Integrated Results for the year ended 31 March 2014 11 July 2014 Disclaimer This presentation does not constitute or form part of and should not be construed as, an offer to sell, or the solicitation or invitation of any offer to buy or subscribe for or underwrite or otherwise acquire, securities of Eskom Holdings SOC Limited (“Eskom”), any holding company or any of its subsidiaries in any jurisdiction or any other person, nor an inducement to enter into any investment activity. No part of this presentation, nor the fact of its distribution, should form the basis of, or be relied on in connection with, any contract or commitment or investment decision whatsoever. This presentation does not constitute a recommendation regarding any securities of Eskom or any other person. Certain statements in this presentation regarding Eskom’s business operations may constitute “forward looking statements”. All statements other than statements of historical fact included in this presentation, including, without limitation, those regarding the financial position, business strategy, management plans and objectives for future operations of Eskom are forward looking statements. Forward-looking statements are not intended to be a guarantee of future results, but instead constitute Eskom’s current expectations based on reasonable assumptions. Forecasted financial information is based on certain material assumptions. These assumptions include, but are not limited to continued normal levels of operating performance and electricity demand in the Customer Services, Distribution and Transmission divisions and operational performance in the Generation and Primary Energy divisions consistent with historical levels, and incremental capacity additions through the Group Capital division at investment levels and rates of return consistent with prior experience, as well as achievements of planned productivity improvements throughout the business activities. Actual results could differ materially from those projected in any forward-looking statements due to risks, uncertainties and other factors. Eskom neither intends to nor assumes any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In preparation of this document certain publicly available data was used. While the sources used are generally regarded as reliable the content has not been verified. Eskom does not accept any responsibility for using any such information. Agenda and presenters Executive summary Collin Matjila Performance on strategic objectives Collin Matjila Ensuring Eskom’s financial sustainability Tsholofelo Molefe Concluding remarks Collin Matjila Executive summary and performance on strategic objectives Collin Matjila Interim chief executive Context of Eskom’s integrated results Current status Mitigating action Highlights • Under pressure due to MYPD31 • Eskom has initiated the business • Eskom has low price increase, a flat productivity programme (BPP) produced fair Financial demand and increasing • Eskom is working closely with results, making a health operating costs (OCGTs and profit of R7 billion, Government to explore possible cost of maintenance) levers to close the funding gap taking into account a R2 billion fair value • Employee safety performance • Safety remains the foundation of profit on embedded has shown a positive trend for Eskom’s operations. Eskom is derivatives2 Safety 2013/14, however contractor conducting investigations into and public fatalities are still a safety incidents, and lessons concern to Eskom learnt will assist in mitigating • Eskom employee LTIR target has future incidents been achieved • Eskom’s new build projects have • Contract placed with a second experienced delays due to contractor for the engineering • Eskom is on track Capacity quality issues and manufacturing of the boiler- to achieve first expansion protection systems synchronisation of Medupi Unit 6 by second half of • Eskom is managing tight • Eskom is aware of its 2014, with full electricity supply to ensure responsibility to meet electricity commercial Keeping the that electricity demand is demand but needs to do so operation expected lights on being met in such a way that within financial, operational and six months national power system integrity environmental constraints thereafter is protected 1 Multi-year price determination 3 2 Profit will be used to cover repayments of the substantial borrowing for the capacity expansion programme Eskom’s purpose, values and strategic objectives Eskom’s seven sustainability dimensions The changing environment requires a response that will ensure sustainability Eskom’s mandate is comprehensive, focused on many dimensions of sustainability • Core areas revolve around the tension of asset creation, operational sustainability, and financial sustainability • Beyond that, Eskom also needs to ensure a positive wider impact on the environment, contribution to strategic transformation and social sustainability objectives as well as the contribution to a sustainable skills base Safety will continue to be the foundation for all our operations and is key to Eskom’s performance and sustainability 7 Eskom has the advantages and challenges of all large-scale enterprises • Strategic 100% state-owned electricity utility, Number of electrification connections strongly supported by the government Number • Supplies approximately 95% of South 201 788 Africa’s electricity 154 250 • Performed 201 788 household electrification 139 881 connections during the year, the highest in a single year since 2002 • As at 31 March 2014: – 5.2 million customers (2013: 5.0 million) – Net maximum generating capacity of Mar-12 Mar-13 Mar-14 42.0GW (2013: 41.9GW) – 17.4GW of new generation capacity being Generation capacity – 31 March 2014 built, of which 6.1GW already Hydro commissioned – Approximately 359 337km of cables and Pumped storage Coal power lines 1.4% – 46 919 employees, inclusive of fixed-term 3.4% 4.4% 42.0GW contractors, in the group (2013: 47 295) of nominal 85.1% 5.7% • Moody’s and S&P stand-alone credit ratings: capacity b1 and b- respectively with a negative Nuclear outlook Gas Safety Becoming a high-performance organisation Year to Year to Year to Employee Fatalities 31 March 31 March 31 March and 2014 2013 2012 contractor Employees 5 3 13 fatalities Contractors 18 16 11 Employee lost-time incidence rate Employee Index LTIR (Target: 0.36) 0.31 0.401 0.41 Electrical Causes of Causes of fatalities Vehicle contact Other fatalities Employees and contractors 7 2 14 On 31 October 2013, an accident at Ingula power station construction site resulted in the tragic loss of six lives, while a further seven sustained Ingula injuries. Although work on the inclined high-pressure shaft was stopped in incident terms of the Mines Health and Safety Act (1996) pending review by the Mine Health and Safety Inspectorate, work on other parts of the site continues. The statutory processes regarding this accident are in progress 1. Number revised from 0.39 to 0.40 due to the late reporting of incidents Improve operations – Generation Becoming a high-performance organisation Highlights 1 • Koeberg unit 2 ended a record run of Unplanned capability loss factor (UCLF ) % 484 days when it was shut down for Constrained 12.1 12.6 1.6 scheduled refuelling on 24 March 2014, UCLF 3.4 10.0 marking a continuous run from one 11.0 refuelling to another 8.0 8.7 6.1 Challenges 5.1 • The increasing UCLF percentage is an indication of the deteriorating plant health and the high plant utilisation Year to 31 Mar Year to 31 Mar Year to 31 Mar Year to 31 Mar Year to 31 Mar • Balancing the need for adequate 2010 2011 2012 2013 2014 maintenance with the constrained system, 2 asset creation, environmental requirements Energy availability factor (EAF ) % and available financial resources – not performing sufficient maintenance reduces 85.2 84.6 80.0 82.0 plant reliability and increases the risk of 77.7 75.1 load shedding over the longer term • Duvha Unit 3 was taken out of service on 30 March 2014 due to an over- pressurisation incident. The incident is still under investigation Year to Year to Year to Year to Year to 1. UCLF measures the lost energy due to unplanned production interruptions 31 Mar 31 Mar 31 Mar 31 Mar 31 Mar resulting from equipment failures and other plant conditions 2010 2011 2012 2013 2014 2. EAF measures plant availability, plus energy losses not under the control of plant management Actual Annual year-end target Improve operations – Transmission Becoming a high-performance organisation 1 Highlights System minutes lost < 1 system minute • Good system technical performance achieved with zero major incidents, 4.7 system minutes <1 performance at 4.1 3.4 3.5 3.05 compared to a target of 3.40, and 3.1 a line fault performance of 1.73 2.6 compared to a target of 2.45 faults per 100km Challenges Year to 31 Mar Year to 31 Mar Year to 31 Mar Year to 31 Mar Year to 31 Mar • Performance vulnerabilities remain with 2010 2011 2012 2013 2014 ageing assets and unfirm networks 2 • Performance of Hydro Cahora Bassa 3 Number of major incidents scheme energy imports remains a risk due to challenges regarding the 3 reliability of high-voltage direct-current 2 transmission lines 1 1 0 0 1. System minutes is a measure of the extent of interruptions to customers. Year to Year to Year to Year to Year to One system minute is equivalent to the loss of the entire system for one 31 Mar 31 Mar 31 Mar 31 Mar 31 Mar minute at annual peak 2010 2011 2012 2013 2014 2. Major Incident is an interruption with a severity ≥ 1 system minute 3. Hidroelectrica de Cahora Bassa S.A. Actual Annual year-end target Improve operations – Distribution Becoming a high-performance organisation Highlights SAIFI (number/annum) 1 • Significant improvement in the SAIFI and SAIDI interruption performance 24.7 25.3 due to: 23.7 22.2 20.0 − Additional customer network centres 20.2 − Maximisation of live-line work for planned maintenance − Increased network visibility Year to Year to Year to Year to Year to Challenges 31 Mar 2010 31 Mar 2011 31 Mar 2012 31 Mar 2013 31 Mar 2014 • Managing the risk of increased 2 exposure of employees and contractors SAIDI (hours/annum) to crime-related assault incidents • Addressing the backlog in 54.4 52.6 45.0 maintenance, refurbishment and 45.8 41.9 reliability with particular focus on 37.0 preventative maintenance for reticulation (low-voltage) networks • Reducing the backlog in customer connections, by addressing material Year to Year to Year to Year to Year to 31 Mar 31 Mar 31 Mar 31 Mar 31 Mar and contractor resource shortages 2010 2011 2012 2013 2014 1. SAIFI: System average interruption frequency index Actual Annual year-end target 2. SAIDI: System average interruption duration index Being customer-centric Becoming a high-performance organisation 1 Highlights Weighted customer service index • Customers responded admirably when 88.7 Eskom declared four power system emergencies and reduced demand by 86.6 600MW in November 2013, 340MW in 86.8 85.6 February 2014 and 1 160MW in 85.1 84.4 March 2014 Challenges Year to 31 Mar Year to 31 Mar Year to 31 Mar Year to 31 Mar Year to 31 Mar • Debt collection, especially from 2010 2011 2012 2013 2014 municipalities, is a challenge with arrear Actual Annual year-end target debt increasing significantly. Eskom is working closely with the shareholder, the Year to Year to Year to Cooperative Governance and Traditional 2 31 March 31 March 31 March Energy losses 2014 2013 2012 Affairs (CoGTA) department and National Treasury at provincial and national level Distribution 7.13 7.12 6.32 3 to address the systemic causes of Transmission 2.34 2.80 3.08 municipal arrear debt Total Eskom 8.88 9.08 8.65 • Energy losses due to theft of equipment, illegal connections, meter tampering and 1. Eskom uses a composite index to measure the service delivered to its illegal vending of pre-paid electricity 2. residential, small and medium customers Non-technical losses are estimated to be between 1.78% and remains a concern 2.85% for the year to 31 March 2014 3. Transmission losses are all technical losses Build strong skills Becoming a high-performance organisation Eskom aims to grow human capital by retaining Skills core, critical and scarce resources, and by effectively developing skills and talent 2 598 2 847 Eskom’s 2 383 engineering, 844 835 815 technician and artisan 2 273 2 144 1 962 learners Year to Year to Year to 31 Mar 31 Mar 31 Mar 2012 2013 2014 Engineering learners Technician learners Artisan learners Youth There are 4 325 learners in the youth programme programme as at 31 March 2014 7.87% of gross employee benefit costs spent Training on training in the year to 31 March 2014 Keeping the lights on Leading and partnering to keep the lights on Highlights • More planned maintenance was done Average monthly % operating reserves during the past winter than the same 60% Monthly Avg at 06:00 Monthly Avg at 15:00 period in the three preceding years, in line Monthly Avg at Peak Monthly Avg at 22:00 with the Generation sustainability strategy 50% 40% Challenges 30% • Adequate reserves available throughout 20% the day to meet demand, but minimal 10% reserves available at peak periods • In order to keep the lights on, Eskom has 0% Jul… Jul… Jul… Jul… Jul… Oct… Oct… Oct… Oct… Oct… Apr… Apr… Apr… Apr… Apr… Jan… Jan… Jan… Jan… Jan… Jan… had to run its generating plant at significantly higher load factors • Four power system emergencies were Summer and winter load profiles declared during the year MW Typical Summer Day Typical Winter Day • Increased costs due to the significant 36 000 reliance placed on the open-cycle gas 34 000 turbine (OCGT) fleet in the current year: 32 000 − R10.6 billion spent to produce 30 000 3 621GWh (2013: R5.0 billion; 28 000 1 905GWh) 26 000 − OCGT load factor of 17.16% (2013: 24 000 9.31%) against a budgeted load factor 22 000 of 6.08%, based on the MYPD 20 000 00:00 03:00 06:00 09:00 12:00 15:00 18:00 21:00 response budget Integrated Demand Management Leading and partnering to keep the lights on • Achieved total evening peak demand Cumulative verified demand savings savings of 410MW (2013: 595MW) MW 4 500 • The average weekday evening peak 4 000 3 500 impact of the power alert and power 3 000 bulletin for all colours (green, orange 2 500 and red) is 224MW, while the average 2 000 1 500 impact for the red flightings in the 1 000 evening peak on the worst constrained 500 0 day is 294MW Year to Year to Year to Year to Year to Year to Year to Year to Year to Year to 31 Mar 31 Mar 31 Mar 31 Mar 31 Mar 31 Mar 31 Mar 31 Mar 31 Mar 31 Mar 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 • Eskom continues to improve the Verified MW Eskom Target internal energy-efficiency of its facilities. Annualised energy savings of 19GWh were achieved from new IDM projects for the year ended 31 March 2014, exceeding the target of 15GWh • Going forward, it will be a challenge to utilise IDM as a key lever in managing demand, due to the reduction in funding allocated in the MYPD 3 determination Deliver capacity expansion Leading and partnering to keep the lights on Highlights Progress on capacity expansion programme • Return-to-service programme of 23 units (3 741MW) has been completed at a cost R billion % completed of R26 billion 45.8% 56.2% 73.3% • Despite outage constraints, refurbishment 63.7% Remaining projects have progressed well 38.1 28.0 64.2 52.0 Completed • Established the Medupi leadership initiative to address the demobilisation of workers 66.9 77.0 66.6 58.3% 74.7% 54.3 6.6 Challenges 10.8 19.4 15.1 • Contract placed with a second contractor for 2013 2014 2013 2014 2013 2014 the engineering and manufacturing of boiler- −−Medupi−− −−Kusile−− −−Ingula−− protection systems, to mitigate against the R105.0 billion2 R118.5 billion2 R25.9 billion2 continued failure of control and instrumentation factory acceptance tests at Medupi • Acquisition of servitudes over state-owned and tribal land, causing delays to transmission projects Synchronisation dates of first units • Medupi in the second half of 2014 (794MW) • Ingula in the second half of 20151 (333MW) • Kusile in the second half of 2015 (800MW) 1. Synchronisation date delayed after the accident at Ingula on 31 October 2013 2. Approved budget (excluding capitalised borrowing costs) Deliver capacity expansion – progress on Medupi Leading and partnering to keep the lights on Key milestones achieved at Medupi in the first quarter of 2014/15 • Welding challenges which resulted in extensive delays to Unit 6 have been effectively resolved • Hydrostatic pressure tests on the reheater and superheater circuits of the Unit 6 boiler were successfully conducted in April and May 2014 • The boiler is now mechanically complete and ready to continue with acid cleaning • Factory acceptance tests have been successfully completed on both the control and instrumentation of the balance of plant and the boiler-protection system in April and May 2014 • This released a significant part of the plant to progress with critical commissioning activities • Achieving these critical milestones ensures that Eskom remains on track for the targeted first synchronisation of Unit 6 by the second half of 2014 as previously reported Deliver capacity expansion (continued) Leading and partnering to keep the lights on To date, the construction work that has been completed has added ~ 6 137MW of capacity, ~ 5 497km of transmission network and ~ 27 565 of MVAs Megawatts MW of capacity 1 770 535 261 120 17 384 453 315 1 351.0 1 043 290 6 137 0 Transmission Km line 787 811 631.3 600 443 9 756 480 418 659 430 5 497 237 Substations MVAs 3 790 3 580 5 940 2 525 42 470 1 355 1 375 1 630 5 280 1 090 1 000 27 565 2004/5 2005/6 2006/7 2007/8 2008/9 2009/10 2010/11 2011/12 2012/13 2013/14 Total Target 1 1. Refers to the target of the total capacity expansion programme Environmental performance Reducing Eskom’s environmental footprint and pursuing low-carbon growth Year to Year to Year to Key performance indicator 31 March 31 March 31 March 2014 2013 2012 Relative particulate emissions, kg/MWh 0.35 0.35 0.31 Environmental sent out performance Specific water consumption, L/kWh sent 1.35 1.42 1.34 out Environmental legal contraventions per the operational health dashboard, 2 21 5 number The installation of 10 of a total of 46 wind 2 turbines was completed at 31 March 2014 , Renewable and a further 22 tower foundations laid. This energy: 100MW renewable project is expected to be Sere wind completed and commissioned in the 2014/15 farm financial year. This will assist in reducing Eskom’s carbon footprint 1. Increased from previously reported figure (1) due to an additional legal contravention that was identified during the year for activities associated with the underground coal gasification (UCG) project, in October 2012 2. To date, the installation of a total of 27 of the 46 wind turbines has been completed. The transmission substation has been completed and the power evacuation line is being commissioned National emission standards Reducing Eskom’s environmental footprint and pursuing low-carbon growth • Eskom believes in a balanced approach to ensure environmental sustainability whilst supporting economic growth and access to affordable electricity • New atmospheric standards come into effect in 2015. Eskom has received new atmospheric emission licenses for most of its power stations, except Kriel, where Eskom’s request to increase the emissions limit and allow a grace period for when emissions exceed the limit of the new license, has been denied • Eskom has embarked on an extensive retrofit programme to reduce emissions at the highest emitting power stations, but the execution of this programme will require long outages and a significant amount of capital (currently R72 billion in nominal terms) • Despite the retrofit programme and Eskom’s best efforts, there remains a risk that Eskom may not be able to fully comply with the new national emission standards, which come into effect in 2015 and 2020, for several reasons: − Certain of the required technologies requires additional water which is not yet available − Implementation of the required technologies requires plant outages of 120 to 150 days per unit; there is insufficient spare capacity to enable the required outages to be taken without impacting on the ability to meet national electricity demand • Given the above, Eskom expects to achieve 57% compliance with the national emission standards by 2026 • Eskom submitted an application in February 2014 for a five-year postponement from compliance to the standards for cases where compliance within the legislated timeframe is not possible. A response from the authorities is expected within six to nine months Coal and water resources Securing future resource requirements Highlights • Coal stock days at 31 March 2014 remains Coal stock days above target of 42 days, but has decreased to 60 2007/8 44 days from the previous year (2013: 46 days) 53 2012/13 2013/14 • Komati water scheme augmentation project 50 44 46 44 was declared operational on 5 June 2013 40 • Mokolo Crocodile water augmentation project 30 delivered water to Medupi for construction activities and commissioning of the first units 20 18 13 10 Challenges • Despite the overall coal quality being on target, 0 Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar coal-related load losses were experienced at Arnot, Matla and Tutuka power stations • Production performance of some cost-plus mines continues to be a challenge • Eskom mixes coarse coal with finer coal to prevent wet coal from coagulating on conveyors • Although four medium-term contracts were signed for coal supply to Kusile power station during the commissioning phase, the conclusion of long-term coal and limestone supply agreements remains a focus area Coal road-to-rail migration Implementing coal haulage and the road-to-rail migration plan Eskom has been progressively migrating coal Coal road-to-rail migration transport from road to rail over the past four 11.6 Mt years. Rail transport is safer, more 10.1 11.5 environmentally friendly, less damaging to 8.5 roads and more cost-effective than road 7.1 transport by truck 5.1 Highlights • Increase of 15% against previous year of coal transported by rail Year to 31 Mar Year to 31 Mar Year to 31 Mar Year to 31 Mar Year to 31 Mar 2010 2011 2012 2013 2014 Challenges Actual Annual year-end target 1 • Both Eskom and Transnet experienced operational challenges regarding the rail transport of coal • In June 2013, rail deliveries were affected by a series of derailments on the Transnet Freight Rail Natcor rail line 1. No target prior to 2012 Independent power producers (IPPs) Pursuing private-sector participation Highlights Energy purchased from IPPs • Total energy procured from short-term GWh IPPs for the year is 3 671GWh at a cost of 4 107 R3 266 million (average cost of 88c/kWh) 3 516 3 671 • The first project under the renewable energy independent power producers (RE-IPP) programme was commissioned on 15 November 2013, adding 7MW • Eskom has successfully facilitated the Mar-12 Mar-13 Mar-14 connection of 21 RE-IPP projects (1 076MW) to the grid, of which 467.3MW is currently available to the system • DoE approved an additional 1 457MW pursuant to the third bid submission, but no contracts have yet been signed • Contracts were signed for 1 005MW under the DoE Peaker programme Maximise socio-economic contribution Transformation A total of 201 788 homes were electrified during the year to 31 March 2014 (2013: 139 881) Electrification Since inception of the electrification programme in 1991, more than 4.5 million homes have been electrified Committed R132.9 million to corporate social initiatives during the year to March 2014 (2013: R194.3 million) 1 Number of project beneficiaries Corporate Number social 652 347 investment 531 762 357 443 Mar-12 Mar-13 Mar-14 1. Number of project beneficiaries impacted by Eskom’s corporate social initiatives at year end Procurement equity and localisation Transformation 100 93.9 86.3 Total measured 90 80 73.2 Target procurement spend for % of B-BBEE spend 1 70 75 Procurement the year was 60 from B-BBEE R133.5 billion of which 50 40 compliant R125.4 billion or 30 entities 93.9% was attributable 20 to B-BBEE, exceeding 10 Year to Year to Year to the target of 75% 31 Mar 2012 31 Mar 2013 31 Mar 2014 % 32.7 Procurement from BO entities % Procurement Procurement from BWO entities % from black- Procurement from BYO entities % owned (BO), 22.1 black women- 14.6 owned (BWO) and black 7.2 youth-owned 3.3 4.7 2 (BYO) entities n/a2 1.0 1.0 Mar-12 Mar-13 Mar-14 1. Reflects the Eskom company’s broad-based black economic empowerment (B-BBEE) expenditure 2. Measurement of the procurement from BYO entities only started in 2013 Procurement equity and localisation (continued) Transformation Local 54.6% local content in the new build contracts placed for the financial sourcing year (2013: 80.2%) As at 31 March 2014, the Job creation capacity expansion Number programme employs 25 181 35 759 people on new build project 28 616 25 181 Job creation sites, down from 35 759 at the previous year end, due to the demobilisation of staff as work packages are completed Mar-12 Mar-13 Mar-14 Since the inception of the capital expansion programme in 2005, a total Local skills of 8 930 (2013: 6 851) contractor employees have been trained in various development trades Employment equity Transformation The Eskom group currently employs 1 305 (2013: 1 137) employees with Disability recognised disabilities. Although the disability percentage of 2.77% is below the 3% target, it is above the government target of 2% % 80 69.6 71.2 70 65.7 58.3 59.5 60 53.9 50 40 30 Racial 20 1 equity 10 0 Year to Year to Year to 31 Mar 31 Mar 31 Mar 2012 2013 2014 ■ Racial equity in senior management (% of black employees) ■ Racial equity in professionals and middle management (% of black employees) % 40 34.6 35.8 35 32.4 28.2 28.9 30 24.3 25 20 15 Gender 10 1 equity 5 0 Year to Year to Year to 31 Mar 31 Mar 31 Mar 2012 2013 2014 ■ Gender equity in senior management (% of female employees) ■ Gender equity in professionals and middle management (% of female employees) 1. Reflects Eskom company numbers Ensuring Eskom’s financial sustainability Tsholofelo Molefe Finance director Income statement for the year ended 31 March 2014 Ensuring Eskom’s financial sustainability Audited Reviewed Audited Audited • Group revenue of R139.5 billion year to half-year year to year to (2013: R128.8 billion), an 31 March to 30 Sep 31 March 31 March Rm 2014 2013 20131 2012 increase of 8.3% Revenue 139 506 77 815 128 775 114 847 • Revenue growth has been offset by escalating primary energy and Other income 962 197 1 126 712 operating costs Primary energy (69 812) (31 266) (60 748) (46 314) • Effective tax rate of 23.3% Operating expenses (2013: 26.5%) (including depreciation & (58 293) (28 702) (57 602) (44 872) amortisation) • Embedded derivative gain is Net fair value loss on (620) (998) (1 655) (2 388) mainly due to changes in the financial instruments USD:ZAR exchange rate and Operating profit before 11 743 17 046 9 896 21 985 changes in interest rates embedded derivatives • Finance costs of R13.3 billion Embedded derivative gain / 2 149 1 868 (5 942) 334 (loss) were capitalised during the year to 31 March 2014 (2013: Operating profit 13 892 18 914 3 954 22 319 2 R3.7 billion) Net finance (cost) / income (4 772) (1 853) 3 003 (3 956) • Assets are accounted for at Share of profit of equity - 43 26 35 41 historic cost. If assets were accounted investees valued at depreciated Profit before tax 9 163 17 087 6 992 18 404 replacement cost, the loss after Income tax (2 137) (4 846) (1 856) (5 156) tax would be R12.5 billion Discontinued operations 63 - 47 - • No dividend was recommended Net profit for the period 7 089 12 241 5 183 13 248 1. Restated due to reclassification of Eskom Energie Manantali s.a as a discontinued operation 2. There was no remeasurement of the government loan during the year to 31 March 2014, as there was no change in the electricity tariff price path. In 2012/13 the effect of the remeasurement of the government loan was a R17.3 billion finance income for the year 31 March 2013 Revaluation of assets – proforma if aligned to regulatory asset base After After Historical cost: revaluation: Historical cost: revaluation: For the year to For the year to For the year to For the year to Rm 31 March 2014 31 March 2014 31 March 2013 31 March 2013 Income statement (current year impact) Historical profit/(loss) for the year 7 089 7 089 5 183 5 183 Adjustments: Depreciation and amortisation expense - (13 887) - (15 534) Net impairment loss and other operating expenses - (40) - (105) Net finance cost - (13 290) - (3 678) Income tax - 7 621 - 5 409 Profit/(loss) for the year 7 089 (12 507) 5 183 (8 725) Equity (cumulative impact) Historical closing equity balance 119 784 119 784 109 139 109 139 Adjustments: Additional cumulative comprehensive loss - (82 746) - (63 150) Revaluation of property, plant and equipment - 279 761 - 252 781 Deferred tax on revaluation - (78 333) - (70 779) Adjusted closing equity balance 119 784 238 466 109 139 227 991 Statement of financial position (cumulative impact) Property, plant and equipment 401 373 566 209 341 429 506 502 Ratios Electricity operating costs, cents per kWh (company) 59.67 66.06 54.15 61.37 Interest cover, ratio (group) 0.77 0.00 0.22 0.65 Debt:equity, ratio (group) 2.06 1.03 1.84 0.88 Sales and revenue Ensuring Eskom’s financial sustainability • Sales were 9 490 GWh lower than Electricity sales forecast in the NERSA tariff application GWh • Local sales of 205 525GWh 224 785 (2013: 202 770GWh) • International sales of 12 378GWh (3.7)% 0.6% 217 903 (2013: 13 791GWh) 216 561 Mar-12 Mar-13 Mar-14 1 Electricity sales by customer type Electricity revenue Commercial & agricultural Mining 14.1%, Cents/kWh 7.4% 6.8%, [6.8%] [14.6%] 16.4% 62.8 58.5 Rail 1.4%,[1.4%] Residential 5.1%, [4.8%] 50.3 International 5.7%, [6.4%] Municipalities Industry 25.0%, 41.9%, [23.8%] [42.2%] Mar-12 Mar-13 Mar-14 1. Percentages reflected for the sales achieved in the year to 31 March 2014 Numbers in brackets are those for the year to 31 March 2013 1 Electricity operating expenses Ensuring Eskom’s financial sustainability • The electricity operating cost per kWh Electricity operating expenses 2 sold is 59.67c/kWh compared to the R million Cents/kWh target of 52.67c/kWh 59.67 54.14 • The 13.2% variance on the cost per kWh 41.28 is mainly attributed to the OCGT spend in 60 748 69 812 the current year of R10.6 billion (originally 46 314 budgeted at R3.6 billion), along with the 12 972 15 341 increase in maintenance costs in line with 10 979 12 917 10 602 the generation sustainability strategy 9 098 8 681 9 787 11 934 17 722 20 776 22 384 • The employee benefit cost includes direct Mar-12 Mar-13 Mar-14 and indirect expenditure for the 42 923 Eskom employees (group: 46 919) Primary energy costs Other operating expenses, including impairments Repairs and maintenance • Included in other operating expenses is Depreciation and amortisation expense Employee benefit expense the impairment on arrear debt of 1.10% of revenue (2012/13: 0.82%) 1. Reflects only company expenses 2. Cents/kWh figures are calculated based on total electricity sales numbers for year Analysis of primary energy costs Ensuring Eskom’s financial sustainability • Primary energy costs have increased significantly OCGT annual production • Given the tight reserve margin, more expensive GWh 4 000 OCGT stations were operated far above previous 3 619 3 500 load factors to ensure continuity of supply 3 000 2 500 Year to Year to Year to 2 000 1 905 31 March 31 March 31 March 1 500 1 151 Rm 2014 2013 2012 1 000 708 Own generation costs, 500 197 43 625 39 371 30 997 136 49 excluding OCGT costs1 0 Year to Year to Year to Year to Year to Year to Year to Open-cycle gas turbine 31 Mar 31 Mar 31 Mar 31 Mar 31 Mar 31 Mar 31 Mar 10 561 5 009 1 490 (OCGT) costs 2008 2009 2010 2011 2012 2013 2014 Environmental levy 8 530 7 971 6 208 OCGT annual costs International electricity R million 3 311 2 070 1 858 purchases 12 000 10 561 10 000 Independent power 3 266 2 956 3 250 8 000 producers 6 000 5 009 2 Other 519 3 371 2 510 4 000 2 004 1 490 2 000 434 Total cost of electricity 233 82 69 812 60 748 46 314 0 generation Year to Year to Year to Year to Year to Year to Year to 31 Mar 31 Mar 31 Mar 31 Mar 31 Mar 31 Mar 31 Mar 2008 2009 2010 2011 2012 2013 2014 1. Includes the cost of coal, uranium, water and liquid fuels that are used in the generation of electricity 2. Includes demand market participation, co-generation and power buybacks Analysis of primary energy costs (continued) Ensuring Eskom’s financial sustainability Primary energy costs (c/kWh)1 • Primary energy costs increased by 14.2% from 28.05 c/kWh as at 31 March 2013 to Primary energy costs 28.05 20.60 32.04 c/kWh for the year to 31 March 2014 as at 31 March 2013 Cost of coal burnt 19% of the 2.7% 0.74 increased by 5% increase OCGT2 costs increased 64% of the 9.1% 2.54 by R5.6bn (111%) increase (32%) of the (4.5%) (1.27) Power buyback costs increase 49% of the Other items in aggregate 6.9% 1.98 increase 14.2% Primary energy costs as at 32.04 31 March 2014 1. Primary energy costs in c/kWh based on electricity sales 20 22 24 26 28 30 32 34 2. Open-cycle gas turbine (OCGT) Cents / kWh Hedging policy Ensuring Eskom’s financial sustainability • Embedded derivatives Gain/(loss) on embedded derivatives – Loss in 2012/13 was mainly due to the R million decision at 31 March 2013 to account for 334 2 149 the full term of the underlying negotiated pricing agreement contracts – Profit in the current year is mainly as a (5 942) result of the changes in the USD/ZAR Mar-12 Mar-13 Mar-14 exchange rate and interest rates Net fair value loss on financial instruments – Eskom submitted an application to R million NERSA to review the last remaining negotiated pricing agreement ( 620) (1 655) (2 388) • Foreign currency and commodity hedging Mar-12 Mar-13 Mar-14 – Foreign currency and commodity exposures are hedged Rand versus Euro and USD exchange rates – Use forward exchange contracts with Exchange rates short maturities and roll-over at maturity 14.57 11.82 as well as cross-currency swaps 10.25 9.21 10.57 7.68 – 78% of total debt at 31 March 2014 has a fixed interest rate component – R110.2 billion exposure to foreign Mar-12 Mar-13 Mar-14 currency Rand:Euro Rand:USD Group audited financial position – property, plant and equipment growth through debt raised Ensuring Eskom’s financial sustainability R million 600 000 Assets 500 000 Other assets, R37 863m Working capital, R32 158m Other assets, R30 579m Liquid assets, R30 583m 400 000 Working capital, R29 204m Other assets, R23 765m Liquid assets, R27 970m Working capital, R25 911m 300 000 Liquid assets, R40 480m Property, plant and Property, plant and equipment, and 200 000 Property, plant and equipment, and intangible assets, equipment, and intangible assets, R404 389m intangible assets, R344 271m 100 000 R292 209m 0 Mar-2012 Mar-2013 Mar-2014 R million Equity and liabilities 600 000 Net debt to equity ratio: 2.06 Net debt to equity ratio: 500 000 Net debt to equity ratio: 1.84 1.57 Equity, R119 784m 400 000 Equity, R109 139m Equity, R103 103m Other liabilities, R84 782m 300 000 Other liabilities, R76 983m Working capital, R45 607m Other liabilities, R62 753m Working capital, R42 946m 200 000 Working capital, R33 942m Debt securities Debt securities Debt securities and borrowings, 100 000 and borrowings, and borrowings, R254 820m R182 567m R202 956m 0 Mar-2012 Mar-2013 Mar-2014 Balance sheet Ensuring Eskom’s financial sustainability Capital expenditure1 Debt securities and borrowings R million R million 254 820 58 815 60 133 59 803 202 956 182 567 Mar-12 Mar-13 Mar-14 Mar-12 Mar-13 Mar-14 Liquid assets at period end Debt and borrowings maturity profile2 R million 40 480 One to 10 30 583 years 3 21 030 27 970 40.2% 10 907 More than 17 350 10 years 54.0% 19 450 19 676 10 620 Within one Mar-12 Mar-13 Mar-14 year 2 5.8% Cash and cash equivalents Investment in securities 1. Excluding capitalised borrowing costs 2. Represents the repayment of nominal capital and interest in the strategic and trading portfolio. Data as at 31 March 2014 3. Reflects the 10 financial years starting 1 April 2014 and ending on 31 March 2024 Funding plan from 1 April 2010 to 31 March 2017 Ensuring Eskom’s financial sustainability This plan was based on the assumption of a 16% MYPD 3 increase and will need to be extended Funding Currently Draw-downs Supported by sourced secured to date government Source of funds R billion R billion R billion R billion Bonds 90.0 65.4 65.4 42.6 Commercial paper1 70.0 70.0 40.0 0.0 Export Credit Agencies 32.9 32.9 21.7 0.0 World Bank 27.8 27.8 12.0 27.8 African Development Bank 20.9 20.9 16.2 20.9 Development Bank of Southern Africa 15.0 15.0 9.0 0.0 Shareholder loan 20.0 20.0 20.0 20.0 Other / new sources 23.4 19.6 4.5 5.0 Totals 300.0 271.6 188.7 116.2 Percentages 90.5%2 69.5%3 42.8%3 1. Commercial paper is issued for up to one year and then redeemed and re-issued for the same net amount. The commercial paper is thus by definition not fully secured for the full period, however, Eskom’s long-term observations and past trends support a high level of confidence that Eskom will be able to roll over the redemptions each year. For this reason, the gross value of the commercial paper is shown under the “secured” column in the borrowing programme table above 2. As a percentage of the R300 billion funding sourced 3. As a percentage of the currently secured total Debt maturity profile Ensuring Eskom’s financial sustainability • Eskom has to be responsible in managing its debt profile • The R255 billion of borrowings at 31 March 2014 will be repaid by 2052 Strategic and trading portfolio nominal and interest cashflows as at 31 March 2014 R billion 40 350 35 300 30 250 25 200 20 150 15 100 10 5 50 - - 2015 2032 2045 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2046 2047 2048 2049 2050 2051 2052 2053 Capital Interest Cumulative Nominal Capital Total 1 1. Annual cash flows from 2044 to 2052 are below R50 million Debt maturity and leverage Ensuring Eskom’s financial sustainability 1 Gross debt / EBITDA ratio Debt service cover ratio 3.50 16.20 2.50 10.96 2.01 6.46 1.21 3.00 Mar-12 Mar-13 Mar-14 Investment Mar-12 Mar-13 Mar-14 Target grade target 2 FFO as a % of gross debt Interest cover ratio 3.27 20.00 15.15 9.73 8.04 0.77 0.22 Mar-12 Mar-13 Mar-14 Investment Mar-12 Mar-13 Mar-14 grade target 1. Earnings before interest, taxation, depreciation and amoritisation 2. In 2012/13 the effect of the remeasurement of the government loan (income of R17.3 billion) impacted the interest cover ratio Eskom credit ratings as at 31 March 2014 Ensuring Eskom’s financial sustainability As a significant portion of Eskom’s debt is guaranteed by government, its headline credit rating has been uplifted, but remains closely linked to that of the sovereign Rating Standard & Poor’s Moody’s Fitch RSA government Foreign currency BBB1 Baa1 BBB Local currency A-1 Baa1 BBB+ Outlook Negative Negative Stable2 Eskom Holdings SOC Limited Foreign currency BBB4 Baa3 - Local currency BBB4 Baa3 BBB+ Standalone b- b1 B Outlook Negative4 Negative Stable3 Action date 14 Oct 2013 19 Jul 2013 11 Jan 2013 Affirmation date 14 Oct 2013 19 Jul 2013 12 Dec 2013 1. On 13 June 2014, Standard & Poor’s downgraded the sovereign foreign currency and local currency ratings (from BBB to BBB- and from A- to BBB+ respectively). This is expected to result in an adjustment to the Eskom headline and standalone credit ratings 2. On 12 June 2014, Fitch revised the sovereign outlook to “negative”, which is expected to result in an adjustment to the Eskom headline and standalone credit ratings 3. On 18 June 2014, Fitch affirmed Eskom’s BBB+ rating, but revised the outlook to “negative” 4. On 20 June 2014, Standard & Poor’s downgraded the foreign and local currency ratings from BBB to BBB-, and also put Eskom on CreditWatch Summary of cash flows Ensuring Eskom’s financial sustainability R million Operations Investing Financing 33 616 (55 835) 44 142 (8 014) (9 070) 5 748 (159) 19 676 10 620 (1 372) 31 Mar 2013 Cash generated Capex Other investing Debt raised Debt repaid Net interest Investment in Other 31 Mar 2014 cash and cash by operations expenditure (incl repayments securities financing cash and cash equivalents future fuel) activities equivalents Appropriate return on assets Ensuring Eskom’s financial sustainability • Eskom requires a rate of return on Rate of return on assets1 vs cost of capital assets that will enable it to maintain (pre-tax real rates) and replace the current asset base % 7.65% 7.65% • An appropriate rate of return on assets is a key building block towards cost- reflective tariffs • Ideally, the rate of return on assets should at least equal the cost of capital • The pre-tax real rate of return on assets was negative 0.53% compared to the pre-tax real cost of capital of (0.47%) (0.53%) 7.65% Mar-2013 Mar-2014 • Continuing with inadequate returns will Rate of return on assets Cost of capital result in a further erosion of Eskom’s financial position • It is therefore imperative that the price of electricity migrates to cost-reflectivity 1. Rate of return on assets calculated on closing balance of assets (revalued using the depreciated replacement cost method) and liabilities, excluding financial assets and liabilities Financial sustainability Ensuring Eskom’s financial sustainability • Critical for Eskom is ensuring a balance between security of supply, asset creation, financial sustainability and environmental compliance and to responsibly manage the trade-offs that are required • Revenue shortfall of R225 billion created by the MYPD 3 determination has serious consequences for Eskom’s business and future sustainability • Key to success is to ensure an appropriate return on assets in the long term and to obtain adequate funding to address liquidity in the short term • Eskom’s response to the liquidity challenges and long-term financial sustainability includes: − Investigating alternative sources of funding, including possible equity or quasi-equity instruments − Exploring additional borrowing options, although the ability to borrow sufficient funds at affordable levels is constrained by credit ratings. Given the recent sovereign ratings downgrade, Eskom is at risk of a further downgrade − Reprioritisation of capital expenditure within the R251 billion budget. However, this could negatively affect operational sustainability and impact security of supply − Applied to NERSA for a regulatory clearing account (RCA) adjustment, to claw back prudently incurred expenditure and lost revenue due to lower demand than forecast in the MYPD 2 application − Business productivity programme launched to reduce cost, increase productivity and enhance efficiencies • Financial sustainability cannot be achieved through efficiencies and savings alone – cost-reflective tariffs remain a key imperative Concluding remarks Collin Matjila Interim chief executive Concluding remarks Safety will continue to be the foundation for all Eskom’s operations and is key to Eskom’s performance, with focus on the following key principles: • The capacity expansion strategy which addresses priorities within the limits of available capital Eskom strategic • The Generation sustainability strategy which focuses on the plant, objectives people and processes • Pursuing cost-reflective tariffs, the RCA and alternative funding options • Continued focus on skills building, transformation and environmental sustainability • Adapt the Eskom business model The objective is to develop levers and solutions to deliver on: • Financial sustainability by achieving business productivity targets and driving internal efficiencies Eskom Emergency • Operational sustainability by ensuring improved generating plant Task Team (EETT) performance and implementing supply-side measures • Asset creation by ensuring the on time completion of the capacity expansion programme It is critical for Eskom to ensure a balance between security of supply, asset creation, financial sustainability and environmental compliance and to responsibly manage the trade-offs that are required Insert image here Insert image here Thank you