www.eskom.co.za CONDENSED GROUP INTERIM FINANCIAL STATEMENTS for the six months ended 30 September 2020 RESTORING TRUST CONTENTS BUSINESS PERFORMANCE OVERVIEW Eskom’s results for the six months ended 30 September 2020 In order to improve our financial position in the longer term, we Business performance overview 1 demonstrate an incremental improvement in key operational require a considerable reduction in the debt profile or a sizable Approval of the condensed group interim financial statements 9 metrics, although significant financial challenges remain, increase in cash flows through cost-reflective tariffs. This would predominantly related to tariffs not being cost-reflective, coupled result in operational cash flows that are adequate to service finance Condensed group statement of financial position 10 with an unsustainably high debt burden. cost, and improve cash interest cover and debt service cover ratios Condensed group income statement 11 to acceptable levels. This commentary provides an overview of our operational and Condensed group statement of comprehensive income 11 financial performance for the period, as well as progress on other As stated on several occasions, we require a rate of return on key matters. Material events after the end of the period up to the assets at least equal to Eskom’s actual weighted average cost of Condensed group statement of changes in equity 12 date of approval have been included. capital to ensure financial sustainability and remain a going concern. Condensed group statement of cash flows 13 An adequate return will enable sufficient operational cash flows to Some noteworthy points for the six months under review include: meet liquidity requirements, service debt commitments and fund Notes to the condensed group interim financial statements • financial results remain challenging, with a net profit after tax of a portion of capital expenditure. In order to improve the rate of only R83 million return and wean ourselves off taxpayer support, we have to migrate 1 Structure and activities 14 • COVID-19 has had a substantial impact on performance, with to a cost-reflective electricity price. 2 Basis of preparation 14 sales volumes down 10.3% year-on-year, negating the tariff increase of 8.76% Cost savings alone are not enough to improve Eskom’s financial 3 Significant changes in accounting policies 15 • despite stagnant revenue, enhanced cost control resulted in an position, as the gap of about R60 billion to cost-reflectivity is improvement in EBITDA to R28.1 billion equivalent to our annual coal costs, or almost twice the employee 4 Critical accounting estimates and judgements 15 • operating profit was eroded by net finance cost of R15.3 billion benefit costs per year. Even an immediate increase in tariffs will only 5 Segment information 16 due to the unsustainable level of R463.7 billion in gross debt improve the financial position in the medium term. • government support of R6 billion year-to-date supported 6 Issuances, repurchases and repayments of debt securities and borrowings and share capital 16 In the absence of an adequate return provided by NERSA’s tariff liquidity, with R56 billion committed for the 2021 financial year determinations, government’s equity support is assisting us to 7 Dividend paid 17 • operational performance is steadily improving, with plant service our debt commitments. Nonetheless, equity support only availability as well as levels of planned and unplanned maintenance 8 Significant events and transactions 17 improves liquidity, but does not reduce the principal debt and showing progress due to the generation recovery plan and therefore, will not ensure Eskom’s long-term financial viability. 9 Seasonality of interim results 17 reliability maintenance recovery programme delivering results • regrettably, loadshedding had to be implemented on 19 days One of our identified disaster risks materialised in March 2020 10 Revenue 17 from July to September 2020 when the COVID-19 outbreak was declared a pandemic by the • transmission network performance has returned to expected World Health Organisation. As an essential service, we were 11 Primary energy 18 levels, with distribution network performance remaining stable allowed to continue operating at full capacity even during level 5 of 12 Employee benefit expense 18 • Kusile unit 2 achieved commercial operation on 29 October 2020 the national lockdown, with coal mines being allowed to operate to • particulate emissions performance has improved significantly, supply power stations. Our priority was the supply of electricity as 13 Finance cost 18 with water usage levels remaining stable an essential service, and maintaining the safety of our people. Non- 14 Income tax 18 essential staff have worked at home since the start of the national Introduction lockdown, with some staff returning to work as restrictions were 15 Accounting classification and fair value 19 Eskom’s operational challenges have not occurred in isolation – they lifted. Where they are able to, a large part of our support staff are are largely due to poor liquidity, exacerbated by an unsustainable still working from home. 16 Material events subsequent to 30 September 2020 25 financial position that arose due to the following: 17 Restatement of comparatives 25 • adverse revenue decisions from the National Energy Regulator Despite being allowed to operate, delays were experienced in of South Africa (NERSA), failing to result in cost-reflective tariffs executing capital and major maintenance projects due to lockdown 18 Exchange rates 26 restrictions on the movement of people. The most noteworthy • unsustainable increases in indebtedness to finance our new build 19 Reportable irregularities 26 programme and the resultant growth in net finance cost which impact on our business came from the reduction in demand during has not been adequately recovered through revenue the earlier levels of the lockdown. Financial results for the period • declining sales volumes, coupled with escalating arrear debt from have been significantly affected by the national lockdowns in South The condensed group interim financial statements for the six months ended 30 September 2020 have been prepared under the supervision non-paying customers Africa and our trading partners, and the resultant downgrade of the of the chief financial officer (CFO), C Cassim CA(SA) and were published on 14 December 2020. • above-inflationary increases in operating costs, especially in the sovereign credit rating – these factors have had an adverse effect coal environment not only on Eskom’s operations and finances but also on the South The condensed group interim financial statements for the six months ended 30 September 2020 have not been audited, reviewed or reported African economy as a whole. on by the external auditors of the group. The financial information for the year ended 31 March 2020 is as reflected in the audited financial In the medium term, our unsustainable debt burden, arising from statements. The financial information for the period ended 30 September 2019, that was previously reviewed by the external auditors, has the abovementioned factors, presents the biggest threat to our Our turnaround strategy continues the focus on five key areas, subsequently been restated. financial sustainability. At 30 September 2020, the gross book namely operational recovery, improving our income statement, value of outstanding debt securities and borrowings stood at strengthening our balance sheet, accelerating the restructuring of R463.7 billion (September 2019: R454.2 billion). The reduction of Eskom into three separate entities, and building a high-performance R20 billion from the balance of R483.7 billion at 31 March 2020 is organisation through addressing our corporate culture by energising due to debt servicing as well as fair value adjustments on foreign our Eskom colleagues. debt, driven by the strengthening of the rand since March 2020. After accounting for derivatives and available cash on hand, net debt amounted to R420.6 billion (September 2019: R424.1 billion). Government guaranteed debt accounted for R304 billion, or approximately 66%, of the gross debt balance. It is clear that, in addition to the threat posed by electricity supply shortages, Eskom’s level of debt is a systemic risk to the fiscus and the country as a whole. ESKOM HOLDINGS SOC LTD | 1 BUSINESS PERFORMANCE OVERVIEW (continued) Compared to the prior year, transmission’s system minutes <1 In April 2019, the total cost for fixing the major plant defects at performance has improved significantly to 1.32 minutes for the Medupi and Kusile was estimated at R7.2 billion. The estimate period (September 2019: 2.92 minutes). However, two major remains the same. We have entered into a contractual consultation incidents occurred in July 2020, affecting smelter loads in KwaZulu- process with the boiler contractor to determine the liability for Natal and industrial loads in North West. Both incidents were due the required modifications to correct the defects. Following proof Operations Improve income Improve balance Business People and to the failure of ageing assets, which includes substation plant and of liability, the liable party will be fully accountable for the costs of recovery statement sheet separation culture line hardware. plant defect correction. At this stage, the defect costs are being split equally between Eskom and the contractor at both Medupi Improve reliability, Achieve revenue Strengthen the Divisionalise and Ensure that the Distribution network performance has been stable, with network and Kusile. reduce loadshedding, certainty, cost balance sheet ultimately form three business is interruption duration (SAIDI) of 38.2 hours (September 2019: refurbish networks optimisation and through liquidity legal wholly owned sufficiently enabled 38.2 hours) and network interruption frequency (SAIFI) of Environmental performance and address efficiency initiatives subsidiaries of Eskom and supported to 14.8 events (September 2019: 14.8 events). Areas that require Relative particulate emissions performance of 0.35kg/MWh design defects transform improvement are network restoration time, maintenance of focus sent out has improved markedly year-on-year (September 2019: feeders, increasing levels of refurbishment of ageing assets and 0.50kg/MWhSO). By September 2020, five units – four at Kendal consistent capital investment. and one at Lethabo – were operating in non-compliance with average monthly emission limits. This placed 3 153MW at risk of In an effort to protect electrical infrastructure against damage Operational performance Koeberg nuclear power station continues to operate well and within due to overloading, we have started implementing load reduction being shut down by the authorities. Plant and network performance the required safety parameters, and at the lowest primary energy during peak times in certain high-density areas associated with During strike action in 2018, significant damage was caused to the The performance of our generation fleet continues to be cost of our base-load stations. The refuelling outage on unit 2 was illegal connections. This is based on active monitoring of load on electrostatic precipitators at Kendal power station, leading to disappointing, although plant availability, unplanned maintenance delayed due to the national lockdown. The unit was finally shut networks. elevated emissions since then. Kendal initially tried to recover from in the form of breakdowns and partial load losses, and planned down for a refuelling and maintenance outage on 11 August 2020. It returned to service on 21 October 2020, loading up to full capacity the situation with short outages to repair the precipitators and dust maintenance have all improved slightly since the previous year New build progress handling plant, and unit 5 was taken off load for repairs for three end. Subsequent to the end of the period, planned maintenance within a week. Kusile unit 2 achieved commercial operation only on months in 2019. However, when it returned to service, emissions conducted in terms of our reliability maintenance recovery We propose extending the life of Koeberg for an additional 29 October 2020, as issues in the mill performance, plant failures remained above the limit. programme has ramped up significantly, to about 15% of nominal 20 years to 2045, in line with the Integrated Resource Plan (IRP) and the COVID-19 lockdown delayed commercialisation. Kusile capacity at the date of release of these results. 2019 expectations for continued energy security beyond 2024. unit 3 is on track for commercial operation by March 2021 and A criminal case in respect of non-compliance to the Kendal The extension of Koeberg is economically viable (compared to the Medupi unit 1 by July 2021. atmospheric emission licence (AEL) was opened in September 2019. Despite the reduced demand during the COVID-19 lockdown, Following engagements with authorities, a compliance notice was loadshedding and/or load curtailment had to be implemented cost of new build) and will secure 1 860MW for another 20 years. The construction of high-voltage transmission lines was negatively The extension will include the replacement of Koeberg’s six steam issued to Kendal in December 2019 in respect of continued AEL on 19 days during the period (September 2019: no loadshedding affected by the COVID-19 lockdown restrictions, with only 6.3km non-compliances. Eskom appealed the notice. Minister Barbara during the six-month period). This was due to due to high levels of generators during the next refuelling outage on each of the units. installed during the period (September 2019: 45.1km). The delays A significant milestone was achieved recently with the delivery of Creecy of the Department of Environment, Forestry and Fisheries unplanned breakdowns, combined with the need to conserve and are expected to put the achievement of the year-end target at (DEFF) responded to the effect that Eskom must operate only one replenish emergency reserves, while maintaining the stability of the the first three steam generators to site from September 2020. risk. Nevertheless, new transformer capacity of 750MVA was of the worst performing units at a time and must provide plans to power system. Loadshedding is always implemented as a last resort The generation recovery plan, which aims to address critical commissioned (September 2019: 540MVA). address the emission levels at the station. to protect the power system, as we recognise the damage that pain points to allow for fast-tracked improvement in generation loadshedding causes to our customers and the greater economy. The availability and reliability of the synchronised units at Medupi In response to the compliance notice issued by DEFF, unit 5 performance and plant availability, is delivering results. Progress and Kusile are steadily improving. This is a result of the continuous However, a total collapse of the grid would be far worse. has been made on many of the areas. Outage effectiveness and the (640MW) was taken out of service in January 2020 due to its high interventions taken in correcting major plant defects and improving emissions. The unit began a planned outage in July 2020 for repairs Open-cycle gas turbines (OCGTs), owned by both Eskom and timely return to service of units is starting to improve, with post- operational inefficiencies. Six units at Medupi and three units at outage unplanned losses and unit trips showing significant year-on- to the electrostatic precipitators to comply with emission limits. independent power producers (IPPs), were utilised frequently Kusile contribute energy to the national grid. It is expected to return to service by April 2021. Unit 6 was taken during the second quarter to support the power system, supplying year improvement. Modifications to correct design defects were successfully off load in November 2020, and will be on an extended outage 787GWh year-to-date (September 2019: 500GWh). Renewable We have concluded that the rebuild of Duvha unit 3 is no longer for a full refurbishment of the electrostatic precipitators and dust generation continued to support the power system during the implemented on Medupi unit 3 during the 75-day outage that ended deemed economically viable, given that the station is scheduled to be in April 2020. In May 2020, the unit reached its full generation handling plant. period, although wind generation is more intermittent during the decommissioned in 2034 and there is no formal plan to extend the winter months than during summer. capacity of 793MW. The optimisation process preceding full Kendal units 1 and 2 are operating in compliance. Nevertheless, station’s life beyond that. Furthermore, since the IRP ends in 2030, performance testing has been completed, as well as the in-house there is no clear direction beyond this. The cancellation of the project units 3 and 4 remain a challenge. Both of the units have undergone Generation plant availability (EAF) decreased to 67.86% for the performance test. Unofficial performance verification tests are interim repairs and will be operated at lower loads to keep emission period (September 2019: 69.91%), well below our aspiration of 73%. was approved by the board’s investment and finance committee. showing positive results. levels down. However, both units require extended outages in the Nevertheless, plant availability has improved from the 66.64% at Average partial load losses at 3 608MW remain high (September 2019: next year to refurbish the electrostatic precipitators. March 2020. The decrease in EAF is largely due to a substantial Modifications were implemented on Medupi units 6, 4 and 1 during 3 674MW). Furthermore, the boiler tube failure rate year-on-year recent outages. The modification on unit 2 is in progress. The increase in other load losses outside power stations’ control comparison deteriorated to 2.40 tube failures per unit per year (OCLF) against the previous year, with an increase in planned losses rollout of the modifications to the Kusile units in operation will by September 2020 (September 2019: 2.06). Boiler tube failure start with unit 1 from mid-2021. being offset by an improvement in unplanned losses compared to performance continues to worsen over time. The biggest contributor the prior year. Planned maintenance of generation plant (PCLF) is maintenance delays related to the deferral of planned reliability improved slightly to 9.96% (September 2019: 8.86%), ramping up outages to later in the year, partially due to the national lockdown. to about 15% by December 2020. Unplanned maintenance (UCLF) improved marginally to 18.59% for the period (September 2019: Coal stock levels continue to improve, with average coal stock 19.81%), due to a reduction in both full and partial load losses. (excluding Medupi and Kusile) at 58 days at the end of the period % % Events/hours Minutes kg/MWh sent out ℓ/kWh sent out 1.50 Peaking and nuclear generation plant continue to perform well. (September 2019: 54 days). No power stations were below their 100 25 50 5 0.5 minimum stock levels (2019: one), and coal stock at all stations 1.45 The reliability maintenance recovery programme has been put were at or above expected levels. Nevertheless, coal-related losses 80 20 40 4 0.4 in place to provide intensified support to power stations. It is a remain a significant contributor to other load losses, with most of 1.40 60 15 30 3 0.3 centre-led programme to ensure integration across the generation those occurring at Matla and Kriel power stations. We are working 1.35 fleet, process management compliance, enhanced project controls with the respective mines on initiatives to improve coal quality, 40 10 20 2 0.2 for transparency, and risk escalation through a core team. Capital including removing stone contamination from coal supplied. 1.30 expenditure for outages for the remainder of the financial year has 20 5 10 1 0.1 1.25 been approved by both Exco and the board. The ultimate aim is to 0 0 0.0 1.20 improve outage performance to reduce the risk of loadshedding, Sep 2016 Sep 2017 Sep 2018 Sep 2019 Mar 2020 Sep 2020 0 Sep 2016 Sep 2017 Sep 2018 Sep 2019 Mar 2020 Sep 2020 0 Sep 2016 Sep 2017 Sep 2018 Sep 2019 Mar 2020 Sep 2020 thereby supporting South Africa’s economy. EAF PCLF UCLF SAIFI SAIDI System minutes lost for events <1 minute Relative particulate emissions Water consumption 2 | CONDENSED GROUP INTERIM FINANCIAL STATEMENTS | 30 SEPTEMBER 2020 ESKOM HOLDINGS SOC LTD | 3 BUSINESS PERFORMANCE OVERVIEW (continued) Operational performance (continued) The group lost-time injury rate (including occupational diseases) has Although Eskom has experienced a trend of declining sales volumes Altogether, these factors led to an improvement in EBITDA to Environmental performance (continued) shown remarkable improvement to 0.24 (September 2019: 0.31). of approximately 1% per annum since 2014, the decline seen during R28.1 billion (September 2019: R26.4 billion, restated) along In August 2020, DEFF approved our action plan for the return to Tragically, we have suffered two employee and eight contractor the first six months of this year was unprecedented. Sales fell by with corresponding growth in the EBITDA margin to 25.82% compliance of Kendal’s units. Failure to comply with the action plan fatalities during the period (September 2019: four contractors). 10.3%, to 93.4TWh (September 2019: 104.1TWh), with local and (September 2019: 24.58%, restated). However, EBITDA was is considered non-compliance with the directive and could result Every loss of life in Eskom’s service is unacceptable. Our heartfelt international sales decreasing by 9.7TWh and 1TWh respectively, eroded to a profit before tax of only R0.1 billion (September 2019: in further censure. The station is tracking the delivery of the plan, condolences go to the affected family, friends and colleagues. as lockdown restrictions and depressed economic conditions led to R2.5 billion loss, restated), mainly by depreciation of R13.8 billion which is going well, except for delays in respect of the dust handling a reduction in the average demand for electricity. Sales worsened (September 2019: R13.5 billion, restated) and net finance costs of Attacks on Eskom employees and contractors or attempts to across every sector of the economy, with the industrial sector R15.3 billion (September 2019: R15 billion, restated). plant. These are being addressed. kidnap them while repairing faults is deplorable. The safety of our being most severely affected by a year-on-year reduction of 17.6%. In November 2020, Eskom received a summons to appear in court people remains our number one priority, and we reserve the right Funding on charges of non-compliance with the AEL for Kendal. Eskom to withdraw our services where the operating environment is Growth in primary energy costs was stable at 4.4%, increasing to Our borrowing programme had originally targeted raising is cooperating fully with the authorities, and disciplinary action deemed unsafe. R54.3 billion for the period (September 2019: R52 billion). Primary R30.8 billion during the year, of which R19.6 billion (64%) has already is being instituted where necessary. The execution of the plan to energy costs are directly related to the volume of electricity been secured, mainly through signed and committed funding from To combat the effects of COVID-19, we continue to institute generated from Eskom’s power stations as well as purchases from recover emissions performance is being closely tracked. development finance institutions and local bond issuances. However, appropriate measures to protect critical staff and minimise the IPPs and international imports. Because of the substantial decline we are anticipating raising funding of R40.7 billion by 31 March 2021 Minister Creecy granted Eskom approval in July 2020 to operate number of employees on site wherever possible. Plans are in place in electricity demand during the national lockdown, electricity to strengthen our liquidity position, subject to available market its stations under pre-1 April 2020 emission limits until decisions to protect key operations such as Koeberg nuclear power station, production reduced by 7.5% from 120.1TWh to 111.1TWh, mostly appetite. Despite this increase, we will remain within our overall on the minimum emission standard (MES) applications have been national control, telecoms control, Apollo converter station, through lower coal production, which was partially offset by higher borrowing programme target for the next five years to 2025. made. The approval was subject to the provision of all outstanding distribution control rooms, resource management centres and utilisation of more expensive Eskom OCGTs, IPPs and imports. As information by August 2020. All outstanding information for the some generation sites. a result, the average cost of production has increased. The sovereign downgrade by Moody’s at the end of March 2020 2019 MES applications and additional applications for Grootvlei, placed the country at sub-investment grade level by all three At 9 December 2020, we had recorded 2 295 positive COVID-19 Coal costs are being controlled, in particular from short- and Acacia and Port Rex power stations were submitted to DEFF as internationally recognised credit rating agencies. Shortly thereafter, cases, comprising 1 893 employees and 402 contractors, with medium-term sources, with an increase of only 4.6% in the required by the end of August. Applications for postponement Moody’s downgraded Eskom’s guaranteed credit rating on notes 2 224 recoveries, a recovery rate of almost 97%. Sadly, we have lost average purchase cost per ton of coal compared to March 2020 or exemption from the MES for Medupi and Matimba were also that rely on the government’s guarantee framework agreement. 34 employees and three contractors to the disease. We extend our (September 2019: 14.2% compared to March 2019). Eskom OCGTs submitted at the end of August. In April 2020, Fitch followed suit and downgraded the sovereign sincere condolences to those affected by their loss. were utilised frequently to support the power system, generating as well as Eskom’s ratings with a negative outlook, subsequently Since late April 2020, all eight Camden units (totalling 1 481MW 496GWh at a cost of R1.4 billion (September 2019: 331GWh at affirming its ratings in September 2020. Societal impact nominal capacity) have been shut down due to an environmental R1.1 billion). During the period, only procurement spend with black youth-owned At the end of November 2020, both Fitch and Moody’s downgraded risk resulting from ash dam capacity constraints. This accounted suppliers achieved the target. Total preferential procurement Expenditure on international purchases increased to R2.5 billion, the sovereign as well as Eskom’s ratings for the second time in a for other load losses of 2.35%. Plans are in place to ensure the spend, as well as spend with black-owned and black women-owned with imports of 4 474GWh (September 2019: 3 703GWh at year, while maintaining their negative outlook; Standard & Poor’s completion of the new ash dam by the first quarter of the 2022 suppliers, qualifying small and exempted micro enterprises, and R2 billion) due to improved supply from Hidroelèctrica de Cahora affirmed their previous Eskom ratings with a negative outlook. financial year, and to redirect a portion of the ashed volume to free suppliers owned by black people living with disabilities, continued Bassa, as an additional generator was made available and its up space allow limited operation of units until the new ash dam is to perform below target, mainly due to expired suppliers’ B-BBEE maintenance plan was put on hold during the Mozambican lockdown. Our access to funding in both domestic and foreign markets remains complete. The first Camden unit was synchronised on load towards certificates. Furthermore, a significant portion of our procurement Expenditure on IPPs, including capacity charges, increased to constrained by low investor confidence as a result of poor financial the end of August 2020, with the remaining units returning during spend relates to IPP contracts that are not B-BBEE compliant. R14.5 billion, with 5 842GWh energy purchased (September 2019: performance, saturated borrowing capacity and the recent rating October. Unit 3 is on outage. Regrettably, four units have since These contracts were concluded in terms of the renewable IPP 5 389GWh at R13 billion), resulting in a weighted average IPP cost downgrades. These factors have a direct effect on market appetite been taken off load due to ash dam capacity constraints, with three programme by the Department of Mineral Resources and Energy of 249c/kWh (September 2019: 241c/kWh). We are still locked into and our future cost of borrowing, and may hinder the execution expected to return to service in December 2020, and the last in (DMRE), over which we had no control. This continues to have a long-term contracts from earlier IPP bid windows at higher rates of our borrowing programme. Nevertheless, opportunities exist in February 2021. negative effect on our procurement equity performance. than new IPP generation affords. some areas. Despite greater economic uncertainty brought about Power station water usage for the period was stable at by COVID-19, the impact of interest rate and currency risk on our More positively, we completed 63 909 connections under DMRE’s We managed to contain employee benefit costs at R16.7 billion existing debt has been limited due to comprehensive hedging of 1.41ℓ/kWhSO (September 2019: 1.39ℓ/kWhSO). Generation electrification programme (September 2019: 77 455), utilising DMRE (September 2019: R16.4 billion, restated) through headcount these exposures. continues to focus on improving water management practices funding of R1 billion year-to-date. Regrettably, our corporate social reduction and sub-inflation salary increases at managerial levels in across the power station fleet, to prevent the occurrence of future investment spend was severely affected by the national lockdown, October 2019. Other operating expenditure, including maintenance, legal contravention incidents due to non-compliance with water- with only R22.2 million committed to six projects during the decreased to R10.4 billion (September 2019: R12.3 billion, restated). use licence conditions. Water management plans are in place and period, assisting 3 320 beneficiaries (September 2019: R63.9 million The restatement for the prior period largely relates to the write-off the implementation thereof is closely monitored through the to 107 581 beneficiaries). of R4 billion of work under construction on potential overpayments generation environmental compliance steering committee, chaired by the group executive: generation. Regrettably, we incurred to a number of contractors involved in the construction of Kusile Financial performance power station. During the period, we wrote off R1.3 billion relating 33 environmental legal contravention incidents during the period Historically, Eskom’s financial performance in the first half of (September 2019: 23), with 91% being water-related incidents. to amounts incurred on Duvha unit 3 since the over-pressurisation the year is better than the second half as the winter period incident on 31 March 2014, as it is no longer considered economically is characterised by higher tariffs and increased sales volumes. viable to continue with the rebuild of the unit. People and safety Additionally, less maintenance is performed in winter to ensure The group headcount continued its anticipated decline to 43 795 adequate supply to sustain the increased demand and to offset at the end of the period (September 2019: 45 625), mainly through lower winter production by renewable IPPs. While we did well to natural attrition, supported to some extent by the voluntary achieve a profit in the first six months given the unprecedented separation packages offered to managerial level staff at the end circumstances, the seasonal nature of Eskom’s revenue and spend of the previous financial year. As part of the turnaround plan, R billion means that there still remains considerable cost pressure in the Ratio Ratio Exco approved another round of voluntary separation packages 40 20 3.0 second half of the year, due to summer maintenance requirements at managerial level to a maximum value of around R300 million 2.5 and costs associated with ensuring security of supply. in November 2020, with successful applicants expected to leave 30 15 2.0 Eskom’s employ by 28 February 2021. Financial results 20 10 1.5 Racial equity at senior management level has improved to 72.27% We recorded a net profit after tax of R83 million while navigating (September 2019: 70.42%), and racial equity at professional and a very challenging operating environment (September 2019: 1.0 management level has increased to 79.17% (September 2019: R1.9 billion loss, restated). Revenue grew to R108.7 billion 10 5 0.5 76.70%). Gender equity has remained relatively stable, at 40.90% (September 2019: R107.5 billion), an increase of only 1.1%, even at senior management level (September 2019: 41.10%) and 38.65% though we were awarded an allowed tariff increase of 8.76% for 0 Sep 2016 Sep 2017 Sep 2018 Sep 2019 Mar 2020 Sep 2020 0 Sep 2016 Sep 2017 Sep 2018 Sep 2019 Mar 2020 Sep 2020 0.0 Sep 2016 Sep 2017 Sep 2018 Sep 2019 Mar 2020 Sep 2020 at professional and middle management level (September 2019: 2021, with sales volumes deteriorating significantly amid COVID-19. 38.12%). Disability equity at group level has declined slightly to Free funds from operations, R billion FFO as % of gross debt Debt/equity ratio Cash interest cover 2.97% (September 2019: 3.08%). EBITDA, R billion Gross debt/EBITDA Debt service cover 4 | CONDENSED GROUP INTERIM FINANCIAL STATEMENTS | 30 SEPTEMBER 2020 ESKOM HOLDINGS SOC LTD | 5 BUSINESS PERFORMANCE OVERVIEW (continued) Financial performance (continued) At 30 September 2020, total municipal arrear debt stood at Other matters Looking ahead Funding (continued) R32.9 billion (September 2019: R25.1 billion), representing 75.6% of Board and executive changes Our top priority remains to address Eskom’s operational and The debt repayment profile of existing debt only, net of swaps and total invoiced municipal debt (September 2019: 70.4%). The top 20 Mr S Dabengwa tendered his resignation as non-executive director financial challenges and return to a growth trajectory. Given based on forward rates, remains pressured over both the short and defaulting municipalities – including Maluti-a-Phofung, Emalahleni, on 21 July 2020. the challenging environment we are all facing, this will require long term. Interest payments of R36 billion and capital payments of Matjhabeng and Emfuleni – constitute 80% of total invoiced extraordinary efforts from every Eskom employee, and continued R58 billion are required during the current year, while total interest municipal arrear debt (September 2019: 79%). There are now 48 Ms F Burn was appointed as general manager: information support from government and all South Africans. payments of R142 billion and capital payments of R197 billion are municipalities with arrear debt of more than R100 million each technology and Mr R Vaughan as general manager: treasury, both (September 2019: 42). with effect from 15 May 2020. Mr V Tuku was appointed as group The implementation of our reliability maintenance recovery required over the next five years to 2025. These repayments executive: transformation management office from 1 July 2020. programme is bearing fruit and positively affecting plant can only be met with continued government support. By Despite our best efforts, limited success has been achieved performance. However, as we have said before, even though the risk 30 September 2020, Eskom had requested and received R6 billion of in managing municipal arrear debt, which has escalated to From 1 September 2020, Mr B Nxumalo was appointed as of loadshedding may have reduced, it has not been eliminated. The the R56 billion government equity support committed for the year, unsustainable levels. The situation cannot be solved by Eskom alone group executive: group capital. Mr R Mathebula will act as group slump in demand seen since October 2020 has allowed some space with cash flows being monitored on a daily basis to assist National – a structural solution is required, along with continued support and executive: generation in his stead. Ms N Minyuku was appointed for maintenance to address short-term risks. This has resulted in an Treasury in determining the appropriate timing of the support. cooperation from government and other stakeholders to address as group executive: government and regulatory affairs with improvement in unplanned unavailability to an average of 9 377MW the root causes of the problem and resolve these challenges. effect from 15 October 2020. Furthermore, Ms N Gafoor was during October and November, compared to 10 584MW for the Managing liquidity appointed as general manager: audit and forensic with effect same period last year. The combination of reduced demand, the Liquidity remains one of our biggest short-term challenges, Eskom’s cash balance declined to R11.8 billion over the last six from 16 November 2020, filling a year-long vacancy in this critical ability to respond to emerging plant defects quickly and not running threatening our ability to achieve operational stability. As mentioned months (September 2019: R7.8 billion) as cash flows remain position. the generators at capacity all the time has led to improved system above, access to cost-effective funding remains restricted, while severely constrained. Net cash flows from operating activities inadequate price increases granted by NERSA as well as declining performance, with virtually no OCGTs being needed to support the of R18.9 billion were insufficient to service debt and interest Progress on governance clean-up system since 26 October 2020. sales and escalating municipal arrear debt further contribute to repayments of R23.7 billion and R19.1 billion respectively, requiring The finalisation of investigations into former executives suspected our liquidity constraints. To address this, our turnaround strategy government support to alleviate our ongoing liquidity challenges. of misconduct remains a priority. We continue to provide all The unreliability of the ageing fleet, with an uncertainty of up focuses on five key areas, two of which are finance-related – necessary support to law enforcement authorities to investigate to 4 000MW at any given time, will remain until the reliability improving our income statement, by achieving revenue certainty, In the recent 2020 Medium-Term Budget Policy Statement concerns and any violations of the law, and to recover stolen funds maintenance recovery programme is able to address the cost optimisation and efficiencies, combined with strengthening our (MTBPS), government reaffirmed its commitment to stabilising using both criminal and civil processes. This applies even where maintenance shortfall. This leaves the system vulnerable and balance sheet. Eskom’s balance sheet with financial support of R225.8 billion implicated individuals have subsequently left Eskom’s employment. unpredictable. Nevertheless, there is reason to be optimistic, to the end of the 2026 financial year, a reduction of R4.2 billion Revenue certainty is dependent on sales growth opportunities and although it is likely that sporadic loadshedding may be required from the original R230 billion announced in the 2019 MTBPS. In At 30 September 2020, 278 cases related to fraud, corruption the migration towards cost-reflective tariffs. As discussed earlier, over the remaining summer months, as high ambient temperatures addition to R49 billion received in the 2020 financial year, a further and irregularities were active, with 123 being investigated by our sales volumes have declined considerably because of COVID-19 and tend to cause higher plant unavailability. As the benefits of R56 billion has been committed for the current financial year. The assurance and forensic department (A&F) and the remainder demand is expected to remain subdued for the foreseeable future. the reliability maintenance recovery programme are realised phasing of the support for 2022, 2023 and 2024 of R31.8 billion, being prepared for outsourcing. Based on findings from concluded The High Court has awarded favourable judgments in three of the beyond September 2021, it is anticipated that the probability of R21.9 billion and R21.1 billion has now been confirmed in the 2020 investigations, A&F has recommended 82 cases for criminal four applications submitted by Eskom to review NERSA’s recent loadshedding will reduce, although the risk won’t diminish entirely MTBPS. However, the phasing of the remaining support thereafter prosecution. Of these, 61 cases have been registered with the revenue and regulatory clearing account (RCA) determinations. until substantial new generation capacity is added to the grid. is still to be confirmed. South African Police Service (SAPS), with the remainder in the Only the review application for the RCA for the 2018 financial process of being registered. A&F maintains a record of all matters As mentioned, financial performance is expected to deteriorate year is outstanding, as NERSA is in the process of opposing the Business separation that have been referred to law enforcement agencies, including the in the second half of the financial year, with increased summer application. In addition, NERSA has been granted leave to appeal The Department of Public Enterprises (DPE) released the “Roadmap Hawks, the Special Investigative Unit (SIU) and the Commercial maintenance and expenditure required to ensure security of supply, the judgment on the timing of the recovery of the incorrectly for the Reform of Eskom in a Changing Energy Supply Industry” (the Crimes Unit. Over the last 15 months, 15 cases have been referred coupled with reduced demand and lower summer tariffs. Although appropriated R69 billion in the Supreme Court of Appeal. We Roadmap) in October 2019. The Roadmap sets timelines for the to these agencies. green shoots have begun to emerge in the economy with the phased have applied for execution of the order while awaiting the appeal restructuring of Eskom from a vertically integrated utility to an easing of lockdown restrictions, the recession and continued process. We are expecting a High Court hearing on the execution unbundled state with three wholly owned separate legal entities in Furthermore, disciplinary action was recommended against uncertainty around COVID-19 is still expected to threaten future order by January 2021. the form of Transmission, Generation and Distribution as follows: 50 employees during the first six months of the financial year. sales volumes, the cost of production and customers’ ability to pay. • divisionalisation by March 2020 Findings from concluded investigations indicate that the key By the end of the 2021 financial year, we expect to record an after- The amounts in dispute through the review applications total over contributor to wrongdoing is unethical behaviour by employees, R110 billion, including the R69 billion equity injection incorrectly • functional separation by March 2021 tax loss of approximately R22 billion, due to the continued negative • legal separation of the Transmission entity by December 2021 resulting in payment for goods not delivered or services not impact of the lower than requested tariff, together with the impact deducted from the determination for the fourth multi-year price rendered, as well as failure to declare and manage conflicts of determination (MYPD 4). This corresponds to a price increase of • legal separation of the Generation and Distribution entities by of lower sales volumes due to COVID-19. December 2022 interest. Furthermore, general procurement irregularities include approximately 55%, if effected once-off in the 2022 financial year. irregular issuing of purchase orders, incorrect or inflated billing for Due to the return to operation of many sectors of the economy, If the amounts were to be recovered over the next four years, the We have approached the implementation of the Roadmap in resources and non-adherence to procurement processes. the projected impact on sales in the second half of the year is less effect on the tariff is estimated at between 12% and 15% per year. a phased manner to ensure organisational stability during the severe in relative terms than that experienced in the first half. transition. By and large, our timelines are aligned to those in the Investigations and reporting of these and other matters will Expected sales of 190TWh for the 2021 financial year is 15.7TWh, NERSA’s reasons for decision on the 2019 RCA were published in continue, with the appropriate disciplinary processes being October 2020. The decision resulted in a shortfall of R14 billion Roadmap. or 7.7%, lower than the 205.6TWh recorded in the 2020 financial instituted, and internal control measures in the affected and related year. We expect largely stagnant sales of approximately 190TWh against an application of R27.3 billion. Once reviewed, the board will Divisionalisation has been completed, with implementation of areas being reviewed and enhanced. An anti-fraud communication make a decision on the way forward. Eskom’s RCA application of per year for at least the next few years. It is unlikely for demand to the new operating model of the functionally separate entities and awareness plan has been developed, with implementation in recover to pre-COVID-19 levels during this timeframe due to the R8.4 billion for the 2020 financial year has been submitted to NERSA. progressing well for completion by March 2021. The legal progress. long-lasting effect of the economic recession. To improve liquidity through cost optimisation and efficiencies, separation of the Transmission entity is expected to be completed by December 2021, and the Generation and Distribution entities In August 2020, Eskom and the SIU issued summons to recover We are exploring negotiated pricing agreements (NPA) and other we have restricted organisational cash requirements through approximately R3.8 billion relating to a prepayment to Tegeta targeted savings on operating and capital expenditure and working by December 2022. avenues to optimise electricity sales to energy-intensive customers Exploration and Resources (Pty) Ltd from former board members and stimulate local sales for the benefit of the economy. We capital. Our target is to reduce Eskom’s cost base by R14.1 billion The process of legal separation has many internal and external Mr B Ngubane, Ms C Mabude and Mr M Pamensky, as well as former in the current financial year, and a cumulative R55.8 billion over welcome the amended short-term NPA framework and the interim dependencies. These areas include licence transfers and executives Mr B Molefe, Mr A Singh, Mr M Koko and Ms S Daniels. long-term NPA framework, published by DMRE in September 2020, the next three years. During the first six months of the year, we applications, policy and regulatory reforms, as well as legal and Other defendants include former minister of Mineral Resources, achieved savings of R5.2 billion against a target of R2.8 billion. The to facilitate the approval of customised incentive pricing by NERSA. financial dependencies. Therefore, the achievement of legal Mosebenzi Zwane, brothers Ajay, Atul and Rajesh (Tony) Gupta, majority of savings came from primary energy through optimising separation is dependent to a large extent on government playing a and businessman Salim Essa. coal inventory, which positively affects working capital, as well as a proactive and supportive role. reduction in other operating expenditure. As reported previously, two former senior employees, Mr F Hlakudi An intergovernmental steering committee comprising DPE, DMRE, and Mr A Masango, were arrested on corruption-related charges in National Treasury and Eskom has been established to focus on the December 2019. Prosecution is still in progress. financial, legal and energy policy dependencies to aid in the timely legal separation of the three entities. 6 | CONDENSED GROUP INTERIM FINANCIAL STATEMENTS | 30 SEPTEMBER 2020 ESKOM HOLDINGS SOC LTD | 7 BUSINESS PERFORMANCE OVERVIEW (continued) APPROVAL OF THE CONDENSED GROUP INTERIM FINANCIAL STATEMENTS Looking ahead (continued) Reducing our reliance on debt and containing debt service costs Basis of preparation With the decline in electricity demand, we anticipate electricity remains most critical in the near term. Gross interest costs have The unaudited condensed group interim financial statements from page 10 to page 26 for the six months ended 30 September 2020 have production for the full year to be 14.4TWh, or 6.1%, lower than become the second largest cost item after coal, higher than both been prepared in accordance with the recognition and measurement requirements of International Financial Reporting Standards (IFRS), the prior year. Despite these lower volumes, primary energy employee benefit costs and capital expenditure, and have a direct the presentation and disclosure requirements of International Accounting Standards (IAS) 34 Interim financial reporting and in the manner costs are expected to increase by about 4.5% year-on-year, due and negative impact on profitability and liquidity, and threatening required by the Companies Act. to normal inflationary increases as well as increased usage of IPPs our ability to continue as a going concern. Our strategy is to manage and OCGTs. Expenditure on coal and nuclear is, however, expected debt downwards as best we can, however, the reality is that in the Going concern to decline. To offset further usage of expensive IPP OCGTs, we absence of cost-reflective tariffs this remains a slow and arduous The board made an assessment of the ability of the group to continue as a going concern in the foreseeable future. The considerations, have issued a request for proposal for additional capacity from the process. Even with an immediate increase to a cost-reflective price, challenges and risks assessed by the board are detailed in note 2.1. market through the short-term power purchase programme. We the financial position would not improve immediately. The board considered the risks relating to the group’s going-concern status and is satisfied that the risks will be satisfactorily addressed with reiterate our call to government to accelerate procurement of new Government support has been crucial in assisting us to service our the mitigation strategies in place. The board continues to manage these strategies as a priority as it is important that they materialise as generation capacity beyond the 11 813MW outlined in the recently debt commitments. However, this support comes at a cost that the envisaged. Tough and painful decisions will have to be made by Eskom, the shareholder and NERSA for the strategy to succeed. The board gazetted ministerial determination, as adequate capacity is critical country simply cannot afford in the prevailing economic climate. therefore concluded that it is satisfied that the group has access to adequate resources and facilities, with shareholder support, to be able to to powering the rebuilding of an economy that has been devastated Furthermore, it will not lead to an immediate reduction in our debt continue its operations for the foreseeable future as a going concern. by the COVID-19 pandemic. nor will it improve our income statement. It only serves to stabilise Initiatives to address arrear debt and improve customer payment the balance sheet, improve liquidity in the short to medium term, Approval levels are continuing, to enhance revenue recovery and ultimately, and assist us in meeting our debt service obligations. Nonetheless, The board is of the opinion, based on the information available to date, that the condensed group interim financial statements fairly present our liquidity. We are working with the Eskom political task team the assistance is mostly used to settle interest, with little remaining the financial position of the group at 30 September 2020 and the results of the operations and cash flow information for the six months then to improve collection of municipal accounts and stem the growth to reduce the principal. ended. The condensed group interim financial statements have been approved by the board and signed on its behalf on 11 December 2020 by: in arrear debt. Interruption of supply due to non-payment remains Consequently, government support will not provide the sustainable the last resort. Regrettably, socio-economic conditions, which solution required to support Eskom’s long-term financial viability. have been worsened by the pandemic, are expected to lead to As stated before, to achieve independent financial sustainability, an increase in non-technical losses through a higher degree of remain a going concern and meet our debt service requirements electricity and equipment theft compared to the prior year. MW Makgoba AM de Ruyter C Cassim on a standalone basis, we require a rate of return on assets at Another means of improving our liquidity is through driving least equal to our actual weighted average cost of capital. Other Chairman Group chief executive Chief financial officer sustainable cost curtailment and efficiencies. As mentioned, we are essential ingredients for financial sustainability include resolving the targeting cumulative savings of R55.8 billion over the next three municipal arrear debt challenge, reducing our interest burden and years through a number of initiatives. Work is under way to identify delivering on the cost savings we have targeted. further opportunities, with increased focus on driving savings in It is widely accepted that the price of electricity in South Africa procurement, working capital and capital expenditure efficiency. must migrate towards a cost-reflective tariff that covers prudent Our efforts in workforce optimisation continue, supporting the and efficient costs to ensure the long-term sustainability of the ability to reduce employee costs and headcount, including limiting electricity supply industry. Furthermore, those connected to external recruitment and most recently, implementing a second the grid must pay for the services they receive using a fair and round of voluntary separation packages at managerial level. reasonable price, both to avoid cross-subsidisation and to send Eskom’s financial health has deteriorated over recent years because appropriate market signals. of lower demand, above-inflationary cost increases, especially in This must be achieved through a structural solution based on coal and employee benefit costs, and an electricity price that is not an appropriate tariff path, with a mutually beneficial outcome cost-reflective. In addition, we are executing a capital expansion for Eskom and the economy of South Africa. The taxpayer programme to provide much-needed generation capacity and cannot continue to subsidise the electricity consumer, as this is extend our transmission network. These factors, together with unsustainable and inefficient. The continued viability of Eskom and the escalation in arrear debt, have had an adverse impact on the electricity sector is crucial to support South Africa’s economic our balance sheet and liquidity position and have resulted in an recovery, to make a vital contribution to job creation and socio- increased reliance on debt. economic development, as well as to create a stable, equitable and cohesive South Africa. 8 | CONDENSED GROUP INTERIM FINANCIAL STATEMENTS | 30 SEPTEMBER 2020 ESKOM HOLDINGS SOC LTD | 9 CONDENSED GROUP STATEMENT OF FINANCIAL POSITION CONDENSED GROUP INCOME STATEMENT at 30 September 2020 for the six months ended 30 September 2020 Unaudited Audited Unaudited1 Unaudited Unaudited1 Audited 30 September 31 March 30 September six months ended six months ended year ended 2020 2020 2019 30 September 30 September 31 March Rm Rm Rm 2020 2019 2020 Note Rm Rm Rm Assets Non-current 688 918 697 893 687 314 Revenue 10 108 723 107 502 199 468 Other income 637 677 1 238 Property, plant and equipment and intangible assets 659 959 657 189 654 457 Primary energy 11 (54 318) (52 018) (112 119) Future fuel supplies 5 361 4 295 4 922 Employee benefit expense 12 (16 676) (16 448) (32 976) Payments made in advance 1 546 1 614 1 610 Impairment of assets 102 (954) 61 Derivatives held for risk management and embedded derivatives 21 270 33 918 25 508 Other expenses (10 393) (12 331) (18 674) Trade, finance lease, loan and other receivables 334 365 390 Other assets 448 512 427 Profit before depreciation and amortisation expense and net fair value and foreign exchange loss on financial instruments (EBITDA) 28 075 26 428 36 998 Current 106 867 116 404 81 203 Depreciation and amortisation expense (13 821) (13 475) (27 779) Inventories 39 100 33 573 32 716 Net fair value and foreign exchange loss on financial instruments 1 145 (480) (4 592) Taxation 112 140 203 Profit before net finance cost 15 399 12 473 4 627 Investments and financial trading assets 13 155 12 133 11 358 Net finance cost (15 332) (15 025) (31 252) Payments made in advance 1 668 1 398 1 700 Derivatives held for risk management and embedded derivatives 15 586 23 718 2 596 Finance income 1 091 1 258 2 610 Trade, finance lease, loan and other receivables 25 472 22 452 24 816 Finance cost 13 (16 423) (16 283) (33 862) Cash and cash equivalents 11 774 22 990 7 814 Share of profit of equity-accounted investees, net of tax 47 40 63 Assets held-for-sale 8 460 8 642 8 811 Profit/(loss) before tax 114 (2 512) (26 562) Total assets 804 245 822 939 777 328 Income tax 14 (31) 582 6 060 Equity Profit/(loss) for the period 2 83 (1 930) (20 502) Capital and reserves 186 870 185 863 162 419 Liabilities Non-current 481 976 502 684 517 881 Debt securities and borrowings 385 285 408 151 410 290 CONDENSED GROUP STATEMENT OF COMPREHENSIVE INCOME Derivatives held for risk management and embedded derivatives 2 277 1 807 5 247 for the six months ended 30 September 2020 Deferred tax 976 3 678 6 728 Employee benefit obligations 14 098 13 530 16 038 Unaudited Unaudited1 Audited Provisions 44 402 41 300 45 309 six months ended six months ended year ended Trade and other payables and lease liabilities 9 410 9 286 10 441 30 September 30 September 31 March Payments received in advance, contract liabilities and deferred income 25 528 24 932 23 828 2020 2019 2020 Current 134 038 132 919 95 552 Rm Rm Rm Debt securities and borrowings 78 418 75 531 43 917 Profit/(loss) for the period2 83 (1 930) (20 502) Derivatives held for risk management and embedded derivatives 4 070 2 270 2 784 Other comprehensive (loss)/income (5 076) 871 7 387 Employee benefit obligations 4 518 3 293 4 022 Provisions 4 835 5 991 5 732 Items that may be reclassified subsequently to profit or loss (5 218) 639 4 836 Trade and other payables and lease liabilities 37 316 40 650 33 967 Cash flow hedges (7 330) 855 6 747 Payments received in advance, contract liabilities and deferred income 4 631 4 970 4 949 Foreign currency translation differences 60 24 (22) Taxation 230 – – Income tax thereon 2 052 (240) (1 889) Financial trading liabilities 20 214 181 Items that may not be reclassified subsequently to profit or loss 142 232 2 551 Liabilities held-for-sale 1 361 1 473 1 476 Re-measurement of post-employment medical benefits 195 323 3 546 Total liabilities 617 375 637 076 614 909 Income tax thereon (53) (91) (995) Total equity and liabilities 804 245 822 939 777 328 Total comprehensive loss for the period2 (4 993) (1 059) (13 115) 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. 10 | CONDENSED GROUP INTERIM FINANCIAL STATEMENTS | 30 SEPTEMBER 2020 ESKOM HOLDINGS SOC LTD | 11 CONDENSED GROUP STATEMENT OF CHANGES IN EQUITY CONDENSED GROUP STATEMENT OF CASH FLOWS for the six months ended 30 September 2020 for the six months ended 30 September 2020 Share Cash flow Unrealised Foreign Accumulated Total Unaudited Unaudited1 Audited capital hedge fair value currency profit equity six months ended six months ended year ended reserve reserve translation 30 September 30 September 31 March reserve 2020 2019 2020 Rm Rm Rm Rm Rm Rm Rm Rm Rm Balance at 31 March 2019 83 000 1 967 (13 641) 19 78 633 149 978 Cash flows from operating activities Restated loss for the period1 – – – – (1 930) (1 930) Profit/(loss) before tax 114 (2 512) (26 562) Restated other comprehensive income, net of tax1 – 615 – 24 232 871 Adjustment for non-cash items 31 232 33 256 65 364 Share capital issued 13 500 – – – – 13 500 Changes in working capital (13 237) (11 150) (2 464) Transfer between reserves – – (713) – 713 – Cash generated from operations 18 109 19 594 36 338 Balance at 30 September 2019 96 500 2 582 (14 354) 43 77 648 162 419 Net cash from/(used in) derivatives held for risk management 1 100 179 (81) Loss for the period – – – – (18 572) (18 572) Finance income received 143 152 377 Other comprehensive income, net of tax – 4 243 – (46) 2 319 6 516 Finance cost paid (26) (20) (60) Share capital issued 35 500 – – – – 35 500 Income taxes paid (395) (230) (367) Transfer between reserves – – (3 258) – 3 258 – Net cash from operating activities 18 931 19 675 36 207 Balance at 31 March 2020 132 000 6 825 (17 612) (3) 64 653 185 863 Profit for the period – – – – 83 83 Cash flows used in investing activities Other comprehensive income, net of tax – (5 278) – 60 142 (5 076) Disposals of property, plant and equipment and intangible assets 56 439 508 Share capital issued 6 000 – – – – 6 000 Acquisitions of property, plant and equipment and intangible assets (10 267) (10 727) (24 269) Transfer between reserves – – (3 262) – 3 262 – Acquisitions of future fuel supplies (1 166) (747) (1 261) Disposals of insurance investments 6 788 4 775 9 188 Balance at 30 September 2020 138 000 1 547 (20 874) 57 68 140 186 870 Acquisitions of insurance investments (7 758) (6 481) (11 930) Payments made in advance (7) (6) (2) Cash used in provisions (401) (376) (846) Net cash used in derivatives held for risk management (582) (301) (120) Finance income received 727 814 1 550 Other cash from investing activities 99 111 171 Net cash used in investing activities (12 511) (12 499) (27 011) Cash flows (used in)/from financing activities Debt securities and borrowings raised 13 056 15 934 32 036 Payments made in advance (188) (197) (642) Debt securities and borrowings repaid (23 712) (11 450) (31 511) Share capital issued 6 000 13 500 49 000 Net cash from derivatives held for risk management 6 408 447 1 843 Cash used in lease liabilities (188) (185) (423) Net cash used in financial trading instruments (43) (58) (24) Finance income received 230 265 597 Finance cost paid (19 142) (19 567) (39 111) Taxes paid (40) (29) (84) Net cash (used in)/from financing activities (17 619) (1 340) 11 681 Net (decrease)/increase in cash and cash equivalents (11 199) 5 836 20 877 Cash and cash equivalents at beginning of the period 22 990 2 031 2 031 Foreign currency translation 60 24 (22) Effect of movements in exchange rates on cash held (139) 86 136 Assets and liabilities held-for-sale 62 (163) (32) Cash and cash equivalents at end of the period 11 774 7 814 22 990 1. Restated. Refer to note 17. 12 | CONDENSED GROUP INTERIM FINANCIAL STATEMENTS | 30 SEPTEMBER 2020 ESKOM HOLDINGS SOC LTD | 13 NOTES TO THE CONDENSED GROUP INTERIM FINANCIAL STATEMENTS for the six months ended 30 September 2020 1. Structure and activities • progress on the court proceedings lodged by Eskom against NERSA include: Eskom Holdings SOC Ltd (Eskom), a state-owned company and holding company of the group, is incorporated and domiciled in – revenue decision for 2020 to 2022 (MYPD 4): The court ruled that the MYPD 4 determination is reviewed and set aside and the Republic of South Africa. Eskom is a vertically integrated operation that generates, transmits and distributes electricity to local that Eskom recover the R69 billion in a phased manner over a three-year period from 2022. NERSA has acknowledged that their industrial, mining, commercial, agricultural, redistributors (metropolitan and other municipalities) and residential customers, and treatment of the equity support was incorrect. NERSA has been granted leave (on 6 October 2020) to appeal the phasing of to international customers in southern Africa. Eskom also purchases electricity from IPPs and international suppliers in southern the recovery. Eskom is requesting that, under an execution order, the current court judgement be implemented for the 2022 Africa. These represent the significant activities of the group. The business focus of the subsidiaries is primarily to support the financial year (R23 billion) until the appeal process is completed. The revenue outlook is premised on the inclusion of the first electricity business. R23 billion being liquidated in 2022 – revenue decision for 2019: The court determined that the revenue decision was procedurally unfair, irrational, unreasonable and unlawful. Eskom submitted a supplementary application to NERSA to recover the costs had a lawful decision been made. 2. Basis of preparation NERSA has decided to undertake a public consultation process and it is envisaged that a final outcome will be determined by The condensed group interim financial statements of Eskom as at and for the six months ended 30 September 2020 comprise the NERSA by 26 February 2021 company, its subsidiaries, joint ventures, associates and structured entities (together, the group). The condensed group interim – RCA decision for 2015 to 2017 (MYPD 3): The judgement sets aside the RCA and accepts that Eskom put forward a case for financial statements do not include all of the information required for full financial statements and should be read in conjunction with relief in areas where NERSA did not implement its methodology and past precedent. NERSA is required to urgently reconsider the Eskom Holdings SOC Ltd 31 March 2020 group annual financial statements. The annual financial statements of the group as at its RCA balance decision. NERSA has undertaken a public consultation process and it is envisaged that a final outcome will be and for the year ended 31 March 2020 are available for inspection at the company’s registered office and on the Eskom website at determined by NERSA by 26 February 2021 www.eskom.co.za. – RCA decision for 2018: Eskom submitted its founding affidavit on the review to NERSA on 9 April 2020 and NERSA has filed its The condensed group interim financial statements are prepared in accordance with the recognition and measurement requirements answering affidavit. The legal process continues of IFRS, the presentation and disclosure requirements of IAS 34 Interim financial reporting, and in the manner required by the • the group’s cost structures and capital programme are continuously being reviewed to extract cost savings and improve cash flows Companies Act. • 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 The condensed group interim financial statements are prepared on the historical-cost basis except for the following items which are • there is continued focus on implementing relevant strategies in an effort to recover overdue trade receivables through the inter- measured at fair value: ministerial task team which has now also been elevated to the presidential technical task team • derivatives held for risk management • the group will not embark on any further generation expansion activities in the foreseeable future after the completion of the • embedded derivatives Kusile power station project • certain investments and financial trading assets and liabilities • 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 2.1 Going concern expenditure reporting process in terms of the Public Finance Management Act (resulted in the qualified audit opinion in recent The board made an assessment of the ability of the group to continue as a going concern in the foreseeable future. The board: years) and the clean-up of the related challenges in the commercial environment • recognised that Eskom continues to face various challenges that resulted from mismanagement and corruption. Significant progress The board considered the risks relating to the group’s going-concern status and is satisfied that the risks will be satisfactorily has been made in cleaning up irregularities and improving processes, but it is taking time to identify all issues and take appropriate addressed with the mitigation strategies in place. The board continues to manage these strategies as a priority as it is important that corrective action and consequence management they materialise as envisaged. Tough and painful decisions will have to be made by Eskom, the shareholder and NERSA for the strategy • noted that there is a need to secure funding of R40.7 billion in 2021 (48% of the funding for 2021 had been secured by September 2020) to succeed. The board therefore concluded that it is satisfied that the group has access to adequate resources and facilities, with • considered the impact of the current economic climate and the sovereign’s credit ratings on Eskom’s ability to raise funds, including shareholder support, to be able to continue its operations for the foreseeable future as a going concern. that the rating agencies have expressed a more cautious outlook on Eskom • reviewed the performance of the group for the period ended 30 September 2020 including the net profit after tax of R83 million and the net current liabilities of R27 171 million 3. Significant changes in accounting policies • noted the further deterioration of some of the group’s financial indicators The accounting policies are consistent with those applied to the financial statements as at and for the year ended 31 March 2020. • considered the impact of the cash flow forecast for the 24 months ending 30 September 2022 and the projected net loss pre-tax for 2021, estimated at R30 430 million and the projected net loss pre-tax for 2022, estimated at R12 255 million per the latest projections. The cash flow forecast has been revised and updated with the latest expectations, including the expected impact of 4. Critical accounting estimates and judgements the COVID-19 pandemic on the operations of the group The significant estimates and judgements made by management in applying the accounting policies and the key sources of estimation • considered that Eskom is in a debt reliant liquidity situation that resulted from low tariffs, stagnant and contracting sales volumes, uncertainty were substantially the same as those applied to the financial statements as at and for the year ended 31 March 2020. 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) • considered the possible impact if key risks materialise and acknowledged that the group is dependent on the positive outcome of court proceedings lodged against NERSA and the liquidation of the RCA balances 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 R56 billion in the 2021 financial year and R31.8 billion in 2022. The board is managing the conditions relating to the support that was allocated through the Special Appropriation Act in November 2019 • 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 South Africa’s electricity supply industry • the board continues with the process of separating the business into the main line divisions (functional unbundling of Eskom) in accordance with the special paper. Plans are being developed to determine the process, timing and implications of Eskom’s legal unbundling including legislative changes, legal structure and ownership as well as addressing Eskom’s debt challenge including the impact of loan covenants 14 | CONDENSED GROUP INTERIM FINANCIAL STATEMENTS | 30 SEPTEMBER 2020 ESKOM HOLDINGS SOC LTD | 15 NOTES TO THE CONDENSED GROUP INTERIM FINANCIAL STATEMENTS (continued) for the six months ended 30 September 2020 5. Segment information 7. Dividend paid No dividend was paid to the shareholder during the six months ended 30 September 2020 nor in the comparative periods presented. Generation Transmission Distribution All other Reallocation and Group segments inter-segment transactions 8. Significant events and transactions Rm Rm Rm Rm Rm Rm The following significant movements occurred in the six months ended 30 September 2020: 30 September 2020 8.1 Foreign exchange impact on derivatives held for risk management and debt securities and External revenue – 5 075 103 648 793 (793) 108 723 borrowings Inter-segment revenue/recoveries 73 426 16 170 (89 442) 5 547 (5 701) – The impact of the strengthening of the Rand against major currencies decreased debt securities and borrowings by R9.9 billion and the net asset position in derivatives held for risk management by R16.4 billion. Total revenue 73 426 21 245 14 206 6 340 (6 494) 108 723 8.2 Inventories (Loss)/profit before tax (1 611) (1 248) 837 2 735 (599) 114 Inventories increased in line with the strategy to increase stock levels to comply with the grid codes and there was lower coal burn Income tax – – – (185) 154 (31) during the initial COVID-19 lockdown period. The maintenance spares also increased due to lower planned maintenance as a result of resource and capacity constraints during the initial COVID-19 lockdown. (Loss)/profit for the period (1 611) (1 248) 837 2 550 (445) 83 Segment assets 536 422 77 278 114 752 99 628 (23 835) 804 245 8.3 Share capital issued Segment liabilities 72 759 17 260 46 731 505 426 (24 801) 617 375 Refer to note 6.2 for details about share capital issued in the period. 30 September 2019 External revenue – 6 103 101 399 873 (873) 107 502 9. Seasonality of interim results The results of the group are impacted by the following seasonal fluctuations: Inter-segment revenue/recoveries 75 020 12 400 (87 280) 5 511 (5 651) – • revenue from electricity sales and consequently electricity receivables are normally higher during the first six months of the Total revenue 75 020 18 503 14 119 6 384 (6 524) 107 502 financial year (winter months) as compared to the summer months arising from higher sales volume, tariff energy charges and peak demand. This impact has been partially offset by the impact of COVID-19 in the six months ended 30 September 2020 (Loss)/profit before tax (3 619) (1 394) 1 269 739 493 (2 512) • primary energy costs associated with renewable IPP purchases are lower in the winter months (first six months of the financial year) Income tax – – – 720 (138) 582 due to a lower proportion of power being produced from renewable sources during this time • less routine maintenance work (and consequently lower costs) is undertaken during the winter months which coincides with the (Loss)/profit for the period (3 619) (1 394) 1 269 1 459 355 (1 930) first six months of the financial year Segment assets 523 381 78 685 112 686 84 914 (22 338) 777 328 Segment liabilities 72 989 16 803 46 765 501 480 (23 128) 614 909 Unaudited Unaudited Audited 31 March 2020 six months ended six months ended year ended External revenue – 11 783 187 685 1 534 (1 534) 199 468 30 September 30 September 31 March Inter-segment revenue/recoveries 135 342 28 442 (163 544) 11 190 (11 430) – 2020 2019 2020 Rm Rm Rm Total revenue 135 342 40 225 24 141 12 724 (12 964) 199 468 10. Revenue (Loss)/profit before tax (23 318) (5 244) (519) 1 284 1 235 (26 562) Redistributors 46 791 44 703 79 918 Income tax – – – 6 420 (360) 6 060 Invoiced to customers 51 223 48 594 85 656 (Loss)/profit for the period (23 318) (5 244) (519) 7 704 875 (20 502) Amounts not meeting revenue recognition criteria (6 862) (5 793) (9 821) Segment assets 526 527 77 491 111 899 128 751 (21 729) 822 939 Recognised on a cash received basis 2 430 1 902 4 083 Segment liabilities 69 897 16 764 45 009 528 498 (23 092) 637 076 Residential 3 395 3 152 5 993 Invoiced to customers 3 602 3 406 6 362 As a consequence of the group’s evolving structure, the balances and activities of the previously reported group capital division Amounts not meeting revenue recognition criteria (224) (254) (369) have been split into components pertaining to the generation, transmission and all other segments. The 30 September 2019 and 31 March 2020 segment figures have been restated in line with the revised reportable segment structure. Recognised on a cash received basis 17 – – Industrial 18 214 20 294 37 946 6. Issuances, repurchases and repayments of debt securities and borrowings and share capital Mining 16 352 16 911 29 968 6.1 Debt securities and borrowings Commercial 7 619 7 687 14 067 The nature of the group’s issuances, repurchases and repayments of debt securities and borrowings are consistent with those Agricultural 5 131 4 858 9 839 reported previously. The debt raised and repaid by the group is disclosed in the statement of cash flows. International 5 163 6 151 12 229 Other customers 1 693 2 001 3 541 6.2 Share capital Post-paid electricity sales 104 358 105 757 193 501 Unaudited Audited Unaudited Prepaid electricity sales 5 089 4 817 9 489 six months ended year ended six months ended Total electricity sales 109 447 110 574 202 990 30 September 31 March 30 September Other 649 1 134 2 161 2020 2020 2019 Shares Shares Shares Gross revenue 110 096 111 708 205 151 Capitalised to property, plant and equipment (1 373) (4 206) (5 683) Authorised ordinary shares 300 000 000 000 300 000 000 000 100 000 000 000 108 723 107 502 199 468 Issued ordinary shares Balance at beginning of the year 132 000 000 001 83 000 000 001 83 000 000 001 Share capital issued 6 000 000 000 49 000 000 000 13 500 000 000 Balance at end of the year 138 000 000 001 132 000 000 001 96 500 000 001 16 | CONDENSED GROUP INTERIM FINANCIAL STATEMENTS | 30 SEPTEMBER 2020 ESKOM HOLDINGS SOC LTD | 17 NOTES TO THE CONDENSED GROUP INTERIM FINANCIAL STATEMENTS (continued) for the six months ended 30 September 2020 Unaudited Unaudited Audited 15. Accounting classification and fair value six months ended six months ended year ended 15.1 Accounting classification 30 September 30 September 31 March 30 September 2020 (unaudited) 2020 2019 2020 Fair value through Amortised Other assets Total Rm Rm Rm profit or loss cost and liabilities Rm Rm Rm Rm 11. Primary energy Own generation costs 34 439 33 985 71 730 Financial assets Environmental levy 3 640 3 873 7 613 Investments and financial trading assets 1 568 11 587 – 13 155 International electricity purchases 2 524 1 993 4 716 Negotiable certificates of deposit – 11 587 – 11 587 Independent power producers 13 715 12 167 28 060 Listed shares 1 568 – – 1 568 54 318 52 018 112 119 Derivatives held for risk management and embedded derivatives 683 – 36 173 36 856 12. Employee benefit expense Foreign exchange contracts 407 – 288 695 Gross employee benefit expense 17 719 17 721 35 618 Cross-currency swaps 127 – 35 885 36 012 Capitalised to property, plant and equipment (1 043) (1 273) (2 642) Credit default swaps 9 – – 9 16 676 16 448 32 976 Inflation-linked swaps 140 – – 140 Trade, finance lease, loan and other receivables – 24 050 354 24 404 13. Finance cost Gross finance cost 23 159 24 451 48 446 Loans receivable – 42 – 42 Capitalised to property, plant and equipment (6 736) (8 168) (14 584) Finance lease receivables – – 354 354 Trade and other receivables – 24 008 – 24 008 16 423 16 283 33 862 Cash and cash equivalents – 11 774 – 11 774 Bank balances – 5 267 – 5 267 14. Income tax Fixed deposits – 6 507 – 6 507 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. 2 251 47 411 36 527 86 189 Financial liabilities Debt securities and borrowings – 463 703 – 463 703 Eskom bonds – 159 696 – 159 696 Eurorand zero coupon bonds – 5 273 – 5 273 Foreign bonds – 93 069 – 93 069 Development financing institutions – 154 850 – 154 850 Export credit facilities – 29 350 – 29 350 Floating rate notes – 4 032 – 4 032 Other loans – 17 433 – 17 433 Derivatives held for risk management and embedded derivatives 2 376 – 3 971 6 347 Foreign exchange contracts 1 894 – 9 1 903 Cross-currency swaps 9 – 3 090 3 099 Credit default swaps 473 – – 473 Embedded derivatives – – 872 872 Trade and other payables and lease liabilities – 34 663 9 162 43 825 Lease liabilities – – 9 162 9 162 Trade and other payables – 34 663 – 34 663 Financial trading liabilities Repurchase agreements 20 – – 20 2 396 498 366 13 133 513 895 18 | CONDENSED GROUP INTERIM FINANCIAL STATEMENTS | 30 SEPTEMBER 2020 ESKOM HOLDINGS SOC LTD | 19 NOTES TO THE CONDENSED GROUP INTERIM FINANCIAL STATEMENTS (continued) for the six months ended 30 September 2020 15. Accounting classification and fair value (continued) 15.1 Accounting classification (continued) 31 March 2020 (audited) 30 September 2019 (unaudited) Fair value through Amortised Other assets Total Fair value through Amortised Other assets Total profit or loss cost and liabilities profit or loss cost and liabilities Rm Rm Rm Rm Rm Rm Rm Rm Financial assets Financial assets Investments and financial trading assets 1 299 10 834 – 12 133 Investments and financial trading assets 1 700 9 658 – 11 358 Negotiable certificates of deposit – 10 682 – 10 682 Negotiable certificates of deposit – 9 599 – 9 599 Repurchase agreements – 152 – 152 Repurchase agreements – 59 – 59 Listed shares 1 299 – – 1 299 Listed shares 1 597 – – 1 597 Government bonds 103 – – 103 Derivatives held for risk management and embedded derivatives 8 851 – 48 785 57 636 Derivatives held for risk management and embedded derivatives 1 521 – 26 583 28 104 Foreign exchange contracts 8 508 – 847 9 355 Cross-currency swaps 241 – 47 938 48 179 Foreign exchange contracts 1 406 – 39 1 445 Commodity forwards 2 – – 2 Cross-currency swaps 30 – 26 544 26 574 Credit default swaps 9 – – 9 Commodity forwards 2 – – 2 Inflation-linked swaps 91 – – 91 Credit default swaps 9 – – 9 Inflation-linked swaps 74 – – 74 Trade, finance lease, loan and other receivables – 21 643 372 22 015 Trade, finance lease, loan and other receivables – 24 251 391 24 642 Loans receivable – 54 – 54 Finance lease receivables – – 372 372 Loans receivable – 56 – 56 Trade and other receivables – 21 589 – 21 589 Finance lease receivables – – 391 391 Trade and other receivables – 24 195 – 24 195 Cash and cash equivalents – 22 990 – 22 990 Cash and cash equivalents – 7 814 – 7 814 Bank balances – 9 897 – 9 897 Unsettled deals – 25 – 25 Bank balances – 5 389 – 5 389 Fixed deposits – 13 068 – 13 068 Fixed deposits – 2 425 – 2 425 10 150 55 467 49 157 114 774 3 221 41 723 26 974 71 918 Financial liabilities Financial liabilities Debt securities and borrowings – 483 682 – 483 682 Debt securities and borrowings – 454 207 – 454 207 Eskom bonds – 157 037 – 157 037 Eskom bonds – 154 777 – 154 777 Commercial paper – 5 444 – 5 444 Commercial paper – 931 – 931 Eurorand zero coupon bonds – 4 964 – 4 964 Eurorand zero coupon bonds – 4 673 – 4 673 Foreign bonds – 98 563 – 98 563 Foreign bonds – 83 783 – 83 783 Development financing institutions – 154 489 – 154 489 Development financing institutions – 147 967 – 147 967 Export credit facilities – 32 746 – 32 746 Export credit facilities – 30 090 – 30 090 Floating rate notes – 4 046 – 4 046 Floating rate notes – 4 046 – 4 046 Other loans – 26 393 – 26 393 Other loans – 27 940 – 27 940 Derivatives held for risk management and Derivatives held for risk management and embedded derivatives 868 – 3 209 4 077 embedded derivatives 804 – 7 227 8 031 Foreign exchange contracts 58 – 29 87 Foreign exchange contracts 262 – 94 356 Cross-currency swaps 4 – 2 044 2 048 Cross-currency swaps 210 – 4 875 5 085 Commodity forwards 6 – – 6 Commodity forwards 4 – – 4 Credit default swaps 710 – – 710 Credit default swaps 296 – – 296 Inflation-linked swaps 90 – – 90 Inflation-linked swaps 32 – – 32 Embedded derivatives – – 1 136 1 136 Embedded derivatives – – 2 258 2 258 Trade, finance lease and other payables – 38 700 9 350 48 050 Trade, finance lease and other payables – 31 640 9 416 41 056 Finance lease payables – – 9 350 9 350 Finance lease payables – – 9 416 9 416 Trade and other payables – 38 700 – 38 700 Trade and other payables – 31 640 – 31 640 Financial trading liabilities Financial trading liabilities 181 – – 181 Repurchase agreements 214 – – 214 Short-sold government bonds 56 – – 56 1 082 522 382 12 559 536 023 Repurchase agreements 27 – – 27 Unsettled deals 98 – – 98 985 485 847 16 643 503 475 20 | CONDENSED GROUP INTERIM FINANCIAL STATEMENTS | 30 SEPTEMBER 2020 ESKOM HOLDINGS SOC LTD | 21 NOTES TO THE CONDENSED GROUP INTERIM FINANCIAL STATEMENTS (continued) for the six months ended 30 September 2020 15. Accounting classification and fair value (continued) Fair value hierarchy 15.2 Fair value The fair value hierarchy of financial instruments that are measured at fair value in the statement of financial position is as follows: Valuation processes and principal markets 30 September 2020 31 March 2020 30 September 2019 The group has a control framework in place for the measurement of fair values. It includes a valuation team that ultimately reports (unaudited) (audited) (unaudited) to the CFO and has overall responsibility for all significant fair value measurements. Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 The valuation team regularly reviews significant unobservable inputs and valuation adjustments. Where third-party information, such Rm Rm Rm Rm Rm Rm Rm Rm Rm as broker quotes or pricing services, is used to measure fair value, this information is assessed as to whether it provides adequate Financial assets support for the accounting treatment applied including the level of the fair value hierarchy assigned to it. Investments and financial The group is involved in various principal markets because of the unique funding activities undertaken where the fair value trading assets 1 568 – – 1 299 – – 1 700 – – is determined by each participant in the different principal markets. The principal markets include capital and money markets, Listed shares 1 568 – – 1 299 – – 1 597 – – development financing institutions and export credit agencies. Government bonds – – – – – – 103 – – Valuation techniques and levels Derivatives held for risk management and embedded Financial instrument Valuation technique derivatives – 36 856 – – 57 636 – – 28 104 – Level 1: Quoted prices (unadjusted) in active markets Foreign exchange contracts – 695 – – 9 355 – – 1 445 – Investments and financial trading assets (listed shares Quoted bid price in active markets. A market is regarded as active when Cross-currency swaps – 36 012 – – 48 179 – – 26 574 – and government bonds) and financial trading liabilities it is a market in which transactions for the asset or liability take place (short-sold government bonds) Commodity forwards – – – – 2 – – 2 – with sufficient frequency and volume to provide pricing information on an ongoing basis Credit default swaps – 9 – – 9 – – 9 – Inflation-linked swaps – 140 – – 91 – – 74 – Level 2: Observable inputs other than quoted prices included within level 1 Financial trading liabilities (repurchase agreements) A discounted cash flow technique is used which uses expected cash Financial liabilities flows and a market-related discount rate Derivatives held for risk management and embedded Derivatives held for risk management Valuation determined with reference to broker quotes as well as use of derivatives – 5 475 872 – 2 941 1 136 – 5 773 2 258 discounted cash flow and option pricing models. Broker quotes are tested for reasonableness by discounting expected future cash flows using a Foreign exchange contracts – 1 903 – – 87 – – 356 – market interest rate for a similar instrument at the measurement date Cross-currency swaps – 3 099 – – 2 048 – – 5 085 – Commodity forwards – – – – 6 – – 4 – Valuations of cross-currency swaps include the credit risk of Eskom Credit default swaps – 473 – – 710 – – 296 – (known as debit value adjustment) and counterparties (known as credit Inflation-linked swaps – – – – 90 – – 32 – value adjustment) where appropriate. A stochastic modelling approach is Embedded derivatives – – 872 – – 1 136 – – 2 258 followed where the expected future exposure to credit risk for Eskom and its counterparties (considering default probabilities and recovery Financial trading liabilities – 20 – – 214 – 56 125 – rates derived from market data) is modelled Short-sold government bonds – – – – – – 56 – – Level 3: Unobservable inputs Repurchase agreements – 20 – – 214 – – 125 – Embedded derivative liabilities Fair valued using unobservable inputs Fair value level 3 disclosures (embedded derivatives) There were no changes in the valuation techniques applied nor transfers between level 1, 2 or 3 of the fair value hierarchy during the Eskom entered into a number of agreements to supply electricity to electricity-intensive businesses where the revenue from six months ended 30 September 2020 nor in the comparative periods presented. 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). 22 | CONDENSED GROUP INTERIM FINANCIAL STATEMENTS | 30 SEPTEMBER 2020 ESKOM HOLDINGS SOC LTD | 23 NOTES TO THE CONDENSED GROUP INTERIM FINANCIAL STATEMENTS (continued) for the six months ended 30 September 2020 15. Accounting classification and fair value (continued) Movement in balances 15.2 Fair value (continued) Embedded Fair value level 3 disclosures (embedded derivatives) (continued) derivative Valuation assumptions liability Forecast sales volumes are based on the most likely future sales volumes based on past trends and taking into account future Rm production plans in consultation with industry specific experts and key customer executives. Balance at 31 March 2019 3 434 The following valuation assumptions were used for the valuation of embedded derivatives and are regarded as the best estimates by Net fair value gain (1 176) the board: Balance at 30 September 2019 2 258 Period ended 30 September 2020 (unaudited) Net fair value gain (1 122) Input Unit 2020 2021 2022 2023 2024 2025 Balance at 31 March 2020 1 136 Aluminium USD per ton 1 750 1 801 n/a1 n/a1 n/a1 n/a1 Net fair value gain (264) Volatility Year-on-year (ratio) 0.17 0.17 0.17 0.17 0.17 0.17 Rand interest rate Continuous actual/365 days (%) 3.52 3.40 3.54 3.76 4.26 4.79 Balance at 30 September 2020 872 Dollar interest rate Annual actual/365 days (%) 0.20 0.22 0.27 0.23 0.26 0.31 South African PPI Year-on-year (%) 8.96 5.99 6.51 6.57 5.78 7.08 15.3 Day-one gain/loss United States PPI Year-on-year (%) (2.26) 1.86 1.55 1.78 1.78 1.14 The group recognises a day-one gain/loss on the initial recognition of cross-currency and inflation-linked swaps held as hedging Rand/USD Rand per USD 16.82 17.09 17.66 18.37 19.34 20.57 instruments where applicable. Electricity price increase Year-on-year (%) 5.23 13.87 n/a1 n/a1 n/a1 n/a1 Cross-currency Inflation-linked Total swaps swaps Period ended 31 March 2020 (audited) Rm Rm Rm Input Unit 2020 2021 2022 2023 2024 2025 Loss at 31 March 2019 (1 146) (25) (1 171) Aluminium USD per ton 1 499 1 595 n/a1 n/a1 n/a1 n/a1 Day-one loss recognised (90) – (90) Volatility Year-on-year (ratio) 0.17 0.17 0.17 0.17 0.17 0.17 Amortised to profit or loss 89 2 91 Rand interest rate Continuous actual/365 days (%) 6.40 6.09 5.20 5.63 6.01 6.80 Dollar interest rate Annual actual/365 days (%) 0.33 0.92 0.48 0.46 0.48 0.51 Loss at 30 September 2019 (1 147) (23) (1 170) South African PPI Year-on-year (%) 3.00 5.26 6.15 6.37 4.41 7.31 Day-one loss recognised (268) – (268) United States PPI Year-on-year (%) (1.97) (0.14) 1.66 2.05 1.85 1.44 Amortised to profit or loss 95 2 97 Rand/USD Rand per USD 17.82 18.76 19.58 20.81 22.24 24.41 Loss at 31 March 2020 (1 320) (21) (1 341) Electricity price increase Year-on-year (%) 5.23 13.87 n/a1 n/a1 n/a1 n/a1 Amortised to profit or loss 97 1 98 Loss at 30 September 2020 (1 223) (20) (1 243) Period ended 30 September 2019 (unaudited) Input Unit 2019 2020 2021 2022 2023 2024 Aluminium USD per ton 1 717 1 748 1 836 n/a1 n/a1 n/a1 16. Material events subsequent to 30 September 2020 Volatility Year-on-year (ratio) 0.18 0.18 0.18 0.18 0.18 0.18 There have been no significant events subsequent to 30 September 2020. 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 17. Restatement of comparatives South African PPI Year-on-year (%) 9.77 6.54 6.09 6.67 7.03 5.51 The impact of the restatements on the financial statements for the period ended 30 September 2020 relating to the restatements United States PPI Year-on-year (%) (1.63) 1.78 1.84 1.80 2.29 1.46 disclosed in the annual financial statements at 31 March 2020 is disclosed on the following page. The restatement relate to: Rand/USD Rand per USD 15.16 15.54 16.35 17.18 18.17 19.29 • post-retirement medical aid Electricity price increase Year-on-year (%) 5.23 13.87 8.76 n/a1 n/a1 n/a1 • impairment of the VAT portion of trade receivables • capitalisation of costs incurred in the construction of plant Sensitivity analysis In addition, disposals and writeoffs of property, plant and equipment have been restated by R3 997 million at 30 September 2019 in The effect on profit/loss before tax of an increase or decrease in the assumptions is: line with the annual financial statements at 31 March 2020 relating to expenditure at the Kusile power station that was previously capitalised to plant and work under construction. Unaudited Audited Unaudited 30 September 2020 31 March 2020 30 September 2019 Change in increase decrease increase decrease increase decrease Input Unit assumption Rm Rm Rm Rm Rm Rm Aluminium USD per ton 1% 9 (9) 8 (8) 19 (19) Rand interest rate Continuous actual/365 days (%) 100 basis points 84 (97) 123 (141) 123 (141) Dollar interest rate Continuous actual/365 days (%) 100 basis points (77) 72 (101) 97 (101) 97 United States PPI Index 1% 72 (78) 53 (51) 90 (97) Rand/USD Rand per USD 1% 28 (22) 19 (17) 41 (35) 1. The embedded derivative that is linked to commodity and/or foreign currency rates expires on 31 January 2021. Inputs beyond this date are therefore not relevant. 24 | CONDENSED GROUP INTERIM FINANCIAL STATEMENTS | 30 SEPTEMBER 2020 ESKOM HOLDINGS SOC LTD | 25 NOTES TO THE CONDENSED GROUP INTERIM FINANCIAL STATEMENTS (continued) CONTACT DETAILS for the six months ended 30 September 2020 17. Restatement of comparatives (continued) Telephone numbers Websites and email addresses Previously Adjustments Restated www.eskom.co.za reported Eskom head office +27 11 800 8111 Eskom website Contact@eskom.co.za Rm Rm Rm +27 11 800 3343 Group statement of financial position at 30 September 2019 Eskom Media Desk +27 11 800 3378 Eskom Media Desk MediaDesk@eskom.co.za Assets +27 11 800 6103 Non-current Investor Relations +27 11 800 2775 Investor Relations InvestorRelations@eskom.co.za Property, plant and equipment and intangible assets 659 734 (5 277) 654 457 Current Whistle-blowing hotline 0800 112 722 Forensic investigations Investigate@eskom.co.za Trade, finance lease, loan and other receivables 26 106 (1 290) 24 816 Eskom Development www.eskom.co.za/csi Eskom Development Foundation +27 11 800 8111 Foundation CSI@eskom.co.za Equity Capital and reserves 168 747 (6 328) 162 419 08600 ESKOM or Promotion of Access to National call centre PAIA@eskom.co.za 08600 37566 Information Act requests Liabilities Non-current Customer SMS line 35328 Customer Service CSOnline@eskom.co.za Deferred tax 9 025 (2 297) 6 728 Facebook EskomSouthAfrica Feedback on our report IRfeedback@eskom.co.za Employee benefit obligations 13 980 2 058 16 038 Twitter Eskom_SA MyEskom app Group income statement for the period ended 30 September 2019 Employee benefit expense (16 454) 6 (16 448) Impairment of assets (781) (173) (954) Other expenses (8 334) (3 997) (12 331) Physical address Postal address Depreciation and amortisation expense (13 503) 28 (13 475) Eskom Megawatt Park Finance cost (16 062) (221) (16 283) 2 Maxwell Drive PO Box 1091 Sunninghill Johannesburg Profit/(loss) before tax 1 845 (4 357) (2 512) Sandton 2000 Income tax (520) 1 102 582 2157 Profit/(loss) for the period 1 325 (3 255) (1 930) Group Company Secretary Company registration number Group statement of comprehensive income for the period ended Office of the Company Secretary PO Box 1091 Eskom Holdings SOC Ltd 30 September 2019 Johannesburg 2002/015527/30 Profit/(loss) for the period 1 325 (3 255) (1 930) 2000 Items that may be reclassified subsequently to profit or loss 639 – 639 Items that may not be reclassified subsequently to profit or loss 189 43 232 Re-measurement of post-employment medical benefits 263 60 323 Income tax thereon (74) (17) (91) Total comprehensive income/(loss) for the period 2 153 (3 212) (1 059) Group statement of cash flows for the period ended 30 September 2019 Cash flows from operating activities Profit/(loss) before tax 1 845 (4 357) (2 512) Adjustment for non-cash items 28 899 4 357 33 256 Net cash from operating activities 19 675 – 19 675 18. Exchange rates Unaudited Unaudited Audited 30 September 31 March 30 September 2020 2020 2019 Euro 19.67 19.55 16.53 United States dollar (USD) 16.82 17.82 15.16 Pound sterling 21.62 22.17 18.67 Swiss franc 18.21 18.49 15.21 Japanese yen 0.16 0.16 0.14 19. Reportable irregularities There have been no significant changes to reportable irregularities as disclosed in the annual financial statements for the year ended 31 March 2020. JOINT VENTURE [0006] 26 | CONDENSED GROUP INTERIM FINANCIAL STATEMENTS | 30 SEPTEMBER 2020