REVIEWED CONDENSED GROUP INTERIM FINANCIAL STATEMENTS for the six months ended 30 September 2019 CONTENTS Currency of financial statements 1 Approval of the condensed group interim financial statements 2 Independent auditors’ review report on the condensed group interim financial statements to the minister of public enterprises 3 Condensed group statement of financial position 4 Condensed group income statement 5 Condensed group statement of comprehensive income 5 Condensed group statement of changes in equity 6 Condensed group statement of cash flows 7 Notes to the condensed group interim financial statements 1 Structure and activities 8 2 Basis of preparation 8 3 Significant changes in accounting policies 9 4 Critical accounting estimates and judgements 11 5 Segment information 11 6 Issuances, repurchases and repayments of debt securities and borrowings and share capital 12 7 Dividend paid 12 8 Significant events and transactions 12 9 Seasonality of interim results 12 10 Revenue 13 11 Primary energy 13 12 Employee benefit expense 13 13 Finance cost 13 14 Income tax 13 15 Accounting classification and fair value 14 16 Material events subsequent to 30 September 2019 20 17 Restatement of comparatives 20 18 Reportable irregularities 21 The reviewed condensed group interim financial statements for the six months ended 30 September 2019 have been prepared under the supervision of the chief financial officer (CFO), C Cassim CA(SA). These condensed group interim financial statements have been independently reviewed by the group’s external auditors and were published on 28 November 2019. CURRENCY OF FINANCIAL STATEMENTS The reviewed condensed group interim financial statements are expressed in South African rand (R). The following are approximate values of the rand to one unit of the selected currencies: Average Reporting date mid-spot rate 30 September 31 March 30 September 30 September 31 March 30 September 2019 2019 2018 2019 2019 2018 Euro 16.23 15.92 15.73 16.53 16.26 16.42 United States dollar (USD) 14.52 13.76 13.38 15.16 14.48 14.17 Pound sterling (United Kingdom) 18.26 18.05 17.78 18.67 18.93 18.45 Swiss franc 14.62 13.89 13.59 15.21 14.55 14.51 Japanese yen 0.13 0.12 0.12 0.14 0.13 0.12 ESKOM HOLDINGS SOC LTD | 1 APPROVAL OF THE CONDENSED GROUP INTERIM FINANCIAL STATEMENTS Basis of preparation The condensed group interim financial statements from pages 4 to 22 for the six months ended 30 September 2019 have been prepared in accordance with the recognition and measurement requirements of International Financial Reporting Standards (IFRS), the presentation and disclosure requirements of International Accounting Standards (IAS) 34 Interim financial reporting, and in the manner required by the Companies Act. 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: • recognised that Eskom continues to face various challenges that resulted from mismanagement and corruption. Significant progress has been made in cleaning-up irregularities and improving processes, but it is taking time to identify all issues and take appropriate corrective action and consequence management • noted that there is a need to secure funding of R46 billion in 2020 (64% of the funding for 2020 has already been secured by November 2019) • considered the impact of the current economic climate and the sovereign’s credit ratings on Eskom’s ability to raise funds, including that the rating agencies have expressed a more cautious outlook on Eskom • reviewed the performance of the group for the period ended 30 September 2019 including the net profit after tax of R1 325 million and the net current liabilities of R13 059 million • noted the further deterioration of some of the group’s financial indicators • considered the impact of the cash flow forecast for the 18 months ending 31 March 2021 and the projected net loss pre-tax for 2020 • considered that Eskom is in a debt reliant liquidity situation that resulted from low tariffs, stagnant and contracting sales volumes, increased costs and the capital programme to increase and replace generating and transmitting capacity • considered the impact of reduced generation performance and the continuous increase in overdue electricity receivables (including the impact of non-recoverability of long outstanding electricity receivables) The challenges that the group is facing are being addressed by the following mitigation strategies and actions: • continuous engagement is taking place with the shareholder and National Treasury to ensure that the challenges that impact the group’s going- concern status are addressed satisfactorily within a reasonable timeframe • government continues to support Eskom to operate as a going concern given the strategic role that Eskom plays in pursuit of government objectives, with support of R49 billion in the current year and R56 billion in 2021 as follows: – government support of R23 billion per year for 2020 to 2022 has been announced in the 2019 budget by the Minister of Finance of which R13.5 billion has been provided in April 2019 – the Special Appropriation Act enacted in November 2019 allocated additional government support of R26 billion in 2020 and R33 billion in 2021. The board will manage the conditions relating to this allocation • the special paper on Eskom released by the Department of Public Enterprises (DPE) on 20 October 2019 provides a degree of clarity on the role that Eskom will play in the unfolding future of the country’s electricity supply industry • the board continues with the process to separate the business into the main line divisions (functional unbundling of Eskom) in line with the special paper. Plans are being developed to determine the process of legal unbundling in terms of timing and implications of the implementation including legislative changes, legal structure and ownership as well as addressing Eskom’s debt challenge including the impact of loan covenants • Eskom lodged court proceedings against the National Energy Regulator of South Africa (NERSA) for the following: – deduction of R23 billion per annum support from government in 2020 to 2022 in the NERSA multi-year price determination (MYPD) 4 tariff determination. The court hearing date is set for December 2019 – determination of the 5.23% tariff increase awarded for the 2019 financial year. The court hearing is expected to take place in January 2020 – incorrect application of the methodology for the 2015 to 2017 regulatory clearing account decisions. The court hearing is expected to take place in February 2020 • the group’s cost structures and capital programme are continuously being reviewed to extract cost savings and improve cash flows • the group’s generation capacity is being managed as a key focus area to ensure appropriate steps are being taken to manage the performance challenges • there is continued focus on implementing relevant strategies in an effort to recover overdue trade receivables through the inter-ministerial task team • the group will not embark on any large scale expansion activities after the completion of Kusile power station • funding options, with the support of National Treasury, are being pursued to implement the group’s borrowing programme • there is continued focus to address the shortcomings relating to the completeness of the irregular as well as fruitless and wasteful expenditure reporting process in terms of the Public Finance Management Act (PFMA) (resulted in the qualified audit opinion in recent years) and the clean-up of the related challenges in the commercial environment The board considered the risks relating to the group’s going-concern status and is satisfied that the risks will be satisfactorily addressed with the mitigation strategies in place. The board continues to manage these strategies as a priority as it is important that they materialise as envisaged. Tough and painful decisions will have to be made by Eskom, the shareholder and NERSA for the strategy to succeed. The board therefore concluded that it is satisfied that the group has access to adequate resources and facilities to be able to continue its operations for the foreseeable future as a going concern. Approval The board is of the opinion, based on the information available to date, that the condensed group interim financial statements fairly present the financial position of the group at 30 September 2019 and the results of the operations and cash flow information for the six months then ended. The condensed group interim financial statements have been approved by the board and signed on its behalf by: SN Mabaso-Koyana JA Mabuza C Cassim Audit and risk committee chairman Interim executive chairman and acting group chief executive Chief financial officer 25 November 2019 25 November 2019 25 November 2019 2 | REVIEWED CONDENSED GROUP INTERIM FINANCIAL STATEMENTS | 30 SEPTEMBER 2019 INDEPENDENT AUDITORS’ REVIEW REPORT ON THE CONDENSED GROUP INTERIM FINANCIAL STATEMENTS TO THE MINISTER OF PUBLIC ENTERPRISES Introduction We have reviewed the accompanying condensed group interim financial statements of Eskom Holdings SOC Ltd set out on pages 4 to 22, which comprise the condensed group statement of financial position at 30 September 2019, and the condensed group income statement, statements of comprehensive income, changes in equity and cash flows for the six months then ended and explanatory notes. The board’s responsibility for the financial statements The board is responsible for the preparation and presentation of these condensed group interim financial statements in accordance with the recognition and measurement requirements of IFRS, the presentation and disclosure requirements of IAS 34 Interim financial reporting, the requirements of the Companies Act and for such internal control as the directors determine is necessary to enable the preparation of interim financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ responsibility for the financial statements Our responsibility is to express a conclusion on these condensed group interim financial statements based on our review. Scope of review We conducted our review in accordance with the International Standard on Review Engagements (ISRE) 2410, Review of interim financial information performed by the independent auditor of the entity. A review of the interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. This standard also requires us to comply with relevant ethical requirements. A review of interim financial statements in accordance with ISRE 2410 is a limited assurance engagement. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters which might be identified in an audit. Accordingly, we do not express an audit opinion. Conclusion Based on our review, nothing has come to our attention that causes us to believe that the accompanying condensed group interim financial statements of Eskom for the six months ended 30 September 2019, are not prepared, in all material respects, in accordance with the recognition and measurement requirements of IFRS, the presentation and disclosure requirements of IAS 34 and the requirements of the Companies Act. Material uncertainty related to going concern We draw attention to the matter below. Our conclusion is not modified in respect of this matter. We draw attention to note 2.1 of the condensed group interim financial statements which indicates that the group’s current liabilities exceed its current assets by R13 059 million. As stated in note 2.1, the debt reliant liquidity position, the deterioration of some of the group’s financial indicators, the impact of reduced generation performance along with other matters, indicate that a material uncertainty exists that may cast significant doubt on the group’s ability to continue as a going concern. Compliance with legislation 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 reportable irregularities in terms of the Auditing Profession Act. We have reported such matters to the Independent Regulatory Board for Auditors. The matters pertaining to the reportable irregularities have been described in note 18 to the condensed group interim financial statements. A Mthimunye SizweNtsalubaGobodo Grant Thornton Inc. Director Registered auditor 27 November 2019 20 Morris East Street, Woodmead, 2191 ESKOM HOLDINGS SOC LTD | 3 CONDENSED GROUP STATEMENT OF FINANCIAL POSITION at 30 September 2019 Reviewed Audited Reviewed1 30 September 31 March 30 September 2019 2019 2018 Rm Rm Rm Assets Non-current 692 591 685 153 673 920 Property, plant and equipment and intangible assets 659 734 655 562 645 131 Future fuel supplies 4 922 6 471 6 472 Payments made in advance 1 610 1 734 1 771 Derivatives held for risk management and embedded derivatives 25 508 20 582 19 682 Trade, finance lease, loan and other receivables 390 414 452 Other assets 427 390 412 Current 82 493 63 994 77 753 Inventories 32 716 26 482 23 412 Taxation 203 102 371 Investments and financial trading assets 11 358 9 725 9 700 Payments made in advance 1 700 1 541 1 873 Derivatives held for risk management and embedded derivatives 2 596 2 080 1 865 Trade, finance lease, loan and other receivables 26 106 22 033 23 190 Cash and cash equivalents 7 814 2 031 17 342 Assets held-for-sale 8 811 8 871 8 985 Total assets 783 895 758 018 760 658 Equity Capital and reserves 168 747 153 094 174 397 Liabilities Non-current 518 120 495 194 511 347 Debt securities and borrowings 410 290 387 208 397 002 Derivatives held for risk management and embedded derivatives 5 247 7 008 7 033 Deferred tax 9 025 8 350 17 313 Payments received in advance, contract liabilities and deferred income 23 828 23 333 22 299 Employee benefit obligations 13 980 13 546 13 698 Provisions 45 309 45 588 43 348 Trade and other payables and lease liabilities 10 441 10 161 10 654 Current 95 552 108 051 73 230 Debt securities and borrowings 43 917 53 402 22 211 Derivatives held for risk management and embedded derivatives 2 784 3 466 4 099 Employee benefit obligations 4 022 3 244 4 012 Provisions 5 732 5 662 6 111 Payments received in advance, contract liabilities and deferred income 4 949 4 858 4 640 Trade and other payables and lease liabilities 33 967 37 181 31 891 Financial trading liabilities 181 238 266 Liabilities held-for-sale 1 476 1 679 1 684 Total liabilities 615 148 604 924 586 261 Total equity and liabilities 783 895 758 018 760 658 1. Restated. Refer to note 17. 4 | REVIEWED CONDENSED GROUP INTERIM FINANCIAL STATEMENTS | 30 SEPTEMBER 2019 CONDENSED GROUP INCOME STATEMENT for the six months ended 30 September 2019 Reviewed Reviewed1 Audited six months ended six months ended year ended 30 September 30 September 31 March 2019 2018 2019 Note Rm Rm Rm Revenue 10 107 502 98 104 179 892 Other income 677 1 678 2 150 Primary energy 11 (52 018) (46 146) (99 488) Employee benefit expense 12 (16 454) (16 944) (33 272) Impairment of assets (781) 594 431 Other expenses (8 334) (9 023) (18 214) Profit before depreciation and amortisation expense and net fair value and foreign exchange loss on financial instruments (EBITDA) 30 592 28 263 31 499 Depreciation and amortisation expense (13 503) (12 870) (29 756) Net fair value and foreign exchange loss on financial instruments (480) (821) (3 409) Profit/(loss) before net finance cost 16 609 14 572 (1 666) Net finance cost (14 804) (13 733) (27 517) Finance income 1 258 1 495 2 722 Finance cost 13 (16 062) (15 228) (30 239) Share of profit of equity-accounted investees, net of tax 40 22 35 Profit/(loss) before tax 1 845 861 (29 148) Income tax 14 (520) (234) 8 419 Profit/(loss) for the period2 1 325 627 (20 729) CONDENSED GROUP STATEMENT OF COMPREHENSIVE INCOME for the six months ended 30 September 2019 Reviewed Reviewed Audited six months ended six months ended year ended 30 September 30 September 31 March 2019 2018 2019 Rm Rm Rm Profit/(loss) for the period2 1 325 627 (20 729) Other comprehensive income 828 3 632 3 685 Items that may be reclassified subsequently to profit or loss 639 3 016 2 433 Cash flow hedges 855 4 157 3 309 Foreign currency translation differences 24 23 50 Income tax thereon (240) (1 164) (926) Items that may not be reclassified subsequently to profit or loss 189 616 1 252 Re-measurement of post-employment medical benefits 263 848 1 737 Income tax thereon (74) (232) (485) Total comprehensive income/(loss) for the period2 2 153 4 259 (17 044) 1. Restated. Refer to note 17. 2. A nominal amount is attributable to the non-controlling interest in the group. The remainder is attributable to the owner of the group. ESKOM HOLDINGS SOC LTD | 5 CONDENSED GROUP STATEMENT OF CHANGES IN EQUITY for the six months ended 30 September 2019 Share Cash flow Unrealised Foreign Accumulate Total capital hedge fair value currency profit equity reserve reserve translation reserve Rm Rm Rm Rm Rm Rm Balance at 31 March 2018 83 000 (416) (10 313) (31) 97 898 170 138 Restated profit for the period1 – – – – 627 627 Other comprehensive income, net of tax – 2 993 – 23 616 3 632 Transfer between reserves – – (3 787) – 3 787 – Balance at 30 September 2018 83 000 2 577 (14 100) (8) 102 928 174 397 Loss for the period – – – – (21 356) (21 356) Other comprehensive income, net of tax – (610) – 27 636 53 Transfer between reserves – – 459 – (459) – Balance at 31 March 2019 83 000 1 967 (13 641) 19 81 749 153 094 Profit for the period – – – – 1 325 1 325 Other comprehensive income, net of tax – 615 – 24 189 828 Share capital issued 13 500 – – – – 13 500 Transfer between reserves – – (713) – 713 – Balance at 30 September 2019 96 500 2 582 (14 354) 43 83 976 168 747 1. Restated. Refer to note 17. 6 | REVIEWED CONDENSED GROUP INTERIM FINANCIAL STATEMENTS | 30 SEPTEMBER 2019 CONDENSED GROUP STATEMENT OF CASH FLOWS for the six months ended 30 September 2019 Reviewed Reviewed Audited six months ended six months ended year ended 30 September 30 September 31 March 2019 2018 2019 Rm Rm Rm Cash flows from operating activities Profit/(loss) before tax 1 845 861 (29 148) Adjustment for non-cash items 28 899 26 979 58 712 Changes in working capital (11 150) (760) 3 693 Cash generated from operations 19 594 27 080 33 257 Net cash from/(used in) derivatives held for risk management 179 (87) (172) Finance income received 152 190 245 Finance cost paid (20) (239) (277) Income taxes paid (230) (288) (313) Net cash from operating activities 19 675 26 656 32 740 Cash flows used in investing activities Disposals of property, plant and equipment and intangible assets 439 327 566 Acquisitions of property, plant and equipment and intangible assets (10 727) (17 073) (34 530) Acquisitions of future fuel supplies (747) (89) (548) Disposals of insurance investments 4 775 8 034 10 669 Acquisitions of insurance investments (6 481) (9 423) (12 025) Payments made in advance (6) (37) (9) Cash used in provisions (376) (539) (1 707) Net cash used in derivatives held for risk management (301) (59) (166) Finance income received 814 724 1 411 Other cash from investing activities 111 74 137 Net cash used in investing activities (12 499) (18 061) (36 202) Cash flows used in financing activities Debt securities and borrowings raised 15 934 34 413 58 914 Payments made in advance (197) (725) (1 179) Debt securities and borrowings repaid (11 450) (27 515) (34 455) Share capital issued 13 500 – – Net cash from derivatives held for risk management 447 3 528 1 219 Cash used in lease liabilities (185) (140) (357) Net cash (used in)/from financial trading instruments (58) 13 (19) Finance income received 265 516 858 Finance cost paid (19 567) (17 705) (35 845) Taxes paid (29) (9) (69) Net cash used in financing activities (1 340) (7 624) (10 933) Net increase/(decrease) in cash and cash equivalents 5 836 971 (14 395) Cash and cash equivalents at beginning of the period 2 031 15 823 15 823 Foreign currency translation 24 23 50 Effect of movements in exchange rates on cash held 86 611 620 Assets and liabilities held-for-sale (163) (86) (67) Cash and cash equivalents at end of the period 7 814 17 342 2 031 ESKOM HOLDINGS SOC LTD | 7 NOTES TO THE CONDENSED GROUP INTERIM FINANCIAL STATEMENTS for the six months ended 30 September 2019 1. Structure and activities Eskom Holdings SOC Ltd (Eskom), a state-owned company and holding company of the group, is incorporated and domiciled in the Republic of South Africa. Eskom is a vertically integrated operation that generates, transmits and distributes electricity to local industrial, mining, commercial, agricultural, redistributors (metropolitan and other municipalities) and residential customers, and to international customers in southern Africa. Eskom also purchases electricity from IPPs and international suppliers in southern Africa. These represent the significant activities of the group. The business focus of the subsidiaries is primarily to support the electricity business. 2. Basis of preparation The reviewed condensed group interim financial statements of Eskom as at and for the six months ended 30 September 2019 comprise the company, its subsidiaries, joint ventures, associates and structured entities (together, the group). The reviewed condensed group interim financial statements do not include all of the information required for full financial statements and should be read in conjunction with the Eskom Holdings SOC Ltd 31 March 2019 group annual financial statements. The annual financial statements of the group as at and for the year ended 31 March 2019 are available for inspection at the company’s registered office and on the Eskom website at www.eskom.co.za. The condensed group interim financial statements are prepared in accordance with the recognition and measurement requirements of IFRS, the presentation and disclosure requirements of IAS 34 Interim financial reporting, and in the manner required by the Companies Act. The condensed group interim financial statements are prepared on the historical-cost basis except for the following items which are measured at fair value: • derivatives held for risk management • embedded derivatives • certain investments and financial trading assets and liabilities 2.1 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: • recognised that Eskom continues to face various challenges that resulted from mismanagement and corruption. Significant progress has been made in cleaning-up irregularities and improving processes, but it is taking time to identify all issues and take appropriate corrective action and consequence management • noted that there is a need to secure funding of R46 billion in 2020 (64% of the funding for 2020 has already been secured by November 2019) • considered the impact of the current economic climate and the sovereign’s credit ratings on Eskom’s ability to raise funds, including that the rating agencies have expressed a more cautious outlook on Eskom • reviewed the performance of the group for the period ended 30 September 2019 including the net profit after tax of R1 325 million and the net current liabilities of R13 059 million • noted the further deterioration of some of the group’s financial indicators • considered the impact of the cash flow forecast for the 18 months ending 31 March 2021 and the projected net loss pre-tax for 2020 • considered that Eskom is in a debt reliant liquidity situation that resulted from low tariffs, stagnant and contracting sales volumes, increased costs and the capital programme to increase and replace generating and transmitting capacity • considered the impact of reduced generation performance and the continuous increase in overdue electricity receivables (including the impact of non-recoverability of long outstanding electricity receivables) The challenges that the group is facing are being addressed by the following mitigation strategies and actions: • continuous engagement is taking place with the shareholder and National Treasury to ensure that the challenges that impact the group’s going-concern status are addressed satisfactorily within a reasonable timeframe • government continues to support Eskom to operate as a going concern given the strategic role that Eskom plays in pursuit of government objectives, with support of R49 billion in the current year and R56 billion in 2021 as follows: – government support of R23 billion per year for 2020 to 2022 has been announced in the 2019 budget by the Minister of Finance of which R13.5 billion has been provided in April 2019 – the Special Appropriation Act enacted in November 2019 allocated additional government support of R26 billion in 2020 and R33 billion in 2021. The board will manage the conditions relating to this allocation • the special paper on Eskom released by the DPE on 20 October 2019 provides a degree of clarity on the role that Eskom will play in the unfolding future of the country’s electricity supply industry • the board continues with the process to separate the business into the main line divisions (functional unbundling of Eskom) in line with the special paper. Plans are being developed to determine the process of legal unbundling in terms of timing and implications of the implementation including legislative changes, legal structure and ownership as well as addressing Eskom’s debt challenge including the impact of loan covenants • Eskom lodged court proceedings against NERSA for the following: – deduction of R23 billion per annum support from government in 2020 to 2022 in the NERSA MYPD 4 tariff determination. The court hearing date is set for December 2019 – determination of the 5.23% tariff increase awarded for the 2019 financial year. The court hearing is expected to take place in January 2020 – incorrect application of the methodology for the 2015 to 2017 regulatory clearing account decisions. The court hearing is expected to take place in February 2020 • the group’s cost structures and capital programme are continuously being reviewed to extract cost savings and improve cash flows • the group’s generation capacity is being managed as a key focus area to ensure appropriate steps are being taken to manage the performance challenges 8 | REVIEWED CONDENSED GROUP INTERIM FINANCIAL STATEMENTS | 30 SEPTEMBER 2019 • there is continued focus on implementing relevant strategies in an effort to recover overdue trade receivables through the inter- ministerial task team • the group will not embark on any large scale expansion activities after the completion of Kusile power station • funding options, with the support of National Treasury, are being pursued to implement the group’s borrowing programme • there is continued focus to address the shortcomings relating to the completeness of the irregular as well as fruitless and wasteful expenditure reporting process in terms of the PFMA (resulted in the qualified audit opinion in recent years) and the clean-up of the related challenges in the commercial environment The board considered the risks relating to the group’s going-concern status and is satisfied that the risks will be satisfactorily addressed with the mitigation strategies in place. The board continues to manage these strategies as a priority as it is important that they materialise as envisaged. Tough and painful decisions will have to be made by Eskom, the shareholder and NERSA for the strategy to succeed. The board therefore concluded that it is satisfied that the group has access to adequate resources and facilities to be able to continue its operations for the foreseeable future as a going concern. 3. Significant changes in accounting policies The accounting policies are consistent with those applied in the audited financial statements as at 31 March 2019 except for the impact of IFRS 16 Leases which has become effective during the six months ended 30 September 2019 as set out below. Eskom has applied IFRS 16 (replacing IAS 17 Leases, IFRIC 4 Determining whether an arrangement contains a lease, SIC-15 Operating leases-incentives and SIC-27 Evaluating the substance of transactions involving the legal form of a lease) from 1 April 2019. It sets out principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for most leases under a single on-balance sheet model. Lessor accounting Lessor accounting remains substantially unchanged in terms of IFRS 16. Leases continue to be classified as operating or finance leases using similar principles as in IAS 17. IFRS 16 therefore did not have any impact on leases where the group is the lessor. Lessee accounting Lessee accounting in terms of IAS 17 The group classified leases as finance or operating leases at commencement of the lease. Leases were classified as finance leases if they transferred substantially all of the risks and rewards of ownership of the leased asset to the lessee. All other leases were classified as operating leases. Finance leases were capitalised at commencement of the lease at the fair value of the leased asset or, if lower, at the present value of the minimum lease payments. Lease payments were apportioned between interest (finance costs) and reducing the lease payable. For operating leases, payments were recognised as an expense in profit or loss on a straight-line basis over the lease term. Lessee accounting in terms of IFRS 16 The group applies a single recognition and measurement approach for all leases except for short-term leases and leases of low-value assets. 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 are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred and lease payments made at or before the commencement date. The recognised right-of-use assets are depreciated on a straight-line basis over the shorter of their estimated useful lives and the lease term. Right-of-use assets are assessed for impairment. Lease liabilities The group recognises a lease liability at lease commencement measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments and any variable lease payments that depend on an index or a rate. Variable lease payments that do not depend on an index or rate are recognised as expenses in the period in which the event or condition that triggers the payment occurs. The group uses the incremental borrowing rate at lease commencement to calculate the present value of lease payments if the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for lease payments made. The carrying amount of lease liabilities is remeasured if there is a change in the lease term, the in-substance fixed lease payments or the assessment of the intention to purchase the underlying asset. The incremental borrowing rate requires a degree of judgement regarding the determination of an appropriate discount rate for the lease term. The discount rate is based on borrowings of a similar term which takes into account current market conditions. Short-term leases and leases of low-value assets The group applies the short-term lease recognition exemption to leases with a term of less than 12 months. The group applies the lease of low-value assets recognition exemption to leases with a value of less than R75 000. Lease payments on short-term leases and leases of low-value assets are recognised as an expense on a straight-line basis over the lease term. ESKOM HOLDINGS SOC LTD | 9 NOTES TO THE CONDENSED GROUP INTERIM FINANCIAL STATEMENTS continued for the six months ended 30 September 2019 3. Significant changes in accounting policies (continued) Lessee accounting (continued) Transition The group adopted IFRS 16 using the modified retrospective method where the retrospective cumulative effect of initially applying the standard was recognised at the date of initial application on 1 April 2019. The group elected to use the practical expedient on transition that allows the group not to reassess whether a contract contains a lease on initial application for contracts that existed at transition date. The group therefore applied the standard to contracts that were previously identified as leases applying IAS 17 and IFRIC 4 on 1 April 2019. The following specific requirements and practical expedients on transition have been applied by the group: Lessee accounting of leases previously classified as finance leases The group did not change the initial carrying amounts of recognised assets and liabilities at the date of initial application for leases previously classified as finance leases (ie the right-of-use assets and lease liabilities are equal to the lease assets and liabilities recognised under IAS 17). The requirements of IFRS 16 were applied to these leases from 1 April 2019. Lessee accounting of leases previously classified as operating leases The group recognised right-of-use assets and lease liabilities for those leases previously classified as operating leases, except for short-term leases and leases of low-value assets. The right-of-use asset for leases were recognised on transition based on the amount equal to the lease liabilities, adjusted for any related prepaid and accrued lease payments previously recognised. Lease liabilities were recognised based on the present value of the remaining lease payments, discounted using the average incremental borrowing rate at the date of initial application of 9.06%. The group also applied the available practical expedients on transition whereby it: • used a single discount rate to a portfolio of leases with reasonably similar characteristics • applied the short-term leases exemption to leases with lease terms that were ending within 12 months of initial application. The group accounted for those leases in the same way as short-term leases as described earlier Financial impact of adoption of IFRS 16 Lease commitments reconciliation Rm Operating lease commitments at 31 March 2019 176 Effect of discounting (9) 167 Short-term leases 28 Right-of-use lease liabilities 139 Righ-of-use assets and lease liabilities movement reconciliation Right-of-use assets Lease liabilities Land, buildings Plant Total and facilities Generating Spares and other Rm Rm Rm Rm Rm Carrying value at 1 April 2019 – 7 718 123 7 841 9 462 Impact of adoption of IFRS 161 132 – – 132 139 Depreciation (37) (319) (6) (362) – Finance costs – – – – 710 Lease payments (capital and finance cost) – – – – (895) Carrying value at 30 September 2019 95 7 399 117 7 611 9 416 1. The adoption of IFRS 16 also resulted in a charge of R7 million to trade and other payables relating to operating lease smoothing balances that had been recognised in terms of IAS 17. 10 | REVIEWED CONDENSED GROUP INTERIM FINANCIAL STATEMENTS | 30 SEPTEMBER 2019 Composition of lease liabilities 30 September 2019 Gross payables Future finance Carrying value charges Rm Rm Rm Non-current 17 584 (8 583) 9 001 Between one and five years 6 928 (4 825) 2 103 After five years 10 656 (3 758) 6 898 Current Within one year 1 792 (1 377) 415 19 376 (9 960) 9 416 Short-term and low-value asset leases The expense recognised for the six months ended 30 September 2019 relating to short-term leases was R496 million. There were no leases of low-value assets. 4. Critical accounting estimates and judgements The significant estimates and judgements made by management in applying the accounting policies and the key sources of estimation uncertainty were substantially the same as those applied to the financial statements as at and for the year ended 31 March 2019. 5. Segment information Gener- Trans- Distri- Energy Group Group All other Reallocation Group ation mission bution purchases/ customer capital segments and inter- sales services segment transactions Rm Rm Rm Rm Rm Rm Rm Rm Rm 30 September 2019 (reviewed) External revenue – 9 952 6 094 100 447 – 872 (872) 107 502 Inter-segment revenue/ recoveries 72 396 5 056 12 827 8 221 (98 302) (90) 5 544 (5 652) – Total revenue 72 396 5 065 13 779 14 315 2 145 (90) 6 416 (6 524) 107 502 Profit/(loss) before tax (219) 121 1 704 (456) 1 599 (2 155) 761 490 1 845 Income tax – – – – – – (382) (138) (520) Profit/(loss) for the period (219) 121 1 704 (456) 1 599 (2 155) 379 352 1 325 Segment assets 333 431 55 771 91 446 10 071 22 529 210 838 82 183 (22 374) 783 895 Segment liabilities 61 443 1 684 32 207 13 841 13 555 12 378 503 173 (23 133) 615 148 30 September 2018 (reviewed) External revenue – 165 184 4 086 93 669 – 767 (767) 98 104 Inter-segment revenue/ recoveries 68 811 2 797 12 169 9 274 (92 857) (73) 5 579 (5 700) – Total revenue 68 811 2 962 12 353 13 360 812 (73) 6 346 (6 467) 98 104 Profit/(loss) before tax (2 950) (452) 723 (507) 2 355 719 1 175 (202) 861 Income tax – – – – – – (288) 54 (234) Profit/(loss) for the period (2 950) (452) 723 (507) 2 355 719 887 (148) 627 Segment assets 312 564 52 097 87 678 10 176 20 886 215 489 85 540 (23 772) 760 658 Segment liabilities 58 370 1 592 31 351 13 846 13 856 11 536 478 354 (22 644) 586 261 31 March 2019 (audited) External revenue – 215 2 118 8 171 169 388 – 1 377 (1 377) 179 892 Inter-segment revenue/ recoveries 125 449 3 548 16 905 21 855 (167 417) (133) 11 252 (11 459) – Total revenue 125 449 3 763 19 023 30 026 1 971 (133) 12 629 (12 836) 179 892 Profit/(loss) before tax (23 954) (4 026) (3 696) (1 347) 1 629 (1 203) 1 567 1 882 (29 148) Income tax – – – – – – 8 837 (418) 8 419 Profit/(loss) for the period (23 954) (4 026) (3 696) (1 347) 1 629 (1 203) 10 404 1 464 (20 729) Segment assets 310 101 54 751 90 205 9 247 19 094 227 054 68 430 (20 864) 758 018 Segment liabilities 64 667 1 800 31 825 14 339 13 273 11 939 488 352 (21 271) 604 924 Eskom is in the process of functional unbundling. As a result, segmentation, as well as the transfer pricing and overhead methodologies are being refined. ESKOM HOLDINGS SOC LTD | 11 NOTES TO THE CONDENSED GROUP INTERIM FINANCIAL STATEMENTS continued for the six months ended 30 September 2019 6. Issuances, repurchases and repayments of debt securities and borrowings and share capital 6.1 Debt securities and borrowings The nature of the group’s issuances, repurchases and repayments of debt securities and borrowings are consistent with those reported previously. The debt raised and repaid by the group is disclosed in the statement of cash flows. 6.2 Share capital Reviewed Audited Reviewed six months ended year ended six month ended 30 September 31 March 30 September 2019 2019 2018 Shares Shares Shares Authorised ordinary shares 100 000 000 000 100 000 000 000 100 000 000 000 Issued ordinary shares Balance at beginning of the year 83 000 000 001 83 000 000 001 83 000 000 001 Share capital issued 13 500 000 000 – – Balance at end of the year 96 500 000 001 83 000 000 001 83 000 000 001 7. Dividend paid No dividend was paid to the shareholder during the six months ended 30 September 2019 nor in the comparative periods presented. 8. Significant events and transactions The following significant movements occurred in the six months ended 30 September 2019: 8.1 Foreign exchange impact on derivatives held for risk management and debt securities and borrowings The impact of the weakening of the rand against major currencies increased debt securities and borrowings by R7.7 billion and the net asset position in derivatives held for risk management by R5.6 billion. 8.2 Share capital issued Refer to note 2.1 and 6.2 for details about share capital issued in the period. 9. Seasonality of interim results The sale of electricity is subject to seasonal fluctuations where revenue and consequently electricity receivables are normally higher during the first six months of the financial year (winter months) as compared to the summer months in terms of volume of sales, tariff energy charges and peak demand. 12 | REVIEWED CONDENSED GROUP INTERIM FINANCIAL STATEMENTS | 30 SEPTEMBER 2019 Reviewed Reviewed Audited six months ended six months ended year ended 30 September 30 September 31 March 2019 2018 2019 Rm Rm Rm 10. Revenue Redistributors 44 703 40 548 71 265 Invoiced to customers 48 594 44 855 77 231 Amounts not meeting revenue recognition criteria (5 793) (5 037) (8 438) Recognised on a cash received basis 1 902 730 2 472 Residential 3 152 2 872 5 490 Invoiced to customers 3 406 3 166 5 966 Amounts not meeting revenue recognition criteria (254) (294) (476) Industrial 20 294 19 396 36 168 Mining 16 911 15 041 26 550 Commercial 7 687 6 726 12 385 Agricultural 4 858 4 137 8 682 International 6 151 4 129 8 241 Other customers 2 001 1 846 3 279 Post-paid electricity sales 105 757 94 695 172 060 Prepaid electricity sales 4 817 4 447 8 645 Total electricity sales 110 574 99 142 180 705 Other 1 134 363 2 580 Gross revenue 111 708 99 505 183 285 Capitalised to property, plant and equipment (4 206) (1 401) (3 393) 107 502 98 104 179 892 11. Primary energy Own generation costs 33 985 29 385 62 991 Environmental levy 3 873 4 063 7 805 International electricity purchases 1 993 1 905 3 740 Independent power producers 12 167 10 793 24 952 52 018 46 146 99 488 12. Employee benefit expense Gross employee benefit expense 17 727 18 631 36 658 Capitalised to property, plant and equipment (1 273) (1 687) (3 386) 16 454 16 944 33 272 13. Finance cost Gross finance cost 24 341 22 855 45 617 Capitalised to property, plant and equipment (8 279) (7 627) (15 378) 16 062 15 228 30 239 14. Income tax Income tax for the interim period is recognised based on management’s best estimate of the weighted average annual income tax rate expected for the full financial year which is applied to the pre-tax income of the interim period. ESKOM HOLDINGS SOC LTD | 13 NOTES TO THE CONDENSED GROUP INTERIM FINANCIAL STATEMENTS continued for the six months ended 30 September 2019 15. Accounting classification and fair value 15.1 Accounting classification 30 September 2019 (reviewed) Fair value Amortised Other assets Total through profit cost and liabilities or loss Rm Rm Rm Rm Financial assets Investments and financial trading assets 1 700 9 658 – 11 358 Negotiable certificates of deposit – 9 599 – 9 599 Repurchase agreements – 59 – 59 Listed shares 1 597 – – 1 597 Government bonds 103 – – 103 Derivatives held for risk management and embedded derivatives 1 521 – 26 583 28 104 Foreign exchange contracts 1 406 – 39 1 445 Cross-currency swaps 30 – 26 544 26 574 Commodity forwards 2 – – 2 Credit default swaps 9 – – 9 Inflation-linked swaps 74 – – 74 Trade, finance lease, loan and other receivables – 26 104 391 26 495 Loans receivable – 56 – 56 Finance lease receivables – – 391 391 Trade and other receivables – 26 048 – 26 048 Cash and cash equivalents – 7 814 – 7 814 Bank balances – 5 389 – 5 389 Fixed deposits – 2 425 – 2 425 3 221 43 576 26 974 73 771 Financial liabilities Debt securities and borrowings – 454 207 – 454 207 Eskom bonds – 154 777 – 154 777 Commercial paper – 931 – 931 Eurorand zero coupon bonds – 4 673 – 4 673 Foreign bonds – 83 783 – 83 783 Development financing institutions – 147 967 – 147 967 Export credit facilities – 30 090 – 30 090 Floating rate notes – 4 046 – 4 046 Other loans – 27 940 – 27 940 Derivatives held for risk management and embedded derivatives 804 – 7 227 8 031 Foreign exchange contracts 262 – 94 356 Cross-currency swaps 210 – 4 875 5 085 Commodity forwards 4 – – 4 Credit default swaps 296 – – 296 Inflation-linked swaps 32 – – 32 Embedded derivatives – – 2 258 2 258 Trade and other payables and lease liabilities – 32 271 9 416 41 687 Lease liabilities – – 9 416 9 416 Trade and other payables – 32 271 – 32 271 Financial trading liabilities 181 – – 181 Short-sold government bonds 56 – – 56 Repurchase agreements 125 – – 125 985 486 478 16 643 504 106 14 | REVIEWED CONDENSED GROUP INTERIM FINANCIAL STATEMENTS | 30 SEPTEMBER 2019 31 March 2019 (audited) Fair value Amortised Other assets Total through profit cost and liabilities or loss Rm Rm Rm Rm Financial assets Investments and financial trading assets 1 720 8 005 – 9 725 Negotiable certificates of deposit – 7 946 – 7 946 Repurchase agreements – 59 – 59 Listed shares 1 617 – – 1 617 Government bonds 103 – – 103 Derivatives held for risk management and embedded derivatives 1 378 – 21 284 22 662 Foreign exchange contracts 1 281 – 20 1 301 Cross-currency swaps 49 – 21 264 21 313 Credit default swaps 9 – – 9 Inflation-linked swaps 39 – – 39 Trade, finance lease, loan and other receivables – 21 989 405 22 394 Loans receivable – 66 – 66 Finance lease receivables – – 405 405 Trade and other receivables – 21 923 – 21 923 Cash and cash equivalents – 2 031 – 2 031 Bank balances – 2 018 – 2 018 Unsettled deals – 13 – 13 3 098 32 025 21 689 56 812 Financial liabilities Debt securities and borrowings – 440 610 – 440 610 Eskom bonds – 152 283 – 152 283 Commercial paper – 1 105 – 1 105 Eurorand zero coupon bonds – 4 399 – 4 399 Foreign bonds – 79 963 – 79 963 Development financing institutions – 135 661 – 135 661 Export credit facilities – 31 782 – 31 782 Floating rate notes – 4 047 – 4 047 Other loans – 31 370 – 31 370 Derivatives held for risk management and embedded derivatives 1 139 – 9 335 10 474 Foreign exchange contracts 471 – 88 559 Cross-currency swaps 322 – 5 813 6 135 Credit default swaps 305 – – 305 Inflation-linked swaps 41 – – 41 Embedded derivatives – – 3 434 3 434 Trade, finance lease and other payables – 36 785 9 462 46 247 Finance lease payables – – 9 462 9 462 Trade and other payables – 36 785 – 36 785 Financial trading liabilities 238 – – 238 Short-sold government bonds 57 – – 57 Repurchase agreements 181 – – 181 1 377 477 395 18 797 497 569 ESKOM HOLDINGS SOC LTD | 15 NOTES TO THE CONDENSED GROUP INTERIM FINANCIAL STATEMENTS continued for the six months ended 30 September 2019 15. Accounting classification and fair value (continued) 15.1 Accounting classification (continued) 30 September 2018 (reviewed) Fair value Amortised Other assets Total through profit cost and liabilities or loss Rm Rm Rm Rm Financial assets Investments and financial trading assets 1 407 8 293 – 9 700 Negotiable certificates of deposit – 8 236 – 8 236 Repurchase agreements – 57 – 57 Listed shares 1 303 – – 1 303 Government bonds 104 – – 104 Derivatives held for risk management and embedded derivatives 1 358 – 20 189 21 547 Foreign exchange contracts 1 213 – 193 1 406 Cross-currency swaps 72 – 19 996 20 068 Commodity forwards 46 – – 46 Credit default swaps 9 – – 9 Inflation-linked swaps 18 – – 18 Trade, finance lease, loan and other receivables – 23 210 423 23 633 Loans receivable – 72 – 72 Finance lease receivables – – 423 423 Trade and other receivables – 23 138 – 23 138 Cash and cash equivalents – 17 342 – 17 342 Bank balances – 5 710 – 5 710 Unsettled deals – 54 – 54 Fixed deposits – 11 578 – 11 578 2 765 48 845 20 612 72 222 Financial liabilities Debt securities and borrowings – 419 213 – 419 213 Eskom bonds – 149 196 – 149 196 Commercial paper – 1 249 – 1 249 Eurorand zero coupon bonds – 6 075 – 6 075 Foreign bonds – 78 306 – 78 306 Development financing institutions – 133 107 – 133 107 Export credit facilities – 34 023 – 34 023 Floating rate notes – 3 982 – 3 982 Other loans – 13 275 – 13 275 Derivatives held for risk management and embedded derivatives 2 469 – 8 663 11 132 Foreign exchange contracts 1 656 – 197 1 853 Cross-currency swaps 354 – 5 263 5 617 Commodity forwards 3 – – 3 Credit default swaps 429 – – 429 Inflation-linked swaps 27 – – 27 Embedded derivatives – – 3 203 3 203 Trade, finance lease and other payables – 30 688 9 679 40 367 Finance lease payables – – 9 679 9 679 Trade and other payables – 30 688 – 30 688 Financial trading liabilities 266 – – 266 Short-sold government bonds 55 – – 55 Repurchase agreements 211 – – 211 2 735 449 901 18 342 470 978 16 | REVIEWED CONDENSED GROUP INTERIM FINANCIAL STATEMENTS | 30 SEPTEMBER 2019 15.2 Fair value Valuation processes and principal markets The group has a control framework in place for the measurement of fair values. It includes a valuation team that ultimately reports to the chief financial officer and has overall responsibility for all significant fair value measurements. 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 for the accounting treatment applied including the level of the fair value hierarchy assigned to it. 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 capital and money markets, development financing institutions and export credit agencies. Valuation techniques and levels Financial instrument Valuation technique Level 1: Quoted prices (unadjusted) in active markets Investments and financial trading assets (listed Quoted bid price in active markets. A market is regarded as active when it is a shares and government bonds) and financial market in which transactions for the asset or liability take place with sufficient trading liabilities (short-sold government bonds) frequency and volume to provide pricing information on an ongoing basis Level 2: Observable inputs other than quoted prices included within level 1 Financial trading liabilities (repurchase A discounted cash flow technique is used which uses expected cash flows and agreements) a market-related discount rate 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 by discounting expected future cash flows using a market interest rate for a similar instrument at the measurement date Valuations of cross-currency swaps include the credit risk of Eskom (known as debit value adjustment) and counterparties (known as credit value adjustment) where appropriate. A stochastic modelling approach is followed where the expected future exposure to credit risk for Eskom and its counterparties (considering default probabilities and recovery rates derived from market data) is modelled Level 3: Unobservable inputs Embedded derivative liabilities Fair valued using unobservable inputs There were no changes in the valuation techniques applied nor transfers between level 1, 2 or 3 of the fair value hierarchy during the six months ended 30 September 2019 nor in the comparative periods presented. ESKOM HOLDINGS SOC LTD | 17 NOTES TO THE CONDENSED GROUP INTERIM FINANCIAL STATEMENTS continued for the six months ended 30 September 2019 15. Accounting classification and fair value (continued) 15.2 Fair value (continued) Fair value hierarchy The fair value hierarchy of financial instruments that are measured at fair value in the statement of financial position is as follows: 30 September 2019 31 March 2019 30 September 2018 (reviewed) (audited) (reviewed) Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Rm Rm Rm Rm Rm Rm Rm Rm Rm Financial assets Investments and financial trading assets 1 700 – – 1 720 – – 1 407 – – Listed shares 1 597 – – 1 617 – – 1 303 – – Government bonds 103 – – 103 – – 104 – – Derivatives held for risk management and embedded derivatives – 28 104 – – 22 662 – – 21 547 – Foreign exchange contracts – 1 445 – – 1 301 – – 1 406 – Cross-currency swaps – 26 574 – – 21 313 – – 20 068 – Commodity forwards – 2 – – – – – 46 – Credit default swaps – 9 – – 9 – – 9 – Inflation-linked swaps – 74 – – 39 – – 18 – Financial liabilities Derivatives held for risk management and embedded derivatives – 5 773 2 258 – 7 040 3 434 – 7 929 3 203 Foreign exchange contracts – 356 – – 559 – – 1 853 – Cross-currency swaps – 5 085 – – 6 135 – – 5 617 – Commodity forwards – 4 – – – – – 3 – Credit default swaps – 296 – – 305 – – 429 – Inflation-linked swaps – 32 – – 41 – – 27 – Embedded derivatives – – 2 258 – – 3 434 – – 3 203 Financial trading liabilities 56 125 – 57 181 – 55 211 – Short-sold government bonds 56 – – 57 – – 55 – – Repurchase agreements – 125 – – 181 – – 211 – Fair value level 3 disclosures (embedded derivatives) Eskom entered into a number of agreements to supply electricity to electricity-intensive businesses where the revenue from these contracts is linked to commodity prices and foreign currency rates or foreign producer price indices that give rise to embedded derivatives. Valuation techniques Valuation techniques are used to determine the fair value as there is no active market for embedded derivatives. The fair value is determined by fair valuing the whole agreement and deducting from it the fair value of the host agreement. The valuation methods include the use of swaps (where the electricity tariff is swapped for a commodity in a foreign currency) and options (where the electricity tariff or other revenue is based on an embedded derivative floor or cap on foreign consumer or producer price indices or interest rates and a closed form analytic solution is used to produce various cap and floor strike prices). A forward electricity price curve is used to value the host agreement and the derivative agreement is valued by using market forecasts of future commodity prices, foreign currency rand exchange rates, interest rate differentials, forecast sales volumes, and production price and liquidity. The forward curves used are based on Eskom’s financial years. The forecast cash flow is determined and then discounted at the relevant interest rate curve. The net present value of the cash flows is then converted at the rand/foreign currency spot rate to the reporting currency. The fair value of the embedded derivative is adjusted, where applicable, to take into account the inherent uncertainty relating to the future cash flows of embedded derivatives such as liquidity, model risk and other economic factors. The important assumptions are obtained either with reference to the contractual provisions of the relevant agreements or from independent market sources where appropriate. The only significant unobservable input is the United States producer price index (PPI). 18 | REVIEWED CONDENSED GROUP INTERIM FINANCIAL STATEMENTS | 30 SEPTEMBER 2019 Valuation assumptions Forecast sales volumes are based on the most likely future sales volumes based on past trends and taking into account future production plans in consultation with industry specific experts and key customer executives. The following valuation assumptions were used for the valuation of embedded derivatives and are regarded as the best estimates by the board: Period ended 30 September 2019 (reviewed) Input Unit 2019 2020 2021 2022 2023 2024 Aluminium USD per ton 1 717 1 748 1 836 1 922 2 009 2 092 Volatility Year-on-year (ratio) 0.18 0.18 0.18 0.18 0.18 0.18 Rand interest rate Continuous actual/365 days (%) 6.59 7.15 6.97 6.61 6.74 6.88 Dollar interest rate Annual actual/365 days (%) 2.13 2.11 1.92 1.60 1.54 1.52 United States PPI Year-on-year (%) (1.63) 1.78 1.84 1.80 2.29 1.46 Rand/USD Rand per USD 15.16 15.54 16.35 17.18 18.17 19.29 Electricity price increase Year-on-year (%) 5.23 13.87 8.76 5.01 8.00 8.00 Period ended 31 March 2019 (audited) Input Unit 2019 2020 2021 2022 2023 2024 Aluminium USD per ton 1 886 1 969 2 048 2 120 2 189 2 256 Volatility Year-on-year (ratio) 0.19 0.19 0.19 0.19 0.19 0.19 Rand interest rate Continuous actual/365 days (%) 6.75 7.93 7.06 7.16 7.24 7.38 Dollar interest rate Annual actual/365 days (%) 2.52 2.75 2.39 2.32 2.29 2.30 United States PPI Year-on-year (%) (1.00) 1.86 1.80 2.28 1.26 1.89 Rand/USD Rand per USD 14.48 15.25 15.89 16.74 17.65 18.67 Electricity price increase Year-on-year (%) 5.23 13.87 7.81 5.05 8.00 8.00 Period ended 30 September 2018 (reviewed) Input Unit 2018 2019 2020 2021 2022 2023 Aluminium USD per ton 2 012 2 068 2 129 2 182 2 226 2 266 Volatility Year-on-year (ratio) 0.19 0.19 0.19 0.19 0.19 0.19 Rand interest rate Continuous actual/365 days (%) 6.46 7.85 7.81 7.52 7.73 7.91 Dollar interest rate Annual actual/365 days (%) 2.44 2.71 3.00 3.02 3.06 3.07 United States PPI Year-on-year (%) 4.54 2.05 1.73 2.01 2.11 2.12 Rand/USD Rand per USD 14.17 14.54 15.21 15.86 16.67 17.59 Electricity price increase Year-on-year (%) 2.20 5.23 8.00 8.00 8.00 8.00 Sensitivity analysis The effect on profit/loss before tax of an increase or decrease in the assumptions is: Reviewed Audited Reviewed 30 September 2019 31 March 2019 30 September 2018 Change in increase decrease increase decrease increase decrease Input Unit assumption Rm Rm Rm Rm Rm Rm Aluminium USD per ton 1% 19 (19) 32 (32) 46 (46) Rand interest Continuous 100 basis rate actual/365 days (%) points 123 (141) 154 (171) 211 (193) Dollar interest Continuous 100 basis rate actual/365 days (%) points (101) 97 (117) 115 (105) 111 United States PPI Index 1% 90 (97) 86 (90) 105 (111) Rand/USD Rand per USD 1% 41 (35) 53 (48) 69 (63) Electricity price increase Rand per kWh 1% (18) 18 (17) 17 (70) 70 ESKOM HOLDINGS SOC LTD | 19 NOTES TO THE CONDENSED GROUP INTERIM FINANCIAL STATEMENTS continued for the six months ended 30 September 2019 15. Accounting classification and fair value (continued) 15.2 Fair value (continued) Fair value level 3 disclosures (embedded derivatives) (continued) Movement in balances Embedded derivative liability Rm Balance at 31 March 2018 5 291 Net fair value gain (2 088) Balance at 30 September 2018 3 203 Net fair value loss 231 Balance at 31 March 2019 3 434 Net fair value gain (1 176) Balance at 30 September 2019 2 258 15.3 Day-one gain/loss The group recognises a day-one gain/loss on the initial recognition of cross-currency and inflation-linked swaps held as hedging instruments where applicable. Cross-currency Inflation-linked Total swaps swaps Rm Rm Rm Loss at 31 March 2018 (707) – (707) Day-one loss recognised (153) (27) (180) Amortised to profit or loss 63 1 64 Loss at 30 September 2018 (797) (26) (823) Day-one loss recognised (427) – (427) Amortised to profit or loss 78 1 79 Loss at 31 March 2019 (1 146) (25) (1 171) Day-one loss recognised (90) – (90) Amortised to profit or loss 89 2 91 Loss at 30 September 2019 (1 147) (23) (1 170) 16. Material events subsequent to 30 September 2019 DPE announced on 18 November 2019 that Mr A de Ruyter had been appointed as the group chief executive (GCE) effective from 15 January 2020. 17. Restatement of comparatives The interim financial statements for the period ended 30 September 2018 omitted to account for the impact of adopting IFRS 15 on certain revenue contracts in Eskom’s subsidiaries. This was identified and corrected in the 2019 annual financial statements. The impact of this error on the income statement for the period ended 30 September 2018 is as follows: Previously Adjustments Restated reported Rm Rm Rm Statement of financial position at 30 September 2018 Assets Property, plant and equipment and intangible assets 645 092 39 645 131 Inventories 23 775 (363) 23 412 Equity Capital and reserves 174 633 (236) 174 397 Liabilities Deferred tax 17 401 (88) 17 313 Income statement for the period ended 30 September 2018 Other expenses (8 963) (60) (9 023) Profit before tax 921 (60) 861 Income tax (250) 16 (234) Profit for the period 671 (44) 627 a 20 | REVIEWED CONDENSED GROUP INTERIM FINANCIAL STATEMENTS | 30 SEPTEMBER 2019 18. Reportable irregularities The external auditors raised certain reportable irregularities in terms of section 45 of the Auditing Profession Act in prior periods. Progress was made in clearing these reportable irregularities but some will stay open until finalisation of court cases or conclusion of investigations by external parties. The table below reflects the status of the reportable irregularities at 30 September 2019. The discussion focuses on items that were open at the previous year end. Description Action Status Reportable irregularities – 31 March 2017 • there were allegations that an early • the Democratic Alliance and Solidarity Trade Union • open, pending retirement agreement between Eskom successfully brought an application in the Gauteng repayment of the early and the former GCE (B Molefe) was Division of the High Court to set aside the early retirement settlement irregular retirement agreement between Eskom and the former GCE • the former GCE appealed the High Court decision to the Supreme Court of Appeal • the Supreme Court of Appeal dismissed the appeal in April 2019 • the former GCE subsequently appealed the matter to the Constitutional Court, which also dismissed the case • the Eskom Pension and Provident Fund (EPPF) issued a letter of demand to the former GCE in April 2019 for payment of the amounts ordered by the High Court, to date payment is outstanding • EPPF advised Eskom that it approached the court for an order empowering it to repay the early retirement to Eskom as the current court orders did not empower it to do so • the Hawks are currently investigating the matter Reportable irregularities – 30 September 2017 • a parliamentary inquiry was held into • Eskom investigated and action was taken, including • open, pending perceived maladministration, relevant reporting where appropriate, against those finalisation and governance and procurement issues at implicated in the parliamentary inquiry conclusion by the Eskom. Certain representations made • some of the implicated employees resigned or their Zondo Commission by previous and current directors and employment was terminated officials indicated that there could have • criminal charges were lodged against relevant been a breach of fiduciary duties in employees terms of the requirements of the • the final report on the inquiry was adopted by the Companies Act Portfolio Committee on Public Enterprises on 28 November 2018 • the findings of the report, which were not conclusive, have been analysed. The report recommended that the findings and evidence be submitted to the Judicial Commission of Inquiry into Allegations of State Capture (Zondo Commission) for further investigation • the Zondo Commission is ongoing and Eskom is participating in this process • the subcontracting of Trillian • executives and senior management resigned • open, pending Management Consultancy (Trillian) by • criminal charges were lodged against relevant completion of the McKinsey did not follow the correct employees recovery process procurement process • the business relationship with McKinsey and Trillian • a further issue relating to this matter was terminated was raised on 31 March 2018 where • information was provided to the Hawks for the former chief procurement officer investigation (CPO) (E Mabelane), former group • the High Court ruled against Trillian on 18 June 2019 executive (GE): group capital and ordered it to repay R595 million to Eskom (A Masango), former acting GE: group • Trillian applied for leave to appeal to the Supreme capital (P Govender) and former Court of Appeal company secretary (S Daniels) approved payments to Trillian without the existence of a contract thereby breaching their fiduciary duties ESKOM HOLDINGS SOC LTD | 21 NOTES TO THE CONDENSED GROUP INTERIM FINANCIAL STATEMENTS continued for the six months ended 30 September 2019 18. Reportable irregularities (continued) Description Action Status Reportable irregularities – 30 September 2017 (continued) • the former CFO (A Singh) approved a • the former CFO resigned • open, pending guarantee on behalf of Eskom to Tegeta • the guarantee was not called on and expired on recovery of guarantee Exploration and Resources (Pty) Ltd in 31 March 2017 fees December 2015 in contravention of the • guarantee fees were incurred and reported as fruitless PFMA without proper delegation of and wasteful expenditure in terms of the PFMA authority • the cost incurred will be recovered from the former CFO Reportable irregularities – 31 March 2018 • there were allegations that the former • the former CFO and interim GCE resigned • open, awaiting CFO (A Singh) and former interim GCE • the agreement was not binding as the required formal conclusion of Zondo (S Maritz) breached their fiduciary approval from the DPE and National Treasury was not Commission duties by contractually and financially obtained binding Eskom to a facilitation fee with • there was no financial loss to Eskom Huarong Asset Financing • it was communicated to Huarong that Eskom would not honour any agreement as it is considered not binding • the matter was discussed at the Zondo Commission • there were allegations that Eskom • the GE: security resigned • open, pending incorrectly procured services from Bizz • the investigation into the matter was finalised and the addressing of findings Tracers (Pty) Ltd through the sole findings from the investigation are being actioned and finalisation of source supplier process • letters of demand were issued to relevant suppliers recovery process • subsequent to 31 March 2018, further for recovery of monies paid suppliers were identified where services were incorrectly procured through the sole source supplier process Reportable irregularities – 30 September 2018 • legal fees were paid on behalf of • the former board members resigned • open, pending certain former board members that • it was confirmed that legal fees had been paid on finalisation of recovery were not directly related to their roles behalf of BS Ngubane, MV Pamensky and DV Naidoo process as directors of Eskom • letters of demand and summons were issued to former board members for recovery of fees paid Reportable irregularities – 31 March 2019 • there was non-compliance in terms of • the relevant submissions were made as required • open, pending the broad-based black economic • procedures have been put in place to ensure that the confirmation of annual empowerment (B-BBEE) Act as relevant submissions are submitted timeously compliance Eskom’s compliance report and annual • a court application has been made to set aside the assessment by B-BBEE financial statements were not tender award made to Dongfang commissioner as well submitted timeously as required as addressing findings • Eskom did not apply the relevant code of non-compliance of good practice in terms of the B-BBEE Act when evaluating a request for proposal and in the award made to Dongfang Electrical Corporation Limited 22 | REVIEWED CONDENSED GROUP INTERIM FINANCIAL STATEMENTS | 30 SEPTEMBER 2019 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 3304 Eskom Media Desk MediaDesk@eskom.co.za +27 11 800 3309 +27 11 800 3343 +27 11 800 3378 Investor Relations +27 11 800 2775 Investor Relations InvestorRelations@eskom.co.za Whistle-blowing hotline 0800 112 722 Forensic investigations Investigate@eskom.co.za Eskom Development Foundation +27 11 800 8111 Eskom Development Foundation www.eskom.co.za/csi 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 CSOnline@eskom.co.za Facebook EskomSouthAfrica Feedback on our report IRfeedback@eskom.co.za Twitter Eskom_SA MyEskom 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 JOINT VENTURE [0005] www.eskom.co.za