Annual financial Reviewed statements condensed group 31 March 2017 interim financial statements for the six months ended 30 September 2017 Enabling Driving economic growth Reviewed condensed group interim financial statements B Contents Currency of financial statements 1 Approval of the condensed group interim financial statements 2 Independent auditors’ review report on the condensed group interim financial statements to the Minister of Public Enterprises 3 Condensed group statement of financial position 4 Condensed group income statement 5 Condensed group statement of comprehensive income 5 Condensed group statement of changes in equity 6 Condensed group statement of cash flows 7 Selected notes to the condensed group interim financial statements: Note 1 Structure and activities 8 2 Basis of preparation 8 3 Significant accounting policies 9 4 Critical accounting estimates and judgements 9 5 Segment information 9 6 Issuances, repurchases and repayments of debt securities and borrowings and share capital 10 7 Dividend paid 10 8 Significant events and transactions 10 9 Seasonality of interim results 10 10 Revenue 11 11 Primary energy 11 12 Employee benefit expense 11 13 Finance cost 11 14 Income tax 11 15 Accounting classification and fair value 12 16 Material events subsequent to 30 September 2017 19 17 Restatement of comparatives 20 18 General 20 19 New standards and interpretations 21 The reviewed condensed group interim financial statements for the six months ended 30 September 2017 have been prepared under the supervision of the acting group chief financial officer, C Cassim CA(SA). These condensed group interim financial statements have been independently reviewed by the group’s external auditors and were published on 30 January 2018. Currency of financial statements The reviewed condensed group interim financial statements are expressed in South African rand (R). The following are approximate values of the rand to one unit of the selected currencies: Average Reporting date mid-spot rate 30 September 31 March 30 September 30 September 31 March 30 September 2017 2017 2016 2017 2017 2016 Euro 15.02 15.44 16.32 15.95 14.29 15.46 United States dollar (USD) 13.19 14.05 14.53 13.52 13.37 13.79 Pound sterling (United Kingdom) 17.07 18.42 19.99 18.07 16.67 17.91 Swiss franc 13.55 14.24 14.93 13.92 13.36 14.21 Japanese yen 0.12 0.13 0.14 0.12 0.12 0.14 Reviewed condensed group interim financial statements 1 Approval of the condensed group interim financial statements Basis of preparation The condensed group interim financial statements from pages 4 to 22 for the six months ended 30 September 2017 have been prepared in accordance with the recognition and measurement requirements of International Financial Reporting Standards (IFRS), the presentation and disclosure requirements of International Accounting Standards (IAS) 34 Interim Financial Reporting, and in the manner required by the Companies Act. Going concern Eskom’s liquidity for the period under review was adversely impacted by the below inflation tariff increase of 2.2% for the 2018 financial year. The audit qualification on the completeness of irregular expenditure reported at 31 March 2017 in terms of the Public Finance Management Act (PFMA) as well as the governance-related challenges experienced by the organisation had a negative impact on Eskom’s access to funding facilities. The board made an assessment of the ability of the group to continue as a going concern in the foreseeable future. The following aspects were considered in the assessment: • The board reviewed the performance of the group for the period ended 30 September 2017 • The board noted the cash flow forecast for the 15 months ending 31 December 2018 based on certain assumptions predating the appointment of the current board. The board will continue to review these cash flows as well as the underlying assumptions and principles in detail in preparation for year end • The tariff increase of 5.23% for the 2019 financial year will have a negative impact on the liquidity of the group • Eskom is pursuing finalisation of the outstanding regulatory clearing account submissions • The board will continue to review the group’s cost structures and capital programme to improve cash flows • Eskom is placing renewed focus on the recovery of its trade receivables • Eskom will not at this stage embark on any further capital expansion activities after the Kusile power station project • Eskom is continuously engaging the shareholder, the department of Public Enterprises, and National Treasury to ensure that the challenges that Eskom is being faced with are addressed satisfactorily within a reasonable timeframe • Government has indicated that Eskom is an important component of the economy and continues to support Eskom as a going concern • The governance related challenges that Eskom has been faced with recently are being addressed mainly through the appointment of a new board and acting group chief executive on 20 January 2018. These appointments will boost investor confidence and significantly improve access to the markets to raise the required funding • The appointment of a permanent group chief executive and group chief financial officer as well as the finalisation of investigations into suspended executives are key priorities for the board • The Ministers of Public Enterprises, Energy and Finance will work together under the leadership of the Deputy President of South Africa, to deal with other structural issues at Eskom, which include the funding model and other industry challenges identified by the inter- ministerial committee on state-owned enterprises reform • The board, with the support of National Treasury, is pursuing funding options to implement the group’s borrowing programme • The current economic climate and the sovereign’s credit ratings have been taken into account in assessing Eskom’s ability to raise funds • Eskom implemented a turn-around programme and is in the process of satisfactorily addressing the shortcomings identified to ensure completeness of reported irregular expenditure in terms of the PFMA that resulted in the qualified audit opinion at 31 March 2017 Based on the above, the board is satisfied that the group has access to adequate resources and facilities to be able to continue its operations for the foreseeable future. Accordingly the board has continued to adopt the going-concern basis in preparing the financial statements. Approval The board is of the opinion, based on the information available to date, that the condensed group interim financial statements fairly present the financial position of the group at 30 September 2017 and the results of the operations and cash flow information for the six months then ended. The condensed group interim financial statements have been approved by the board and signed on its behalf by: J Mabuza P Hadebe C Cassim Chairman Acting group chief executive Acting group chief financial officer 26 January 2018 26 January 2018 26 January 2018 2 Eskom Holdings SOC Ltd Independent auditors’ review report on the condensed group interim financial statements to the Minister of Public Enterprises Introduction We have reviewed the accompanying condensed group interim financial statements of Eskom Holdings SOC Ltd set out on pages 4 to 22, which comprise the condensed group statement of financial position at 30 September 2017, and the condensed group income statement, statements of comprehensive income, changes in equity and cash flows for the six months then ended and selected explanatory notes. The board’s responsibility for the financial statements The board is responsible for the preparation and presentation of these condensed group interim financial statements in accordance with the recognition and measurement requirements of IFRS, the presentation and disclosure requirements of IAS 34 Interim Financial Reporting, the requirements of the Companies Act and for such internal control as the directors determine is necessary to enable the preparation of interim financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ responsibility for the financial statements Our responsibility is to express a conclusion on these condensed group interim financial statements based on our review. Scope of review We conducted our review in accordance with the International Standard on Review Engagements 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity. A review of the condensed group interim financial statements consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters which might be identified in an audit. Accordingly, we do not express an audit opinion. Conclusion Based on our review, nothing has come to our attention that causes us to believe that the accompanying condensed group interim financial statements of Eskom for the six months ended 30 September 2017, are not prepared, in all material respects, in accordance with the recognition and measurement requirements of IFRS, the presentation and disclosure requirements of IAS 34 Interim Financial Reporting and the requirements of the Companies Act. Emphasis of matter We draw attention to note 2 of the condensed group interim financial statements, which describes Eskom’s liquidity position for the period under review. The audit qualification on the completeness of irregular expenditure reported at 31 March 2017 in terms of the Public Finance Management Act (PFMA) as well as the governance-related challenges experienced by the organisation had a negative impact on Eskom’s access to funding facilities. As stated in note 2, these events, along with other matters as set forth in note 2 indicates aspects that were considered in the assessment of Eskom’s ability to continue as a going concern. Based on these aspects, the board is satisfied that the group has access to adequate resources and facilities to be able to continue its operations for the foreseeable future. Our review conclusion is not qualified in respect of this matter. Compliance with laws and regulations In accordance with our responsibilities in terms of sections 44(2) and 44(3) of the Auditing Profession Act, we report that we have identified reportable irregularities in terms of the Auditing Profession Act. We have reported such matters to the Independent Regulatory Board for Auditors. The matter pertaining to the reportable irregularities have been described in note 18 to the condensed group interim financial statements. A Mthimunye SizweNtsalubaGobodo Inc. Director Registered auditor 26 January 2018 20 Morris Street East, Woodmead, 2191 Reviewed condensed group interim financial statements 3 Condensed group statement of financial position at 30 September 2017 Reviewed Audited Reviewed1 30 September 31 March 30 September 2017 2017 2016 Rm Rm Rm Assets Non-current assets 643 351 622 331 592 618 Property, plant and equipment and intangible assets 614 195 592 848 557 300 Future fuel supplies 8 770 8 190 8 672 Payments made in advance 1 500 1 938 2 250 Derivatives held for risk management 17 911 16 868 21 800 Trade, finance lease, loan and other receivables 562 536 605 Investment in securities and financial trading assets – 1 537 1 533 Other assets 413 414 458 Current assets 71 400 78 879 90 282 Inventories 23 021 22 359 20 540 Taxation 176 125 – Investment in securities and financial trading assets 10 364 13 460 15 387 Payments made in advance 2 496 2 091 2 738 Derivatives held for risk management 2 146 1 000 427 Trade, finance lease, loan and other receivables 24 690 19 419 20 879 Cash and cash equivalents 8 507 20 425 30 311 Non-current assets held-for-sale 8 823 8 799 8 925 Total assets 723 574 710 009 691 825 Equity Capital and reserves 182 618 175 942 188 557 Liabilities Non-current liabilities 465 074 453 777 427 545 Debt securities and borrowings 347 584 336 770 317 267 Embedded derivatives 2 950 4 032 5 186 Derivatives held for risk management 5 401 6 767 4 544 Deferred tax 20 336 18 067 23 907 Deferred income and payments received in advance 20 742 19 640 18 660 Employee benefit obligations 13 699 13 790 13 664 Provisions 43 778 44 021 33 381 Trade, finance lease and other payables 10 584 10 690 10 936 Current liabilities 74 202 78 607 74 037 Debt securities and borrowings 19 443 18 530 15 653 Embedded derivatives 1 349 1 382 1 708 Derivatives held for risk management 1 360 3 826 4 660 Employee benefit obligations 5 342 7 348 5 607 Provisions 7 627 9 057 8 404 Deferred income and payments received in advance 5 074 4 734 5 838 Trade, finance lease and other payables 32 534 32 028 31 082 Taxation 5 82 – Financial trading liabilities 1 468 1 620 1 085 Non-current liabilities held-for-sale 1 680 1 683 1 686 Total liabilities 540 956 534 067 503 268 Total equity and liabilities 723 574 710 009 691 825 1. Restated. Refer to note 17. 4 Eskom Holdings SOC Ltd Condensed group income statement for the six months ended 30 September 2017 Reviewed Reviewed1 Audited six months ended six months ended year ended 30 September 30 September 31 March 2017 2016 2017 Note Rm Rm Rm Revenue 10 95 505 97 461 177 136 Other income 730 752 1 573 Primary energy 11 (41 257) (40 380) (82 760) Employee benefit expense 12 (15 153) (15 758) (33 178) Net impairment loss (679) (615) (1 669) Other expenses (9 490) (9 635) (23 570) Profit before depreciation and amortisation expense and net fair value gain/(loss) (EBITDA) 29 656 31 825 37 532 Depreciation and amortisation expense (10 877) (10 068) (20 300) Net fair value gain/(loss) on financial instruments 105 (1 875) (1 731) Profit before net finance cost 18 884 19 882 15 501 Net finance cost (10 026) (6 535) (14 377) Finance income 1 865 2 766 5 212 Finance cost 13 (11 891) (9 301) (19 589) Share of profit of equity-accounted investees, net of tax 26 18 35 Profit before tax 8 884 13 365 1 159 Income tax 14 (2 572) (3 822) (271) Profit for the period 2 6 312 9 543 888 Condensed group statement of comprehensive income for the six months ended 30 September 2017 Reviewed Reviewed Audited six months ended six months ended year ended 30 September 30 September 31 March 2017 2016 2017 Rm Rm Rm Profit for the period 2 6 312 9 543 888 Other comprehensive income/(loss) 364 (3 338) (7 298) Items that may be reclassified subsequently to profit or loss (365) (3 039) (7 464) Available-for-sale financial assets 1 56 60 Cash flow hedges (505) (4 262) (10 365) Foreign currency translation differences on foreign operations (2) (10) (45) Income tax thereon 141 1 177 2 886 Items that may not be reclassified subsequently to profit or loss 729 (299) 166 Re-measurement of post-employment medical benefits 1 012 (415) 231 Income tax thereon (283) 116 (65) Total comprehensive income/(loss) for the period2 6 676 6 205 (6 410) 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. Reviewed condensed group interim financial statements 5 Condensed group statement of changes in equity for the six months ended 30 September 2017 Reviewed Reviewed Audited six months ended six months ended year ended 30 September 30 September 31 March 2017 2016 2017 Rm Rm Rm Balance at beginning of the period 175 942 182 352 182 352 Previously reported 175 942 180 563 182 352 Prior period restatements, net of tax – 1 789 – Total comprehensive income/(loss) for the period 6 676 6 205 (6 410) Balance at end of the period 182 618 188 557 175 942 Comprising Share capital 83 000 83 000 83 000 Cash flow hedge reserve 3 796 8 553 4 160 Available-for-sale reserve 7 3 6 Unrealised fair value reserve (11 116) (15 911) (11 873) Foreign currency translation reserve (8) 29 (6) Accumulated profit 106 939 112 883 100 655 Total equity 182 618 188 557 175 942 6 Eskom Holdings SOC Ltd Condensed group statement of cash flows for the six months ended 30 September 2017 Reviewed Reviewed Audited six months ended six months ended year ended 30 September 30 September 31 March 2017 2016 2017 Rm Rm Rm Cash flows from operating activities Profit before tax 8 884 13 365 1 159 Adjustment for non-cash items 21 477 21 323 47 932 Changes in working capital (6 724) (2 611) (1 730) Cash generated from operations 23 637 32 077 47 361 Net cash flows used in derivatives held for risk management (1 168) (382) (1 787) Interest received 442 592 1 342 Interest paid (33) (17) (22) Income taxes paid (517) (337) (1 053) Net cash from operating activities 22 361 31 933 45 841 Cash flows used in investing activities Proceeds from disposal of property, plant and equipment and intangible assets 172 86 398 Acquisitions of property, plant and equipment and intangible assets (25 598) (26 000) (57 259) Expenditure on future fuel supplies (1 235) (304) (639) Net cash flows (used in)/from investment in securities and financial trading assets (1 804) (22) 496 Increase in payments made in advance (4) (118) (99) Expenditure incurred on provisions (1 689) (4 296) (6 890) Net cash flows (used in)/from derivatives held for risk management (252) 780 389 Interest received 731 581 1 221 Other cash flows from investing activities 16 31 97 Net cash used in investing activities (29 663) (29 262) (62 286) Cash flows (used in)/from financing activities Debt securities and borrowings raised 12 553 21 910 50 994 Payments made in advance to secure balances raised (518) (626) (1 096) Debt securities and borrowings repaid (7 581) (4 248) (7 034) Net cash flows used in derivatives held for risk management (259) (2 502) (7 738) Decrease in finance lease payables (115) (21) (139) Decrease/(increase) in investment in securities and financial trading assets and liabilities 6 301 (2 755) (660) Interest received 751 1 473 2 365 Interest paid (15 673) (14 082) (28 788) Taxes paid (20) – (49) Net cash (used in)/from financing activities (4 561) (851) 7 855 Net (decrease)/increase in cash and cash equivalents (11 863) 1 820 (8 590) Cash and cash equivalents at beginning of the period 20 425 28 454 28 454 Foreign currency translation (2) (10) (45) Effect of movements in exchange rates on cash held 5 22 647 Non-current assets held-for-sale (58) 25 (41) Cash and cash equivalents at end of the period 8 507 30 311 20 425 Reviewed condensed group interim financial statements 7 Selected notes to the condensed group interim financial statements for the six months ended 30 September 2017 1. Structure and activities Eskom Holdings SOC Ltd (Eskom), a state-owned company and holding company of the group, is incorporated and domiciled in the Republic of South Africa. Eskom is a vertically integrated operation that generates, transmits and distributes electricity to industrial, mining, commercial, agricultural, redistributor (metropolitan and other municipalities), and residential customers and to international customers in southern Africa. Eskom also purchases electricity from IPPs and international suppliers in southern Africa. These represent the significant activities of the group. The business focus of the subsidiaries is primarily to support the electricity business. 2. Basis of preparation The reviewed condensed group interim financial statements of Eskom as at and for the six months ended 30 September 2017 comprise the company, its subsidiaries, joint ventures, associates and structured entities (together, the group). The reviewed condensed group interim financial statements do not include all of the information required for full financial statements and should be read in conjunction with the Eskom Holdings SOC Ltd 31 March 2017 group annual financial statements. The annual financial statements of the group as at and for the year ended 31 March 2017 are available for inspection at the company’s registered office and on the Eskom website at www.eskom.co.za. The condensed group interim financial statements are prepared in accordance with the recognition and measurement requirements of IFRS, the presentation and disclosure requirements of IAS 34 Interim Financial Reporting, and in the manner required by the Companies Act. The condensed group interim financial statements are prepared on the historical-cost basis except for the following items which are measured at fair value: • derivatives held for risk management • embedded derivatives • investment in securities • financial trading assets • financial trading liabilities Eskom’s liquidity for the period under review was adversely impacted by the below inflation tariff increase of 2.2% for the 2018 financial year. The audit qualification on the completeness of irregular expenditure reported at 31 March 2017 in terms of the Public Finance Management Act (PFMA) as well as the governance-related challenges experienced by the organisation had a negative impact on Eskom’s access to funding facilities. The board made an assessment of the ability of the group to continue as a going concern in the foreseeable future. The following aspects were considered in the assessment: • The board reviewed the performance of the group for the period ended 30 September 2017 • The board noted the cash flow forecast for the 15 months ending 31 December 2018 based on certain assumptions predating the appointment of the current board. The board will continue to review these cash flows as well as the underlying assumptions and principles in detail in preparation for year end • The tariff increase of 5.23% for the 2019 financial year will have a negative impact on the liquidity of the group • Eskom is pursuing finalisation of the outstanding regulatory clearing account submissions • The board will continue to review the group’s cost structures and capital programme to improve cash flows • Eskom is placing renewed focus on the recovery of its trade receivables • Eskom will not at this stage embark on any further capital expansion activities after the Kusile power station project • Eskom is continuously engaging the shareholder, the department of Public Enterprises, and National Treasury to ensure that the challenges that Eskom is being faced with are addressed satisfactorily within a reasonable timeframe • Government has indicated that Eskom is an important component of the economy and continues to support Eskom as a going concern • The governance related challenges that Eskom has been faced with recently are being addressed mainly through the appointment of a new board and acting group chief executive on 20 January 2018. These appointments will boost investor confidence and significantly improve access to the markets to raise the required funding • The appointment of a permanent group chief executive and group chief financial officer as well as the finalisation of investigations into suspended executives are key priorities for the board • The Ministers of Public Enterprises, Energy and Finance will work together under the leadership of the Deputy President of South Africa, to deal with other structural issues at Eskom, which include the funding model and other industry challenges identified by the inter-ministerial committee on state-owned enterprises reform • The board, with the support of National Treasury, is pursuing funding options to implement the group’s borrowing programme • The current economic climate and the sovereign’s credit ratings have been taken into account in assessing Eskom’s ability to raise funds • Eskom implemented a turn-around programme and is in the process of satisfactorily addressing the shortcomings identified to ensure completeness of reported irregular expenditure in terms of the PFMA that resulted in the qualified audit opinion at 31 March 2017 Based on the above, the board is satisfied that the group has access to adequate resources and facilities to be able to continue its operations for the foreseeable future. Accordingly the board has continued to adopt the going-concern basis in preparing the financial statements. 8 Eskom Holdings SOC Ltd Selected notes to the condensed group interim financial statements (continued) for the six months ended 30 September 2017 3. Significant accounting policies The accounting policies are consistent with those applied in the audited financial statements as at 31 March 2017 except for the revised statements and interpretations of IFRS which have become effective during the six months ended 30 September 2017. These changes had no or minimal impact on the interim financial statements. 4. Critical accounting estimates and judgements The significant estimates and judgements made by management in applying the accounting policies and the key sources of estimation uncertainty were substantially the same as those applied to the financial statements as at and for the year ended 31 March 2017. 5. Segment information Gener- Trans- Distri- Energy Group Group All other Reallocation Group ation mission bution purchases/ customer capital segments and inter- sales services segment transactions Rm Rm Rm Rm Rm Rm Rm Rm Rm 30 September 2017 (reviewed) External revenue – – 685 4 825 89 995 – 567 (567) 95 505 Inter-segment revenue/recoveries 64 676 4 839 12 487 5 718 (87 538) (62) 6 473 (6 593) – Total revenue 64 676 4 839 13 172 10 543 2 457 (62) 7 040 (7 160) 95 505 Profit/(loss) before tax 3 123 495 1 943 (613) 1 910 105 1 951 (30) 8 884 Income tax – – – – – – (2 580) 8 (2 572) Profit/(loss) for the period 3 123 495 1 943 (613) 1 910 105 (629) (22) 6 312 Segment assets 302 801 52 292 82 395 10 664 22 195 200 331 76 037 (23 141) 723 574 Segment liabilities 59 445 1 517 30 522 13 706 13 588 13 681 430 439 (21 942) 540 956 30 September 2016 (reviewed) External revenue – – 921 5 847 90 693 – 662 (662) 97 461 Inter-segment revenue/recoveries 62 715 5 918 13 849 5 097 (87 402) (65) 5 890 (6 002) – Total revenue 62 715 5 918 14 770 10 944 3 291 (65) 6 552 (6 664) 97 461 Profit/(loss) before tax 7 592 2 058 4 122 (221) 1 230 (2 127) 1 446 (735) 13 365 Income tax – – – – – – (4 021) 199 (3 822) Profit/(loss) for the period 7 592 2 058 4 122 (221) 1 230 (2 127) (2 575) (536) 9 543 Segment assets 209 673 47 520 77 871 11 327 18 377 239 902 109 887 (22 732) 691 825 Segment liabilities 48 550 1 592 29 827 13 262 16 557 14 506 401 004 (22 030) 503 268 31 March 2017 (audited) External revenue – 8 1 912 10 729 164 487 – 1 212 (1 212) 177 136 Inter-segment revenue/recoveries 116 030 7 600 22 262 12 859 (158 365) (173) 12 412 (12 625) – Total revenue 116 030 7 608 24 174 23 588 6 122 (173) 13 624 (13 837) 177 136 Profit/(loss) before tax (2 207) 115 1 939 (1 505) 3 119 (2 911) 4 010 (1 401) 1 159 Income tax – – – – – – (655) 384 (271) Profit/(loss) for the period (2 207) 115 1 939 (1 505) 3 119 (2 911) 3 355 (1 017) 888 Segment assets 219 654 51 235 80 376 10 835 16 974 260 776 91 193 (21 034) 710 009 Segment liabilities 60 775 1 960 30 147 13 470 13 840 14 663 419 065 (19 853) 534 067 Reviewed condensed group interim financial statements 9 Selected notes to the condensed group interim financial statements (continued) for the six months ended 30 September 2017 6. Issuances, repurchases and repayments of debt securities and borrowings and share capital 6.1 Debt securities and borrowings The nature of the group’s issuances, repurchases and repayments of debt securities and borrowings are consistent with those reported previously. The debt raised and repaid by the group is disclosed in the statement of cash flows. 6.2 Share capital There was no change in share capital during the six months ended 30 September 2017 nor in the comparative periods presented. 7. Dividend paid No dividend was paid to the shareholder during the six months ended 30 September 2017 nor in the comparative periods presented. 8. Significant events and transactions The following significant movements occurred in the six months ended 30 September 2017: 8.1 Property, plant and equipment Property, plant and equipment increased by R21.4 billion as a result of the continuing capital expansion programme. Finance cost capitalised reduced to R8.7 billion for the six months ended 30 September 2017 compared to R9.5 billion for the comparative six months ended 30 September 2016 because of generating and transmitting plant that has been transferred into commercial operation and therefore the related finance cost no longer qualifies for capitalisation. 8.2 Derivatives held for risk management There was an increase in net derivative assets held for risk management of R6.0 billion since 31 March 2017 mainly because of the significant devaluation of the rand, in particular against the euro. 8.3 Trade and other receivables Trade and other receivables increased by R5.3 billion mainly as a result of municipalities’ payment terms that were extended from a maximum of 15 to 30 days. In addition, certain municipalities continue to not pay their outstanding accounts within the agreed payment terms. 8.4 Cash and cash equivalents Cash and cash equivalents decreased by R11.9 billion as a result of reduced available debt funding as well as the impact of the below inflation tariff increase of 2.2% for the 2018 financial year. This also impacted the investment in securities and financial trading assets that reduced by R4.6 billion. 8.5 Re-measurement of post-employment medical benefits The actuarial gain of R1.0 billion on the post-employment medical benefits provision that was recognised in the statement of comprehensive income resulted from increases in the estimated long-term discount and medical aid inflation rates which led to a net discount rate of 1.7% compared to 1.3% used at 31 March 2017. 8.6 Contingent liabilities Eskom was notified by its reinsurers of their intention to pursue legal proceedings to recover R1.7 billion relating to a settlement for the replacement of damaged plant where they are of the view that Eskom has failed to fulfil its undertakings in terms of the settlement agreement between Eskom and the reinsurers. The legal process regarding this matter is ongoing. 9. Seasonality of interim results The sale of electricity is subject to seasonal fluctuations where revenue is normally higher during the first six months of the financial year (winter months) as compared to the summer months in terms of volume of sales, tariff energy charges and peak demand. 10 Eskom Holdings SOC Ltd Selected notes to the condensed group interim financial statements (continued) for the six months ended 30 September 2017 Reviewed Reviewed Audited six months ended six months ended year ended 30 September 30 September 31 March 2017 2016 2017 Rm Rm Rm 10. Revenue Electricity 94 752 96 474 175 094 Other 753 987 2 042 95 505 97 461 177 136 There was a reduction in electricity demand during the six month period mainly as a result of a contraction in the local economy and structural changes in electricity demand including customers turning to own supply. Electricity revenue of R2 643 million (30 September 2016: R2 395 million; 31 March 2017: R3 196 million) was not recognised as it was assessed that there is a high probability that the related economic benefits will not materialise. Eskom continues to actively pursue recovery of these amounts. 11. Primary energy Own generation costs 27 341 26 018 52 042 Environmental levy 4 061 4 167 8 086 International electricity purchases 1 397 1 396 2 681 Independent power producers 8 392 8 697 19 757 Other 66 102 194 41 257 40 380 82 760 12. Employee benefit expense Gross employee benefit expense 16 710 17 461 36 833 Capitalised to property, plant and equipment (1 557) (1 703) (3 655) 15 153 15 758 33 178 13. Finance cost Gross finance cost 20 597 18 783 37 822 Capitalised to property, plant and equipment (8 706) (9 482) (18 233) 11 891 9 301 19 589 14. Income tax Income tax for the interim period is recognised based on management’s best estimate of the weighted average annual income tax rate expected for the full financial year which is applied to the pre-tax income of the interim period. Reviewed condensed group interim financial statements 11 Selected notes to the condensed group interim financial statements (continued) for the six months ended 30 September 2017 15. Accounting classification and fair value 15.1 Accounting classification Held- Loans and Available- Liabilities at Other assets Total for-trading receivables for-sale amortised and liabilities cost Rm Rm Rm Rm Rm Rm 30 September 2017 (reviewed) Financial assets Investment in securities and financial trading assets 3 158 – 7 206 – – 10 364 Government bonds 36 – – – – 36 Listed shares 1 296 – – – – 1 296 Negotiable certificates of deposit – – 7 206 – – 7 206 Repurchase agreements 1 826 – – – – 1 826 Derivatives held for risk management 1 595 – – – 18 462 20 057 Commodity forwards 1 – – – – 1 Credit default swaps 9 – – – – 9 Cross-currency swaps 23 – – – 18 207 18 230 Foreign exchange contracts 1 562 – – – 255 1 817 Trade, finance lease, loan and other receivables – 24 777 – – 448 25 225 Loans receivable – 87 – – – 87 Finance lease receivables – – – – 448 448 Trade and other receivables1 – 24 690 – – – 24 690 Cash and cash equivalents – bank balances – 8 507 – – – 8 507 4 753 33 284 7 206 – 18 910 64 153 Financial liabilities Debt securities and borrowings – – – 367 027 – 367 027 Commercial paper – – – 3 105 – 3 105 Development financing institutions – – – 113 536 – 113 536 Eskom bonds – – – 141 169 – 141 169 Eurorand zero coupon bonds – – – 5 371 – 5 371 Export credit facilities – – – 36 362 – 36 362 Foreign bonds – – – 54 182 – 54 182 Other loans – – – 13 302 – 13 302 Embedded derivatives – – – – 4 299 4 299 Derivatives held for risk management 1 048 – – – 5 713 6 761 Commodity forwards 8 – – – – 8 Credit default swaps 448 – – – – 448 Cross-currency swaps 513 – – – 5 593 6 106 Foreign exchange contracts 79 – – – 120 199 Trade, finance lease and other payables – – – 31 642 9 950 41 592 Finance lease payables – – – – 9 950 9 950 Trade and other payables2 – – – 31 642 – 31 642 Financial trading liabilities 1 468 – – – – 1 468 Repurchase agreements 385 – – – – 385 Short-sold government bonds 1 083 – – – – 1 083 2 516 – – 398 669 19 962 421 147 1. Amount disclosed in statement of financial position include VAT receivable. 2. Amount disclosed in statement of financial position include VAT payable. 12 Eskom Holdings SOC Ltd Selected notes to the condensed group interim financial statements (continued) for the six months ended 30 September 2017 15. Accounting classification and fair value (continued) 15.1 Accounting classification (continued) Held- Loans and Available- Liabilities Other Total for-trading receivables for-sale at amortised assets and cost liabilities Rm Rm Rm Rm Rm Rm 31 March 2017 (audited) Financial assets Investment in securities and financial trading assets 2 919 – 12 078 – – 14 997 Government bonds 113 – 3 523 – – 3 636 Listed shares 1 189 – – – – 1 189 Negotiable certificates of deposit – – 8 555 – – 8 555 Repurchase agreements 1 617 – – – – 1 617 Derivatives held for risk management 832 – – – 17 036 17 868 Commodity forwards 1 – – – – 1 Credit default swaps 9 – – – – 9 Cross-currency swaps 61 – – – 17 006 17 067 Foreign exchange contracts 761 – – – 30 791 Trade, finance lease, loan and other receivables – 19 460 – – 474 19 934 Loans receivable – 93 – – – 93 Finance lease receivables – – – – 474 474 Trade and other receivables1 – 19 367 – – – 19 367 Cash and cash equivalents – 20 425 – – – 20 425 Bank balances – 14 736 – – – 14 736 Fixed deposits – 5 677 – – – 5 677 Unsettled deals – 12 – – – 12 3 751 39 885 12 078 – 17 510 73 224 Financial liabilities Debt securities and borrowings – – – 355 300 – 355 300 Commercial paper – – – 5 627 – 5 627 Development financing institutions – – – 107 800 – 107 800 Eskom bonds – – – 139 255 – 139 255 Eurorand zero coupon bonds – – – 5 049 – 5 049 Export credit facilities – – – 33 228 – 33 228 Foreign bonds – – – 53 524 – 53 524 Promissory notes – – – 54 – 54 Other loans – – – 10 763 – 10 763 Embedded derivatives – – – – 5 414 5 414 Derivatives held for risk management 2 647 – – – 7 946 10 593 Commodity forwards 18 – – – – 18 Credit default swaps 560 – – – – 560 Cross-currency swaps 572 – – – 6 440 7 012 Foreign exchange contracts 1 497 – – – 1 506 3 003 Trade, finance lease and other payables – – – 32 014 10 065 42 079 Finance lease payables – – – – 10 065 10 065 Trade and other payables 2 – – – 32 014 – 32 014 Financial trading liabilities 1 620 – – – – 1 620 Repurchase agreements 1 294 – – – – 1 294 Short-sold government bonds 326 – – – – 326 4 267 – – 387 314 23 425 415 006 1. Amount disclosed in statement of financial position include VAT receivable. 2. Amount disclosed in statement of financial position include VAT payable. Reviewed condensed group interim financial statements 13 Selected notes to the condensed group interim financial statements (continued) for the six months ended 30 September 2017 15. Accounting classification and fair value (continued) 15.1 Accounting classification (continued) Held- Loans and Available- Liabilities Other Total for-trading receivables for-sale at amortised assets and cost liabilities Rm Rm Rm Rm Rm Rm 30 September 2016 (reviewed) Financial assets Investment in securities and financial trading assets 3 465 – 13 455 – – 16 920 Government bonds 356 – 3 530 – – 3 886 Listed shares 1 209 – – – – 1 209 Negotiable certificates of deposit – – 9 925 – – 9 925 Repurchase agreements 1 900 – – – – 1 900 Derivatives held for risk management 195 – – – 22 032 22 227 Commodity forwards 11 – – – – 11 Credit default swaps 9 – – – – 9 Cross-currency swaps 69 – – – 22 014 22 083 Foreign exchange contracts 106 – – – 18 124 Trade, finance lease, loan and other receivables – 20 904 – – 462 21 366 Loans receivable – 94 – – – 94 Finance lease receivables – – – – 462 462 Trade and other receivables1 – 20 810 – – – 20 810 Cash and cash equivalents – 30 311 – – – 30 311 Bank balances – 20 195 – – – 20 195 Fixed deposits – 10 339 – – – 10 339 Unsettled deals – (223) – – – (223) 3 660 51 215 13 455 – 22 494 90 824 Financial liabilities Debt securities and borrowings – – – 332 920 – 332 920 Commercial paper – – – 3 979 – 3 979 Development financing institutions – – – 83 969 – 83 969 Eskom bonds – – – 138 652 – 138 652 Eurorand zero coupon bonds – – – 4 747 – 4 747 Export credit facilities – – – 37 067 – 37 067 Foreign bonds – – – 55 188 – 55 188 Promissory notes – – – 50 – 50 Other loans – – – 9 268 – 9 268 Embedded derivatives – – – – 6 894 6 894 Derivatives held for risk management 5 173 – – – 4 031 9 204 Commodity forwards 1 – – – – 1 Credit default swaps 1 180 – – – – 1 180 Cross-currency swaps 943 – – – 3 067 4 010 Foreign exchange contracts 3 049 – – – 964 4 013 Trade, finance lease and other payables – – – 30 513 10 183 40 696 Finance lease payables – – – – 10 183 10 183 Trade and other payables2 – – – 30 513 – 30 513 Financial trading liabilities 1 085 – – – – 1 085 Repurchase agreements 1 010 – – – – 1 010 Short-sold government bonds 75 – – – – 75 6 258 – – 363 433 21 108 390 799 1. Amount disclosed in statement of financial position include VAT receivable. 2. Amount disclosed in statement of financial position include VAT payable. 14 Eskom Holdings SOC Ltd Selected notes to the condensed group interim financial statements (continued) for the six months ended 30 September 2017 15. Accounting classification and fair value (continued) 15.2 Fair value The relevant disclosure for assets and liabilities that are measured at fair value in the statement of financial position and for fair value measurement using significant unobservable inputs (level 3) are provided below. Valuation processes The group has established a control framework with respect to the measurement of fair values. It includes a valuation team that ultimately reports to the chief financial officer and has overall responsibility for all significant fair value measurements. The valuation team regularly reviews significant unobservable inputs and valuation adjustments. If third party information, such as broker quotes or pricing services, is used to measure fair value, then the valuation team assesses and documents the evidence obtained from the third parties to support their conclusion that such valuations meet the requirements of IFRS, including the level to which the fair value hierarchy that the resulting fair value estimate should be classified. Principal markets The group is involved in various principal markets because of the unique funding activities undertaken. The fair value is determined by each participant in the different principal markets. The principal markets are: • capital and money markets • development financing institutions • export credit agencies Fair value hierarchy There was no change in the valuation technique applied. The hierarchy levels are defined as follows: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (ie as prices) or indirectly (ie derived from prices). Level 3: Inputs for the financial asset or liability that are not based on observable market data (unobservable inputs). Eskom’s policy for determining when transfers between levels in the hierarchy have occurred includes monitoring of the following factors: • changes in market and trading activity (eg significant increases/decreases in activity) • changes in inputs used in valuation techniques (eg inputs becoming/ceasing to be observable in the market) The group recognises transfers between levels of the fair value hierarchy at the end of the reporting period during which the transfers have occurred. There were no transfers between level 1, 2 or 3 of the fair value hierarchy during the six months ended 30 September 2017 nor in the comparative periods presented. The valuation techniques used are as follows: Level 1: Quoted prices (unadjusted) in active markets The fair values of financial instruments traded in active markets are based on quoted market prices at the reporting date. A market is regarded as active when it is a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. The quoted market price used for financial assets held by the group is the current bid price. For financial liabilities included in level 1, the current ask price is used. Instruments included in level 1 comprise listed investments classified as trading securities or available-for-sale. Level 2: Inputs other than quoted prices included within level 1 that are observable Financial instrument Fair value determination Derivatives Valuation determined with reference to broker quotes as well as use of discounted cash flow and option pricing models. Broker quotes are tested for reasonableness by discounting expected future cash flows using a market interest rate for a similar instrument at the measurement date Valuations of cross-currency swaps include the credit risk of Eskom (known as debit value adjustment) and counterparties (known as credit value adjustment) where appropriate. A stochastic modelling approach is followed where the expected future exposure to credit risk for Eskom and its counterparties (considering default probabilities and recovery rates derived from market data) is modelled Non-derivatives A discounted cash flow technique is used, which uses expected cash flows and a market- related discount rate Level 3: Inputs not based on observable market data (unobservable inputs) Level 3 items are fair valued using unobservable inputs. Reviewed condensed group interim financial statements 15 Selected notes to the condensed group interim financial statements (continued) for the six months ended 30 September 2017 15. Accounting classification and fair value (continued) 15.2 Fair value (continued) The fair value hierarchy of financial instruments is as follows: Level 1 Level 2 Level 3 Total Rm Rm Rm Rm 30 September 2017 (reviewed) Financial assets Investment in securities and financial trading assets 1 332 9 032 – 10 364 Government bonds 36 – – 36 Listed shares 1 296 – – 1 296 Negotiable certificates of deposit – 7 206 – 7 206 Repurchase agreements – 1 826 – 1 826 Derivatives held for risk management – 20 057 – 20 057 Commodity forwards – 1 – 1 Credit default swaps – 9 – 9 Cross-currency swaps – 18 230 – 18 230 Foreign exchange contracts – 1 817 – 1 817 Financial liabilities Embedded derivatives – – 4 299 4 299 Derivatives held for risk management – 6 761 – 6 761 Commodity forwards – 8 – 8 Credit default swaps – 448 – 448 Cross-currency swaps – 6 106 – 6 106 Foreign exchange contracts – 199 – 199 Financial trading liabilities 1 083 385 – 1 468 Repurchase agreements – 385 – 385 Short-sold government bonds 1 083 – – 1 083 31 March 2017 (audited) Financial assets Investment in securities and financial trading assets 4 825 10 172 – 14 997 Government bonds 3 636 – – 3 636 Listed shares 1 189 – – 1 189 Negotiable certificates of deposit – 8 555 – 8 555 Repurchase agreements – 1 617 – 1 617 Derivatives held for risk management – 17 868 – 17 868 Commodity forwards – 1 – 1 Credit default swaps – 9 – 9 Cross-currency swaps – 17 067 – 17 067 Foreign exchange contracts – 791 – 791 Financial liabilities Embedded derivatives – – 5 414 5 414 Derivatives held for risk management – 10 593 – 10 593 Commodity forwards – 18 – 18 Credit default swaps – 560 – 560 Cross-currency swaps – 7 012 – 7 012 Foreign exchange contracts – 3 003 – 3 003 Financial trading liabilities 326 1 294 – 1 620 Repurchase agreements – 1 294 – 1 294 Short-sold government bonds 326 – – 326 16 Eskom Holdings SOC Ltd Selected notes to the condensed group interim financial statements (continued) for the six months ended 30 September 2017 15. Accounting classification and fair value (continued) 15.2 Fair value (continued) Level 1 Level 2 Level 3 Total Rm Rm Rm Rm 30 September 2016 (reviewed) Financial assets Investment in securities and financial trading assets 5 095 11 825 – 16 920 Government bonds 3 886 – – 3 886 Listed shares 1 209 – – 1 209 Negotiable certificates of deposit – 9 925 – 9 925 Repurchase agreements – 1 900 – 1 900 Derivatives held for risk management – 22 227 – 22 227 Commodity forwards – 11 – 11 Credit default swaps – 9 – 9 Cross-currency swaps – 22 083 – 22 083 Foreign exchange contracts – 124 – 124 Financial liabilities Embedded derivatives – – 6 894 6 894 Derivatives held for risk management – 9 204 – 9 204 Commodity forwards – 1 – 1 Credit default swaps – 1 180 – 1 180 Cross-currency swaps – 4 010 – 4 010 Foreign exchange contracts – 4 013 – 4 013 Financial trading liabilities 75 1 010 – 1 085 Repurchase agreements – 1 010 – 1 010 Short-sold government bonds 75 – – 75 Fair value hierarchy – level 3: Embedded derivatives Eskom has entered into a number of agreements to supply electricity to electricity-intensive businesses where the revenue from these contracts is linked to commodity prices and foreign currency rates or foreign producer price indices that give rise to embedded derivatives. Valuation 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: • swaps: electricity tariff is swapped for a commodity in a foreign currency • options: electricity tariff or other revenue is based on an embedded derivative floor or cap on foreign consumer or producer price indices or interest rates. 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, model risk and other economic factors. 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 (US PPI). Valuation assumptions The forward electricity price used to value the embedded derivatives was based on an annual increase of 8% from 2019 until maturity. Another key estimate in the valuation of embedded derivatives includes the forecast US PPI which is based on an internal model which simulates US PPI using other observable market prices such as the South African consumer price index and Rand/ USD forward exchange rates. Forecast sales volumes are based on the most likely future sales volumes based on past trends and taking into account future production plans in consultation with industry specific experts and key customer executives. Reviewed condensed group interim financial statements 17 Selected notes to the condensed group interim financial statements (continued) for the six months ended 30 September 2017 15. Accounting classification and fair value (continued) 15.2 Fair value (continued) The following valuation assumptions were used for the valuation of embedded derivatives and are regarded as the best estimates by the board: Period ended 30 September 2017 (reviewed) Input Unit 2017 2018 2019 2020 2021 2022 Aluminium USD per ton 2 107 2 116 2 159 2 195 2 222 2 249 Volatility Year-on-year (ratio) 0.15 0.15 0.15 0.15 0.15 0.15 Rand interest rate Continuous actual/365 days (%) 6.77 7.27 7.12 6.81 6.95 7.11 Dollar interest rate Annual actual/365 days (%) 1.20 1.58 1.80 1.79 1.89 1.98 US PPI Year-on-year (%) 3.98 1.96 1.90 2.07 1.45 2.21 Rand/USD Rand per USD 13.52 13.91 14.65 15.33 16.14 17.03 Period ended 31 March 2017 (audited) Input Unit 2017 2018 2019 2020 2021 2022 Aluminium USD per ton 1 962 1 978 2 003 2 028 2 055 2 088 Volatility Year-on-year (ratio) 0.17 0.17 0.17 0.17 0.17 0.17 Rand interest rate Continuous actual/365 days (%) 7.20 8.06 7.25 7.35 7.55 7.67 Dollar interest rate Annual actual/365 days (%) 1.09 1.82 1.62 1.81 1.96 2.08 US PPI Year-on-year (%) 3.61 1.87 1.70 2.36 1.33 1.76 Rand/USD Rand per USD 13.37 14.23 14.96 15.78 16.72 17.69 Period ended 30 September 2016 (reviewed) Input Unit 2016 2017 2018 2019 2020 2021 Aluminium USD per ton 1 661 1 685 1 732 1 785 1 844 1 905 Volatility Year-on-year (ratio) 0.20 0.20 0.20 0.20 0.20 0.20 Rand interest rate Continuous actual/365 days (%) 7.21 7.29 7.81 7.72 7.35 7.44 Dollar interest rate Annual actual/365 days (%) 0.48 0.86 1.26 1.29 1.02 1.08 US PPI Year-on-year (%) (0.48) 1.75 1.52 2.10 2.06 1.49 Rand/USD Rand per USD 13.79 14.25 15.19 16.15 17.23 18.41 Movement in the fair value measurement Embedded derivatives Rm Balance at 31 March 2016 7 025 Net fair value gain (131) Balance at 30 September 2016 6 894 Net fair value gain (1 480) Balance at 31 March 2017 5 414 Net fair value gain (1 115) Balance at 30 September 2017 4 299 18 Eskom Holdings SOC Ltd Selected notes to the condensed group interim financial statements (continued) for the six months ended 30 September 2017 15. Accounting classification and fair value (continued) 15.2 Fair value (continued) Fair value hierarchy – level 3: Embedded derivatives (continued) Sensitivity analysis The approximate change in the value of embedded derivatives if one of the inputs is changed is disclosed below. The analysis assumes that all other variables remain constant and the possible impact on profit or loss is: Reviewed Audited Reviewed 30 September 2017 31 March 2017 30 September 2016 Increase Decrease Increase Decrease Increase Decrease Unit change Rm Rm Rm Rm Rm Rm Aluminium price 1% 69 (69) 74 (74) 78 (78) Rand interest rate 100 basis points 294 (328) 346 (376) 454 (489) Dollar interest rate 100 basis points (222) 214 (244) 245 (303) 309 Electricity tariffs 1% (157) 156 (150) 149 (277) 273 US PPI 1% 114 (128) 109 (115) 153 (156) Rand/USD 1% 94 (86) 96 (91) 104 (98) 15.3 Day-one gain/loss The group recognises a day-one gain/loss on initial recognition of cross-currency and credit default swaps held as hedging instruments where applicable. Cross- Credit Total currency default swaps swaps Rm Rm Rm (Loss)/gain at 31 March 2016 (41) 24 (17) Day-one loss recognised (611) – (611) Amortised to profit or loss 36 (24) 12 Loss at 30 September 2016 (616) – (616) Day-one loss recognised (151) – (151) Amortised to profit or loss 40 – 40 Loss at 31 March 2017 (727) – (727) Day-one loss recognised (95) – (95) Amortised to profit or loss 56 – 56 Loss at 30 September 2017 (766) – (766) 16. Material events subsequent to 30 September 2017 Board appointments A new board was appointed for Eskom on 8 December 2017 comprising Mr Z Khoza (chairperson), Dr P Naidoo, Mr G Leonardi, Dr P Molokwane, Mr S Dingaan, Dr B Makhubela, Mr S Gounden, Prof M Makgoba and Prof T Mongalo. Subsequently a new board was announced for Eskom on 20 January 2018 replacing the board appointed on 8 December 2017. The new board comprised of Mr J Mabuza (chairperson), Mr S Dabengwa, Ms S Mabaso-Koyana, Mr M Lamberti, Prof T Mongalo, Prof M Makgoba, Ms B Mavuso, Ms N Magubane, Dr R Crompton, Mr G Sebulela, Dr P Molokwane, Dr B Makhubela and Ms J Molisane. Interim group chief executive Mr S Maritz was appointed as interim group chief executive on 6 October 2017 replacing Mr JA Dladla whom resumed his former role as chief executive officer of Eskom Rotek Industries SOC Ltd. Mr P Hadebe was appointed on 20 January 2018 as the acting group chief executive replacing Mr S Maritz. Government has directed the board to appoint a permanent group chief executive and group chief financial officer within the next three months. Group chief financial officer The board, through the Chairman, accepted the resignation of Mr A Singh as the group chief financial officer effective 22 January 2018. Mr C Cassim continues as the acting group chief financial officer. Eskom’s credit rating Moody’s downgraded Eskom’s long-term credit rating on 26 January 2018 from Ba3 to B1, mainly because of Eskom’s deteriorating liquidity and the ability of government to provide direct equity support. They see the recent interventions, including the appointment of the new board, as favourable in bolstering the credit quality of Eskom. Reviewed condensed group interim financial statements 19 Selected notes to the condensed group interim financial statements (continued) for the six months ended 30 September 2017 17. Restatement of comparatives Eskom restated the financial statements at 30 September 2016 in line with the restatement that was done at 31 March 2017 because it did not account correctly for certain distribution assets that were developed by third parties and transferred to Eskom in prior periods. This error was corrected as a prior period restatement by accounting for the assets that were transferred to Eskom in terms of the requirements of IFRIC 18 Transfers of assets from customers. The distribution assets were recognised in terms of IAS 16 Property, plant and equipment as property, plant and equipment at fair value and the related revenue was recognised in terms of IAS 18 Revenue. The impact of the restatement for the period ended 30 September 2016 was as follows: Previously reported Adjustments Restated Rm Rm Rm Statement of financial position at 30 September 2016 Assets Non-current assets Property, plant and equipment and intangible assets 554 555 2 745 557 300 Equity Capital and reserves 186 581 1 976 188 557 Liabilities Non-current liabilities Deferred tax 23 138 769 23 907 Income statement for the period ended 30 September 2016 Revenue 97 131 330 97 461 Profit before depreciation and amortisation expense and net fair value (loss)/gain (EBITDA) 31 495 330 31 825 Depreciation and amortisation expense (9 998) (70) (10 068) Profit before tax 13 105 260 13 365 Income tax (3 749) (73) (3 822) Profit for the period 9 356 187 9 543 18. General Matters relating to the 31 March 2017 annual financial statements Eskom received an audit qualification on its annual financial statements at 31 March 2017 as the auditors could not express an opinion on the completeness of the irregular expenditure reported in the notes to the annual financial statements in terms of the PFMA. A recovery programme to address the shortcomings in the procurement environment has been implemented and is progressing well. A reportable irregularity was raised by the auditors in the 31 March 2017 annual financial statements relating to the early retirement agreement between Eskom and Mr B Molefe. The matter was considered by the High court and the court ruled on 25 January 2018 against Mr Molefe. The pension agreement was set aside and the court ordered that Mr Molefe pay back all pension payments made to him. The hearing relating to the allegations that Mr M Koko had a potential conflict of interest with regards to his stepdaughter’s holding in Impulse International (Pty) Ltd concluded that Mr Koko was not guilty and he returned to work in January 2018. Mr Koko obtained an interim order from the Labour Court on 26 January 2018 restraining Eskom from dismissing him. Mr Koko’s case is scheduled to be heard by the Labour Court on 6 February 2018. Matters relating to period ending 30 September 2017 The independent auditors of Eskom raised reportable irregularities (RI) in terms of section 45 of the Auditing Profession Act in relation to the following matters: Parliamentary inquiry into Eskom There is currently a parliamentary inquiry into perceived maladministration, governance and procurement issues at Eskom. Certain representations made by previous and current directors and officials indicated that there could have been a breach of fiduciary duties in terms of the requirements of the Companies Act. The board cannot comment on the correctness of the statements made by individuals while the inquiry is still ongoing and will review the findings and take appropriate action if necessary once the inquiry has been concluded. Contracts with McKinsey and Company (McKinsey) and Trillian Management Consultancy (Trillian) Eskom procured the services of McKinsey through its sole source supplier process and as a result a competitive bidding process was not followed. In addition, the use of Trillian as a sub-contractor to McKinsey is being investigated. The related contract with McKinsey has been cancelled and the board is pursuing recovery from McKinsey in order to minimise the loss to Eskom. Senior executives were suspended to allow for the investigations to be completed. Some executives have subsequently resigned or have been dismissed. 20 Eskom Holdings SOC Ltd Selected notes to the condensed group interim financial statements (continued) for the six months ended 30 September 2017 18. General (continued) Matters relating to period ending 30 September 2017 (continued) Guarantee issued to Tegeta Exploration & Resources (Pty) Ltd (Tegeta) The group chief financial officer approved a three-month guarantee on behalf of Eskom to Tegeta which is in contravention of PFMA. There was no financial loss to Eskom as the guarantee was not called on. The board accepted the resignation of Mr A Singh effective from 22 January 2018. External services provided to the company secretary Certain services provided to the company secretary by an external servicer are being investigated. The company secretary has been suspended and the disciplinary process is underway. Eskom is in the process of reviewing its business relationship with the supplier. Eskom did not suffer any financial loss. Removal of the group chief financial officer as director There are certain alleged discrepancies relating to the removal of the group chief financial officer as a director which are being investigated. Administrative matters Eskom did not timeously update directors’ records with the Companies and Intellectual Property Commission. In addition, certain minutes of the board and its sub-committees were not timeously approved. These matters have been addressed appropriately and preventative processes are being implemented to prevent any reoccurrence. 19. New standards and interpretations Eskom is in the process of implementing the statements that will be applicable in the 2019 financial year as follows: Topic Summary of requirements Impact IFRS 9 Financial IFRS 9 replaces IAS 39 Financial instruments: The group is preparing for the transition to IFRS 9 instruments recognition and measurement. It retains but simplifies with effect from 1 April 2018 and has developed a (1 January 2018) the mixed measurement model and establishes detailed plan to assess the impact of IFRS 9 on initial three primary measurement categories for financial adoption as well as thereafter. assets: amortised cost, fair value through other comprehensive income and fair value through profit A detailed review of a representative sample of or loss. The basis of classification depends on the contracts is being analysed to determine the impact, entity’s business model and the contractual cash if any, on the classification of financial assets. flow characteristics of the financial asset. Investments Derivatives held for risk management are currently in equity instruments are required to be measured classified as fair value through profit and loss and this at fair value through profit or loss with the classification is not expected to change in terms of irrevocable option at inception to present changes IFRS 9. in fair value in other comprehensive income The adoption of IFRS 9 is not expected to change the IFRS 9 also replaces the rule-based hedge classification of financial liabilities significantly. The accounting requirements in IAS 39. It requires an impact on the presentation of fair value changes for economic relationship between the hedged item financial liabilities designated at fair value through and hedging instrument and for the “hedged ratio” profit and loss will be considered and amendments to be the same as the one management actually will be made if deemed necessary. uses for risk management purposes An expected credit loss data readiness assessment IFRS 9 includes an expected credit loss model for and gap analysis are being performed to assess the calculating impairment on financial assets. This implications on trade and finance lease receivables in replaces the incurred loss model used under IAS 39 order to define the modelling approach and methodology. An assessment of the potential impact of accounting for hedges in terms of IFRS 9 will be undertaken to determine if the hedge accounting requirements of IAS 39 will continue to be applied. Hedges will be qualitatively and quantitatively assessed to ensure that the hedge accounting relationships are aligned with the group’s risk management objectives and strategy if it is decided to adopt the general hedging model in terms of IFRS 9. The hedge documentation (hedge effectiveness testing, determination of hedge ratio and an analysis of the sources of ineffectiveness) will also be updated in line with the changes. The group will assess the cost of hedging relating to its various hedging strategies to determine if any changes are required as a result of adopting IFRS 9. It will also be assessed whether any additional risk management strategies will qualify for hedge accounting. Financial statement disclosures will be updated to ensure compliance with IFRS 7 and IFRS 9 requirements including the implications of adoption of the various transition options. Reviewed condensed group interim financial statements 21 Selected notes to the condensed group interim financial statements (continued) for the six months ended 30 September 2017 19. New standards and interpretations (continued) Topic Summary of requirements Impact IFRS 15 Revenue IFRS 15 replaces the two main revenue recognition The group progressed with the quantification of the from contracts standards, IAS 18 Revenue and IAS 11 Construction impact of adopting IFRS 15 in the 2019 financial year. with customers contracts and their related interpretations It identified its key performance obligations to be the (1 January 2018) sale of electricity, the upfront capital contributions, IFRS 15 provides a single control-based revenue the transportation of third-party energy over the recognition model and clarifies the principles for Eskom network and services relating to recoverable recognising revenue from contracts with work. customers. The core principle is that an entity should recognise revenue to depict the transfer of Electricity revenue will be recognised over time as a promised goods or services to customers at an series of performance events and no material change amount that reflects the consideration which the from the current revenue recognition pattern is entity expects to be entitled to in exchange for expected to arise from the adoption of IFRS 15. those goods or services. Revenue is recognised when a customer obtains control of a good or Upfront capital contributions received from customers service. A customer obtains control when it has prior to 30 June 2009 are credited to profit or loss the ability to direct the use of and obtain the over the expected useful lives of the related assets. benefits from the good or service Contributions received after 30 June 2009 are recognised in profit or loss when the customer is IFRS 15 also includes a cohesive set of disclosure connected to the electricity network. IFRS 15 could requirements that will result in an entity providing change this accounting treatment. The possible impact users of financial statements with comprehensive is being assessed. information about the nature, amount, timing and uncertainty of revenue and cash flows arising from The revenue earned from transportation of third- the entity’s contracts with customers party energy over the Eskom network will be recognised at a point in time or as a series of IFRS 15 will be applied retrospectively subject to performance events depending on the circumstances the application of the transitional provisions and no material change is expected from the adoption (includes modified retrospective approach) of IFRS 15. Eskom is in the process of assessing the possible impact of the adoption of IFRS 15 relating to recoverable work. An important factor currently under consideration, in conjunction with the IFRS 9 implementation project, is the impact of the collectability recognition criterion within IFRS 15. Eskom is assessing the impact of the more extensive disclosure requirements of IFRS 15 on its financial statements. 22 Eskom Holdings SOC Ltd Contact details Telephone numbers Websites and email addresses Eskom head office +27 11 800 8111 Eskom website www.eskom.co.za Contact@eskom.co.za Eskom media desk +27 11 800 3304 Eskom media desk MediaDesk@eskom.co.za +27 11 800 3309 +27 11 800 3343 +27 11 800 3378 +27 82 805 7278 Investor relations +27 11 800 2775 Investor relations InvestorRelations@eskom.co.za Eskom corporate affairs +27 11 800 2323 Eskom integrated results www.eskom.co.za/IR2017 Toll-free crime line 0800 112 722 Feedback on our report IRfeedback@eskom.co.za Eskom Development +27 11 800 6128 Eskom Development Foundation www.eskom.co.za/csi Foundation CSI@eskom.co.za National sharecall number 08600 ESKOM or Promotion of Access to Information PAIA@eskom.co.za 08600 37566 Act requests Customer SMS line 35328 Integrated demand management and AdvisoryService@eskom.co.za energy advice CS (customer service) mobile Dial *120*6937566# or Customer service CSOnline@eskom.co.za *120*myeskom# MyEskom mobi-site www.myeskom.co.za MyEskom app Facebook EskomSouthAfrica Twitter Eskom_SA Physical address Postal address Eskom Megawatt Park PO Box 1091 2 Maxwell Drive Johannesburg Sunninghill 2000 Sandton 2157 Group company secretary Company registration number Mr N Ebrahim (Acting) Eskom Holdings SOC Ltd 2002/015527/30 Reviewed condensed group interim financial statements 23 www.eskom.co.za