audit Section 112(2)(a) Professional judgement and professional scepticism Section 129(7) As part of an audit in accordance with the ISAs, we exercise professional judgement and maintain professional scepticism throughout our audit of the consolidated and separate financial statements, and the procedures performed on the reported performance information for selected key Prevention and Combating of Corrupt Activities Act No.12 of 2004 Section 34(1) performance areas and on the group’s compliance with selected requirements in key legislation. (PRECCA) Companies Regulations Section 34(1) Financial statements In addition to our responsibility for the audit of the consolidated and separate financial statements as described in this auditor’s report, we also: Construction Industry Development Board Act No.38 of 2000 Section 18(1) (CIDB) Section 22(3) • identify and assess the risks of material misstatement of the consolidated and separate financial statements, whether due to fraud or error; design and perform audit procedures responsive to those risks; and obtain audit evidence that is sufficient and appropriate to provide a basis CIDB Regulations Regulation 17; 18(1A)1; 25(1); 25(5); 25(7A) for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may Preferential Procurement Policy Framework Act, No. 5 of 2000 Section 1(i); 2.1(a); 2.1(b); 2.1(f ) involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. (PPPFA) • obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, PPR 2017 Paragraph 4.1; 4.2 but not for the purpose of expressing an opinion on the effectiveness of the public entity’s internal control. Paragraph 5.1; 5.3; 5.6; 5.7 • evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made. Paragraph 6.1; 6.2; 6.3; 6.5; 6.6; 6.8 • conclude on the appropriateness of the accounting authority’s use of the going-concern basis of accounting in the preparation of the financial Paragraph 7.1; 7.2; 7.3; 7.5; 7.6; 7.8 statements. We also conclude, based on the audit evidence obtained, whether a material uncertainty exists relating to events or conditions that Paragraph 8.2; 8.5 may cast significant doubt on the ability of the public entity and its subsidiaries to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated and separate financial Paragraph 9.1; 9.2 statements about the material uncertainty or, if such disclosures are inadequate, to modify our opinion on the consolidated and separate Paragraph 10.1; 10.2 financial statements. Our conclusions are based on the information available to us at the date of this auditor’s report. However, future events Paragraph 11.1; 11.2 or conditions may cause a public entity to cease operating as a going concern. Paragraph 12.1; 12.2 30 31 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Statements of financial position at 31 March 2023 Income statements for the year ended 31 March 2023 Group Company Group Company Restated1 Restated1 Restated1 Restated1 Restated1 Restated1 2023 2022 2021 2023 2022 2021 2023 2022 2023 2022 Note Rm Rm Rm Rm Rm Rm Note Rm Rm Rm Rm Assets Revenue 31 259 543 247 594 259 543 247 594 Non-current 743 235 720 155 711 762 743 780 721 345 712 203 Other income 32 2 742 1 494 4 374 2 013 Property, plant and equipment 8 669 398 667 458 663 559 671 483 669 493 665 519 Primary energy 33 (154 942) (132 933) (154 942) (132 933) Intangible assets 9 3 370 3 624 3 656 3 367 3 355 3 358 Employee benefit expense 34 (32 321) (32 985) (28 205) (27 858) Future fuel supplies 10 7 167 6 304 4 390 7 167 6 304 4 390 Impairment of financial assets 35 (1 026) (589) (1 042) (544) Investment in equity-accounted investees 11 350 418 420 95 95 95 Impairment and writedown of other assets 35 (1 156) (847) (1 149) (833) Investment in subsidiaries 12 – – – 380 380 380 Other expenses 36 (34 795) (28 780) (39 671) (36 261) Inventories 13 12 209 11 516 11 001 12 209 11 516 11 001 Profit before depreciation and amortisation expense and net fair Deferred tax 14 17 190 9 326 5 758 17 664 10 261 6 129 value and foreign exchange loss (EBITDA) 38 045 52 954 38 908 51 178 Loans receivable 15 7 823 7 830 8 007 5 674 5 650 5 758 Depreciation and amortisation expense 37 (32 485) (32 066) (32 214) (31 990) Embedded derivatives 16 772 822 – 772 822 – Net fair value and foreign exchange loss 38 (285) (3 126) (223) (3 281) Derivatives held for risk management 17 17 633 8 046 11 185 17 633 8 046 11 185 Finance lease receivables 18 218 258 292 218 258 292 Profit before net finance cost and share of profit of equity-accounted Payments made in advance 19 1 986 2 064 1 800 1 984 2 063 1 799 investees 5 275 17 762 6 471 15 907 Trade and other receivables 20 4 101 2 489 1 694 5 134 3 102 2 297 Net finance cost (37 015) (33 063) (38 480) (34 089) Insurance investments 21 1 018 – – – – – Finance income 39 3 365 2 364 1 962 1 360 Current 84 652 83 173 66 839 69 028 64 966 52 052 Finance cost 40 (40 380) (35 427) (40 442) (35 449) Inventories 13 24 014 23 086 22 481 23 834 22 850 22 229 Share of profit of equity-accounted investees after tax 11 93 52 – – Taxation 37 38 120 – – – Loss before tax (31 647) (15 249) (32 009) (18 182) Loans receivable 15 247 319 310 – – – Income tax 41 7 708 3 319 7 795 4 270 Embedded derivatives 16 51 117 – 51 117 – Derivatives held for risk management 17 9 359 463 1 358 9 359 464 1 360 Loss for the year 2 (23 939) (11 930) (24 214) (13 912) Finance lease receivables 18 31 35 35 31 35 35 Payments made in advance 19 1 066 749 1 377 1 033 748 1 351 Trade and other receivables 20 26 702 25 163 22 716 28 888 26 534 24 574 Insurance investments 21 15 629 17 318 14 401 – – – Cash and cash equivalents 22 7 516 15 885 4 041 5 832 14 218 2 503 Total assets 827 887 803 328 778 601 812 808 786 311 764 255 Equity Capital and reserves 236 087 237 057 216 647 215 635 216 934 198 523 Statements of comprehensive income for the year ended 31 March 2023 Liabilities Non-current 473 282 453 876 460 416 476 845 452 545 458 705 Group Company Debt securities and borrowings 25 367 993 345 490 357 411 372 195 344 568 356 486 Restated1 Restated1 Embedded derivatives 16 – – 208 – – 208 2023 2022 2023 2022 Derivatives held for risk management 17 241 5 415 3 736 241 5 415 3 736 Note Rm Rm Rm Rm Deferred tax 14 – 348 388 – – – Loss for the year2 (23 939) (11 930) (24 214) (13 912) Payments received in advance 26 3 986 2 576 2 867 4 000 2 589 2 867 Contract liabilities and deferred income 26 26 078 25 525 23 943 26 078 25 525 23 943 Other comprehensive income 1 112 647 1 058 630 Employee benefit obligations 27 16 902 16 404 15 414 16 573 16 067 15 089 Items that may be reclassified subsequently to profit or loss 556 (690) 523 (695) Provisions 28 50 143 49 257 47 335 50 141 49 250 47 264 Cash flow hedges Lease liabilities 29 7 415 8 032 8 447 7 414 8 031 8 445 Changes in fair value 17 1 567 (328) 1 567 (328) Trade and other payables 30 524 829 667 203 1 100 667 Net amount transferred to profit or loss (730) (477) (730) (477) Current 118 518 112 395 101 538 120 328 116 832 107 027 Amortisation of effective portion of terminated cash flow hedges 38 (3) – (3) – Debt securities and borrowings 25 55 936 50 804 44 415 56 182 53 498 47 556 Ineffective portion of cash flow hedges 38 (727) (477) (727) (477) Embedded derivatives 16 – – 1 283 – – 1 283 Net amount transferred to initial carrying amount of hedged items (120) (145) (120) (145) Derivatives held for risk management 17 1 788 4 563 4 538 1 788 4 563 4 538 Foreign currency translation differences on foreign operations 33 5 – – Payments received in advance 26 4 026 3 880 2 796 4 004 3 879 2 809 Income tax thereon 41 (194) 255 (194) 255 Contract liabilities and deferred income 26 2 019 1 921 1 729 2 019 1 921 1 729 Employee benefit obligations 27 3 584 3 450 3 732 3 272 3 129 3 403 Items that may not be reclassified subsequently to profit or loss 556 1 337 535 1 325 Provisions 28 5 914 8 944 5 307 5 832 8 801 5 234 Re-measurement of benefits 27 761 1 737 733 1 718 Lease liabilities 29 711 571 522 626 571 522 Income tax thereon 41 (205) (400) (198) (393) Trade and other payables 30 44 264 37 994 37 082 46 605 40 468 39 951 Taxation 276 266 132 – – – Total comprehensive loss for the year2 (22 827) (11 283) (23 156) (13 282) Financial trading liabilities 21 – 2 2 – 2 2 Total liabilities 591 800 566 271 561 954 597 173 569 377 565 732 Total equity and liabilities 827 887 803 328 778 601 812 808 786 311 764 255 1. Refer to note 48. 1. Refer to note 48. 2. A nominal amount is attributable to the non-controlling interest in the group. The remainder is attributable to the owner of the company. 32 33 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Statements of changes in equity for the year ended 31 March 2023 Statements of cash flows for the year ended 31 March 2023 Share Cash flow Unrealised Foreign Accumulated Total Group Company capital hedge fair value currency profit/(loss) equity Restated1 Restated1 reserve reserve translation 2023 2022 2023 2022 reserve Note Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm Cash flows from operating activities Group Cash generated from operations 42 41 969 54 725 40 825 52 720 Balance at 31 March 2021 as restated 188 000 (163) (10 855) 9 39 656 216 647 Net cash from/(used in) derivatives held for risk management 97 (899) 97 (896) Previously reported 188 000 (163) (10 855) 9 38 313 215 304 Finance income received 462 441 462 441 Prior year restatements, net of tax1 – – – – 1 343 1 343 Finance cost paid (109) (25) (109) (25) Income taxes paid (892) (218) – – Loss for the year – – – – (11 930) (11 930) Other comprehensive (loss)/income, net of tax – (695) – 5 1 337 647 41 527 54 024 41 275 52 240 Share capital issued 31 693 – – – – 31 693 Cash flows used in investing activities Transfers between reserves – – 1 184 – (1 184) – Disposals of property, plant and equipment 491 331 557 328 Disposals of intangible assets 255 – – – Balance at 31 March 2022 219 693 (858) (9 671) 14 27 879 237 057 Acquisitions of property, plant and equipment (31 698) (28 673) (31 754) (28 851) Loss for the year – – – – (23 939) (23 939) Acquisitions of intangible assets (167) (343) (31) (149) Other comprehensive income, net of tax – 523 – 33 556 1 112 Acquisitions of future fuel supplies (3 137) (2 468) (3 137) (2 468) Share capital issued 21 857 – – – – 21 857 Disposals of insurance investments 36 850 18 543 – – Transfers between reserves – – (3 086) – 3 086 – Acquisitions of insurance investments (36 203) (21 144) – – Balance at 31 March 2023 241 550 (335) (12 757) 47 7 582 236 087 Payments made in advance (442) – (442) – Cash used in provisions (1 900) (318) (1 900) (318) Company Net cash (used in)/from derivatives held for risk management (18) 178 (18) 178 Balance at 31 March 2021 as restated 188 000 (163) (10 855) – 21 541 198 523 Loans receivable repaid 816 176 19 136 Previously reported 188 000 (163) (10 855) – 20 198 197 180 Loans receivable advanced (746) – – – Prior year restatements, net of tax1 – – – – 1 343 1 343 Cash from finance lease receivables 39 36 39 36 Dividends received 93 75 161 655 Loss for the year – – – – (13 912) (13 912) Dividends received – investment in equity-accounted investees 11 161 54 – – Other comprehensive (loss)/income, net of tax – (695) – – 1 325 630 Finance income received 1 792 1 150 343 260 Share capital issued 31 693 – – – – 31 693 Transfers between reserves – – 1 184 – (1 184) – (33 814) (32 403) (36 163) (30 193) Cash flows used in financing activities Balance at 31 March 2022 219 693 (858) (9 671) – 7 770 216 934 Debt securities and borrowings raised 43 29 603 33 036 34 599 35 029 Loss for the year – – – – (24 214) (24 214) Payments made in advance 43 (369) (471) (369) (471) Other comprehensive income, net of tax – 523 – – 535 1 058 Debt securities and borrowings repaid 43 (39 110) (38 854) (41 406) (41 267) Share capital issued 21 857 – – – – 21 857 Share capital issued 24 21 857 31 693 21 857 31 693 Transfers between reserves – – (3 086) – 3 086 – Net cash from/(used in) derivatives held for risk management 43 4 894 (2 769) 4 894 (2 769) Balance at 31 March 2023 241 550 (335) (12 757) – (12 823) 215 635 Cash used in lease liabilities 43 (687) (417) (575) (416) Net cash used in financial trading liabilities 43 (2) – (2) – Share capital Finance income received 789 656 725 618 Refer to note 24 for details regarding share capital. Finance cost paid (33 069) (32 547) (33 200) (32 640) Taxes paid (58) (66) (58) (66) Cash flow hedge reserve (16 152) (9 739) (13 535) (10 289) The cash flow hedge reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments Net (decrease)/increase in cash and cash equivalents (8 439) 11 882 (8 423) 11 758 (forward exchange contracts and cross-currency swaps) related to hedged transactions that have not yet occurred. The cross-currency swap Cash and cash equivalents at beginning of the year 15 885 4 041 14 218 2 503 hedges foreign exchange rate and interest rate risk of the future interest payments and the principal repayment on bonds and loans (denominated Foreign currency translation 33 5 – – in US dollar, euro and yen). Effect of movements in exchange rates on cash held 37 (43) 37 (43) Unrealised fair value reserve Cash and cash equivalents at end of the year 22 7 516 15 885 5 832 14 218 The cumulative net change in the fair value of financial instruments that have not been designated as cash flow hedging instruments is recognised in profit or loss. The unrealised portion of the net change in fair value is not distributable and has been reallocated from a distributable reserve (accumulated profit) to a non-distributable reserve. Cash flow allocation Cash flows that form part of the changes in the line items of the statement of financial position are classified into operating, investing and financing Foreign currency translation reserve activities in a manner that is most appropriate to the group. As a result, the cash flows associated with some line items in the statement of financial position may be split into multiple cash flow activities in the statement of cash flows. These line items are: The foreign currency translation reserve comprises exchange differences resulting from the translation of the results and financial position of foreign operations. Derivatives held for risk management Derivatives held for risk management are classified as operating, investing or financing activities based on the allocation of the cash flows of the Accumulated profit underlying hedged item. Refer to note 17. Accumulated profit is the amount of cumulative profit retained in the business after tax. No dividend has been proposed in the current or prior year. There are no restrictions on the distribution of dividends. Payments made in advance Payments made in advance that relate to the raising of debt securities and borrowings are classified as financing activities. Payments related to the Non-controlling interest acquisition of property, plant and equipment and intangible assets are allocated to investing activities. All other payments made in advance are The non-controlling interest in the group is a nominal amount. deemed operational in nature and are therefore included within operating activities. Refer to note 19. Provisions Cash flows related to provisions for compensation events where the cost of property, plant and equipment includes these costs are classified as investing activities. All other provisions are operational in nature and are classified as operating activities. Refer to note 28. Finance income and costs Finance income and costs are allocated in line with the allocation of the related balances on which the income or cost arose. The interest income classified as financing activities was earned incidental to the financing activities and has thus been classified as such in the statement of cash flows. 1. Refer to note 48. 1. Refer to note 48. 34 35 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements for the year ended 31 March 2023 1. General information Foreign operations Eskom Holdings SOC Ltd (Eskom), a state-owned company and holding company of the group, is incorporated and domiciled in the The assets and liabilities of foreign operations (including fair value adjustments arising on acquisition) are translated to rand at the Republic of South Africa. Eskom is a vertically integrated operation that generates, transmits and distributes electricity to local industrial, prevailing exchange rates at the reporting date. The income and expenses of foreign operations are translated to rand at the average mining, commercial, agricultural, redistributor (metropolitan and other municipalities) and residential customers, and to international exchange rate. Foreign currency differences arising as a result of these transactions are recognised in other comprehensive income within customers in southern Africa. Eskom also purchases electricity from IPPs and international suppliers in southern Africa. These represent the foreign currency translation reserve. the significant activities of the group. The business focus of the subsidiaries is primarily to support the electricity business. The nature of the businesses of the significant operating subsidiaries is set out in note 12. 2.4 Property, plant and equipment Recognition and measurement Property, plant and equipment is stated at cost less accumulated depreciation and impairment losses. Cost includes environmental 2. Summary of significant accounting policies rehabilitation costs, borrowing costs and transfers from equity of any gains or losses on qualifying cash flow hedges of foreign currency The principal accounting policies applied in the preparation of these separate and consolidated financial statements are set out below. transactions. Work under construction includes the cost of materials and direct labour and any other directly attributable costs incurred in bringing an item of property, plant and equipment to its present location and condition. Significant parts of an item of property, 2.1 Basis of preparation and measurement plant and equipment that have different useful lives are accounted for as separate items (major components). Spare parts classified as Statement of compliance strategic and critical spares are recognised as property, plant and equipment and are only capable of operating in the manner intended by The consolidated financial statements of Eskom Holdings SOC Ltd at and for the year ended 31 March 2023 comprise the company management when they are installed. Items of property, plant and equipment transferred from customers are initially recognised at fair (Eskom), its subsidiaries, joint ventures, associates and structured entities (together the group). The separate and consolidated financial value in accordance with IAS 16 Property, plant and equipment and any related revenue is recognised in accordance with IFRS 15 Revenue statements have been prepared in accordance with IFRS and in the manner required by the PFMA and the Companies Act. The financial from contracts with customers, within revenue. statements have been prepared on the going-concern basis and were approved for issue by the board on 30 October 2023. Subsequent costs are capitalised only when it is probable that future economic benefits associated with the item will flow to the group Basis of measurement and the cost of the item can be measured reliably. When part of an asset is being replaced, the carrying amount of the replaced part is The separate and consolidated financial statements are prepared on the historical-cost basis except for the following items which are derecognised. Repairs and maintenance are charged to profit or loss during the financial period incurred. measured at fair value: Owned land and spare parts are not depreciated. Depreciation on other owned assets is calculated using the straight-line method to • derivatives held for risk management allocate cost over the estimated useful lives (limited to residual values). Right-of-use assets are depreciated on a straight-line basis over • embedded derivatives the shorter of the lease term and the estimated useful life of the assets. The useful lives of owned and right-of-use assets are as follows: • certain investments and financial trading instruments Owned Right-of-use Functional and presentation currency Years Years The separate and consolidated financial statements are presented in South African Rand (rounded to the nearest million unless otherwise Buildings and facilities 8 to 40 2 to 5 stated), which is the company’s functional currency and the presentation currency of the group. Plant Changes in accounting policies • Generating 3 to 80 2 to 15 The group has consistently applied the accounting policies to all periods presented in these consolidated financial statements except for • Transmitting 5 to 50 n/a new or revised statements and interpretations implemented during the year. The nature and effect of new standards and interpretations • Distributing 5 to 55 n/a are discussed in note 50.2. • Other 10 to 40 16 to 22 Equipment and vehicles 3 to 15 2 to 5 2.2 Consolidation Subsidiaries The depreciation method, residual values and useful lives of assets are reviewed, and adjusted if appropriate, at each reporting date. Subsidiaries are consolidated from the date on which control is transferred to the group until the date that control ceases. Investments in The estimation of the useful lives and residual values of property, plant and equipment is an area of judgement. The estimation is based subsidiaries are accounted for at cost less impairment losses in the separate financial statements of the company. When the group ceases on professional judgement and independent expert opinion, where available, considering historical performance, the circumstances and to have control of an entity, it derecognises the assets and liabilities of the subsidiary and any components of equity. Any resulting gain or operating environment in which the assets operate, alignment to industry benchmarks as well as expectations about the future. loss is recognised in profit or loss. Gains or losses on the disposal or write off of an item of property, plant and equipment are recognised in profit or loss within other income The accounting policies of the subsidiaries have been adjusted, where necessary, to ensure consistency with the policies adopted by the or other expenses. Projects in works under construction that have been discontinued are written off and included in other expenses. group. Investigations into possible corruption and related impact on capital projects Investment in equity-accounted investees Eskom acknowledges that there is evidence that its control environment to ensure that capital contracts were awarded appropriately, Investments in equity-accounted investees (associates and joint ventures) are accounted for at cost less impairment losses in the separate subsequent changes and amendments were valid, and that value was received have not operated effectively and that remediation of such financial statements of the company and on the equity method of accounting in the consolidated financial statements. The group’s share control deficiencies is on-going. of post-acquisition profits or losses of these investments is recognised in profit or loss within share of profit of equity-accounted investees. The cumulative post-acquisition movements, including dividends received, are adjusted against the carrying amount of the investment. Several contracts and contract amendments have been highlighted by the Zondo Commission, SIU and other internal and external mechanisms. Matters that are under investigation include: Accounting policies of associates and joint ventures have been adjusted where necessary to ensure consistency with the policies adopted • contracts being irregularly awarded by the group. If the financial statements of the associate or joint venture were prepared as of a different date to that of the group • non-compliance with contractual terms in submitting claims (maximum of three months difference), adjustments were made to the group financial statements for significant transactions and events • modifications to contracts where the value added to Eskom is questionable that occurred between the date of the financial statements of the associate or joint venture and the date of the financial statements of the group. Eskom is mostly reliant on the SIU who has the requisite knowledge and access to systems and data to evaluate and investigate these complex transactions and the consequential effects thereof. Eskom does not have access to the SIU investigations and related progress as 2.3 Foreign currency translation the details are only made available to Eskom once an investigation is finalised. Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. The outcomes of these SIU and other internal investigations are assessed once finalised and, if required, an adjustment is made to the Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates carrying value of the related assets. The investigations are complex and determining the correct accounting implications for these possible of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss, except when recognised in other irregularities that cover an extended period of time presents a key judgement. A receivable is only raised for a recovery of an overpayment comprehensive income for qualifying cash flow hedges. when the realisation of the income is probable and included as other income in profit or loss. Non-monetary items are measured at historical cost. Internal investigations into corruption and maladministration are completed from time-to-time and where wasteful, fruitless and fraudulent expenditure is identified, these are expensed and the carrying value of the related asset reduced. These write offs will have an impact on Foreign loans are initially recognised at the exchange rate prevailing at transaction date and are translated at spot rate at every reporting the EBITDA at the time of recognition but are non-cash in nature. date. Foreign exchange gains and losses that relate to financial assets and liabilities at amortised cost are presented in profit or loss within net fair value and foreign exchange gain/loss. 36 37 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 2. Summary of significant accounting policies continued 2.8 Leases 2.5 Intangible assets The group assesses at contract inception whether a contract is or contains a lease if the contract conveys the right to control the use of Research and development an identified asset for a period of time in exchange for consideration. Research expenditure is recognised as an expense as incurred. Lessee accounting Development expenditure (relating to the design and testing of new or improved products) is capitalised only if the expenditure can be The group recognises right-of-use assets relating to the right to use the underlying assets and lease liabilities for the lease payments except measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the group for short-term leases and leases of low-value assets, where the recognition exemption is applied. intends to, and has sufficient resources to complete development and to use or sell the asset. Otherwise, it is recognised in profit or loss within other expenses as incurred. Subsequent to initial recognition, development expenditure is measured at cost less accumulated Right-of-use assets The group recognises a right-of-use asset at lease commencement (the date the underlying asset is available for use). Right-of-use assets amortisation and any accumulated impairment losses. are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period. Development costs The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred and lease payments made at previously capitalised that have been discontinued are written off and included in other expenses. or before the commencement date. Refer to note 2.4 for details regarding the depreciation of right-of-use assets and to note 2.6 regarding assessment for impairment of right-of-use assets. Capitalised development costs are amortised from the point at which the asset is ready for use on a straight-line basis over its useful life. Subsequent to initial recognition, the capitalised development costs are measured at cost less accumulated amortisation and Lease liabilities impairment losses. The group recognises a lease liability at the commencement of a lease at the present value of the lease payments that must be made over the lease term. The lease payments include fixed payments and variable payments dependent on an index or rate. Rights Rights consist mainly of servitudes and rights of way under power lines. A servitude right is granted to Eskom for an indefinite period The group uses the incremental borrowing rate at lease commencement to calculate the present value of lease payments if the interest rate (useful life) and is therefore not amortised. implicit in the lease is not readily determinable. The incremental borrowing rate requires a degree of judgement regarding the determination of an appropriate discount rate for the lease term and is based on borrowings of a similar term which considers current market conditions. Computer software Computer software and licences acquired have a finite useful life and are measured at cost less accumulated amortisation and any After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for lease accumulated impairment losses. If software is integral to the functionality of related equipment, it is capitalised as part of the equipment. payments made. The carrying amount of lease liabilities is remeasured to reflect any reassessment, lease modification or a change of the Costs associated with the support and maintenance of computer software programmes are recognised as an expense as incurred. in substance fixed lease payments. Amortisation is calculated using the straight-line method to allocate costs over the estimated useful lives of software of between 3 and Short-term leases and leases of low-value assets 10 years. Amortisation methods and useful lives of assets are reviewed at each reporting date and adjusted if appropriate. The group applies the short-term lease recognition exemption to leases with a term of less than 12 months. The group also applies the lease of low-value assets recognition exception to leases with a value of less than R75 000. Lease payments on short-term leases and Concession assets leases of low-value assets are recognised as an expense on a straight-line basis over the lease term. Concession assets consist of the right to charge for the usage of the infrastructure under service concession arrangements. The capital expenditure incurred in respect of the service concession arrangements (fair value at initial recognition), including borrowing costs on Lessor accounting qualifying capital expenditures, is capitalised (refer to note 2.7) and amortised over the estimated useful life of the concession asset, which Finance leases is the concession period during which it is available for use (refer to note 23). Subsequent to initial recognition, the concession assets are Finance lease receivables mainly comprise premium power supply equipment contracts. measured at cost less accumulated amortisation and impairment losses. The concession assets are derecognised at the end of the service concession agreement. Gains and losses are recognised in profit or loss. The present value of the lease payments is recognised as a receivable when property, plant and equipment are leased out under a finance lease. The difference between the gross receivable and the present value of the receivable is disclosed as unearned finance 2.6 Impairment of non-financial assets income within finance lease receivables. Lease income is recognised over the term of the lease using the net investment method, which The carrying amounts of non-financial assets within the scope of IAS 36 Impairment of assets are assessed at each reporting date to reflects a constant periodic rate of return. Finance lease receivables are assessed for impairment and derecognised in accordance with determine whether there is any indication of impairment. These assets are reviewed for impairment whenever events or changes in the requirements for financial assets. circumstances indicate that the carrying amount may not be recoverable or if there are indicators of impairment. Assets that have an Operating leases indefinite useful life (rights) are tested annually for impairment. Leases where substantially all of the risks and rewards of ownership are not transferred are classified as operating leases. Payments The group’s assets are grouped at the smallest identifiable group of assets CGUs, that generate cash inflows that are largely independent received under operating leases are recognised in profit or loss within other income on a straight-line basis over the period of the lease. of the cash inflows from other assets or groups of assets. The identification of CGUs involves some judgement. Eskom (company) has been identified as a single CGU as it is a vertically integrated regulated business, and the segments do not generate largely independent cash 2.9 Payments made in advance flows. Eskom’s core operating assets (generation, transmission, and distribution) function together to deliver and earn revenue from the sale Securing debt raised of electricity to customers in South Africa. The end product is the sale of electricity generated, transmitted, and distributed through the Payments are made in advance to lenders for the commitment and issuing fees incurred in raising debt. vertically integrated value chain at a single price as determined by NERSA. Some of the excess capacity in the grid is sold by the transmission segment to international customers. Environmental rehabilitation trust fund Contributions were made by Eskom to environmental rehabilitation trust funds that were established to fund the financial obligation in The identification of the Eskom CGU may be impacted by the future legal separation of transmission, generation and distribution into respect of the rehabilitation of certain coal mines from which Eskom sources its coal for the generation of electricity. The trust funds separate entities. It is expected that the single CGU will only be impacted once the separate legal entities are fully operational in terms of are controlled by third parties and will be used solely for the environmental rehabilitation of the relevant coal mines. The contributions their individual mandates (eg market operator with independent trading and selling of electricity) with entity specific revenue determinations made to the trust funds are recognised separately from the environmental rehabilitation provision in accordance with the requirements by NERSA in line with the approved licences. of IFRIC 5 Rights to interests arising from decommissioning, restoration and environmental rehabilitation funds. Fair value adjustments on the trust funds are recognised in profit or loss within other income. An impairment loss is recognised for the amount by which the asset’s (or CGU) carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's (or CGU) fair value less costs to sell and value in use. Other Other payments made in advance comprise mainly of payments made to suppliers to reserve manufacturing capacity and resources for the The fair value less cost of disposal is determined using a cost-based methodology, referred to as the depreciated replacement cost (DRC) future construction of assets as well as for support and maintenance of IT infrastructure. These amounts will be used as partial settlement method calculated as a proxy to assess impairment. Value in use is based on the estimated future cash flows, discounted to their present value towards the future amounts payable to the suppliers. In the event of default or non-performance, there are various remedies in place, using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. including performance bonds, early cancellation penalties and guarantees that can be used to recover outstanding payments in advance. Non-financial assets that were subject to impairment are reviewed for possible reversal of the impairment at each reporting date. Impairment losses or reversals are recognised in profit or loss within impairment and writedown of other assets. 2.10 Financial instruments 2.10.1 Financial assets (excluding derivatives) 2.7 Capitalisation of borrowing costs Classification Borrowing costs attributable to the construction of qualifying assets are capitalised as part of the cost of these assets over the period The appropriate classification of a financial asset is determined on acquisition of the financial asset and is based on: of construction, until the asset is substantially ready for its intended use. All other borrowing costs are expensed in the period in which • whether the contractual terms of the financial asset gives rise to contractual cash flows that are solely payments of principal and interest they occur. • the objective of the business model in which the financial asset is held at a portfolio level that best reflects the way the business is managed Borrowing costs for qualifying assets financed by specific borrowings are capitalised using the actual interest expense incurred. Borrowing Financial assets are not reclassified subsequent to their initial recognition unless the group changes its business model for managing costs for qualifying assets not financed by specific borrowings are capitalised at the weighted average of the borrowing costs (capitalisation financial assets, in which case all affected financial assets are reclassified on the first day of the first reporting period following the change rate) using the borrowings applicable to the entity in the group. in the business model. 38 39 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 2. Summary of significant accounting policies continued Lifetime expected credit losses are the expected credit losses that result from all possible default events over the expected life of the 2.10 Financial instruments continued financial instrument. 2.10.1 Financial assets (excluding derivatives) continued Expected credit losses are probability-weighted estimates of credit losses. Credit losses are measured as the difference between the Classification continued cash flows due in accordance with the contract and the cash flows expected to be received, discounted at the effective interest rate of The group may irrevocably designate a financial asset on initial recognition that otherwise meets the requirements to be measured at the financial asset. amortised cost or at fair value through other comprehensive income, as at fair value through profit or loss, if doing so, eliminates or significantly reduces an accounting mismatch that would otherwise arise. The group may also irrevocably elect on initial recognition of an All financial assets subject to impairment based on the general approach are monitored to assess whether they have been subject to a equity investment that is not held for trading to present subsequent changes in the investment’s fair value, in other comprehensive income. significant increase in credit risk after initial recognition. There will be a significant increase in credit risk when: This election is made on an investment-by-investment basis. • payments are more than 30 days past due • a significant qualitative event has occurred The group did not designate any financial assets at fair value through profit or loss and has not elected to present equity investments at fair value through other comprehensive income. Where it is assessed that a counterparty’s credit risk has increased significantly from its initial low risk designation, the related asset is moved from stage 1 to stage 2. Financial assets are classified into the following categories: Amortised cost An assessment is performed at each reporting date to determine whether financial assets subject to impairment are credit impaired. A A financial asset is measured at amortised cost if it meets both of the following conditions and is not designated as at fair value through financial asset is credit impaired when there is observable evidence that one or more event has occurred that has had a detrimental impact profit or loss: on the estimated future cash flows expected to flow from the asset such as: • its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount • significant financial difficulty of the borrower, issuer or customer outstanding • a breach of contract such as a default (where the counterparty is unlikely to pay its obligations) or being more than 90 days past due • it is held within a business model whose objective is to hold assets to collect contractual cash flows • restructuring of a loan or advance on terms that the group would not otherwise consider • it is probable that the borrower or customer will enter bankruptcy or other financial reorganisation Fair value through other comprehensive income • the disappearance of an active market for a security because of financial difficulties A financial asset is measured at fair value through other comprehensive income if it meets both of the following conditions and is not designated as at fair value through profit or loss: Where the counterparty is assessed to be credit impaired, the related asset is disclosed in stage 3. • its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding Summary of staging • it is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets Instrument Criteria used for assessment of expected credit loss measurement Fair value through profit or loss 12-month expected credit loss Lifetime expected credit loss All financial assets not classified as measured at amortised cost or fair value through other comprehensive income are measured at fair Stage 1 Stage 2 Stage 3 value through profit or loss. Low credit risk Not credit impaired or Credit impaired or default significant increase in credit risk Measurement Trade and other Not applicable (simplified Elected to measure loss Financial asset more than Initial recognition receivables approach applied and allowances at an amount equal 90 days past due Financial assets are initially measured at fair value on the date of commitment to purchase (trade date). The transaction price is generally therefore use lifetime to the lifetime expected credit the best indicator of fair value. If a contract with a customer has a significant financing component, the related financial asset is initially expected credit loss) losses measured at the transaction price excluding the time value of money. Finance leases, loans Credit risk is assessed as low Financial asset more than Financial asset more than Where the fair value of a financial asset is different to the transaction price, a day-one gain or loss may arise. If the fair value has been receivable (other than (where the credit risk rating 30 days past due 90 days past due determined based on market-observable data the whole day-one gain or loss is recognised immediately in profit or loss. If the fair value home loans) and financial assigned is equivalent to the has not been based on market-observable data the day-one gain or loss is deferred in the statement of financial position and amortised guarantees globally understood definition over the term of the instrument in profit or loss. of investment grade) Any directly attributable transaction costs are included in the initial measurement of financial assets except for financial assets at fair value Loans receivable Financial asset is not past due Financial asset more than Financial asset more than through profit or loss where directly attributable transaction costs are recognised in profit or loss. (home loans) 30 days past due 90 days past due After initial recognition Investments and cash and Credit risk is assessed as low Significant increase in credit risk There is objective evidence that Amortised cost cash equivalents (where the credit risk rating since initial recognition but the counterparty is unlikely to Financial assets at amortised cost are measured at amortised cost after initial recognition using the effective interest rate method less assigned is equivalent to the there is no objective evidence pay its obligations any accumulated impairment losses. Interest income, foreign exchange gains and losses and impairments are recognised in profit or loss. globally understood definition of loss (ie the counterparty is of investment grade) still considered likely to pay its Loss allowances for financial assets measured at amortised cost are deducted from the gross carrying amount of the assets. obligations) Fair value through other comprehensive income Derecognition Financial assets at fair value through other comprehensive income are measured at fair value after initial recognition. Interest income Financial assets are derecognised when the right to receive cash flows from the assets has expired or substantially all the risks and rewards calculated using the effective interest method, foreign exchange gains and losses and impairments are recognised in profit or loss. Other of ownership have transferred from the group. Realised gains or losses on derecognition are determined using the last-in-first-out method. net gains and losses are recognised in other comprehensive income. Gains and losses, including those accumulated in other comprehensive income, are recognised in profit or loss. Fair value through profit or loss The gross carrying amount of a financial asset is written off when the group has no reasonable expectation of recovering a financial asset. Financial assets at fair value through profit or loss are measured at fair value after initial recognition. Changes in the fair value after initial recognition (including any interest or dividend income) are recognised in profit or loss. 2.10.2 Financial liabilities (excluding derivatives) Impairment Classification Loss allowances are recognised for expected credit losses on financial assets measured at amortised cost or fair value through other Financial liability balances have been classified as either amortised cost or other liabilities. comprehensive income. Loss allowances are calculated using the general or simplified approach. Measurement The general approach requires impairment to be measured using a 12-month or lifetime expected credit loss. The lifetime expected credit Initial recognition loss method will be used if, after initial recognition, there is a significant increase in the credit risk of a financial asset or if it becomes credit Financial liabilities are recognised at the date it becomes a party to the contractual provisions of the instrument. Where financial liabilities impaired. The simplified approach requires impairment to be measured using a lifetime expected credit loss and is applied to trade and are carried at amortised cost, transaction costs are included in the value of the financial liability. Where financial liabilities are carried other receivables. at fair value through profit or loss, transaction costs are recognised in profit or loss. Fees paid on the establishment of loan facilities are recorded as a payment made in advance where it is probable that some or all of the facility will be drawn down. Refer to note 2.9. The The maximum period considered when estimating expected credit losses is the maximum contractual period over which the group is fees paid are recognised as transaction costs upon drawdown and then amortised to profit or loss within finance costs from the date of exposed to credit risk. The 12-month expected credit losses are the portion of the expected credit loss resulting from default events first drawdown to final maturity of each facility. that are possible within 12 months after reporting date (or a shorter period if the expected life of the instrument is less than 12 months). 40 41 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 2. Summary of significant accounting policies continued 2.10.5 Repurchase and resale agreements 2.10 Financial instruments continued Repurchase agreements are included in financial trading liabilities or financial trading assets dependent on whether securities are bought or sold. Agreements to resell securities are recorded as repurchase agreements and included in financial trading assets when the securities 2.10.2 Financial liabilities (excluding derivatives) continued are bought for market-making activities. The difference between the sale and repurchase price or purchase and resale price is treated as Measurement continued interest accrued over the life of the repurchase or resale agreement using the effective-yield method. After initial recognition Financial liabilities at amortised cost are measured at amortised cost using the effective interest method. Financial liabilities classified as at fair 2.10.6 Financial guarantees value through profit or loss are measured at fair value. The group did not designate any financial liabilities at fair value through profit or loss. Financial guarantees are contracts that require the group to make specified payments to reimburse the holder for a loss that it incurs because a specified debtor fails to make payment when it is due in accordance with the terms of a debt instrument. Derecognition Financial liabilities are derecognised when the obligation expires, is discharged or cancelled, or there is a substantial modification to the Financial guarantees issued are initially measured at fair value and subsequently at the loss allowance calculated in accordance with IFRS 9 terms of the liability. Realised gains and losses are determined using the last-in-first-out method. Financial instruments. 2.10.3 Derivatives held for risk management 2.11 Future fuel supplies Classification and measurement Coal Derivatives held for risk management are not managed on a held-to-collect and/or for sale business model and the default classification and The contractual agreement with coal mines for the right to future coal supplies is accounted for as future fuel. The output of the coal mine measurement is therefore at fair value through profit or loss unless they meet the criteria for and have been designated as cash flow hedges. is controlled through the contractual agreement between Eskom and the mine. Eskom does not have control over the coal resources until the coal has been mined and delivered to Eskom. Economic hedges Certain derivative instruments do not qualify for cash flow hedge accounting but are used for economic hedging. Changes in the fair value The right to future coal supplies from coal mines is measured at cost. Cost includes payments made to coal suppliers for mine establishment of these derivative instruments (realised and unrealised gains or losses) are recognised in profit or loss within net fair value and foreign and related equipment in terms of cost-plus agreements. The cost also includes the initial estimate of environmental rehabilitation of the exchange gain/loss. mine as well as changes in the estimated timing or amount of outflow of resources or changes in the discount rate. The cost is amortised to coal inventory over the lesser of the life of the agreement or the underlying assets. Cash flow hedges The relationship between hedging instruments and hedged items as well as risk management objectives and the strategy for undertaking Nuclear various hedging transactions are documented at the inception of a transaction. The group also documents its assessment, both at hedge Expenditure incurred to obtain, convert, enrich and fabricate fuel assemblies is stated at cost in future fuel supplies. The fuel assemblies inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes are transferred to inventory when they are received. Costs include the transfer from equity of any gains or losses on qualifying cash flow in fair values or cash flows of hedged items. hedges relating to purchases of raw materials, fabrication and enrichment. It is expected that the values of the hedging instrument and hedged item will move in opposite directions because of the hedged risks 2.12 Inventories (foreign exchange and interest rate risks). Coal, liquid fuel, maintenance spares and consumables The hedge ratio is based on a hedging instrument with the same notional amount in currency terms as the hedged item or portion thereof Inventories are stated at the lower of cost and net realisable value. Cost is determined on the weighted average basis and includes designated for hedge accounting. This results in a hedge ratio of 1:1 or 100%. expenditure incurred in acquiring inventories and other costs in bringing inventory to its present location and condition as well as the cost of ongoing programmes to rehabilitate the environment and other closure costs for active mines that are charged to profit or loss within Day-one gains and losses are deferred in the statement of financial position (in derivatives held for risk management) and amortised on primary energy as the coal is consumed. a straight-line basis over the term of the hedging instrument to profit or loss. Unamortised day-one gains and losses are written off to The Eskom Grid Code specifies the minimum coal inventory level to be on stockpile at the coal-fired power stations (either 10 or 20 days). profit or loss if the related financial instrument is derecognised (extinguished) before maturity date. Day-one gains and losses on hedging All coal inventory up to the grid code level (except for Medupi and Matimba power stations) is classified as non-current as it is not anticipated instruments are predominantly a function of the inclusion of credit, liquidity and other risks in the terms of the trading instrument. These that it will be used within 12 months from the reporting date. Coal inventory at Medupi and Matimba power stations is classified as non- risks are not included in the determination of a hypothetical derivative used to measure fair value movements in a hedged item and are current as it is not expected that the coal will be used within 12 months from the reporting date as it is foreseen that the planned production therefore excluded from any hedge accounting relationships. requirements of these stations will be met from the minimum contractual offtake of the underlying coal supply agreements. The effective realised and unrealised portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognised in other comprehensive income within the cash flow hedge reserve. The gain or loss relating to the ineffective portion is Nuclear fuel recognised immediately in profit or loss within net fair value and foreign exchange gain/loss. Nuclear fuel consists of enriched and fabricated fuel assemblies and fuel in reactors. Nuclear fuel is stated at the lower of cost and net realisable value. Cost is determined on the first-in-first-out basis and includes cost for the management of fuel assemblies that are Cumulative gains or losses existing in other comprehensive income where the hedged item is a non-financial asset are included in the initial recognised to profit or loss on a straight-line basis within primary energy over the estimated useful life of the fuel in the reactor (average carrying amount of the asset when the forecast transaction results in the recognition of a non-financial asset. Gains and losses recognised 46 months). Nuclear fuel is classified as current as it is expected to be realised within the normal operating cycle. in the cash flow hedge reserve in other comprehensive income will affect profit or loss in the periods during which the relevant non- financial assets are expensed to profit or loss. 2.13 Share capital Ordinary shares are classified as equity. Cumulative gains or losses existing in other comprehensive income where the hedged item is a financial liability are taken to profit or loss within finance cost or net fair value and foreign exchange gain/loss when the cash flows occur on the hedged financial liability. 2.14 Income tax Income tax expense is recognised in profit or loss except to the extent that it relates to items recognised in other comprehensive income When a hedging instrument expires, is sold or a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss or equity, in which case it is recognised on that basis. existing in equity at that time remains in other comprehensive income until the forecast transaction occurs. If a forecast transaction is still expected to occur, the cumulative gains or losses in other comprehensive income are reclassified from equity to profit or loss in the 2.15 Deferred tax same periods during which the hedged forecast cash flows affect profit or loss. If a forecast transaction is no longer expected to occur, Deferred tax is recognised on temporary differences arising between the carrying amounts of assets and liabilities for financial reporting the cumulative gain or loss that was reported in other comprehensive income is immediately transferred to profit or loss within net fair purposes and the amounts used for tax purposes. Deferred tax is determined using tax rates (and laws) enacted or substantively enacted value and foreign exchange gain/loss. at the reporting date and that are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled. Sources of ineffectiveness include the following: Deferred tax assets are reviewed at each reporting date and derecognised if it is no longer probable that the related tax benefits will be • period mismatches between the hedging instrument and hedged item realised. The measurement of deferred tax reflects the tax consequences that would follow from the manner in which the group expects, • the fair value of the hedging instrument at the hedge relationship designation date (if not zero) at the reporting date, to recover or settle the carrying amount of its assets and liabilities. • the fair value or cash flow of the hedged item and hedging instrument are dependent on different variables Deferred tax is not recognised for: • temporary differences on the initial recognition of assets or liabilities in a transaction other than a business combination that, at the 2.10.4 Embedded derivatives time of the transaction, affects neither accounting nor taxable profit or loss Embedded derivatives that are closely related to the host contract are not separated and are effectively accounted for as part of the • temporary differences relating to investments in subsidiaries and associates to the extent that the group is able to control the timing of hybrid instrument. the reversal of the temporary differences and it is probable that they will not reverse in the foreseeable future Derivatives that are separated are accounted for on terms that result in a fair value of zero at the date of inception. Option-based Deferred tax assets are recognised for unused tax losses, unused tax credits and deductible temporary differences to the extent that derivatives are separated on the terms stated in the contracts and will not necessarily have a fair value equal to zero at the initial it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred tax is also recognition of the embedded derivative resulting in day-one gains or losses. These day-one gains or losses are recognised as deferred recognised in respect of temporary differences arising on the assets and provisions created in respect of decommissioning and nuclear income and amortised over the period of the agreement to profit or loss. waste management and closure, pollution control and rehabilitation. Future taxable profits are determined based on business plans for The changes in fair value of embedded derivatives are recognised in profit or loss within net fair value and foreign exchange gain/loss. The legal entities in the group. impact of the fair value gains or losses is taken into account in the calculation of current and deferred tax. 42 43 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 2. Summary of significant accounting policies continued The contributions to the EPPF comprise 19.55% of pensionable emoluments of which 12.25% is contributed by the employer and 7.30% 2.16 Payments received in advance, contract liabilities and deferred income by members. Contributions are made by each employer in the fund. Customer connections Pension benefits are provided by the EPPF to all pensioners of the fund in terms of the rules of the fund. The annual pension benefit on Customer connections arise when customers make a contribution to Eskom to construct regular distribution and transmission assets retirement is based on a defined formula of 1.085/600 of the final average emoluments over the last year of service multiplied by the or when the constructed assets are transferred to Eskom to connect customers to the electricity network. Contributions are made in pensionable service period in months. The formula does not limit the benefits payable to the assets and contributions made to the fund. advance in terms of a financing agreement or the completed assets are transferred to Eskom. However, the rules of the fund state that any deficit on the valuation of the fund will be funded by increases in future contributions (if consented to by the employer) or reductions in member benefits (as agreed by the members). The obligation on Eskom as the employer Customer connections received in advance are initially recognised as payments received in advance. to contribute towards the deficit is an area of judgement. The related customer connections that arise when customers transferred distribution and transmission assets to Eskom to connect to the As the benefit formula does not limit the payments to the assets in existence in the fund at the payment date, management concluded electricity network are accounted for when the customer hands over the completed assets to Eskom. that the actuarial and investment risk fall on Eskom when considering the requirements of IAS 19 and therefore classified the fund as a Connections for electricity customers that were connected after 1 April 2018 (transition date to IFRS 15) defined benefit fund. When the connection provides the customer with a material right, the connection is allocated to deferred income (contract liabilities) If there is a substantial surplus on the valuation of the fund, future contributions may be decreased or pensioner benefits may be improved when the customer is connected to the electricity network. The deferred income is recognised in profit or loss within revenue on a as determined and appropriated by the trustees of the fund. The surplus is not controlled by Eskom, but by the trustees of the fund in straight-line basis over the estimated customer relationship period as the connection provides the customer with a material right of terms of the Pension Fund Act and rules of the EPPF. An asset ceiling is therefore applied in the case of a surplus that limits the net benefit renewal that extends the revenue recognition period beyond the initial contractual period. asset to zero. When the connection does not provide the electricity customer with a material right, the connection is recognised in full in profit or loss The pension benefits plan is funded. The cost to the employer, in the form of employer contributions, is actuarially determined. within revenue when the customer is connected to the electricity network. Return on plan assets in excess of interest, adjustments to the asset ceiling and actuarial gains or losses on the obligation are recognised Connections for electricity customers that were connected after 30 June 2009 but before 1 April 2018 in other comprehensive income within re-measurement of benefits. The expense or income recognised in profit or loss includes the Connections were recognised in profit or loss when the customer was connected to the electricity network in terms of IFRIC 18 Transfers current service cost, interest income on plan assets and interest expense on the defined benefit obligation and the irrecoverable surplus of assets from customers. (effect of asset ceiling). Connections for electricity customers that were connected before 30 June 2009 Occasional and service leave Connections were allocated to deferred income when the customer was connected to the electricity network. The deferred income is The liability for occasional and service leave is of a long-term nature in terms of IAS 19 as it is not expected to be settled wholly within recognised in profit or loss within revenue on a straight-line basis over the expected useful lives of the related assets. 12 months after the reporting period but there is no unconditional right to defer settlement for at least 12 months after the reporting Refer to note 2.19 for revenue recognition of connections. period. The full provision is therefore presented as a current liability in the statement of financial position. An actuarial valuation of the occasional and service leave liability is performed at the reporting date. All actuarial gains or losses and past Grants service costs are recognised in profit or loss within employee benefit expense. The present value of the benefit is determined by using Government grants for electrification are initially recognised in payments received in advance and allocated to deferred income when the government bonds which have maturities similar to the liability. related asset has been connected to the electricity network. The deferred income is recognised in profit or loss within depreciation and amortisation expense on a straight-line basis over the expected useful lives of the related assets. Bonus Annual and production bonuses are short-term employee benefits which are expensed as the related services are provided. A liability for 2.17 Employee benefit obligations annual bonuses is accrued on a proportionate basis as services are rendered. A liability for production bonus is raised on the estimated Post-employment medical benefits amount payable in terms of the scheme. All permanent employees qualify for post-employment medical benefits, except for new employees appointed on or after 1 June 2003 at a managerial level. The entitlement to post-employment medical benefits is conditional on the employee remaining in service up to 2.18 Provisions retirement when the employee qualifies for the full benefit. Retirement includes any early retirement from age 55 up to normal retirement Provisions are recognised when the group has a present legal or constructive obligation as a result of a past event, when it is probable at age 65. that an outflow of resources will be required to settle the obligation and when the amount can be reliably estimated. Provisions are not recognised for future operating losses. The group accounts for its post-employment medical benefits obligation as a defined benefit plan in line with IAS 19 Employee benefits. The post-employment medical benefits plan is unfunded. The cost to the employer, in the form of employer contributions, is actuarially The valuation of long-term provisions requires a degree of judgement regarding the future cash flows and the timing thereof. Provisions determined. Provision is made for the estimated cost over the period until the date of early retirement at age 55 when further service are determined by discounting the expected future cash flows using pre-tax discount rates that reflects current market assessments of by the employee will lead to no material amount of further benefits to the employee. Actuarial gains or losses are recognised in other the time value of money and, where appropriate, the risks specific to the liability. comprehensive income within re-measurement of benefits. Interest and other expenses related to these benefits are recognised in profit or loss. The initial cost of a provision is capitalised against the cost of the related asset if it meets the requirements for capitalisation. Subsequent changes in the liability for capitalised provisions are added to, or deducted from, the cost of the related asset. Any amount exceeding the Pension benefits cost of the related asset is allocated to profit or loss. The increase in the provision due to the passage of time is recognised as an expense All permanent employees of the group are members of the Eskom Pension and Provident Fund (EPPF) in terms of its rules and conditions. in profit or loss under finance costs. The EPPF is registered as a defined benefit fund in terms of the requirements of the Pension Funds Act. The main categories of provisions include the following: The assets and pension benefits are administered by the EPPF which is a separate legal entity to the group. The board of trustees of Power station-related environmental restoration – nuclear plant and other generating plants the EPPF consists of an equal number of employer (includes appointing of a non-executive chair and an expert) and member (includes The provision includes the estimated decommissioning cost of nuclear and other generating plant. The estimated cost of decommissioning managerial, labour and pensioners) representatives. The board of trustees is required by law to act in the best interest of the plan at the end of the productive life of plant is based on engineering and technical estimates and reports from independent experts. The initial participants in terms of the rules of the fund and the provisions of the Pension Funds Act and are responsible for setting policies including cost of the provision is capitalised against property, plant and equipment. those governing investments and ensuring that there are sufficient assets to meet the plan obligations as they become due. A provision is also raised for the management of fuel assemblies and radioactive waste, which is recognised and measured based on a The board of trustees generally targets to have a portfolio mix of a combined 70% in equity and property and 30% in debt instruments. report from independent experts. The costing and methodologies are revised on a regular basis to ensure alignment with the requirements The board of trustees aims to keep fund assets at a level such that no plan deficits (based on actuarial valuations performed) will arise. of the National Nuclear Regulator of South Africa. The cost for the fuel assemblies is included in the cost of inventory while the fuel is in the reactor. The cost relating to radioactive waste is charged to profit or loss within primary energy. Eskom, Rotek and the EPPF itself are the employers in the EPPF. The fund is measured as a whole and there is no policy in place for proportionate allocation of net assets to individual entities of the group. Mine-related closure, pollution control and rehabilitation The fund is accounted for in terms of IAS 19 as a defined benefit plan although the terms of the fund do not automatically require the The provision includes the estimated cost of physical, biophysical and social closure and environmental rehabilitation of the mines where employer to make good any deficit should it arise. a legal or constructive obligation exists. The initial cost of the provision is capitalised against future fuel. The cost of ongoing closure and rehabilitation programmes for active mines is charged to inventory and subsequently to profit or loss within primary energy as the coal is consumed, while the cost relating to defunct mines is charged directly to profit or loss. 44 45 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 2. Summary of significant accounting policies continued The group’s principal revenue-generating activities are as follows: 2.18 Provisions continued Revenue activity Nature and timing of satisfaction of Revenue recognition Compensation events performance obligation, including Compensation events and claims are a normal part of construction agreements and are triggered by changes in scope of work or time significant payment terms needed to complete the work. A dispute resolution process, as outlined in the contractual agreements, is followed as and when a compensation event or claim arises and are dealt with through a structured process involving notification, consultation, assessment and Electricity sales Performance obligation is settled when Revenue is recognised over time as electricity is consumed by the agreement or adjudication. electricity is supplied to the customer. customer (ie when control is transferred) and is billed for on a Most customers pay for electricity after monthly basis. Revenue is measured based on the consideration All open compensation events and claims are assessed at the reporting date by management’s experts and legal advisors (where deemed consumption and have terms ranging specified in a contract with a customer and excludes amounts necessary) based on the latest available information to determine the probability of an outflow of resources and the best estimate of the between 15 and 45 days. Some customers collected on behalf of third parties. expenditure that would be required to settle the present obligation. prepay for electricity. There is significant judgement applied by management and the board, based on past experience regarding the finalisation and outcome of Connections Connections arise when customers make Connections that were completed before 30 June 2009 were compensation events, in determining the appropriate provision for these matters. The related costs are charged to profit or loss within a contribution to Eskom to construct allocated to deferred income when the customer was connected other expenses or work under construction if it meets the requirements for capitalisation. regular distribution and transmission to the electricity network. The deferred income is recognised in assets or when the constructed assets are profit or loss within revenue on a straight-line basis over the Other transferred to Eskom to connect expected useful life of the related assets. Other provisions include provisions made for contractual obligations relating to onerous contracts, litigation matters and guarantees. customers to the electricity network. These provisions are recognised based on contractual obligations and measured based on the best estimate of the expenditure that would Connections arise from contracts with Connections that were completed after 30 June 2009 were be required to settle the present obligation at the end of the reporting period and are charged to profit or loss within other expenses. customers who will also become electricity recognised as revenue when the customer was connected to the The amount of the provisions is based on management’s assessment of the most likely amounts due based on the current information purchasing customers once they are electricity network in terms of IFRIC 18. available. The group expects to settle the majority of these provisions within 12 months. The finalisation of an obligation depends on connected and those who will not Connections that were completed from 1 April 2018 are recognised factors outside the control of the group, for example, arbitration and dispute resolution processes, which could impact the timing. It is purchase electricity (eg proper ty as follows: not expected that any additional liability in excess of the amounts provided would have a material adverse effect on the group’s financial developers). • connections relating to electricity purchasing customers where position, liquidity or cash flow. there is a material right are allocated to deferred income when the customer is connected to the electricity network. The 2.19 Revenue from contracts with customers deferred income is recognised in profit or loss within revenue Eskom’s main revenue activity is the sale of electricity which is recognised when electricity is consumed by the user. The subsidiaries on a straight-line basis over the estimated customer relationship support this main activity but are not considered to be part of the main revenue activity as their operations include providing home loans period of 25 years. Refer to note 26 for the contract liabilities of to Eskom employees, insurance, maintenance and construction services to Eskom. connections recognised on a straight-line basis Revenue is recognised when a customer obtains control of the goods or services supplied. The amount of revenue recognised is measured • connections relating to electricity purchasing customers where based on the consideration specified in a contract with a customer and excludes amounts collected on behalf of third parties. there is not a material right are recognised as revenue over the initial contract term Customers that fail the collectability criterion are accounted for on a cash basis and revenue is only recognised when cash is received. • connections relating to non-electricity purchasing customers are Refer to note 4.6. recognised as revenue at a point in time when the customer is An invoice is still raised for sales to customers accounted for on a cash basis. Eskom has a statutory obligation to charge value added tax connected to the electricity network (VAT) for local customers, payable to the SARS, when an invoice is created which gives rise to a receivable that is accounted for as a Other Ad hoc requests for electricity-related Revenue is recognised at a point in time when the service is statutory receivable within other receivables. A portion of the VAT on revenue recognised on a cash basis (for municipalities recorded services that are distinct from the sale of completed. on a cash basis) are not expected to be realised within 12 months after the reporting period because of the low payment levels of the electricity or the connection of customers municipalities which are accounted for on the cash basis and are therefore classified as non-current. to the grid. An impairment is raised based on the discounted cash flows at a market related interest rate. The expected recovery period is based on current information and past experience limited to a maximum recovery period of five years to provide for a recovery from SARS The assessment to defer revenue for connection charges from electricity customers requires judgement because of divergent international through a writeoff. treatments based on contract and operational differences. Changes to the recognition of customer connections are not expected based on the current information available. When cash is received from the customer, the transaction price is recognised in profit or loss within revenue, and the related payment for The assessment of whether a connection charge is a material right or not in terms of IFRS 15 requires judgement of what constitutes a VAT is allocated against the trade and other receivables balance. material right from the perspective of the customer and results in different accounting treatments as discussed above. 2.20 Finance income Finance income comprises interest receivable on loans, trade receivables, finance lease receivables and income from financial market investments. Finance income is calculated by applying the effective interest rate method to the gross carrying amount of non-credit impaired financial assets (ie at the amortised cost of the financial asset before adjusting for any expected credit loss allowance). Finance income on credit impaired financial assets is calculated by applying the effective interest rate to the amortised cost of the credit impaired financial assets (ie the gross carrying amount less the allowance for expected credit losses). Interest income is recognised in profit or loss. 2.21 Finance cost Finance cost comprises interest and fees payable on debt securities and borrowings and lease liabilities, interest resulting from derivatives held for risk management and interest from the unwinding of discount on liabilities. Borrowing costs which are not capitalised are recognised in profit or loss. Refer to note 2.7. 2.22 Assets and liabilities held-for-sale Assets and liabilities (or disposal groups) which meet the definition of held-for-sale under IFRS 5 Non-current assets held-for-sale and discontinued operations are stated at the lower of their carrying amount and fair value less costs to sell if their carrying amount will be recovered principally through a sale transaction. 2.23 Net debt Gross debt is the aggregate of debt securities and borrowings and lease liabilities. Net debt is calculated by adjusting gross debt for related payments made in advance, derivatives held for risk management, financial trading instruments and cash and cash equivalents. 46 47 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 3. Capital management and going concern Eskom’s credit ratings at 31 March were as follows: 3.1 Capital management Rating Outlook The objective of capital management is to ensure that the group is sustainable over the long term. The government, as the sole shareholder, and 2023 2022 2023 2022 the board have the responsibility to ensure that the group is adequately capitalised and that the business is attractive to investors and lenders. Standard & Poor’s The group’s funding consists of equity investments by the shareholder, funds generated from operations and funds borrowed on local and foreign Foreign currency CCC+ CCC+ Credit watch positive Negative debt markets with strong government support. There were no changes to the group’s approach to capital management during the financial year. Local currency CCC+ CCC+ Credit watch positive Negative Moody’s The following capital reserves are managed by the group: Foreign currency Caa1 Caa1 Positive Negative Group Company Local currency b1 Caa1 Positive Negative Fitch Ratings Restated Restated Foreign currency – – – Negative 2023 2022 2023 2022 Local currency B B Stable Negative Note Rm Rm Rm Rm Share capital 24 241 550 219 693 241 550 219 693 Net debt is sourced globally to ensure the lowest cost of funding. Where funds are received and have not yet been spent, they are invested Accumulated profit/(loss) 7 582 27 879 (12 823) 7 770 to provide the maximum possible return while ensuring minimal capital risk and matching the maturity term requirements of the spending Net debt 43 398 833 389 139 404 879 392 577 of the amount. 647 965 636 711 633 606 620 040 Net debt is managed via the continuous monitoring of current and potential debt funding arrangements to achieve the most favourable terms possible. These terms and costs are heavily dependent on Eskom’s credit rating. Eskom is focusing on alleviating the rating agencies’ Facilities available – debt securities and borrowings1 19 374 22 285 19 374 22 285 concerns regarding the high leveraged financial profile, inadequate electricity price path and funding requirements of Eskom. Refer to note 43 for a reconciliation of the movements and analysis of the composition of net debt. 3.1.1 Share capital An additional R21 857 million (2022: R31 693 million) of shares were issued during the year. 3.2 Going concern The board made an assessment of the ability of the group to continue as a going concern in the foreseeable future. The board: 3.1.2 Accumulated profit • Reviewed the performance of the group for the year ended 31 March 2023 including the net loss after tax of R23 939 million and the net Revenue current liabilities of R33 866 million. Eskom analyses the Integrated Resource Plan (which forecasts the growth in long-term electricity demand) and evaluates the • Noted the deterioration of some of the group's financial indicators compared to 31 March 2022, in particular the deterioration in EBITDA alternative options to meet and manage forecast demand. This information impacts the planning process and informs the revenue and EBITDA margin. applications made to NERSA for tariff increases that will allow Eskom to be financially sustainable. • Noted the decline in the cash and cash equivalents balance of R7 516 million from R15 885 million at 31 March 2022 which were mainly applied Operating cost towards settling Eskom’s debt obligations. • Considered the impact of the cash flow forecast for the 24 months ending 31 March 2025 (that provided for higher use of the OCGTs and The group continues to pursue cost-saving opportunities to assist in ensuring financial sustainability. increased capital expenditure) and the projected net loss before tax for 2024, estimated at R19 819 million (unaudited). The following non-generally accepted accounting principles income statement measures are monitored by management: • Considered that Eskom is in a constrained liquidity situation that resulted from low tariffs, contracting sales volumes, above inflation cost increases, constrained generating plant performance, increased non-payment by municipalities and the capital programme to increase and Group Company replace generating and transmitting capacity. Restated Restated • Noted the debt relief arrangement from government of R254 billion over the next three years as set out in the Eskom Debt Relief Act, 7 of 2023 2022 2023 2022 2023 that was enacted on 7 July 2023. The arrangement will provide liquidity support of R78 billion in 2024, R66 billion in 2025 and R40 billion % % % % in 2026 to address Eskom’s debt and interest payments as they fall due, together with the takeover of R70 billion of Eskom debt (principal and EBITDA margin 14.66 21.39 14.99 20.67 future interest) in 2026. The support is subject to certain conditions and will take the form of a subordinated loan that will be settled in Eskom ordinary shares upon complying with the conditions, allowing Eskom to better manage its liquidity position. Refer to note 47 for the conditions Net loss margin (9.22) (4.82) (9.33) (5.62) included in the debt relief arrangement. Eskom received R16 billion of debt relief on 3 August 2023, R12 billion on 26 October and R8 billion on 30 October 2023. The remaining balance of R78 billion committed for 2024 is expected to be received during the 2024 financial year. 3.1.3 Net debt • Noted that no new borrowings (except for drawdowns from existing facilities) were allowed from 1 April 2023 until the end of the debt relief Group Company period, unless approved by the Minister of Finance. All other operational and relevant capital expenditure spending will be financed through operational cash flows and drawdowns from existing project related loan agreements. The government guarantee facility of R350 billion Restated Restated expired on 31 March 2023 in line with the debt relief arrangement. Existing guarantees issued in terms of the government guarantee facility 2023 2022 2023 2022 were not impacted and will remain in place until settlement of the guaranteed debt. Refer to note 5.3.2 regarding facilities available and Rm Rm Rm Rm government guarantees. Funding used 105 204 103 148 110 044 103 482 • Noted and considered the potential impact of the recent communication from the Minister of Finance relating to further delays in the sale of EFC and the possible impact on the timing of debt relief as this matter is a long outstanding cabinet decision arising from previous government Debt repayment and net finance costs 71 390 70 745 73 881 73 289 support. Investment funding requirements 33 814 32 403 36 163 30 193 • Considered the impact on projected future cash flows of annual deposits which will be required for a ring-fenced financial nuclear decommissioning fund as directed by the National Nuclear Regulator. Funding raised 105 204 103 148 110 044 103 482 • Considered the impact of the current economic climate, including that rating agencies expressed a stable outlook on Eskom after the Cash from operations 41 527 54 024 41 275 52 240 enactment of the Eskom Debt Relief Act. Financing activities 55 238 61 006 60 346 63 000 • Considered the impact of the continuous deteriorating generation plant performance and increased reliance on more expensive sources (IPPs Utilisation of cash 8 439 (11 882) 8 423 (11 758) and OCGTs) and load curtailment to manage supply and demand and noted the improved generation plant performance experienced towards the middle of 2024. A further worsening of generating plant performance could negatively impact cash flow due to lost revenue and an increase in costs, in particular the level of spend required on OCGTs. The generation capacity could also be impacted if the extension of the licence for The following ratios play an important role in the credit ratings given to Eskom, which in turn influences the cost of funding. Eskom’s credit Koeberg power station, which expires in June 2024, beyond the original operating life is delayed. rating is affected by its own financial position as well as the credit rating of the sovereign: • Considered the impact of the continuous increase in overdue electricity receivables (including the impact of non-recoverability of long outstanding electricity receivables) and the municipal debt relief arrangement that is intended to assist with the overdue electricity receivable Group Company challenge. Refer to note 5.1.1. Restated Restated • Acknowledged that an acceptable price increase and improved plant performance are critical factors in the going-concern assessment. Unit 2023 2022 2023 2022 • Recognised that Eskom continues to face various challenges that resulted from mismanagement and corruption that could have an influence on stakeholder sentiment. Progress has been made in cleaning-up irregularities, improving processes and strengthening Net debt : equity Ratio 1.69 1.64 1.88 1.81 controls, but it is taking time to identify all issues and take appropriate corrective action and implement consequence management. Net debt : EBITDA Ratio 10.48 7.35 10.41 7.67 • Considered the possible impact if key risks materialise and acknowledged that improved plant performance, the management of Net debt service cover Ratio 0.58 0.76 0.56 0.71 operating (particularly generating expenditure) and capital costs, as well as addressing the escalating overdue electricity receivables Free funds from operations : net debt % 10.99 16.39 11.10 15.56 are critical factors in the going-concern assessment. 1. Facilities in foreign currency are converted to rand at mid-spot rate at reporting date. Refer to note 5.2.1. 48 49 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 3. Capital management and going concern continued Value in use 3.2 Going concern continued The value in use calculation is based on the estimated future cash flows discounted to their present value based on the future revenue The challenges that the group is facing are being addressed by the following mitigation strategies and actions: and cost to operate and maintain the assets over their useful life. Estimates in the value in use calculation include long-term growth • Continuous engagement is taking place with the shareholder and National Treasury to ensure that the challenges that impact the rates, electricity sales volumes, price path, available generation capacity and discount rates. Estimates are based on past experience and group’s going-concern status are addressed satisfactorily within a reasonable timeframe. Government believes that it is critical that a expectations of future changes in the market, including the prevailing economic climate. credible, comprehensive and long-term strategy (which incorporates addressing municipal receivables, providing greater clarity and Key assumptions transparency in tariff pricing and addressing operational efficiencies) is developed to fully optimise Eskom’s balance sheet. The Eskom The cash flow projections used in the two models were based on the Eskom Corporate Plan for 2024 to 2028, adjusted to exclude new debt relief arrangement and the municipal debt relief programme will assist in putting Eskom on a path to long-term financial stability. capacity and expansion of assets. The projections after the first five years were extrapolated based on the estimated long-term average • The sale of EFC is being prioritised and managed as a condition of the debt relief from government and, if not disposed of, would impact growth rates, inflation and available existing capacity. The extrapolation beyond the first five years was deemed appropriate as generating the amount available for drawdown in 2024 and 2025. plants have long useful lives. • Eskom is working with the National Nuclear Regulator to finalise the details of a ring-fenced nuclear decommissioning fund to ensure sufficient financial resources will be available to fund decommissioning costs. A declining sales trajectory limited to available capacity was assumed. The available capacity depends on generating capacity (still under • The group’s generation capacity is managed as a critical focus area to ensure appropriate steps are being taken to manage the construction) becoming available and decommissioning of old power stations. It was assumed that there will be no new electricity production performance challenges, including ongoing interaction with the National Nuclear Regulator as part of the licence extension activities. sources, both from Eskom and IPPs. The usage of the OCGTs was assumed at an average load factor of 12% in 2024, 9% in 2025 and reducing • Eskom is working with the Minister of Electricity, leveraging the National Energy Crisis Committee structures, to ensure that the over time to 3%. The power stations EAF was aligned to the current performance, with a gradual improvement over time. Electricity Action Plan is implemented expeditiously in collaboration with all key stakeholders. The price of electricity is a key input in the recoverable amount calculation. The price path is based on the NERSA determination (adjusted • The Eskom roadmap released by the DPE on 20 October 2019 provides a degree of clarity on the role that Eskom will play in the for the impact of court and RCA decisions). The price path is considered to be conservative, taking into account the recent history of unfolding future of the country’s electricity supply industry. several court decisions in favour of Eskom as well as outstanding court proceedings and RCA applications. • Progress has been made to prepare the business for the legal separation. NERSA approved the operating of the transmission system, trading and import/export licences for National Transmission Company South Africa SOC Ltd (NTCSA) and will issue the licences in Carbon tax was included as part of primary energy cost from 2026 which resulted in a substantial increase in cost from 2027. due course. The only remaining condition to give effect to the suspensive sale agreement of NTCSA is to obtain the required lender consent. Discussions are ongoing with lenders from whom consent is required and requests for consent have been made. Bilateral A conservative view was taken on overdue municipality debt by assuming that it will continue to increase. The possible impact of the engagements were held with lenders and they are supportive of the process. Government is in the process of revising the Electricity municipal debt relief arrangement was not taken into account. Regulation Act to allow other players to enter the electricity market. The National Electricity Distribution Company of South Africa Management concluded that the key assumptions (which includes price path and EAF) are reasonable. SOC Ltd (NEDCSA) has been registered during the 2023 financial year for the envisaged legal separation of the distribution division. It is expected that NTCSA will be operationalised in the 2025 financial year with NEDCSA in the year thereafter. The price increase used for group and company was: • The cost structures and capital programme of the group are continuously reviewed to extract cost savings and improve cash flows. • The group is aware of the impact of large capital projects on its statement of financial position and will only engage in such projects in Year ended 31 March compliance with the conditions attached to the Eskom Debt Relief Act and with full disclosure and approval by the Minister of Finance 2024 2025 2026 2027 2028 2029 and the shareholder. % % % % % % • There is continued focus on implementing various strategies in an effort to recover overdue trade receivables. The successful outcome of 2023 these strategies remains uncertain. Eskom is working with National Treasury on the implementation of the municipal debt relief arrangement. Price increase 19 13 13 11 15 11 The board considered that there are uncertainties and dependencies that exist both from a timing of intervention perspective as well as whether the plans will materialise as anticipated. Year ended 31 March 2023 2024 2025 2026 2027 2028 The life extension of the nuclear plant is also dependent on several key challenges which, individually or collectively, may have a further % % % % % % material impact on the current operational challenges. 2022 The events, conditions and assumptions described above inherently include material uncertainties that may cast significant doubt on the Price increase 9 13 13 13 13 10 going concern. An average long-term negative sales growth rate of 0.5% (2022: 1.9% positive) was used whilst there was sufficient production capacity to The board has a reasonable expectation that the risks will be satisfactorily addressed with the mitigation strategies in place. The board support sales. Once production capacity was insufficient to support sales, sales was restricted to production capacity. continues to manage these strategies as a priority as it is important that they materialise as envisaged. The board assessed the current cash flow projections considering that future capital costs will be funded from cash from operations. The board concluded after carefully A pre-tax nominal discount rate of 16.25% (2022: 12.46%) was used as derived from the NERSA determination. considering the progress of the initiatives above and the continued financial support from the government through the debt relief arrangement that there is a reasonable expectation that the group has access to adequate resources and facilities to be able to continue Outcome of impairment calculation its operations and fund the capital programme for the foreseeable future as a going concern. The consolidated and separate financial Management is satisfied that the recoverable amount based on value in use is higher than the carrying value of the CGU, even though there statements have therefore been prepared on a going-concern basis. was a general decline in the valuation outcome in 2023 compared to 2022 (difference in the recoverable amount exceeding the carrying amount). This was largely as a result of the increase in the discount rate, using a more conservative approach regarding recoverability 3.3 Impairment assessment of the Eskom CGU (including property, plant and equipment and indefinite useful of outstanding municipality debt, higher OCGT load factors, decline in availability of generating plant and the impact thereof on sales. life of intangible assets) Management is comfortable that it is not expected that a reasonable possible change in any of the key assumptions would cause the The CGU of Eskom (refer note 2.6) was assessed for impairment because of liquidity, financial and operational performance challenges. carrying value of the CGU to exceed the recoverable amount. This conclusion is based on the results of the following sensitivity analyses: Rights are part of the Eskom CGU and were tested for impairment as part of the CGU. No impairment loss was recognised on the CGU as the recoverable amount of the Eskom CGU (determined based on the higher of its Price sensitivity fair value less costs of disposal and value in use) was higher than the carrying value. A conservative price path has been assumed. The price already determined by NERSA for 2024 and 2025 has been used as it is fixed. A reduction of 1% in the price for 2026 results in the recoverable amount exceeding the carrying amount by 6%. A reduction in the price Management incorrectly disclosed the result of the fair value less cost of disposal calculation as the value in use result in 2022. This had no impact for 2026 will result in permanent reduction in the base price in future periods. on the impairment assessment as the outcome of both calculations (recoverable amount) were higher than the carrying amount of the CGU in 2022. This has been correctly disclosed in 2023 where the recoverable amount based on the value in use is higher than the carrying amount. Discount rate sensitivity An increase of 1% in the discount rate will result in a recoverable amount equal to carrying value. Eskom uses two models as part of its impairment assessment to determine the recoverable amount of the CGU. Other sensitivities Fair value less cost of disposal A 1% cumulative increase in the cost of coal over the 2024 to 2050 periods results in the recoverable amount exceeding the carrying The fair value less cost of disposal (no estimate for cost of disposal provided as deemed not material) is determined using a cost-based amount by about 2%. methodology, referred to as the DRC method that is a calculated proxy to assess for impairment (referred to in Eskom as the regulatory model). The DRC approximates the current cost of replacing an asset with its modern equivalent asset less deductions for physical A 2% cumulative reduction in available total production from coal plants over the 2024 to 2050 periods results in the recoverable amount deterioration and all relevant forms of obsolescence and optimisation. This approach is normally adopted for the valuation of specialised exceeding the carrying amount by about 7%. assets or installations where there is little or no comparable market evidence to estimate value. The fair value determined using the DRC methodology was adjusted by a revenue shortfall that approximates the discount to market participants because the electricity tariff is not cost reflective and therefore would result in an insufficient return on assets. 50 51 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 4. Critical accounting estimates and assumptions Sensitivity analysis The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities The effect on profit/loss before tax of an increase or decrease in the assumptions is: within the next financial year are discussed in this note. Group and company The methods and types of assumptions used in preparing the sensitivity analyses did not change compared to the previous period. 2023 2022 Sensitivity analyses are calculated based on a change in a single key assumption keeping all other assumptions constant. In practice it is increase decrease increase decrease unlikely that changes in assumptions would occur in isolation from one another. All relevant inputs are listed and sensitivities have then Input Unit Change in assumption Rm Rm Rm Rm been provided for the key sources of estimation uncertainty. Aluminium price USD per ton 10% relative1 258 (218) 153 (170) 4.1 Embedded derivatives Rand/USD Rand per USD 10% relative1 248 (243) 450 (341) Eskom entered into an agreement to supply electricity to an electricity-intensive business where the revenue from the contract is Rand interest rates Continuous actual/365 days (%) 100 basis points 43 (48) 63 (65) based on an approved tariff with a possible upside charge that is applicable only if both the aluminium and foreign exchange rate Dollar interest rates Annual actual/365 days (%) 100 basis points (81) 84 (99) 107 simultaneously exceed predefined thresholds. The agreement gave rise to an option based embedded derivative from August 2021 to July South African PPI Index 1% absolute1 (51) 48 (72) 62 2031. The valuation of the embedded derivative reflects the benefit to Eskom attributable to the upside charge when both the thresholds United States PPI Index 1% absolute1 3 (13) 32 (48) are simultaneously breached. Correlation (ALU/USD/ZAR) Correlation coefficient 10% absolute1 (55) 52 (51) 51 Valuation Valuation techniques are used to determine the fair value as there is no active market for embedded derivatives. 4.2 Post-employment medical benefits Valuation The embedded derivative is valued independently from the host contract. A Monte Carlo valuation method was used which uses random The estimated present value of the anticipated expenditure for both in-service and retired members is calculated by independent paths to model the price of aluminium and the USD/ZAR exchange rate. The simulation paths allow for varying prices depending on actuaries using the projected unit credit method annually. This method accounts for the accrued service liability separately from the the underlying simulations being above or below the threshold levels. The fair value of the embedded derivative reflects a probability- current cost liability. The accrued service liability is based on the completed service to the valuation date for the in-service members and weighted estimate of the upside benefit to Eskom in terms of the Monte Carlo method. the full liability in respect of retired members. The current cost liability is the cost of providing the benefit over the next year. The present value of the obligation is determined by using government bonds which have maturities similar to the liability. Input and valuation assumptions The aluminium price and USD/ZAR exchange rate are modelled on a correlation-weighted stochastic basis, while economic forecasts of The fund is exposed to inflation risk, interest rate risks and changes in the life expectancy for beneficiaries. purchase price indices (PPI) are used. Projected cash flows are weighted with the survival probability of the counterparty and discounted Valuation assumptions at the appropriate risk-free rate approximated by the USD overnight index swap curve. The principal actuarial assumptions used were: The United States and South African PPI with the aluminium price and USD/ZAR exchange rate correlation are significant unobservable Group Company inputs used in the model. Other inputs were obtained from appropriate market data providers or were otherwise modelled using market standard modelling procedures which do not attract significant uncertainty or judgement. Unit 2023 2022 2023 2022 Discount rate % 13.2 12.0 13.2 12.0 The following valuation assumptions were used for the valuation and are regarded as the best estimates by management: Medical aid inflation % 9.3 8.6 9.3 8.6 2023 Year ended 31 March Male longevity years 14.42 14.42 14.42 14.42 Input Unit 2023 2024 2025 2026 2027 2028 Female longevity years 20.82 20.82 20.82 20.82 Weighted average duration years 17.60 18.00 17.70 18.10 Aluminium price USD per ton 2 377 2 496 2 608 2 713 2 798 2 875 Aluminium volatility Year-on-year (%) 24.53 24.53 24.53 24.53 24.53 24.53 Assumptions regarding future mortality have been based on published mortality tables and statistics derived from experience. Rand/USD Rand per USD 17.72 19.27 20.00 20.62 21.32 21.98 Sensitivity analysis USD/Rand volatility Year-on-year (%) 18.36 18.36 18.36 18.36 18.36 18.36 The effect of an increase or decrease in the assumptions is: Rand interest rates Annual actual/365 days (%) 10.06 8.35 8.11 8.09 8.25 8.47 Dollar interest rates Annual actual/365 days (%) 4.95 4.72 4.05 3.65 3.46 3.32 Group Company South African PPI Year-on-year (%) 7.43 7.75 6.75 5.75 5.50 5.50 2023 2022 2023 2022 United States PPI Year-on-year (%) (0.61) 4.75 3.00 2.50 2.25 2.25 Change in increase decrease increase decrease increase decrease increase decrease Electricity usage Electricity usage per maximum 97.49 97.49 97.49 97.49 97.49 97.49 assumption Rm Rm Rm Rm Rm Rm Rm Rm capacity (%) Effect on aggregate Aluminium/exchange rate Correlation coefficient (%) 15.25 15.25 15.25 15.25 15.25 15.25 current service cost correlation and finance cost Counterparty default Cumulative probability of – 1.41 3.23 5.32 8.11 10.72 Discount rate 1% (210) 258 (185) 228 (209) 256 (184) 227 probability default (%) Medical aid inflation 1% 467 (374) 429 (342) 462 (369) 424 (337) Future mortality 1 year 63 (63) 58 (58) 62 (62) 57 (57) 2022 Year ended 31 March1 Effect on post- employment medical Input Unit 2022 2023 2024 2025 2026 2027 benefits obligation Aluminium price USD per ton 3 537 3 483 3 354 3 220 3 093 2 976 Discount rate 1% (2 089) 2 595 (2 072) 2 587 (2 057) 2 556 (2 037) 2 544 Aluminium volatility Year-on-year (%) 26.72 26.72 26.72 26.72 26.72 26.72 Medical aid inflation 1% 2 618 (2 133) 2 598 (2 108) 2 580 (2 100) 2 556 (2 073) Rand/USD Rand per USD 14.60 15.24 15.89 16.57 17.27 18.01 Future mortality 1 year 410 (414) 411 (414) 402 (406) 402 (405) USD/Rand volatility Year-on-year (%) 18.00 18.00 18.00 18.00 18.00 18.00 Rand interest rates Annual actual/365 days (%) 5.62 6.96 6.38 6.63 6.83 7.04 4.3 Pension benefits Dollar interest rates Annual actual/365 days (%) 0.75 1.75 2.34 2.42 2.35 2.26 Valuation The estimated present value of the anticipated expenditure for both in-service and retired members is calculated by independent South African PPI Year-on-year (%) 8.75 4.85 5.35 5.50 5.50 5.50 actuaries using the projected unit credit method annually. This method accounts for the accrued service liability separately from the United States PPI Year-on-year (%) 8.41 1.95 2.00 2.00 2.00 2.00 current cost. The accrued service liability is based on the completed years of service to the valuation date in respect of current in-service Electricity usage Electricity usage per maximum 97.46 97.46 97.46 97.46 97.46 97.46 members and the full liability in respect of pensioners. The current cost liability is the cost of providing the benefit over the next year. The capacity (%) present value of the obligation is determined by using government bonds which have maturities similar to the liability. Aluminium/exchange rate Correlation coefficient (%) 13.40 13.40 13.40 13.40 13.40 13.40 correlation The liability is compared to the fair value of the plan assets to determine a resultant deficit or surplus (which would be subject to an asset ceiling). The fair value of the plan assets represents the market value of the assets. Counterparty default Cumulative probability of –2 1.08 2.52 4.37 6.87 9.73 probability default (%) The fund is exposed to inflation, interest rate risks, changes in the life expectancy for pensioners, changes in the age profile of members, equity and debt market risk, and foreign exchange risk. 1. In the prior year the column headings reflected 2021 instead of 2022 onwards. This was corrected in the current year. 2. The default probability for the prior year was corrected to reflect a 12 month default probability at valuation date instead of a six month default probability that 1. The change in assumption was incorrectly described in the prior year financial statements. This was corrected in the current year and had no impact on the was previously used. disclosure of the monetary amount for the respective sensitivities. 52 53 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 4. Critical accounting estimates and assumptions continued Valuation assumptions and estimated payment dates 4.3 Pension benefits continued The real discount rates used for these provisions and estimated payment dates of the costs are: Valuation continued Group and company Valuation assumptions 2023 2022 The principal actuarial assumptions used were: % Year % Year Group and company Nuclear plant 3.4 – 4.6 2025 – 2039 2.6 – 4.1 2026 – 2041 Unit 2023 2022 Coal, pump storage, open cycle gas turbine and renewable stations 3.4 – 4.7 2024 – 2099 1.3 – 4.1 2023 – 2099 Spent nuclear fuel 3.1 – 4.6 2024 – 2100 1.3 – 4.2 2023 – 2125 Discount rate % 13.2 12.0 Mine-related closure, pollution control and rehabilitation 3.1 – 4.6 2024 – 2150 1.3 – 4.2 2023 – 2150 Long-term price inflation rate % 7.3 6.6 Future salary inflation % 8.8 8.1 The estimated payment dates of the spent nuclear fuel provision changed as monitoring and surveillance costs (expected to be incurred Future pension increases % 7.3 6.6 from 2100 to 2125) were excluded from the provision in 2023 as the costs are immaterial and carried by the National Radioactive Waste Male longevity years 13.5 13.5 Disposal Institute in terms of the National Radioactive Waste Disposal Institute Act. Female longevity years 19.7 19.7 Weighted average duration years 14.4 14.9 Sensitivity analysis The effect on the provisions of an increase or decrease in the real discount rate is: Assumptions regarding future mortality have been based on published mortality tables and statistics derived from experience. Group and company Sensitivity analysis The effect on fund obligations of an increase or decrease in the assumptions is: Restated 2023 2022 Group and company Change in increase decrease increase decrease 2023 2022 assumption Rm Rm Rm Rm increase decrease increase decrease Nuclear plant 1% (533) 580 (823) 924 Change in assumption Rm Rm Rm Rm Coal, pump storage, open cycle gas turbine and renewable stations 1% (2 057) 2 598 (2 304) 2 962 Discount rate 1% (7 288) 11 429 (7 311) 11 764 Spent nuclear fuel 1% (1 647) 2 425 (1 641) 2 478 Inflation rate 1% 11 571 (7 682) 11 849 (7 687) Mine-related closure, pollution control and rehabilitation 1% (1 458) 1 935 (1 719) 2 652 Future mortality 1 year (1 471) 1 506 (1 524) 1 493 4.6 Revenue from contracts with customers 4.4 Occasional and service leave Customer connections Valuation Connection charges are charged to customers in exchange for connection to Eskom’s electricity network. This connection enables Eskom An actuarial valuation is done on an annual basis for occasional and service leave. The accrued liability is determined by valuing all future to sell electricity to these customers over the estimated customer relationship period. The customer relationship period refers to the leave expected to be taken and payments to be made in respect of benefits up to the valuation date. Allowance is made for the assumed period the customer remains a purchaser of electricity from Eskom at a given point of supply. A period of 25 years was determined after benefit options employees will exercise and salary increases up to the date the benefit is estimated to be paid. The present value of the considering, inter alia, assumptions about the life-cycle of the distribution network used to supply electricity to customers. obligation is determined by using government bonds which have maturities similar to the liability. Collectability of amounts receivable Valuation assumptions Revenue may only be recognised if it is believed at the time of sale that the revenue is likely to be recovered from the customer. This The principal actuarial assumptions used were: recoverability requirement is not considered to have been met in contracts with customers who have a poor payment history and for which Eskom does not have the ability to manage the credit risk due to external facts and circumstances (for example socio-economic or Group and company political reasons). Eskom accounts for revenue from these contracts on a cash (rather than accrual) basis. 2023 2022 Where the recoverability requirement is met, revenue is recognised on an accrual basis. The risk of non-collection is reflected in the % % expected credit loss as an impairment expense rather than an adjustment to the revenue recognised. Discount rate 13.2 12.0 General price inflation 7.3 6.6 4.7 Expected credit loss on financial assets Salary increases 8.8 8.1 The expected credit loss on financial assets is calculated using the following formula: Leave usage 8.0 8.0 Expected credit loss = Exposure at default x Probability of default x Discounted loss given default Assumptions regarding future mortality have been based on published mortality tables and statistics derived from experience. For details The exposure is the estimated amount outstanding at the point of default less any collateral held. The probability of default measures regarding current longevities underlying the values of the occasional and service leave obligation at the reporting date refer to note 4.2. the likelihood that the amount outstanding will become more than 90 days past due, and depending on the portfolio, this is either on a 12-month or lifetime basis in accordance with IFRS 9 requirements. The loss given default measures the expected credit loss in the event Sensitivity analysis that the outstanding amount becomes more than 90 days past due. Cash flows are discounted at the original effective interest rate over Based on current experience, 8% (2022: 8%) of the leave is utilised. If the rate at which leave is taken is 16% (2022: 16%), then the liability the expected recovery period. will increase by R97 million (2022: R98 million) for the group and R91 million (2022: R92 million) for the company. If the rate at which leave is taken is 4% (2022: 4%), then the liability will decrease by R55 million (2022: R55 million) for the group and R52 million (2022: The financial assets that are subject to IFRS 9 impairment are stratified using factors such as the balance type, credit risk rating, existence R52 million) for the company. and type of collateral, remaining term to maturity, delinquency status, and geographical location. The carrying amount of the occasional and service leave liability for the group is R1 279 million (2022: R1 284 million) and R1 155 million An economic overlay in the form of a five-year forward-looking scaler that incorporates economic variables (including gross domestic (2022: R1 147 million) for the company. product (GDP) and exchange rate growth) has been applied to international electricity receivables, intercompany trade and other receivables, other receivables, finance lease receivables, loans receivables, investments, financial trading assets and financial guarantee 4.5 Power station-related environmental restoration and mine-related closure, pollution control and portfolios. rehabilitation It was not necessary to apply an economic overlay to the municipality, large power and small power user portfolios as the models to Valuation determine the probability of default are considered to be sensitive to the economic environment and representative of the most recent These provisions are determined by discounting the current estimated future decommissioning and rehabilitation costs. The present value economic conditions. of the obligation is determined by using government bonds which have maturities similar to the liability. An additional expected credit loss consideration was applied to the municipality portfolio to account for the possible impact of the municipal debt relief arrangement. Municipalities can apply to National Treasury to have their arrear debt at 31 March 2023 written off over a three-year period subject to approval by National Treasury and meeting the predetermined conditions. An assessment was performed per municipality on the probability of applying for and meeting the conditions, including consideration of current financial health and payment levels. This resulted in an additional impairment raised of R824 million. 54 55 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 4. Critical accounting estimates and assumptions continued 5.1 Credit risk 4.7 Expected credit loss on financial assets continued The carrying amounts of financial assets represent the maximum credit exposure. The group’s maximum exposure as a result of financial The following details are applicable to the models used for the various financial asset balances: guarantees issued is disclosed in note 44.1. Financial asset Model details 5.1.1 Trade and other receivables Impairment analysis International Expected credit losses were calculated using a benchmark approach that assigns a probability of default to a client electricity based on the size and country in which the client operates. Credit ratings were assigned to these categories which 2023 receivables were then used to determine the probability of default. A five-year economic forward-looking scaler was applied to Stage 2 Stage 3 Total the probability of default. The loss given default is standardised and based on the implied regulatory downturn using Gross Allow- Carrying Gross Allow- Carrying Gross Allow- Carrying a foundation approach of 45%. ance for value ance for value ance for value Local large and Expected credit losses were calculated using a provision matrix which utilises a transition approach. The probability impair- impair- impair- small power user of default relevant to balances with similar characteristics was determined by analysing their most recent delinquency ment ment ment electricity data. The loss given default was calculated using the long-run average recovery rates. Rm Rm Rm Rm Rm Rm Rm Rm Rm receivables Trade receivables Intercompany The expected credit losses were calculated using a dual rating approach, which relies on key financial ratios to Group and company loans receivable determine a through-the-cycle probability of default. The through-the-cycle probability of default was updated with International 1 204 (19) 1 185 504 (227) 277 1 708 (246) 1 462 economic information to produce a point-in-time probability of default, which is consistent with the current and B- to BB+ 920 (7) 913 504 (227) 277 1 424 (234) 1 190 future forecasted economic conditions. The loss given default is standardised and based on the implied regulatory Below B- 284 (12) 272 – – – 284 (12) 272 downturn using a foundation approach of 45%. Local large power users – Intercompany The estimates of the probability of default were based on the external rating of Eskom mapped to an internal rating municipalities 10 009 (204) 9 805 2 492 (2 281) 211 12 501 (2 485) 10 016 trade and other scale. A five-year economic forward-looking scaler was applied to the probability of default. The loss given default receivables is standardised and based on the implied regulatory downturn using a foundation approach of 45%. 0–30 days 9 793 (166) 9 627 – – – 9 793 (166) 9 627 30–90 days 216 (38) 178 – – – 216 (38) 178 Other Expected credit losses were calculated using a benchmark approach that assigns a probability of default to a client More than 90 days or credit impaired – – – 2 492 (2 281) 211 2 492 (2 281) 211 receivables, based on the size and country in which the client operates. Credit ratings were assigned to these categories which finance lease were then used to determine the probability of default. A five-year economic forward-looking scaler was applied to Local large power users – other 10 544 (56) 10 488 580 (386) 194 11 124 (442) 10 682 receivables and the probability of default. The loss given default is standardised and based on the implied regulatory downturn using 0–30 days 10 299 (16) 10 283 – – – 10 299 (16) 10 283 loans receivable a foundation approach of 45%. 30–90 days 245 (40) 205 – – – 245 (40) 205 (excluding home More than 90 days or credit impaired – – – 580 (386) 194 580 (386) 194 loans) Local small power users – other 2 162 (141) 2 021 1 309 (885) 424 3 471 (1 026) 2 445 Loans receivable The estimates of the probability of default are influenced by factors including whether a client is still employed by (home loans) Eskom and whether they are in arrears. Loans are assigned a risk rating based on payment levels. Forward looking 0–30 days 1 764 (53) 1 711 – – – 1 764 (53) 1 711 information is based on reasonable and supportable forecasts of future economic conditions, including experience 30–90 days 398 (88) 310 – – – 398 (88) 310 judgement. The loss in the event of default is determined as the difference between the outstanding loan amount More than 90 days or credit impaired – – – 1 309 (885) 424 1 309 (885) 424 and the amount that can be recovered through the legal collection process, which also includes the perfection of 23 919 (420) 23 499 4 885 (3 779) 1 106 28 804 (4 199) 24 605 physical collateral. The historical loss experience is adjusted for current observable data to determine the loss given default. Trade and other receivables Group 26 145 (441) 25 704 5 410 (4 258) 1 152 31 555 (4 699) 26 856 Investments, The estimates of the probability of default were based on the external credit ratings of the counterparts using an financial trading external rating scale mapped to an internal rating scale. A five-year economic forward-looking scaler was applied to Trade receivables 23 919 (420) 23 499 4 885 (3 779) 1 106 28 804 (4 199) 24 605 assets and the probability of default. The loss given default is standardised and based on the implied regulatory downturn using Other receivables (B- to BB+) 2 226 (21) 2 205 525 (479) 46 2 751 (500) 2 251 financial a foundation approach of 45%. Company 29 484 (519) 28 965 5 305 (4 195) 1 110 34 789 (4 714) 30 075 guarantees Trade receivables 23 919 (420) 23 499 4 885 (3 779) 1 106 28 804 (4 199) 24 605 Other receivables (B- to BB+) 5 565 (99) 5 466 420 (416) 4 5 985 (515) 5 470 5. Financial risk management The group’s integrated risk and resilience management process enables management to assess and respond to all material risks that may affect the achievement of organisational objectives. The group maintains an integrated risk and resilience management framework comprising governance structures, management policies and guidance standards with a focus on risk and resilience assessments, treatment plans, monitoring and reporting. The management of financial risks, as defined by IFRS 7 Financial instruments: disclosures, falls within these overarching structures, policies and standards. The management of financial risks is delegated by the board to the audit and risk committee. Day-to-day management of financial risks is carried out in the area in which the risks arise. Risk assessments, treatment plans and monitoring measures are reported to the audit and risk committee on a quarterly basis. The group’s exposure to risk, its objectives, policies and processes for managing the risk and the methods used to measure it have been consistently applied in the years presented. The group has exposure to the following risks as a result of its financial instruments: • credit risk – the risk of financial loss to the group if a customer or other counterparty to a financial instrument fails to meet its contractual obligations • market risk – the risk that the fair value or future cash flows of financial instruments will fluctuate because of changes in foreign exchange rates, commodity prices, interest rates or equity prices • liquidity risk – the risk that the group will not have sufficient financial resources to meet its obligations when they fall due, or will have to do so at excessive cost 56 57 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 5. Financial risk management continued ECL percentages used 5.1 Credit risk continued 2023 2022 5.1.1 Trade and other receivables continued Stage 2 Stage 3 Total Stage 2 Stage 3 Total % % % % % % 2022 Stage 2 Stage 3 Total Trade receivables Gross Allow- Carrying Gross Allow- Carrying Gross Allow- Carrying Group and company ance for value ance for value ance for value International 2 45 14 1 81 22 impair- impair- impair- B- to BB+ 1 45 16 1 81 23 ment ment ment Below B- 4 – 4 5 – 5 Rm Rm Rm Rm Rm Rm Rm Rm Rm Local large power users – municipalities 2 92 20 3 91 18 Trade receivables 0–30 days 2 – 2 2 – 2 Group and company 30–90 days 18 – 18 22 – 22 International 1 193 (14) 1 179 432 (351) 81 1 625 (365) 1 260 More than 90 days or credit impaired – 92 92 – 91 91 B- to BB+ 1 113 (10) 1 103 432 (351) 81 1 545 (361) 1 184 Local large power users – other 1 67 4 – 80 3 Below B- 80 (4) 76 – – – 80 (4) 76 30–90 days 16 – 16 7 – 7 Local large power users – More than 90 days or credit impaired – 67 67 – 80 80 municipalities 9 131 (290) 8 841 1 808 (1 653) 155 10 939 (1 943) 8 996 Local small power users – Soweto 0–30 days 8 526 (157) 8 369 – – – 8 526 (157) 8 369 More than 90 days or credit impaired – – – – 100 100 30–90 days 605 (133) 472 – – – 605 (133) 472 Local small power users – other 7 68 30 6 72 28 More than 90 days or credit impaired – – – 1 808 (1 653) 155 1 808 (1 653) 155 0–30 days 3 – 3 3 – 3 Local large power users – other 10 454 (20) 10 434 449 (359) 90 10 903 (379) 10 524 30–90 days 22 – 22 22 – 22 More than 90 days or credit impaired – 68 68 – 72 72 0–30 days 10 264 (6) 10 258 – – – 10 264 (6) 10 258 30–90 days 190 (14) 176 – – – 190 (14) 176 2 77 15 2 83 14 More than 90 days or credit impaired – – – 449 (359) 90 449 (359) 90 Other receivables Local small power users – Soweto Group 1 91 18 2 88 24 More than 90 days or credit Company 2 99 9 2 97 9 impaired – – – 6 (6) – 6 (6) – Age analysis of trade receivables balances Local small power users – other 2 363 (132) 2 231 1 222 (875) 347 3 585 (1 007) 2 578 0–30 days 2 008 (53) 1 955 – – – 2 008 (53) 1 955 2023 2022 30–90 days 355 (79) 276 – – – 355 (79) 276 <1 year >1 year >2 years >3 years <1 year >1 year >2 years >3 years More than 90 days or credit impaired – – – 1 222 (875) 347 1 222 (875) 347 % % % % % % % % International 93 7 – – 84 13 3 – 23 141 (456) 22 685 3 917 (3 244) 673 27 058 (3 700) 23 358 Local large power users – municipalities 97 2 1 – 96 1 2 1 Trade and other receivables Local large power users – other 100 – – – 100 – – – Group 24 150 (480) 23 670 4 262 (3 547) 715 28 412 (4 027) 24 385 Local small power users – Soweto – – – – 100 – – – Local small power users – other 82 10 4 4 83 8 5 4 Trade receivables 23 141 (456) 22 685 3 917 (3 244) 673 27 058 (3 700) 23 358 Other receivables (B- to BB+) 1 009 (24) 985 345 (303) 42 1 354 (327) 1 027 Reconciliation of movements in allowance for impairment Company 26 238 (519) 25 719 4 163 (3 482) 681 30 401 (4 001) 26 400 2023 2022 Trade receivables 23 141 (456) 22 685 3 917 (3 244) 673 27 058 (3 700) 23 358 Stage 2 Stage 3 Total Stage 2 Stage 3 Total Other receivables (B- to BB+) 3 097 (63) 3 034 246 (238) 8 3 343 (301) 3 042 Note Rm Rm Rm Rm Rm Rm Group Balance at beginning of the year 480 3 547 4 027 619 3 671 4 290 Raised to the income statement 35 85 938 1 023 179 502 681 Reversed on payment of opening balance (359) (2 037) (2 396) (256) (2 079) (2 335) Remeasurement of opening balances held at year end 136 (80) 56 (51) 46 (5) Raised on new balances 308 3 055 3 363 486 2 535 3 021 Transfer of balances between stage 2 and 3 (101) 101 – (252) 252 – Finance income on stage 3 balances – 283 283 – 144 144 Writeoffs (23) (611) (634) (66) (1 022) (1 088) Balance at end of the year 20 441 4 258 4 699 480 3 547 4 027 Company Balance at beginning of the year 519 3 482 4 001 728 3 632 4 360 Raised to the income statement 35 121 937 1 058 76 497 573 Reversed on payment of opening balance (356) (2 019) (2 375) (368) (1 988) (2 356) Remeasurement of opening balances held at year end 139 (80) 59 (49) 80 31 Raised on new balances 338 3 036 3 374 493 2 405 2 898 Transfer of balances between stage 2 and 3 (101) 101 – (252) 252 – Finance income on stage 3 balances – 283 283 – 144 144 Writeoffs (20) (608) (628) (33) (1 043) (1 076) Balance at end of the year 20 519 4 195 4 714 519 3 482 4 001 58 59 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 5. Financial risk management continued Local large power users 5.1 Credit risk continued Local large power users comprise South African redistributors (metropolitan and municipal) and commercial, industrial and mining customers usually with supplies above 100kVA. Payment terms are individually negotiated and are normally a maximum of 15 days, except 5.1.1 Trade and other receivables continued for certain bulk redistributing municipalities which are at a maximum of 30 days. Security held for trade receivables (guarantees and deposits) Municipalities are required to provide security for all new supplies or where they request an upgrade of existing supply points. Where a Group and company large power user has an acceptable credit rating from an approved rating agency, the provision of security is amended based on the type 2023 2022 of risk as defined in the revenue security policy. Fair value of security held Security Rene- Fair value of security held Security Rene- Credit- Not Total called gotiated Credit- Not Total called gotiated Eskom continues its efforts to ensure maximum collections from non-paying municipalities. Unfortunately, Eskom’s attempts to enforce impaired credit- upon balances impaired credit- upon balances contractual credit control is hampered by drawn out litigation and interdicts granted by the courts in the interest of municipal end- recei- impaired recei- impaired consumers. Eskom is advocating an active partnering solution whereby Eskom supports municipalities with distribution, reticulation and vables recei- vables recei- revenue collection services. vables vables Interventions include: Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm • entering into special payment arrangements International – 6 6 – – – 6 6 – – • promoting and implementing an active partnering solution for municipalities Local large • following the Promotion of Administrative Justice Act processes to restrict, interrupt or terminate supply power users 349 15 569 15 918 46 3 146 319 13 567 13 886 43 2 572 • restricting electricity supply if the set maximum demand levels are exceeded • terminating supply where no other option is available Municipalities 301 709 1 010 – 3 138 278 628 906 2 2 553 • issuing of summonses Other 48 14 860 14 908 46 8 41 12 939 12 980 41 19 • pursuing the attachment of assets Local small power users 203 2 597 2 800 117 48 177 2 485 2 662 90 72 The municipal debt relief arrangement, as announced by the Minister of Finance in February 2023, has the objective to reduce the challenge of arrear municipal debt. The key elements relating to the debt relief, as published by National Treasury in the MFMA Circular No. 124, include: Soweto 13 – 13 1 1 13 – 13 1 – • municipalities can apply to National Treasury to have their arrear Eskom debt at 31 March 2023 written off over a three-year period Other 190 2 597 2 787 116 47 164 2 485 2 649 89 72 subject to complying with set conditions, including but not limited to the continuous payment of their current account • the conditions have to be met on a consecutive 12-month basis to qualify for a one-third write off of the arrear debt 552 18 172 18 724 163 3 194 496 16 058 16 554 133 2 644 • municipalities have to first pay Eskom before any other creditors on a monthly basis • the cut-off date to apply to National Treasury has been extended to 31 October 2023 Additional information • Eskom has to stop any legal proceedings and terminate existing payment arrangements for approved municipalities Trade receivables • interest will be permanently suppressed for approved municipalities Credit risk attributable to trade receivables is assessed taking into account the following counterparty characteristics: • geographic location of the customer (both internationally and within South Africa) The possible impact of the debt relief arrangement is not quantifiable because of the uncertainty relating to a qualifying municipality’s • size of demand (large or small power user) potential to be approved by National Treasury for the debt relief and its ability to comply with the requisite conditions. • receivable ageing profile The debt relief has a potential impact on R58 billion (inclusive of VAT) of arrear municipal debt at 31 March 2023. There is no further • security held (deposits and guarantees) financial impact on R55 billion of this amount as it relates to municipalities accounted for on the cash basis in terms of IFRS 15. Additional • payment history impairment of R824 million was raised on the remaining arrear debt balance of R3.6 billion. Eskom can also recover VAT of R6 billion that was paid over when an invoice was raised for sales from the South African Revenue Services when the related arrear debt is written off. A large number of residential customers are on a prepaid basis thereby eliminating credit risk relating to these customers. Eskom has well-established credit control measures for conventional customers that include: The debt relief arrangement can possibly result in increased payment levels from these municipalities. There is the potential that there will • increased security deposits and guarantees no longer be a need to account for some of these municipalities on a cash basis in the future. The probability of default when assessing for impairment can also decrease. • conversion of customers to prepayment • early identification of and engagement with non-paying customers The reconciliation and monitoring of the first five municipalities that were approved for the debt relief arrangement commenced on • negotiation of mutually acceptable payment arrangements 1 June 2023. A total of 28 municipalities have been approved by National Treasury by 30 September 2023. • disconnection of supply In addition, the National Treasury circular also provided for the following key aspects applicable to all municipalities: • use of debt collectors • Payment terms increased from 15 to 30 days. • taking legal measures such as issuing letters of demand and pursuing adverse listing of defaulting customers • The interest rate charged on arrear receivables reduced from prime plus 5 to prime plus 2.5 percent effective from October 2023. All billed customers must provide security and this requirement can only be deviated from based on sound business decisions. The The increase in payment terms will result in a negative cashflow impact for the first month after the implementation date of 28 August granting of deviations for a customer must be approved according to the revenue security policy. 2023. The future impact of charging a lower interest rate and suppressing interest is not expected to be material as most of the interest is recorded on a cash basis and therefore not recognised. Progress on the collection process is regularly reviewed. Strict procedures are in place governing the writeoff of trade receivables. Where balances are assessed to not be collectable (for example deceased customers and businesses in liquidation after completion of There were no other material changes to the expected credit loss percentages compared to the prior year. business rescue), writeoffs are considered. Outstanding amounts after recovery from the security held are written off once the relevant governance and legal collection processes have been followed. The process of recovery continues unless it is confirmed that there is no Local small power users prospect of recovery or the costs of such action will exceed the benefits to be derived. Local small power users comprise local customers that have a supply of 100kVA or less in size. Payment terms for small power customers is 30 days. The main classes of trade receivables are: New customers are required to provide security equivalent to between one and three months’ consumption at the commencement of International customers the supply agreement. The level of security is reviewed if a customer defaults on their payment obligation or requires additional electricity Electricity supply agreements are entered into with key international customers who comprise utility companies, governments of supply capacity. In these instances, additional security is required to cover between one and three months of recent consumption before neighbouring countries and sundry large power users. Their payment terms are between 10 and 45 days. Impairment is assessed based supply will commence. All new customers will preferably be on prepayment terms. on the country-specific risk. The residential revenue management strategy continues to be implemented with a focus on converting customers to prepaid. International customers are not required to provide upfront security. If they default, new payment arrangements are negotiated, or supply There were no material changes to the expected credit loss percentages for small power users compared to the prior year. is curtailed. Certain international customers may be required to pay upfront when their credit risk profile has changed. Other receivables The expected credit loss percentages improved compared to the prior year as a dispute relating to stage 3 receivables has been resolved Other receivables comprise of various sundry receivables. There are no significant balances with specific repayment terms. No security is in 2023. held in respect of these balances and no interest has been charged on overdue balances. There were no material changes to the expected credit loss percentages compared to the prior year. 60 61 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 5. Financial risk management continued The following are monitored and reported on: 5.1 Credit risk continued • aggregate credit risk exposure 5.1.2 Derivatives held for risk management and cash and cash equivalents • limits utilisation including any breaches Impairment analysis • hold-limit exceptions • risk profile changes 2023 2022 • risk concentrations Not Subject to Total Not Subject to Total subject to impairment subject to impairment Where the credit risk of a particular counterparty has increased, a reassessment of the valuation of the instrument is made. In making this impairment impairment assessment, the counterparty is assessed for the following factors: Stage 1 Stage 1 • significance of financial difficulty Rm Rm Rm Rm Rm Rm • probability of bankruptcy Group • probability of breach of contract Derivatives held for risk management 26 992 – 26 992 8 509 – 8 509 BBB- to AAA 11 042 – 11 042 3 493 – 3 493 5.1.3 Insurance investments B- to BB+ 15 950 – 15 950 5 016 – 5 016 Impairment analysis Cash and cash equivalents – 7 516 7 516 – 15 885 15 885 Group BBB- to AAA – 2 039 2 039 – 423 423 B- to BB+ – 5 202 5 202 – 15 459 15 459 Not Subject to impairment Total Unrated – 275 275 – 3 3 subject to Stage 1 Company impairment Derivatives held for risk management 26 992 – 26 992 8 510 – 8 510 Gross Gross Allowance Carrying Gross Allowance Carrying for value for value BBB- to AAA 11 042 – 11 042 3 494 – 3 494 impairment impairment B- to BB+ 15 950 – 15 950 5 016 – 5 016 Rm Rm Rm Rm Rm Rm Rm Cash and cash equivalents – 5 832 5 832 – 14 218 14 218 2023 BBB- to AAA – 661 661 – 424 424 B- to BB+ – 15 153 (20) 15 133 15 153 (20) 15 133 B- to BB+ – 5 168 5 168 – 13 791 13 791 Not subject to credit risk 1 514 – – – 1 514 – 1 514 Unrated – 3 3 – 3 3 1 514 15 153 (20) 15 133 16 667 (20) 16 647 The gross values of cash and cash equivalents approximate its carrying value as the impairments calculated are immaterial. 2022 B- to BB+ – 15 183 (10) 15 173 15 183 (10) 15 173 The asset and liability committee (Alco) manages credit risk arising from the treasury department’s activities in the financial markets with Not subject to credit risk 2 145 – – – 2 145 – 2 145 the objective of maximising the rate of return on investments while not exceeding approved levels of credit risk exposure. It is chaired by the chief financial officer and reports on a quarterly basis to Exco and the audit and risk committee. 2 145 15 183 (10) 15 173 17 328 (10) 17 318 The committee’s terms of reference are maintained and approved by the chief financial officer. They are aligned to the Exco credit risk There was a slight increase in the expected credit loss percentage because of downgraded counterparty credit ratings in 2023. governance standards and are supplemented by appropriate policies and procedures. Escap invests in listed shares and negotiable certificates of deposit to satisfy its capital adequacy requirements in line with insurance regulations Specific activities undertaken by the Alco include the following: in South Africa. The listed shares do not expose the group to credit risk. The objective is to invest negotiable certificates of deposit in banks • assessing the credit quality of counterparties and approving credit limits based on this assessment with an investment-grade credit rating. The highest available investment grade is used where investment-grade ratings are not available. • monitoring the adherence to credit limits 5.1.4 Finance lease receivables • approving methodologies for the management of counterparty exposure Impairment analysis • ensuring that, where applicable, transactions with counterparties are supported by trading agreements • facilitating and managing the issuing of financial guarantees by the group Group and company To assist the Alco to discharge its mandate, the portfolio assessment section within the treasury function provides it with regular feedback Stage 1 Stage 3 Total Gross Allowance Carrying Gross Allowance Carrying Gross Allowance Carrying on all treasury credit risk-related matters. for value for value for value The management of credit risk is governed by the following policies: impairment impairment impairment • trading in financial instruments is only conducted with selected counterparties after credit limits have been authorised Rm Rm Rm Rm Rm Rm Rm Rm Rm • financial institutions and/or counterparties with an independent minimum rating of A1 are preferred for investments. If there are no 2023 independent ratings, the credit quality of the counterparty is assessed, taking into account its financial position, past experience and B- to BB+ 253 (4) 249 1 (1) – 254 (5) 249 other factors 2022 • all exposures are based on mark-to-market values. Transaction or close-out netting takes place in accordance with the terms and B- to BB+ 296 (3) 293 2 (2) – 298 (5) 293 conditions of the underlying trading agreements • minimum credit-rating requirements for financial institutions are maintained to assess the risk categories by rating class and to ascertain There were no material changes to the expected credit loss percentages compared to the prior year. the probability of default inherent in each rating class • approved concentration risk parameters and collateral management procedures are in place. Concentration of credit risk is managed The supply of electricity to customers may be in the form of either a standard or premium power supply. A standard power supply is by setting credit risk limits at a counterparty-specific level. Concentration credit risk limits are used as second tier limits in relation to the least life-cycle cost technically acceptable solution as defined in the South African Grid Code and the Distribution Network Code counterparty credit limits. Counterparty-specific exposure is monitored against a set concentration of credit risk limits in relation to whereas with a premium supply the customer’s connection requirement exceeds the specifications of a standard supply. This is achieved the total credit risk exposure to all counterparties through the installation of premium supply equipment for which the customer is required to pay a connection charge. Connection charges for premium supply contracts were repayable on a monthly basis over a maximum period of 25 years. This payment option is no longer Risk is measured by determining a default probability per counterparty using default probabilities assessed by rating agencies for various available for new premium supplies as the connection charges are payable upfront. types of credit ratings. These default probabilities are then applied to the market value of the investment placed to determine the capital at risk. The standard payment terms for trade receivables are also applied to the premium supply equipment connection charge customers. The credit risk exposure resulting from premium supply contracts is managed by monitoring payment levels of the customer’s trade receivable The treasury department’s policies and practices are designed to preserve the independence and integrity of decision-making and ensure balance. There were no significant overdue or distressed balances relating to finance lease receivables in the current or prior financial credit risks are accurately assessed, properly approved, continually monitored and actively managed. year. Security in the form of bank guarantees is required from customers before the asset is constructed and is in place for a maximum period of 14 years to cover irrecoverable costs in the event of early termination of the supply contract. In addition, the premium supply equipment serves as security for the outstanding finance lease receivable balance. 62 63 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 5. Financial risk management continued Other loans 5.1 Credit risk continued The Alco manages credit risk arising from loans to subsidiaries with the objective of reducing the costs on the group’s consolidated liability. Credit risk on loans by Eskom to EFC are mitigated through the same means that EFC mitigates its loans to employees. 5.1.5 Loans receivable Impairment analysis There were no material changes to the expected credit loss percentages compared to the prior year. Stage 1 Stage 2 Stage 3 Total 5.2 Market risk Gross Allow- Carrying Gross Allow- Carrying Gross Allow- Carrying Gross Allow- Carrying A significant part of market risk encountered by the group arises from financial instruments that are managed centrally within the group’s ance for value ance for value ance for value ance for value treasury department. impair- impair- impair- impair- ment ment ment ment The objective of the group’s market risk management framework is to protect and enhance the statement of financial position and profit or Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm loss by managing and controlling market risk exposures and to optimise the funding of business operations and facilitate capital expansion. Group The basis for calculating risk and sensitivity measures is consistent with the prior year. Sensitivity analysis assumes that only the input being 2023 analysed changes with all other variables remaining constant. Home loans 7 173 (5) 7 168 330 (21) 309 324 (36) 288 7 827 (62) 7 765 B- to BB+ 7 173 (5) 7 168 330 (21) 309 – – – 7 503 (26) 7 477 Financial instruments mainly managed by the treasury department Below B- – – – – – – 324 (36) 288 324 (36) 288 The treasury department is responsible for managing market risk within the risk management framework approved by Exco and the board. The overall authority for the management of market risks within the treasury department is vested in the Alco. Measurement and Other loans 300 (1) 299 6 (1) 5 2 (1) 1 308 (3) 305 reporting occurs on a daily and/or monthly basis and is performed by an independent section within the treasury department. Financial B- to BB+ 300 (1) 299 6 (1) 5 – – – 306 (2) 304 derivatives are used to manage market risk. Below B- – – – – – – 2 (1) 1 2 (1) 1 Financial instruments managed by various divisions and subsidiaries 7 473 (6) 7 467 336 (22) 314 326 (37) 289 8 135 (65) 8 070 Market risk arises mainly from changes in foreign exchange rates and, to a limited extent, commodity and equity prices. The divisions and subsidiaries are responsible for identifying the exposure arising from these risks. They liaise with the centralised treasury department to 2022 hedge (economic and cash flow hedges) these exposures appropriately on their behalf. Home loans 7 435 (8) 7 427 235 (3) 232 285 (44) 241 7 955 (55) 7 900 B- to BB+ 7 435 (8) 7 427 235 (3) 232 – – – 7 670 (11) 7 659 5.2.1 Currency risk Below B- – – – – – – 285 (44) 241 285 (44) 241 Currency risk arises primarily from purchasing imported goods and services directly from overseas or indirectly via local suppliers, foreign sales and foreign borrowings. The group is exposed to foreign exchange risk arising from future commercial transactions and recognised Other loans 250 (2) 248 1 – 1 1 (1) – 252 (3) 249 assets and liabilities that are denominated in a currency other than the functional currency of the group. All transactions in excess of B- to BB+ 250 (2) 248 1 – 1 – – – 251 (2) 249 R150 000 are hedged (ie economic or cash flow hedges). Currency exposure is identified by the business and hedged and managed by the Below B- – – – – – – 1 (1) – 1 (1) – central treasury department. Hedging instruments consist of cross-currency swaps and forward exchange contracts. Most of the forward exchange contracts have a maturity of less than one year from the reporting date and are rolled over at maturity when necessary. Hedging 7 685 (10) 7 675 236 (3) 233 286 (45) 241 8 207 (58) 8 149 instruments are entered into once the exposure is firm and ascertainable. Company EUR USD GBP JPY SEK 2023 2023 Other loans Foreign currency exposure (notional amounts in millions per currency) B- to BB+ 5 681 (7) 5 674 – – – – – – 5 681 (7) 5 674 Group 2022 Liabilities Other loans Debt securities and borrowings (1 261) (8 414) – – – B- to BB+ 5 657 (7) 5 650 – – – – – – 5 657 (7) 5 650 Trade and other payables (34) (15) (1) – (24) Gross statement of financial position exposure (1 295) (8 429) (1) – (24) Home loans Estimated forecast purchases1 (236) (337) (9) (143) (336) EFC provides loan facilities mainly for the purchase of immoveable property to the employees of the group. Credit risk policies are in place requiring staff to meet various criteria on valuation, affordability and credit history in compliance with the National Credit Act before Gross exposure (1 531) (8 766) (10) (143) (360) they are granted home loans. Derivatives held for risk management 2 1 527 8 761 10 143 355 Net exposure (4) (5) – – (5) Home loans are extended up to a maximum of 112% of the market value of the property being purchased to cater for bond and transfer costs. Credit risk exposure is mitigated by having: Company • recourse to the value of the underlying properties through mortgage contracts Liabilities • monthly instalments deducted from the salaries of employees Debt securities and borrowings (1 261) (8 414) – – – Trade and other payables (33) (15) (1) – (24) Credit risk is re-assessed when an employee leaves the service of the group. Ex-employees may make arrangements for a monthly debit Gross statement of financial position exposure (1 294) (8 429) (1) – (24) order or over-the-counter deposits to settle monthly instalments. Estimated forecast purchases1 (236) (337) (9) (143) (336) EFC closely monitors properties held as collateral where the related loans are considered to be credit-impaired in order to mitigate Gross exposure (1 530) (8 766) (10) (143) (360) potential credit losses. Derivatives held for risk management 2 1 526 8 761 10 143 355 Group Net exposure (4) (5) – – (5) Unit 2023 2022 Mid-spot rate for one unit of the currency to the rand 19.30 17.72 21.95 0.13 1.71 Carrying value of credit-impaired balances Rm 288 241 Fair value of properties held as security for credit-impaired loans Rm 179 182 Weighted average loan to value ratio % 85 85 Average repayment period1 years 17 17 Eskom guarantees all losses EFC incurs where the loan granted by EFC exceeded 80% of the market value of the property at the time of origination. Refer to note 44 for details regarding this guarantee. 1. Represents future purchases contracted for. 1. The 2022 average repayment period has been restated as it was incorrectly disclosed as 25 years. 2. Includes notional value and accrued interest. 64 65 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 5. Financial risk management continued Commodity exposure 5.2 Market risk continued Group and company 5.2.1 Currency risk continued Estimated Derivatives Net EUR USD GBP JPY SEK forecast held for risk exposure purchases management 2022 Unit (notional) Foreign currency exposure (notional amounts in millions per currency) Group 2023 Liabilities Low sulphur gas oil kilo litres 85 000 (85 000) – Debt securities and borrowings (1 588) (8 234) – (231) – Bunker fuel oil tons 115 000 (115 000) – Trade and other payables (28) (4) (1) – (10) Copper tons 135 (135) – Gross statement of financial position exposure (1 616) (8 238) (1) (231) (10) Estimated forecast purchases1 (302) (179) (6) (143) (284) Sensitivity analysis The group is exposed mainly to changes in the price of brent crude oil and USD exchange rates. The sensitivity analysis has been Gross exposure (1 918) (8 417) (7) (374) (294) performed assuming that all other variables remain constant and the possible impact on profit or loss is: Derivatives held for risk management 2 1 918 8 419 7 374 294 Group and company Net exposure – 2 – – – increase decrease Company Input Unit Change in assumption Rm Rm Liabilities Debt securities and borrowings (1 588) (8 234) – (231) – 2023 Trade and other payables (27) (4) (1) – (10) Rand/USD Rand per USD 10% relative 143 (143) Low sulphur gas oil price USD per metric ton 10% relative 69 (69) Gross statement of financial position exposure (1 615) (8 238) (1) (231) (10) Bunker fuel oil price USD per ton 10% relative 72 (72) Estimated forecast purchases1 (302) (179) (6) (143) (284) Copper price USD per ton 10% relative 2 (2) Gross exposure (1 917) (8 417) (7) (374) (294) Derivatives held for risk management 2 1 917 8 419 7 374 294 5.2.3 Interest rate risk Net exposure – 2 – – – Interest rate risk is the risk that the group’s financial position may be adversely affected as a result of changes in interest rate levels, yield curves and spreads. Mid-spot rate for one unit of the currency to the rand 16.19 14.59 19.18 0.12 1.56 Debt securities and borrowings and derivatives held for risk management at variable rates expose the group to cash flow risk and those Sensitivity analysis at fixed rates expose the group to fair value risk. The group’s policy is to restrict the maximum effective portion of the external debt (excluding the trading portfolio which is managed within the constraints of the risk management framework) exposed to an interest rate Group and company reset within the next 12-month period to 40%. 2023 2022 The group’s quantitative exposure to interest rate risk is disclosed in note 25. 1% 1% 1% 1% increase decrease increase decrease Sensitivity analysis Rm Rm Rm Rm The group analyses its interest rate exposure on a dynamic basis by conducting a sensitivity analysis. This involves determining the impact on profit or loss of defined interest rate shifts. The same interest rate shift is used for each simulation for all currencies. Profit/(loss) before tax Rand/EUR exposure 32 (32) 36 (36) The sensitivity analysis for interest rate risk excludes finance costs capitalised. Rand/USD exposure 156 (156) 123 (123) Rand/other currency 22 (22) 1 (1) The simulation is performed on a monthly basis to verify that the maximum loss potential is within the limit set by management. The results Equity of the simulation are included in the table below: Rand/EUR exposure 24 (24) 25 (25) Group Company Rand/USD exposure 10 (10) 12 (12) Rand/other currency 5 (5) 6 (6) 2023 2022 2023 2022 +100 -100 +100 -100 +100 -100 +100 -100 5.2.2 Commodity risk basis points basis points basis points basis points basis points basis points basis points basis points Rm Rm Rm Rm Rm Rm Rm Rm The group is exposed to commodity risk where commodities are either used directly (liquid fuels) or indirectly as a component of plant, Profit/(loss) before tax equipment or inventory (eg aluminium, copper or steel). Rand interest rates 680 (713) 1 916 (2 016) 680 (713) 1 908 (2 008) The exposures are hedged economically by means of commodity forwards. Economic hedging is applied where it is practical (a relevant EUR interest rates (150) 42 (294) 265 (149) 42 (294) 265 hedging instrument exists) based on the optimal economic solution and in compliance with the SARB requirements. USD interest rates (1 008) 1 046 (2 144) 2 263 (1 008) 1 046 (2 144) 2 263 Equity Commodities used directly Rand interest rates 2 546 (2 679) 1 840 (1 949) 2 546 (2 679) 1 840 (1 949) The group is exposed to price risk on diesel (low sulphur gas oil) used in the generation of electricity at the OCGT power stations and EUR interest rates (464) 488 (359) 382 (432) 456 (319) 342 on fuel oil (bunker fuel oil) used to manage the temperature of heat generating components at the coal fired power stations. Prices are USD interest rates (3 164) 3 350 (1 786) 1 908 (3 164) 3 350 (1 786) 1 908 determined by the DMRE based on the price of brent crude oil, refining margins and USD exchange rates. Commodity forwards were entered into from July 2022 to hedge the group against these exposures. Commodities used indirectly The group had a relatively small exposure to commodities that formed a part of plant, equipment or inventory, mainly copper. 1. Represents future purchases contracted for. 2. Includes notional value and accrued interest. 66 67 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 5. Financial risk management continued 5.3.2 Primary sources of funding and unused facilities 5.2 Market risk continued The primary sources to meet Eskom's liquidity requirements are cash generated from operations, cash inflows from maturing financial assets purchased, funds committed by government through the debt relief arrangement as well as signed development funding institution 5.2.3 Interest rate risk continued facilities. No new borrowings will be allowed during the period of the debt relief, unless approved by the Minister of Finance. Eskom is Fixed and floating rate debt allowed to drawdown on existing facilities in place at 31 March 2023. All figures are quoted in notional amounts. Group and company ZAR EUR USD 2023 2022 2023 2022 2023 2022 2023 2022 fixed floating fixed floating m m m m m m % % % % Group and company Proportion of fixed versus floating rate debt at 31 March 54 46 62 38 Facilities available Export credit agencies 5.2.4 Equity price risk Kreditanstalt für Wiederaufbau – Hermes – – – 20 – – Equity price risk arises from investments listed on the Johannesburg Stock Exchange. Changes in the fair value of equity securities held by the group will fluctuate because of changes in market prices caused by factors specific to the individual equity issuer or factors affecting Development financing institutions 2 930 3 446 – – 928 1 269 all similar equity securities traded on the market. African Development Bank 2 095 2 095 – – 25 25 The investment policy is approved by the Escap board and monitored by the Escap audit and risk committee. Exposure to market risk is Clean technology fund – African Development Bank – – – – 58 58 limited through diversification and by applying strict investment criteria. Clean technology fund – World Bank – – – – 136 215 New Development Bank – – – – 78 140 Carrying values of investments per sector Kreditanstalt für Wiederaufbau – – – – 94 94 Agence Française de Développement 835 1 351 – – – – Group China Development Bank – – – – 537 737 2023 2022 portfolio portfolio 2 930 3 446 – 20 928 1 269 Rm % Rm % 2 930 3 446 – 324 16 444 18 515 Facilities available (Rand equivalent) Banks, financial services and insurance 511 34 746 35 Basic materials and resources 334 22 554 26 Additional funding of R16 billion was concluded on 31 March 2023 as part of the 2023 borrowing programme where the cash funds were Consumer goods and services 546 36 677 32 received on 4 April 2023. Refer to note 47. Other 123 8 168 7 ZAR EUR USD 1 514 100 2 145 100 2023 2022 2023 2022 2023 2022 m m m m m m A 1% increase or decrease in share prices would have increased/decreased profit or loss before tax by R15 million (2022: R21 million). Group and company 5.3 Liquidity risk Funds received during the year Liquidity risk can arise from mismatches in the timing of cash flows from revenue with capital and operational outflows. Funding risk arises Export credit agencies when the necessary liquidity to fund illiquid asset positions, such as building new electricity capacity, cannot be obtained at the expected Kreditanstalt für Wiederaufbau – Hermes – – 4 18 – – terms and when required. Development financing institutions 516 626 – 12 341 359 The objective of the group’s liquidity and funding management is to ensure that all foreseeable operational, capital expansion and loan World Bank1 – – – – – 18 commitment expenditure can be met under both normal and stressed conditions. The group has adopted an overall statement of financial African Development Bank 2 – 536 – 12 – – position approach, which consolidates all sources and uses of liquidity, while aiming to maintain a balance between liquidity, profitability Clean technology fund – World Bank 3 – – – – 79 – and interest rate considerations. New Development Bank4 – – – – 62 15 The management of group liquidity and funding risk is centralised in the treasury department in accordance with practices and limits set Kreditanstalt für Wiederaufbau5 – – – – – 6 by Exco and the board. The group’s liquidity and funding management process includes: Agence Française de Développement6 516 90 – – – – • projecting cash flows and considering the cash required by the group and optimising the short-term liquidity as well as the long-term funding China Development Bank7 – – – – 200 320 • managing the concentration and profile of debt maturities 516 626 4 30 341 359 • maintaining liquidity and funding contingency plans Funds received during the year (Rand equivalent) 516 626 77 486 6 043 5 238 Eskom has an established corporate governance structure and process for managing the risks regarding guarantees and contingent liabilities. All significant guarantees issued by Eskom are approved by the board and are managed on an ongoing basis by the treasury department and by Exco and audit and risk committee. Refer to note 44. 5.3.1 Key liquidity indicators Group Company Restated Restated Unit 2023 2022 2023 2022 Weighted average term to maturity of debt securities and borrowings years 6.17 6.66 6.18 6.60 Working capital ratio 0.89 0.90 0.90 0.89 Cash interest cover ratio 1.29 1.69 1.27 1.63 Net debt service cover ratio 0.58 0.76 0.56 0.71 Liquid assets Rm 7 516 15 885 5 832 14 218 1. Funds received were reimbursements on payments made by Eskom to various suppliers for goods and services related to the Medupi power station and Majuba rail projects. Management has set a minimum weighted average term to maturity for debt securities and borrowings of five years. The term limits are 2. Funds received were reimbursements on payments made by Eskom to various suppliers for goods and services supplied for the Medupi power station boilers and turbines as well as transmission projects. independently monitored and reported to the Alco on a monthly basis and the investment and finance committee on a quarterly basis. 3. Funds received were for the battery energy storage system project. The cash interest cover and debt service cover ratios measure the ability to fund debt costs via cash from operations. Management has 4. Funds received were for the renewable energy integration and transmission augmentation project. targeted 3.5 for cash interest cover and 1.5 for net debt service cover. 5. Funds received were for the renewable grid integration and strengthening programme. 6. Funds received were for phase 2 of the Namaqualand strengthening project. Liquid assets are investments identified as having the potential to be quickly converted into cash. These consist of cash and cash equivalents. 7. Funds received were for the Medupi and Kusile power stations. 68 69 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 5. Financial risk management continued – Legal separation of the transmission division: The legal separation of Eskom is an event that requires advance approval from lenders. 5.3 Liquidity risk continued Eskom is engaging with lenders in this regard and has issued requests for consent from lenders impacted by the unbundling process. This process is ongoing. 5.3.2 Primary sources of funding and unused facilities continued • Suspension and cancellation events Government guarantees Certain events such as audit qualifications, misprocurement or funds not used in line with the loan conditions could trigger suspension 2023 2022 and/or cancellation of undisbursed amounts if the event that has triggered the suspension is not cured or remedied within a specified Domestic General Total Domestic General Total period (usually 60 days). Eskom proactively engaged with lenders to ensure that all possible suspension and/or cancellation events were multi-term multi-term remedied in time. Independent external reviews were performed on certain facilities to ensure funds were utilised in compliance with note note the loan conditions. All disbursements have been received on all facilities. programme programme • Representation and warranties Rm Rm Rm Rm Rm Rm Eskom made certain representations about its status and the information provided to lenders by signing the loan agreement. Making Group and company false and/or misleading representation and warranties is an event of default in all the agreements. Opening balance 7 912 27 788 35 700 5 225 40 244 45 469 All possible events and covenant breaches have been successfully remedied before default and there were no loan defaults or breaches Guarantee granted 152 000 198 000 350 000 145 000 205 000 350 000 during the year and up to the date of approval of the financial statements. There were also no breaches that resulted in the early Accumulated amounts used (144 088) (170 212) (314 300) (139 775) (164 756) (304 531) repayment of a facility at the reporting date. Facilities withdrawn – – – – 2 002 2 002 5.3.3 Contractual cash flows Facilities repaid 21 664 – 21 664 2 020 14 306 16 326 The contractual undiscounted cash flows of the group’s financial assets and liabilities are indicated on the basis of their earliest possible Facilities raised (23 344) (25 597) (48 941) (6 333) (21 764) (28 097) contractual maturity. Guarantee swap – – – 7 000 (7 000) – Closing balance 6 232 2 191 8 423 7 912 27 788 35 700 The cash flows for derivatives held for risk management are presented on a net basis in line with the classification in the statement of financial position. Contractual cash flows are a function of forward exchange rates and forward interest rates and are a point-in-time Guarantee granted 152 000 198 000 350 000 152 000 198 000 350 000 calculation that are impacted by market conditions at that time. Accumulated amounts used (145 768) (195 809) (341 577) (144 088) (170 212) (314 300) The contractual cash flows of financial trading assets and liabilities are disclosed based on their contractual maturities. Some of these instruments are held for trading and may be sold or settled prior to contractual maturity. The facilities raised includes approved government guarantees of R10 billion relating to a loan agreement (part of the 2023 borrowing programme) that was finalised after 31 March 2023 for the repurposing of the Komati power station. Only cash flows relating to financial instruments and financial guarantees have been presented and do not include future cash flows expected from the normal course of business and related commodity-linked pricing agreements. The availability of the government guarantee facility of R350 billion expired on 31 March 2023. Existing guarantees issued will remain in place until settlement of the guaranteed debt. Cash flows Nominal 0–3 4–12 1–5 >5 Loan covenants inflow/outflow months months years years There are various loan covenants, both of a financial and non-financial nature, attached to the loan facilities. Rm Rm Rm Rm Rm The covenants are closely monitored for compliance. Eskom proactively notifies and engages with lenders should an event of default 2023 be anticipated to remedy the possible event before a default is triggered, including obtaining an extension of a submission deadline or a Group waiver for a potential breach. Financial assets Loans receivable 18 319 186 416 5 267 12 450 The covenants generally fall into the following categories: Derivatives held for risk management 39 185 765 7 877 7 481 23 062 • Events of default Finance lease receivables 354 15 45 219 75 There are various events, both of a financial and non-financial nature, that can trigger a default. Eskom has to on occurrence of these Trade and other receivables 31 855 29 235 1 278 1 342 – events, without delay, notify the relevant lender and all other lenders. If an event is not cured or remedied within specified periods, it Insurance investments 16 667 6 451 9 194 1 022 – could trigger acceleration of outstanding amounts (immediately due and payable upon notice) and cancellation of undisbursed funds. Cash and cash equivalents 7 516 7 516 – – – Acceleration will lead to re-calling of government guarantees and event of default of government debt. Cross default to other loans may be triggered in most instances. 113 896 44 168 18 810 15 331 35 587 Potential events of default and mitigating measures include: Financial liabilities – Maintain financial ratios: Key lenders require that certain financial ratios be maintained at specified levels (debt service cover ratio Debt securities and borrowings 745 939 7 567 71 059 234 586 432 7271 between 0.9 to 1.3 and a minimum EBITDA margin of 25%). Potential non-compliance is mitigated through financial action plans as Derivatives held for risk management 3 609 1 059 3 750 273 (1 473) detailed in the loan agreements. These include sharing of relevant financial information with lenders, such as the performance on Lease liabilities 13 402 480 1 379 8 527 3 016 financial measures quarterly and the Eskom Corporate Plan annually, as well as submission of annual compliance certificates. Eskom Trade and other payables 42 427 34 684 7 184 559 – maintained compliance to the relevant loan conditions through continuous interaction during the year. 805 377 43 790 83 372 243 945 434 270 – Annual financial statements submitted within specified timelines: Eskom proactively engaged with lenders to obtain extensions and waivers for late submission. Eskom received the necessary extensions and waivers timeously for the year and thereby ensured Company compliance with the loan conditions. Financial assets Loans receivable 5 803 2 724 3 079 – – – Unqualified audit opinion of the financial statements and no reportable irregularities: Eskom proactively engaged with lenders Derivatives held for risk management 39 185 765 7 877 7 481 23 062 regarding the details and potential impact of a qualified audit opinion and reportable irregularities prior to the release of the financial Finance lease receivables 354 15 45 219 75 statements. The relevant waivers were obtained timeously and any potential default was therefore successfully remedied. Trade and other receivables 35 371 30 444 2 631 2 296 – – Information submitted within specified timelines: Information covenants include submission of project progress reports, compliance Cash and cash equivalents 5 832 5 832 – – – certificates and environmental reports. Any anticipated delays in submitting the required information are communicated upfront to lenders. The financial position, operational performance, progress of the legal separation and PFMA compliance of Eskom are 86 545 39 780 13 632 9 996 23 137 discussed during the quarterly engagements with lenders. Financial liabilities • Prepayment events Debt securities and borrowings 751 569 8 004 71 067 239 788 432 7101 Certain events could trigger the prepayment of outstanding loan balances prior to the original maturity date, usually within 30 days of Derivatives held for risk management 3 610 1 059 3 751 273 (1 473) notice. Potential prepayment events and mitigating measures include: Lease liabilities 13 315 444 1 329 8 527 3 015 – Environmental compliance: Certain obligations in the loan agreements could be breached with emissions above allowed limits when the Trade and other payables 44 473 37 067 7 168 238 – three units at Kusile power station that were damaged after the flue-gas duct failure at unit 1 on 22 October 2022 become operational Financial guarantees 2 2 – – – in November 2023 without using the flue-gas desulphurisation plant. Eskom obtained approval from the Department of Forestry, 812 969 46 576 83 315 248 826 434 252 Fisheries and the Environment, as a mitigation measure, to postpone compliance with emission standards. Refer note 47. Eskom is engaging with lenders in advance regarding the mitigation measures, thereby preventing any potential breach of loan conditions. 1. The maturity profile of undiscounted contractual payments of debt securities and borrowings due after five years comprise of R230 million (2022: R227 million) between years five and 10 and R203 million (2022: R156 million) beyond year 10. 70 71 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 5. Financial risk management continued 6. Accounting classification and fair value 5.3 Liquidity risk continued 6.1 Accounting classification 5.3.3 Contractual cash flows continued 2023 2022 Cash flows Fair Amor- Other Total Fair Amor- Other Total Nominal 0–3 4–12 1–5 >5 value tised assets value tised assets inflow/ months months years years through cost and through cost and outflow profit liabilities1 profit liabilities1 Rm Rm Rm Rm Rm or loss or loss Note Rm Rm Rm Rm Rm Rm Rm Rm 2022 Group Group Financial assets Financial assets Loans receivable 15 061 227 675 3 293 10 866 Loans receivable 15 – 8 070 – 8 070 – 8 149 – 8 149 Derivatives held for risk management 9 260 (52) (98) 6 667 2 743 Home loans – 7 765 – 7 765 – 7 900 – 7 900 Finance lease receivables 423 17 51 251 104 Other loans – 305 – 305 – 249 – 249 Trade and other receivables 27 805 25 365 1 581 859 – Insurance investments 17 328 6 129 11 199 – – Embedded derivatives 16 823 – – 823 939 – – 939 Cash and cash equivalents 15 885 15 885 – – – Derivatives held for risk management 17 3 890 – 23 102 26 992 4 710 – 3 799 8 509 85 762 47 571 13 408 11 070 13 713 Foreign exchange contracts 943 – 145 1 088 24 – 19 43 Financial liabilities Cross-currency swaps 2 661 – 22 957 25 618 4 494 – 3 780 8 274 Debt securities and borrowings 670 309 7 195 64 676 215 363 383 0751 Commodity forwards 1 – – 1 – – – – Derivatives held for risk management 9 584 2 745 6 922 13 068 (13 151) Credit default swaps 5 – – 5 5 – – 5 Lease liabilities 15 140 455 1 356 8 581 4 748 Inflation-linked swaps 280 – – 280 187 – – 187 Trade and other payables 36 576 27 832 7 782 962 – Finance lease receivables 18 – – 249 249 – – 293 293 Financial trading liabilities 2 2 – – – Trade and other receivables 20 – 26 856 – 26 856 – 24 385 – 24 385 731 611 38 229 80 736 237 974 374 672 Insurance investments 21 1 514 15 133 – 16 647 2 145 15 173 – 17 318 Company Negotiable certificates of deposit – 14 115 – 14 115 – 15 173 – 15 173 Financial assets Floating rate notes – 1 018 – 1 018 – – – – Loans receivable 5 730 2 666 3 064 – – Listed shares 1 514 – – 1 514 2 145 – – 2 145 Derivatives held for risk management 9 261 (52) (97) 6 667 2 743 Finance lease receivables 423 17 51 251 104 Cash and cash equivalents 22 – 7 516 – 7 516 – 15 885 – 15 885 Trade and other receivables 30 177 27 785 1 540 852 – Bank balances – 7 514 – 7 514 – 7 877 – 7 877 Cash and cash equivalents 14 218 14 218 – – – Fixed deposits – 2 – 2 – 8 008 – 8 008 59 809 44 634 4 558 7 770 2 847 6 227 57 575 23 351 87 153 7 794 63 592 4 092 75 478 Financial liabilities Debt securities and borrowings 671 924 7 934 66 738 214 697 382 555 1 Financial liabilities Derivatives held for risk management 9 584 2 745 6 922 13 068 (13 151) Debt securities and borrowings 25 – 423 929 – 423 929 – 396 294 – 396 294 Lease liabilities 15 138 456 1 355 8 580 4 747 Eskom bonds – 160 218 – 160 218 – 161 635 – 161 635 Trade and other payables 38 711 29 989 7 760 962 – Commercial paper – 896 – 896 – 1 058 – 1 058 Financial trading liabilities 2 2 – – – Eurorand zero coupon bonds – 7 128 – 7 128 – 6 318 – 6 318 Financial guarantees 104 104 – – – Foreign bonds – 75 411 – 75 411 – 61 916 – 61 916 735 463 41 230 82 775 237 307 374 151 Development financing institutions – 137 352 – 137 352 – 124 438 – 124 438 Export credit facilities – 15 956 – 15 956 – 17 735 – 17 735 Other loans – 26 968 – 26 968 – 23 194 – 23 194 Derivatives held for risk management 17 1 219 – 810 2 029 5 015 – 4 963 9 978 Foreign exchange contracts 842 – 28 870 3 531 – 436 3 967 Cross-currency swaps 52 – 782 834 1 403 – 4 527 5 930 Commodity forwards 232 – – 232 – – – – Credit default swaps 92 – – 92 81 – – 81 Inflation-linked swaps 1 – – 1 – – – – Lease liabilities 29 – – 8 126 8 126 – – 8 603 8 603 Trade and other payables 30 – 42 817 – 42 817 – 36 796 – 36 796 Financial trading liabilities 21 – – – – 2 – – 2 1 219 466 746 8 936 476 901 5 017 433 090 13 566 451 673 1. Other assets and liabilities include derivatives held for risk management designated as hedges measured at fair value through other comprehensive income and 1. The maturity profile of undiscounted contractual payments of debt securities and borrowings due after five years comprise of R230 million (2022: R227 million) finance leases measured at amortised cost. The total assets measured at amortised cost amounts to R57 824 million (2022: R63 885 million), the total liabilities between years five and 10 and R203 million (2022: R156 million) beyond year 10. measured at amortised costs amounts to R474 872 million (2022: R441 693 million). 72 73 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 6. Accounting classification and fair value continued Principal markets 6.1 Accounting classification continued The group is involved in various principal markets because of the unique funding activities undertaken where the fair value is determined by each participant in the different principal markets. The principal markets include: 2023 2022 • capital and money markets Fair value Amortised Other Total Fair value Amortised Other Total • development financing institutions through cost assets through cost assets • export credit agencies profit and profit and or loss liabilities1 or loss liabilities1 Fair value hierarchy Note Rm Rm Rm Rm Rm Rm Rm Rm Fair value measurements are categorised into the different levels in the fair value hierarchy based on the inputs to the valuation techniques Company used. There were no changes in the valuation techniques applied. The hierarchy levels are defined as follows: Financial assets Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. Loans receivable Level 2: Inputs other than quoted prices included within level 1 that are observable, either directly (ie as prices) or indirectly (ie derived Loans to subsidiaries 15 – 5 674 – 5 674 – 5 650 – 5 650 from prices). Embedded derivatives 16 823 – – 823 939 – – 939 Level 3: Unobservable inputs. Derivatives held for risk management 17 3 890 – 23 102 26 992 4 711 – 3 799 8 510 There were no transfers between level 1, 2 or 3 of the fair value hierarchy during the year, except for loans receivable (home loans) that transferred from level 2 to level 3 due to a change in fair value methodology. The group recognises transfers between levels of the fair Foreign exchange contracts 943 – 145 1 088 25 – 19 44 value hierarchy at the end of the reporting period during which the transfers have occurred. The group’s policy for determining when Cross-currency swaps 2 661 – 22 957 25 618 4 494 – 3 780 8 274 transfers between levels in the hierarchy have occurred includes monitoring of the following factors: Commodity forwards 1 – – 1 – – – – • changes in market and trading activity (eg significant increases/decreases in activity) Credit default swaps 5 – – 5 5 – – 5 • changes in inputs used in valuation techniques (eg inputs becoming/ceasing to be observable in the market) Inflation-linked swaps 280 – – 280 187 – – 187 Finance lease receivables 18 – – 249 249 – – 293 293 Valuation techniques Trade and other receivables 20 – 30 075 – 30 075 – 26 400 – 26 400 Financial instrument Valuation technique Cash and cash equivalents 22 – 5 832 – 5 832 – 14 218 – 14 218 Level 1: Quoted prices (unadjusted) in active markets Financial trading assets (government bonds) and Quoted bid price in active markets. A market is regarded as active when it is a Bank balances – 5 830 – 5 830 – 6 210 – 6 210 insurance investments (listed shares) market in which transactions for the asset or liability take place with sufficient Fixed deposits – 2 – 2 – 8 008 – 8 008 frequency and volume to provide pricing information on an ongoing basis. 4 713 41 581 23 351 69 645 5 650 46 268 4 092 56 010 Financial trading liabilities (short-sold government Quoted bid price in active markets. A market is regarded as active when it is a bonds) market in which transactions for the asset or liability take place with sufficient Financial liabilities frequency and volume to provide pricing information on an ongoing basis. Debt securities and borrowings 25 – 428 377 – 428 377 – 398 066 – 398 066 Level 2: Inputs other than quoted prices included within level 1 that are observable Eskom bonds – 165 294 – 165 294 – 163 622 – 163 622 Loans receivable (excluding home loans), A discounted cash flow technique is used which uses expected cash flows and a Commercial paper – – – – – 595 – 595 insurance investments (negotiable certificates of market-related discount rate. Eurorand zero coupon bonds – 7 128 – 7 128 – 6 318 – 6 318 deposit), debt securities and borrowings and Foreign bonds – 75 411 – 75 411 – 61 916 – 61 916 financial trading assets and liabilities (repurchase Development financing institutions – 137 352 – 137 352 – 124 438 – 124 438 agreement assets and liabilities) Export credit facilities – 15 956 – 15 956 – 17 735 – 17 735 Other loans – 27 236 – 27 236 – 23 442 – 23 442 Derivatives held for risk management Valuation determined with reference to broker quotes as well as use of discounted cash flow and option pricing models. Broker quotes are tested for reasonableness Derivatives held for risk management 17 1 219 – 810 2 029 5 015 – 4 963 9 978 by discounting expected future cash flows using a market interest rate for a similar Foreign exchange contracts 842 – 28 870 3 531 – 436 3 967 instrument at the measurement date. Cross-currency swaps 52 – 782 834 1 403 – 4 527 5 930 Valuations of cross-currency swaps include the credit risk of Eskom (known as debit Commodity forwards 232 – – 232 – – – – value adjustment) and counterparties (known as credit value adjustment) where Credit default swaps 92 – – 92 81 – – 81 appropriate. A stochastic modelling approach is followed where the expected Inflation-linked swaps 1 – – 1 – – – – future exposure to credit risk for Eskom and its counterparties (considering default Lease liabilities 29 – – 8 040 8 040 – – 8 602 8 602 probabilities and recovery rates derived from market data) is modelled. Trade and other payables 30 – 44 894 – 44 894 – 39 551 – 39 551 Trade and other payables and cash and cash Fair values have not been disclosed for financial instruments where the carrying equivalents amounts are a reasonable approximation of fair value. Financial trading liabilities 21 – – – – 2 – – 2 Level 3: Unobservable inputs 1 219 473 271 8 850 483 340 5 017 437 617 13 565 456 199 Embedded derivatives Fair valued determined using unobservable inputs. Refer to note 16 for a movement reconciliation and to note 4.1 for information regarding the valuation techniques 6.2 Fair value and assumptions used. Valuation processes Loans receivable (home loans) The fair value of home loans is based on discounted cash flows using market related The group has a control framework in place for the measurement of fair values. It includes a valuation team that ultimately reports to the interest rates. The methodology and assumptions changed in the current year as chief financial officer and has overall responsibility for all significant fair value measurements. the expected future cash flows and discount rates relies on unobservable inputs to determine fair value. The valuation team regularly reviews significant unobservable inputs and valuation adjustments. Where third-party information, such as broker quotes or pricing services, is used to measure fair value, this information is assessed as to whether it provides adequate support Trade and other receivables Fair value determined using unobservable inputs. Due to the expected short-term for the accounting treatment applied including the level of the fair value hierarchy assigned to it. maturity of the trade receivables, the carrying value is equal to the fair value. The fair value for long-term receivables is based on discounted cash flows using the effective interest rate method. The carrying value approximates the fair value as the interest rates are market related and no additional disclosure is required. 1. Other assets and liabilities include derivatives held for risk management designated as hedges measured at fair value through other comprehensive income and finance leases measured at amortised cost. The total assets measured at amortised cost amounts to R41 830 million (2022: R46 561 million), the total liabilities measured at amortised costs amounts to R481 311 million (2022: R446 219 million). 74 75 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 6. Accounting classification and fair value continued Measured 2023 2022 6.2 Fair value continued at fair Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Fair value hierarchy continued value Rm Rm Rm Rm Rm Rm The fair value hierarchy of financial instruments is as follows: Company Financial assets Measured 2023 2022 Loans receivable at fair Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Loans to subsidiaries1 No – 5 683 – – 5 654 – value Rm Rm Rm Rm Rm Rm Embedded derivatives Yes – – 823 – – 939 Group Financial assets Derivatives held for risk management – 26 992 – – 8 510 – Loans receivable – 196 7 503 – 7 237 – Foreign exchange contracts Yes – 1 088 – – 44 – Home loans1 No – – 7 503 – 7 119 – Cross-currency swaps Yes – 25 618 – – 8 274 – Other loans No – 196 – – 118 – Commodity forwards Yes – 1 – – – – Credit default swaps Yes – 5 – – 5 – Embedded derivatives Yes – – 823 – – 939 Inflation-linked swaps Yes – 280 – – 187 – Derivatives held for risk management – 26 992 – – 8 509 – Financial liabilities Foreign exchange contracts Yes – 1 088 – – 43 – Debt securities and borrowings – 409 155 – – 389 924 – Cross-currency swaps Yes – 25 618 – – 8 274 – Commodity forwards Yes – 1 – – – – Eskom bonds No – 153 462 – – 154 025 – Credit default swaps Yes – 5 – – 5 – Commercial paper No – – – – 596 – Inflation-linked swaps Yes – 280 – – 187 – Eurorand zero coupon bonds No – 5 486 – – 5 271 – Foreign bonds No – 73 408 – – 61 382 – Insurance investments 1 514 15 192 – 2 145 15 175 – Development financing institutions No – 134 921 – – 124 807 – Negotiable certificates of deposit No – 14 126 – – 15 175 – Export credit facilities No – 14 396 – – 19 888 – Floating rate notes No – 1 066 – – – – Other loans No – 27 482 – – 23 955 – Listed shares Yes 1 514 – – 2 145 – – Derivatives held for risk management – 2 029 – – 9 978 – Financial liabilities Foreign exchange contracts Yes – 870 – – 3 967 – Debt securities and borrowings – 404 706 – – 387 850 – Cross-currency swaps Yes – 834 – – 5 930 – Eskom bonds No – 148 395 – – 152 035 – Commodity forwards Yes – 232 – – – – Commercial paper No – 887 – – 759 – Credit default swaps Yes – 92 – – 81 – Eurorand zero coupon bonds No – 5 486 – – 5 271 – Inflation-linked swaps Yes – 1 – – – – Foreign bonds No – 73 408 – – 61 382 – Financial trading liabilities Development financing institutions No – 134 921 – – 124 807 – Repurchase agreements Yes – – – – 2 – Export credit facilities No – 14 396 – – 19 888 – Other loans No – 27 213 – – 23 708 – Derivatives held for risk management – 2 029 – – 9 978 – 7. Segment information Foreign exchange contracts Yes – 870 – – 3 967 – Management has determined the reportable segments based on the reports regularly provided, reviewed and used by Exco to make Cross-currency swaps Yes – 834 – – 5 930 – strategic decisions and assess performance of the segments. Exco assesses the performance of the operating segments based on a Commodity forwards Yes – 232 – – – – measure of profit or loss consistent with that of the financial statements. The amounts provided to Exco with respect to total assets and Credit default swaps Yes – 92 – – 81 – liabilities are measured in terms of IFRS. These assets and liabilities are allocated based on the operation of the segment and the physical Inflation-linked swaps Yes – 1 – – – – location of the assets. Financial trading liabilities The operations in each of the group’s reportable segments are as follows: Repurchase agreements Yes – – – – 2 – Segment Operations Generation Consists of the following components: • primary energy procurement • electricity generation • planning, development, execution and monitoring of generation-related capital projects Transmission Consists of the following components: • transmission grids and the integrated demand management area. These functions operate and maintain the transmission network for transmitting electricity and also sell bulk electricity to international customers • the southern African energy and energy planning and market development areas. Their activities include systems operations, purchase or sale of electricity from or to southern African countries, purchase of electricity from IPPs and wholesale energy for the purposes of energy trading Distribution Consists of five operating clusters who provide, operate and maintain the distribution network for distributing electricity as well as a retail function that sells electricity to local large and small power users All other segments Relates to operating segments which are below the quantitative thresholds for determining a reportable segment in terms of IFRS 8 Operating segments which includes the group’s subsidiaries as well as all service and strategic functions which do not qualify as a reportable segment in terms of IFRS 8 1. The fair value of the loan is calculated based on the assumption that there are no changes in the manner of recovery of the loan. This assumes that the outstanding 1. The fair value has changed from level 2 to level 3 in the current year due to a change in methodology. amount would be recovered based on the collections from the underlying loans and advances in EFC in the normal course of business. 76 77 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 7. Segment information continued Gene- Trans- Distri- All other Re- Group The revenue earned by subsidiaries is presented in the segment note in line with what is reported in the respective subsidiary financial ration mission bution segments allocation statements. Inter-segment transfer pricing for the flow of electricity from generator to consumer is allocated between the generation, and inter- transmission and distribution segments based on cost recovery plus a return on assets informed by the regulatory determination. All segment direct corporate overhead costs are allocated to the relevant segments and a cost driver apportionment is used to split the remaining trans- overhead costs on an equal basis between segments. Net finance costs, net fair value and foreign exchange gains/(losses) are allocated to actions segments based on divisional funding requirements. Rm Rm Rm Rm Rm Rm The 2022 segment information has been updated in line with the restatements presented in note 48. Restated 2022 The segment information provided to Exco for the reportable segments is as follows: External revenue – 11 022 236 572 1 252 (1 252) 247 594 Inter-segment revenue/recoveries 158 610 43 624 (202 181) 14 106 (14 159) – Gene- Trans- Distri- All other Re- Group ration mission bution segments allocation Total revenue 158 610 54 646 34 391 15 358 (15 411) 247 594 and inter- Other income 233 199 566 1 606 (1 110) 1 494 segment Primary energy (92 414) (40 509) (10) – – (132 933) trans- Employee benefit expense (10 921) (2 422) (11 323) (8 319) – (32 985) actions Reversal of impairment/(impairment) of financial assets 45 (13) (143) 311 (368) (168) Rm Rm Rm Rm Rm Rm Impairment and writedown of other assets (793) (3) (459) (15) 2 (1 268) 2023 Impairment and writedown of other assets – reversed – – – 5 (5) – External revenue – 10 276 249 267 1 537 (1 537) 259 543 Other expenses (28 037) (2 533) (9 506) (6 271) 17 567 (28 780) Inter-segment revenue/recoveries 168 015 48 761 (216 717) 14 280 (14 339) – Profit before depreciation and amortisation expense Total revenue 168 015 59 037 32 550 15 817 (15 876) 259 543 and net fair value and foreign exchange (loss)/gain Other income 2 976 150 890 1 082 (2 356) 2 742 (EBITDA) 26 723 9 365 13 516 2 675 675 52 954 Primary energy (106 706) (48 224) (12) – – (154 942) Depreciation and amortisation expense (24 124) (3 125) (4 391) (650) 224 (32 066) Employee benefit expense (11 792) (2 721) (11 626) (6 182) – (32 321) Net fair value and foreign exchange (loss)/gain (4 360) (510) 1 598 144 2 (3 126) (Impairment)/reversal of impairment of financial assets (74) (321) (637) (72) 78 (1 026) (Loss)/profit before net finance (cost)/income and share Impairment and writedown of other assets (731) (10) (410) (85) 80 (1 156) of profit of equity-accounted investees (1 761) 5 730 10 723 2 169 901 17 762 Other expenses (29 083) (2 502) (10 213) (8 643) 15 646 (34 795) Net finance (cost)/income (26 291) (4 143) (2 438) (452) 261 (33 063) Profit/(loss) before depreciation and amortisation Finance income 487 104 524 1 055 194 2 364 expense and net fair value and foreign exchange Finance cost (26 778) (4 247) (2 962) (1 507) 67 (35 427) (loss)/gain (EBITDA) 22 605 5 409 10 542 1 917 (2 428) 38 045 Share of profit of equity-accounted investees – – – 52 – 52 Depreciation and amortisation expense (25 275) (2 274) (4 472) (665) 201 (32 485) Net fair value and foreign exchange (loss)/gain (527) 262 (5) (16) 1 (285) (Loss)/profit before tax (28 052) 1 587 8 285 1 769 1 162 (15 249) Income tax – – – 3 794 (475) 3 319 (Loss)/profit before net finance (cost)/income and share of profit of equity-accounted investees (3 197) 3 397 6 065 1 236 (2 226) 5 275 (Loss)/profit for the year (28 052) 1 587 8 285 5 563 687 (11 930) Net finance (cost)/income (31 329) (4 433) (2 511) 1 053 205 (37 015) Other information Finance income 220 91 589 2 390 75 3 365 Segment assets 546 170 79 450 120 496 82 858 (26 064) 802 910 Finance cost (31 549) (4 524) (3 100) (1 337) 130 (40 380) Investment in equity-accounted investees – – – 418 – 418 Share of profit of equity-accounted investees – – – 93 – 93 Total assets 546 170 79 450 120 496 83 276 (26 064) 803 328 (Loss)/profit before tax (34 526) (1 036) 3 554 2 382 (2 021) (31 647) Total liabilities 85 499 19 408 50 038 439 8581 (28 532) 566 271 Income tax – – – 7 199 509 7 708 (Loss)/profit for the year (34 526) (1 036) 3 554 9 581 (1 512) (23 939) Additions and transfers to property, plant and equipment and intangible assets 21 524 2 890 4 531 410 (247) 29 108 Other information Segment assets 551 992 81 373 121 620 101 542 (28 990) 827 537 Investment in equity-accounted investees – – – 350 – 350 Group Total assets 551 992 81 373 121 620 101 892 (28 990) 827 887 Revenue Non-current assets Restated Restated 2023 2022 2023 2022 Total liabilities 85 639 21 306 52 747 462 2161 (30 108) 591 800 Geographical information Rm Rm Rm Rm Additions and transfers to property, plant and South Africa 248 844 236 144 682 271 679 600 equipment and intangible assets 23 469 3 203 5 253 734 (200) 32 459 Foreign countries 10 699 11 450 – 268 259 543 247 594 682 271 679 868 The group’s reportable segments operate mainly in South Africa, which is Eskom’s country of domicile. Revenue is allocated based on the country in which the customer is located after eliminating inter-segment transactions. There is no significant revenue derived from a single external customer by any of the reportable segments. Non-current assets disclosed for geographical information comprise non-current assets other than deferred tax assets and financial instruments. 1. Represents the external debt and borrowings that are accounted for in the treasury segment. 1. Represents the external debt and borrowings that are accounted for in the treasury segment. 78 79 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 8. Property, plant and equipment Land, Plant Equip- Work Total buildings Gene- Trans- Distri- Spares ment under Land, Plant Equip- Work Total and rating mitting buting and and cons- buildings Gene- Trans- Distri- Spares ment under facilities other vehicles truction and rating mitting buting and and cons- Note Rm Rm Rm Rm Rm Rm Rm Rm facilities other vehicles truction Note Rm Rm Rm Rm Rm Rm Rm Rm 2022 Company 2023 Carrying value at beginning of the year as restated 8 526 346 355 45 686 77 683 14 581 3 896 168 792 665 519 Group Carrying value at beginning of the year 9 072 362 906 46 503 77 205 14 805 4 774 152 193 667 458 Cost 10 902 477 755 68 266 136 793 16 365 14 386 168 792 893 259 Accumulated depreciation and impairment Cost 11 683 511 201 71 313 138 558 16 615 17 457 152 193 919 020 losses (2 376) (131 400) (22 580) (59 110) (1 784) (10 490) – (227 740) Accumulated depreciation and impairment losses (2 611) (148 295) (24 810) (61 353) (1 810) (12 683) – (251 562) Additions and transfers 79 3 127 47 316 246 302 24 826 28 943 Transfers of assets from customers – – (36) 1 124 – – – 1 088 Additions and transfers 43 812 133 205 (622) 807 30 914 32 292 Commissioning of assets constructed 281 41 361 4 028 4 186 68 200 (50 124) – Transfers of assets from customers – – – 628 – – – 628 Basis adjustment – cash flow hedge Commissioning of assets constructed 539 53 403 2 834 4 232 46 46 (61 100) – reserve – – – – – – (142) (142) Basis adjustment – cash flow hedge reserve – – – – – – (112) (112) Finance cost capitalised 40 – – – – – – 8 184 8 184 Finance cost capitalised 40 – – – – – – 7 459 7 459 Provisions capitalised 28 – 626 – – – – 1 751 2 377 Provisions capitalised 28 – (394) – – – – (56) (450) Disposals and writeoffs (46) (1 335) (683) (300) (2) (99) (594) (3 059) Disposals and writeoffs (229) (1 892) (6) (270) (3) (102) (1 403) (3 905) Depreciation (194) (24 542) (2 328) (5 562) (88) (703) – (33 417) Depreciation (648) (25 055) (1 457) (5 568) (87) (1 157) – (33 972) Carrying value at end of the year 8 646 365 592 46 714 77 447 14 805 3 596 152 693 669 493 Carrying value at end of the year 8 777 389 780 48 007 76 432 14 139 4 368 127 895 669 398 Cost 11 166 515 084 71 587 138 929 16 615 14 126 152 693 920 200 Cost 11 888 560 906 74 597 143 222 16 038 17 975 127 895 952 521 Accumulated depreciation and impairment Accumulated depreciation and impairment losses (2 520) (149 492) (24 873) (61 482) (1 810) (10 530) – (250 707) losses (3 111) (171 126) (26 590) (66 790) (1 899) (13 607) – (283 123) Company The ongoing internal and external investigations (including by the SIU) into allegations of contract corruption continued during the year. Carrying value at beginning of the year 8 646 365 592 46 714 77 447 14 805 3 596 152 693 669 493 There was a writeoff of R2 billion (including borrowing cost) at 31 March 2023 of cost previously capitalised relating to overpayments to Cost 11 166 515 084 71 587 138 929 16 615 14 126 152 693 920 200 a number of contractors involved in the construction of the Kusile power station based on the progress of the investigations into these Accumulated depreciation and impairment matters. There were also other writeoffs in the group during the year because of asset scrapping and clean up. The related expense is losses (2 520) (149 492) (24 873) (61 482) (1 810) (10 530) – (250 707) reflected in note 38. There could be further writeoffs in the future as the investigations are ongoing and once advanced to the stage where the outcome is certain, the related accounting impact will be assessed and processed. Refer to note 2.4. Additions and transfers 40 813 133 207 (623) 489 31 092 32 151 Transfers of assets from customers – – – 628 – – – 628 The total depreciation charge for property, plant and equipment is disclosed in profit or loss in the following categories: Commissioning of assets constructed 461 53 780 2 842 4 238 46 37 (61 404) – Basis adjustment – cash flow hedge reserve – – – – – – (112) (112) Group Company Finance cost capitalised 40 – – – – – – 7 459 7 459 Restated Restated Provisions capitalised 28 – (394) – – – – (56) (450) 2023 2022 2023 2022 Disposals and writeoffs (228) (1 892) (6) (270) (3) (36) (1 403) (3 838) Note Rm Rm Rm Rm Depreciation (646) (25 262) (1 469) (5 585) (86) (800) – (33 848) Depreciation and amortisation expense 37 33 960 33 258 33 836 33 405 Carrying value at end of the year 8 273 392 637 48 214 76 665 14 139 3 286 128 269 671 483 Primary energy 12 12 12 12 Cost 11 289 565 066 74 878 143 600 16 038 14 344 128 269 953 484 33 972 33 270 33 848 33 417 Accumulated depreciation and impairment losses (3 016) (172 429) (26 664) (66 935) (1 899) (11 058) – (282 001) Average rates of finance cost capitalised to qualifying assets: 2022 Group and company Group 2023 2022 Carrying value at beginning of the year as restated 8 932 344 223 45 472 77 429 14 581 5 087 167 835 663 559 % % Cost 11 392 474 233 68 001 136 422 16 365 17 660 167 835 891 908 General borrowings 10.08 9.64 Accumulated depreciation and impairment Specific borrowings 8.96 8.13 losses (2 460) (130 010) (22 529) (58 993) (1 784) (12 573) – (228 349) Additions and transfers 83 3 129 48 317 245 355 24 588 28 765 Transfers of assets from customers – – (36) 1 124 – – – 1 088 Commissioning of assets constructed 305 40 579 4 019 4 180 68 236 (49 387) – Basis adjustment – cash flow hedge reserve – – – – – – (142) (142) Finance cost capitalised 40 – – – – – – 8 184 8 184 Provisions capitalised 28 – 626 – – – – 1 751 2 377 Disposals and writeoffs (47) (1 335) (683) (300) (2) (100) (636) (3 103) Depreciation (201) (24 316) (2 317) (5 545) (87) (804) – (33 270) Carrying value at end of the year 9 072 362 906 46 503 77 205 14 805 4 774 152 193 667 458 Cost 11 683 511 201 71 313 138 558 16 615 17 457 152 193 919 020 Accumulated depreciation and impairment losses (2 611) (148 295) (24 810) (61 353) (1 810) (12 683) – (251 562) 80 81 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 8. Property, plant and equipment continued 9. Intangible assets Property, plant and equipment includes the following right-of-use asset balances: Rights Computer Concession Total Land, Plant Equipment Total software assets buildings Generating Spares and and vehicles Note Rm Rm Rm Rm and facilities other Rm Rm Rm Rm Rm 2023 Group 2023 Carrying value at beginning of the year 3 299 57 268 3 624 Group Carrying value at beginning of the year 126 5 717 86 36 5 965 Cost 3 515 1 346 821 5 682 Accumulated amortisation and impairment losses (216) (1 289) (553) (2 058) Cost 284 9 768 506 70 10 628 Accumulated depreciation and impairment losses (158) (4 051) (420) (34) (4 663) Additions and transfers 29 5 133 167 Additions 20 – – 196 216 Writeoffs – – (255) (255) Disposals and writeoffs (7) – – – (7) Amortisation 37 – (20) (146) (166) Depreciation (61) (652) (13) (139) (865) Carrying value at end of the year 3 328 42 – 3 370 Carrying value at end of the year 78 5 065 73 93 5 309 Cost 3 544 1 351 – 4 895 Cost 164 9 768 505 266 10 703 Accumulated amortisation and impairment losses (216) (1 309) – (1 525) Accumulated depreciation and impairment losses (86) (4 703) (432) (173) (5 394) Company Company Carrying value at beginning of the year 3 299 56 – 3 355 Carrying value at beginning of the year 126 5 717 86 35 5 964 Cost 3 515 1 016 – 4 531 Cost 283 9 768 506 67 10 624 Accumulated amortisation and impairment losses (216) (960) – (1 176) Accumulated depreciation and impairment losses (157) (4 051) (420) (32) (4 660) Additions and transfers 29 2 – 31 Additions 19 – – – 19 Amortisation 37 – (19) – (19) Disposals and writeoffs (6) – – – (6) Depreciation (61) (652) (12) (13) (738) Carrying value at end of the year 3 328 39 – 3 367 Carrying value at end of the year 78 5 065 74 22 5 239 Cost 3 544 1 018 – 4 562 Cost 164 9 768 506 68 10 506 Accumulated amortisation and impairment losses (216) (979) – (1 195) Accumulated depreciation and impairment losses (86) (4 703) (432) (46) (5 267) 2022 2022 Group Group Carrying value at beginning of the year 3 177 182 297 3 656 Carrying value at beginning of the year 154 6 368 98 50 6 670 Cost 3 393 1 555 575 5 523 Cost 281 9 768 567 70 10 686 Accumulated amortisation and impairment losses (216) (1 373) (278) (1 867) Accumulated depreciation and impairment losses (127) (3 400) (469) (20) (4 016) Additions and transfers 122 27 194 343 Additions 51 – – – 51 Amortisation 37 – (152) (223) (375) Disposals and writeoffs (2) – – – (2) Depreciation (77) (651) (12) (14) (754) Carrying value at end of the year 3 299 57 268 3 624 Carrying value at end of the year 126 5 717 86 36 5 965 Cost 3 515 1 346 821 5 682 Cost 284 9 768 506 70 10 628 Accumulated amortisation and impairment losses (216) (1 289) (553) (2 058) Accumulated depreciation and impairment losses (158) (4 051) (420) (34) (4 663) Company Company Carrying value at beginning of the year 3 177 181 – 3 358 Carrying value at beginning of the year 154 6 368 98 48 6 668 Cost 3 393 1 218 – 4 611 Cost 280 9 768 567 67 10 682 Accumulated amortisation and impairment losses (216) (1 037) – (1 253) Accumulated depreciation and impairment losses (126) (3 400) (469) (19) (4 014) Additions and transfers 122 27 – 149 Additions 51 – – – 51 Amortisation 37 – (152) – (152) Disposals and writeoffs (2) – – – (2) Carrying value at end of the year 3 299 56 – 3 355 Depreciation (77) (651) (12) (13) (753) Carrying value at end of the year 126 5 717 86 35 5 964 Cost 3 515 1 016 – 4 531 Accumulated amortisation and impairment losses (216) (960) – (1 176) Cost 283 9 768 506 67 10 624 Accumulated depreciation and impairment losses (157) (4 051) (420) (32) (4 660) 82 83 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 10. Future fuel supplies 12. Investment in subsidiaries Group and company 2023 2022 2023 2022 Name Main business Interest Interest held held Coal Nuclear Total Coal Nuclear Total % % Note Rm Rm Rm Rm Rm Rm Carrying value at beginning of the year 5 734 570 6 304 4 349 41 4 390 Directly held Net additions 1 595 1 187 2 782 1 914 554 2 468 Escap SOC Ltd Insurance 100 100 Provisions capitalised 28 (416) – (416) 113 – 113 Eskom Development Foundation NPC Corporate social investment 100 100 Basis adjustment – cash flow hedge reserve – (8) (8) – (3) (3) Eskom Enterprises SOC Ltd Non-regulated electricity supply industry activities 100 100 in South Africa and electricity supply and related Transfer to inventories 13 (752) (743) (1 495) (642) (22) (664) services outside South Africa Carrying value at end of the year 6 161 1 006 7 167 5 734 570 6 304 Eskom Finance Company SOC Ltd1 Finance (employee housing loans) 100 100 National Electricity Distribution Company of Distribution of electricity – not trading 100 n/a South Africa SOC Ltd 11. Investment in equity-accounted investees National Transmission Company South Africa SOC Ltd Transmission and trading of electricity – not trading 100 100 PN Energy Services SOC Ltd Not trading – in liquidation 100 100 Group Company Indirectly held 2023 2022 2023 2022 Eskom Rotek Industries SOC Ltd Construction and abnormal load transportation 100 100 Rm Rm Rm Rm Eskom Uganda Ltd2 Operations management 100 100 Balance at beginning of the year 418 420 95 95 Golang Coal SOC Ltd Coal exports 67 67 Share of profit after tax 93 52 – – Nqaba Finance 1 (RF) Ltd Residential backed mortgage securities 100 100 Dividends received (161) (54) – – Pebble Bed Modular Reactor SOC Ltd Reactor driven generation project – not trading 100 100 South Dunes Coal Terminal Company SOC Ltd Coal exports 69 69 Balance at end of the year 350 418 95 95 The group’s investments in joint ventures and associates are not individually material. 2023 2022 The group’s share of the results of its joint ventures and associates, all of which are unlisted, is as follows: Investment Accumulated Investment Accumulated Dividend at cost impairment at cost impairment declared 2023 2022 Rm Rm Rm Rm Rm Group Company Group Company Escap SOC Ltd 380 – 380 – 600 Name Main Country of Interest Share of Investment Share of Investment Eskom Development Foundation NPC – – – – – business incorporation held profit after at cost profit after at cost Eskom Enterprises SOC Ltd –3 – –3 – – tax for tax for Eskom Finance Company SOC Ltd –3 – –3 – – the year the year % Rm Rm Rm Rm National Electricity Distribution Company of –3 – – – – South Africa SOC Ltd4 Directly held Motraco – Mozambique Electricity National Transmission Company South Africa SOC Ltd –3 – –3 – – Transmission Company SARL1 transmission Mozambique 33 91 95 70 95 PN Energy Services SOC Ltd 4 (4) 4 (4) – Indirectly held 384 (4) 384 (4) 600 Trans Africa Projects (Pty) Ltd Engineering services South Africa 50 2 (18) All subsidiaries continue to be accounted for as previously assessed as there has not been any change in the outcome of the control 93 52 assessment. The group does not have any subsidiaries with a material non-controlling interest. All subsidiaries were incorporated in South Africa with the exception of Eskom Uganda Ltd (Eskom Uganda) which was incorporated in Uganda. The share capital of the group’s investment in joint ventures comprises ordinary shares. The joint ventures are structured as separate vehicles and the group has a residual interest in the net assets. The relevant activities are jointly controlled in accordance with the agreements under which the entities are established. The joint arrangements have therefore been classified as joint ventures. 1. The disposal of EFC did not progress to the extent that it can be continued to be classified as held-for-sale at 31 March 2023. 2. Year end is 31 December. The service concession ended on 31 March 2023. Refer to note 23. 3. Nominal. 1. Year end is 31 December. 4. The National Electricity Distribution Company of South Africa SOC Ltd was registered in 2023. 84 85 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 13. Inventories 14. Deferred tax 2023 2022 Group Company Coal Nuclear Maintenance Total Coal Nuclear Maintenance Total Assets Liabilities Assets Liabilities and fuel spares and and fuel spares and Restated Restated liquid consumables liquid consumables 2023 2022 2023 2022 2023 2022 2023 2022 fuel fuel Note Rm Rm Rm Rm Rm Rm Rm Rm Note Rm Rm Rm Rm Rm Rm Rm Rm Reconciliation of movements in Group balances Carrying value at beginning of the year 17 659 1 920 15 023 34 602 17 474 2 575 13 433 33 482 Balance at beginning of the year 9 326 5 758 348 388 10 261 6 129 – – Changes in working capital (1 284) (638) 3 033 1 111 (77) (768) 2 437 1 592 Recognised in profit or loss 41 8 263 3 705 (348) (48) 7 795 4 270 – – Transfer from future fuel supplies 10 752 743 – 1 495 642 22 – 664 Provisions capitalised 28 (258) 88 – (170) (380) 91 – (289) Raised/reversal of temporary differences 8 263 4 130 (348) (38) 7 795 4 730 – – Net writedowns and write offs 35 – – (815) (815) – – (847) (847) Change in tax rate – (425) – (10) – (460) – – 16 869 2 113 17 241 36 223 17 659 1 920 15 023 34 602 Recognised in other Maturity analysis 16 869 2 113 17 241 36 223 17 659 1 920 15 023 34 602 comprehensive income 41 (399) (137) – 8 (392) (138) – – Non-current 12 209 – – 12 209 11 516 – – 11 516 Raised/reversal of temporary Current 4 660 2 113 17 241 24 014 6 143 1 920 15 023 23 086 differences (399) (213) – 7 (392) (214) – – Change in tax rate – 76 – 1 – 76 – – Company Carrying value at beginning of the year 17 659 1 920 14 787 34 366 17 474 2 575 13 181 33 230 Balance at end of the year 17 190 9 326 – 348 17 664 10 261 – – Changes in working capital (1 284) (638) 3 082 1 160 (77) (768) 2 439 1 594 Comprising 17 190 9 326 – 348 17 664 10 261 – – Transfer from future fuel supplies 10 752 743 – 1 495 642 22 – 664 Provisions capitalised 28 (258) 88 – (170) (380) 91 – (289) Property, plant and equipment (101 835) (95 792) – 604 (100 693) (94 858) – – Net writedowns and write offs 35 – – (808) (808) – – (833) (833) Tax losses 80 834 70 890 – (146) 80 762 70 890 – – Trade and other receivables 15 926 13 468 – 4 15 675 13 476 – – 16 869 2 113 17 061 36 043 17 659 1 920 14 787 34 366 Payments made in advance (178) (159) – – (182) (159) – – Maturity analysis 16 869 2 113 17 061 36 043 17 659 1 920 14 787 34 366 Insurance investments (33) – – 79 – – – – Non-current 12 209 – – 12 209 11 516 – – 11 516 Derivatives held for risk management 122 315 – – 122 315 – – Current 4 660 2 113 17 061 23 834 6 143 1 920 14 787 22 850 Embedded derivatives (41) 50 – – (41) 50 – – Provisions 13 407 11 823 – (17) 13 045 11 814 – – Nuclear fuel of R1 484 million (2022: R1 362 million) will be recovered more than 12 months after the reporting date. Employee benefit obligations 5 374 5 183 – (176) 5 358 5 184 – – Payments received in advance 3 614 3 548 – – 3 618 3 549 – – The group has R299 385 million (2022: R263 096 million) and the company has R299 119 million (2022: R262 556 million) of unused tax losses available for offset against future taxable income. The tax losses do not expire and resulted in the recognition of a deferred tax asset for group and company of R80 834 million (2022: R71 036 million) and R80 762 million (2022: R70 890 million) respectively. The tax losses mainly arose from favourable tax incentives claimed on the new build projects in terms of the South African income tax law. The tax incentives resulted in the creation of taxable temporary differences in group of R378 100 million (2022: R357 919 million) and in company of R373 763 million (2022: R351 915 million). The group has a closing deferred tax asset balance of R17 190 million (2022: R9 326 million) and the company R17 664 million (2022: R10 261 million) that was recognised as management concluded that it is probable that the business will generate sufficient future taxable profits. Eskom (significant portion of deferred tax asset) is expected to be profitable by 2026 based on the 2024 to 2028 Corporate Plan and it is expected that the tax losses will be fully utilised by 2030. The balance of an assessed loss carried forward can only be set-off to the extent that the set-off does not exceed 80% of the taxable income determined for that year (before considering the assessed loss). The group only considers substantively enacted tax laws when assessing the amount and availability of tax losses that can offset against future taxable profits. The financial loss position of Eskom is mainly attributed to: • inadequate cost reflective tariffs approved by NERSA • growth in production from IPPs replacing Eskom generation capacity • increased use of OCGTs, both Eskom and IPPs, to minimise the impact of loadshedding • increased non-payment by municipalities • high debt service costs 86 87 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 14. Deferred tax continued 17. Derivatives held for risk management The following factors in addition to those listed on the previous page have been considered in the assessment of the future profitability Foreign Cross- Comm- Credit Inflation- Total and taxable income of Eskom: exchange currency odity default linked • revenue determination by NERSA for 2024 and 2025 of 18.65% and 12.74% respectively contracts swaps forwards swaps swaps • favourable court rulings relating to tariff determinations Note Rm Rm Rm Rm Rm Rm • current operational challenges, including unprecedented loadshedding 2023 • Eskom debt relief arrangement from government Group • impact of the municipality debt relief arrangement Net (liability)/asset at beginning of the year (3 924) 2 344 – (76) 187 (1 469) • proposed closure dates of coal-fired power stations and the impact on production Net fair value gain/(loss) 8 070 23 448 (333) (11) (1) 31 173 • decline in sales and potential impact of customers moving to alternative energy sources • Eskom legal separation Recognised in profit or loss 38 7 445 22 506 (333) (11) (1) 29 606 Recognised in other comprehensive income 625 942 – – – 1 567 The expected return to profitability by 2026 is dependent on revenue determinations (in line with the NERSA pricing methodology), continuing cost containment, addressing current operational challenges, and the reduction of debt service costs because of the debt relief Finance cost accrued – 139 – – 93 232 provided by government. The possible impact of additional assessed losses arising from debt writeoffs because of the municipality debt Cash (received)/paid (3 928) (1 147) 102 – – (4 973) relief arrangement could not yet be determined for the 2023 financial year. Net asset/(liability) at end of the year 218 24 784 (231) (87) 279 24 963 15. Loans receivable Hedge exposure covered 218 24 784 (231) (87) 279 24 963 Debt securities and borrowings 38 24 784 – (87) 279 25 014 2023 2022 Other 180 – (231) – – (51) Gross Allowance Carrying Gross Allowance Carrying for value for value Assets impairment impairment Economic hedging 943 2 661 1 5 280 3 890 Rm Rm Rm Rm Rm Rm Cash flow hedging 145 22 957 – – – 23 102 Group 1 088 25 618 1 5 280 26 992 Home loans 7 827 (62) 7 765 7 955 (55) 7 900 Maturity analysis 1 088 25 618 1 5 280 26 992 Other 308 (3) 305 252 (3) 249 Non-current – 17 356 – – 277 17 633 8 135 (65) 8 070 8 207 (58) 8 149 Current 1 088 8 262 1 5 3 9 359 Maturity analysis 8 135 (65) 8 070 8 207 (58) 8 149 Liabilities Non-current 7 887 (64) 7 823 7 887 (57) 7 830 Economic hedging 842 52 232 92 1 1 219 Current 248 (1) 247 320 (1) 319 Cash flow hedging 28 782 – – – 810 Company 870 834 232 92 1 2 029 Loans to subsidiaries 5 681 (7) 5 674 5 657 (7) 5 650 Maturity analysis 870 834 232 92 1 2 029 Maturity analysis Non-current – 179 – 62 – 241 Non-current 5 681 (7) 5 674 5 657 (7) 5 650 Current 870 655 232 30 1 1 788 The loan to EFC has been classified as non-current as it was not expected that the loan would be settled within 12 months from the reporting date as the intention and practice has been to extend the loan facility to a future date upon maturity. Interest rates are linked Notional amount in foreign currency m m m m m m to prevailing market rates. EUR 774 747 – – – 1 521 USD 2 905 6 560 – – – 9 465 16. Embedded derivatives GBP 10 – – – – 10 2023 2022 JPY 143 – – – – 143 Asset Asset/ SEK 355 – – – – 355 (liability) ZAR – – 2 089 5 088 1 000 8 177 Note Rm Rm Group and company Balance at beginning of the year 939 (1 491) Day-one fair value recognised in deferred income 26 – 808 Net fair value (loss)/gain 38 (116) 1 622 Balance at end of the year 823 939 Maturity analysis 823 939 Non-current 772 822 Current 51 117 88 89 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 17. Derivatives held for risk management continued Foreign Cross- Comm- Credit Inflation- Total Foreign Cross- Comm- Credit Inflation- Total exchange currency odity default linked exchange currency odity default linked contracts swaps forwards swaps swaps contracts swaps forwards swaps swaps Note Rm Rm Rm Rm Rm Rm Note Rm Rm Rm Rm Rm Rm 2023 2022 Company Group Net (liability)/asset at beginning of the year (3 923) 2 344 – (76) 187 (1 468) Net (liability)/asset at beginning of the year (4 193) 8 415 – (97) 144 4 269 Net fair value gain/(loss) 8 069 23 448 (333) (11) (1) 31 172 Net fair value (loss)/gain (4 852) (4 552) 6 21 (32) (9 409) Recognised in profit or loss 38 7 444 22 506 (333) (11) (1) 29 605 Recognised in profit or loss 38 (4 613) (4 463) 6 21 (32) (9 081) Recognised in other comprehensive income 625 942 – – – 1 567 Recognised in other comprehensive income (239) (89) – – – (328) Finance cost accrued – 139 – – 93 232 Finance cost accrued – 106 – – 75 181 Cash (received)/paid (3 928) (1 147) 102 – – (4 973) Cash paid/(received) 5 121 (1 625) (6) – – 3 490 Net asset/(liability) at end of the year 218 24 784 (231) (87) 279 24 963 Net (liability)/asset at end of the year (3 924) 2 344 – (76) 187 (1 469) Hedge exposure covered 218 24 784 (231) (87) 279 24 963 Hedge exposure covered (3 924) 2 344 – (76) 187 (1 469) Debt securities and borrowings 38 24 784 – (87) 279 25 014 Debt securities and borrowings (3 358) 2 344 – (76) 187 (903) Other 180 – (231) – – (51) Other (566) – – – – (566) Assets Assets Economic hedging 943 2 661 1 5 280 3 890 Economic hedging 24 4 494 – 5 187 4 710 Cash flow hedging 145 22 957 – – – 23 102 Cash flow hedging 19 3 780 – – – 3 799 1 088 25 618 1 5 280 26 992 43 8 274 – 5 187 8 509 Maturity analysis 1 088 25 618 1 5 280 26 992 Maturity analysis 43 8 274 – 5 187 8 509 Non-current – 17 356 – – 277 17 633 Non-current – 7 863 – – 183 8 046 Current 1 088 8 262 1 5 3 9 359 Current 43 411 – 5 4 463 Liabilities Liabilities Economic hedging 842 52 232 92 1 1 219 Economic hedging 3 531 1 403 – 81 – 5 015 Cash flow hedging 28 782 – – – 810 Cash flow hedging 436 4 527 – – – 4 963 870 834 232 92 1 2 029 3 967 5 930 – 81 – 9 978 Maturity analysis 870 834 232 92 1 2 029 Maturity analysis 3 967 5 930 – 81 – 9 978 Non-current – 179 – 62 – 241 Non-current – 5 334 – 81 – 5 415 Current 870 655 232 30 1 1 788 Current 3 967 596 – – – 4 563 Notional amount in foreign currency m m m m m m Notional amount in foreign currency m m m m m m EUR 773 747 – – – 1 520 EUR 989 924 – – – 1 913 USD 2 905 6 560 – – – 9 465 USD 2 415 5 961 – – – 8 376 GBP 10 – – – – 10 GBP 7 – – – – 7 JPY 143 – – – – 143 JPY 143 230 – – – 373 SEK 355 – – – – 355 SEK 294 – – – – 294 ZAR – – 2 089 5 088 1 000 8 177 ZAR – – – 5 088 1 000 6 088 90 91 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 17. Derivatives held for risk management continued Cash flow hedges Contractual cash flows are a function of foreign exchange and interest rates and are a point-in-time calculation that are impacted by Foreign Cross- Comm- Credit Inflation- Total market conditions at that time. This may result in future contractual cash outflows or inflows even though the fair value of the derivative exchange currency odity default linked may be reflected as an asset or liability. contracts swaps forwards swaps swaps Note Rm Rm Rm Rm Rm Rm Group and company 2022 Carrying Un- 0–3 4–12 1–5 >5 Company amount discounted months months years years Net (liability)/asset at beginning of the year (4 191) 8 415 – (97) 144 4 271 cash flows Net fair value (loss)/gain (4 850) (4 552) 6 21 (32) (9 407) Rm Rm Rm Rm Rm Rm Recognised in profit or loss 38 (4 611) (4 463) 6 21 (32) (9 079) The periods in which the cash flows of derivatives Recognised in other comprehensive income (239) (89) – – – (328) designated as cash flow hedges are expected to occur are: Finance cost accrued – 106 – – 75 181 2023 Cash paid/(received) 5 118 (1 625) (6) – – 3 487 Foreign exchange contracts Assets 145 151 92 59 – – Net (liability)/asset at end of the year (3 923) 2 344 – (76) 187 (1 468) Liabilities (28) (26) (6) (20) – – Hedge exposure covered (3 923) 2 344 – (76) 187 (1 468) Cross-currency swaps Assets 22 957 34 586 20 5 376 6 969 22 221 Debt securities and borrowings (3 358) 2 344 – (76) 187 (903) Liabilities (782) (2 628) (86) (2 632) 90 – Other (565) – – – – (565) 22 292 32 083 20 2 783 7 059 22 221 Assets Economic hedging 25 4 494 – 5 187 4 711 2022 Cash flow hedging 19 3 780 – – – 3 799 Foreign exchange contracts Assets 19 19 17 2 – – 44 8 274 – 5 187 8 510 Liabilities (436) (438) (151) (287) – – Maturity analysis 44 8 274 – 5 187 8 510 Cross-currency swaps Assets 3 780 3 699 4 (104) 2 861 938 Non-current – 7 863 – – 183 8 046 Liabilities (4 527) (4 097) (84) (2 910) (8 396) 7 293 Current 44 411 – 5 4 464 (1 164) (817) (214) (3 299) (5 535) 8 231 Liabilities Economic hedging 3 531 1 403 – 81 – 5 015 The periods in which the cash flows associated with Cash flow hedging 436 4 527 – – – 4 963 derivatives are expected to impact profit or loss are: 3 967 5 930 – 81 – 9 978 2023 Foreign exchange contracts Maturity analysis 3 967 5 930 – 81 – 9 978 Assets 145 5 473 92 59 421 4 901 Non-current – 5 334 – 81 – 5 415 Liabilities (28) (26) (6) (20) – – Current 3 967 596 – – – 4 563 Cross-currency swaps Assets 22 957 34 586 20 5 376 6 969 22 221 Liabilities (782) (2 628) (86) (2 632) 90 – Notional amount in foreign currency m m m m m m 22 292 37 405 20 2 783 7 480 27 122 EUR 988 924 – – – 1 912 USD 2 415 5 961 – – – 8 376 2022 GBP 7 – – – – 7 Foreign exchange contracts JPY 143 230 – – – 373 Assets 19 8 978 50 103 686 8 139 SEK 294 – – – – 294 Liabilities (436) (438) (151) (287) – – ZAR – – – 5 088 1 000 6 088 Cross-currency swaps Assets 3 780 3 699 4 (104) 2 861 938 Liabilities (4 527) (4 097) (84) (2 910) (8 396) 7 293 The hedging practices and accounting treatment are disclosed in note 2.10.3 in the accounting policies. The derivative instruments used to hedge the various financial risks are set out as follows: (1 164) 8 142 (181) (3 198) (4 849) 16 370 Derivative Financial risk hedged Exposure Foreign exchange contracts Market (currency) Electricity generation, transmission and distribution activity Ineffective cash flow hedges purchases and loans denominated in foreign currencies The change in the fair value of the hedging instrument of R9 470 million (2022: R1 509 million) and for the hedged item (represented by a hypothetical derivative) of R10 208 million (2022: R1 910 million) were used to calculate hedge effectiveness. The cash flow hedge reserve Cross-currency swaps Market (currency and interest rate) Foreign fixed rate bonds and other foreign fixed or floating is adjusted to the lower in absolute amounts of the cumulative gain or loss of the hedging instrument and hedged item from inception of borrowings each hedge. During the year a loss of R727 million (2022: a gain of R477 million) was recognised in profit or loss as ineffectiveness. Refer Commodity forwards Market (commodity) Liquid fuel purchases for electricity generation activities and to note 38. base metal exposure relating to a component of plant, equipment or inventory Credit default swaps Credit Event of default by Eskom on debt securities and borrowings Inflation-linked swaps Market (interest rate) Finance cost that are dependent on current interest rates Hedging relationships directly affected by interbank offered rate reform Eskom had exposure to USD foreign loans and cross-currency transactions at 31 March 2023 that were linked to the USD London interbank offered rate with a nominal value of USD3.64 billion and USD1.4 billion on foreign loans and cross-currency interest rate swaps respectively. Cash flow hedge accounting was applied to the foreign loans and USD1.3 billion of the cross-currency interest rate swaps. The terms of all the loan agreements were renegotiated and agreed on with counterparties to convert to the new interest protocol and all derivative contracts were renegotiated by 28 June 2023. 92 93 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 17. Derivatives held for risk management continued 20. Trade and other receivables Hedging relationships directly affected by interbank offered rate reform continued Day-one gain/loss 2023 2022 The group recognises a day-one gain/loss on initial recognition of cross-currency swaps held as hedging instruments where applicable. Receivable Amounts Allowance Carrying Receivable Amounts Allowance Carrying before not for impair- value before not for impair- value Group and company collect- meeting ment collect- meeting ment ability collect- ability collect- Cross- Inflation- Total adjust- ability adjust- ability currency linked ments criteria ments criteria swaps swaps Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm Group Loss at 31 March 2021 (1 516) (19) (1 535) Financial instruments Day-one loss recognised (267) – (267) Trade receivables Amortised to profit or loss 194 3 197 International 1 708 – (246) 1 462 1 625 – (365) 1 260 Loss at 31 March 2022 (1 589) (16) (1 605) Local large power users 74 904 (51 279) (2 927) 20 698 61 772 (39 930) (2 322) 19 520 Day-one loss recognised (154) – (154) Municipalities 63 780 (51 279) (2 485) 10 016 50 869 (39 930) (1 943) 8 996 Amortised to profit or loss 246 3 249 Other 11 124 – (442) 10 682 10 903 – (379) 10 524 Loss at 31 March 2023 (1 497) (13) (1 510) Local small power users 5 532 (2 061) (1 026) 2 445 7 805 (4 214) (1 013) 2 578 Soweto 2 061 (2 061) – – 4 219 (4 213) (6) – Other 3 471 – (1 026) 2 445 3 586 (1) (1 007) 2 578 18. Finance lease receivables 82 144 (53 340) (4 199) 24 605 71 202 (44 144) (3 700) 23 358 Group and company Other receivables 2 751 – (500) 2 251 1 354 – (327) 1 027 2023 2022 84 895 (53 340) (4 699) 26 856 72 556 (44 144) (4 027) 24 385 Gross Unearned Allowance Carrying Gross Unearned Allowance Carrying Non-financial instruments 3 947 3 947 3 267 3 267 receivables finance for value receivables finance for value income impairment income impairment VAT – – 31 31 Rm Rm Rm Rm Rm Rm Rm Rm VAT on cash basis receivables 3 947 3 947 3 236 3 236 Non-current 294 (72) (4) 218 355 (93) (4) 258 88 842 (53 340) (4 699) 30 803 75 823 (44 144) (4 027) 27 652 Between one and five years 219 (69) (3) 147 251 (89) (2) 160 Maturity analysis 88 842 (53 340) (4 699) 30 803 75 823 (44 144) (4 027) 27 652 After five years 75 (3) (1) 71 104 (4) (2) 98 Non-current 4 101 – – 4 101 2 493 – (4) 2 489 Current 60 (28) (1) 31 68 (32) (1) 35 Current 84 741 (53 340) (4 699) 26 702 73 330 (44 144) (4 023) 25 163 354 (100) (5) 249 423 (125) (5) 293 Company Financial instruments Trade receivables 19. Payments made in advance International 1 708 – (246) 1 462 1 625 – (365) 1 260 Local large power users 74 904 (51 279) (2 927) 20 698 61 772 (39 930) (2 322) 19 520 2023 2022 Municipalities 63 780 (51 279) (2 485) 10 016 50 869 (39 930) (1 943) 8 996 Securing Environ- Other Total Securing Environ- Other Total Other 11 124 – (442) 10 682 10 903 – (379) 10 524 debt mental debt mental Local small power users 5 532 (2 061) (1 026) 2 445 7 805 (4 214) (1 013) 2 578 raised rehabili- raised rehabili- tation tation Soweto 2 061 (2 061) – – 4 219 (4 213) (6) – trust fund trust fund Other 3 471 – (1 026) 2 445 3 586 (1) (1 007) 2 578 Rm Rm Rm Rm Rm Rm Rm Rm 82 144 (53 340) (4 199) 24 605 71 202 (44 144) (3 700) 23 358 Group Other receivables 5 985 – (515) 5 470 3 343 – (301) 3 042 Balance at beginning of the year 778 1 470 565 2 813 1 137 1 361 679 3 177 88 129 (53 340) (4 714) 30 075 74 545 (44 144) (4 001) 26 400 Payments made 369 – 809 1 178 471 – 265 736 Non-financial instruments Recognised in profit or loss – 86 (184) (98) – – (244) (244) VAT on cash basis receivables 3 947 3 947 3 236 3 236 Changes in net fund assets – – – – – 109 – 109 Transfers (455) (300) (86) (841) (830) – (135) (965) 92 076 (53 340) (4 714) 34 022 77 781 (44 144) (4 001) 29 636 Balance at end of the year 692 1 256 1 104 3 052 778 1 470 565 2 813 Maturity analysis 92 076 (53 340) (4 714) 34 022 77 781 (44 144) (4 001) 29 636 Maturity analysis 692 1 256 1 104 3 052 778 1 470 565 2 813 Non-current 5 164 – (30) 5 134 3 113 – (11) 3 102 Current 86 912 (53 340) (4 684) 28 888 74 668 (44 144) (3 990) 26 534 Non-current 589 1 256 141 1 986 529 1 470 65 2 064 Current 103 – 963 1 066 249 – 500 749 Group and company Company Balance at beginning of the year 778 1 470 563 2 811 1 137 1 361 652 3 150 2023 2022 Payments made 369 – 774 1 143 471 – 265 736 Note Rm Rm Recognised in profit or loss – 86 (182) (96) – – (219) (219) Reconciliation of movements in amounts not meeting collectability criteria Changes in net fund assets – – – – – 109 – 109 Balance at beginning of the year 44 144 37 804 Transfers (455) (300) (86) (841) (830) – (135) (965) Revenue not meeting collectability criteria 31 15 774 14 215 Balance at end of the year 692 1 256 1 069 3 017 778 1 470 563 2 811 Finance income not meeting collectability criteria 39 3 416 1 644 Cash basis revenue recognised 31 (7 563) (6 543) Maturity analysis 692 1 256 1 069 3 017 778 1 470 563 2 811 Writeoffs (2 431) (2 976) Non-current 589 1 256 139 1 984 529 1 470 64 2 063 Balance at end of the year 53 340 44 144 Current 103 – 930 1 033 249 – 499 748 Refer to note 5.1.1 for a reconciliation of the movements in allowance for impairment. 94 95 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 21. Investments and financial trading instruments Group Portfolio Managed by Purpose 2023 2022 Rm Rm Insurance Escap To maintain adequate ring-fenced capital reserves to meet the statutory solvency requirements of the Insurance Act Summarised income statements Revenue 464 422 Financial trading Treasury To reduce the funding cost of the company Profit before tax 25 41 21.1 Insurance investments Taxation (15) (13) Group Profit after tax 10 28 2023 2022 Gross Allowance Carrying Gross Allowance Carrying The information above is included in the respective line items in the group income statement and includes the loss of R57 million on the for value for value transfer of the energy assets at the end of the concession period. impairment impairment The year end of Eskom Uganda is 31 December. The results for the three-month period to 31 March 2023 were included in the 2023 Rm Rm Rm Rm Rm Rm income statement as the service concession came to an end at 31 March 2023. Negotiable certificates of deposit 14 131 (16) 14 115 15 183 (10) 15 173 Floating rate notes 1 022 (4) 1 018 – – – Listed shares 1 514 – 1 514 2 145 – 2 145 24. Share capital 16 667 (20) 16 647 17 328 (10) 17 318 Group and company Maturity analysis 16 667 (20) 16 647 17 328 (10) 17 318 2023 2022 Shares Shares Non-current 1 022 (4) 1 018 – – – Current 15 645 (16) 15 629 17 328 (10) 17 318 Authorised ordinary shares 300 000 000 000 300 000 000 000 Issued 21.2 Financial trading instruments Balance at beginning of the year 219 692 945 001 188 000 000 001 Group and company Share capital issued 21 857 331 000 31 692 945 000 2023 2022 Balance at end of the year 241 550 276 001 219 692 945 001 Assets Liabilities Net Assets Liabilities Net Unissued 58 449 723 999 80 307 054 999 liabilities liabilities Rm Rm Rm Rm Rm Rm The unissued share capital is under the control of the Government of the Republic of South Africa, represented by the DPE, as the sole Eskom bonds – – – – 2 (2) shareholder. Financial trading liabilities – encumbered assets Eskom concluded sale and repurchase transactions of both Eskom and government bonds with approved counterparties. The group 25. Debt securities and borrowings enters into transactions whereby it transfers assets recognised in its statement of financial position, but retains either all or substantially all Group Company of the risks and rewards of the transferred assets or a portion of them. The transferred assets are not derecognised if all or substantially all risks and rewards are retained. The difference between the sale and repurchase price is treated as interest accrued over the life of the 2023 2022 2023 2022 agreement using the effective-yield method. Rm Rm Rm Rm Eskom bonds 160 218 161 635 165 294 163 622 Commercial paper 896 1 058 – 595 22. Cash and cash equivalents Eurorand zero coupon bonds 7 128 6 318 7 128 6 318 Group Company Foreign bonds 75 411 61 916 75 411 61 916 Development financing institutions 137 352 124 438 137 352 124 438 2023 2022 2023 2022 Export credit facilities 15 956 17 735 15 956 17 735 Rm Rm Rm Rm Other loans 26 968 23 194 27 236 23 442 Bank balances 7 514 7 877 5 830 6 210 423 929 396 294 428 377 398 066 Fixed deposits 2 8 008 2 8 008 Maturity analysis 423 929 396 294 428 377 398 066 7 516 15 885 5 832 14 218 Non-current 367 993 345 490 372 195 344 568 Current 55 936 50 804 56 182 53 498 23. Service concession arrangements The group operated a service concession for a 20-year period for the generation and transmission of electricity through its operations in Uganda which ended on 31 March 2023. Eskom Uganda had an operation and maintenance agreement with Uganda Electricity Generation Company Ltd (UEGCL), which was linked to a power purchase agreement with Uganda Electricity Transmission Company Ltd (UETCL). Eskom Uganda operated and maintained two hydro-electric power stations in Uganda from which it supplied electricity to UETCL. The dams, powerhouses, related switchyard facilities, high voltage substations, land and movable property together constituted the energy assets in terms of the agreement. The company ceased to trade on 31 March 2023 when the concession agreement came to a natural term end. All the energy assets were handed over to UEGCL on 31 March 2023 in terms of the concession agreement. A portion (USD12.2 million) of the confirmed buyout amount of USD12.6 million (R223.8 million), to affect the transfer of the operations and all rights over the plant on 31 March 2023 in terms of the agreement, has been received in April 2023 by Eskom Uganda from the Government of the Republic of Uganda. This resulted in a loss of R57 million on the transfer of the energy assets. The remaining assets and liabilities of Eskom Uganda with a net asset value of R203 million (including cash and cash equivalents of R225 million) at 31 March 2023 will be settled through a process of voluntary liquidation. 96 97 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 25. Debt securities and borrowings continued Group Company Group Company Currency Security Interest rate Nominal Maturity Carrying value Carrying value Currency Security Interest rate Nominal Maturity Carrying value Carrying value number date number date 2023 2022 2023 2022 2023 2022 2023 2022 2023 2022 2023 2022 2023 2022 2023 2022 % % m m Rm Rm Rm Rm % % m m Rm Rm Rm Rm Eskom bonds 160 218 161 635 165 294 163 622 Balances carried forward from ZAR ES231 – 9.06 – 21 664 Jan 23 – 20 230 – 22 217 the previous page 243 653 230 927 247 833 232 451 ZAR ECN24 – 10.37 – 5 000 Mar 24 – 4 988 – 4 988 Development ZAR ES261 9.26 9.29 37 987 32 950 Apr 26 33 025 32 688 38 101 32 688 financing ZAR EL281 2.55 2.55 6 278 6 278 May 28 10 902 10 140 10 902 10 140 institutions1 137 352 124 438 137 352 124 438 ZAR EL291 1.90 1.90 5 370 5 370 Nov 29 8 793 8 150 8 793 8 150 ZAR n/a 2 8.80 5.47 733 867 Aug 28 744 874 744 874 ZAR EL301 2.30 2.30 5 136 5 136 Jul 30 8 023 7 446 8 023 7 446 USD n/a 2 6.24 1.67 107 126 Aug 28 1 906 1 840 1 906 1 840 ZAR EL311 2.10 2.10 5 699 5 699 Jun 31 8 369 7 749 8 369 7 749 EUR n/a 2 4.01 – 409 471 Aug 29 7 937 7 630 7 937 7 630 ZAR ECN32 2.95 2.95 5 000 5 000 Mar 32 7 257 6 770 7 257 6 770 ZAR n/a 2 8.10 4.67 4 642 5 356 Aug 29 4 703 5 396 4 703 5 396 ZAR ES331 9.21 9.21 34 542 34 542 Sep 33 30 789 30 580 30 789 30 580 ZAR n/a 2 10.10 10.10 2 557 2 951 Sep 29 2 553 2 946 2 553 2 946 ZAR EL361 2.25 2.25 5 594 5 594 Jan 36 7 698 7 130 7 698 7 130 USD n/a 2 3.47 3.47 6 6 Sep 30 99 81 99 81 ZAR EL371 2.25 2.25 23 725 5 418 Jan 37 26 416 6 871 26 416 6 871 ZAR n/a 10.47 10.47 12 000 12 000 Jan 31 12 149 12 145 12 149 12 145 ZAR ES421 10.39 10.39 21 437 21 437 Apr 42 18 946 18 893 18 946 18 893 EUR n/a 2 4.60 1.50 358 403 Feb 31 6 326 5 929 6 326 5 929 Commercial USD n/a 2 5.76 1.19 5 6 Aug 31 92 84 92 84 paper 896 1 058 – 595 ZAR n/a 7.92 4.68 818 912 Mar 32 821 914 821 914 ZAR n/a 2 – 5.07 – 600 Jun 223 – – – 595 USD n/a 2 7.75 3.33 3 378 3 263 Sep 33 59 237 46 887 59 237 46 887 ZAR n/a – 5.72 – 129 May 224 – 130 – – USD n/a 2 7.99 3.42 7 8 Feb 36 121 105 121 105 ZAR n/a 9.42 5.80 530 621 May 234 536 625 – – ZAR n/a 2 11.45 8.12 3 822 4 116 Feb 36 3 822 4 093 3 822 4 093 ZAR n/a 9.28 5.65 358 301 May 524 360 303 – – ZAR n/a 2 9.14 9.14 27 297 29 063 May 38 28 349 30 127 28 349 30 127 USD n/a 2 4.21 1.39 1 1 Aug 38 15 13 15 13 Eurorand ZAR n/a 2 8.50 5.07 791 791 Nov 38 806 798 806 798 zero coupon USD n/a 2 5.71 1.26 102 40 Mar 39 1 803 589 1 803 589 bonds 5 7 128 6 318 7 128 6 318 ZAR n/a 2 10.36 10.24 3 173 2 832 Nov 43 3 253 2 903 3 253 2 903 ZAR n/a 13.33 13.33 8 000 8 000 Aug 27 4 622 4 078 4 622 4 078 USD n/a 2 0.25 0.25 107 32 May 51 1 889 473 1 889 473 ZAR n/a 11.89 11.89 7 500 7 500 Dec 32 2 506 2 240 2 506 2 240 USD n/a 2 0.25 0.25 41 42 Aug 51 727 611 727 611 Foreign Export credit bonds 75 411 61 916 75 411 61 916 facilities 15 956 17 735 15 956 17 735 USD n/a 6.90 6.90 1 000 1 000 Aug 23 17 890 14 710 17 890 14 710 JPY n/a – 0.88 – 230 May 22 – 28 – 28 USD n/a 7.39 7.39 1 250 1 250 Feb 25 22 259 18 284 22 259 18 284 EUR n/a 4.63 1.25 5 15 Sep 23 91 230 91 230 USD n/a1 5.42 5.42 500 500 Jul 27 8 471 6 877 8 471 6 877 EUR n/a 3.82 0.38 2 4 Jul 24 46 64 46 64 USD n/a 8.47 8.47 500 500 Aug 28 8 947 7 363 8 947 7 363 EUR n/a 4.76 4.75 258 374 Jan 27 4 803 5 746 4 803 5 746 USD n/a1 6.37 6.37 1 000 1 000 Aug 28 17 844 14 682 17 844 14 682 EUR n/a 3.81 2.44 219 314 Jul 27 3 989 4 739 3 989 4 739 ZAR n/a 9.74 6.28 902 1 147 Jul 27 842 1 048 842 1 048 Balances carried forward to the USD n/a 2.32 2.32 382 449 Mar 31 6 185 5 880 6 185 5 880 next page 243 653 230 927 247 833 232 451 Other loans4 26 968 23 194 27 236 23 442 ZAR n/a – 6.31 – 14 390 Oct 22 – 14 445 – 14 445 ZAR n/a 13.43 6.91 3 451 1 000 Aug 23 3 216 1 010 3 216 1 010 ZAR n/a 11.26 9.27 2 000 1 000 Mar 24 2 031 1 002 2 031 1 002 ZAR n/a 9.63 – 15 000 – Apr 24 15 171 – 15 171 – ZAR n/a 12.37 8.82 4 250 4 250 Feb 25 4 318 4 300 4 318 4 300 ZAR n/a 12.99 11.88 2 100 2 300 Feb 27 2 198 2 400 2 198 2 400 On ZAR n/a3 7.30 4.08 300 285 demand – – 302 285 On ZAR n/a – – 34 37 demand 34 37 – – 423 929 396 294 428 377 398 066 1. Latest in a range of maturity dates is indicated for these instruments. 1. Government guaranteed. 2. Government guaranteed. 2. Includes, inter alia, instruments issued to subsidiaries. 3. Includes, inter alia, instruments issued to subsidiaries. 3. Latest in a range of maturity dates is indicated for these instruments. 4. Comprises of loans with various banking institutions. 4. Nqaba breached an early amortisation event trigger in June 2020. As a result, the cash flows from the assets in the securitisation structure are applied to repay the capital to all noteholders in a reducing order of rank (pari passu if equal rank) on a quarterly basis on or before the final maturity date, which is 32 years from the scheduled maturity date. 5. Holders have a right to first charge against revenue and assets of Eskom in terms of section 7 of the Eskom Conversion Act. 98 99 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 26. Payments received in advance and contract liabilities and deferred income Customer Government Other Total Customer Government Other Total connections grant connections grant Note Rm Rm Rm Rm Note Rm Rm Rm Rm 26.1 Payments received in advance 26.2 Contract liabilities and deferred income 2023 2023 Group Group and company Balance at beginning of the year 4 504 1 201 751 6 456 Balance at beginning of the year 4 510 22 182 754 27 446 Payments received 1 681 3 120 244 5 045 Transfers of property, plant and equipment from customers 45 – – 45 Transfers to contract liabilities and deferred income 26.2 (206) (2 384) – (2 590) Transfers from payments received in advance 26.1 206 2 384 – 2 590 Income recognised (397) (172) (330) (899) Income recognised 37 (262) (1 641) – (1 903) Balance at end of the year 5 582 1 765 665 8 012 Amortisation of day-one fair value 38 – – (81) (81) Maturity analysis 5 582 1 765 665 8 012 Balance at end of the year 4 499 22 925 673 28 097 Non-current 3 864 – 122 3 986 Maturity analysis 4 499 22 925 673 28 097 Current 1 718 1 765 543 4 026 Non-current 4 224 21 262 592 26 078 Company Current 275 1 663 81 2 019 Balance at beginning of the year 4 504 1 201 763 6 468 2022 Payments received 1 681 3 120 221 5 022 Group and company Transfers to contract liabilities and deferred income 26.2 (206) (2 384) – (2 590) Balance at beginning of the year 3 994 21 678 – 25 672 Income recognised (397) (172) (327) (896) Transfers of property, plant and equipment from customers 309 – – 309 Balance at end of the year 5 582 1 765 657 8 004 Transfers from payments received in advance 26.1 455 2 071 – 2 526 Day-one fair value gain 16 – – 808 808 Maturity analysis 5 582 1 765 657 8 004 Income recognised 37 (248) (1 567) – (1 815) Non-current 3 864 – 136 4 000 Amortisation of day-one fair value 38 – – (54) (54) Current 1 718 1 765 521 4 004 Balance at end of the year 4 510 22 182 754 27 446 2022 Maturity analysis 4 510 22 182 754 27 446 Group Balance at beginning of the year 4 125 948 590 5 663 Non-current 4 249 20 603 673 25 525 Payments received 1 266 2 456 396 4 118 Current 261 1 579 81 1 921 Transfers to contract liabilities and deferred income 26.2 (455) (2 071) – (2 526) Income recognised (432) (132) (235) (799) 27. Employee benefit obligations Balance at end of the year 4 504 1 201 751 6 456 Maturity analysis 4 504 1 201 751 6 456 Post- Pension Bonus Leave Total employment benefits Non-current 2 545 – 31 2 576 medical Current 1 959 1 201 720 3 880 benefits Company Note Rm Rm Rm Rm Rm Balance at beginning of the year 4 125 948 603 5 676 2023 Payments received 1 266 2 456 395 4 117 Group Transfers to contract liabilities and deferred income 26.2 (455) (2 071) – (2 526) Balance at beginning of the year 17 153 – 430 2 271 19 854 Income recognised (432) (132) (235) (799) Recognised in profit or loss Balance at end of the year 4 504 1 201 763 6 468 Employee benefit expense – raised 371 2 067 583 1 007 4 028 Finance cost 40 2 058 98 – – 2 156 Maturity analysis 4 504 1 201 763 6 468 Recognised in other comprehensive income Non-current 2 545 – 44 2 589 Re-measurement of benefits (1 097) 336 – – (761) Current 1 959 1 201 719 3 879 Cash paid (757) (2 501) (563) (970) (4 791) Balance at end of the year 17 728 – 450 2 308 20 486 Maturity analysis 17 728 – 450 2 308 20 486 Non-current 16 902 – – – 16 902 Current 826 – 450 2 308 3 584 Company Balance at beginning of the year 16 798 – 375 2 023 19 196 Recognised in profit or loss Employee benefit expense – raised 369 1 814 426 931 3 540 Finance cost 40 2 016 98 – – 2 114 Recognised in other comprehensive income Re-measurement of benefits (1 069) 336 – – (733) Cash paid (736) (2 248) (407) (881) (4 272) Balance at end of the year 17 378 – 394 2 073 19 845 Maturity analysis 17 378 – 394 2 073 19 845 Non-current 16 573 – – – 16 573 Current 805 – 394 2 073 3 272 100 101 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 27. Employee benefit obligations continued 27.2 Pension benefits Movement reconciliation Post- Pension Bonus Leave Total employment benefits Group and company medical 2023 2022 benefits Fund Asset Fund Net asset/ Fund Asset Fund Net asset/ Note Rm Rm Rm Rm Rm assets ceiling obligations (liability) assets ceiling obligations (liability) 2022 adjustment adjustment Group Rm Rm Rm Rm Rm Rm Rm Rm Balance at beginning of the year 16 121 – 446 2 579 19 146 Asset/(liability) at beginning of Recognised in profit or loss the year 176 855 (70 049) (106 806) – 162 616 (51 417) (111 199) – Employee benefit expense – raised 346 3 086 425 836 4 693 Recognised in profit or loss Finance cost 40 2 224 259 – – 2 483 Employee benefit expense – – (2 067) (2 067) – – (3 086) (3 086) Recognised in other comprehensive income Finance cost 21 015 (8 407) (12 706) (98) 22 253 (7 096) (15 416) (259) Re-measurement of benefits (822) (915) – – (1 737) Recognised in other Cash paid (716) (2 430) (441) (1 144) (4 731) comprehensive income Re-measurement of benefits (11 231) 3 926 6 969 (336) (5 297) (11 536) 17 748 915 Balance at end of the year 17 153 – 430 2 271 19 854 Return on plan assets in excess Maturity analysis 17 153 – 430 2 271 19 854 of finance cost (11 231) – – (11 231) (5 297) – – (5 297) Adjustment to asset ceiling – 3 926 – 3 926 – (11 536) – (11 536) Non-current 16 404 – – – 16 404 Actuarial gain – – 6 969 6 969 – – 17 748 17 748 Current 749 – 430 2 271 3 450 Payments received by the fund 3 917 – (1 416) 2 501 3 793 – (1 363) 2 430 Company Employer funded 2 501 – – 2 501 2 430 – – 2 430 Balance at beginning of the year 15 777 – 386 2 329 18 492 Member funded 1 416 – (1 416) – 1 363 – (1 363) – Recognised in profit or loss Payments made by the fund (7 402) – 7 402 – (6 510) – 6 510 – Employee benefit expense – raised 344 2 841 375 718 4 278 Finance cost 40 2 177 259 – – 2 436 Benefit and pension payments (6 713) – 6 713 – (6 236) – 6 236 – Recognised in other comprehensive income Fund management costs (345) – 345 – (310) – 310 – Re-measurement of benefits (803) (915) – – (1 718) Net transfers (from)/to the fund (344) – 344 – 36 – (36) – Cash paid (697) (2 185) (386) (1 024) (4 292) Asset/(liability) at end of the year 183 154 (74 530) (108 624) – 176 855 (70 049) (106 806) – Balance at end of the year 16 798 – 375 2 023 19 196 Fund assets composition Maturity analysis 16 798 – 375 2 023 19 196 Group and company Non-current 16 067 – – – 16 067 Current 731 – 375 2 023 3 129 2023 2022 Domestic International Total Domestic International Total Refer to note 4 for relevant critical accounting estimates and assumptions. Rm Rm Rm Rm Rm Rm Equities 73 127 37 370 110 497 73 550 32 926 106 476 27.1 Post-employment medical benefits Bonds 33 626 5 809 39 435 34 931 3 113 38 044 Group Company Issued by Eskom 2 465 – 2 465 2 707 – 2 707 Other 31 161 5 809 36 970 32 224 3 113 35 337 2023 2022 2023 2022 Property 11 091 – 11 091 11 715 – 11 715 Rm Rm Rm Rm Cash 1 975 1 751 3 726 2 560 2 459 5 019 Actuarial gain Hedge funds 1 486 – 1 486 1 400 – 1 400 Financial assumptions 1 204 (406) 1 185 (399) Collective investment schemes – 16 919 16 919 – 14 201 14 201 Experience adjustments (107) 1 228 (116) 1 202 121 305 61 849 183 154 124 156 52 699 176 855 1 097 822 1 069 803 Group and company Expected maturity analysis of undiscounted benefits 2023 2022 Non-current 455 911 311 603 452 372 308 578 Rm Rm Between one and two years 900 814 877 793 Actuarial gain Between two and five years 3 443 3 122 3 356 3 043 Financial assumptions 5 922 10 475 After five years 451 568 307 667 448 139 304 742 Experience adjustments 1 047 7 273 Current 826 749 805 731 6 969 17 748 456 737 312 352 453 177 309 309 Expected maturity analysis of undiscounted benefits Non-current 1 739 253 1 302 616 The group expects to pay R826 million and the company R805 million in contributions to this plan in the 2024 financial year. Refer to Between one and two years 6 679 6 074 note 4.2 for the principal actuarial assumptions used and a sensitivity analysis. Between two and five years 23 055 20 816 After five years 1 709 519 1 275 726 Current 6 104 5 584 1 745 357 1 308 200 The group expects to pay R2 778 million and the company R2 476 million in contributions to this plan in the 2024 financial year. Refer to note 4.2 for the principal actuarial assumptions used and a sensitivity analysis. 27.3 Bonus The bonus comprises of an accrual for a thirteenth cheque generally paid in November. Managerial employees can choose to spread the payment over the course of the year instead of all being paid in November. 102 103 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 28. Provisions Power station-related Mine-related Compen- Other Total Power station-related Mine-related Compen- Other Total environmental closure, sation environmental closure, sation restoration pollution events restoration pollution events control and Nuclear Other control and Nuclear Other rehabilitation plant generating rehabilitation plant generating plant plant Note Rm Rm Rm Rm Rm Rm Note Rm Rm Rm Rm Rm Rm 2023 2022 Group Group Balance at beginning of the year 18 269 16 293 15 303 7 204 1 132 58 201 Balance at beginning of the year 17 317 14 811 15 259 3 119 2 136 52 642 Recognised in profit or loss 1 307 (1 302) (2 304) (285) 916 (1 668) Recognised in profit or loss (514) (245) (517) 2 746 (659) 811 Raised 1 753 221 – 811 1 144 3 929 Raised – 1 5 326 2 746 156 8 229 Reversed – (780) (1 123) (1 096) (228) (3 227) Reversed (648) (364) (6 053) – (815) (7 880) Change in discount rate (446) (743) (1 181) – – (2 370) Change in discount rate 134 118 210 – – 462 Capitalised to property, plant and equipment 8 402 (796) – (56) – (450) Capitalised to property, plant and equipment 8 74 552 – 1 751 – 2 377 Raised 566 80 – 2 050 – 2 696 Raised – – – 5 911 – 5 911 Reversed – (465) – (2 106) – (2 571) Reversed – – – (4 160) – (4 160) Change in discount rate (164) (411) – – – (575) Change in discount rate 74 552 – – – 626 Capitalised to future fuel supplies 10 – – (416) – – (416) Capitalised to future fuel supplies 10 – – 113 – – 113 Raised – – 194 – – 194 Raised – – 105 – – 105 Reversed – – (82) – – (82) Reversed – – (9) – – (9) Change in discount rate – – (528) – – (528) Change in discount rate – – 17 – – 17 Capitalised to inventories 13 88 – (258) – – (170) Capitalised to inventories 13 91 – (380) – – (289) Raised 88 – 21 – – 109 Raised 91 – 42 – – 133 Reversed – – (279) – – (279) Reversed – – (422) – – (422) Finance cost 40 1 922 1 668 1 455 – 16 5 061 Finance cost 40 1 383 1 175 1 166 – 17 3 741 Transfers – – (300) – – (300) Cash paid (82) – (338) (412) (362) (1 194) Cash paid (164) – (367) (2 820) (850) (4 201) Balance at end of the year 18 269 16 293 15 303 7 204 1 132 58 201 Balance at end of the year 21 824 15 863 13 113 4 043 1 214 56 057 Maturity analysis 18 269 16 293 15 303 7 204 1 132 58 201 Maturity analysis 21 824 15 863 13 113 4 043 1 214 56 057 Non-current 18 163 16 105 14 867 – 122 49 257 Non-current 21 323 15 827 12 875 – 118 50 143 Current 106 188 436 7 204 1 010 8 944 Current 501 36 238 4 043 1 096 5 914 Company Company Balance at beginning of the year 17 317 14 811 15 259 3 119 1 992 52 498 Balance at beginning of the year 18 269 16 293 15 303 7 204 982 58 051 Recognised in profit or loss (514) (245) (517) 2 746 (704) 766 Recognised in profit or loss 1 307 (1 302) (2 304) (285) 934 (1 650) Raised – 1 5 326 2 746 101 8 174 Raised 1 753 221 – 811 1 141 3 926 Reversed (648) (364) (6 053) – (805) (7 870) Reversed – (780) (1 123) (1 096) (207) (3 206) Change in discount rate 134 118 210 – – 462 Change in discount rate (446) (743) (1 181) – – (2 370) Capitalised to property, plant and equipment 8 74 552 – 1 751 – 2 377 Capitalised to property, plant and equipment 8 402 (796) – (56) – (450) Raised – – – 5 911 – 5 911 Raised 566 80 – 2 050 – 2 696 Reversed – – – (4 160) – (4 160) Reversed – (465) – (2 106) – (2 571) Change in discount rate 74 552 – – – 626 Change in discount rate (164) (411) – – – (575) Capitalised to future fuel supplies 10 – – 113 – – 113 Capitalised to future fuel supplies 10 – – (416) – – (416) Raised – – 105 – – 105 Raised – – 194 – – 194 Reversed – – (9) – – (9) Reversed – – (82) – – (82) Change in discount rate – – 17 – – 17 Change in discount rate – – (528) – – (528) Capitalised to inventories 13 91 – (380) – – (289) Capitalised to inventories 13 88 – (258) – – (170) Raised 91 – 42 – – 133 Raised 88 – 21 – – 109 Reversed – – (422) – – (422) Reversed – – (279) – – (279) Finance cost 40 1 383 1 175 1 166 – 17 3 741 Finance cost 40 1 922 1 668 1 455 – 15 5 060 Cash paid (82) – (338) (412) (323) (1 155) Transfers – – (300) – – (300) Balance at end of the year 18 269 16 293 15 303 7 204 982 58 051 Cash paid (164) – (367) (2 820) (801) (4 152) Maturity analysis 18 269 16 293 15 303 7 204 982 58 051 Balance at end of the year 21 824 15 863 13 113 4 043 1 130 55 973 Non-current 18 163 16 105 14 867 – 115 49 250 Maturity analysis 21 824 15 863 13 113 4 043 1 130 55 973 Current 106 188 436 7 204 867 8 801 Non-current 21 323 15 827 12 875 – 116 50 141 Current 501 36 238 4 043 1 014 5 832 Refer to note 4.5 for relevant critical accounting estimates and assumptions for the power station-related environmental restoration and mine-related closure, pollution control and rehabilitation related provisions and note 44.2 for compensation events. 104 105 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 29. Lease liabilities 2023 2022 Group Company Gross Future Carrying Gross Future Carrying Restated Restated payables finance value payables finance value 2023 2022 2023 2022 charges charges Note Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm Group 31. Revenue Non-current 11 543 (4 128) 7 415 13 329 (5 297) 8 032 Redistributors (metropolitan and municipal customers) 103 475 98 063 103 475 98 063 Between one and five years 8 527 (3 742) 4 785 8 581 (4 540) 4 041 Invoiced to customers 111 414 105 369 111 414 105 369 After five years 3 016 (386) 2 630 4 748 (757) 3 991 Amounts not meeting collectability criteria 20 (15 421) (13 849) (15 421) (13 849) Recognised on a cash received basis 20 7 482 6 543 7 482 6 543 Current 1 859 (1 148) 711 1 811 (1 240) 571 Residential 7 016 7 091 7 016 7 091 13 402 (5 276) 8 126 15 140 (6 537) 8 603 Invoiced to customers 7 288 7 457 7 288 7 457 Company Amounts not meeting collectability criteria 20 (353) (366) (353) (366) Non-current 11 542 (4 128) 7 414 13 327 (5 296) 8 031 Recognised on a cash received basis 20 81 – 81 – Between one and five years 8 527 (3 742) 4 785 8 580 (4 539) 4 041 Industrial 53 269 48 204 53 269 48 204 After five years 3 015 (386) 2 629 4 747 (757) 3 990 Mining 39 958 36 630 39 958 36 630 Current 1 773 (1 147) 626 1 811 (1 240) 571 Commercial 17 622 16 723 17 622 16 723 Agricultural 11 660 11 600 11 660 11 600 13 315 (5 275) 8 040 15 138 (6 536) 8 602 International 10 699 11 450 10 699 11 450 Rail 3 374 3 477 3 374 3 477 Group Company Public lighting 279 257 279 257 2023 2022 2023 2022 Post-paid electricity sales 247 352 233 495 247 352 233 495 Note Rm Rm Rm Rm Prepaid electricity sales 10 485 10 966 10 485 10 966 Movement reconciliation Total electricity sales 257 837 244 461 257 837 244 461 Balance at beginning of the year 8 603 8 969 8 602 8 967 Connections 1 242 1 459 1 242 1 459 Additions 216 51 19 51 Other 464 1 674 464 1 674 Disposals (6) – (6) – 259 543 247 594 259 543 247 594 Finance costs 40 1 267 1 300 1 244 1 300 Cash paid (1 954) (1 717) (1 819) (1 716) Sales of electricity to local customers are included in the distribution operating segment. International sales are included in the transmission Capital (687) (417) (575) (416) segment. Other revenue consists of reconnection fees and ad hoc Finance costs (1 267) (1 300) (1 244) (1 300) sundry revenue. Connections occur mainly within the transmission and Balance at end of the year 8 126 8 603 8 040 8 602 distribution operating segments. Refer to note 36 for short-term and low-value lease expenses. 32. Other income Insurance proceeds 1 425 60 3 339 437 Insurance premiums 6 98 – – 30. Trade and other payables Services income 483 439 – – Management fee income – – 156 151 Group Company Operating lease income 274 270 190 190 2023 2022 2023 2022 Dividend income 93 75 161 655 Rm Rm Rm Rm Other 461 552 528 580 Financial instruments 42 817 36 796 44 894 39 551 2 742 1 494 4 374 2 013 Trade and other payables 28 491 23 230 28 476 23 704 Accruals 7 593 7 455 9 685 9 736 33. Primary energy Deposits 6 733 6 111 6 733 6 111 Own generation costs 106 706 92 414 106 706 92 414 Non-financial instruments 1 971 2 027 1 914 2 017 International electricity purchases 6 471 5 316 6 471 5 316 Independent power producers 41 765 35 203 41 765 35 203 VAT 1 398 1 399 1 341 1 389 Environmental levy 573 628 573 628 154 942 132 933 154 942 132 933 Generation costs relate to the cost of coal (including logistics), 44 788 38 823 46 808 41 568 uranium, water and liquid fuels that are used in the generation of Maturity analysis 44 788 38 823 46 808 41 568 electricity. Eskom uses a combination of short-, medium- and long- term agreements with suppliers for coal purchases and long-term Non-current 524 829 203 1 100 agreements with the Department of Water Affairs to reimburse the Current 44 264 37 994 46 605 40 468 department for the cost incurred in supplying water to Eskom. 106 107 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 Group Company Group Company Restated Restated 2023 2022 2023 2022 2023 2022 2023 2022 Note Rm Rm Rm Rm Note Rm Rm Rm Rm 38. Net fair value and foreign exchange loss 34. Employee benefit expense Profit/(loss) on items carried at fair value 29 512 (7 139) 29 570 (7 294) Salaries 25 438 24 789 22 821 22 183 Insurance investments (59) 157 – – Overtime 2 509 2 055 2 021 1 588 Derivatives held for risk management 17 29 606 (9 081) 29 605 (9 079) Post-employment medical benefits 371 346 369 344 Embedded derivatives 16 (116) 1 622 (116) 1 622 Pension benefits 2 069 3 088 1 814 2 841 Deferred income 26 81 54 81 54 Annual bonus1 1 368 1 305 1 215 1 148 Payments made in advance – 109 – 109 Production bonus2 35 172 31 169 (Loss)/gain on foreign currency translation of items carried at amortised cost (30 527) 3 536 (30 523) 3 536 Leave 1 007 836 931 718 Trade and other receivables – (8) – (8) Direct costs of employment 32 797 32 591 29 202 28 991 Cash and cash equivalents 37 (43) 37 (43) Direct training and development 90 68 76 54 Trade and other payables (230) 20 (226) 20 Temporary and contract staff costs 675 1 721 268 285 Debt securities and borrowings (30 334) 3 567 (30 334) 3 567 Other staff costs 724 661 624 584 Amounts recycled from cash flow hedge reserve 730 477 730 477 Gross employee benefit expense 34 286 35 041 30 170 29 914 Amortisation of effective portion of terminated cash flow hedges 3 – 3 – Capitalised to property, plant and equipment (1 965) (2 056) (1 965) (2 056) Ineffective portion of cash flow hedges 727 477 727 477 32 321 32 985 28 205 27 858 (285) (3 126) (223) (3 281) 35. Impairment and writedown of assets 39. Finance income 35.1 Financial assets Insurance investments 1 059 637 – – Loans receivable 9 (8) – (14) Loans receivable 746 566 354 237 Finance lease receivables (1) (6) (1) (6) Finance lease receivables 32 37 32 37 Trade and other receivables 5 1 023 681 1 058 573 Trade and other receivables 739 468 851 468 Insurance investments 10 (69) – – Invoiced to customers 4 155 2 112 4 267 2 112 1 041 598 1 057 553 Amounts not meeting collectability criteria 20 (3 416) (1 644) (3 416) (1 644) Bad debts recovered – trade and other receivables (15) (9) (15) (9) Cash and cash equivalents 789 656 725 618 1 026 589 1 042 544 3 365 2 364 1 962 1 360 Cash interest included in finance income comprises: 35.2 Other assets Insurance investments 1 014 547 – – Inventories 13 815 847 808 833 Loans receivable 746 566 311 223 Trade and other receivables 341 – 341 – Finance lease receivables 32 37 32 37 1 156 847 1 149 833 Trade and other receivables 462 441 462 441 Cash and cash equivalents 789 656 725 618 2 182 1 436 2 191 1 377 3 043 2 247 1 530 1 319 36. Other expenses 40. Finance cost Managerial, technical and other fees 869 745 835 731 Debt securities and borrowings 33 744 29 107 33 874 29 176 Lease expense 869 998 187 164 Eskom bonds 15 528 14 562 15 711 14 576 Short term 812 943 131 109 Commercial paper 75 67 4 111 Low value 57 55 56 55 Eurorand zero coupon bonds 810 718 810 718 Auditors’ remuneration3 290 152 260 139 Foreign bonds 5 021 4 268 5 021 4 268 Net loss on disposals and writeoffs of property, plant and equipment Development financing institutions 8 841 7 059 8 841 7 059 and intangible assets 3 414 2 772 3 281 2 731 Export credit facilities 1 078 1 204 1 078 1 204 Repairs and maintenance, transport and other expenses 29 353 24 113 35 108 32 496 Floating rate notes – 3 – 3 Other loans 2 391 1 226 2 409 1 237 34 795 28 780 39 671 36 261 Derivatives held for risk management 5 147 6 708 5 147 6 708 Employee benefit obligations 27 2 156 2 483 2 114 2 436 37. Depreciation and amortisation expense Provisions 28 5 061 3 741 5 060 3 741 Depreciation of property, plant and equipment 8 33 960 33 258 33 836 33 405 Lease liabilities 29 1 267 1 300 1 244 1 300 Amortisation of intangible assets 9 166 375 19 152 Trade and other payables 464 272 462 272 Contract liabilities and deferred income recognised (government grant) 26.2 (1 641) (1 567) (1 641) (1 567) Gross finance cost 47 839 43 611 47 901 43 633 32 485 32 066 32 214 31 990 Capitalised to property, plant and equipment 8 (7 459) (8 184) (7 459) (8 184) 40 380 35 427 40 442 35 449 Cash interest included in finance cost comprises: Debt securities and borrowings 26 425 24 357 26 578 24 449 Derivatives held for risk management1 5 379 6 890 5 379 6 890 Lease liabilities 1 267 1 300 1 244 1 300 Trade and other payables 107 25 108 26 1. The annual bonus represents a thirteenth cheque. Refer to note 27.3. 33 178 32 572 33 309 32 665 2. The production bonus is self-funded and rewards employees for improved efficiency, operational productivity and performance in the production environment. 3. The audit fees for 2023 includes the current year audit fees incurred to 31 March 2023 as well as additional fees incurred to finalise the 2022 audit. There were no non-audit services for 2023 (2022: R0.5 million). 1. Includes cash paid relating to opening balance accruals. 108 109 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 41. Income tax 2023 2022 Before tax Tax Net of tax Before tax Tax Net of tax Group Company Rm Rm Rm Rm Rm Rm Restated Restated Recognised in other comprehensive income 2023 2022 2023 2022 Group Note Rm Rm Rm Rm Cash flow hedges 717 (194) 523 (950) 255 (695) Recognised in profit or loss Net change in fair value 1 567 (423) 1 144 (328) 89 (239) Current tax 903 434 – – Net amount transferred to profit or loss (730) 197 (533) (477) 129 (348) Current year 965 404 – – Net amount transferred to initial carrying amount (Over)/under provided in prior years (62) 30 – – of hedged items (120) 32 (88) (145) 37 (108) Deferred tax 14 (8 611) (3 753) (7 795) (4 270) Foreign currency translation differences 33 – 33 5 – 5 Reversal of temporary differences 1 187 3 953 2 077 3 290 Re-measurement of benefits 761 (205) 556 1 737 (400) 1 337 Raised/reversal of temporary differences 855 6 796 1 651 6 075 1 511 (399) 1 112 792 (145) 647 Under/(over) provided in prior years 332 (622) 426 (615) Company Change in tax rate – (2 221) – (2 170) Cash flow hedges 717 (194) 523 (950) 255 (695) Tax losses (9 798) (7 706) (9 872) (7 560) Net change in fair value 1 567 (423) 1 144 (328) 89 (239) Raised/reversal of temporary differences (9 458) (10 938) (9 435) (10 786) Net amount transferred to profit or loss (730) 197 (533) (477) 129 (348) (Over)/under provided in prior years (340) 600 (437) 600 Net amount transferred to initial carrying amount Change in tax rate – 2 632 – 2 626 of hedged items (120) 32 (88) (145) 37 (108) Re-measurement of benefits 733 (198) 535 1 718 (393) 1 325 (7 708) (3 319) (7 795) (4 270) 1 450 (392) 1 058 768 (138) 630 Reconciliation between standard and effective tax rate: R million Taxation income at standard rate (8 545) (4 270) (8 642) (5 091) 42. Cash generated from operations Non-taxable income (394) (292) (409) (455) Group Company Government grants (290) (271) (290) (271) Dividend income (24) (21) (43) (184) Restated Restated Incentive allowances (80) – (76) – 2023 2022 2023 2022 Rm Rm Rm Rm Expenses not deductible for tax purposes 1 304 825 1 267 806 Loss before tax (31 647) (15 249) (32 009) (18 182) Non-deductible capital expenditure1 1 284 806 1 247 787 Adjustments for: 75 936 79 745 76 500 79 737 Donations 20 19 20 19 Depreciation and amortisation expense 32 485 32 066 32 214 31 990 Change in tax rate – 410 – 455 Depreciation expense – primary energy 12 12 12 12 Prior period (over)/under provision (73) 8 (11) 15 Impairment and writedown of assets (excluding bad debts recovered) 2 197 1 445 2 206 1 386 Net fair value loss on financial instruments 285 3 126 223 3 281 Taxation income per the income statement (7 708) (3 319) (7 795) (4 270) Net loss on disposals and write offs of property, plant and equipment 3 414 2 772 3 281 2 731 % Transfer of assets from non-electricity purchasing customers (583) (779) (583) (779) Taxation income at standard rate 27.00 28.00 27.00 28.00 Write off of diesel rebate – 3 466 – 3 466 Non-taxable income 1.24 1.92 1.28 2.50 Dividend income (93) (75) (161) (655) Government grants 0.92 1.78 0.91 1.49 Increase in employee benefit obligations 4 028 4 693 3 540 4 278 Dividend income 0.08 0.14 0.13 1.01 (Decrease)/increase in provisions (1 668) 811 (1 650) 766 Incentive allowances 0.25 – 0.24 – Decrease in contract liabilities and deferred income (262) (248) (262) (248) Payments made in advance recognised in profit or loss 98 244 96 219 Expenses not deductible for tax purposes (4.11) (5.41) (3.96) (4.44) Payments received in advance recognised in profit or loss (899) (799) (896) (799) Non-deductible capital expenditure1 (4.05) (5.29) (3.90) (4.34) Finance income (3 365) (2 364) (1 962) (1 360) Donations (0.06) (0.12) (0.06) (0.10) Finance cost 40 380 35 427 40 442 35 449 Share of profit of equity-accounted investees (93) (52) – – Change in tax rate – (2.69) – (2.50) Adjustments to current tax of prior periods 0.23 (0.05) 0.03 (0.08) 44 289 64 496 44 491 61 555 Taxation income per the income statement 24.36 21.77 24.35 23.48 Changes in working capital: (2 320) (9 771) (3 666) (8 835) Payments made in advance (367) (265) (332) (265) Increase in inventories (1 048) (1 495) (1 097) (1 497) Increase in trade and other receivables (4 269) (7 369) (5 396) (6 785) Increase in trade and other payables 5 411 847 4 661 724 Expenditure incurred on employee benefit obligations (4 791) (4 731) (4 272) (4 292) Expenditure incurred on provisions (2 301) (876) (2 252) (837) Payments received in advance 5 045 4 118 5 022 4 117 41 969 54 725 40 825 52 720 1. Non-deductible capital expenditure includes expenditure of a capital nature and not incurred in the production of income. 110 111 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 43. Net debt reconciliation Compensation events The net debt reconciliation includes the changes arising from financing activities. The final settlement of open compensation claims is generally far below the amount claimed by contractors. The adjudication rulings are mostly in favour of Eskom, resulting in no additional expenditure being incurred. Eskom recognises a provision based on the best estimate Debt Derivatives of the potential expenditure required to settle open compensation claims. securities Financial held for Payments Cash and Lease trading risk made in and cash There are uncertainties relating to the finalisation of open compensation events which are subject to a contractual adjudication process borrowings1 liabilities2 liabilities management4 3 advance equivalents 6 5 Net debt where the outcome could be different to management’s assessment of the probability of an outflow of resources and best estimate of Rm Rm Rm Rm Rm Rm Rm the expenditure. The potential financial impact can therefore not be precisely determined due to the ongoing nature of the negotiations and the complexities involved. Group Balance at 31 March 2021 401 826 8 969 2 (4 868) (1 137) (4 041) 400 751 Eskom is actively engaging with the relevant parties to resolve matters in line with the contractual agreements. Net cash decrease (5 818) (417) – (2 769) (471) (11 882) (21 357) Net fair value and foreign The group continuously monitors the developments related to these contingencies and will recognise the liabilities in the financial exchange (gains)/losses (3 567) – – 8 722 – 43 5 198 statements when it becomes probable that an outflow of resources will be required, and the amount can be reasonably estimated. Foreign currency translation – – – – – (5) (5) The estimated potential contingent liabilities at 31 March 2023 arising from compensation events was R4 640 million considering the Other movements 3 8537 51 – (182) 830 – 4 552 historical outcomes on similar matters. Balance at 31 March 2022 396 294 8 603 2 903 (778) (15 885) 389 139 Net cash (decrease)/increase (9 507) (687) (2) 4 894 (369) 8 439 2 768 44.3 Contingent assets Net fair value and foreign There are certain negotiation processes underway by the SIU for the recovery of payments by Eskom arising from state capture. Further exchange losses/(gains) 30 334 – – (30 580) – (37) (283) details are not currently available as Eskom is reliant on the process as controlled by the SIU. The outcome of these processes will be Foreign currency translation – – – – – (33) (33) assessed once the details are made available to Eskom. Other movements 6 8087 210 – (231) 455 – 7 242 Balance at 31 March 2023 423 929 8 126 – (25 014) (692) (7 516) 398 833 45. Commitments Company Group Company Balance at 31 March 2021 404 042 8 967 2 (4 868) (1 137) (2 503) 404 503 2023 2022 2023 2022 Net cash decrease (6 238) (416) – (2 769) (471) (11 758) (21 652) Rm Rm Rm Rm Net fair value and foreign exchange (gains)/losses (3 567) – – 8 722 – 43 5 198 45.1 Capital expenditure Other movements 3 8297 51 – (182) 830 – 4 528 Contracted capital expenditure 29 328 25 684 29 232 25 612 Balance at 31 March 2022 398 066 8 602 2 903 (778) (14 218) 392 577 Within one year 17 958 16 260 17 863 16 189 Net cash (decrease)/increase (6 807) (575) (2) 4 894 (369) 8 423 5 564 One to five years 11 365 9 423 11 365 9 423 Net fair value and foreign After five years 5 1 4 – exchange losses/(gains) 30 334 – – (30 580) – (37) (283) Capital expenditure excludes finance costs capitalised and foreign currency fluctuations. Other movements 6 7847 13 – (231) 455 – 7 021 The capital expenditure will be financed through drawdowns from existing project related Balance at 31 March 2023 428 377 8 040 – (25 014) (692) (5 832) 404 879 loan agreements and internally generated funds. The capital programme will be reviewed and reprioritised by management in line with the Financing activities excludes cash and cash equivalents. funds available. 45.2 Leases As lessee 44. Guarantees, contingent liabilities and assets The future minimum lease payments payable under non-cancellable leases are: 44.1 Financial guarantees Within one year 195 234 58 40 EFC loans to group employees Short-term leases 137 192 1 – EFC has granted loans (secured by mortgage bonds on the properties) to qualifying employees of the group. Eskom has issued guarantees Low-value leases 58 41 57 39 to EFC to the extent to which the loan values of employees exceed the current value of the mortgage security. Right-of-use leases not yet commenced – 1 – 1 Eskom’s guarantee exposure is governed by the default probability of EFC, which is influenced by the risk of significant fluctuations in One to five years 34 52 29 49 interest rates that might cause default on repayments. The risk-adjusted credit exposure of EFC is calculated by applying a rating agency’s annual default probabilities. Low-value leases 34 50 29 47 Right-of-use leases not yet commenced – 2 – 2 Group Company Total 229 286 87 89 Unit 2023 2022 2023 2022 Short-term leases 137 192 1 – Financial guarantee Rm – – 227 104 Low-value leases 92 91 86 86 Right-of-use leases not yet commenced – 3 – 3 44.2 Contingent liabilities The lease payments payable under non-cancellable leases are of a similar nature to the Legal claims right-of-use, short-term and low-value leases recognised in the statement of financial There are legal claims in process against Eskom as a result of disputes position and income statement. with various parties. Based on the evidence available, there is no As lessor present obligation relating to these claims. The claims are disclosed The future minimum lease payments receivable under non-cancellable operating leases are: 274 267 195 182 as a contingent liability and amounted to Rm 563 525 561 523 Within one year 146 137 74 52 One to five years 119 119 112 119 After five years 9 11 9 11 1. Refer to note 25. The lease payments receivable under non-cancellable leases are of a similar nature to the right-of-use, short-term and low-value leases 2. Refer to note 29. recognised in the statement of financial position and income statement. 3. Refer to note 21.2. 4. Refer to note 17 (hedge exposure covering debt securities and borrowings). 5. Refer to note 19 (securing debt raised). 6. Refer to note 22. 7. Mainly constitutes interest accrual. 112 113 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 46. Related-party transactions and balances Group Company The group is wholly owned by the government represented by the DPE. Eskom (and its subsidiaries) are classified as schedule 2 public entities in terms of the PFMA. Eskom is part of the national sphere of government and its related parties in that sphere include national 2023 2022 2023 2022 departments (including the shareholder), constitutional institutions and public entities (schedule 1, 2 and 3). A list of related parties is Rm Rm Rm Rm provided by National Treasury on its website www.treasury.gov.za. Outstanding balances (due by related parties) Receivables and amounts owed by related parties 1 877 1 708 6 893 4 254 Related parties include subsidiaries, associates and joint ventures of the group and post-employment benefit plans for the benefit of employees. It also includes key management personnel of Eskom and close family members of these related parties. Key management National departments 131 125 131 125 personnel for Eskom include the group’s board of directors and Exco. Disclosure of related-party transactions with key management Public entities 1 322 1 200 1 239 1 131 personnel is included in note 49 and government guarantees issued to Eskom in note 5.3.2. Subsidiaries, associates and joint ventures 424 383 5 523 2 998 Group Company Loans receivable Subsidiaries, associates and joint ventures1 – – 5 681 5 657 2023 2022 2023 2022 Rm Rm Rm Rm Total due by related parties 1 877 1 708 12 574 9 911 Transactions Outstanding balances (due to related parties) Sales of goods and services 13 447 13 340 17 526 13 859 Debt securities and borrowings 111 930 112 555 117 308 115 422 National departments 1 404 1 508 1 404 1 508 National departments 53 22 53 22 Public entities 7 366 7 639 7 344 7 518 Public entities 109 412 109 826 109 412 109 826 Subsidiaries, associates and joint ventures 4 677 4 193 8 778 4 833 Subsidiaries, associates and joint ventures2 – – 5 378 2 867 Eskom Pension and Provident Fund 2 465 2 707 2 465 2 707 Government grant funding received for electrification National departments 3 120 2 456 3 120 2 456 Payables and amounts owed to related parties 5 140 3 592 8 326 7 340 Purchases of goods and services 30 023 18 337 43 033 31 396 Constitutional institutions 6 6 6 6 National departments 356 338 356 338 Constitutional institutions 9 14 9 14 Public entities 4 462 2 940 4 059 2 710 National departments 1 875 1 880 1 875 1 880 Subsidiaries, associates and joint ventures 9 18 3 598 3 996 Public entities 25 363 13 713 24 384 13 045 Eskom Pension and Provident Fund 307 290 307 290 Subsidiaries, associates and joint ventures 275 300 14 517 14 272 Eskom Pension and Provident Fund 2 501 2 430 2 248 2 185 Payments received in advance 1 761 1 196 1 775 1 211 Bad debts expense 5 33 5 2 National departments 1 761 1 196 1 761 1 196 Subsidiaries, associates and joint ventures – – 14 15 National departments – 1 – 1 Public entities 5 32 5 1 Derivative liabilities held for risk management Subsidiaries, associates and joint ventures – – 1 1 Net fair value and foreign exchange (loss)/gain Subsidiaries, associates and joint ventures – – (1) 1 Total due to related parties 118 831 117 343 127 410 123 974 Finance income 99 64 453 301 Commitments Eskom does not have any material commitments with its related parties. National departments 8 8 8 8 Public entities 91 56 91 56 Subsidiaries, associates and joint ventures – – 354 237 Finance cost1 9 238 8 447 9 443 8 583 National departments 9 7 9 7 Public entities 8 951 8 215 8 951 8 215 Subsidiaries, associates and joint ventures – – 205 136 Eskom Pension and Provident Fund 278 225 278 225 Dividend income Subsidiaries, associates and joint ventures – – 161 654 Lease income 11 5 14 8 National departments 2 – 2 – Public entities 9 5 9 5 Subsidiaries, associates and joint ventures – – 3 3 Lease expenses 10 7 12 11 Public entities 10 7 10 7 Subsidiaries, associates and joint ventures – – 2 4 Environmental levy Public entities 7 033 7 512 7 033 7 512 1. The effective interest rate on the loans to subsidiaries is 7.91% (2022: 4.75%). 1. Bonds are bearer instruments and it is therefore unknown if the initial counterparty still holds the bonds. Transactions in the secondary market where Eskom is not the counterparty are therefore excluded. 2. Refer to note 25 for effective interest rate and maturity date relating to intercompany instruments. 114 115 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 47. Events after the reporting date 48. Restatement of comparatives The following significant events occurred after 31 March 2023: The pre-commissioning proceeds from electricity sales and the cost to produce the electricity were previously allocated to the cost of the power station under construction. The related pre-commissioning revenue and cost are now accounted for in profit or loss in terms Changes in board and Exco of the amendment to IAS 16 that became effective from 1 April 2022. Refer to note 50.2. The 2021 and 2022 statements of financial The group chairman Mr PM Makwana resigned from the Eskom board effective from 30 October 2023. Dr M Nyati has been appointed position, income statements and statements of cash flows have been restated as a result of the amendment to IAS 16 as follows: as the new chairman of the board effective from 31 October 2023. Group Company The group chief operating officer Mr JA Oberholzer retired on 30 April 2023 and was on a fixed-term contract until 31 July 2023. The position was removed as it is no longer considered to be required. The divisional executives for generation, transmission and Previously Adjustments Restated Previously Adjustments Restated distribution, Mr SM Scheppers, Mr BJ Nxumalo and Mr ML Bala respectively, are attending Exco in a participating role from 1 April 2023. reported reported Rm Rm Rm Rm Rm Rm The group executive: government and regulatory affairs, Ms N Minyuku, and group executive: legal and compliance, Ms M Govender, Statements of financial position resigned on 30 April 2023 and 30 June 2023 respectively. Ms W Madonsela acted as the group executive: legal and compliance from 1 July 2023. Ms S Nassiep acted as the group executive: government and regulatory affairs from 1 June 2023 until 9 August 2023 and at 31 March 2021 Ms N Sithole acted from 10 August 2023 in this position. Assets Non-current Debt relief Property, plant and equipment 661 694 1 865 663 559 663 654 1 865 665 519 The Eskom Debt Relief Act, 7 of 2023, was enacted on 7 July 2023. The Minister of Finance confirmed the conditions in terms of Deferred tax 6 280 (522) 5 758 6 651 (522) 6 129 section 2(2)b of the act on 31 July 2023. Eskom must comply with the following conditions that are applicable from 1 August 2023 to Equity 31 March 2026 (conditions can be amended by the Minister from time to time): Capital and reserves 215 304 1 343 216 647 197 180 1 343 198 523 • The debt relief may only be used to settle debt and interest payments. Statements of financial position • Capital expenditure may only be incurred for transmission and distribution as well as generation relating to minimum emission at 31 March 2022 standards, flue-gas desulphurisation, outages and maintenance of existing plant and a greenfield generation project with the written Assets approval from the Minister of Finance. Non-current • All net cash proceeds from the sale of non-core assets, including the EFC and any property sales, may only be used to settle debt and Property, plant and equipment 665 070 2 388 667 458 667 105 2 388 669 493 interest payments. Deferred tax 9 971 (645) 9 326 10 906 (645) 10 261 • Eskom may only borrow new facilities with the written approval of the Minister of Finance. Equity • The Eskom guarantee framework agreement for the R350 billion facility (which expired on 31 March 2023) must, subject to the terms Capital and reserves 235 314 1 743 237 057 215 191 1 743 216 934 of that agreement, be reduced as the relevant redemptions fall due. Income statements for the year • Positive equity balances in Eskom’s derivative contracts may not be used to structure new debt or loan agreements or be used as ended 31 March 2022 margin financing for another derivative contract or derivative overlays, without the written approval of the Minister of Finance. Revenue 246 520 1 074 247 594 246 520 1 074 247 594 • Eskom must continue to prioritise and expedite the implementation of the legal separation process, including for example, obtaining Primary energy (132 439) (494) (132 933) (132 439) (494) (132 933) the required lender consent. Depreciation and amortisation expense (32 009) (57) (32 066) (31 933) (57) (31 990) • Eskom may not implement remuneration adjustments that negatively affect its overall financial position and sustainability. Loss before tax (15 772) 523 (15 249) (18 705) 523 (18 182) • Any transaction undertaken in terms of section 54 of the PFMA must be subject to joint approval by the Minister of Public Enterprises Income tax 3 442 (123) 3 319 4 393 (123) 4 270 and the Minister of Finance. Loss for the year (12 330) 400 (11 930) (14 312) 400 (13 912) Eskom received debt relief of R16 billion on 3 August 2023, R12 billion on 26 October 2023 and R8 billion on 30 October 2023. Statements of cash flows for Borrowing activities the year ended 31 March 2022 Eskom concluded two funding arrangements on 31 March 2023 as part of its 2023 borrowing programme where the cash funds were Cash flows from operating activities 53 444 580 54 024 51 660 580 52 240 only received on 4 April 2023. These consisted of a six-year USD750 million (R13 295 million) foreign loan agreement and an eight-year Cash flows used in investing activities (31 823) (580) (32 403) (29 613) (580) (30 193) USD155 million (R2 757 million) foreign bond. Cash flows used in financing activities (9 739) – (9 739) (10 289) – (10 289) Cash and cash equivalents at beginning Plant incidents of the year 4 041 – 4 041 2 503 – 2 503 A fire incident was experienced at Grootvlei power station unit 1 on 6 May 2023. Investigations are under way into the cause of the Foreign currency translation 5 – 5 – – – incident, the extent of the damage as well as the scope of work for recovery. Effect of movements in exchange rates Environmental compliance on cash held (43) – (43) (43) – (43) Eskom received postponement from the Department of Forestry, Fisheries and the Environment relating to the minimum emission Cash and cash equivalents at end of the year 15 885 – 15 885 14 218 – 14 218 standards pertaining to sulphur dioxide (SO2) emission levels at Kusile power station on 5 June 2023. The atmospheric emission licence for Kusile power station was updated and issued on 13 June 2023 in line with the postponement. The impacted notes to the annual financial statements have been updated where relevant because of the restatements, including where a movement reconciliation has been presented. The restatements also resulted in various restatements in the capital management, financial The licence allows Eskom to operate the three units that were damaged at Kusile power station after the flue-gas duct failure at unit 1 risk management, fair value and segment reporting disclosures. on 22 October 2022 without using the flue-gas desulphurisation plant (equipped with emission-abatement technology for SO2) until 31 March 2025 while the flue-gas ducts in the permanent stacks are being repaired (expected completion by December 2024). Refer to note 51.3(b) for details of the restatement to non-technical energy losses included in losses due to criminal conduct. The repairs to the temporary stack structures were completed ahead of schedule with Kusile unit 3 returned to service on 30 September 2023 and unit 1 on 16 October 2023. Eskom will continue to implement the necessary steps to mitigate the impact of SO2 emissions on air quality during the repair process. Legal separation NERSA approved the license to operate the transmission system on 28 July 2023 and the trading and import/export licences on 14 September 2023 for NTCSA. The granting of the requisite operating licences to NTCSA is one of the key dependencies required to enable the operationalisation of the NTCSA. The Minister of Public Enterprises granted approval of the PFMA application in terms of section 54(2)(a) and 54(2)(d) on 7 August 2023 for the transfer of the distribution business to NEDCSA, subject to further discussions on the preferred model and financial sustainability of the new distribution company. 116 117 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 49. Directors’ remuneration 49.2 Non-executive directors The background to directors’ remuneration and an overview of the main provisions of the remuneration policy is included in the remuneration and benefits section in the integrated report. The details of the board (governing body) and executive management 2023 2022 R’000 R’000 remuneration are included in this note. The details regarding the appointments, resignations and other changes in roles of directors during the year are included in the directors’ report. Non-executive directors receive a fixed fee and are reimbursed for out-of-pocket expenses incurred in fulfilling their duties. Their emoluments were as follows: 49.1 Executive directors and group executives PM Makwana 799 – The remuneration of the group chief executive and the chief financial officer (executive directors) and Exco members (group executives) RDB Crompton 724 717 are disclosed below. Eskom’s prescribed officers are the group executives. The group chief executive and the chief financial officer have FBB Gany-Ahmed 459 – fixed-term contracts. The group executives have permanent contracts based on Eskom’s standard conditions of service. LL Goqwana 296 – CR le Roux 400 – The emoluments for the executives of the group were as follows: APZ Mafuleka 314 – 2023 2022 NVB Magubane – 255 Name Salary Other Total Salary Notice Other Total MW Makgoba 799 1 599 payments remuneration payment payments remuneration BCE Makhubela 341 682 earned and earned and B Mavuso 296 593 cash paid cash paid L Mkhabela 366 – R’000 R’000 R’000 R’000 R’000 R’000 R’000 PE Molokwane 355 711 TH Mongalo 361 717 Executive directors 11 522 1 065 12 587 11 940 – 222 12 162 TL Mthombeni 348 – AM de Ruyter 6 453 457 6 910 7 040 – 71 7 111 B Ntshalintshali 393 – C Cassim 4 900 608 5 508 4 900 – 151 5 051 M Nyati 445 – JM Buys 169 – 169 – – – – T Ramano 393 – Group executives 23 883 885 24 768 22 938 169 1 084 24 191 B Vilakazi 366 – C von Eck 462 – JA Oberholzer 5 496 127 5 623 5 496 – 161 5 657 FS Burn 3 519 134 3 653 3 400 – 80 3 480 7 917 5 274 M Govender 3 100 84 3 184 1 550 – 35 1 585 N Minyuku 3 100 157 3 257 3 100 – 92 3 192 N Otto – – – 1 017 – 10 1 027 50. New standards and interpretations EM Pule 3 339 224 3 563 3 339 – 536 3 875 50.1 Standards, interpretations and amendments to published standards that are not yet effective J Sankar 2 468 157 2 625 1 795 – 162 1 957 The following new standards, interpretations and amendments to existing standards have been published and are applicable for future MS Tshitangano – – – 380 169 6 555 accounting periods that have not been adopted early by the group. These standards and interpretations will be applied in the first year V Tuku 2 861 2 2 863 2 861 – 2 2 863 that they are applicable to the group which is the financial period beginning on or after the effective date. Topic Summary of requirements Impact 35 405 1 950 37 355 34 878 169 1 306 36 353 IFRS 17 Insurance contracts IFRS 17 will replace IFRS 4 Insurance contracts and introduces one The standard will mainly impact Salaries and amendments to accounting model for all insurance contracts in all jurisdictions that the individual financial statements Salaries consist of a guaranteed package that includes Eskom’s medical and pension fund contributions. No fees were paid to executives IFRS 17 (1 January 2023) apply IFRS. of Escap. There will be no material who serve on the boards of Eskom subsidiaries. impact on the group as the It requires an entity to measure insurance contracts using updated insurance activities undertaken by estimates and assumptions that reflect the timing of cash flows and Escap are mainly for the benefit of Notice payments take into account any uncertainty relating to insurance contracts. the group and the key account These consist of payments made in terms of contractual agreements. The financial statements of an entity will have to reflect the time balances affected by the new Other payments value of money of estimated payments required to settle incurred standard do not impact the results Other payments include accumulated leave paid out, sign-on bonuses, long service awards and expenditure related to telephone, security claims. Insurance contracts will be measured only on the obligations of the group. services, operating vehicle, professional subscriptions as well as spouse funeral and dreaded disease cover. created by the contracts. An entity will also be required to recognise profits as an insurance service is delivered, rather than Bonuses on receipt of premiums. Short-term bonus Disclosure of accounting The amendments aim to help entities provide accounting policy No material impact on the group If applicable, a short-term incentive bonus is paid after year end. No short-term bonuses were awarded in the current or prior financial years. policies – amendments to disclosures that are more useful by replacing the requirement for as the group discloses significant IAS 1 and IFRS Practice entities to disclose their significant accounting policies with a accounting policies for transactions Long-term bonus statement 2 Making requirement to disclose their material accounting policies. that have a material impact. The If applicable, a long-term incentive bonus is paid after year end in cash and consists of the vested amount in a reporting period. No new materiality judgements group continues to consider long-term bonus units have been awarded since 1 April 2017 due to Eskom’s current financial constraints. The practice statement provides guidance and examples on how (1 January 2023) materiality in its disclosure. entities apply the concept of materiality in making decisions about 2023 2022 accounting policy disclosures. R’000 R’000 Definition of accounting The amendments to IAS 8 introduces a definition of accounting The amendments are not Housing loans estimate – amendments to estimates. expected to have a material C Cassim 2 906 3 032 IAS 8 Accounting policies, impact on the group. The group J Sankar 4 004 695 The amendments clarify the distinction between changes in an changes in accounting will apply the definitions where 6 910 3 727 estimates and errors accounting estimate, changes in accounting policies and the applicable. (1 January 2023) correction of errors. The use of measurement techniques and Home loan balances are disclosed when an individual is in the role of an executive director or group executive. The interest rate on the inputs to develop accounting estimates are also clarified. loans from EFC at 31 March 2023 was 9% (2022: 5.75%). The loans are repayable over a maximum period of 30 years. The terms and conditions applicable to ex-employees are applied on resignation. 118 119 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 50. New standards and interpretations continued 50.2 Standards, interpretations and amendments to published standards that are effective and applicable to the group Topic Summary of requirements Impact Topic Summary of requirements Impact Deferred tax related to Targeted amendments were made to IAS 12 to clarify how The amendments are not Annual improvements The amendments to IFRS 1 First-time adoption of International The amendments to IFRS 1 are assets and liabilities arising companies should account for deferred tax on certain transactions expected to have a material 2018–2020 cycle – Financial Reporting Standards simplifies the application of IFRS 1 for not applicable as all subsidiaries of from a single transaction eg leases and decommissioning provisions. impact on the group as the group amendments to IFRS 1, a subsidiary that becomes a first-time adopter of IFRS standards the group apply IFRS. – amendments to IAS 12 already comply with these IFRS 9, IAS 41 and IFRS 16 later than its parent. Income taxes The amendments narrow the scope of the initial recognition requirements. The group (1 January 2022) (1 January 2023) exemption so that it does not apply to transactions that give rise recognises a deferred tax asset The amendments to IFRS 9 Financial instruments clarify the fees No material impact on the group to equal and offsetting temporary differences. As a result, a and a deferred tax liability for that an entity includes when assessing whether the terms of a new as fees are normally taken into deferred tax asset and a deferred tax liability will have to be temporary differences arising on or modified financial liability are substantially different from the account in line with the recognised for temporary differences arising on the initial initial recognition of leases and terms of the original financial liability. These fees include only those amendment when assessing recognition of a lease and a decommissioning provision. The decommissioning provisions. paid or received between the borrower and the lender, including whether the terms of a new or amendments apply retrospectively. fees paid or received by either the borrower or lender on the modified financial liability are Classification of liabilities IAS 1 has been amended to clarify the requirements of determining No material impact as there are other’s behalf. An entity applies the amendments to financial substantially different to the as current or non-current if a liability is current or non-current. currently no financial liabilities liabilities that are modified or exchanged on or after the beginning original liability. – amendments to IAS 1 with a right to defer settlements. of the annual reporting period in which the entity first applies the Presentation of financial The amendments clarify: The group will continue to amendments. statements • what is meant by a right to defer settlement consider the impact where The amendments to IAS 41 Agriculture remove the requirement The amendment to IAS 41 is not (1 January 2024) • that a right to defer must exist at the end of the reporting period applicable. to exclude cash flows for taxation when measuring fair value, applicable as the group does not • that classification is unaffected by the likelihood that an entity thereby aligning the fair value measurement requirements in have any agricultural assets as will exercise its deferral right IAS 41 with those in IFRS 13 Fair value measurement. defined in IAS 41. • that only if an embedded derivative in a convertible liability is The amendments deleted references to reimbursements relating The impact of the amendment is itself an equity instrument would the terms of a liability not to leasehold improvements in illustrative example 13 in IFRS 16. not material as contracts with impact its classification The amendments remove the potential for confusion in identifying leasehold improvements have These amendments have to be applied retrospectively. lease incentives. been considered in terms of the measurement guidance of IFRS 16 Sale or contribution of These amendments address the conflict between the guidance on No impact as the group is and the assessment was not assets between an investor consolidation and equity accounting when a parent loses control currently not disposing of any of impacted by the update to the and its associate or joint of a subsidiary in a transaction with an associate or joint venture. its investments in associates or illustrative example. venture – amendments to The parent recognises the full gain on the loss of control under joint ventures. IFRS 10 and IAS 28 the consolidation standard, but under the standard on associates Amendments to IFRS 3 – Amendments were made to replace older references that referred No impact as there are currently (optional adoption, and joint ventures, the parent recognises the gain only to the reference to the to the Framework for the preparation and presentation of financial no business combinations. effective date deferred extent of unrelated investors’ interests in the associate or joint Conceptual framework for statements with Conceptual framework for financial reporting. The indefinitely) venture. The amendments require the full gain to be recognised financial reporting Conceptual framework for financial reporting is applicable from when the assets transferred meet the definition of a business (1 January 2022) 1 January 2020 and the references and related details were aligned under IFRS 3 Business combinations. accordingly. Onerous contracts: cost of The amendments clarify that the costs of fulfilling a contract No material impact as the group fulfilling a contract – comprise both: already accounts for onerous amendments to IAS 37 • the incremental costs – direct labour and materials contracts on the full cost approach. Provisions, contingent • an allocation of other direct costs – an allocation of the liabilities and contingent depreciation charge for an item of property, plant and assets (1 January 2022) equipment used in fulfilling the contract The amendments apply to open contracts on adoption without the need to restate comparatives. Proceeds before intended The amendments prohibit entities from deducting any proceeds The proceeds from electricity use – amendments to from selling items produced while bringing that asset to the sales and the cost to produce the IAS 16 Property, plant and location and condition necessary for it to be capable of operating electricity were previously equipment (1 January 2022) in the manner intended by management from the cost of an item allocated to the cost of the power of property, plant and equipment. The proceeds from selling such station under construction. The items and the costs of producing those items are instead related pre-commissioning recognised in profit or loss. revenue and cost are now accounted for in profit or loss in terms of the amendment to IAS 16. The accounting and taxation treatments relating to proceeds before intended use are now aligned with no temporary differences and deferred tax from the effective date. The amendments are applicable retrospectively only to items of The impact of the restatement is property, plant and equipment made available for use on or after disclosed in note 48. the beginning of the earliest period presented in the financial statements in which the amendments are first applied. 120 121 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 51. Information required by the Public Finance Management Act 2023 2022 Section 55(2)(b)(i) of the PFMA requires that the particulars of any irregular expenditure, any fruitless and wasteful expenditure as well as material losses due to criminal conduct be disclosed in the annual financial statements and annual report (integrated report). The Current Previously Prior year Confirmed Restated National Treasury Instruction 4 of 2022/23 on PFMA Compliance and Reporting Framework was applied in this regard when compiling year reported errors during the the disclosure in the 2023 annual financial statements and integrated report. The instruction applies to all departments, trading entities, current year constitutional institutions and public entities listed in Schedules 2 and 3 to the PFMA and is effective from 3 January 2023. Note Rm Rm Rm Rm Rm Company The instruction requires that detailed information be reported in the integrated report and only expenditure relating to the current and PFMA 653 1 454 (244) 270 1 480 comparative financial years be reported in the annual financial statements. All information reported previously in the annual financial statements is therefore still reported in the integrated report. The instruction also requires reporting of amounts inclusive of VAT. The Use of sole source (a) 55 601 (56) – 545 group has historically reported all amounts excluding VAT and continued to do so in the current year due to limited time and resources to Incorrect classification as emergency procurement (b) – 5 – – 5 recalculate amounts, particularly on opening balances and multi-year contracts where continued expenditure was incurred in the current Tender processes not adhered to and insufficient and comparative years. delegation of authority (c) 460 545 (167) 270 648 Modifications exceeding allowed amounts (d) 138 303 (21) – 282 The group is required to report quarterly to National Treasury on current and historical irregular expenditure and fruitless and wasteful expenditure that has not been fully addressed. PPPFA 245 857 (744) – 113 Incorrect tender process applied (e) – 19 (19) – – 51.1 Irregular expenditure Tax clearance certificates (f ) 142 626 (548) – 78 Irregular expenditure is defined as expenditure, other than unauthorised expenditure, incurred in contravention of, or that is not in Designated sectors (g) 103 212 (177) – 35 accordance with a requirement of any applicable legislation. The scope includes transgressions of any laws and regulations regardless of whether or not the expenditure was justified from a business perspective, value was received, the breaches were deliberate or accidental, CIDB regulations or the breaches happened unknowingly or in good faith. Contracts awarded without following CIDB requirements (h) 39 2 283 – 285 2023 2022 National Treasury instructions Current Previously Prior year Confirmed Restated Expenditure not in accordance with National year reported errors during the Treasury instructions (i) – – – 1 1 current year Various commercial requirements Note Rm Rm Rm Rm Rm Breach of more than one legislative requirement (j) 3 744 5 437 (304) 1 815 6 948 Other – 6 (1) – 5 Group PFMA 975 2 095 (314) 901 2 682 4 681 7 756 (1 010) 2 086 8 832 Use of sole source (a) 108 929 (56) 11 884 The National Treasury Instruction Note 4 of 2022/23 requires that expenditure must be disclosed in the year it was incurred. The Incorrect classification as emergency procurement (b) – 12 (6) – 6 expenditure that was reported previously in 2022 was therefore adjusted to only include the irregular expenditure incurred in the year. Tender processes not adhered to and insufficient The allocation of additional identified expenditure to the relevant reporting period was previously done based on general principles delegation of authority (c) 729 851 (231) 886 1 506 applied at a summarised level. This led to instances where expenditure was reported in the incorrect reporting period. This shortcoming Modifications exceeding allowed amounts (d) 138 303 (21) 4 286 has been addressed in 2023 with reporting of expenditure in the correct period at a divisional level. PPPFA 257 862 (744) 2 120 There were also 63 matters of irregular expenditure relating to 2022 that were confirmed and quantified in the current year. Incorrect tender process applied (e) 2 24 (19) 2 7 Tax clearance certificates (f ) 142 626 (548) – 78 Details of the material restatements have been included in the notes below where relevant. Designated sectors (g) 113 212 (177) – 35 (a) Use of sole source CIDB regulations State-owned entities are required to procure goods and services in a manner that is fair, equitable, transparent, competitive and cost- Contracts awarded without following CIDB effective. Expenditure was incurred on awards which did not follow proper tender processes where awards were incorrectly allocated requirements (h) 47 5 277 – 282 to predetermined suppliers. National Treasury instructions Expenditure not in accordance with National The irregular expenditure reported in the current year relates to costs incurred in 2023 on non-compliant contracts from prior years. Treasury instructions (i) – – – 1 1 Sole source requests are scrutinised to confirm compliance with criteria before approval through the relevant governance processes. Various commercial requirements The requirement to obtain National Treasury approval for these transactions has since been repealed through the PFMA Supply Chain Breach of more than one legislative requirement (j) 3 751 5 483 (347) 2 176 7 312 Management (SCM) National Treasury Instruction No. 3 of 2021/22, effective 1 April 2022. All procurement through other means are Other – 6 (1) – 5 reported to National Treasury within 14 days of transaction approval. 5 030 8 451 (1 129) 3 080 10 402 (b) Incorrect classification as emergency procurement Irregular expenditure was incurred where emergency purchases did not meet the National Treasury requirements for emergency procurement. Four new incidents of irregular expenditure which occurred during 2022 were reported in this category. The requirement to obtain National Treasury approval for these transactions has since been repealed through the PFMA SCM National Treasury Instruction No. 3 of 2021/22, effective 1 April 2022. All procurement through other means are reported to National Treasury within 14 days of transaction approval. (c) Tender processes not adhered to and insufficient delegation of authority Irregular expenditure was incurred where incorrect tender processes were followed and/or transactions were executed without the appropriate approvals. A procurement-specific delegation of authority, extracted from the Eskom delegation of authority, is being created. (d) Modifications exceeding allowed amounts National Treasury required that their approval be obtained for any modification made during 1 May 2016 to 1 April 2022 to an original contract where the value of the modification was more than 20% or R20 million for construction-related goods, works or services and 15% or R15 million for all other goods or services. The group did not initially comply with this requirement, predominately due to a misinterpretation of the instruction note. The requirement to obtain National Treasury approval for these transactions has since been repealed through the PFMA SCM National Treasury Instruction No. 3 of 2021/22, effective 1 April 2022. Expansions and variations of contracts are reported to National Treasury on a monthly basis. 122 123 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 51. Information required by the Public Finance Management Act continued 51.3 Criminal conduct Material losses caused by criminal conduct and any disciplinary, civil or criminal action taken in respect of such losses are reported in 51.1 Irregular expenditure continued terms of the significance and materiality framework as agreed upon with the Minister of Public Enterprises. Incidents that exceeded the (e) Incorrect tender process applied materiality threshold individually or as a type of closely related items are disclosed. All losses, regardless of materiality, were disclosed in The Preferential Procurement Policy Framework Act, No. 5 of 2000 (PPPFA) requires that the preferential points calculation is determined previous financial years. inclusive of VAT. Certain procurement was incorrectly done where the preferential points calculation was determined exclusive of VAT. The controls continue to be effective as the number of findings in this category has dramatically decreased. Group Company (f) Tax clearance certificates Restated Restated The PPPFA regulations stipulate that suppliers must be compliant with SARS regulations. Internal processes require that the tax status of Note 2023 2022 2023 2022 all successful tenderers is confirmed to be compliant prior to concluding a contract. This continues to be an area of concern. Losses incurred (Rm) Theft of conductors, cabling and network-related equipment (a) 197 316 197 315 (g) Designated sectors Estimated non-technical energy losses (b) 5 607 5 343 5 607 5 343 Where local production and content is of critical importance in the award of tenders in designated sectors, such tenders must be Fraud and corruption (c) 81 14 80 10 advertised with a specific tendering condition that only locally produced goods, services or works or locally manufactured goods that Malicious damage to property (a) 122 49 122 49 meet the stipulated minimum threshold for local production and content will be considered. Contracts were awarded to suppliers despite Attempted theft (a) 25 5 25 5 having declared a local content threshold that was below the required stipulated threshold as per the Department of Trade and Industry list of designated materials. Internal processes make it mandatory for commercial practitioners to indicate whether the transaction has 6 032 5 727 6 031 5 722 designated elements or not. Losses recovered (Rm) Theft of conductors, cabling and network-related equipment (a) 9 18 9 18 (h) Contracts awarded without following CIDB requirements Estimated non-technical energy losses (b) 225 447 225 447 The group did not always comply with the Construction Industry Development Board (CIDB) regulations regarding the advertising of Fraud and corruption (c) – 1 – 1 tenders, grading of contractors and publishing of awards. One new incident was reported during the year, while the rest of the current Malicious damage to property (a) – – – – year expenditure relates to existing multi-year contracts. Attempted theft (a) 1 1 1 1 (i) Expenditure not in accordance with National Treasury instructions 235 467 235 467 One new incident relating to 2022 of insignificant value was reported during the year. Number of incidents (j) Breach of more than one legislative requirement Theft of conductors, cabling and network-related equipment (a) 2 522 3 226 2 519 3 220 Transgression of more than one legislative requirement was identified in certain instances. Continuous improvements are made to Estimated non-technical energy losses (b) – – – – processes to address breaches. Expenditure of R2 630 million incurred in the current year relates to new matters, of which 78% Fraud and corruption (c) 56 65 36 20 comprised of an isolated incident relating to the non-application of the requirements of the National Industrial Participation Programme. Malicious damage to property (a) 342 226 342 225 The remaining amount incurred in 2023 relates to existing multi-year contracts that will continue to attract irregular expenditure until Attempted theft (a) 116 121 116 119 condoned. 3 036 3 638 3 013 3 584 51.2 Fruitless and wasteful expenditure Number of arrests Fruitless and wasteful expenditure is expenditure made in vain that could have been avoided had reasonable care been exercised. Fruitless Theft of conductors, cabling and network-related equipment (a) 167 244 167 243 and wasteful expenditure is reported in the annual financial statements when it is confirmed. Estimated non-technical energy losses (b) 39 16 39 16 Fraud and corruption (c) 3 7 3 6 2023 2022 Malicious damage to property (a) 26 10 26 10 Current year Previously Adjustments Restated Attempted theft (a) 59 25 59 24 reported 294 302 294 299 Rm Rm Rm Rm Group (a) Theft of conductors, cabling and network-related equipment, malicious damage to property and attempted theft Project management 102 17 ( 17) – Actions to combat losses through criminal conduct are managed in collaboration with other affected state-owned companies, industry Procurement and contract management – 1 ( 1) – role players, the National Prosecuting Authority and SAPS, including: Interest and penalties – 7 ( 6) 1 • realignment of security contracts (scope and resources) and optimisation of deployment Other 3 1 1 2 • improve the Eskom asset disposal process and strategies 105 26 ( 23) 3 • focus on asset management and protection – researching and implementation of innovative solutions, i.e. unique marking and tracking capabilities Company • drive policy and legislative changes to address scrap and market regulation Project management 102 8 ( 8) – Procurement and contract management – 1 ( 1) – • introduction of integrated, intelligent and SMART security technologies and systems to reduce dependence on the human factor such Interest and penalties – 7 ( 6) 1 as use of drones, intelligent cameras, alarm systems Other 2 1 ( 1) – • focused strategies and projects on revenue losses – metering, vending, tampering, disruptive operations, etc. • minimising breaches that allow easy access to sites and assets by improving housekeeping, appropriate storing of material and equipment 104 17 ( 16) 1 with well-functioning delay and deterring solutions to prevent or minimise impact • deploying robust security systems that can detect and prevent crime and provide evidence that can be used for disciplinary or criminal The group experienced 9 (2022: 40, restated) and the company 5 (2022: 20, restated) incidents of fruitless and wasteful expenditure processes during the year. Overpayments of R1 632 million on Kusile contracts dating back to 2014 were confirmed in the current year, of which R102 million was incurred in 2023. Fruitless and wasteful expenditure must be disclosed in the year it was incurred in terms of the National • ensuring consistent and continuous screening and vetting of contractors and staff to prevent and minimise insider threat involvement Treasury Instruction No. 4 of 2022/23. The 2022 expenditure previously disclosed for the group was reduced because of a reallocation and collusion of expenses to the correct accounting period. • arrests and working with relevant role players to build strong cases and dockets leading to convictions 124 125 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 51. Information required by the Public Finance Management Act continued 52. Reportable irregularities and matters under investigation 51.3 Criminal conduct continued 52.1 Reportable irregularities (b) Estimated non-technical energy losses The external auditors raised certain reportable irregularities in terms of section 45 of the Auditing Profession Act. Progress was made in Non-technical energy losses relate to losses due to electricity theft through illegal connections, tampering and bypassing of electricity clearing these reportable irregularities. meters as well as the purchase of electricity tokens from unregistered or illegal vendors. The management of non-technical losses focuses The table below reflects the status of the reportable irregularities at 31 March 2023. The discussion focused on items that were open at on ensuring that all energy supplied is accounted, including initiatives to minimise non-technical energy losses. the previous year end and new items identified in the current year. The reported losses represent the estimated cost of non-technical energy lost. Description Response Status Total energy losses were as follows: Reportable irregularities – 31 March 2022 2023 2022 1. Eskom failed to effect corrective action for identified • Response discussed in reportable irregularity Encapsulated in % GWh % GWh non-compliance to the National Environmental number 7 below. finding 7 Management Act, No. 107 of 1998 (NEMA) thereby Technical 2.93 5 755 2.89 5 943 breaching fiduciary duties. Non-technical 6.81 13 396 6.73 13 835 2. Certain financial records were not complete or • Response discussed in reportable irregularities Encapsulated in Non-technical energy losses are determined by applying a scientific approach to measure total energy losses as the difference between accurately maintained in line with legislative number 10 and 13 below. findings 10 and 13 energy produced and energy sold. Technical energy losses are derived based on known factors of the electrical grid such as conductor requirements of the PFMA and Companies Act. This resistance, transformer and equipment losses. The residual of losses is attributed to non-technical losses. includes: • Incomplete registers relating to required PFMA A review was conducted of the methodology to split energy losses into technical and non-technical losses. The non-technical energy losses disclosure which resulted in scope limitations previously reported were restated as it was found that the pattern of the change in non-technical losses already existed at 31 March 2022. relating to information not provided by management to the auditors. 2022 • Keeping of accurate and complete accounting Previously Adjustments Restated records for preparing the annual financial reported Rm Rm statements. Rm • Multiple non-compliances of PFMA (section 40, Non-technical energy losses 2 291 3 052 5 343 51 and 55) and the Companies Act (section 28, 29 and 93). The inaccurate and incomplete Eskom invoiced R346 million (2022: R752 million) of revenue relating to these losses during the year, of which R225 million financial record keeping is a material breach of the (2022: R447 million) has been received. fiduciary duties of management. 3. Tender documents were requested for audit • The implicated employee was dismissed from Closed (c) Fraud and corruption purposes. These documents were purposefully Eskom’s service. Eskom concluded 56 (2022: 65) investigations into fraud during the year. The internal control measures in the affected areas have been destroyed in a fire. Management was made aware of • The record management standards were updated reviewed and enhancements recommended to the accountable line managers for implementation. This includes controls, disciplinary, the matter and failed to investigate whether there to ensure record keeping is adequately covered criminal and civil proceedings against those involved. are additional circumstances around whether the and communicated to procurement practitioners documents were destroyed to avoid audit findings, and relevant business employees during and to ensure appropriate consequence December 2022. management. • The ethics training material will be updated to cover destroying of documents. It is compulsory for all employees to attend ethics training annually. • Awareness communication regarding the importance of retention of records were issued to all employees. 4. Allegations of financial misconduct against the • The matters have been reported to the accounting Re-reported in 2023 accounting authority was not reported to the authority. and subsequently executive authority. Thus, the relevant executive closed authority could not ensure that an appropriate investigation process was followed and that disciplinary proceedings are initiated in terms of National Treasury regulations section 33.1.3. 5. Due to the backlog of forensic cases, management • Response discussed in reportable irregularity Encapsulated in are not meeting the requirements of section 33.1.2 number 8 below. finding 8 of the National Treasury regulations and have not met the 30-day investigation deadline as required. In addition, management is not meeting its fiduciary duty requirements as delays in investigations will impact on Eskom’s ability to mitigate any possible future exposures to financial losses and to implement effective consequence management. This results in the accounting authority not being in a position to confirm that all relevant matters are reported in terms of section 34(1) of the Prevention and Combatting of Corrupt Activities Act (PRECCA). 126 127 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 52. Reportable irregularities and matters under investigation continued 52.1 Reportable irregularities continued Description Response Status Description Response Status Reportable irregularities – 31 March 2022 continued Reportable irregularities – 31 March 2023 continued 6. Management has not complied with sections • Response discussed in reportable irregularity Encapsulated in 8. Certain duties have not been fulfilled. These include: • Weaknesses and opportunities for improvement Open, pending 51(1)(a)(i), 51(1)(e)(iii) and 55(1)(a) of the PFMA as number 11 below. finding 11 • Contravention with the requirements of National have been identified. finalisation of they failed to: Treasury regulation section 33.1.2 as there were • Some of the investigations have not been finalised in forensic backlog and • Conduct investigations of instances of irregular delays within the investigative functions of the line with the National Treasury regulations due to the disciplinary inquiries and fruitless and wasteful expenditure reported organisation in initiating and finalising forensic complexity thereof. in previous years to determine if disciplinary steps investigations and allegations of misconduct of • The use of panels and other mechanisms have been need to be taken against liable officials. individuals in key roles. implemented to assist with addressing the backlogs • Management also did not meet its fiduciary duty in investigations. • Take disciplinary actions against any official who requirements as delays in investigations will impact • The use of external firms from the forensics panel has made or permitted irregular and fruitless and Eskom’s ability to mitigate any possible future been increased and has yielded significant progress wasteful expenditure based on the outcome of exposures to financial losses in contravention to the towards closing of cases. It is envisaged that the backlog investigations. requirements of section 50 (1) of the PFMA. will be addressed by the end of the 2024 financial year. • Provide supporting documentation to confirm • The aggregate of these matters led the auditors • Disciplinary processes where there have been that disciplinary steps were taken against all the to believe that management and the board have allegations of misconduct have been instituted officials who made or permitted irregular and not acted in good faith, in the best interest of the against individuals within the organisation. fruitless and wasteful expenditure based on company and with the appropriate diligence and skill • Suitable individuals with the necessary qualifications the outcome of investigations and whether the expected of a person carrying out the same function have been appointed and provided with the outcome of disciplinary processes were executed. in breach of section 76 of the Companies Act. necessary delegation to act in positions where Reportable irregularities – 31 March 2023 • The accounting authority was, as a result, not in individuals were suspended or exited the business. a position to confirm that all relevant matters are Permanent appointments can only be made once 7. Eskom failed to effect corrective action for identified • Incidents of non-compliance are reported to the Open, pending reported in terms of section 34(1) of PRECCA. investigations have been completed. non-compliance to the NEMA, National Water Act authorities and investigations are undertaken to outcome of court (NWA) and National Environmental Management: ensure that appropriate corrective and preventative case and 9. A procurement contract was awarded to a close family • An independent legal opinion has been obtained. Open, pending Air Quality Act (NEM: AQA) at multiple power measures are put in place. The risks relating to the implementation of member (related party) of a member of management • A disciplinary process has been initiated. conclusion of action stations, specifically the following: non-compliances are appropriately reported and action items of the company. This conflict of interest contravened • The matter has been reported in terms of PRECCA items • section 28 and 30 of NEMA tracked at the relevant management levels. Progress PFMA sections 50(3)(a) and 51(1)(b)(ii), PRECCA requirements. of all open actions is tracked by the power stations provision 17 and Public Service regulations clause 91. • The process is expected to be concluded by the end • section 19, 20, 21, 22 and 53 of NWA and reported both internally and to the authorities. of November 2023 and all related legal reporting • section 21, 22 ,47, 51 ,52 and 53 of NEM: AQA requirements will be considered and actioned. • No further correspondence has been received on Notices have been levied by the authorities for some the criminal investigation at Tutuka power station. 10. Certain financial records were not complete or • Addressing the PFMA reporting challenge is a key Open, pending of these non-compliances, resulting in a risk of The matters raised in the compliance notice (water accurately maintained in line with legislative priority of the Eskom board that is actively being addressing of PFMA sanctions from the authorities as well as referral to use licence audit findings) are being addressed and requirements of the PFMA and Companies Act. This overseen by the Audit and Risk Committee. reporting challenges the National Prosecuting Authority for criminal progress has been made with addressing the root includes: • Management acknowledged that there are significant investigation. causes of non-compliance. The flow of polluted • Incomplete registers relating to required PFMA internal control deficiencies in the PFMA reporting water from the dirty water dam has been stopped disclosure which resulted in scope limitations process and are taking steps as a key focus area to These breaches lead the auditors to believe the non- since May 2023. relating to information not provided by improve controls, enhance compliance with relevant compliance with NEMA, NWA and NEM:AQA are • A water improvement plan is being implemented management to the auditors. regulations, and foster a culture of accountability and breaches of the fiduciary duties of the directors of which aims to address the root causes that result in • Inadequate management action commitment to transparency within the organisation. the company. unlawful water overflows. address PFMA disclosure deficiencies identified in • The role of the loss control function and the execution • The criminal case against Eskom in respect of the the prior period. of its mandate will be reviewed to ensure that it is atmospheric emission licence non-compliance • Multiple non-compliances of PFMA (section 49, adequately positioned and resourced to address the at Kendal power station between April 2015 51 and 55) and the Companies Act (section 28, weaknesses in the PFMA reporting process. and April 2019 is ongoing. The matter has been 29 and 93). The inaccurate and incomplete • A review is currently being conducted on the number set down to commence trial on 1 November financial record keeping is a material breach of the of resources necessary to fulfil the role of the loss 2023. The emission recovery plan agreed to as a fiduciary duties of management. control function and management also plan to review condition of the atmospheric emission licence the reporting structure of the loss control function. compliance directive issued in 2019 continues to be • The role and accountability of business in the PFMA implemented at Kendal power station. reporting process will be reviewed to ensure that it • An air quality implementation plan is being is clearly defined with enhanced management and implemented that includes key objectives to: reporting processes. Reliance on business to identify – Minimise the impact of Eskom’s emissions on non-compliance is critical and managers must play human health and the natural environment. an active role in overseeing controls and reporting of PFMA information. It will be re-confirmed that it – Maintain Eskom's licence to operate by ensuring is the responsibility of the respective divisional and compliance with air quality legislation, including subsidiary boards to oversee this process. power station atmospheric emission licences and minimum emission standards. • Quarterly feedback on the status and progress in improving internal controls will be provided to Exco • Poor technical performance and ageing of coal-fired and Audit and Risk Committee. stations remain a risk and continue to lead to the • All managerial and executive employees are required unlawful release of water and unlawful air emissions. to attend PFMA training annually. An attendance tracking process is in place. • Quarterly reporting to National Treasury is in place. Information is submitted from a divisional level and is consolidated by the loss control function into the final reports. 128 129 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Notes to the financial statements continued for the year ended 31 March 2023 52. Reportable irregularities and matters under investigation continued 52.1 Reportable irregularities continued Description Response Status Description Response Status Reportable irregularities – 31 March 2023 continued Reportable irregularities – 31 March 2023 continued 11. Investigations into alleged financial misconduct • Management acknowledged that there are Open, pending 13. Management did not discharge their fiduciary • It has been challenging in recent years for Open, pending relating to instances of irregular, fruitless and internal control deficiencies in the consequence implementation of duty as they failed to ensure that the entity’s Eskom to meet the deadline for complete and implementation of wasteful expenditure and performing the management process and is in the process of improvements complete and accurate financial statements were accurate draft annual financial statements by improvements necessar y disciplinar y procedures and developing a plan to address the shortcomings. submitted to National Treasury and the auditors 31 May due to the size and complexity of the consequence management was not done • A focus area will be to strengthen a culture around on 31 May 2023, as required by the PFMA group’s operations, as well as the material risks timeously in line with the legislative (sections accountability and implementtation of effective section 55. The same matter was identified in the and challenges that Eskom is facing, including 51(1)(e)(iii) and 55(1)(a)) of the PFMA and related policies as well as responding consistently and prior year which highlights that there are failures the impact of ongoing investigations into the treasury regulations (paragraph 31.1.1 and 33.1.2). fairly to incidences of non-compliance. It is within the financial reporting controls which have challenge of criminality. This includes: important that the consequence management not been rectified and put in place as required by • The extent and effort to address the PFMA • Conducting investigations into instances of process is applied consistently to all employees, the PFMA section 51. reporting challenges also impacts on the irregular and fruitless and wasteful expenditure regardless of their position or status within the practicality of meeting the May reporting to determine if disciplinary steps needed to be organisation. deadline. taken against liable officials. • A review will be conducted on the reporting • Additional financially skilled resources are • Following inadequate investigation processes structure and number of resources necessary required to deal with the complex and stressful to arrive at conclusions. in the business to improve the consequence challenges of Eskom’s current operating • Taking disciplinary actions against any official(s) management process. environment. The need for identified additional who made or permitted irregular and fruitless • An interconnected process between the loss financial resources will be addressed, particularly and wasteful expenditure based on the control function and divisional, forensic and for expert technical and process control outcome of investigations. people relations department will be developed to monitoring skills. • Providing supporting documentation to address the non-compliances. • The finance business partnering matrix will be confirm that disciplinary steps were taken • The escalation process to a higher level of improved and aligned. against all the officials who made or permitted matters that are not adequately addressed will be • Review and discipline around reporting will be irregular and fruitless and wasteful expenditure redefined to ensure accountability at all levels. strengthened to ensure timeous and complete based on the outcome of investigations. • Policies and procedures will be amended to submissions, including a focused hard-close • Providing evidence to confirm that include consideration of a progressive disciplinary before year end. recommendations of completed disciplinary approach in cases of repeat non-compliance. • A process is underway to implement the use hearings were implemented. • Training will be provided to staff to ensure of artificial intelligence to assist with identifying • Conducting investigations into alleged financial understanding of the policies and the implications areas of control deficiencies. misconduct within 30 days of the incidents thereof. • A workshop will be held between management being reported. • A detailed record of non-compliant incidents with and auditors to review and identify areas for the actions taken and consequence management improvement in the reporting and auditing applied will be maintained as proper record process. keeping is crucial in legal and ethical proceedings. • Quarterly feedback on the status and progress 52.2 Matters under investigation of consequence management will be provided There are currently various internal and external investigations being conducted into alleged fraud and malfeasance by current and former to Exco, the Audit and Risk Committee, Human Eskom employees as well as external parties. Eskom is working with relevant authorities regarding these matters. Capital and Remuneration Committee and Social, Ethics and Sustainability Committee. 12. Management has not complied with section 17(2) • The incorrect reporting in past submissions Open, pending of the Powers, Privileges and Immunities of have been investigated. The process is impacted implementation of Parliaments and Provincial Legislatures Act (Act 4 by the short notice and turnaround period of improvements and of 2004) regarding misleading information information requests, even though the submitted reporting to SCOPA. provided to the Standing Committee on Public information was clearly indicated as being based Accounts (SCOPA). Management omitted to on draft information at the time of submitting. correct the misrepresentations made. • Feedback will be provided to SCOPA to clarify incorrect reporting. • A register and history of submitted information will be implemented. • The review and approval process for submissions to the parliamentary committees will be improved. • Information with supporting evidence will be signed-off by the relevant divisional and group management before submission. • Information will be reviewed for accuracy by internal audit before submission. 130 131 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 Appendix – abbreviations, acronyms and definitions Accounting, audit and other financial terms Other CGU Cash Generating Unit Alco Asset and Liability Committee DRC Depreciated Replacement Cost Board Board of Directors EBITDA Profit before depreciation and amortisation expense and net fair value and foreign exchange (loss)/gain B-BBEE Broad-Based Black Economic Empowerment GDP Gross Domestic Product CA(SA) Chartered Accountant of South Africa IAS International Accounting Standard/(s) CIDB Construction Industry Development Board IFRIC International Financial Reporting Interpretations Committee CSI Corporate Social Investment IFRS International Financial Reporting Standard/(s) DFFE Department of Forestry, Fisheries and Environment ISA International Standards on Auditing DMRE Department of Mineral Resources and Energy PPI Producer Price Index DPE Department of Public Enterprises R Rand EAF Energy Availability Factor Rm Rand millions EUF Energy Utilisation Factor VAT Value Added Tax Exco Executive Committee WACC Weighted Average Cost of Capital GE Group Executive IPP Independent Power Producer Currencies KPI Key Performance Indicator CAD Canadian Dollar MTBPS Medium-term Budget Policy Statement CHF Swiss Franc MYPD Multi-Year Price Determination EUR Euro NERSA National Energy Regulator of South Africa GBP Pound Sterling (United Kingdom) NPA National Prosecuting Authority JPY Japanese Yen OCGT Open Cycle Gas Turbine SEK Swedish Krona OCLF Other Capacity Loss Factor USD United States Dollar RAB Regulatory Asset Base ZAR South African Rand RCA Regulatory Clearing Account SAPS South African Police Service Entities SARB South African Reserve Bank Company Eskom Holdings SOC Ltd SARS South African Revenue Services EFC Eskom Finance Company SOC Ltd SCOPA Standing Committee on Public Accounts EPPF Eskom Pension and Provident Fund SIU Special Investigations Unit Escap Escap SOC Ltd TMPS Total Measured Procurement Spend Eskom Uganda Eskom Uganda Ltd UCLF Unplanned Capacity Loss Factor Group Eskom Holdings SOC Ltd and its subsidiaries Zondo Commission Judicial Commission of Inquiry into Allegations of State Capture Motraco Mozambique Transmission Company SARL Definitions NEDCSA National Electricity Distribution Company South Africa SOC Ltd NTCSA National Transmission Company South Africa SOC Ltd Cash interest cover ratio Net cash flows from operating activities divided by the aggregate of interest paid and received from Nqaba Nqaba Finance 1 (RF) Ltd financing activities Rotek Eskom Rotek Industries SOC Ltd EBITDA Revenue plus other income minus primary energy, employee benefit expense, impairment of financial UEGCL Uganda Electricity Generation Company Ltd assets, impairment of other assets and other expenses UETCL Uganda Electricity Transmission Company Ltd EBITDA margin EBITDA divided by revenue Legislation Free funds from operations Net cash flows from operating activities minus cash flows from changes in working capital Companies Act Companies Act, No. 71 of 2008 Insurance Act Insurance Act, No. 18 of 2017 Liquid assets Treasury investments plus cash and cash equivalents MFMA Municipal Finance Management Act Net debt Debt securities and borrowings plus lease liabilities minus treasury investments minus financial trading NEMA National Environmental Management Act, No. 107 of 1998 assets plus financial trading liabilities plus derivative liabilities held for risk management (used to hedge PAA Public Audit Act, No. 25 of 2004 other items of net debt) minus derivative assets held for risk management (used to hedge other items of PFMA Public Finance Management Act, No. 1 of 1999 net debt) minus payments made in advance (used to secure borrowings raised) minus cash and cash PPPFA Preferential Procurement Policy Framework Act, No. 5 of 2000 equivalents PRECCA Prevention and Combating of Corrupt Activities Act, No.12 of 2004 Net debt service cover Net cash flows from operating activities divided by the aggregate of debt repaid and interest paid and Measures received from financing activities GWh Gigawatt hour Net profit margin Net profit divided by revenue kg Kilogram Working capital current assets Inventories plus payments made in advance (current portion) plus trade and other receivables (current km Kilometre portion) plus taxation asset kWh Kilowatt hour kWhSO Kilowatt hour Sent Out Working capital current liabilities Trade and other payables (current portion) plus payments received in advance (current portion) plus ℓ Litre provisions (current portion) plus employee benefit obligations (current portion) plus taxation liability Mt Million tons Working capital ratio Working capital current assets divided by working capital current liabilities MVA Mega volt ampere MW Megawatt Refer to the integrated report for definitions relating to the shareholder compact key performance indicators. MWh Megawatt hour MWhSO Megawatt hour Sent Out TWh Terawatt hour 132 133 ESKOM HOLDINGS SOC LTD Annual Financial Statements 2023 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 Media Desk +27 11 800 3343 Eskom Media Desk MediaDesk@eskom.co.za +27 11 800 3378 +27 11 800 6103 Investor Relations +27 11 800 2775 Investor Relations InvestorRelations@eskom.co.za Eskom whistle-blowing hotline 0800 112 722 Forensic investigations Investigate@eskom.co.za DPE whistle-blowing hotline 0800 111 628 DPE whistle-blowing website www.thehotlineapp.co.za DPE@thehotline.co.za Eskom Development Foundation +27 11 800 8111 Eskom Development www.eskom.co.za/csi Foundation CSI@eskom.co.za National call centre 08600 ESKOM or Promotion of Access to PAIA@eskom.co.za 08600 37566 Information Act requests Customer SMS line 35328 Customer Service CustomerServices@eskom.co.za Facebook EskomSouthAfrica YouTube EskomOfficialSite Twitter Eskom_SA MyEskom Customer app Physical address Postal address Eskom Megawatt Park PO Box 1091 2 Maxwell Drive Johannesburg Sunninghill 2000 Sandton 2157 Group Company Secretary Company registration number Office of the Company Secretary Eskom Holdings SOC Ltd PO Box 1091 2002/015527/30 Johannesburg 2000 Feedback on or queries relating to our report may be directed to IRfeedback@eskom.co.za Our suite of reports covering our integrated results for 2023 is available at https://www.eskom.co.za/investors/integrated-results/ 134