1970 – 1990 1990 – 2010 Contact information Integrated Report 2010 Two hydro stations were commissioned for peak load. The decision was taken to build Electrification started on a massive scale and the real price of electricity was reduced to Koeberg, the first nuclear station in Africa. stimulate economic growth. In 2001 Eskom Gas turbine, coal and pumped storage received the Global Power Company of the Telephone Websites and email stations were commissioned. Escom was Year Award. Eskom was converted to a renamed to Eskom in 1987 and an company in 2002. Surplus electricity ran out Eskom head office: +27 11 800 8111 Eskom environmental: envhelp@eskom.co.za Electricity Council replaced the 1990 – 2010 and power shortages became apparent in Eskom Group Communications: +27 11 800 2323 Eskom annual report: www.eskom.co.za/annreport10/ TO Commission Electrification started on a massive scale and the real 2007 S PIC ITH RE W price of electricity was reduced to stimulate economic Eskom Development Foundation: +27 11 800 8111 Eskom Development Foundation: www.eskom.co.za/csi HI OME EED C BL growth. In 2001 Eskom received the Global Power : E: Company of the Year Award. Eskom was converted to a NB SIZ Eskom website: www.eskom.co.za FIT 310 company in 2002. Surplus electricity ran out and power TO 40 X shortages became apparent in 2007 2 Ethics office advisory service: +27 11 800 2791/3187 Company registration number: 2002/015527/06 or ethics@eskom.co.za 1970 – 1990 Confidential fax line: +27 11 507 6358 Two hydro stations were commissioned for peak load. The decision was taken to build Koeberg, the first nuclear station in Africa. Gas turbine, coal and pumped storage stations were BE commissioned. Escom was renamed to Eskom in 1987 and an Physical address: Postal address: TO IC ED S P LI Electricity Council replaced the Commission Eskom Eskom -RE PP HI SU Megawatt Park PO Box 1091 2 Maxwell Drive Johannesburg 1984 Sunninghill 2000 Koeberg, Africa’s first Nuclear Power Sandton Station is built Integrated Repo r t 2010 2157 Eskom Holdings Secretariat 1950 – 1970 Bongiwe Mbomvu (Company secretary) Generation capacity increased by 130% PO Box 1091 Johannesburg 2000 www.eskom.co.za 1950 Vaal and Klip power stations built 1923 Electricity Supply Commission established 1923 – 1929 1930 – 1950 1950 – 1970 The Electricity Supply New goldfields on the Soaring growth in the Vaal Commission (Escom) was Witwatersrand and the rise Triangle and Witwatersrand, established. Dr Hendrik in gold price boosted Eskom’s capacity doubled by On the path to recovery van der Bijl was the first electricity demand.Vaal and extending existing stations and Chairman. Witbank, Colenso Klip power stations were building new ones. R376 million and Salt River Power Stations built and the distribution was spent on new plant. Capacity were commissioned network was extended increased by 130% 1970 – 1990 1990 – 2010 Contact information Integrated Report 2010 Two hydro stations were commissioned for peak load. The decision was taken to build Electrification started on a massive scale and the real price of electricity was reduced to Koeberg, the first nuclear station in Africa. stimulate economic growth. In 2001 Eskom Gas turbine, coal and pumped storage received the Global Power Company of the Telephone Websites and email stations were commissioned. Escom was Year Award. Eskom was converted to a renamed to Eskom in 1987 and an company in 2002. Surplus electricity ran out Eskom head office: +27 11 800 8111 Eskom environmental: envhelp@eskom.co.za Electricity Council replaced the 1990 – 2010 and power shortages became apparent in Eskom Group Communications: +27 11 800 2323 Eskom annual report: www.eskom.co.za/annreport10/ TO Commission Electrification started on a massive scale and the real 2007 S PIC ITH RE W price of electricity was reduced to stimulate economic Eskom Development Foundation: +27 11 800 8111 Eskom Development Foundation: www.eskom.co.za/csi HI OME EED C BL growth. In 2001 Eskom received the Global Power : E: Company of the Year Award. Eskom was converted to a NB SIZ Eskom website: www.eskom.co.za FIT 310 company in 2002. Surplus electricity ran out and power TO 40 X shortages became apparent in 2007 2 Ethics office advisory service: +27 11 800 2791/3187 Company registration number: 2002/015527/06 or ethics@eskom.co.za 1970 – 1990 Confidential fax line: +27 11 507 6358 Two hydro stations were commissioned for peak load. The decision was taken to build Koeberg, the first nuclear station in Africa. Gas turbine, coal and pumped storage stations were BE commissioned. Escom was renamed to Eskom in 1987 and an Physical address: Postal address: TO IC ED S P LI Electricity Council replaced the Commission Eskom Eskom -RE PP HI SU Megawatt Park PO Box 1091 2 Maxwell Drive Johannesburg 1984 Sunninghill 2000 Koeberg, Africa’s first Nuclear Power Sandton Station is built Integrated Repo r t 2010 2157 Eskom Holdings Secretariat 1950 – 1970 Bongiwe Mbomvu (Company secretary) Generation capacity increased by 130% PO Box 1091 Johannesburg 2000 www.eskom.co.za 1950 Vaal and Klip power stations built 1923 Electricity Supply Commission established 1923 – 1929 1930 – 1950 1950 – 1970 The Electricity Supply New goldfields on the Soaring growth in the Vaal Commission (Escom) was Witwatersrand and the rise Triangle and Witwatersrand, established. Dr Hendrik in gold price boosted Eskom’s capacity doubled by On the path to recovery van der Bijl was the first electricity demand.Vaal and extending existing stations and Chairman. Witbank, Colenso Klip power stations were building new ones. R376 million and Salt River Power Stations built and the distribution was spent on new plant. Capacity were commissioned network was extended increased by 130% www.eskom.co.za Wherever this symbol is present please refer to the website for more information. Profile CONTENTS Scope of report Eskom electricity sales The annual report for the year ended 31 March 2010 is an Profile Generation Business integrated financial, economic, environmental and social 6,1% Foreign 95 Overview sustainability report. Eskom Holdings Limited (Eskom) and its History of Eskom Scope of report 100 Generation division subsidiaries aligns itself with international sustainability best 1 Key facts 102 Technical performance reporting practices, including the Global Reporting Initiative (GRI) 41,5% Municipalities 6 Organisational structure 105 Environmental performance Sustainability Reporting Guideline, and the AA1000APS (2008) 7 Vision, values and strategic objectives 108 Primary Energy division 109 Coal quality and quantity Accountability Principles Standard. 1,3% Rail Sustainability reporting in Eskom 110 Long-time water strategy 113 Safety – coal transport 12 Sustainability 114 Nuclear division The report considers financial, economic, environmental, social and 14,5% Mining 13 The application of the GRI principles 116 Nuclear capacity increase technical performance and is available in an internet version on the 14 Stakeholder engagement 17 Eskom reputation and engagement with stakeholders 117 Nuclear safety Eskom website (www.eskom.co.za/annreport10). Additional 25,5% Industry 118 Environmental performance sustainability information is disclosed in the internet version of the 18 Integrated risk management 120 Generation Business Engineering division report. The availability of extra web-based information is indicated in 6,4% Commerce and agricultural Leadership overview 124 125 Enterprises division Capacity expansion programme the printed report. 22 Letter from the acting chairman 129 Benchmarking build costs globally 26 Board of directors 130 Local content of capacity expansion contracts 4,7% Residential 28 Executive management committee Nature of business, major products and 30 Executive performance overview Customer Network Business services The core business of Eskom Finance Company (Pty) Limited (EFC) is 34 Performance against the shareholder compact 135 Overview Eskom generates approximately 95% of the electricity used in 140 System Operations and Planning division the granting of employee home loans, while that of Escap Limited is Finance division 142 Status of the power supply system in South Africa South Africa and approximately 45% of the electricity used the management and insurance of business risk. in Africa. Eskom generates, transmits and distributes electricity to 40 Financial performance overview 142 Power conservation programme 43 Capital expenditure 143 Ten-year transmission development plan industrial, mining, commercial, agricultural and residential customers Eskom’s corporate social investment is channelled principally through 44 Funding gap 145 Integrated resource plan and redistributors. The majority of sales are in South Africa. Other 45 Credit rating 146 Transmission division the Eskom Development Foundation, a wholly owned subsidiary of countries of southern Africa account for a small percentage of 47 Procurement and supply chain 147 Transmission system performance Eskom Holdings and a section 21 company. 150 Contracting with SADC utilities sales. (Refer page 301). Corporate Services division 151 Environmental performance Role in South Africa 153 Distribution division Additional power stations and major power lines are being built to 54 Climate change 155 Distribution system performance Eskom, as a state-owned enterprise, has a greater role to play in 56 Internal energy efficiency meet rising electricity demand in South Africa. 156 Demand-side management addition to the supply of electricity. Eskom also supports South 57 Managing our environmental impact 158 Customer service 59 Safety Africa’s growth and development aspirations. Eskom’s value 158 Tariffs Eskom buys electricity from and sells electricity to the countries 65 Research and development 160 Management of total energy losses proposition to the country can be summarised as follows: 68 Contributing to society of the Southern African Development Community (SADC). The 162 Electrification • providing electricity to all South Africans 162 Environmental performance future involvement in African markets outside South Africa (that Human Resources division is the SADC countries connected to the South African grid and • having mutually beneficial arrangements with support industries 78 Skills Eskom Enterprises (Pty) Ltd the rest of Africa) is currently limited to those projects that have such as the coal mining sector and related industries 80 Training interventions 169 Independent assurance report on sustainability • driving transformation through our procurement strategy a direct impact on ensuring a secure supply of electricity for 81 Transformation information • creating jobs and new industries through our local content drive South Africa. Regulatory and Legal 174 Consolidated group annual associated with our massive capacity expansion programme • continually improving environmental performance including Framework financial statements Eskom is regulated under subject licences granted by the National climate change mitigation Energy Regulator of South Africa (NERSA), originally under the 87 87 Regulatory affairs function Regulatory and legal framework Corporate governance Electricity Act (41 of 1987) – and more recently under the Electricity 90 Multi-year price determination (MYPD 2) and the price and tables Regulation Act (4 of 2006) – and by the National Nuclear Regulator Countries in which operations are located increase 288 corporate governance Eskom’s head office is in Johannesburg and its operations are spread in terms of the National Nuclear Regulatory Act (47 of 1999). 296 Tables throughout the country. In December 2008, Eskom also opened a 296 Statistical overview small office in London in the United Kingdom, primarily to exercise 298 Power stations capacities Subsidiaries quality control for the equipment being manufactured in Europe for 299  Environmental implications of using/saving one The Eskom Enterprises (Pty) Limited group (Eskom Enterprises), a kilowatt-hour of electricity our capacity expansion programme. wholly owned subsidiary of Eskom Holdings, provides lifecycle 300  Transmission and distribution equipment in service 301  Sale of electricity and revenue per category support and plant maintenance, network protection and support of customer Eskom Enterprises operates primarily in South Africa. It has two for the capacity expansion programme for all divisions of Eskom 303 Awards subsidiaries that operate electricity generation concessions in the Holdings Limited. (See organisational structure on page 6). 305 Glossary African countries of Mali, Senegal, Mauritania and Uganda. Research block Information block Education block 309 Abbreviations and acronyms 312 GRI index IBC Contact details www.eskom.co.za Wherever this symbol is present please refer to the website for more information. Profile CONTENTS Scope of report Eskom electricity sales The annual report for the year ended 31 March 2010 is an Profile Generation Business integrated financial, economic, environmental and social 6,1% Foreign 95 Overview sustainability report. Eskom Holdings Limited (Eskom) and its History of Eskom Scope of report 100 Generation division subsidiaries aligns itself with international sustainability best 1 Key facts 102 Technical performance reporting practices, including the Global Reporting Initiative (GRI) 41,5% Municipalities 6 Organisational structure 105 Environmental performance Sustainability Reporting Guideline, and the AA1000APS (2008) 7 Vision, values and strategic objectives 108 Primary Energy division 109 Coal quality and quantity Accountability Principles Standard. 1,3% Rail Sustainability reporting in Eskom 110 Long-time water strategy 113 Safety – coal transport 12 Sustainability 114 Nuclear division The report considers financial, economic, environmental, social and 14,5% Mining 13 The application of the GRI principles 116 Nuclear capacity increase technical performance and is available in an internet version on the 14 Stakeholder engagement 17 Eskom reputation and engagement with stakeholders 117 Nuclear safety Eskom website (www.eskom.co.za/annreport10). Additional 25,5% Industry 118 Environmental performance sustainability information is disclosed in the internet version of the 18 Integrated risk management 120 Generation Business Engineering division report. The availability of extra web-based information is indicated in 6,4% Commerce and agricultural Leadership overview 124 125 Enterprises division Capacity expansion programme the printed report. 22 Letter from the acting chairman 129 Benchmarking build costs globally 26 Board of directors 130 Local content of capacity expansion contracts 4,7% Residential 28 Executive management committee Nature of business, major products and 30 Executive performance overview Customer Network Business services The core business of Eskom Finance Company (Pty) Limited (EFC) is 34 Performance against the shareholder compact 135 Overview Eskom generates approximately 95% of the electricity used in 140 System Operations and Planning division the granting of employee home loans, while that of Escap Limited is Finance division 142 Status of the power supply system in South Africa South Africa and approximately 45% of the electricity used the management and insurance of business risk. in Africa. Eskom generates, transmits and distributes electricity to 40 Financial performance overview 142 Power conservation programme 43 Capital expenditure 143 Ten-year transmission development plan industrial, mining, commercial, agricultural and residential customers Eskom’s corporate social investment is channelled principally through 44 Funding gap 145 Integrated resource plan and redistributors. The majority of sales are in South Africa. Other 45 Credit rating 146 Transmission division the Eskom Development Foundation, a wholly owned subsidiary of countries of southern Africa account for a small percentage of 47 Procurement and supply chain 147 Transmission system performance Eskom Holdings and a section 21 company. 150 Contracting with SADC utilities sales. (Refer page 301). Corporate Services division 151 Environmental performance Role in South Africa 153 Distribution division Additional power stations and major power lines are being built to 54 Climate change 155 Distribution system performance Eskom, as a state-owned enterprise, has a greater role to play in 56 Internal energy efficiency meet rising electricity demand in South Africa. 156 Demand-side management addition to the supply of electricity. Eskom also supports South 57 Managing our environmental impact 158 Customer service 59 Safety Africa’s growth and development aspirations. Eskom’s value 158 Tariffs Eskom buys electricity from and sells electricity to the countries 65 Research and development 160 Management of total energy losses proposition to the country can be summarised as follows: 68 Contributing to society of the Southern African Development Community (SADC). The 162 Electrification • providing electricity to all South Africans 162 Environmental performance future involvement in African markets outside South Africa (that Human Resources division is the SADC countries connected to the South African grid and • having mutually beneficial arrangements with support industries 78 Skills Eskom Enterprises (Pty) Ltd the rest of Africa) is currently limited to those projects that have such as the coal mining sector and related industries 80 Training interventions 169 Independent assurance report on sustainability • driving transformation through our procurement strategy a direct impact on ensuring a secure supply of electricity for 81 Transformation information • creating jobs and new industries through our local content drive South Africa. Regulatory and Legal 174 Consolidated group annual associated with our massive capacity expansion programme • continually improving environmental performance including Framework financial statements Eskom is regulated under subject licences granted by the National climate change mitigation Energy Regulator of South Africa (NERSA), originally under the 87 87 Regulatory affairs function Regulatory and legal framework Corporate governance Electricity Act (41 of 1987) – and more recently under the Electricity 90 Multi-year price determination (MYPD 2) and the price and tables Regulation Act (4 of 2006) – and by the National Nuclear Regulator Countries in which operations are located increase 288 corporate governance Eskom’s head office is in Johannesburg and its operations are spread in terms of the National Nuclear Regulatory Act (47 of 1999). 296 Tables throughout the country. In December 2008, Eskom also opened a 296 Statistical overview small office in London in the United Kingdom, primarily to exercise 298 Power stations capacities Subsidiaries quality control for the equipment being manufactured in Europe for 299  Environmental implications of using/saving one The Eskom Enterprises (Pty) Limited group (Eskom Enterprises), a kilowatt-hour of electricity our capacity expansion programme. wholly owned subsidiary of Eskom Holdings, provides lifecycle 300  Transmission and distribution equipment in service 301  Sale of electricity and revenue per category support and plant maintenance, network protection and support of customer Eskom Enterprises operates primarily in South Africa. It has two for the capacity expansion programme for all divisions of Eskom 303 Awards subsidiaries that operate electricity generation concessions in the Holdings Limited. (See organisational structure on page 6). 305 Glossary African countries of Mali, Senegal, Mauritania and Uganda. Research block Information block Education block 309 Abbreviations and acronyms 312 GRI index IBC Contact details Eskom Holdings Limited 1 Integrated Repor t 2010 Key facts RA – Reasonable assurance provided by the independent assurance provider (refer page 169) LA – Limited assurance provided by the independent assurance provider (refer page 169) Electricity sales 2010 2009 2008 2007 2006 Sales within South Africa (GWh) 205 364 202 202 210 458 204 531 194 799 International sales (GWh) 13 227 12 648 13 908 13 589 13 122 Sales within South Africa Total sales (GWh) 218 591 214 850 224 366 218 120 207 921 2010 Growth in GWh sales (%) 1,7 (4,2) 2,9 4,9 (18,9)1 2009 Revenue within South Africa (Rm) 66 970 50 766 41 585 37 874 34 071 2008 International revenue (Rm) 2 972 2 334 1 971 1 515 1 290 2007 Total revenue (Rm)2 69 942 53 100 43 556 39 389 35 361 2006 Growth in revenue (%) 31,7 21,9 10,6 11,4 (14,2)1 0 50 100 150 200 250 Customers (number) 4 463 301 4 361 007 4 152 312 3 963 164 3 758 506 GWh (’000) Peak demand (MW) 35 850 35 959 36 513 34 807 33 461 Electricity production by own stations 2010 2009 2008 2007 2006 Coal-fired (GWh) 215 940 211 941 222 908 215 211 206 606 Hydro-electric (GWh) 1 274 1 082 751 2 443 1 141 Pumped storage (GWh) 2 742 2 772 2 979 2 947 2 867 Gas turbine (GWh) 49 143 1 153 62 78 Demand-side management savings Nuclear (GWh) 12 806 13 004 11 317 11 780 11 293 2010 Wind energy (GWh)3 1 2 1 2 3 2009 Total production (GWh) 232 812 228 944 239 109 232 445 221 988 2008 Electricity purchased by Eskom 2007 • Foreign imports (GWh)4 10 047 9 162 10 998 10 624 9 318 • Local IPP and co-generation, 0 0 0 0 0 2006 0 200 400 600 800 1 000 (GWh) MW Reserve margin (including 16,4 10,6 5,6 7,8 12,7 imports) (%) Demand-side management 372RA 916RA 650 170 72 Savings (MW) Power station net maximum capacity (own) 2010 2009 2008 2007 2006 Coal-fired (MW) 34 658 34 294 33 566 33 036 32 256 Total production Hydro-electric (MW) 600 600 600 600 600 2010 Pumped storage (MW) 1 400 1 400 1 400 1 400 1 400 2009 Gas turbine (MW) 2 409 2 409 1 378 925 342 2008 Nuclear (MW) 1 800 1 800 1 800 1 800 1 800 2007 Wind energy (MW) 3 3 3 3 3 2006 Total production (MW) 40 870 40 506 38 747 37 764 36 401 0 10 20 30 40 50 MW (’000) 1. Actual sales growth or revenue growth when compared to the 12 months from 1 April 2004 to 31 March 2005. 2. Total revenue including the EDI and environmental levies. 3. Wind energy facility commissioned in 2008. 4. Foreign imports exclude wheeling of electricity. 2 Eskom Holdings Limited Integrated Repor t 2010 Key facts continued Transmission and distribution equipment 2010 2009 2008 2007 2006 Transmission lines (km) 28 482 28 243 28 164 27 619 27 406 Transmission lines Distribution lines (km) 46 018 45 302 44 680 44 044 43 330 2010 Reticulation lines (km) 305 151 297 783 293 424 288 040 282 361 2009 Underground cables (km) 10 687 10 379 9 921 8 622 8 031 2008 Transformer capacity (MVA) 2007 • Transmission 123 990 122 860 122 180 120 745 118 445 2006 • Distribution 99 408 96 372 93 956 90 184 87 217 0 5 10 15 20 25 30 Km (’000) Capacity expansion 2010 2009 2008 2007 2006 Generation capacity installed and Generation capacity installed commissioned (MW) 452RA 1 770RA 1 061 1 351 170 2010 Transmission lines installed (km) 600RA 418RA 246 430 237 2009 Transmission transformer capacity installed (MVA) 1 630RA 1 255 RA 1 295 1 000 1 090 2008 Distribution lines installed (km) 8 392 5 439 7 319 6 984 5 944 2007 Distribution transformer capacity 2006 installed (MVA) 3 036 2 776 3 412 2 967 1 866 0 500 1 000 1 500 2 000 MW Environmental information 2010 2009 2008 2007 2006 Coal burnt in power stations (Mt) 122,7 121,2 125,3 119,1 112,1 Raw water consumption Specific water consumption by 2010 power stations (ℓ/kWh sent out) 1,34RA 1,35RA 1,32 1,35 1,32 2009 Net raw water consumption (Mℓ) 316 202 323 190 322 666 313 064 291 516 2008 Relative particulate emissions (kg/MWh sent out) 0,39RA 0,27 RA 0,21 0,20 0,21 2007 Carbon dioxide emissions (CO2) 2006 (Mt) 224,7RA 221,7RA 223,6 208,9 203,7 0 50 100 150 200 250 300 350 Ml (’000) Radiation release (mSv) 0,0040 0,0045 0,0047 0,0034 0,0049 Safety information 2010 2009 2008 2007 2006 Employee fatalities 2RA 6RA 17 8 10 Employee fatalities Contractor fatalities 14RA 21RA 12 18 13 2010 Lost-time incident rate 0,54RA 0,50RA 0,46 0,35 0,40 2009 Public fatalities 41 28 42 41 34 2008 2007 2006 0 5 10 15 20 Eskom Holdings Limited 3 Integrated Repor t 2010 Developmental initiatives 2010 2009 2008 2007 2006 B-BBEE attributable spend (Rbn)1 20,8LA 46,3 – – – Electrification, homes connected B-BBEE attributable spend (%)1 28,65 63,17 – – – 2010 BEE spend – 35 209 25 447 16 557 11 681 2009 Electrification, homes connected 149 901 112 965 168 538 152 125 135 903 2008 Corporate social investment (Rm) 58,7RA 79,5RA 69,8 74,7 83,6 2007 Jobs created through capital 2006 expansion projects cumulative2 15 707 – – – – 0 50 100 150 200 Eskom trainees/bursars (pipeline) 5 255RA 5 907 5 368 5 136 2 163 (’000) Group financial performance 2010 2009 2008 2007 2006 EBIT (before profit/loss on embedded derivatives) (Rm) 4 805 (2 115) 3 215 6 452 7 032 Net profit for the year (Rm) 3 620 (9 668) (168) 7 220 4 447 Total assets (Rm) 246 135 199 302 166 170 139 838 125 716 Total equity (Rm) 70 222 59 578 61 129 55 890 48 670 Net cash from operating activities (Rm) 11 646 11 764 (1 912) 13 954 12 346 Total assets Net cash used in investing activities 2010 (Rm) (48 934) (42 945) (22 930) (16 908) (9 003) 2009 Net cash from financing activities (Rm) 34 382 38 871 26 193 2 267 (1 368) 2008 Funds from operations (FFO) 2007 (Rm) 10 531 2 803 7 499 11 161 11 594 2006 Electricity revenue/kWh (total) 0 50 100 150 200 250 (cents) 31,9 24,7 19,9 18,0 16,2 Rm Electricity operating costs per kWh (including depreciation and amortisation) (cents) 28,2 25,9 18,6 15,7 13,8 Interest cover 0,57RA (0,80) 2,50 9,11 6,80 Debt:equity ratio 1,55RA 1,22 0,40 (0,21) 0,19 Debt service cover ratio 0,86 (0,55) (0,17) 0,44 0,56 Employees 2010 2009 2008 2007 2006 Employees (number) 39 222 37 857 35 404 32 674 31 548 Number of employees Training cost (Rm) 758 823 784 748 543 2010 2009 2008 2007 2006 0 5 10 15 20 25 30 35 40 Number (’000) 1. Net measured prior to 2009. 2. Non-skilled, semi-skilled and skilled jobs, of which some are very short term (such as site clearance). Prior to 2008, this programme was in the preparation phase. 4 Eskom Holdings Limited Integrated Repor t 2010 Electricity: from power station to customer Input: Power stations Coal1 122,7Mt Water 316 202Mℓ Liquid fuels (diesel and kerosene) 16,1Mℓ Output: Total electricity produced by Eskom stations – 232 812GWh Total electricity sold 218 591GWh Carbon dioxide 224,7Mt Nitrogen oxide 959kt Transmission high-voltage lines Nitrous oxide 2 825t (AC– 765, 400, 275, 220kV; Sulphur dioxide 1 856kt DC – 533kv) Particulate emissions 88,27kt Ash produced 36,01Mt Radiation releases 0,0040mSv Transmission substations Municipalities high-voltage lines (132, 88, 66, 44, 33kV) Distribution high-voltage lines (132, 88, 66, 44, 33kV) Distribution substations Reticulation high-voltage lines (22, 11, 6,6, 3,3kV) The voltage levels of electricity are further transformed to meet distribution requirements Customers Reticulation low-voltage lines (380, 220V) 1.88% of electricity sold is produced from coal. Eskom Holdings Limited 5 Integrated Repor t 2010 Southern Africa grid map Zimbabwe Beira 0kV Bulawayo 33 Namibia Pande Gas Fields Temane Gas Fields Serule Mozambique Walvis Bay Windhoek Massingir DC Morupule kV Polokwane Botswana 533 kV 400 220kV Matimba Inhambane 132kV Lephalale Corumana 400kV 220kV Gaborone Pretoria Tubatse 132kV Arnot Xai-Xai 2kV 765kV Kusile Maputo 13 Witbank Selomo Johannesburg Ermelo Luderitz Edvalein II r V lfou 40 0k BaGrootvlei Swaziland 400kV V 765 0k kV 40 Kudu 40 Drakensberg 0k Richards Bay V Kimberley 765kV Bloemfontein Lesotho Durban 400kV 5kV V 0k 76 Vanderkloof 40 South Africa Gariep Ankerlig Klipheuwel East London 76 Koeberg 5k Acacia V Port Rex Cape Town Gourikwa Port Elizabeth Mossel Bay Palmiet KEY Future pumped storage station Existing grid system Coal-fired power station Possible future grid system Future interconnection substation Future hydro-electric power station Nuclear power station Future coal-fired power station Pumped storage station Hydro-electric power station Gas power station Interconnection substation Renewable energy Future gas station Town The map indicates the South African power network and some interconnections with neighbouring countries. 6 Eskom Holdings Limited Integrated Repor t 2010 Organisational structure Eskom Holdings Limited Business areas Primary subsidiaries Customer Eskom Generation Network Corporate Enterprises Business Business divisions (Pty) Limited divisions divisions Finance Rotek Industries System Operations (Pty) Limited Generation Human Resources and Planning Roshcon (Pty) Limited Primary Energy Corporate Services Transmission Eskom Energie Nuclear Regulatory and Legal Manantalie SA Distribution Generation Business Eskom Uganda Limited Engineering Enterprises Escap Limited Eskom Finance Company (Pty) Limited Eskom Development Foundation (section 21 company) Eskom Holdings Limited 7 Integrated Repor t 2010 Vision Together building the powerbase for sustainable growth and development Values Excellence, innovation, customer satisfaction and integrity Strategic objectives Ensuring reliable supply Ensuring adequate future Supporting the Ensuring business of electricity to all South electricity supply for developmental objectives sustainability Africans South Africa of South Africa of Eskom Strategic thrusts and initiatives Electricity is the essential South Africa needs to Eskom will continue to Eskom will work towards component of all economic build 40 000MW of new support the electricity sustainability in the short, activity, and for realising generation capacity by supply and value chain of medium and long term, national socioeconomic 2025, of which 12 476MW, the economy by driving which means embracing all objectives. Eskom must is already under affirmative procurement areas of sustainability. This therefore ensure that it construction (mainly and creating new jobs and implies the necessary operates its system in such Medupi, Kusile, return-to- industries through the balance and trade-offs that a way that it provides service stations and Ingula). capacity expansion will have to be made reliable supply of electricity Of these, 4 906MW programme which will be between the various to the country at have already been measured through progress sustainability criteria, eg, appropriate costs ie, commissioned. Eskom made on the competitive financial health versus the migrate to cost-reflective will also facilitate the supplier development plan additional costs incurred for tariffs in line with the implementation of (CSDP). climate change mitigation, electricity pricing policy independent power with the consequent impact (EPP). producers (IPPs) within on performance in these the industry while taking areas. every care to ensure that associated risks are managed. Safety Environmental management Quality Technology management Cross-cutting enablers 8 Eskom Holdings Limited Integrated Repor t 2010 Eskom priorities Sou th A R190 billion funding gap challenge fric a In om Security of supply – options for SA (IRP) cor Esk por ate Sustainable industry – input to Vision 2025 d Economic, social, environmental Industry structure (EDI and ISO) Maintain business as usual core Cost efficiencies: strategy: 2010 FIFA NERSA response Reputation Back to basics Generation World Cup™ and IMC liaison management Business Corporate review Customer Network Business 2010 FIFA World Cup™: Significant work has been undertaken to Generation Business: Add new capacity, manage existing plant, ensure that Eskom plays its part in this global event. strive for cost efficiencies, focus on operational excellence and safety. Back to basics project: Integration and prioritisation of the many financial and human resource initiatives. This includes the Customer Network Business: Integrate demand management standardisation of transaction processing, reporting, policies and across Eskom, improve revenue management, sign power procedures, controls and associated training across the business. purchase agreements, and facilitate the national integrated This will ultimately result in a SAP upgrade and provide improved, resource plan. quicker management information. Participation in subcommittee of Inter-Ministerial Committee (IMC) on Energy: A number of regulatory and policy issues need Corporate review: This project will analyse corporate divisional to be addressed now to position the electricity industry for functions, benchmark then against similar institutions and identify success into the future. Government has established the Inter- activities for rationalisation within existing operations. Potential Ministerial Committee on Energy to address the key challenges duplications will be identified. This project aims to create the and to facilitate progress towards an optimal regulatory and policy urgency for rationalisation and improve the effectiveness and environment – one that is credible, predictable, legitimate and efficiency of corporate functions. transparent. Eskom needs to provide input and support into this Reputation management: Stem the flow of negative media important process. coverage in the short term and recover and turn around Eskom image and reputation in the long term, while at the same time, gearing Eskom’s corporate communication strategy. Eskom Holdings Limited 9 Integrated Repor t 2010 Apollo substation in Gauteng is the main interconnection to Cahora Bassa in Mozambique. 10 Eskom Holdings Limited Integrated Repor t 2010 Eskom Holdings Limited 11 Integrated Repor t 2010 Sustainability reporting in Eskom 12 Sustainability 13 The application of the GRI principles 14 Stakeholder engagement 17 Eskom reputation and engagement with stakeholders 18 Integrated risk management 12 Eskom Holdings Limited Integrated Repor t 2010 Sustainability What sustainability means to us Sustainability performance index Our long-term drive for sustainable development is inherent in the Our internally developed sustainability performance index has now long-term nature of our business. While we are responding to the been in place for five years and provides a view of our long-term demand for electricity by building new capacity, ensuring financial sustainability status. This is achieved through the use of economic stability and driving energy efficiency we understand that the long- (including financial), environmental, social and technical indicators for term nature of our business has an impact on environmental our operations. sustainability into the future. Therefore we continue to strive for a balance between the different legs of sustainability. Bearing this in The index has 20 indicators and each indicator is allocated a relative mind, our long-term planning processes take into account a lower weighting and further modified with regard to the relative carbon future for South Africa, while ensuring that we uphold our contribution of each of the four areas of economic, environmental, definition of sustainability – providing affordable energy and related technical and social aspects. The overall performance is considered services through the integration and consideration of economic sustainable if the score is equal to or greater than three on a development, environmental quality and social equity into business five‑point scale. practices in order to continually improve performance and underpin development. Eskom integrates sustainability criteria into its decision- Our overall performance was 2,5 (2009: 2,5) with sector scores as making process in order to ensure that this aspiration for sustainable follows: development is continuously achieved. Sustainability performance index An important part of our sustainability drive is increasing consumer 4,0 awareness of the implications of electricity generation – the resources consumed, the cost, and the impacts on the environment – as well as 3,5 the benefits of using electricity. Sustainable development requires that every person in South Africa starts thinking about energy – how we generate it, what we pay for it, how we use it and how sustainable 3,0 it is. Collectively we can make national decisions to ensure a sustainable electricity system for South Africa. 2,5 Sustainability governance 2,0 2005/06 2006/07 2007/08 2008/09 2009/10 The directors of Eskom regard corporate governance as vitally Technical Social Environmental important to the success of the business and are unreservedly Economic Overall score Target committed to applying the principles necessary to ensure that good governance is practised, and that the company remains a sustainable After five years of measurement we have seen an initial and viable business, of global stature. The board sustainability three years of decline and a subsequent stabilisation of committee deals with integrated sustainability issues and approves or sustainability performance during the last two repor ting periods. recommends policies, strategies and guidelines, particularly related to The performance was the result of improvements in the areas of safety, health, environment, quality and nuclear issues. staff commitment, electrification connections, HIV/Aids strategy and return to profitability. Areas contributing to the score being The executive management sustainability and safety subcommittee low, are staff and contractor fatalities, our reserve margin, guides Eskom’s strategy on sustainability including environmental productivity, equity and B-BBEE spend. management, development issues and occupational health and safety matters. Sustainability strategies are reviewed by this committee for The index will be re-looked at during the next financial year based consideration by the sustainability committee of the board. on a revised sustainability strategy. Eskom Holdings Limited 13 Integrated Repor t 2010 The application of the GRI principles We make use of the Global Reporting Initiative (GRI) guideline as a This report has been structured around the different areas of reporting framework for this report and have declared a GRI B+ LA our business, namely: Finance, Corporate Services, Human application level. We aim for an A+ application level in the future Resources, Regulatory and Legal Framework, Generation Business, using the GRI Electric Utility Sector Supplement. Customer Network Business and subsidiaries. Each of these areas has reported on their business performance around the material In terms of providing assurance around the sustainability issues issues, highlights, lowlights and forward-looking strategies and commitments, where relevant. in this report, our assurance provider was requested to provide assurance for certain non-financial/sustainability measures against the In Eskom’s previous annual report there were certain shortcomings International Standard on Assurance Engagements 3000: Assurance relating to our stakeholder engagement process and the way in Engagements other than Audits or Reviews of Historical Information which stakeholders influence our reporting of material issues. and the AA1000AS (2008) Assurance Standard – Requirements for The diagram on page 15 depicts the internal governance structure independent assurance on disclosed information regarding non- used during this reporting period to co‑ordinate the integrated financial/sustainability and sustainability performance. This report is report process. This also sets out the process for determining presented on page 169. material issues to be reported on in this report. Stakeholders’ issues and concerns are integrated into the process through our Our understanding of sustainable development in our specific stakeholder engagement working group. See section on the next context is set out on page 12. The Eskom sustainability performance page for more information on stakeholder engagement for the index on page 12, together with the performance areas and indicators annual report. The sustainability reporting process allows for a in this report, reflect the opportunities and constraints we face in “bottom-up” and “top-down” approach in determining the material executing our sustainable development strategy. issues for reporting. The following AA1000APS principles have been applied in the compilation of this integrated sustainability report: • Inclusivity: the results of our stakeholder engagement processes, as set out in sections on stakeholder engagement, regulatory framework and Eskom reputation on pages 14, 17 and 87 of the profile are used to inform the structure and, more importantly, the issues reported on. This is in addition to our internal process of business planning, setting of objectives and performance targets as well as integrated risk management.We acknowledge that our existing process around stakeholder engagement is not optimised through a centrally co‑ordinated approach. This is reflected in the corporate risk register relating to “broad reputation damage caused by inconsistent and uncontrollable communication” – see page 18. • Materiality: the main areas covered in this report in terms of both current and future issues are based on what our stakeholders have communicated to us. In addition, our business focus areas and priorities have influenced the material issues reported on as shown on page 16 covering our vision, values and strategic objectives.This has been strengthened through a group-wide integrated risk management process. This is disclosed in the risk profiles of the divisional sections within this report. The process of identifying material issues to be reported on is depicted in the diagram on page 15. • Responsiveness: our intention is to ensure that we have provided the information our stakeholders have requested relating to sustainable development. This has been indicated by way of cross-references within the table on page 16. Eskom aims to improve the reporting on the issues most material to our stakeholders by responding to their specific needs (through the integrated report process as well as our other stakeholder engagement mechanisms) and provide them with sufficient details. LA – Limited assurance provided by the independent assurance provider (refer page 169). 14 Eskom Holdings Limited Integrated Repor t 2010 Stakeholder engagement Understanding our stakeholders • input gathered through stakeholder dialogues We define stakeholders as a person, group, or organisation that has • input from investors and investor groups committed to sustainable a direct stake in our business because they can affect or be affected investing by our activities, objectives and policies. In this sense, among our key • partners, non-governmental organisations, suppliers and other stakeholders are our shareholder, civil society, the public, and land stakeholders owners affected by our operations, customers, Eskom (board of • media coverage directors and employees), lending institutions and investors, • industry benchmarking government, regulators, industry, suppliers, media, organised business, • the Global Reporting Initiative (GRI), the UN Global Compact organised labour, parliamentary portfolio committees and select principles committees and regulators. Engagements with key internal stakeholders from across all our How we engage with our stakeholders portfolios, divisions and functional areas of the business were held to At Eskom we view the participation of internal and external identify and prioritise material issues for Eskom. The principal stakeholders as an essential part of our decision-making process. Our purpose of the engagements was to establish stakeholders’ and the stakeholder engagement practices are based on the AA1000 organisation’s material concerns that Eskom should report on. The Stakeholder Engagement Standard (SES) principles of materiality, material issues were defined through a number of activities in Eskom: completeness and responsiveness. The process is influenced by our • feedback from the executive management commitment as a signatory to the United Nations Global Compact • engagement with employees and alignment with King III. • internal and independent reviews of Eskom’s 2009 Annual Report • engagement with external stakeholders We had a range of stakeholder engagements within the business • queries, reviews and assessments from investors and rating driven by different portfolios, divisions and functional areas agencies throughout the year. The material issues reported on in this • trend-spotting of issues of relevance to Eskom’s business integrated report are based on these engagements. • review of media coverage of Eskom and public agenda issues Our internal Guardian programme (refer to page 17 for more The table on page 16 provides a summary (full table available on details) was designed and used as a tool to facilitate continual internal internet) of material issues from the stakeholders that were dialogues with employees to empower them to be ambassadors for identified and prioritised for the purposes of the integrated Eskom. Added to this was customer feedback through focus groups, repor t. We recognise the impor tance of issues that may not be forums, committees and other methods. Input was also gathered within our mandate but influence the operations of Eskom. In through stakeholder dialogues, reports from lending institutions and these areas, we believe that we can, however, influence how investors, the shareholder, non-governmental organisations, suppliers, progress is made in addressing these issues, par ticularly through media and industry. public policy and regulation through engagement with those that have the mandate – see the Regulatory and Legal Framework Stakeholders and materiality issues section on page 86. To identify the key material issues to be reported on, we first compiled information on economic, environmental, governance and Method for selecting materiality issues social issues that were relevant to Eskom’s business and stakeholders. Materiality is determining the relevance and significance of an issue to To this end, we reviewed numerous sources, including: Eskom and our stakeholders. An issue or concern is considered • Eskom shareholder compact material if it influences or is likely to influence the decisions, actions • shareholder resolutions and other feedback received through and behaviour of stakeholders and/or Eskom. Accountability’s five- ongoing dialogue with shareholders part materiality test was used to help to define the materiality of • Eskom corporate plans, objectives and strategies and performance issues. Issues were ranked as being of high, medium, or low materiality • risks in the following: • policies and initiatives related to our business • the impact on Eskom’s ability to achieve its business strategy • employee surveys and other inputs from employees • level of concern to external stakeholders and • customer feedback obtained through focus groups, forums, • the degree to which Eskom can control and influence the issue committees and other methods Eskom Holdings Limited 15 Integrated Repor t 2010 Process used to determine material issues to be reported in the integrated report 1. Annual report steering Annual report core team committee (ARSC) 2. Annual report action 7. committee (ARAC) 3. Annual report working committee (ARWC) 4. 5. 6. Annual financial statements Stakeholder engagement Annual report sustainability audit working group working group working group 8. Material issues for the annual report Stakeholder engagement strategies Stakeholder issues Organisational issues 1. This is an executive management level committee to give strategic 4. This group co‑ordinates all the financial input into the annual report direction and focus on the theme, material issues and key messaging (including managing the financial audit process). of the report (top-down). 5. This group co‑ordinates and collates the various stakeholder issues, 2. This is a general manager level committee to review input into the and informs the material issues for reporting for the annual report. report and facilitate the key messaging from the ARSC to the 6. This group co‑ordinates the sustainability (non-financial) audit process. ARWC and inform the ARSC of the “bottom-up” material issues 7. This group acts as an overall facilitator to the annual report process from the ARWC. to ensure that all components of the annual report are achieved 3. This is a technical and management level committee that is tasked timeously. to manage and co‑ordinate the input from the three working groups 8. This diagram depicts how the material issues for the annual report and to inform the ARAC. are determined, also recognising that there are other processes for stakeholder engagement that respond to stakeholder concerns. Using information obtained from stakeholder feedback to stakeholders on the substance and progress made engagements regarding the issues tabled at these engagements. We have obtained valuable insight from engagements with our Eskom recognises the diverse range of material issues from our stakeholders and this information has the potential to bring about a stakeholders. However, it was critical to address specific material significant shift in the way we do business. Some stakeholder concerns issues they have raised during this reporting period. These have been raised can be addressed fairly easily while others have the potential addressed through management responses in the form of questions to bring about significant process changes within the organisation. and answers in those divisional sections mandated to respond to those material issues. Further insight into those material issues is The fundamental issue at present is therefore to prioritise resolution addressed in the divisional sections. or incorporation of stakeholder interests of an immediate nature, while making a sincere attempt to respond to stakeholder concerns Looking forward that require longer-term interventions. To build trust, Eskom will Eskom will continue to improve on the effectiveness of our existing continue to create platforms for meaningful input and discussion with stakeholder engagement practices through alignment with the the broadest spectrum of stakeholders, and to provide meaningful AA1000 Stakeholder Engagement Standard. 16 Eskom Holdings Limited Integrated Repor t 2010 Stakeholder engagement continued Key stakeholders and their material issues • Civil society (general public, communities land owners and farmers, ngos) • Customers • Employees • Financial markets and investors • Industry, including indepen­dent power producers; Energy Intensive User Group; Amal­gamated Municipal Electricity Undertakers; South African Wind Energy Association, etc • Government Stakeholders • Suppliers • Media • Organised business • Organised labour • Parliamentary portfolio com­mittees and select committees • Regulators • Previous recipients of our annual report • Focus groups • Forums and committees • One-on-one meetings • National Energy Regulator of South Africa’s public hearings on Eskom’s multi-year price determination Engagement methods (MYPD 2) • Online – emails and internet and intranet • Public participation as part of environmental impact assessments • Road shows • Surveys Page • Financial sustainability of Eskom including tariff and funding 38 to 46 • Employees: safety, recruiting skills, retaining skills and involving staff in the business (organisational 76 to 83 resilience) 156 to • Energy efficiency and demand-side management 157 • Eskom’s operational efficiencies, including the costs and supply of primary energy (coal and 102, 109, water), the collection of bad debt, optimal spending on maintenance for the ageing fleet 203 • Leadership and management commitment 22 to 25 • Managing large capital expansion programme while tightening the anti-corruption and fraud 67, 125 prevention mechanisms • Policy and regulatory environment including: – Pricing policy – long-term tariff stability and funding of the capacity expansion programme 110, 158 Material issues as well as fuel and water policy – adequacy of long-term coal and water supply – Energy policy – market structure, regulation – enabling the introduction of Independent 87 Power Producers (IPPs) • Responding to climate change, renewable energy and nuclear 54 • Restoring public confidence, Eskom’s image and reputation management 17 • Restructuring of the electricity distribution industry 89 • Security of electricity supply – availability of adequate generation capacity to meet customer demand at any time and a secure and reliable transmission system to deliver power to all 135 regions of the country. Including 2010 FIFA World CupTM • Supporting the developmental objectives of South Africa – electrification, eradication of poverty and unemployment and protecting the poor against the impact of a higher electricity 69 tariff, public safety Eskom Holdings Limited 17 Integrated Repor t 2010 Eskom reputation and engagement with stakeholders Eskom’s challenge to satisfy the demand for electricity still remains. management. This consists of members of the executive This has taken place within the context of poor financial performance committee, as well as specialists from key functions such as and leadership challenges. Environmental lobby groups have also reputation management, corporate strategy and planning, risk focused worldwide attention on Eskom’s coal-based capacity management, human resources, finance, legal and audit expansion programme.These factors, among others, affect the overall depar tments. This has since culminated in a successful rollout of corporate reputation negatively, which makes it difficult for Eskom to the guardian programme – an internal brand ambassador operate and source the required funding. campaign, and the MYPD 2 stakeholder engagement roadshows across the country. The results of these initiatives are leadership A number of reputation studies were conducted in partnership with visibility, openness and transparency; and an exciting journey the Reputation Institute to determine the key drivers of Eskom’s towards restoring public confidence in Eskom. reputation among employees, stakeholders and the general public. The insights gained from these studies have been used to inform Under the auspices of a major reputation restoration campaign for communication strategies and plans aimed at creating breathing Eskom, which has been approved for implementation, Eskom will space for Eskom in the short term, building credibility in the medium focus on enhancing our culture, educating employees on their role in term and repositioning the organisation into the future. supporting the South Africa Incorporated brand, delivering a successful 2010 FIFA World Cup™ intensifying stakeholder An integrated communication campaign has been implemented to engagement on key issues that impact on the corporate reputation, educate residential customers about energy efficiency, public safety pro-active media engagement and mobilising the nation towards and the benefits of the capacity expansion programme. This is power conservation. supported by media relations and messaging; as well as branding and public relations interventions. Internal programme The Guardian programme, introduced towards the end of 2009, is An extensive energy efficiency campaign has been implemented to focused on empowering employees to be ambassadors for Eskom. not only build awareness of saving electricity but also to change the Central to this objective is instilling pride and passion in the Eskom energy consumption behaviour of South Africans. In partnership with brand and helping employees at all levels to work as teams, dedicated a number of suppliers, new product offerings were also introduced to safeguarding the assets that are vital to the nation’s electricity. to the market such as energy-efficient showerheads, solar water heating, energy-efficient motors, to name a few. Launched by the Acting Chairman Mpho Makwana, the Guardian programme is being introduced to all Eskom regions and power Eskom’s public safety campaign continues to create awareness in the stations in a phased manner. The campaign relies extensively on the market on the safe use of electricity. The campaign culminates in an use of elements such as roadshows, industrial theatre, roadmaps, annual electricity awareness safety week in August. websites and audio-visual material, to gain the support of employees. The interactive campaign will continue throughout 2010 and into Energy losses remain a major concern for the business and a targeted 2011 to ensure that the Guardian programme becomes an integral social marketing campaign was launched in September 2009. This part of the lives of all employees. campaign focuses on non-technical losses such as theft, non-payment and tampering with electricity installations. Staff who embody the values of the Guardian programme through their interactions with colleagues and their dedication to their roles Reputation management has been elevated to be among the key within the company will be used to reinforce the programme with strategic imperatives of the business. A cross-functional team has their peers and families. been established to ensure an integrated approach to reputation 18 Eskom Holdings Limited Integrated Repor t 2010 Integrated risk management Eskom values the importance and benefits of having an integrated Risk reviews are conducted continually with input from divisional risk management (IRM) programme and applies best practices as set and functional areas. Risks identified are ranked by divisions and out in ISO 31000, King lll and the Department of Public Enterprises’ subsidiaries, reviewed, and then assessed by Exco, the Board risk risk management framework. management committee, and the board to determine the priority risks and those risks that may require business continuity plans. Eskom has established one framework for the management of all The risk profile is finalised only after executive accountability risks across the whole organisation, achieving an appropriate balance has been assigned for each of the risks, backed by continuous between realising opportunities for gains while minimising adverse monitoring of the effectiveness of controls and progress against impacts. IRM is an integral part of good management practice and an agreed treatment plans. essential element of good corporate governance. Eskom Holdings strategic risks Eskom’s approach to IRM looks at risk as exposure to the The current Eskom Holdings high priority risks and initiatives to consequences of uncertainty, or potential deviations from what is address them are listed below: planned or expected and is applied to the management of both potential gains and potential losses. Financial sustainability • The impact of funding shortfalls which could affect plant availability Eskom management is integrating risk management into Eskom’s and capacity expansion could lead to load shedding, delayed management culture. This means that IRM will be embedded in commissioning of new plant and further damage to Eskom’s everything the organisation does – aligning strategy, processes, reputation. people, technology and knowledge. This will enable: • Increase in bad debts given the impact of the MYPD 2 increases • the Board and senior managers to confidently make informed and the impact on the funding shortfall. decisions about risk and risk treatment • Increased economic growth (above forecast) and the financial • the pursuit of strategic growth opportunities and projects with impact of having to run the more expensive gas turbine stations. greater speed, robustness and confidence to the benefit of Eskom n To address all of the above, a detailed and robust funding plan has and its customers and shareholder been formulated and is being implemented (see further detail in • daily business decisions at the operating level within the context of Finance division report). Eskom’s capacity to bear risk and the types it prefers • the organisation to manage the risks to the value of non-tangible Brand and reputation assets – customers, partners, intellectual and knowledge capital, • Brand and reputation damage that may be caused by inconsistent brand, processes and systems – just as fully as physical and financial and uncontrolled communication about Eskom both internally and assets externally. This could spiral into stakeholder activism and give rise to security threats. As a result, there will be greater certainty around achieving Eskom’s n Eskom is currently running internal roadshows and external strategic objectives. communication programmes. A review is underway to ensure integrated reporting across Eskom and that there is consistency in Integrated risk profile all communication with the external environment. The Board acknowledges its overall accountability to ensure an effective results-driven, IRM process. Exco has implemented a risk Generation and networks control system to enable management to respond appropriately to • Overloaded networks leading to Eskom not being able to meet significant risks that could impact negatively or positively on business the nation’s electricity demand, and thus not achieving regulated objectives. service standards. The impact of this can be rolling blackouts and increased safety related threats. • Risks n Solutions Eskom Holdings Limited 19 Integrated Repor t 2010 n Eskom has embarked on several initiatives to reduce the demand Business continuity management for electricity such as energy efficiency demand-side management Business continuity management (BCM) entails risks that may (EEDSM). This has been executed simultaneously with asset threaten the continuity of business should they occur. All divisions management and refurbishment programmes that will allow our and subsidiaries develop, implement, maintain and review appropriate existing infrastructure to accommodate the current demand. business continuity plans for their businesses. Capacity expansion Emerging risks • Large-scale overruns on capital projects and overruns on key Trends in the local and international domain that might affect milestone dates due to uncertainties associated with planning, Eskom’s strategic business context and which will be continually design, integration and executability of long-term expansion plans. monitored and assessed: n Eskom is continually assessing and improving its controls over • Widening global governance gaps as a result of international design planning and execution of capital projects. government decisions taken regarding climate change, international financial policy, etc. Regulation and legislation • Global market recovery and South African financial and growth • Environmental legislation affecting existing and future plant and recovery resulting in increased demand for electricity. investment decisions. • Energy inefficiency in South Africa due to the perceived high cost n Eskom is engaging all relevant regulatory bodies and factoring of energy-saving technology and poor/wasteful behaviour derived possible changes into all planning initiatives. from a long period of low cost electricity. • Protecting the poor from burdensome increases of electricity Skills prices while aiming to have electricity tariffs that reflect the • Recruitment and retention of skills impacting Eskom’s current and economic cost of electricity production. future needs with regard to day-to-day operations, maintenance • Increasing cost of transporting coal, uncertain long-term supply of and capacity expansion activities. coal and deteriorating quality of coal. n Eskom is reviewing its processes to streamline and optimise • Decreasing availability and quality of water. various human resource related functions. • Security threats against Eskom’s people and assets, energy theft and vandalism of energy infrastructure. Climate change • Increased non-payment as a way of public protest against the price • Agreements related to international climate change negotiations of electricity. could lead to onerous obligations for the Republic of South Africa • Data fraud/loss due to the hacking of networks. and Eskom. • Introduction of carbon taxes which may have a negative effect on n Climate change has long been an integral part of Eskom’s business. Eskom’s financial position. We remain committed to the principles and aspirations of our climate change strategy, developed in 2005 and our six-point plan on climate change. During this year we will be revising our climate change strategy taking into account changing international and national circumstances. For detail on Eskom’s six-point climate change strategy go to www.eskom.co.za/annreport10/001.html • Risks n Solutions On the path to recovery Leadership overview 22 Letter from the acting chairman 26 Board of directors 28 Executive management committee 30 Executive performance overview 34 Performance against the shareholder compact 22 Eskom Holdings Limited Integrated Repor t 2010 Letter from the acting chairman Mpho Makwana, Acting Chairman 1,7% sales volume growth R57,0 billion capital expenditure 452MW generation capacity added Dear Stakeholders It is a privilege to have been asked to serve Eskom and South Africa as Acting Chairman of this impor tant utility. I wish to thank the Board of Directors and the shareholder, the Honourable Ms Barbara Hogan (MP), for the confidence she placed in me. The biggest challenge was to execute this mandate with deep humility, ensuring that such confidence is not misplaced. I am repor ting on the 2010 annual results as Acting Chairman following the resignation of both the Chairman of the Board, Bobby Godsell, in November 2009 and the Chief Executive, Jacob Maroga in October 2009. I was tasked to focus on recovery and, more impor tantly, to heal the people of Eskom following these unsettling leadership challenges. Eskom Holdings Limited 23 Integrated Repor t 2010 Tumultuous as the end of their tenure has been, as we move on and to recovering that proud status: a par tner and enabler in southern turn over a new leaf in a new chapter in the history of Eskom, I wish Africa’s development. I believe that the 2010 FIFA World to thank them on behalf of the Eskom family for the contribution CupTM will be one of the steps along that road for us. However, they made to our journey as a state-owned enterprise. I fully appreciate that we will have to earn the trust of our stakeholders again. Last year, when Eskom recorded a loss, we committed to return Eskom back to financial health and ensure that it will remain a going We have enough reason to believe that we’ll overcome the concern. I’m pleased to report back on that promise and that we are recent challenges – our list of recent achievements stands proud posting a profit.We have now removed the majority of the embedded for all to see: derivatives from our balance sheet. The vacancies in our executive • In 1994, 30% of all South Africans had access to electricity. That management committee, a worry last year for both the board and now stands at 70%, with an addition of 149 901 connections this the entire community of stakeholders, have all been filled. We will year. We have extended electricity to tens of millions of people soon announce the name of the new chief executive. since 1994, with 3 901 054 homes electrified since the inception of the electrification programme in 1991. We believe that we are slowly returning to the status we’ve always • Eskom has been recognised by the Department of Public Works had: a great place to work, a great place to invest for financiers, a for creating tens of thousands of jobs under the expanded public great customer for some of the world’s leading technology suppliers works programme. and a great source of pride for all South Africans. We are pleased to • We run a massive skills development programme, training report back at this point on the progress we’ve made over the past thousands of people every year, as well as run schools initiatives 12 months, and what still needs to be done. such as the Eskom energy and sustainability programme – a long- standing partnership between Eskom and the Wildlife and Last year we defined our objective as regaining the trust from our Environment Society of South Africa (WESSA) – and the Eskom local and regional markets and customers, the global financial markets, Expo for Young Scientists. our regulator and government stakeholders. While this is a work in • From the late 1980s until the mid 1990s we allowed the price of progress, I believe we’re well on our way to recovery. electricity to reduce – too much, as it happens – but in the process, we released in excess of R40 billion to customers between 1988 Our past and 1999, in a time when the economy needed this kind of Since 1923, Eskom has been an integral part of South Africa: Eskom’s support. story is South Africa’s story in so many ways. Eskom matters, and it • During that time and, we believe, partly as a result of our efforts, matters to all of us: South Africa won the confidence of investors and foreign • our 40 870MW net maximum installed capacity makes us one businesses. Our reputation as a world-class utility, confirmed in of the world’s top utilities, when measured in terms of generation capacity 2001 when Eskom was chosen as the Global Power Company • we generate 95% of all electricity consumed in South Africa, of the Year, served us, and served South Africa, during tough times. indeed, that’s 45% of all electricity consumed in Africa • We spend billions of rand in South Africa every year, supporting • we serve more than four million customers, across southern local business and industry. Our procurement processes have Africa, every day been instrumental in the establishment of numerous local • our infrastructure includes 390 000km of power lines: end-to-end, businesses and the empowerment of thousands of previously that’s almost 10 times around the globe disadvantaged South Africans. • we employ 39 222 people in the group to serve the nation who are driven by our central asset – which I believe is our value Our assets and challenges system We managed to do that with the people that make the Eskom family. They are South Africans from all walks of life, and without their That’s what makes our recent history so painful, while it makes special dedication, South Africa would be the poorer. Service tenures our long history a source of pride. We are, I believe, on the way of 30 or 40 years are not uncommon. They are truly representative 24 Eskom Holdings Limited Integrated Repor t 2010 Letter from the acting chairman continued of our nation, comprising a skills base arguably unmatched anywhere that Eskom’s projects have been major anchors as the economy else in South Africa. With the changes we have seen in our racial weathered the storm of recession. and gender mix since 1994, we now tap the entire skills pool of South Africa. As a massive business, with the kind of projects we undertake, and under the kind of pressure we operate, we have to continue to live They are also the reason I believe we will overcome our current, and our values, and be guided by a clear sense of ethics in all our future challenges, significant as these are: endeavours. We believe it is essential that the integrity of our people, • While the deliberate under-pricing in the early nineties, referred to processes and practices are beyond reproach. As founding signatories above, needed to stimulate the South African economy and to the United Nation’s Global Compact (which includes an anti- investments as it was coming out of the apartheid era at the time, corruption clause) and the World Economic Forum’s Partnership it is now clear that it was extended too far, and too long, and that Against Corruption Initiative, we are proud of our long record of this needs to be recovered. integrity in this regard. • After more than 80 years of delivering the lifeblood of our economy, we have let the country down through supply shortages Our procurement practices are world class – as is evidenced by and other operational issues. the outcomes of numerous third-par ty reviews which are • Our capacity expansion programme is enormous: the three projects under taken in parallel with ever y major order we place. This currently underway are among the biggest in the world, with a single includes the controversial placement of the Medupi and Kusile project such as Medupi power station being bigger than all the 2010 boiler contract with Hitachi South Africa. The process relating FIFA World CupTM investments and Gautrain combined. to this contract has been exhaustively reviewed for any • We are partnering with the South African government in working improper conduct and emerged intact. The outcomes of the through the challenges of developing a sustainable supply of third-par ty review repor t of this process have already been electricity, increasing the energy efficiency of the South African made public. economy, while facing the requirements of climate change obligations, for instance through large-scale solar and wind Road to recovery power projects. Our recent history, though, is one of several significant crises, such as • We have to continue our commitment to numerous the Western Cape crisis of 2006, the nationwide load shedding of programmes that invest in social development. These include 2007 and 2008, the financial crisis of 2009 and most recently the projects run under the auspices of the Eskom Development leadership crisis of 2009. Foundation, and focus on the empowerment of women and children in rural communities. We have let our customers down – and we have in the process disappointed and angered South Africa and ourselves. But even in I believe we are currently staring down the challenges ahead of us, these crises there is a silver lining. Earlier in this letter, I praised the which I see as supply challenges, associated funding challenges, people of Eskom and I shall close in the same vein – it is this huge managing the large capital investment programme, and regaining the team that has pulled us through these crises. In particular the trust of our customers and other stakeholders. The reason I believe recovery from the load shedding in the first quarter of 2008 – and we will emerge from this challenging phase of our history stronger the subsequent absence of load shedding – has been nothing short and with pride is unambiguous – because of the special people we of commendable. have, and the special organisation I have the privilege of stewarding, and the extraordinary support we have experienced from all our At the same time we must recognise that the crises are far from stakeholders. gone. We will be running out of capacity in the near future (as early as 2011 onwards) and there is therefore a need to urgently We will continue to leverage our investments to the benefit of the proceed with the current Eskom capacity expansion programme. South African economy – our capacity expansion programme has This includes the Medupi, Kusile and Ingula projects and to return already created tens of thousands of jobs locally and has catalysed the mothballed power stations to service, and introduce several new industries which will add value to the economy for years independent power producers in terms of the medium-term to come – and all this through a major recession. It is noteworthy power purchase programme. Eskom Holdings Limited 25 Integrated Repor t 2010 Eskom and South Africa still have to face emission reduction targets, We bid farewell to Mr Allen Morgan who resigned as a non-executive water shortages, massive funding requirements and many more director in March 2010 after serving on the board for nine years. challenges – all of this while recovering from the recession and Ms Sonia Sebotsa, an external committee member, resigned in investing in new infrastructure at a rate unprecedented in our February 2010. I thank them for their tangible contribution to the country’s history. organisation in terms of strategic guidance. I believe that there is a need for a national dialogue on our energy A word of welcome to our new board members, Dr BL Fanaroff future, while we focus on the completion of Kusile in 2017. This involves and Dr B Mehlomakulu. I would like to make special mention of making choices as a country regarding the capacity needs for the future, Mr Paul O’Flaherty who was appointed as the Finance Director in the capacity mix, who will build the required capacity, what it will cost January 2010. He has in this short space of time already left an and how it will be funded.There has been a call for greater engagement indelible mark on the Eskom business. and broader dialogue – we wholeheartedly welcome this in line with our own call for a national compact on electricity supply. Eskom A special word of thanks to Ms Barbara Hogan, Minister of Public welcomes an open and transparent engagement with stakeholders. Enterprises and Mr Enoch Godongwana, Deputy Minister, for their active interest in and suppor t of Eskom. I must also Sustainability acknowledge the guidance and strategic direction from Ms Dipuo Eskom is a leader in sustainability reporting – focusing transparently Peters, Minister of Energy. I would also like to thank Ms Vytjie on reporting our financial, technical, environmental and social impact Mentor and Ms Elisabeth Thabethe, chairpersons of the por tfolio performance. We include full disclosure of our compact with our committees on public enterprises and energy respectively, as well shareholder as well as against the norms of the Global Reporting as Ms Priscilla Themba, chairperson of the select committee on Initiative (GRI) and strive to continually improve our performance in Labour and Public Enterprises for their continued suppor t. this regard. We may make more mistakes in future – but I hope you share my Eskom is also a trend setter in this regard – as reflected in the deep belief that, while the threats and challenges are still out there, the respect we show for our value of innovation. In 1990 we were base that makes Eskom special is also still there. Together with the applying the principles of managing our business in terms of the triple special partnerships we have throughout the South African society bottom line – committed to maximise the economic, environmental we can build on the hard lessons we have learnt in recent years and and social returns of our business. only go from strength to strength from here on. We acknowledge that 2010 is declared by the United Nations as the international year of biodiversity and continue to work with our partners and stakeholders to control our impacts on ecosystems and seek opportunities to contribute to the South African biodiversity strategy. Acknowledgements Mpho Makwana I have already made special mention of the women and men of Acting Chairman Eskom who managed to prevent further load shedding over the past year. I would also like to thank my fellow board members for their counsel and am glad that we can continue to rely on their guidance and assurance for this important national asset. They have spent an enormous amount of additional time in special board meetings this year, to address the various challenges and I thank them for their invaluable time. 26 Eskom Holdings Limited Integrated Repor t 2010 Board of directors ZEE HEE-BOEM MPHO DANIEL LARS WENDY 1. Mr PM (Mpho) Makwana (39) 4. Mr LG (Lars) Josefsson (59) (Swedish) Acting Chairman with executive powers Non-executive director B Admin (Hons) (Pretoria), EDP (North Western) MSc (Applied Physics) (Chalmers, Sweden) Mpho was appointed in July 2002 Professor, Cottbus University, Germany Director: Epitome Investments Lars was appointed in July 2002 Trustee: Lovelife Trust Director: Robert Bosch Industrie-Treuhand KG, Robert Bosch GmbH, Dynea Oy 2. Ms LCZ (Zee) Cele (57) Non-executive director 5. Mr HB (Hee-Beom) Lee (61) (Korean) BCom (Fort Hare), PostGrad Dip Tax, MAcc (Natal) Executive Non-executive director Leadership Development Programme (Cambridge, USA) BA in Electronics Engineering, Seoul National University, Graduate Zee was appointed in August 2005 School of Public Administration, Seoul National University, MBA (summa cum laude), George Washington University, Ph.D in Director: Hulamin Ltd, Combined Motor Holdings, Sports Business Management, Kyunghee University, Honorary Doctorate For All Franchising (Pty) Ltd, Three Cities Investments (Pty) Degree in Public Administration, Hoseo University Ltd Hee-Beom was appointed in July 2008. 3. Mr SD (Daniel) Dube (60) Director: National Academy of Engineering of Korea, Korean Non-executive director Air, STX Energy Group Diploma in Management from the University of Leicester 6. Ms WE (Wendy) Lucas-Bull (56) Daniel was appointed in July 2008. Non-executive director Chairman: Self-help and Resource Exchange BSc (Wits) Wendy was appointed in July 2002 Director: Peotona Group Holdings (Pty) Ltd, Dimension Data Holdings PLC, Development Bank of Southern Africa, Nedbank Group Limited, Anglo Platinum Limited Eskom Holdings Limited 27 Integrated Repor t 2010 JACOB ALLEN JOHN PAUL UHURU 7. Mr J (John) Mirenge (44) (Rwandan) 10. Mr PS (Paul) O’Flaherty (47) Non-executive director Executive director responsible for finance Bachelor of Law (LLB) from the Makerere University, BCom, BAcc, CA (SA) Kampala and a Post-graduate Diploma in Legal Practice (Law Paul was appointed in January 2010 Development Centre, Kampala) Director: Escap (Pty) Ltd John was appointed in July 2008 11. Ms U (Uhuru) Zikalala (50) Director: Crystal Ventures Ltd, Rwandair Express, RECO/ RWASCO (Rwanda) Non-executive director MSc (Structural Eng) (Patrice Lumumba, Moscow) 8. Mr JRD (Jacob) Modise (43) Uhuru was appointed in August 2005 Non-executive director Director: Blue Flame Properties, Ulwazi-Bosch Skills Academy. BCom, BAcc, CA(SA), MBA (Wits), AMP(Harvard), AMP (Samford) Jacob was appointed in July 2002 Major directorships: Altron, Batsomi Group, Blue IQ Changes in board composition: Investment Holdings, Electricity Distribution Industry Holdings, • Resignation of Jacob Maroga as Chief Executive on Road Accident Fund 28 October 2009 9. Mr AJ (Allen) Morgan (62) • Resignation of Bobby Godsell as Chairman on 8 November 2009 • Appointment of Mpho Makwana as Acting Chairman, with Non-executive director executive powers on 12 November 2009 BSc, BEng (Electrical) (Stellenbosch) • Appointment of Paul O’Flaherty as Finance Director in Allen was appointed in July 2002 and resigned on January 2010 31 March 2010 • Resignation of Allen Morgan on 31 March 2010 Director: Kumba Iron Ore Ltd, Lomold (Pty) Ltd, Lomotek Polymers (Pty) Ltd, Proplas (Pty) Ltd, South African Sustainability Development Company (Pty) Ltd, Bio Therm Energy (Pty) Ltd 28 Eskom Holdings Limited Integrated Repor t 2010 Executive management committee BHABHALAZI MPHO BRIAN 1. Mr PM (Mpho) Makwana (39) 3. BA (Brian) Dames (44) Acting Chairman with executive powers Chief officer – Generation business B Admin (Hons) (Pretoria), EDP (North Western) BSc (Hons) (Western Cape) Director: Epitome Investments MBA and Graduate Diploma in Utility Management Trustee: Lovelife Trust (Samford, USA) Director: Rotek Industries (Pty) Limited, Roshcon (Pty) Limited, Eskom Enterprises (Pty) Limited 2. BE (Bhabhalazi) Bulunga (54) Operating and maintenance of generation assets throughout Managing director – Human Resources division the plant lifecycle, nuclear operations and strategic primary BA (Social Science) (Swaziland) energy sourcing. Designing, building and refurbishing electricity Providing human resources strategy, direction, policies and assets, leading project development for the Eskom group, being assurance, strategic services including health and wellness, the custodian of the non-regulated businesses and offering industrial relations, learning, organisational effectiveness and strategic and commercial lifecycle services to the divisions. remuneration and benefits. Driving culture change through effective change management and implementation and development of appropriate programmes Eskom Holdings Limited 29 Integrated Repor t 2010 STEVE ERICA PAUL 4. E (Erica) Johnson (41) 6. Mr PS (Paul) O’Flaherty (47) Chief officer – Customer network business Finance director, BCom, BAcc, CA (SA) BSc (Electrical Eng) (Cape Town), MSc (Electrical Eng) Paul was appointed in January 2010 (Cape Town), MBA (Witwatersrand) Director: Eskom Holdings Limited, Escap Limited Director: Eskom Enterprises (Pty) Limited Providing financial procurement strategy, policies, assurance Accountable for the Network and Customer Services Business and strategic services to the Eskom group. in Eskom. This entails the planning, operations and maintenance of the Transmission and Distribution network, the management Changes in Exco composition: of the customer base, long-term electricity capacity planning and the revenue stream. • Resignation of Jacob Maroga as Chief Executive on 28 October 2009 5. Dr SJ (Steve) Lennon (51) • Appointment of Mpho Makwana as Acting Chairman with Managing director – Corporate services division executive powers MSc (Phys Metallurgy) and PhD (Witwatersrand) • Appointment of Paul O’Flaherty as Finance Director Professional scientist (Pr. Sci. Nat.) • Appointment of Bhabhalazi Bulunga as Managing Director Fellow of the Academy of Engineering for Human Resources in February 2010 Fellow of the Royal Society Chairman: National Advisory Council on Innovation Director: National Advisory Council on Innovation, Electric Power Research Institute, Eskom Enterprises (Pty) Limited Supporting growth, innovation and sustainability of Eskom group by influencing strategic direction and risk management, ensuring safety, assurance, strategy execution, an optimal portfolio of assets, regulatory compliance, and effective group- wide governance, and providing strategic services in the area of information management, environment, security, insurance and research, demonstration and development to the benefit of the business as a whole. 30 Eskom Holdings Limited Integrated Repor t 2010 Executive performance overview Economic conditions path to ensure that electricity tariffs are cost reflective in the medium The slowdown in economic performance in the past year led to low term. It has, however, exacerbated the funding challenges we face consumer spending, further slowing down growth and putting the as we had requested a 35% annual tariff increase over the next brakes on demand for credit. Spending on retail and wholesale trade three years. sales plummeted to record lows, with the motor vehicle industry experiencing one of its worst years in decades. Government We are working hard to ensure that Eskom once more becomes consumption expenditure remained resilient, supported by state- a reliable supplier of electricity, a great place to work, a great place to invest for financiers, a great customer for some of the owned enterprises infrastructure programmes including Eskom’s world’s leading technology suppliers and a great source of pride capacity expansion programme. for all South Africans. Despite the huge investment drive by state-owned enterprises, real This recovery would not have been possible without the direct gross fixed domestic investment decelerated sharply in the 2009 continued support of the Government of South Africa who have calendar year by 2,3% from a strong 11,7% in 2008. It is worth provided us bridging financial support in terms of a R60 billion mentioning that Eskom’s huge investment drive played a role in (R40 billion drawn down to date) and a R176 billion guarantee for keeping fixed domestic investment in positive territory. Although borrowings (R117 billion drawn down to date). Our medium-term headline inflation averaged 7,1% (above the 6% target) in the 2009 goal is to become independently financially stable and the bridging calendar year, indications are that consumer prices may decelerate finance provided to us has set us up favourably to achieve this goal. further in 2010 as a result of the stronger currency and general weak price pressures.This should steer consumer prices lower and even to Highlights average below 6% in 2010. • Return to profitability. • Capacity expansion achievements – Ambitious agreed targets Demand for electricity is already on the increase from a negative for Eskom capacity expansion programme were exceeded. 4,2% reduction in 2009 to a positive 1,7% growth in 2010 in line with These achievements include: 452MW installed and commissioned, improving economic conditions. 600km transmission lines built and 1 630MVA installed. Two units at Grootvlei power station were commissioned and we upgraded Business overview three units at Arnot power station. The Tabor-Spencer high- During the past year Eskom started laying the foundation for its voltage line was commissioned. Since 2005 we have completed recovery in terms of its people, plant, finances, and reputation. Eskom 4 905,5MW generating capacity, 2 825,4km transmission lines and achieved some notable improvements, the most significant being the 11 730MVA transmission capacity. group’s return to profitability. Our promise was to return the group • No load shedding has taken place since end April 2008. to financial health and ensure that it remains a sustainable going • Limited usage of the expensive open cycle gas turbine stations. concern. As part of this, we have been able to remove a large portion • Re-negotiation of aluminium contracts to eliminate embedded of the embedded derivatives from our balance sheet and are also derivative components are at an advanced stage. well advanced in finding solutions for our funding gap. The vacancies • Electrification connections of 149 901 against a target of 145 615 in our executive committee, a worry last year for both the Board and were achieved. the entire community of stakeholders, have all been filled, except for • Eskom ready for the FIFA 2010 World CupTM. the permanent Chief Executive position and the Managing Director • World Bank (R28 billion) and African Development Bank in the Enterprises Division. (R21 billion) loans granted with drawdowns to commence in the next financial year. The National Energy Regulator of South Africa (NERSA), after • A 17-year coal supply agreement for Majuba power station was lengthy deliberations including unprecedented stakeholder signed. engagement announced on 24 February 2010, price increases over • Very low staff turnover, highlighting our staff commitment and the next three years of 24,8% (FY11), 25,8% (FY12) and 25,9% resilience. (FY13). This ruling is encouraging as it is a positive move along the • Solutions to our funding gap well advanced. Eskom Holdings Limited 31 Integrated Repor t 2010 Challenges Technical performance • Slower path to desired tariff level. Some of the power stations are achieving world-class technical • Increasing concern about staff security. performance, but the older stations are under pressure.The increased • Increasing losses of equipment and electricity through theft electricity demand and the low reserve margin over the last number affecting plant performance and increasing general cost levels. of years have resulted in less time available to do essential • Concerns over safety despite the reduced level of fatalities maintenance on the power stations. Many of the power stations are recorded among employees and contractors. in their mid-life and require more maintenance. Given the high load • Eskom-tied mines are not meeting the budgeted coal deliveries factors and continued challenges with coal quality, we have seen an and the impact of excessive rain led to the coal stock days reducing increase in particulate emissions and unplanned unit trips. to 37 days (target: 42 days). • Increase in particulate emissions due to poor coal quality. Despite these challenges, we have managed to avoid load shedding since the end of April 2008. Actual Actual Measure Description Target 2010 2009 UCF measures the plant availability and indicates how Unit capability factor (UCF) 86,50% 85,86% 86,07% well the plant is operated and maintained EAF measures plant availability (UCF above), plus energy Energy availability factor (EAF) losses not under the control of plant management 85,50% 85,21% 85,32% (external) and internal non-engineering constraints UCLF measures the lost energy due to unplanned Unplanned capability loss factor production interruptions resulting from equipment 4,50% 5,10%RA 4,38%RA (UCLF) failures and other plant conditions GLF indicates the extent to which the generation fleet Generation load factor (GLF) was loaded on average over the year to produce the 66,60% 66,20% 67,02% energy demanded PCLF-planned energy loss is energy that was not Planned capability loss factor produced during the period because of planned 9,00% 9,04% 9,54% (PCLF) shutdowns or load reductions due to causes under plant management control Difference between net system capability and the Reserve margin system’s maximum load requirements (peak load or peak 15,00% 16,40% 10,60% demand) as a percentage of the peak demand RA – Reasonable assurance provided by the independent assurance provider (refer page 169). The continuous growth in demand for electricity prior to early The low reserve margin in the South African electricity supply system 2008, and the resurgence in the electricity demand growth towards has, since 2006, resulted in shorter windows of opportunity to the end of 2009 and beginning 2010, combined with limited increased perform essential maintenance on our power stations, as well as less electricity generation capacity, has resulted in a significant increase in opportunity to schedule the major refurbishments required by the the production required from existing power stations. older power stations. The decrease in electricity demand which resulted in a lower load factor experience in 2008 and 2009 in The generation recovery process in 2008/09 resulted in improved comparison to previous years provided more opportunity for availability and reliability of those plant areas given priority. However, maintenance, resulting in higher PCLF in 2009 and 2010 compared to other plant areas like coal handling and particulate emissions systems 2008 and the target. have deteriorated as a result of the demanding operating regime of the coal-fired power stations and variation in coal qualities. 32 Eskom Holdings Limited Integrated Repor t 2010 Executive performance overview continued Transmission and distribution technical performance Target Actual Actual Measure (and unit) Description of measure Comments 2010 2010 2009 Records number of incidents Incident initiated by a third party Number of major with a severity greater than one ≤2 1RA 3RA and exacerbated by a incidents system minute transmission breaker failure System average Target not achieved. See interruption Reliability of supply index ≤23,50 24,65RA 24,16RA comments for SAIFI and SAIDI frequency index (number per annum) below (SAIFI) System average Target not achieved. See interruption Availability of supply index ≤50,00 54,41RA 51,51RA comments for SAIFI and SAIDI duration index (hours per annum) below (SAIDI) RA – Reasonable assurance provided by the independent assurance provider (refer page 169). SAIDI and SAIFI performance have deteriorated from the previous • 41 members of the public in 2010 (compared to 28 in 2009), year. Business plan targets have also not been achieved because of with vehicle accidents and electrical contacts remaining the the slower than anticipated benefit realisation for the Distribution major causes. An intense public safety campaign is underway network performance improvement initiatives, resource constraints, to address this. impact of conductor/equipment theft on resources and network performance and adverse weather conditions during the financial In addition our lost-time incident rate (LTIR) worsened to 0,54 per year. There has been an increased focus during the year on planned 200 000 manhours worked from 0,50 in 2009 and well above maintenance work. our target of 0,31. We are disappointed that we did not meet our target and reaffirm that the safety of our people remains Energy losses fundamental to our business, and we will not rest until we have Actual Actual achieved our safety goals through collective responsibility, Target 2010 2009 commitment and ongoing focus. Total distribution loss ≤6,00% 5,87% 5,46% Total transmission loss ≤3,30% 3,27% 3,08% Eskom is working with suppliers, customers and contractors to Total Eskom loss ≤8,76% 8,45% 7,94% integrate safety, health and environmental issues into their operations. Contractors working under our supervision or on our premises are Technical performance benchmarks indicate that Transmission is expected to comply with Eskom’s safety, health and environment within the top quartile in terms of performance, but Distribution (SHE) policy, and support the zero tolerance approach to safety needs to improve their performance. Distribution requires different management. investment priorities based on mixed urban and rural customer profiles. Unacceptably high levels of theft of equipment and electricity Environmental performance are affecting plant performance and increasing cost. Due to the nature and extent of our operations, we impact the environment in terms of our use of resources, the processes required Safety performance to generate electricity and the physical footprint we have on the land. Although there has been a reduction in the number of employee and contractor fatalities for the past year as compared to 2009, we Eskom’s water usage has stabilised to some extent. The volume of remain focused on improving safety. Fatalities are unacceptable. Sadly water used as part of the process to generate electricity improved and regrettably we lost: slightly from 1,35L/kWh in 2009 to 1,34L/kWh in 2010. • two employees, due to motor vehicle accidents, compared to six in 2009. There has been a deterioration in our particulate emissions • 14 contractors compared to 21 in 2009. Six of the fatalities were performance from our coal-fired power stations from 0,27kg/MWh attributable to vehicle accidents, three to gunshots, three to being to 0,39kg/MWh sent out linked to continued poor coal quality struck by falling objects, one to an electrical contact incident and and reduced opportunity for maintenance in prior years due to the one passed away due to a fall from height. lower reserve margins. Eskom Holdings Limited 33 Integrated Repor t 2010 Eskom obtained environmental authorisations for a number of key During the month of the world cup the Distribution division will Transmission and Distribution projects, including a waste licence for secure bulk supplies to the municipalities and key world cup the Medupi power station for its surface ash facility. installations. A joint Eskom and municipal 2010 regional task team has been established to manage key electrical supply points and Capacity expansion programme substations as well as to ensure effective communication. The Although the funding constraints delayed the awarding of certain Southern African Power Pool has pledged support to supply contracts related to the Medupi and Kusile projects, overall, the additional megawatts if required. capacity expansion programme has shown remarkable progress. The significant number of commissioned projects is evidence of Climate change Mitigating Eskom’s contribution to climate change has long been an the progress that has been made from inception in 2005 to date: integral part of our business. Our climate change strategy, developed Some 4 905,5MW of generating capacity has been installed, 2 825,4km in 2005 and our six-point plan on climate change prove our of high-voltage (400kV and 765kV) transmission lines have been commitment. The six-point plan was detailed over the last two years constructed and 11 730MVA transmission capacity has been in our annual reports and we remain committed to the principles commissioned through the construction and refurbishment and aspirations highlighted therein. Over the last year, we have been of substations. driving the climate agenda further through planning, research, pricing studies and training sessions both internally and with our key (Excluding borrowing cost Target Actual Actual industrial customers. capitalised) 2010 2010 2009 Generation capital The future of renewable energy in South Africa received a major expenditure, Rm 43 566 29 467RA 25 984 boost, with the inclusion of concentrating solar power (CSP) and Transmission capital wind in the South African Clean Technology Fund application to the expenditure, Rm 6 888 4 246RA 4 451 Generation capacity World Bank. installed, MW 420 452 RA 1 770 RA Transmission lines installed, Internal energy efficiency targets have been developed for each kilometres 428 600RA 418RA division for the next three years in order to achieve a saving of Transformers installed, MVA 1 365 1 630RA 1 255RA 1 billion kWh by 2012 and have been included in relevant compacts. Non-essential consumption savings of 9,6GWh in the year ended 2010 FIFA World CupTM readiness March 2010 and 46,7GWhLA since the project started in 2003, have The successful delivery of a reliable, uninterrupted flow of electricity been achieved. for the 2010 FIFA World Cup TM has been a major focus for the last three years. A dedicated team has driven Eskom’s internal The savings from the demand-side management (DSM) programme preparations and co-ordinated the broad-based collaborative efforts was 372MWRA, against a target of 432MW. This has increased the cumulative saving to 2 372MW since the inception of DSM in 2003. and partnerships required for an event of this magnitude. For the 2010 financial year 3 455 rebate claims were processed and settled for qualifying solar water heating systems. Over 4,6 million With regards to the Generation Business, preparations for the compact fluorescent lamps were installed in residential houses, World Cup have been ongoing throughout the 2010 financial year realising savings of 237MW for the 2010 financial year. and included the identification of potential risks to the ability of the power stations to produce electricity and the mitigation actions and Future prospects timelines to address these risks. Criteria were developed against Our short- to medium-term focus going forward is to ensure the which the readiness is assessed and have been used by Generation ongoing security of supply of electricity to all our customers and to Business leadership during on-site reviews and engagements with the ensure that we remain financially sustainable by addressing the power station and (where applicable) mine management teams. significant funding gap. The Transmission division identified ten project platforms to ensure Operationally we are focused on the successful delivery of the 2010 that the entire electricity supply chain from power station to stadium FIFA World CupTM, significant cost reductions through efficiencies operates effectively and that all risks are identified and managed. without sacrificing critical expenditure, ongoing interaction with and LA – Limited assurance provided by the independent assurance provider (refer page 169). RA – Reasonable assurance provided by the independent assurance provider (refer page 169). 34 Eskom Holdings Limited Integrated Repor t 2010 Executive performance overview continued support for the Inter-Ministerial Committee on Energy, restoring our anticipate declining in the medium term, means that operating reputation as a world-class utility and ensuring that in our ongoing conditions will be difficult for the foreseeable future. In addition, the operational business we continue to improve and perform at the uncertainty in the recovery of the global economy means that highest level. funding activities could be impacted. At the same time we must remain aware of the risks facing the Eskom remains confident that its path to recovery will lay the business. Volatility in electricity demand, which is heavily dependent foundation for a brighter future. on economic growth, coupled with a reserve margin which we Performance against the shareholder compact This is an overview of business performance against the shareholder compact1 key performance indicators. Refer to page 298 for more detailed information on the shareholder compact. Key performance indicator Target 2010 2009 2008 Generation capacity installed (Megawatts) 420 452 RA 1 770 RA 1 061 l Transmission lines installed (kilometres of line) 428 600 RA 418 RA 246 l Transmission MVA installed 1 365 1 630 RA 1 255 RA 1 295 l National load shedding (Generation induced) No load NoneRA 641,5 953,6 l or unserved energy (system minutes)2 shedding Internal energy efficiency 15% reduction of non essential consumption by 20153 46,7LA 4 n/a n/a l Capacity expansion programme budget (R million) 50 454 33 713 30 435 13 398 l Generation capital expenditure 43 566 29 467 RA 25 984 11 004 l Transmission capital expenditure 6 888 4 246 RA 4 451 2 394 l Cost of electricity (rand/megawatt-hour before embedded derivatives) 267,71 255,09RA l 240,82 197,80 Debt:equity ratio 1,75 1,68RA 1,22 0,40 l Interest cover 0,23 0,45RA (1,50) (0,65) l Percentage of local content in capacity 50,0% 73,9%RA n/a n/a l expansion contracts placed during the year. Skills development: Eskom trainees/bursars (learner pipeline) 4 500 5 255RA 5 907 5 368 l Number of engineering trainees/apprentices 3 500 3 780 RA 3 535 4 563 l Additional number of non-Eskom learners on 4505 236RA n/a n/a l Eskom-sponsored learning RA – Reasonable assurance provided by the independent assurance provider (refer page 169). LA – Limited assurance provided by the independent assurance provider (refer page 169). 1. This compact measures the performance of the electricity business (Eskom company). 2. National load shedding was avoided with the help of customers who reduced their consumption throughout the year, as well as customers who provided contractual demand reduction during periods when the system was constrained. Load shedding is recorded when all manual load shedding or curtailment instructed by the National System Operator in response to a national supply-demand constraint – (i) where this is caused by a generation or import constraint, (ii) including where such shedding/curtailment is not strictly rotational – ie, if a load shedding event lasts less than two hours, such load shedding will be reported. 3. The target is aligned to that of the Power Generation Sector, as per the National Energy Efficiency Strategy for South Africa (2005 and 2008). The percentage savings will be determined once the Eskom baseline is completed. 4. Inception to date saving, with some projects initiated prior to 2009 (the year-to-date saving was 9,6GWhLA). 5. Target is 10% of internal learners. Eskom Holdings Limited 35 Integrated Repor t 2010 Reasons for targets not being met University of Technology – Merit Bursars also sponsored by Eskom, Internal energy efficiency were unintentionally omitted from the definition, but included in the Metering and monitoring is still outstanding at some key facilities, target. Hence the number reported being below target. hence not all potential savings are yet being reported. Metered information is also required for the development of the Eskom For the new year, the definition for this measure will be amended to baseline.The targeted savings (percentage savings) will be determined include all Eskom sponsored scholarships and bursaries for non- once the Eskom baseline is completed. Eskom learners: • Dr Straszacker scholarship Generation and Transmission capital expenditure • Van der Bijl scholarship As a result of funding constraints, the capital expenditure was delayed • Merit University bursary on a number of projects, which would otherwise have been on • Merit University of Technology bursary target. • Any non-Eskom learnerships and/or apprenticeships over and above the Eskom business requirements, sponsored by Eskom. Additional number of non-Eskom learners on Eskom-sponsored learning The definition of non-Eskom learners only included the Dr Straszacker and Van der Bijl Eskom sponsored scholarships. The University and Members of Eskom’s environmental liaison committee and the land and biodiversity task team at the Ingula pumped storage site. Driving financial sustainability Finance division (corporate) 38 Summary 39 Risk profile 40 Financial performance overview 40 Results of operations 42 Liquidity and capital resources 44 Funding gap 45 Credit rating 46 Understanding Eskom’s funding 46 Group value added statement 47 Valuation of assets and impairments 47 Procurement and supply chain 48 Back to basics 49 Escap Limited 49 Eskom Finance Company Limited 38 Eskom Holdings Limited Integrated Repor t 2010 Finance division (corporate) Mandate: Provides financial and procurement strategy, policies, assurance and strategic financial services (including treasury, corporate finance, tax, corporate and regulatory reporting) to the Eskom Group. Progress this year Highlights • Return to profitability Challenges • African Development Bank and World Bank funding • Pressure on current capital structure secured • Cash flow challenges over the next three to seven • Morzal special pricing agreement renegotiated to years eliminate embedded derivatives • Slower path to desired tariff level. The MYPD 2 price • Term sheets have been agreed in the renegotiation of increase of 24,8% (FY11), 25,8% (FY12) and 25,9% the remainder of the contracts and Eskom is in (FY13) for 2010/11, announced by NERSA in February negotiations with the parties to finalise these 2010, was lower than the 35% over three years requested by Eskom • Launch of “back-to-basics” project to improve internal efficiency Future priorities • Focus on closing the funding gap • Cost saving drive and efficiencies through “back to basics” • Winning back financial reputation Financial performance Net operating income Capex funded primarily by borrowings 2010 operating profit before finance costs 2010 cash and cash equivalents Investing Other Other investing Fair value changes Capex Impact of inflation on manpower costs Ops Cash generated by operations Manpower numbers Other financing Environmental levy Subordinated shareholder loan Embedded derivatives Financing Net repayment of borrowings GWh sales volume Tariff changes Net debt issuance 2009 operating loss before financing costs 2009 cash and cash equivalents -15 -10 -5 0 5 10 15 20 -50 -40 -30 -20 -10 0 10 20 30 R billion R billion Eskom Holdings Limited 39 Integrated Repor t 2010 Paul O’Flaherty Finance Director Q: How do you intend to fund Eskom’s funding gap in the short to medium term? Ultimately tariffs must cover most of the funding of the capacity expansion programme once completed and A: To achieve both long-term sustainability and cost over the years that it generates electricity revenues. The efficiency, Eskom needs to find the appropriate balance central theme in government’s electricity pricing policy between three sources of funding, namely equity, debt is that tariffs should be cost reflective. Presently tariffs and regulated revenue net of operating costs. are set at much lower levels than where they should be. To assist with funding, the South African government has Risk profile already made available R60 billion subordinated loan The Finance division is fully aligned with the Eskom (R40 billion drawndown to date) and R176 billion of Holdings’ risk management methodology, which over guarantees (R117 billion drawndown to date). and above the funding challenge, dealt with on page 18, has led to the identification of the following predominant The debt options that are available to us in the short to causes of the division’s key risks: medium term are DFI loans, ECA covered financing, local • Differing organisational business processes. bond and commercial loan funding. We are currently • Inconsistent use of IT systems. utilising all these traditional sources of funding but since • Multiple disintegrated databases. there are substantial shortfalls in certain years we will • Deteriorating financial control effectiveness. have to find innovative funding methods in the medium • Insufficient communication. to long term. Solutions to this have reached an advance stage and should be approved and implemented shortly. In order to address these, the division has initiated a back-to-basics programme across the entire Eskom Group. 40 Eskom Holdings Limited Integrated Repor t 2010 Finance division (corporate) continued Financial performance overview | Results of group operations Key ratios 2010 2009 Current ratio ratio 0,99 1,02 Debt:equity including long-term provisions ratio 1,55 1,22 Interest cover ratio 0,57 (0,80) Free funds from operations (FFO) Rm 10 531 2 803 Return on average total assets % 2,2 (1,2) Return on average equity % 5,6 (16,0) Revenue per kWh (total electricity business) cents/kWh 31,9 24,7 Operating costs per kWh (total electricity business costs including depreciation and amortisation) cents/kWh 28,2 25,9 Bad debts as % of revenue % 0,82 1,54 Average days debtors days 22 21 Average days coal stock days 37RA 41LA Locally, we experienced the weakest economic performance in the Overall, our electricity revenue per kWh sold improved by 29,5% 2009 calendar year since the dawn of the new democracy. Not only from 24,7 cents to 31,9 cents and our electricity-related did the country experience a recession, but it suffered major job operational costs per kWh increased by 8,8% to 28,2 cents, from losses as a result. The economy contracted by 1,8% as manufacturing 25,9 cents in 2009, reflecting an overall return to operational and mining under-performed, costing the economy about 870 000 profitability. jobs in the process. This financial turnaround resulted from the 31,3% (including the Globally, economic recovery is now underway and the economy is environmental levy) interim tariff increase granted by NERSA with expected to improve trade activity. In mid-2009 we saw commodity effect from 1 July 2009, improved efficiencies and stringent cost prices recovering from the lows of 2008. The notable upturn in cutting as well as the re-negotiation of certain of the special pricing commodity prices was largely driven by the increased demand for agreements (SPAs) relating to the commodity-linked revenue commodities by the economies of China and India among others. contracts. Despite the tariff increase, South African household tariffs This meant that our key industrial customers had to increase their are still among the lowest electricity tariffs in the world. production of commodities leading to an increase in the demand for electricity locally. The operating profit for the year, before fair value gains and losses and net finance costs for the Eskom Group, was R10,2 billion (2009: The upturn in the domestic economy was reflected in the demand loss of R0,3 billion) and for the company R8,4 billion (2009: loss of for electricity which grew by 1,7% from 214 850GWh to R2,6 billion): 218 591GWh compared to a 4,2% decline in the prior year. The GWh for 2010 is at the levels we achieved in 2007 but not yet near Revenue the high of 224 366GWh achieved during 2008. Compared to the previous year, the sale of electricity increased by 1,7% (2009: decreased by 4,2%) and this coupled with a 29,5% During the 2010 financial year our aim was to return the company increase in average sales price resulted in a 31,8% increase in to financial stability and we are pleased to announce that we have electricity revenue from R53,0 billion to R69,8 billion. Group revenue, achieved a group profit of R3,6 billion (2009: loss of R9,7 billion) and which includes a small portion of non-electricity revenue, increased for the company a profit of R3, 2 billion (2009: loss of R10,1 billion). by 31% from R54,2 billion to R71,2 billion. Eskom Holdings Limited 41 Integrated Repor t 2010 Primary energy costs expansion programme and the associated forward cover taken out The primary energy costs (group and company – mainly coal) on foreign imports. increased by 16,9% from R24,9 billion in 2009 to R29,1 billion in 2010 inclusive of R3,7 billion for the environmental levy paid in Profit on embedded derivatives 2010 which was not in effect in the prior financial year. The cost At 31 March 2010, the embedded derivative assets (group and of primary energy as a percentage of electricity revenue decreased company) amounted to R0,1 billion (2009: R1,4 billion) and the from 47% in 2009 to 41,7% in 2010. We were able to secure short- embedded derivative liabilities (group and company) to to medium-term coal supplies at lower prices than in the previous R4,7 billion (2009: R8,3 billion). The net impact on the income financial year and we also made more use of our fixed cost and cost statement of changes in the fair value of the embedded plus contracts. In addition, the more expensive gas and liquid fuel derivatives for group and company was a fair value gain of turbine stations were operated at normal levels. However, as noted R2,3 billion (2009: loss of R9,5 billion). The net liability has been this was offset by the negative effects of the 2c/kWh environmental significantly reduced as a result of renegotiating cer tain special levy charge (recoverable through revenue), implemented on 1 July pricing agreements (SPAs) relating to commodity-linked revenue 2009, which resulted in a direct 14,9% increase in primary energy contracts. The negotiations on the balance of the SPAs are costs from the previous year. expected to be concluded in the next year. Operating costs Net finance cost Group and company operating costs consisted of the following The net finance cost after the capitalisation of borrowing cost • Employee benefit expenses: the group manpower numbers was R1,2 billion (2009: R1,2 billion) for the group and R1,3 billion increased by a net 1 365 to 39 222 (company by 1 351 to 36 547) (2009: R1,3 billion) for the company. resulting, together with salary increases, in a 14,9% increase (company 13,3%) in manpower costs from R15,1 billion to The amount of borrowing costs capitalised increased from R17,4 billion (company R14,1 billion to R16,0 billion). Eskom’s R3,4 billion to R8,2 billion (group and company). This was due to the manpower needs will continue to grow to bolster core and critical significant increase in the amount spent on property, plant and skills in the context of a capacity expansion programme. equipment as well as more capital expenditure financed by • Group depreciation costs increased to R5,7 billion (2009: borrowings. This also includes the cost of the re-measurement of the R4,9 billion) due to an increase in the level of capitalised property subordinated loan from the shareholder amounting to R4,6 billion. plant and equipment. Company depreciation costs increased to R5,9 billion from R4,7 billion accordingly. Taxation • Other operating expenses, which primarily include repairs and The net effective tax rate of 35,4% (2009: 29,7%) for the group maintenance, remained constant for both group and company due differs from the statutory rate of 28% (2009: 28%) due primarily to to tight controls exercised over the expenditure as a result of the disallowed expenditure and a prior year adjustment following the funding constraints during the year. finalisation of the 2009 tax return. The net effective tax rate for the • Group bad debt as a percentage of revenue was 0,82% compared company was 33,9% (2009: 29,1%) due to the same reasons stated to 1,54% last year (company 0,86% compared to 1,60%). Bad above. debts decreased due to the resolution of doubtful debts relating to some of our large customers. Net fair value loss on financial instruments, excluding embedded derivatives The major portion of this cost is the forward cover costs. Group and company forward cover costs for the year were up by 38% from R2,5 billion to R3,5 billion due to the ongoing progress of the capital 42 Eskom Holdings Limited Integrated Repor t 2010 Finance division (corporate) continued Liquidity and capital resources Group cash and cash equivalents decreased from R18,4 billion Embedded derivatives (company: R17,9 billion) to R15,5 billion (company R14,9 billion) at Eskom previously entered into four agreements with electricity- 31 March 2010 for the reasons explained below: intensive customers to supply electricity to them, where the revenue of these contracts was based on commodity prices, foreign currency rates and/or foreign production price indices Cash flows from operating activities the present value of which gave rise to differences when The group net cash from operations for the year decreased slightly compared to the present value of the forecast revenues if the to R11,6 billion (2009: R11,8 billion) consistent with the decrease in standard megaflex tariff was charged (an embedded derivative). company net cash from operations to R11,0 billion from R12,4 billion In terms of IFRS the difference needs to be accounted for on in 2009. the balance sheet as either an asset or liability with the resultant movement being credited or charged to the income statement. The group currently carries sufficient funds each month to meet four Original intent months’ operational cash flows and interest and debt repayments. In the early 1990s large electricity contracts with specific pricing The intent is to fund all capital expenditure through additional debt arrangements were concluded between Eskom and major and borrowings over the longer term and also with operational cash clients. A consultative process was followed between surpluses in the medium term as the tariff starts to become more government, the customers and Eskom in setting up these contracts. The contracts were approved by the appropriate cost reflective. council governing the industry at the time. The rationale for entering into these contracts was based on the following: Compared to the previous year’s 41 days, coal stock days were • To stimulate the regional economy. 37 days as at year end. The decline in coal deliveries over the • To use Eskom’s excess capacity. 2009 festive season due to the underperformance of the coal mines • To enable the supply of electricity to energy-intensive supplying Eskom, and the impact of rain resulted in the system coal industries and align with their pricing requirements. stock days falling to 37 days, below the target 42 days. Plans have • To align with the government’s growth objectives for the been implemented to facilitate stock day recovery to the targeted SADC region. levels. Contract performance • Since inception up to recently the contracts have delivered At the end of March 2010 debtor days remained consistent at revenues in excess of cost and enabled Eskom to use excess 22 (2009: 21 days). capacity. • However, due to the decrease in the outlook for the Cash flows used in investing activities aluminium price during 2009 coupled with the 31% increase Cash flows used in investing activities increased by 13,9% from in tariffs given by NERSA, the valuation of the embedded R42,9 billion to R48,9 billion for the group and the company derivatives at 31 March 2009 resulted in a fair value loss of from R43,3 billion to R47,3 billion. R9, 5 billion.. • As a result of the current negotiations and the expected outcomes of such negotiations the net liability of the Group capital expenditure, (excluding capitalised interest) included in embedded derivatives has reduced to R4,6 billion as at this line item increased by 10,4% (company: 9,4%) from R43,6 billion 31 March 2010 resulting in a gain in the income statement of (company R43,5 billion) to R48,2 billion (company R47,6 billion) due R2,3 billion. to the progress of the capacity expansion programme. However, this Going forward expenditure was still R16,7 billion behind the budget due to a • Eskom is renegotiating the contracts in an attempt to remove deferral of expenditure as a result of the tight financial constraints the commodity-linked pricing element, which will in turn experienced by the group during the year. remove the embedded derivative. • Eskom will not be entering into contracts of this long-term Eskom exceeded the capacity expansion targets set by Government. nature going forward. Some 452MW of new capacity was added against a target of The pricing arrangements on the contracts may give rise to 420MW. Six hundred kilometres of new transmission lines were built, profits or losses on the fair valuation of embedded derivatives against a target of 428km. In the case of new transformers we in the future, depending on the final outcome of the negotiations installed 1 630MVA (target: 1 365MVA). Eskom Holdings Limited 43 Integrated Repor t 2010 The new coal (Kusile and Medupi) and the peaking capacity additional debt was obtained to fund the capacity expansion expansion project (Ingula) are on track in terms of schedule and programme. The group return on assets for the year was 2,2% as the cost. The remaining two return-to-service stations are slightly group returned to profitability compared to a (1,2)% in the previous behind schedule. year. Cash flow from financing activities During the year, R60,1 billion (2009: R54,0 billion) in funding was raised Cash flow from financing activities for the group decreased by 11,5% at the group and company level (debt securities issued R16,3 billion, (company: 13,9%) from R38,9 billion to R34,4 billion and the subordinated loan from the shareholder R30,0 billion and R13,8 billion company from R38,5 billion to R33,2 billion despite the net increase from other borrowings). An amount of R20,4 billion (2009: in debt securities and borrowings.This was primarily due to increased R23,5 billion) was repaid by the group in respect of debt securities and cash outflows to purchase forward exchange contracts to cover the borrowings. increase in foreign purchases associated with the capacity expansion programme and an increase in net interest paid. Capital expenditure (including interest capitalised) Our total capital programme, including capacity expansion is firmly The group debt:equity ratio (including long-term provisions) underway and since inception of the capacity expansion programme weakened from 1,22 to 1,55 at the end of the financial year as in 2005, we have spent a total of R98,9 billion. 2010 2009 2008 Description of capital expenditure (group) Rm Rm Rm Generation division 40 484 31 824 15 239 New capacity (R29 467 million relates to capacity expansion projects) 31 343 27 015 11 004 Technical plan projects 5 485 4 515 3 939 Asset purchase and other 3 656 294 296 Transmission division 7 143 6 465 3 553 New strengthening projects (R4 246 million relates to capacity expansion projects) 6 108 5 724 3 027 Land and rights 173 70 87 Capital spares 582 523 346 Asset purchase and other 280 72 93 Distribution division 7 079 6 446 5 605 Direct customers 2 511 1 848 1 771 Strengthening 1 356 1 859 1 589 Refurbishment 558 859 617 Electrification 1 324 861 904 Asset purchase and other 1 330 1 019 724 Other divisions 1 916 1 848 58 Subsidiaries 509 516 530 Elimination of inter-segment transactions (128) – – Total 57 003 47 099 24 985 44 Eskom Holdings Limited Integrated Repor t 2010 Finance division (corporate) continued Capacity expansion programme by project (including interest capitalised) Total approved project cost Total inception to date expenditure Project Rm Rm Camden 6 061 5 739 Grootvlei 7 803 7 107 Komati 12 965 8 402 Kriel 1 973 1 035 Arnot 1 496 1 233 Matla refurbishment 3 564 689 Duvha 2 450 58 Majuba rail 4 235 238 Ingula 21 800 6 131 OCGT and Gas 1 8 762 7 861 Sere 3 356 40 Kusile 141 500 14 697 Medupi 125 500 32 076 Tutuka 185 2 Camden rail 63 9 Transmission projects 26 800 13 623 Total 368 513 98 940 The capital expenditure incurred (excluding interest capitalised) yet not been approved by either the board or through the from 2005 to date in relation to these projects is as follows: Department of Energy’s (DoE) Integrated Resource Plan (IRP2) Year (R million) Budget Actual process. This plan also assumes tariff increases of 25% in 2014 and 2015 and inflationary related increases thereafter. 2005/6 3 015 2 835 2006/7 7 058 8 226 As a result, during the early part of the 2010 calendar year, Eskom 2007/8 12 112 12 783 secured a mandate from its shareholder to formally pursue a much 2008/9 28 655 30 460 broader range of potential financing solutions, and we have engaged 2009/10 50 454 33 713 advisers to evaluate these as well as specific funding opportunities Cumulative 101 294 88 017 around the Kusile power station that is currently under construction As can be seen from the above table, due to the funding constraints in eMalahleni in Mpumalanga. Eskom has experienced, a slowdown in the capital expansion programme has occurred. This support from Government is in addition to the R60 billion loan committed during the previous financial year (R40 billion received to Funding gap date) and the R176 billion Government guarantee (R117 billion The funding gap over the next seven years based on the plan utilised to date) provided to enable Eskom to raise debt. formulated by Eskom after the multi-year price determination (MYPD 2) tariff ruling and as communicated in the public domain The outcome of the exercise to identify additional funding solutions during April and May 2010, indicated that Eskom is facing has resulted in the following initiatives by Eskom to date to close the cumulative cash shortfalls of R115 billion by 2013 and R190 billion funding gap: by 2017 (the year in which the Kusile power station is fully • Eskom expects to fund a significant portion of the capacity commissioned). expansion programme in various debt markets, notably the bond and loan markets, domestic and, in particular, international. These amounts, however, include capital expenditure of R144 billion • These markets offer Eskom access to large pools of competitive, relating to capacity expansion projects beyond Kusile which have as term funding but Eskom will need to maintain a strong investment Eskom Holdings Limited 45 Integrated Repor t 2010 grade rating and strong financial ratios to maximise its market cash on hand, together with current undrawn secured facilities are access at the least cost to the business. sufficient to meet Eskom’s present working capital and capital • Eskom is therefore working with Government to use the existing expenditure needs during that period. unutilised Government guarantee in a way that directly strengthens its credit profile. In turn, Eskom will be able to access the debt Credit rating markets on a stand-alone basis going forward to complete the Currently, Eskom’s ability to raise funds beyond the tariff increase is capacity expansion programme as a strong investment grade limited by its credit rating as assigned by the various rating agencies borrower. (see chart below). The above initiatives are expected to result in cash stability over the Concerns raised by the rating agencies on Eskom’s balance sheet next seven years (excluding the R144 billion estimated in the period ability to finance the huge infrastructure investment without a for capacity expansion beyond Kusile). cost-reflective tariff adjustment have yet again put the spotlight firmly on Eskom’s financials. However, this concern is mitigated by With regard to capacity expansion projects beyond Kusile, Eskom’s present strong support from the South African government as position is that once the IRP2 has been published by the DoE later shareholder. this year, indicating the new capacity requirements, they will need to be prefunded at inception to avoid a repeat of Eskom’s current Should Eskom be downgraded to below investment grade rating financial position. in the future, very limited funding will be available. Investors are more willing to lend to a corporate with a higher rating and Even though this funding plan requires final Government approval therefore a lower risk of default. Regaining the current ratings and implementation, the Eskom board believes that Eskom is a going once downgraded could take a considerable financial effort and a concern over the next 18 months as its expected working capital very long time. It is therefore, Eskom’s number one priority to resources, by way of cash generated from operations and existing maintain its current credit rating. Credit ratings and outlook 2010 2009 2008 Standard and Poor’s – Foreign currency Rating BBB+ BBB+ BBB+ CreditWatch CreditWatch Outlook Negative negative negative – Local currency Rating A- A- A- CreditWatch CreditWatch Outlook Negative developing negative Moody’s – Foreign currency Rating Baa2 Baa2 A2 Possible Outlook Negative Negative downgrade – Local currency Rating Baa2 Baa2 A1 Possible Outlook Negative Negative downgrade FitchRatings – National Long-term (zaf) Rating AAA AAA AAA Outlook Stable Stable1 Negative – National Short-term (zaf) Rating F1+ F1+ F1+ Outlook Stable Stable Stable 1. Changed from negative to stable on 10 June 2009. 46 Eskom Holdings Limited Integrated Repor t 2010 Finance division (corporate) continued Understanding Eskom’s funding New plant is funded from a combination of sources – retained earnings (reserves), new equity, borrowings, and regulated revenue and tariffs. Borrowings Eskom has a borrowing target of approximately R90 billion per year over a three-year period. This borrowing programme is supported by Government guarantees of R176 billion of which R117 billion have been committed to date. Funding from various sources namely local and international debt capital markets, development finance institutions (DFIs) such as the EIB, African Development Bank and World Bank are included in the overall borrowing mix. DFIs generally bring concessionary terms and contract with Eskom on the strength of our shareholder. Access to the debt capital markets depends on an organisation’s credit rating. Regulated revenue Regulated revenue assists in a move towards achieving sustainable tariffs, it strengthens the organisation’s capacity to borrow and it supports an investment grade credit rating. While borrowings and other various forms of funding can be used to finance the capital expenditure ultimately tariffs must cover the cost of operational expenditure and the interest charge. Refer to www.eskom.co.za/annreport10/002.html for a review of Eskom’s productivity movement over the past year, as well as a graph of Eskom’s competitiveness over 10 years. Group value added statement 2010 2009 2008 Rm Rm Rm Value created Revenue 71 209 54 177 44 448 Other income 571 647 445 Less: primary energy and other operating expenses (41 668) (46 970) (28 166) Value added 30 112 7 854 16 727 Finance income 1 614 3 152 2 933 Wealth created 31 726 11 006 19 660 Value distributed 28 804 23 201 17 072 Benefits to employees 17 390 15 135 11 353 Social spending to communities 59 88 70 Finance costs to lenders 11 085 7 755 5 448 Dividends to shareholder – – – Taxation to government 270 223 201 Value reinvested in the group to maintain and develop operations 2 922 (12 195) 2 588 Depreciation and amortisation 5 726 4 918 4 284 Borrowing cost capitalised (8 234) (3 436) (727) Deferred tax 1 810 (4 009) (801) Net profit/(loss) after dividend 3 620 (9 668) (168) 31 726 11 006 19 660 Revenue per employee (Rm) 1,82 1,43 1,26 Value added per employee (Rm) 0,77 0,21 0,47 Value added per GWh (Rm) 0,14 0,04 0,07 Wealth created per employee (Rm) 0,81 0,29 0,56 Benefits to employees per employee (Rm) 0,45 0,41 0,33 No of employees 39 222 37 857 35 404 GWh 218 591 214 850 224 366 Eskom Holdings Limited 47 Integrated Repor t 2010 Energy flow 2010 (GWhours) Generation of electricity Supply International • Generation 232 812 • Generation 232 812 • Purchases 10 579 • Distribution 114 • International 13 754 • Wheeling 3 175 • Total 232 926 • Subtotal 246 566 • Gross 13 754 • Distribution 114 • Total 246 680 SA pool Sales • Local 205 364 • International 13 227 Demand • Total 218 591 • Sales 218 591 Technical and other losses • Losses 20 848 Pumping and internal use • Distribution 12 839 • Pumping and internal 4 091 • Pumping 3 695 • Transmission 8 009 • Wheeling 3 175 • Internal 396 • Total 20 848 • Total 246 705 • Total 4 091 Valuation of assets and impairments Procurement and supply chain Eskom does not view each asset in isolation but rather all its assets The objective of procurement and supply chain management is to as a pool.There is tariff cross-subsidisation between certain customer secure supply while balancing the competing objectives of lowering the categories (depending on electricity consumption, geographical total cost of ownership and ensuring the quality, timing and safety of location and voltage supply) – refer to page 134 of the Customer our purchases. At the same time, the objective is to meet Eskom Network Business report for further details. Eskom recovers all the targets in terms of government’s AsgiSA programme. These include costs of supplying electricity to its overall customer base and earns a broad-based black economic empowerment (B-BBEE) targets and the positive return on its assets. On this basis, the directors believe that initiation of Competitive Supplier Development Programmes (CSPD). no impairment adjustment is required to the value of assets relating (Refer to page 70 in the Corporate Services division for the AsgiSA to any particular customer category in the current period. objectives.) To deliver this, Eskom has a dual structure with strategic and high value project commodities consumed across the Generation, Transmission and Distribution divisions being secured through Group value added statement – 2010 initiatives led by the Finance, Primary Energy and Enterprises divisions. The Generation, Transmission and Distribution divisions procure 5% 3% 1% naturally owned commodities for use in that specific division and Employer execute against contracts secured for strategic commodities at the Social spending corporate level. Finance cost 35% 55% Taxation Eskom has established a structured strategic procurement process that Deferred tax effectively enables government’s localisation, empowerment, skills, Reinvested employment and industry development policies, all while maintaining strict governance and control.Through the implementation of strategic 1% and project sourcing, fact-based local content targets are set for each transaction. Governance structures specifically check for CSDP initiatives within each sourcing strategy.This strategy is also fully aligned with the Government Industrial Policy Action Plan (IPAP) that seeks to address the ad hoc nature of public procurement which is failing to 48 Eskom Holdings Limited Integrated Repor t 2010 Finance division (corporate) continued deliver fully on either value for money or key industrial policy objectives. under the old BEE criteria. However, there are some major Fundamental changes to procurement legislation, regulations and corporations who have not updated their B-BBEE certification or practice are being proposed at shareholder level so as to enable a who have not yet been certified. Procurement and the line divisions more conducive environment for value delivery. are to take a more pro-active role in ensuring that their suppliers obtain certification. To date, R368 billion of Eskom’s investment in capacity expansion has been committed to contracted suppliers. These suppliers are The black women-owned target has not been met, partly due to the contractually obliged to invest in South Africa in capacity specific to small number of BWO companies in our active sourcing sectors. the Eskom supply chain. New South African based supply chains for boiler and turbine parts for the Medupi and Kusile power stations Back to basics have already been created, benefiting local businesses and addressing Eskom’s sustainability requires world class financial and human South Africa’s industrialisation agenda. Refer to page 130 for further resources reporting and forecasting to enable effective decision discussion in this regard. making. However, this is not an easy task for our organisation as we still face a number of challenges, such as different business and system Across all major capacity expansion projects, Eskom’s localisation processes employed by divisions and regions. content exceeds 50%. This means that for every rand spent by Eskom, more than half remains within the country. To mitigate these challenges Eskom has embarked on a Back2Basics programme driven by the Finance, Human Resources and Corporate The current capacity expansion programme alone is projected to Services divisions. The objective is to standardise and simplify create approximately 40 000 direct and indirect jobs. A total of identified processes, policies, procedures, controls and reporting, 1 837 individuals (of the 5 200 new jobs that suppliers to the ultimately creating a foundation for the consolidation and re- capacity expansion programme committed to employ) have implementation of SAP. The management information we produce started their training interventions. The benefit from these through our systems and processes must be complete, accurate, commitments will only be realised over time as the programme is relevant, accessible and timely (CARAT) consistently. These CARAT being implemented. standards will guide Eskom to efficiency in our business. Eskom’s B-BBEE attributable spend performance The programme scope has been structured on a matrix basis and This covers the performance of the Eskom company as a purchaser, includes identified finance and human resources business processes, where we will benefit from the attributable spend, dependent on the with standardisation streams cutting across all process areas to B-BBEE certification of our suppliers. ensure conformance to standardisation requirements. Eskom company Target 2010 2009 1 The first output of the programme will be process and control Measured procurement spend (Rbn) n/a 72,6 73,3 manuals, which will outline activities within each process with Attributable spend (Rbn) n/a 20,82LA 46,3 associated controls, policies and reporting requirements. Extensive Attributable spend (%) 50,0 28,65 63,17 training on these standardised processes will be provided to all role Attributable BWO spend (Rbn) n/a 2,5 4,6 players and end users. BWO as % of attributable spend (%) 15,0 12,02 10,0 Limited assurance provided by the independent assurance provider (refer LA Associated with these process changes is a change required in page 169) behaviour and leadership for Eskom as a whole. The way we do The attributable spend target is in line with the Codes of Good business will definitely change, for the better, as it will be more Practice, which prescribes a minimum of 50% for the first five years efficient. For this reason, change management forms a critical part of since the inception and implementation of the codes. the programme. The 28,65% achieved indicates that many of our top suppliers are The Finance, Human Resources and Corporate Services divisions not meeting our certification requirements for B-BBEE. Many of have joined hands in taking the first step towards becoming a world these relate to contracts entered into when Eskom still operated class Eskom. This is evident in the sponsorship of this project, which 1. Eskom converted to the B-BBEE Codes of Good Practice during 2009. The 2009 figures are obtained from the Empowerdex certificates.  There are no comparatives for 2008. 2. The B-BBEE attributable spend has been verified and checked for accuracy from the top 295 suppliers out of 11 790 active vendors. Eskom Holdings Limited 49 Integrated Repor t 2010 resides with the Finance director, the Managing director: Human Escap is subject to supervisory and regulatory legislation including Resources and the Managing director: Corporate Services. the Short-Term Insurance Act, Financial Services Board Regulations, Companies Act, PFMA, Income Tax Act, VAT Act, SARS regulations, Escap Limited Reserve Bank regulations, etc. Ultimate responsibility for compliance Eskom’s local captive insurance subsidiary company, Escap, continues resides with Escap’s board of directors. to provide a full range of customised short-term insurance products to the Eskom Group and manages the insurance needs through a The need for Gallium, as our offshore captive insurance company, combination of reinsurance with the external insurance market and was reviewed in terms of our risk financing strategy as Escap is able a level of self insurance. This methodology achieves effective cost to cater for the organisation’s self-insurance needs. As a result, solutions for Eskom by balancing risk and the cost of insurance. Gallium was effectively closed down in the prior year and paid Eskom a dividend of R165 million (2009: R30 million). Escap’s board of directors has overall responsibility for the establishment and oversight of Escap’s risk management framework Eskom Finance Company Limited and has a risk committee that is responsible for developing and The core business of the Eskom Finance Company (EFC) is the monitoring its risk management policies. The risk committee meets granting of employee home loans which is a key part of quarterly to identify and analyse the risks Escap faces, to set Eskom’s retention and attraction of key staff strategy. The loan appropriate risk mitigation strategies, and to monitor development of book is funded both through external securitisation and internal risks and adherence to the agreed strategies. funding. Note 3 on page 204 of the financial statements provides further information in this regard. Palmiet pumped-storage scheme near Grabouw in the Western Cape. Driving sustainability Corporate Services division 52 Summary 54 Climate change 56 Internal energy efficiency 57 Managing our environmental impact 59 Safety 63 Quality 65 Research and development 66 Information management 67 Anti-fraud and anti-corruption programmes 68 Contributing to society 52 Eskom Holdings Limited Integrated Repor t 2010 Corporate Services division Mandate: Drives research and innovation and ensures sustainability of the Eskom group, by assuring statutory compliance, assuring effective group-wide corporate governance and legal practice and policies, drives environmental, safety and occupational health programmes while developing and ensuring execution of appropriate business strategies, undertakes research and development, develops and executes Eskom’s developmental initiatives, ensures optimal information management, a quality culture, and integrated risk management. Progress this year Highlights Challenges • Successful handling of fraud and corruption cases • Overall poor environmental perfor­mance • Implementation of a new integrated risk management system across divisions related to particulate emissions and environmental legal compliance • Integration of climate change considerations in the business and input into various government processes • Increasing concern about staff security • Underground coal gasification research project ready for co-firing at Majuba • Conductor and lattice theft increasing and approvals to continue design of medium-scale power plant • Fraud and corruption still a concern • Utility load manager (ULM) piloted successfully • Continuing fatalities • Safety cardinal rules rolled out • Inclusion of solar and wind in the South African Clean Technology Fund application • Division received ISO 9000 certification • Received award for practice in promoting openness and setting up systems that promote compliance with the provisions of the Promotion of Access to Information Act (PAIA) • Completion of full assurance programme • Execution of security improvement programme • Award from Department of Public Works for jobs created • Small Business Expo • Eskom Expo for Young Scientists • Record number of entries for eta Awards for excellence in energy efficiency Future priorities • Improve IT efficiencies and reduce costs • Revise climate change strategy in line with recent national and international developments and integrate with IRP2 • Roll out large-scale renewable energy plant • Step up internal energy efficiency • Reduce risk profile • Roll out phase 2 of underground coal gasification project • Roll out phase 2 of utility load manager project • Continue improvement in environmental performance • Implement the King III Report and new Companies Act • Tap innovation potential internally • Roll out quality strategy • Continue drive for improvement in safety performance • Revise sustainability performance index for Eskom • Roll out SAP upgrade and back-to-basics programme together with Finance and Human Resources Eskom Holdings Limited 53 Integrated Repor t 2010 Dr Steve Lennon Managing Director: Corporate Services Q: What is Eskom doing to increase its renewable energy mix? A: Eskom remains committed to increasing the share of renewable energy in its mix. However, the reality is that funding for renewables has been a stumbling block. In the last year the negotiations with the World Bank, through our government, has proven fruitful in terms of securing funding for solar and wind projects.This funding will now go a long way in growing both the solar and wind capacity in the country. We see this as the start of a major expansion of renewable investments by Eskom and other players in the power sector, and during 2010/11 we will be developing the details behind these investments. The following group issues are covered in this section of the report: • Risk (specific to Corporate Services division) • Business planning and target setting • Climate change • Internal energy efficiency • Managing our environmental impact • Safety • Quality • Forensic and anti-corruption • Research and development • Information management • Contribution to society 54 Eskom Holdings Limited Integrated Repor t 2010 Corporate Services division continued Risks related to Corporate Services division (CSD) specifically are: Risk Treatment plans Financial and funding constraints • Re-aligning short- and medium-term business requirements in line with reduced budgets. At the same time CSD is refocusing on core business and downscaling on peripheral activities. This is supported by more pro-active cash flow management and cash saving initiatives • New emphases on contract review and intensive supplier negotiations • Lastly, innovation is actively promoted as being one of our core values through various activities championed by the innovation circuit Skills availability, retention and sourcing • Implement a localised retention strategy while specific skills are managed through the development of a function-specific succession plan Information security, confidentiality, • Review of the current information and communications strategy. More stringent web inte­grity, availability content filtering and vulnerability assessment is done, while a consolidated patch roll-out strategy on IT systems minimises rogue attacks • Update information security policy and standards and put in place processes for IT service providers to report on frequency and vulnerability management Business planning and target setting • Successful carbon school held with key industrial customers Eskom’s business planning sets the strategic and operational direction • Initiated work on the impact of carbon taxes on electricity pricing for the company and captures the necessary financial, operational • Great success with underground coal gasification project and the and resource plans to support this direction. A secondary purpose is utility load manager for residential customers to comply with the requirements of section 52 of the Public Finance • Advice given to the UN secretary general on energy access and Management Act (PFMA) and to support Eskom’s policies. The energy efficiency business plan covers a period of three years. Challenges Part of the business plan process is an environmental scan of internal • Lack of certainty on the future climate change regime from and external environments. Eskom as a business strongly depends on Copenhagen how well it responds to the events unfolding in the political, economic, • Delay of renewable projects due to funding constraints social, technological, environmental and legal spheres. These are • Increase in absolute CO2 emissions from 221,7MtRA (2009) to tracked regularly. 224,7MtRA Global events in the current environment are very dynamic and Last year was a pivotal year for climate change in the international largely unpredictable. Rapid technological changes are fast shaping arena. The climate talks in Copenhagen marked the culmination of the behaviour of Eskom’s key stakeholders such as customers, two years of negotiations on the future international climate suppliers and the public. These are then addressed in the business change regime. plan objectives and performance targets. The Copenhagen climate change talks closed on Saturday, Linked to the business plan is a robust key performance indicator 19 December 2009, without reaching an international legally binding (KPI) management process that includes independent development, agreement. review, appraisal and approval of targets at various levels of the organisation. The KPI setting process caters for a controlled However, negotiations resulted in a political agreement called the revaluation and revision of the target should an event that is outside Copenhagen Accord, which deals with important issues such as management control occur. mitigation (both developed country targets and developing country action) and financing, but it has a long way to go in dealing with issues Climate change such as adaptation. During 2010, there will be further negotiating sessions to hopefully arrive at a global climate change deal by the end Highlights of 2010 as part of the conference of parties to be held in Mexico. • Integrated planning. Planning was based on a low carbon future – This is especially important for South Africa, as it hosts the conference embracing the principles and objectives for the country as set out of parties at the end of 2011 – where there must be an agreement in the long-term mitigation scenarios (LTMS) on the post-2012 regime. RA – Reasonable assurance provided by independent assurance provider (refer page 169). Eskom Holdings Limited 55 Integrated Repor t 2010 South Africa’s undertaking to act is distinct from the legally binding quantified emission reduction commitments required from all developed countries. Further, South Africa’s efforts were emphasised The climate change negotiation process as voluntary and conditional on two key elements. Firstly, South This process is governed by the United Nations Framework Africa requires the UN climate change summit at the end of 2010 Convention on Climate Change (UNFCCC).This international in Mexico to conclude with a fair, ambitious, effective and legally treaty has been ratified by all countries and the goal is to binding international agreement. This would be required to ensure consider what can be done to reduce climate change and to legally binding obligations by developed countries on both mitigation cope with whatever temperature increases are inevitable. and support. Secondly, the extent of the actions to be taken by South Africa, and other developing countries, will depend on the provision The UNFCCC does not contain any legally binding of support from the international community, in particular finance, technology and support for capacity building from developed commitments for any country. In 1997 the Kyoto Protocol countries, in line with their commitments under both the Framework was negotiated and became the legal instrument of the Convention on Climate Change and the Bali Action Plan. While UNFCCC. The major feature of the Kyoto Protocol is that it the Copenhagen Accord makes provision for some of these sets binding targets for 37 industrialised countries and the conditionalities, the requirement for legally binding emission reduction European community for the reduction of greenhouse gas commitments from developed countries remains elusive. The (GHG) emissions. This amounts to an average of 5% against negotiations in 2010 will provide more certainty in this regard. 1990 levels from 2008 to 2012. The Protocol came in force in 2005, following ratification by the majority of countries. Most South Africa is already undertaking significant mitigation actions in famous for not ratifying Kyoto and therefore not bound to any relation to: energy efficiency in commerce, energy and industry; legal obligation, is the USA, which is historically the largest mechanisms to support the rollout of renewables and alternative emitter of GHGs. energies; working towards integrated rapid transit systems; and the rollout of solar water heaters. The five-year period for countries to reduce their emissions Eskom’s participation in the climate negotiations is two-pronged. will end in 2012 and therefore a new regime is required post We participate in both the government negotiations and the business 2012, which includes additional targets for developed meetings. We specifically give input on mitigation issues, including countries. The negotiating session in Copenhagen last year market-related issues and sectoral approaches. We also provide input was seen as the watershed for agreeing the post-2012 to the technology negotiations and provide support in general to architecture and emission targets for developed countries and the South African delegation where necessary. International business a commitment by developing countries to deviate from has a strong presence at the negotiations through bodies such as the business as usual. It is important to note that the Kyoto World Business Council for Sustainable Development (WBCSD), Protocol contains many other commitments for developed International Chamber of Commerce (ICC), International Emissions countries, including financing and technology transfer. Trading Association (IETA) and the World Economic Forum (WEF). We are a member of these organisations and we actively participate Countries are still legally bound to deliver on these in their development of position papers for the negotiations on an commitments even post 2012. It is therefore not the Kyoto ongoing basis. Protocol that comes to an end in 2012, as is often quoted, but the target period for developed countries to comply with Eskom commitment – pre- and post-Copenhagen emission reduction targets. Every year in June the governments Climate change has long been an integral part of our business. Our of the UNFCCC and Kyoto Protocol countries come together climate change strategy, developed in 2005 and our six-point plan on to negotiate how these agreements will be met. climate change are testament to this. The six-point plan was detailed over the last two years in our annual reports and we remain committed to the principles and aspirations highlighted therein. Over the last year, we have been driving the climate agenda further through South Africa’s obligation planning, research, pricing studies and training sessions – both The requirements of the accord means that South Africa will need to internally and with our key industrial customers. prepare a report on its mitigation action for formal submission to the (UNFCCC), confirming that South Africa would undertake a range of Eskom has made significant strides in ensuring that the planning voluntary nationally appropriate mitigation actions (NAMAs). South process takes into account a low carbon future and prioritises energy Africa’s undertaking ensures that these actions will enable the efficiency internally and externally. In the past the integrated strategic country’s emissions to deviate below the projected business-as-usual electricity planning process was based on a least-cost optimisation emissions by 34% by 2020 and 42% by 2025. This level of effort imperative, while the sustainability indicators were used to do the would enable emissions to peak between 2020 and 2025, plateau for sensitivity analyses of the plans. The last round of planning used the approximately a decade and decline in absolute terms thereafter. least cost plan as a reference plan, but several other plans were developed based on achieving a low carbon future as contained in the objectives of the LTMS work and policy objectives at a national level. The process included a robust multi-criteria decision analysis process 56 Eskom Holdings Limited Integrated Repor t 2010 Corporate Services division continued which resulted in the plan of choice being one that entrenched a low carbon future. This was outlined in Eskom’s MYPD 2 submission. It is a significant mindset shift but it also needs active support – especially from a financial point of view.This plan needs to be financed and supported at a national level. In the last year we have also initiated studies on carbon pricing and the impact of a carbon tax on electricity pricing. Further work will look at the macroeconomic impacts. It is extremely important to recognise that climate change is not an issue that can be addressed in isolation. We need to address this as a nation in an integrated manner. For Eskom, stakeholder engagement and liaison with government will continue to play a very crucial role in achieving its climate change aspirations. Further, there are several opportunities that Eskom could embrace in the next few years up to 2013 and beyond. These include stepping up energy efficiency programmes, and realising benefit from the carbon market and green financing options. While these options do not currently generate enough revenue to cover the entire expense of a new technology, they certainly offer an opportunity to augment Eskom’s financing options. Eskom’s research into ground-breaking technologies such as concentrating solar power, underground coal gasification, smart grids and the utility load manager must move to the implementation phase. An important aspect of Eskom’s six-point plan on climate change is adaptation to the negative impacts of climate change to ensure reliability and continuity of supply. Climate-related risks include, among others, the availability of water for power generation in drought conditions, severe precipitation and extreme weather events impacting on the ability to supply, infrastructure damage and relocation of people. In the last year we completed a scoping exercise to determine the requirements for an adaptation strategy, including working with other institutions to look at downscaling climate models target in the shareholder compact is aligned to that of the power to better inform the strategy. We also completed an extensive generation sector, as per the national energy efficiency strategy for desktop review of what other utilities around the world are doing in South Africa (2005 and 2008). The percentage savings will be terms of adaptation strategies. We have also looked at this from a risk determined once the Eskom baseline has been completed. and insurance point of view. The full adaptation strategy will be • Year-to-date (March 2010) savings are 30,6GWhLA (contribution developed over the coming year. by non-essential consumption was 9,6GWh)LA and 75,3GWh since the project started in 2003 (contribution by non-essential Internal energy efficiency consumption was 46,7GWh). These savings were achieved Eskom’s internal energy efficiency campaign is aimed at implementing through energy efficiency initiatives at Lethabo power station, energy saving projects within our facilities and educating our Braamfontein and Rosherville buildings, the Eskom employee CFL employees on how to save energy. We are also addressing the actions exchange programme and initiatives in buildings in the northern highlighted in the World Business Council for Sustainable region. Various other facilities have been implementing measures Development’s buildings manifesto and have signed their pledge. to save energy. However, as these savings have not been measured and verified, the savings have not yet been recognised. Highlights • An Eskom baseline, using the metered information from the key • A company pledge, directive and procedure has been completed. sites and modelling techniques for the smaller sites, has been • Targets have been developed for each division for the next three initiated.1 years in order to achieve an internal energy saving of 1 billion • An extensive communications campaign was re-launched and kilowatt-hours by 2012 and these have been included in relevant involved a revamped and dedicated website (including interactive compacts. games and quizzes), articles in internal publications, road shows • A building monitoring website has been developed to track and and educational posters/table talkers highlighting the seven things manage energy consumption at our key facilities. Several buildings staff can do to cut down on energy use at the office. are being monitored. • Internal energy efficiency is included in the Eskom shareholder compact and relates specifically to savings in our facilities. The LA – Limited assurance provided by independent assurance provider 1. The percentage saving will be determined once the Eskom baseline has been (refer page 169). completed Eskom Holdings Limited 57 Integrated Repor t 2010 Challenges • Very few projects were actually implemented. • The delay in the installation of meters has delayed the development of the Eskom baseline as metered data is required. Concentrating solar power (CSP) project The renewable energy research programme has identified Future priorities CSP as a high-potential future electricity generation option, • Installation of metering at remaining key sites. given Southern Africa’s significant solar energy resource. • Completion of the Eskom baseline. CSP technologies convert the thermal energy of the sun’s • Implementation of projects. radiation into steam which powers a steam turbine to • Monitoring and managing the consumption of key sites through the building monitoring system. generate electricity. • Continued communication, education and awareness on internal Eskom is developing a 100MW CSP pilot plant that uses the energy efficiency. central receiver technology with molten salt storage. This research project will demonstrate the full-scale commercial Managing our environmental impact operation of this technology in the South African context. Due to the nature and extent of our operations, we impact the environment in terms of our use of resources, the processes required The World Bank’s approval in April 2010 for a USD3,75 billion to generate electricity and the physical footprint we have on the land. loan to help South Africa achieve a reliable electricity supply This has led to us adopting a systematic approach to environmental includes financing for this CSP pilot plant and the planned management to ensure our environmental duty of care. wind power plant along the west coast of South Africa. Environmental performance is managed as an integral part of our governance structure, from the board sustainability committee, to the executive management committee (Exco) sustainability and safety subcommittee. Accountable environmental managers and environmental practitioners from the various line divisions ensure the effective implementation of environmental management systems throughout our business. Corporate Services division sets overall Eskom strategy on the environment and provides oversight, reporting and assurance. Through this commitment, our objective remains to ensure continual improvement in our environmental performance by setting environmental performance indicators and controlling our activities through management systems and ensuring that our decision-making processes are based on balanced criteria.These commitments are set out in our safety, health and environment policy. Our activities that have significant environmental impacts include: Highlights • the construction of power stations and transmission and • Continual improvement in the development and implementation distribution power lines – impact on land use and ecosystems of environmental management systems – maintenance of • the generation of electricity at our coal-fired power stations – use ISO 14001 certification for parts of Eskom and additional ISO of resources (coal and water), land transformation, gaseous and 14001 certification for the peaking power stations. particulate emissions and waste generation (such as ash) • Continuation of environmental stakeholder forums for engagement • the generation of electricity at our nuclear power station – land on Eskom’s capacity expansion programme. transformation, radiation and radioactive waste • Continued engagement with the Department of Environmental Affairs with regard to air quality, biodiversity, EIAs and waste Based on these significant aspects of Eskom’s operations, the management. environmental highlights, challenges, performance and future • Research outcomes in the area of managing our environmental priorities are set out in the divisional sections of this report. impact (air quality, biodiversity and waste and water management). Challenges • Activities resulting in us not complying with environmental legislation on 55RA occasions (2009PY: 114RA). While an improvement in controls and practices has led to a decrease in the contravention of environmental legislation from the previous year, the level of non-compliance is still not acceptable. RA – Reasonable assurance provided by independent assurance provider (refer page 169). 58 Eskom Holdings Limited Integrated Repor t 2010 Corporate Services division continued Consolidated Eskom non-compliance with environmental legislation, waste disposal and expenditure1 Target Actual Actual Actual 2010 2010 2009 2008 Environmental legal contraventions (number)2 0 55RA 114RA 46 l Environmental legal contraventions reported in terms of Eskom’s operational health dashboard (number)3 0 0 124 6 l Materials containing asbestos disposed of (tons) 4 n/a 321,1 RA 3 590,8 LA 321,0 Materials containing polychlorinated biphenyls (PCBs) thermally destructed (tons) n/a 19,1 RA 505,6 LA 17,0 Environmental expenditure (Capex) (Rbn) n/a 0,6 1,1 1,3 Environmental expenditure (Opex) (Rbn) n/a 0,9 1,0 0,5 RA – Reasonable assurance provided by the independent assurance provider (refer page 169). LA – Limited assurance provided by the independent assurance provider (refer page 169). 1. The operational environmental performance areas and contribution to non-compliance to environmental legislation, waste and expenditure are set out in the divisional sections contained in this report. 2. Under certain conditions, contraventions of environmental legislation are classified in terms of the Eskom operational health dashboard (OHD) index. These include instances where censure was received from authorities, non-reporting to authorities as may be legally required, non-reporting in Eskom, a repeat legal contravention, or when the contravention was not addressed adequately. Managing directors can escalate any significant environmental legal contravention to the OHD. 3. The 2009 annual report reported 11 environmental legal contraventions in terms of the OHD. During this reporting period, one legal contravention regarding the illegal disposal of waste for the Medupi project was identified following an investigation. This was found to be a repeat legal contravention in the preceding year and is recorded as such. 4. Quantities of waste disposed of at registered waste sites. Our objective is to integrate environmental management into our inherent variable cost to the production of electricity from non- systems, processes and activities for a sustainable electricity supply, renewable sources, similar to fuel costs. ensuring continual improvement in environmental performance. To achieve this, our environmental management objectives and The environmental levy was introduced as a separate charge for all criteria are entrenched in our procurement and investment tariffs. It is anticipated that national treasury will publish a carbon tax strategies, governance structures, operational practices and decision- proposal for stakeholder comment in 2010. making processes. Environmental management In line with this objective we have developed and implemented Our focus is on re-enforcing environmental controls and decision environmental management systems throughout our operational making, emissions control and water management practices and divisions. We based our environmental management systems on ISO driving continual improvement by taking a systems approach to 14001, a framework of agreed rules for our process to control what environmental management. Opportunities exist to implement our we do and how we do it. own internal energy efficiency projects and expand on water conservation programmes, and conservation of certain land to Looking forward secure its biodiversity value. In 2006, South Africa’s national treasury released a draft policy paper for comment entitled “A framework for considering market-based Benchmarking our key environmental performance instruments to support environmental fiscal reform in South Africa”. indicators In order to provide some perspective to our environmental Government introduced a 2c/kWh environmental levy on non- performance, a few other electricity utilities’ performance is provided renewable generation effective from 1 July 2009.The total value over in the table below. Their technology mix is aligned to an extent with three years is projected to be in excess of R15 billion. This will be an ours. All information is based on information published in the respective utilities’ annual reports. Eskom Holdings Limited 59 Integrated Repor t 2010 Electricity Electricity Electricity Electricity utility in Electricity utility in utility in utility in Canada/USA utility in Eskom Europe Australia USA Australia/Mexico Australia 2009/10 2009 2009 2009 2008 2009 Total electricity produced (GWh) 232 812 187 200 23 746 53 100 43 105 26 999 Electricity generation mix Coal-fired power stations (%) 92,8 61,4 88,3 35,0 71,1 99,8 Renewables (%) 0,5 3,5 11,7 8,0 5,3 0,2 Pumped storage and other (%) 1,2 1,1 n/a 2,0 n/a n/a Gas (%) 0,02 15,9 0,0 37,0 23,6 n/a Nuclear (%) 5,5 18,1 0,0 18,0 n/a n/a Environmental performance Water usage (ℓ/kWhSO) 1,38 1,74 1,73 13,111 5,89 3,18 CO2 (kg/kWhSO) 0,98 0,80 0,91 0,53 0,90 0,94 Particulate emissions (g/kWhSO) 0,39 0,02 0,12 n/a 0,12 0,19 SO2 emissions (g/kWhSO) 8,10 0,32 3,74 4,76 1,08 4,35 1. 90% of water used is returned to the rivers – therefore the high value Biodiversity remain concerned about this unacceptable performance. To this end, This year is the United Nation’s International Year of Biodiversity. a number of safety improvement initiatives have been and are in the Globally, there is an increased level of awareness of the importance process of being implemented, to reduce the number of safety- of biodiversity and the relevant ecosystem services that we rely on. related incidents for contractors and employees to zero. We are participating in the World Business Council for Sustainable Development (WBCSD) ecosystems focus area, which is currently The implementation of a safety improvement programme has led to developing a corporate guide for ecosystem valuations. Furthermore, enhanced operational discipline among employees and visible felt we have accepted the challenge of road testing the guide – in parallel leadership in safety. We have identified critical behaviours or – to better understand our impact on ecosystem services and actions that, when performed, have a very high probability of subsequently investigate measures to mitigate this impact. causing incidents resulting in severe injuries or fatalities. In order to prevent these unacceptable consequences, we implemented During this reporting year the Eskom land and biodiversity task team five safety cardinal rules that apply to Eskom employees and other (represented by all the business areas within Eskom) has revised persons performing work for Eskom. This initiative has led to zero various biodiversity-related procedures, and drafted a biodiversity fatalities among employees in the high-risk activities covered by policy and standard within the framework of the ISO 14001 the cardinal rules. environmental management system. There has also been a greater focus on the health and safety The Eskom-EWT strategic partnership performed a review of the of Eskom contractors and the public. To this end, Eskom is working effectiveness of the partnership, which highlighted the need to look with suppliers, customers and contractors to integrate safety, at more pro‑active and collective mechanisms to manage our impact health and environmental issues into their operations. Contractors on biodiversity.This led to the development of a partnership strategy working under our supervision or on our premises, are expected with related KPAs and KPIs. It is our intention to test the reporting of to comply with Eskom’s safety, health and environment (SHE) policy, these KPIs within the short term. and support the zero tolerance approach to safety management. Eskom leadership has taken the initiative to engage with Safety contractors in the form of quarterly contractor forums to ensure Although there has been a reduction in the number of employee and that the standard of safety management at Eskom sites is in line contractor fatalities for the past year as compared to 2009, we with best practice. 60 Eskom Holdings Limited Integrated Repor t 2010 Corporate Services division continued Safety performance Unit of Actual Actual Actual measure 2010 2009 2008 Employee safety Total fatalities number 2RA 6RA 17 l Electrical contact fatalities number 0 4 5 l Vehicle accident fatalities number 2 0 8 l Other fatalities number 0 2 4 l Lost-time incident rate, including occupational diseases index 0,54RA 0,50RA 0,46 l Electrical contact injuries number 17 13 25 l Contractor safety Total contractor fatalities number 14RA 21RA 12 l Electrical contact fatalities number 1 1 1 l Other fatalities number 13 20 11 l Public safety Total public fatalities number 41 28 42 l Electrical contact fatalities number 27 22 32 l Fatalities from other causes number 14 6 10 l RA – Reasonable assurance provided by the independent assurance provider (refer page 169). Divisional safety performance Employee Contractor LTIR fatalities fatalities Generation 0,50 0 0 Transmission 0,80 0 1 Distribution 0,72 2 8 Enterprises 0,29 0 3 Nuclear 0,32 0 1 Corporate Services 0,50 0 0 Primary Energy 0,00 0 1 Generation Business Engineering 0,00 0 0 System Operations and Planning 0,00 0 0 Finance 1,40 0 0 Human Resources 0,97 0 0 Office of the Chief Executive 2,20 0 0 Eskom Holdings Limited 61 Integrated Repor t 2010 Continued focus is required on enhancing safety training and In memoriam awareness, skills and competency, supervision and operational Our thoughts and prayers go to the families of the employees and discipline to drastically improve the current performance. contractors who passed away in the line of duty this past year: • We unfortunately lost twoRA employees this financial year in Employees Contractors comparison to the sixRA we lost in 2009. Both the fatalities were Piet Tshabalala Mbolwane Malambu attributed to motor vehicle accidents. Mzuzi Ngema Irvin Assegaai • Sadly 14RA contractors lost their lives this financial year compared Magrieta Assegaai to 21RA in 2009. Six of the fatalities were attributable to vehicle Bernardus Janse van Vuuren accidents, three to gunshots, three to being struck by falling objects, Phathuxolo Zingunyele one to an electrical contact incident and one passed away due to Ndiafhi Nekhubvi a fall from height. Saule Sikhonza • Sadly 41 members of the public died in 2010, with vehicle accidents Frans Mkhonto Sonnyboy Phetla and electrical contacts remaining the major causes. A massive Bokang Luphondo public safety campaign is addressing this. Thabane Khoza Samuel Ramogopotsi Employee fatalities Freddy Mochike Nelson Mdingane 2010 2009 Lost-time incident rate (LTIR) 2008 The progressive LTIR is a proportional representation of the occurrence of lost-time injuries over 12 months. The actual lost-time 2007 injury rate (LTIR) performance was 0,54RA per 200 000 manhours 2006 worked against a target of 0,31 for 2010 in comparison to the 0,50RA reported in 2009 and 0,46 in 2008. We are disappointed that 0 5 10 15 20 Number of employee fatalities we did not meet our LTIR target, and reaffirm that the safety of our Bee sting Struck by Burns Falling objects Falls Electrical Vehicle Gunshot Tractor Aircraft people remains fundamental to our business. We will not rest until contact accidents accident crashed we achieve our safety goals through collective responsibility, commitment and ongoing focus. Contractor fatalities In risk-specific terms, the leading causes of injuries were motor 2010 vehicle accidents, caught and struck by objects and falls. 2009 Contractor and construction management 2008 While there are instances of good health and safety practice among 2007 some contractors, overall contractor performance is still discouraging. 2006 0 5 10 15 20 Number of contractor fatalities Shot Aircraft crashed Assault Burns Falling objects Falls Electrical Vehicle Caught and contact accidents struck by RA – Reasonable assurance provided by independent assurance provider (refer page 169). 62 Eskom Holdings Limited Integrated Repor t 2010 Corporate Services division continued Establishing and maintaining an effective contractor health and safety management programme requires significant changes to the current procurement and supply chain management processes. As part of the contractor safety management system, it will become mandatory Safety requirements for vendors for all vendors who wish to undertake work for Eskom to undergo a Eskom has implemented wide-ranging policies, procedures thorough SHE evaluation/pre-qualification process. This in-depth and standards for vendors. We expect our vendors to adhere process will ensure that all contractors take the necessary practicable to our policies and procedures in addition to their own safety programmes. In an effort to manage Eskom vendors more steps to apply safe systems of work and comply with the legislative effectively, we have set minimum, mandatory safety, health requirements of the OHS Act together with Eskom’s requirements. and environmental requirements in the procurement and Vendors who are found to be deficient will not be permitted to supply chain management processes for all vendors that undertake work for Eskom. A comprehensive health and safety we engage with. integration standard has been drafted and awaits authorisation. What is a vendor? A national contractor MD forum was hosted by Eskom on A vendor is a person or legal entity who qualifies to render a 5 November 2009 and was well attended by senior Eskom officials service to, or performs work for, Eskom and is listed on the and contractors. The theme was “Am I doing enough to ensure the Eskom vendor database. Vendors may include contractors, health and safety of my employees?” The focus of this forum was on service providers, consultants and suppliers. how Eskom and contractors can work together in delivering on our projects with zero harm to people and the environment. It also What are the Eskom mandatory requirements? served as an opportunity for Eskom and contractor management to In addition to our current corporate policies and procedures, interface on health and safety-related matters. a standard is being drafted to ensure that mandatory SHE requirements are addressed. The commercial process will use these requirements to prescribe minimum criteria to evaluate, select and monitor vendors. What is expected from vendors? All vendors must be familiar with and comply, at all times, with all applicable SHE statutory requirements as well as Eskom policy and procedural requirements while performing work for Eskom. Measures to ensure vendor health and safety must include: • identifying the requirements of the job and assessing the risks involved • consulting and co‑operating with Eskom personnel on relevant health and safety issues • providing requisite training and induction • ensuring competence of employees and subcontractors • review of work and risk assessment • appropriate supervision • exercising a duty of care towards all contractors and service providers Eskom Holdings Limited 63 Integrated Repor t 2010 Safety benchmarks The benchmarks were based on 2009 data and the results were concluded at the beginning of 2010. Benchmarked companies Company Description MOL is a Hungarian oil and gas company and one of the largest multi-national corporations in Central MOL Group Europe Fortum is a leading energy company in the Nordic countries and other parts of the Baltic Rim. Activities Fortum cover the generation, distribution and sale of electricity and heat as well as the operation and maintenance of power plants Core businesses are electricity, gas, water and waste water, waste disposal and recycling. The German RWE group develops innovative products and services for safe and reliable supply and disposal E.ON is on track to becoming the world’s leading power and gas company. They are already the world’s E.ON largest investor-owned energy service provider. Benchmark fatalities As part of Eskom’s goal of zero harm we have implemented a behaviour observations process to change the safety culture from Mol Group being re-active (by measuring and investigating accidents) to being RWE pro-active (by observing and addressing unsafe acts and conditions through management visibility in the workplace). We also continue to Fortum enforce our five cardinal rules which are based on critical behaviours or actions that, when performed, have a very high probability of E.on causing incidents resulting in severe injuries or fatalities. Eskom 0 5 10 15 20 25 30 Our cardinal rules are: Fatalities • Rule 1: Open, isolate, test, earth, bond and/or insulate before touch Note: Displayed fatalities include employee and contractor fatalities combined. • Rule 2: Hook up at height • Rule 3: Buckle Up Benchmark employee LTIR • Rule 4: Be Sober Mol • Rule 5: Ensure that you have a permit to work Group RWE Quality Eskom has embarked on a quality improvement journey in order to Fortum integrate quality into all activities throughout the organisation. A E.on quality management strategy was developed in 2009 as a roadmap to achieve, sustain and improve quality throughout our value chain. Eskom As part of the strategy, we adopted the ISO 9001:2008 standard as 0 0,2 0,4 0,6 0,8 1 the framework for business management in all our divisions and LTIR subsidiaries. 64 Eskom Holdings Limited Integrated Repor t 2010 Corporate Services division continued Management system certification Division ISO 9001 ISO 14001 Generation In progress (currently Matimba, Hendrina In progress (peaking power stations are and peaking power stations are certified) currently certified) Transmission Certified Certified Distribution In progress In progress Enterprises In progress (to date: Project Development In progress Department) Nuclear In progress In progress Corporate Services Certified In progress (to date: Climate Change and Sustainability) Primary Energy In progress In progress Generation Business Engineering In progress In progress System Operations and Planning In progress In progress Finance In progress In progress Human Resources In progress In progress Those divisions that are not certified are developing and implementing their quality management system and overall progress towards compliance is estimated to be 60%. A demonstration solar-powered traffic light in the Western Cape. Eskom Holdings Limited 65 Integrated Repor t 2010 Research and development The Eskom research and development programme is driven by the Sustainability and Innovation business unit. The department provides Underground coal gasification research a variety of services such as scientific and technical advice, research The underground coal gasification (UCG) technology has and consulting, analysis, detailed design as well as strategic technical been successfully piloted for more than three years, and initial planning services and direction. technical predictions have been confirmed. The next phase of the demonstration 100 – 140MW open-cycle gas turbine, for The research is focused on the needs of the line divisions within planned commissioning in 2014, has recently been approved. Eskom. Thus, the focus is predominantly on applied, not pure Stakeholder engagement and a full environmental impact research and the research outputs are linked to the strategic and assessment (EIA) are already underway. The plant will be able operational needs of Eskom. In order to remain relevant, however, to prove and quantify the technical, environmental and a portion of research resources is allocated to technology innovation commercial performance of the technology, and will be able and emerging technology options. Our research expenditure for the to predict design and performance of a full-scale, commercial year amounted to R197 million (2009: R207 million). UCG plant. For further details on the expenditure and research focus The demonstration plant remains under the stewardship areas, go to www.eskom.co.za/annreport10/003.html of Corporate Services division, but the project now involves all Eskom divisions and stakeholders that will be responsible for ensuring the success of the demonstration plant, and Demonstration and pilot projects subsequent uptake of the technology when proven viable. As research matures, it leads to the establishment of demonstration plants that take the understanding of the technology to the next level. A In parallel to the demonstration plant design, the pilot plant is demonstration project is a production scale asset that is built to evaluate presently ramping up gas production, in order to prove the and validate prior research findings and recommendations to enable concept of co-firing the UCG gas with coal in Majuba power future business decisions (especially the understanding of risk and station’s unit 4. The interconnecting pipe work between the certainty of costs) regarding the applicability of the technology in an power station and the UCG gas field has been installed, and Eskom context. Eskom’s investment in the demonstration and pilot will be commissioned as soon as unit 4 is scheduled for an programme over the last year is shown below. outage. The pilot plant is gaining incredible interest locally and globally Actual given the technology’s potential for clean and lower cost expenditure Project name R000 electricity production. Solar power for Africa (100MW concentrated solar plant) 2 981 Plant monitor (Online analysis of equipment characteristics) 20 448 Utility load manager (Load management device) 22 914 HVDC (High voltage direct current power transmission) 1 800 Underground coal gasification (Majuba demonstration) 198 945 247 088 66 Eskom Holdings Limited Integrated Repor t 2010 Corporate Services division continued Most of the allocated research capital will continue to be invested in Information management the concentrating solar power and underground coal gasification The information communication technology (ICT) team focused projects in an effort to diversify the generation portfolio. Significant primarily on the following five areas in the past year: investment is also being made in the utility load manager (ULM) • Operational excellence: confidentiality, integrity and high availability which is a form of load control on the customer’s premises. of data and systems. • Financial sustainability: lowering total cost of ownership for ICT. The purpose of the demonstration programme is to support Eskom’s • Solutioning and innovation: responsiveness to business demands, infrastructure expansion programme through research that improves optimal feasible solutions, processes and systems, standardised and quality, reduces cost and reduces the time taken from conception to optimised systems. commission. It will also drive and challenge our capital expansion • Safety, health, environment, quality, people: putting people first. technology choices based on the knowledge gained through • ICT image: thought leadership, communication, ICT value demonstration, by ensuring that key technologies that can proposition: contributing to a positive image for Eskom. fundamentally change Eskom’s current technology path and improve performance are well understood and part of our technology plan. Other initiatives included the introduction of sustainability initiatives such as green IT, enhanced WEB and media services and attaining ISO 9001 certification. A major milestone was the successful disposal of arivia.kom and conclusion of a sound outsourcing agreement with Innovation circuit T-Systems South Africa. To support one of Eskom’s core values, namely innovation, Eskom Sustainability and Innovation (S&I) formed the Eskom ICT adopts cutting-edge solutions and technology. Many of innovation circuit (IC). the new innovations such as online vending, enhancements on billing The IC website went live at the end of 2006 and now boasts systems, weigh-bridge (coal) system, integrated business management 4 616 registered users. A total of 1 491 ideas have been reporting contributed to improved decision making and operational submitted by staff, of which 158 are either under review or in excellence in the business. the implementation phase, while numerous have already been implemented. The IC accepts any ideas that could potentially benefit Eskom. Some ideas under review include an energy educational board game, various cost-saving initiatives (such as lower cost wooden electricity poles), a print optimisation project and recycling drive. Innovative financial instruments for the funding of energy efficiency products are also being explored. Innovation is part of human nature and we are realising immeasurable value through the Innovation Circuit, ensuring that innovation becomes part of what we do in Eskom. Eskom Holdings Limited 67 Integrated Repor t 2010 Below are the current Eskom mission critical systems as determined through a business impact risk assessment: IT system Target availability Delivered availability Performance Maximo (Distribution maintenance) 99,00% 99,49% CC&B (Billing) 98,80% 99,30% GTX (Contact centre) 99,00% 99,69% OVS (Online vending systems) 99,00% 99,81% GPSS (Generation – production and sales) 100% 100% Phoenix (Transmission) 98,00% 99,20% The business continuity and disaster recovery plans were invoked Anti-fraud and anti-corruption programmes successfully when three hardware failure incidents occurred. There The forensic and anti-corruption department assists Eskom with were no significant information security incidents on our network good corporate governance and prevents, mitigates, detects and this year. responds appropriately to fraud, corruption and other forms of economic crime or acts of dishonesty. This is in support of our Going forward commitment as a signatory to the United Nations Global Compact. There will be a major focus on cost reduction; efficiency improvements; simplification of systems and management of IT in Eskom. Other Partnering Against Corruption Initiatives (PACI) principles were future priorities include: developed by a multi-sectoral and multi-national task force of bodies • Computing centralisation: opportunities to save money and such as the World Economic Forum, Transparency International and promote sustainability through resource centralisation while the Basel Institute on Governance, of which Eskom is a member. The maintaining the quality and integrity of the computing environment. aim of these principles is to provide a framework for good business • Application support: widening the range of requirements with practices and risk management strategies to counter corruption. regards to applications while integrating, developing and supporting PACI principles commit companies to two basic actions: them as best possible. • a zero-tolerance policy towards bribery, and • Systems assurance/resilience: continually improve protection from • development of a practical and effective internal “programme” in viruses and maintain our reliability of 99,99% uptime for our line with the policy network and all production systems. • Technology collaboration: intended to result in a better IT It is against this background that Eskom has developed a fraud environment across the business. prevention policy to express its commitment to fight fraud, corruption and economic crime, in line with the national anti-corruption strategy of South Africa and in line with the principles of “partnering against corruption”. 68 Eskom Holdings Limited Integrated Repor t 2010 Corporate Services division continued Contributing to society Progress this year Future priorities Highlights • Support programmes in communities where Eskom • Through the Eskom Foundation, Eskom has impacted 196 implements its capacity expansion projects, focusing primarily beneficiary organisations for the year. on capacity building, skills development and job creation, • In the “Top caring companies spontaneous awareness:2009” thereby enhancing the socioeconomic fabric of communities survey Eskom was rated: in which we operate. – among the top five caring companies since 1998; and • Support developmental programmes in rural communities. – second top caring company by urban blacks and first by • Continue to ensure local content, skills development and the rural blacks – and ranked first among public enterprises in participation of small, black enterprises and black, women- this survey. owned organisations in communities around Eskom capacity • ISO 9001:2008 certified. expansion programme sites. Haylene Liberty, Acting Senior General Manager (Development Department) Q: Why does Eskom focus on corporate social investment? A: Eskom recognises the importance of operating in a corporate socially responsible manner.The organisation is part of the communities where we operate and as such the welfare of those communities is of strategic importance. Corporate social investment not only contributes to the wellbeing of communities, but also promotes skills development, education and enterprise development, jobs, poverty alleviation and employability. It also contributes to a pipeline of available critical skills and creates a future supplier pool for the organisation and other industries. Ultimately, these contribute to the country’s priorities of shared economic growth, poverty alleviation, and reducing unemployment. Summary of corporate social investment 2010 2009 2008 No of No of No of projects Rm projects Rm projects Rm Grants for flagship and national programmes and economic and social sector projects 43 47,4RA 43 47,8 64 44,9 Donations to registered, non-profit philanthropic organisations 153 8,4RA 109 4,7 135 3,9 Rural development 7 2,9 RA 50 27,0 45 21,0 Total donations and grants 203 58,7RA 202 79,5RA 244 69,8 RA – Reasonable assurance provided by the independent assurance provider (refer page 169). Eskom Holdings Limited 69 Integrated Repor t 2010 Corporate social investment Distribution of grants, donations Eskom Development Foundation In the period under review, the Foundation approved a total of The Eskom Development Foundation (Foundation) is an association 43 grants for R47,4RA million towards economic and social develop­ incorporated under section 21 of the Companies Act and is a wholly ment projects, national programmes and flagship projects; and owned subsidiary of Eskom Holdings Limited (Eskom) as its sole 153 donations for R8,4RA million were approved for philanthropic shareholder. The Foundation receives its mandate from Eskom and is and welfare organisations. This brings the total grant and donation governed by an independent board whose directors are accountable making to R55,8 million for this reporting period (2009: R52,5 million). to Eskom through the shareholder compact. It complies with the PFMA and the Companies Act and follows good governance A total of 196 organisations benefited from the grants and donations principles. The Foundation is responsible for the co‑ordination and made during the reporting period, with some 590 440 project integration of Eskom’s corporate social investment (CSI) strategy beneficiaries (2009: 239 617 beneficiaries). The significant increase in with a view to enhance quality of life, while maximising the strategic the number of beneficiaries is due to increased interventions in the impact for Eskom. education sector, resulting in more schools and learners participating. The CSI strategy is aligned to the objectives of AsgiSA, with the Donation of assets Foundation supporting economic and social programmes that Assets that had been written off in Eskom were donated to the contribute to job creation, poverty alleviation and skills development. Foundation. These assets were in turn donated to institutions such as schools and welfare organisations. The estimated market value of In executing its mandate, the Foundation provides support to these assets amounted to R30 000 in the current financial period. programmes in the economic and social sector through grants, particularly in communities where Eskom implements its capacity Refer to www.eskom.co.za/annreport10/csi expansion programme and, in broad terms, supporting the theme of for further information about the Eskom Development Foundation. energy. Donations are made to registered non-profit philanthropic organisations. AmaBlom flower project at the Nelspruit Incubator funded by the Eskom Foundation. 70 Eskom Holdings Limited Integrated Repor t 2010 Corporate Services division continued Focus on development in communities around unemployment by 2014. Eskom’s most significant contribution to strategic sites AsgiSA is through its core business of supplying reliable electricity. The Foundation revised its strategy in 2010 with a view to focus on However, Eskom also leverages associated activities such as development in communities around Eskom new build sites. Planning procurement, and its corporate social investment (CSI) programmes, has been completed to implement projects in the communities for the development of the disadvantaged. An amount of R6,4 million around Lephalale (Medupi site). Communities around Kusile site was spent on the development of contractors through the Eskom include eMalahleni, Delmas, Ogies and Phola. contractor academy in Polokwane and East London. In the period under review, grants for the before-mentioned project AsgiSA elements and targets continue to form part of key deliverables sites have been approved, with implementation rolling out from May of the capacity expansion programme and some of the power 2010. These included contributions towards mobile classrooms for delivery procurement contracts. Cumulatively, since the inception Pine Ridge primary school in eMalahleni, Tokoloho primary school in of the capacity expansion programme, up to and including the Grootvlei and Ithembalethu daycare centre benefiting 2 036 learners. fourth quarter of the reporting period, of the R103,2 billion Mpumalanga Education Development Trust centre in eMalahleni (2009: R96,4 billion) contracted, R62,3 billion (2009: R52,4 billion) received a grant to equip the science centre. This was a joint funding was contracted to local suppliers. This represented over 60,5% (2009: 50%) of the total value contracted and exceeded the venture between Anglo Coal, MTN, Vodacom and Eskom. The centre 50% Eskom had compacted with the shareholder. services 552 primary and secondary schools in this district with 217 358 educators and learners. In line with main contractors’ commitment to empowerment spending, of the R62,3 billion (2009: R52,4 billion), some R26,0 billion The Eskom contractor academy, which aims to build capacity for (2009: R22,8 billion) has been awarded to second tier large, black selected black contractors, particularly to render services to Eskom suppliers, small, black enterprises and black, women-owned and other industries during the construction phase of Kusile and organisations. beyond, received a grant. Thirty contractors will be selected to participate in the academy. Skills development remained a key focus of the initiative, with a target of 5 000 learners to be developed in skills such as engineering, Twenty-two black, and black women-owned SME owners will be technicians and artisans during the Medupi, Kusile and Ingula selected, in consultation with the Kusile stakeholder forum, for SME construction phases. To date 2 324 learners have been registered in business and management skills training to improve their business various programmes since construction started in 2007. performance with a view to be listed on the procurement database of Eskom and other industries in the area. Rural development Eskom’s rural development programme contributes to government’s The Nkangala further education and training (FET) college in Integrated Sustainable Rural Development strategy (ISRDS) to Middelburg, which services the Nkangala district and includes address development needs in the rural areas of South Africa. By eMalahleni, Delmas, Ogies and Phola received a grant to equip their design, its focus is on the basic needs of the most indigent fitting and turning as well as the automotive workshops for trade test communities, aimed at closing the gap between the main stream and accreditation.The FET will become a fully operational centre with the the second economy. During the period under review, R2,9 million upgrading and accreditation as a trade test centre where all their was spent. This expenditure includes part implementation of a national vocational certificate learners as well as staff can prepare for number of projects that will be fully implemented during the coming trade tests. This grant to the FET is central to the delivery of priority financial year. These projects include the upgrading and building of skills needed to ensure access and participation in South Africa’s schools in the Eastern Cape and KwaZulu-Natal. growing economy. According to the strategic plan for higher education, enrolment at these institutions should rise from 15% to In addition, a capacity building programme for schools was introduced 20% within fifteen years. in January 2008 in KwaZulu-Natal, which was also implemented in two clusters, each comprising a number of schools in KwaZulu-Natal These interventions inter alia promote Eskom’s goodwill and support in the 2009 academic year. One cluster was in Hluhluwe with seven to harmonise its business activities in these communities. schools, benefiting 3 982 people and the other in Turton/Umzumbe with 12 schools, benefiting 6 591 people. According to a baseline Accelerated and Shared Growth Initiative for assessment conducted at the beginning of the programme at South Africa the above schools, the average pass rate was at 64%. Year end Eskom remains committed to the objectives of government’s results reflect an average pass rate of 78%. This represents a Accelerated and Shared Growth Initiative for South Africa (AsgiSA), 14% improvement after the introduction of the capacity building which are to promote economic growth and halve poverty and programme. Eskom Holdings Limited 71 Integrated Repor t 2010 CASE STUDY: Coromandel dairy farm, Lydenburg, Mpumalanga The Eskom Development Foundation’s grant to Coromandel dairy farm indicates how strategic assistance has helped a fledgling agri-business expand its productivity output and create new jobs. The farm is an iconic piece of land in Mpumalanga between Dullstroom and Lydenburg. In 2002 Coromandel farm made history when ownership was transferred to 248 farm workers, who succeeded in obtaining a land grant to purchase the 5 800-hectare farm. What made this case unique was that the transfer of ownership was not driven by a land claim, but rather by the workers themselves. When Coromandel came onto the market from a deceased estate, the workers – many of whom had been on the farm from its beginning – approached the Land Reform Office for a purchase grant. Prior to the Coromandel Farmers Trust taking ownership, farming included cattle (beef and dairy), sheep for their wool and fruit farming. At the time of the sale, only the dairy and some orchards remained. As Coromandel had spiralled into increasing financial difficulty in the years leading up to the sale, vital assets were held by liquidators before an agreement was finally reached. “This set us back and we had no chance to make improvements or expansions to the farm even though we continued to protect these assets while the estate was being wound up,” explains Brian Phokane, Chairman of the Coromandel Farmers Trust and farm manager. “Eventually the liquidators conceded that the Farmers Trust should have first right of purchase.” The Eskom Development Foundation assisted Coromandel with a grant for a new milking system and a computerised cooling tank. Since the installation of the system, milking time has been halved to two and a half hours per milking session instead of four and a half hours per milking session. An additional 75 litres of milk is being produced on a daily basis and the dairy’s income has increased to over R6 000 per day. An additional 16 seasonal workers were employed to work at the dairy. 72 Eskom Holdings Limited Integrated Repor t 2010 Corporate Services division continued More contractor academy students graduate 2009 contractor academy graduates at the awards ceremony. Eskom’s contractor academy performed well in the 2009 academic year, thanks to the efforts and commitment of its latest group of graduates. At a special awards ceremony, each graduate received certificates of achievement. In addition, the programme’s top students received further accolades in the form of a number of special awards. The graduates used the occasion to pay a special tribute to Eskom for its support and continual encouragement and, importantly, for taking the time and resources to invest in their skills. Some of the students shared their personal development experiences with the assembled guests; many telling their stories of dedication and sheer hard work in order to improve their personal skills and career prospects by also studying management programmes. The dedication and commitment of the students at the Eskom contractor academy is testimony to the benefits of Eskom’s contribution to the business world of South Africa.The academy’s graduates emerge richer in terms of self-empowerment, enriched personal lives, and access to a world of new opportunities, while adding to a growing supplier pool of capable small and medium black businesses from which industries can draw. Haylene Liberty, CEO of the foundation, presents a cheque to Dr Gareth Edwards, chairman of the Breast Health Foundation at the Eskom Development Foundation’s annual fundraising event – Joy & Jewels. Eskom Holdings Limited 73 Integrated Repor t 2010 Broad-based black economic empowerment Eskom’s B-BBEE performance is rated from two perspectives: (B-BBEE) • Eskom as an empowerment company, where Eskom’s B-BBEE level This year saw Eskom fully engaging the Codes of Good Practice 2 contributor rating will provide evidence to stakeholders of (the codes) in terms of B-BBEE. The codes, gazetted in February Eskom’s performance as an empowerment company. 2007, are a replacement of the narrow-based BEE. The main aim of • Eskom’s performance as a purchaser, where Eskom will benefit the codes is to open more doors for economic emancipation and from the attributable spend, dependent on the B-BBEE certification participation, with sustainability as the core focus. B-BBEE suppliers of its suppliers. For Eskom to benefit, it must ensure that its need to be classified according to their level of B-BBEE contribution, suppliers have a current B-BBEE certification document, and to based on certificates from accredited verification agencies, as encourage them to improve their B-BBEE scoring. required by the codes. For details of Eskom’s B-BBEE scorecard see the Finance Division report on page 48. Refer to www.eskom.co.za/annreport10/004.html for details of the B-BBEE process, an explanation of the B-BBEE levels and the link to attributable spend. Learners enjoy their new classroom at Bester Primary School near the Ingula project. Staffing for growth Human Resources division 76 Summary 77 Performance 77 Risk profile 78 Skills 80 Training interventions 80 Focus on leadership 81 Transformation 82 Health and wellness 82 Employee relations 82 Benchmarking 83 Staffing for the expansion phase 76 Eskom Holdings Limited Integrated Repor t 2010 Human Resources Q: What is your major challenge in terms of human resources? A: Ensuring that we maximise our value to the business through genuine alignment to the line businesses’ needs. Bhabhalazi Bulunga Managing Director: Human Resources Mandate: Provides human resources strategy, direction, policies and assurance as well as strategic services to the Eskom Group. Human resources will also drive Eskom-wide culture change through effective change management and implementation of appropriate programmes. Progress this year Performance • Given the economic recession in South Africa, the organisation still attained a steady growth in the performance of its human resources sustainability Skills • Magnet Survey: engineering learners voted Eskom – Employer of choice for two consecutive years • Sustained the skills base and tripled the skills pipeline over the last five years Future priorities • Leadership and supervisory development • Workforce planning and skills management • Eskom academy of learning (EAL) operationalised • Maintain employee value proposition (EVP) • Labour costs and options optimised • HR@Eskom – back to basics Eskom Holdings Limited 77 Integrated Repor t 2010 Performance human resources interventions are relevant and meet the needs of The mandate of human resources within Eskom remains entrenched our people and our organisation. in Eskom’s role within the context of South Africa. The human resources strategy therefore supports universal principles that reflect If we want to meet the needs of this constantly evolving organisation, the common needs of all South Africans namely: we must ensure that we employ the right people for the right job at • improving the quality of life of all citizens of our country the right time. Every effort is being made to ensure that we obtain • maximising the potential of each employee in our organisation and retain the skills needed to ensure a reliable electricity supply for • becoming the embodiment of a united and democratic South generations to come. Africa • enhancing South Africa’s participation in the global economy The human resource development strategy over the past year has demonstrated remarkable resilience in an environment characterised The human resources division provides by a number of constraints, such as the impact of the global economic • direction and assurance on people-related issues downturn and international demand for scarce skills. • business partnering in the delivery of the organisational objectives • a cost-effective transactional service for economies of scale and As per the skills development legislation, Eskom has submitted a skills workplace skills plan and an annual training report for the period 2009/2010. An important role is to measure and monitor critical factors relating to the sustainability of Eskom’s human resources, an internally Risk profile developed human resources sustainability index (HRSI) measures The Human Resources division recognises the importance of an key aspects of human resources sustainability. The HRSI is also integrated risk management (IRM) system and has implemented a contracted into leadership performance compacts. programme to identify, report and manage the risks in line with Eskom’s IRM standard and policy. The division started reporting The areas of measurement can be summarised into employee on the new IRM methodology in October 2009. The Human satisfaction, employee competence and employee health and Resources executive committee reviews the risk reports and wellness. The measurements and measurement criteria are reviewed monitors the status and progress in the treatment of human on an annual basis to ensure applicability. resources risks. The HRSI score for the past year was 92,1% (2009: 89,8%) against a The dynamic nature of events, both internal and external to target of 80%. Eskom’s human resources performance was well Eskom, has presented the following distinctive risks to Human maintained and marginally improved in spite of rigorous resource Resources in Eskom. constraints. This is a satisfactory performance, indicating that our 78 Eskom Holdings Limited Integrated Repor t 2010 Human Resources continued Risk Treatment plans Leadership alignment and Implement appropriate governance and operating model to sustain the leadership framework. Implement development the leadership framework and associated behaviours throughout Eskom. Measure the impact of “new” leadership behaviours, including LEA (leadership effectiveness assessment) and leadership excellence scorecard Workforce planning Complete workforce management policy/strategy. Develop workforce planning, organisational design and organisational maintenance procedures. Develop Eskom resourcing framework. Develop and increase the capability to plan and design the organisation Technical and/or functional Develop an attraction, retention and development strategy. Implement an employee value proposition. competence Implement and maintain the learning management system. Ensure IDPs are in place. Engage the learner pipeline steering committee Dynamic changes within the Perform environmental scanning and impact analysis on staff. Strengthen the collaborative relationship with health sector stakeholders Skills Medium- and long-term skills requirements have been determined in Eskom has been fortunate in benefiting from the extremely low terms of the critical workforce segments. Likewise, the core and 3,5% staff turnover during the year (6,0% in 2009), mainly due to scarce skills have been identified and translated into a workforce plan the restricted job market resulting from the tight economic climate and a medium-term skills plan – aligned to the first integrated both locally and internationally. However, we continue to face a resource plan (IRP). number of skills-related challenges: • ring-fencing and operationalising the Eskom Academy of Learning The recruitment section on the Eskom website that manages all learning in Eskom (www.eskom.co.za – “A career at Eskom”) has been streamlined to • learner pipeline make it easy for job seekers to find meaningful work opportunities in • employee value proposition (EVP) the organisation. Eskom has sustained its skills base and even managed to triple the An integral part of retaining current staff and recruiting new people learner pipeline over the last five years (2006 – 2010). During the is developing Eskom as an employer of choice and building a sound recent Magnet survey, 4 892 young professionals rated Eskom as EVP. Key activities in this regard were: “Employer of Choice,” out of 60 South African blue-chip companies. • Incentives: motivating people by looking at reward and recognition strategies. Where there is a shortage of core, critical or scarce The next planning cycle will be marked by reinforcement of the skills, we will pay competitive salaries and fringe benefits and shareholder’s vision of being a developmental entity. The higher review the latest remuneration principles and practices. levels of growth and development will put the required pressure • Employee engagement: meaningful engagement and mutual on Eskom to maintain and improve its “employer of choice” niche in commitment through effective organisational communication and the marketplace through high potential (HiPo) talent management ensuring that people are given work that is challenging and strategies and skills development opportunities for all employees. motivating, while having a work/life balance. A succession management business process and procedure has • Co-worker quality: employees value co-worker and managerial been developed to ensure that there is robust talent contingency quality. Eskom will be able to enhance these qualitative planning and that career development opportunities are put in place. relationships through the introduction of communities of practice (CoPs). The identification and categorisation of skills, be it non-core or core, critical and scarce should be aligned with the new legislative requirements which is the organising framework for occupations (OFO). Eskom Holdings Limited 79 Integrated Repor t 2010 Additional core, critical and scarce skills must be developed or been increased to 5 255 learners with three- or four-year learning recruited annually over the next five years to replace losses and cater bursary contracts to accommodate the new skills requirements and for Eskom’s new build programme. The Eskom learner pipeline has offset normal attrition. This is reflected in the table below: Cumulative projected additional core, critical and scarce skills requirements 2010 2011 2012 2013 2014 Skills required 1 712 2 054 2 465 2 958 3 300 Eskom staff turnover Actual Actual Actual Company 2010 2009 2008 Employees at start of period 35 196 32 954 30 746 Add:  Recruitment 2 581 4 261 4 385 Less:  Resignations (541) (1 312) (1 370) Deaths (260) (276) (260) Dismissals (110) (98) (85) Absconded (12) (11) (13) Retirements (300) (337) (447) Voluntary packages (5) (7) (15) Other (2) 22 13 Total employees at end of period 36 547 35 196 32 954 Employee turnover rate (%) 3,5 6,0 6,9 Eskom staff age distribution Actual Actual Actual 2010 2009 2008 Company % % % Age distribution of workforce – end of period 18 – 20 years 0,05 0,04 0,05 20 – 29 21,86 21,62 19,35 30 – 39 28,75 27,25 25,60 40 – 49 22,04 24,59 28,40 50 – 59 23,54 23,20 23,50 Over 60 3,76 3,30 3,10 80 Eskom Holdings Limited Integrated Repor t 2010 Human Resources continued Staff complement per division Actual Actual Actual Division 2010 2009 2008 Generation 11 312 10 833 10 586 Transmission 1 889 1 819 1 976 Distribution 17 441 16 716 15 692 Enterprises 3 152 3 097 2 506 Corporate Services 1 368 1 339 1 133 System Operations and Planning 285 270 – Finance 611 649 619 Human Resources 442 422 391 Office of the Chief Executive 47 51 51 Total 36 547 35 196 32 954 Training interventions 6 000 courses in Eskom’s course catalogue on the centralised Training has always been a major focus area at Eskom – to such an learning management system (LMS). During the year we achieved extent that outside organisations make use of our training facilities. 140 000 learner days. These facilities, staff and programmes are used We have 28 facilities with 244 on job training venues spread across to support the development of new and existing employees, in South Africa to train our learner base. There are approximately accordance with individual development plans, to ensure optimal 530 training practitioners with 28 instructors and in excess of performance in the work environment. Total training investment per year Actual Actual Actual 2010 2009 2008 Total training costs Rm 758 823 784 The Eskom Academy of Learning was established in the last year, with Focus on leadership a council consisting of the divisional managing directors and a chief Building on comprehensive leadership value chain architecture, learning officer. 810 leaders were assessed with the LEA assessment instrument via a 360° assessment methodology. Leaders received individual The objective of the academy is to co‑ordinate and integrate all feedback and used the feedback to compile their individual learning throughout Eskom, focusing on business needs and cater for development plans. A comprehensive leadership assessment all facets of the learning value chain, covering strategy and planning, framework was also compiled, aligned with the leadership value learning design and development, learning delivery, learning chain architecture and implemented to assist decision making by administration, as well as learning operations, supported by a quality talent boards. management process. The academy faculties have already been created, namely engineering, artisan, services, project management, Capacity building interventions were conducted as part of the leadership and finance. ongoing process to entrench the leadership architecture. The key focus will be on engineers, technologists, technicians and This year 120 managers and professionals were trained in the theory artisans for the future. We have 5 255 learners in the pipeline, of which 3 780 are studying in the engineering and technical fields. and application of Situational Leadership II. “Leading in times of crisis” Once they have completed their training, they will be absorbed into e-learning material was developed and activated, and a “vision the business as engineers or graduates-in-training. Over and above dialogue initiative” partly rolled out. In total 822 leaders and the business learner pipeline requirements, Eskom is training supervisors were developed over the course of the year, including 236 learners to contribute to the socioeconomic development of leadership safety and supervisors development programmes. our country (bursaries for employee dependants which are also included in the learner pipeline). Eskom Holdings Limited 81 Integrated Repor t 2010 Transformation Human resources operational measurements Eskom continues to drive transformation as part of its strategic The table below reflects the performance against internal objectives.The organisation has over the years set targets to improve transformation guidelines, reflecting employee movements and the its workforce profile. A 2020 strategy was put in place to set long- achievement of targets set for gender and race in the managerial term targets. levels only. These guidelines and targets differ from the regulatory definitions of the Employment Equity Act in the following respects: The highlight of the transformation process has been the • Eskom does not include non-permanent employees who would establishment of consultative structures at all business units, at otherwise be included in terms of the Employment Equity Act. divisional and Eskom Holdings level. The challenge is to revise our • Eskom has excluded foreign nationals when preparing this table. long-term strategy for target setting of race, gender and disability to Although the current Eskom guideline provides for the inclusion of enable the organisation to change its workforce profile within the foreign nationals who would otherwise not be included in terms different occupational levels to reflect the demographics of the of the Employment Equity Act, Eskom intends to modify its country’s economically active population. guideline to bring it in line with this Act. As part of our transformation agenda, we will continue with the Eskom’s annual report to the Department of Labour in terms of the affirmative action drive, the promotion of women and the focus on Employment Equity Act is being discussed with organised labour employment equity for people living with disabilities, not only because prior to the October 2010 submission requirement. it is required of us by statute, but because we believe that it is the right thing to do. It is also a business imperative. Unit of Target Actual Actual Actual Group measure 2010 2010 2009 2008 Race: Black1 staff at managerial level2 % 66,3 68,7RA 68,6 65,9 Black staff at all levels % n/a 76,0 75,8 73,7 Gender: Women at managerial level % 36,4 34,4RA 34,5 34,1 Women at all levels % n/a 29,1 28,8 27,5 People with disabilities % 3,7 2,4RA 3,2 3,1 Internal promotions: Black staff at all levels % n/a 83,4 78,7 79,1 Women at all levels % n/a 31,8 37,4 36,0 Unit of Target Actual Actual Actual Company measure 2010 2010 2009 2008 Race: Black1 staff at managerial level2 % 66,3 69,3RA 69,3 66,4 Black staff at all levels % n/a 76,7 76,5 74,5 Gender: Women at managerial level % 36,4 35,0RA 35,1 34,8 Women at all levels % n/a 29,9 29,6 28,2 People with disabilities % 3,7 2,6RA 3,4 3,3 Internal promotions: Black staff at all levels % n/a 83,4 78,7 78,6 Women at all levels % n/a 31,8 37,4 37,7 1. African, Asian and Coloured Eskom employees. 2. Managers, professionals and supervisors – CU to F band on the Patterson grading; TASK grading 11 to 23 plus F bands in Eskom. RA Reasonable assurance provided by the independent assurance provider (refer page 169). 82 Eskom Holdings Limited Integrated Repor t 2010 Human Resources continued Health and wellness Benchmarking Eskom supports a comprehensive health and wellness programme Training and development costs as a percentage of the that provides occupational health services, an employee assistance wage bill programme, chronic disease management (including HIV and Aids), Eskom’s investment in training and development as a percentage of sport and recreation, preventive care and biokinetics to all employees. the wage bill is 4,5%. This puts Eskom well within the 75th percentile of US utility companies (3,3%), and UK/European utility companies In the past year we have seen an increase in awareness and employees (3,5%) (PWC, 2008). accessing health and wellness services. Training hours per full-time equivalent (FTE) Employee relations Eskom’s training hours per FTE is 62. This puts Eskom above the No man-hours were lost due to industrial action at Eskom in the last 75th percentile of US utility companies (37 hours) and between year. Good communication is a feature of the industrial relations the 25th percentile and 50th percentile of UK/European utility environment.There are direct lines of communication with managers companies (53 – 75 hours) (PWC, 2008). and professionals and consultation in the bargaining unit through recognised trade unions. COSATU called for protest marches in Learner pipeline various provinces throughout the country intended, among others, Eskom’s learner pipeline consists of 5 255 learners, which is to highlight the electricity crisis facing South Africa and its impact on above the target as agreed in the shareholder compact. There employment, but this had no impact on Eskom. We concluded a one- are 3 780 engineering/technical learners, which is also above the year salary and conditions of service agreement with trade unions target as agreed in the shareholder compact. (SOE Shareholder during the last year. Compact; 2009 – 2010). Employer of choice 16% Eskom was rated as the number 1 “Employer of Choice” by 4 892 young professionals in engineering/technology out of 60 companies in South Africa (Ideal Employer Ranking; Magnet Non-bargaining employees (managerial, professional and specialist) survey, 2009). Bargaining employees (non-managerial levels) Overall staff turnover Eskom’s overall staff turnover is 3,5%. This places Eskom favourably below the 25th percentile of South African companies (9,5%). This 84% also reflects the lowest turnover that Eskom has had in the last 20 years, and could be reflective of the previous recessionary climate. The average turnover of Eskom has been 6,2% over the Eskom evaluates jobs using the Tuned Assessment of Skills and last two decades. Knowledge (TASK) job evaluation system. There are 23 grades within the system of which grades 1 – 13 are bargaining unit grades Turnover due to retirement and 14 – 23 are non-bargaining unit grades. The main evaluation Eskom’s turnover due to retirement is 0,82%. This places Eskom criteria are complexity, knowledge, influence and pressure. TASK also midway between the 50% percentile and 75% percentile of South identifies five skill levels, namely, basic, discretionary, specialised, African companies (0,6 – 1,2%). Twenty-seven percent (27%) of tactical and strategic which fit well within the Eskom context. Eskom’s staff are above the age of 50 years and could be considered a retirement risk within the next decade. Eskom Holdings Limited 83 Integrated Repor t 2010 Disability Staffing for the expansion phase According to the report on equity disability in the SA Public In order to achieve ongoing efficiencies, Eskom is developing a Service, the public service sets a benchmark of 2% for disability. strategy to contain manpower numbers by reallocating headcount The Employment Equity Commission’s Report 2009 found that from the existing business to the new business, with the impact people with disabilities (PWD) accounted for nearly 0,7% of the of this being visibly reflected in years two and three of the total number of employees reported by all employers. Despite MYPD 2 period. the national challenge of employing PWDs, Eskom prides itself in achieving targets that are above the national norm. Eskom will have to manage increases in overtime and monitor ongoing adherence to public safety requirements resulting from Age profile these efficiencies, to ensure compliance with legislation. Shifting the The Eskom age profile is made up as follows: under 30 years balance from the existing to the new business is only possible if (22%); between 30 – 39 years (29%); between 40 – 49 years (22%); adequate skills levels can be redeployed in critical areas (such as over 50 years (27%). The ideal age profile and knowledge transfer maintenance and delivery on the new build). profile of young professionals to older professionals should be 2:1, but the current ratio is 2:3, reflecting a disproportionately high number of people in the higher age categories (SAICE, 2008). Diane Else and Busi Megale from Corporate Affairs at work in Eskom’s head office. Engaging on policy and regulation Regulatory and Legal Framework 87 Regulatory affairs function 87 Regulatory and legal framework 90 Multi-year price determination (MYPD 2) and the price increase 91 Looking ahead 86 Eskom Holdings Limited Integrated Repor t 2010 Regulatory and Legal Framework Q: Why did Eskom request a price increase of 35%? A: The price of electricity has historically not recovered the prudent costs of supply; nor did it allow for a reasonable return to assist with the building of reserves which could be used for capital expansion. In addition, this resulted in a price that was not sustainable and thus weakened Eskom’s financial position and its ability to raise funds on the capital markets. The need for a significant increase was therefore unavoidable to ensure long- term sustainability and security of supply. Mohamed Adam Senior General Manager: Regulatory Affairs Progress this year • Pricing – Stakeholder consultation process on MYPD 2 application – Finalisation of MYPD 2 application – Input into MYPD 2 rules • Strengthening of internal regulatory processes and interface • Enhancing regulatory integration • Initiated programmes to facilitate private participation • Rollout of workshops to enhance businesses’ understanding of the basics of economic regulation Future priorities • Establish regulatory function/capability and further strengthen processes • Pricing – Contribute to the development of a long-term price path – Prepare for MYPD3 – Align with NERSA reporting framework • Regulatory strategy – Identify and prioritise regulatory topics – Identify and minimise regulatory risk (increase predictability) – Enhance communication and transparency – Clarify the roles of corporate and divisions – Co-ordinate and lead discussions with NERSA on key priorities – Consolidate divisional submissions in key areas – Provide guidance on inter-divisional issues to ensure alignment to overall strategy • Industry structure – Continue engagement on structure issues and facilitate implementation of certain initiatives, for example, the independent system operator, introduction of independent power producers and EDI restructuring Eskom Holdings Limited 87 Integrated Repor t 2010 Regulatory affairs function Africa is applicable to Eskom – for example the Companies Act, the In an effort to enhance Eskom’s regulatory capability and its ability to competition laws, labour laws and tax legislation, to mention a few. In develop an integrated regulatory strategy that supports its business addition, Eskom is also subject to legislation specifically applicable to objectives in line with best practices, Eskom has established a state-owned entities – notably the Public Finance Management Act regulatory affairs function, under the guidance of Mohamed Adam, and the Promotion of Administrative Justice Act. Senior General Manager (Regulatory Affairs) and Corporate Counsel. The role of the function will be to constructively and effectively During the 2011 financial year, two major pieces of legislation will engage with and shape the policy and regulatory environment within become effective. The first is the Companies Act, 71 of 2008 and the second is the Consumer Protection Act, 68 of 2008. Both Acts may which Eskom operates. Its key focus areas in the immediate future have a major impact on Eskom and as such Eskom has during the will include the refinement of the regulatory strategy for the current financial year focused on preparing for effective organisation, co-ordinating the interface with NERSA, assisting with implementation. regulatory compliance and assisting with the integration of regulatory matters in business decisions across the organisation. Regulatory framework Eskom is regulated by the National Energy Regulator of South Africa Currently, regulatory matters across the organisation are co- (NERSA) in accordance with the Electricity Regulation Act, 4 of 2006. ordinated through a regulatory interface co-ordinating forum (RICF), The objectives of the Act include: with representation across the divisions in Eskom. As further details • achieving the efficient, effective, sustainable and orderly of the Regulatory Affairs function unfolds, it is likely that the workings development and operation of electricity supply infrastructure in of the RICF will be strengthened to assist in fulfilling this mandate. South Africa • promoting the long-term sustainability of the industry The Regulatory Affairs function will work closely with all the divisions • facilitating investment in the industry as well as other corporate support functions in providing a value- • facilitating universal access to electricity added input to Eskom’s business. In particular, there is a close • promoting the use of diverse energy sources and energy efficiency relationship with the company secretary regarding legal, compliance • promoting competitiveness and customer choice and governance matters; with the Finance division regarding pricing • facilitating a fair balance between the interests of customers and and funding matters and with group communications regarding end users, licensees, investors and the public stakeholder engagement. NERSA’s powers include issuing licences for the operation of A number of issues that are referred to herein are also dealt with generation, distribution and transmission facilities, import, export in the divisions. While this section provides an overall context and trading of electricity, and determining and approving electricity for some of the major initiatives, further detail is provided in the prices and tariffs as well as the conditions on which electricity may divisional reports. be sold. Regulatory and legal framework Eskom has been issued with separate licences for the generation, The absence of sufficient competition in the electricity sector in transmission and distribution of electricity, including all matters South Africa necessitates economic regulation of the industry so related or incidental thereto. Eskom also has a nuclear licence that as to ensure that the interests of customers, licensees and other regulates the operation of its nuclear power station and all aspects of stakeholders are balanced and to ensure the sustainability of the nuclear value chain. the industry. In the light of the above it is clear that NERSA has significant influence The regulatory, legislative and policy framework in the energy sector and oversight over Eskom’s business. Eskom is also subject to has also been evolving. Some of the significant developments in this oversight directly or indirectly through government as shareholder regard are set out later in this section. and policy maker, as well as other regulators. Eskom is also regulated in the broader sense beyond electricity Eskom needs to interact across all areas of government and has the regulation. In 2002 Eskom was converted into a public company benefit of a number of relationships with various ministries and pursuant to the Eskom Conversion Act, 13 of 2001 and as such the government departments in so far as the regulatory environment legislative framework applicable to any corporate entity in South within which it operates is concerned. 88 Eskom Holdings Limited Integrated Repor t 2010 Regulatory and Legal Framework continued Some of the key relationships are outlined below. licences or permits for commencement of construction of power stations and major power lines and substations, waste (including ash Shareholder – Minister of Public Enterprises dams/dumps), emission licences and integrated water use licences. The Minister of Public Enterprises is the shareholder representative Further information in this regard is set out in the Corporate Services of the South African government with oversight responsibility for and Generation Business sections. Eskom. The relationship is governed through a shareholder compact. The shareholder sets and agrees on the strategic intent, key Economic planning and integration – Minister of Planning performance areas and targets for Eskom. The shareholder compact (National Planning Commission), Minister of Economic includes strategic objectives, policies, financial, technical and other key Development and Minister of Trade and Industry performance indicators and reporting requirements. Quarterly and Eskom recognises the need to build additional synergies in other annual reports on performance against the compact are provided to areas of government. The operations of Eskom, and in particular the the Department of Public Enterprises (DPE). Eskom’s responsibilities, capital expansion programme, have a significant macroeconomic approvals and reporting in terms of the Public Finance Management impact beyond just the energy sector. The infrastructure development Act (PFMA) are managed through the DPE. The DPE also serves as needs to be aligned with national planning and economic a conduit for Eskom’s relationship with other government development initiatives. In addition, the construction programme departments. Eskom’s compliance with the PFMA is discussed in the could be leveraged to achieve sustainable benefits for local industry directors’ report on page 179. and manufacturing capability and needs to be aligned with South Africa’s industrial policy and the industrial policy action plan. Policy – Minister of Energy The Minister of Energy, together with the Department of Energy Nuclear operations – National Nuclear Regulator (DoE) is the key policy ministry responsible for the energy industry, Eskom is also regulated by the National Nuclear Regulator established including the electricity sector, the activities of which are mainly by the National Nuclear Regulator Act, 47 of 1999. Its role is to governed by the Electricity Regulation Act, 4 of 2006 and its protect persons, property and the environment against nuclear associated regulations. damage through the establishment of safety standards and regulatory practices, to exercise regulatory control related to safety over various Additional financial oversight and reporting – National aspects of the nuclear sector, and to issue nuclear licences. The Treasury activities of Eskom’s Koeberg power station are regulated hereunder. The Minister of Finance plays a pivotal role in developing South Africa’s fiscal policy. In certain instances Eskom also needs to obtain Legal and policy framework approval from the Minister of Finance and reports to National Some of the most important recent developments within the Treasury in terms of the PFMA. In addition, National Treasury has electricity sector are summarised below. been instrumental in providing the government loan and guarantees in favour of Eskom. Further information in this regard is set out in the Electricity regulations on new generation capacity1 Finance division section. On 5 August 2009 the Minister of the then Department of Minerals and Energy (DME) promulgated the electricity regulations on new Environmental compliance – Minister of Water and generation capacity. These regulations provide guidance on future Environmental Affairs investment in generation capacity by both Eskom and independent Eskom’s operations have an impact on the environment and Eskom power producers (IPPs) in accordance with the integrated resource is committed to managing and mitigating this impact in an effective plan (IRP). manner. It is subject to the current environmental legislation and policies and strives to fulfil its obligations in a responsible manner. IPPs have an important role to play in addressing the energy needs of the country since it is vital to diversify the source and nature of In terms of environmental control, Eskom is regulated through energy production, introduce new skills and capital in the industry environmental authorisations and licences/permits issued by the and enable the benchmarking of related pricing and performance. Department of Water and Environmental Affairs. These include Eskom therefore supports the introduction of IPPs. 1. Issued in terms of the Electricity Regulation Act, 4 of 2006. Eskom Holdings Limited 89 Integrated Repor t 2010 In order to ensure successful implementation of these regulations, it fairly quickly to assist Eskom and the country with the medium-term is imperative that resolution is reached on a number of critical issues capacity constraints. In light of the market request and Eskom’s such as the finalisation of the IRP and designation of the independent awareness of potential projects, Eskom initiated the MTPPP to attract system operator. relevant projects. It was Eskom’s intention to procure the maximum MWs of capacity in the shortest period of time. The MTPPP was Integrated resource plan (IRP) meant to fill a gap between supply and demand in the short to The IRP is the long-term electricity or capacity plan for the country. medium term. One of the key characteristics of this programme was It should answer a number of questions: how much capacity is the publishing of price profiles (ceiling price and maximum needed for South Africa in the long term, what mix of energy sources programme price). The programme was run with the necessary should be used and who should build the required capacity. approvals and support of NERSA. Due to funding constraints during 2009, the programme was, however, temporarily delayed. As outlined in the electricity regulations on new generation capacity, “the system operator, in consultation with the energy planner and Eskom is pleased to announce that two power purchase agreements the regulator is responsible for developing the IRP, with the Minister have been finalised and are awaiting necessary approvals from of Energy ultimately responsible for the approval and gazetting of the NERSA. Discussions with other short-listed bidders are continuing IRP”. Further details on the IRP are reflected in the System Operations and we anticipate that further agreements will be finalised shortly. and Planning section on page 145. Electricity regulatory rules Independent system operator (ISO) As the regulatory environment in South Africa continues to mature, On 11 February 2010, the President of South Africa during his state a myriad of regulations, codes, rules, directives and guidelines will be of the nation address announced the establishment of an independent developed to provide the necessary guidance required in so far as system operator. The creation of an independent system operator is the regulation of the electricity supply industry is concerned. seen as a mechanism to support the introduction of independent power producers (IPPs), by creating a non-conflicted buyer of power. Over the past year, a number of developments have taken place on this front. This restructuring of the electricity supply industry will have a significant bearing on how the industry is to be regulated into the NERSA’s multi-year price determination (MYPD) future. Eskom has provided input regarding the possible methodology implementation options in this regard and it is anticipated that a The MYPD methodology was published by NERSA on 20 November decision will be finalised by government in due course. 2009. NERSA has indicated that the purpose of the methodology is to consolidate and align the regulatory methodology from various Electricity distribution industry restructuring places into one document. Eskom supports the effective integration In October 2006 Cabinet approved the proposal to create six of the regulatory framework. regional electricity distributors (REDs). These REDs are to be established as public entities, accountable to the Department of However, the methodology provides for a substantive change in the Energy. Electricity Distribution Industry Holdings (Pty) Limited is way Eskom’s revenue requirement will be assessed. Significant new implementing government’s restructuring policy. The critical next methodological frameworks include: steps include the finalisation of outstanding policy matters and • the mechanism for the calculation of the cost of capital enabling legislation. • valuation of the regulatory asset base • the revenue allowance for return on the regulatory asset base Eskom completed the ring-fencing of its operating units in prior years, • the revenue allowance for depreciation (based on the valuation of in preparation for the RED formation. Any further internal preparation the regulatory asset base) is dependent on the resolution of national policy matters. • treatment of research and development costs • service quality incentive/penalty mechanisms Medium-term power purchase programme (MTPPP) Early in 2008, during the load-shedding period, Eskom received Eskom has commented to NERSA on the proposed methodology numerous requests from the market claiming that there were new and raised some concerns. and refurbished generation projects that could be brought online 90 Eskom Holdings Limited Integrated Repor t 2010 Regulatory and Legal Framework continued The Electricity Pricing Policy of 2008 (EPP) resulted in a low reserve margin (the capacity available above the During November 2008 Cabinet approved an electricity pricing maximum demand), which necessitated Eskom embarking on a policy (EPP) which was gazetted on 19 December 2008. Among massive capital expansion programme. other issues it also ensures the long-term sustainability of the industry with the ability to fund future investment in the expansion of In addition, Eskom is also facing significant challenges to meet its infrastructure capacity without price shocks, by requiring that operational costs. This is due partly to the increased costs that have electricity tariffs be based on a depreciated replacement valuation resulted because of a low reserve margin. More importantly the of assets. NERSA’s MYPD 2 decision recognised the requirements of price of electricity has historically not recovered all the prudently the EPP and has made some progress towards full implementation incurred costs of supply and thus did not create adequate borrowing of its requirements within the allowed five-year period. capacity, nor did it allow for the building of reserves which could be used for the capital expansion. Regulatory rules for power purchases cost recovery NERSA approved the regulatory rules on power purchases cost Eskom highlighted in its MYPD 2 application that: recovery with effect from 26 November 2009. These rules were “…a significant strategic shift was required to achieve a successful developed to facilitate the introduction of IPPs by ensuring that the outcome for Eskom and South Africa. Furthermore the expectations and costs for IPPs could be recovered through the tariff. roles of Eskom, government and stakeholders should be consistent with this shift. This strategic shift is based on a deeper commitment to the Regulatory rules on selection criteria for renewable energy following: projects under the REFIT programme • The contextualisation of the MYPD 2 application within a long-term In terms of the regulations on new generation capacity, NERSA is country vision. As a country we need to have a view of the overarching required to issue rules relating to the selection of renewable energy objectives and outcomes that define success and sustainability for the or co-generation IPPs that qualify for licences. In line with this, NERSA economy and the electricity industry and ensure that the price path is published regulatory rules on selection criteria for renewable energy consistent with that objective. projects under the REFIT (renewable energy feed-in tariff) programme • It is crucial that the roles of the various parties in achieving our national for public comment during February 2010. objectives are clear. In particular, there should be clarity of roles regarding the implementation of key initiatives: aggressive demand- As a stakeholder in this process, Eskom has submitted its comments side management initiatives, facilitating access to funding, introducing on the said selection criteria. It is important that the selection criteria new capacity, ensuring integrated infrastructure development, reducing are finalised timeously, so as to advance progress on renewable our carbon footprint, reducing energy intensity per GDP output and energy projects. ensuring security of supply. • Eskom cannot provide for all the future energy needs of the country Reporting on its own and therefore an enabling environment is required to attract NERSA is in the process of enhancing reporting and information new entrants to the market. requirements. In particular, a regulatory reporting manual has been • A collaborative effort is required between Eskom, government, and all developed and the focus is now on implementation. NERSA has also stakeholders including business, communities, customers and other issued minimum information requirements for tariff applications for role players in the electricity industry. In order to succeed, Eskom public comment. In principle, Eskom supports these initiatives which, should place its confidence in the ability of other stakeholders to if correctly implemented, would facilitate greater transparency. contribute to a solution. • Eskom needs to focus on executing its mandate within its own Multi-year price determination (MYPD 2) and capability and capacity, while other role players in the country assigned the price increase with specific mandates must execute those mandates.” The most significant initiative regarding regulatory matters during the past financial year related to Eskom’s price increase application. Eskom normally applies for a revenue determination, which is then translated into a price increase. For ease of reference we refer herein It may be useful to recap Eskom’s rationale regarding its approach. As to a price increase application. Eskom submitted a proposed price was explained in Eskom’s proposed price application, over the last increase application of 45% on 30 September 2009, followed by a decade there has been an increasing demand for electricity that has revised application of 35% on 30 November 2009. NERSA held Eskom Holdings Limited 91 Integrated Repor t 2010 public hearings on the application in all nine provinces during January In the short term Eskom needs to address its funding shortfall and 2010, for the first time ever. On 24 February 2010 NERSA awarded manage its business within the limits of the price increase allowed by Eskom a price determination of 24, 8% (FY11), 25, 8% (FY12) and NERSA. This will present a significant challenge to the organisation, 25,9% (FY13), resulting in a revenue shortfall of approximately but we are committed to be as efficient and effective as possible. R55 billion for the three-year period compared to the 35% increase applied for. Further information in this regard is set out on page 44 in There are a number of critical decisions that need to be made during the Finance division section. 2010 to ensure security of supply in 2011 and beyond. Not all of these decisions are within Eskom’s control and there is a need for In its application Eskom also emphasised the following: government and other stakeholders to prioritise these decisions. The “This MYPD 2 application, and in particular the price path and time critical interventions include the implementation of an appropriate period within which to migrate from the current price level to an demand management and energy efficiency framework, signing up appropriate price level, should be assessed in relation to the achievement IPPs, and the finalisation of certain capacity choices to ensure security of the overarching long-term country objectives. The MYPD 2 is therefore of supply. a stepping stone towards achieving the objectives of South Africa in the long term. It is a stepping stone that has been forged through intense In addition, a number of regulatory and policy issues need to be stakeholder discussions and relies for its success on an effective addressed now to position the electricity industry for success into partnership between Eskom and all stakeholders. the future. A number of government and other stakeholder-led interventions are already underway to address the key challenges Eskom is concerned about the increased risk profile but is committed to and to facilitate progress towards an optimal regulatory and policy working within this partnership to ensure that we all achieve success. environment – one that is credible, predictable, legitimate and transparent. The provision of reliable and affordable electricity is a critical and strategic imperative to ensure sustainable economic growth in South Africa. The priorities being addressed and which need to be finalised include: Eskom’s price application will result in an integrated solution that is in the • the IRP, including the assumptions regarding growth, the capacity best interests of Eskom, customers and the country. It has also mitigated need for the country and the fuel choices, and in particular, the adverse impact on the economy and job losses by choosing a longer- renewables and nuclear, and who should build this capacity time period to achieve cost-reflective tariffs. It is our firm belief that it is • mechanisms to ensure the protection of the poor in the national interest that the appropriate country choices have been • mitigating the impact on climate change made in a collaborative and participative process.” • industry structure, including decisions on the ISO, the electricity distribution industry and the designation of “buyers” in terms of In the medium to long term – it is expected that the principles of the the regulations EPP, intended to restore electricity tariffs to cost-reflective levels, in • an effective demand-management framework (including the particular the revaluation of the asset base and the earning of a rate power conservation scheme (PCP) and demand-side management of return equal to the cost of capital will be phased in.This will ensure interventions). Further details on PCP can be found in the System that cost-reflective tariffs are achieved over the medium term in Operations and Planning section on page 142 order to ensure the financial sustainability of Eskom and other • securing coal, water and other resources for power generation companies who intend entering the local electricity market. Eskom has and will continue to play an active role in contributing to the advancement of the regulatory environment so as to ensure that For a history of pricing, see www.eskom.co.za/annreport10/005.html current, potential and future consumers are protected, that Eskom is sustainable and that national policy objectives can be realised. Looking ahead Eskom continues to be optimistic regarding the continued maturity of the regulatory environment within South Africa. A consistent and concerted effort by all stakeholders in the electricity industry will aid in ensuring the long-term viability and sustainability of the industry as well as the achievement of our long-term goals as a country. Powering the nation Generation Business 95 Overview 120 Generation Business 100 Generation division Engineering division 121 Key strategy 101 Key focus areas 121 The engineering excellence programme 101 Risk profile 122 Plans for 2010 – 2013 102 Plans for 2010 – 2013 122 The GEDI project 102 Technical performance 123 Risk profile 104 Benchmarking 123 Challenges 105 Environmental performance 107 Environmental impact assessments 124 Enterprises division 108 Primary Energy division 125 Capacity expansion programme 125 Risk profile 109 Primary energy update 129 Future of renewable projects 109 Risk profile 129 Benchmarking build costs globally 109 Coal quality and quantity 130 Environmental performance 110 Long-term coal supply strategy 130 Local content of capacity expansion contracts 110 Long-term water strategy 131 Stimulating economies around capacity expansion 111 Liquid fuels (diesel and kerosene) strategy projects 111 Impact of primary energy costs on the business 131 Training and development 112 Road repairs 112 Environmental performance 113 Safety – coal transport 114 Nuclear division 115 Key focus areas 115 Risk profile 116 Key performance indicators 116 Nuclear capacity increase 116 Pebble-bed modular reactor (PBMR) update 117 Nuclear fuel 117 Nuclear safety 118 Environmental performance 119 Nuclear waste management 94 Eskom Holdings Limited Integrated Repor t 2010 Generation Business Mandate: The Generation Business is a dynamic portfolio that efficiently operates the existing generating capacity, provides primary energy and water resources, delivers on the massive capacity expansion programme and ensures world-class engineering solutions. Progress this year Highlights Challenges • Improved financial performance • Increased particulate emissions • No load shedding in the past 12 months • Number of trips at power stations • Negotiations for new coal supply agreement for Majuba • Undersupply of coal by coal companies and the poor power station successfully completed quality of coal supplied to Eskom power stations impacting station performance and output • Improved performance of Koeberg nuclear power station as measured by the INPO index • Funding constraints on new build projects • Generation capacity and transmission infrastructure installed and commissioned exceeded targets • Safety performance on capacity expansion construction sites • Staff commitment Future priorities • Delivery of Eskom expansion programme • Implementation of the Eskom long-term coal supply strategy • An improvement of 4% in the energy availability factor (EAF) of the power stations within three years (“4 in 3” programme) • Energy efficiency – reduce power plant consumption • Reduce carbon footprint – investigate co-firing coal-fired power stations with biomass, thereby reducing coal usage by 10% • Operational excellence – back to basics in the operation and maintenance of power plants • Financial excellence – 10% reduction in operating and primary energy costs Financial results – Generation Business R millions 2010 2009 Total revenue 49 732 33 790 Profit (loss) for the year 192 (6 537) Total assets 131 039 93 671 Capital expenditure 40 484 31 864 Eskom Holdings Limited 95 Integrated Repor t 2010 Brian Dames Chief officer: Generation Business Q: What impact has the funding challenge had on the capacity expansion programme? A: The funding challenge has resulted in delays in placing contracts, for example for certain parts of the Kusile power station project, and the suspension of other new capacity projects, such as Nuclear-1. The consequence is a delay in a return of the reserve margin (the margin between the demand for, and the capacity to supply electricity) to internationally acceptable levels. Q: What are the key challenges in generating – Camden, Grootvlei and Komati) and the new power electricity for the future? stations as well as new transmission network infrastructure. A: Our priority is always to ensure the safety of our staff and contractors. This will be an increasing challenge, The Generation Business portfolio operates, maintains particularly on our construction sites. We are also running and engineers are of the world’s largest fleet of electricity our existing power stations much harder to meet the generating power stations, and is implementing the fifth demand for electricity. Until the reserve margin improves, largest utility capacity expansion programme internationally. the scheduling for planned maintenance activities will be The portfolio procures more than half of the coal produced challenging, but is critical to ensure and improve the technical in South Africa, while the logistics supporting the coal and environmental performance of the stations. A reliable movements are one of the largest undertakings in the supply of good quality coal and water to our coal-fired country. Through these new build activities Eskom will be power stations at a reasonable price is a further challenge. investing around R485 billion in the South African economy And of course completing the return-to-service programme over a seven-year period from 2005 to 2012. Annually and keeping to the schedule, maintaining high quality and Eskom procures about approximately R20 billion in coal and containing costs for the power stations and transmission water and spends approximately R6 billion on operating and infrastructure under construction remains one of our maintenance activities. Collectively, these activities provide priorities. direct and indirect employment for more than 60 000 people throughout South Africa across the electricity, mining, Overview transport and construction industries. The Generation Business portfolio was established in 2008. It is a diverse portfolio encompassing the operations and Power station performance engineering of the existing power stations, the supply of In early 2008 the country experienced significant shortages primary energy (coal, liquid fuels and nuclear fuel), the supply of electricity (rolling blackouts) due partly to technical of water and the project development, project management, problems and unexpectedly high unplanned shutdowns for construction and commissioning associated with the return- repairs and maintenance at some of the power stations, to-service project (of the three mothballed power stations exacerbated by the continuous growth in the demand for electricity. Since then significant progress has been and 96 Eskom Holdings Limited Integrated Repor t 2010 Generation Business continued continues to be made in improving the performance of the power the mines were never designed to meet the current station burn stations. levels) and a need for new coal supplies to meet the needs of the return to service (RTS) and new build power stations. Importantly, A number of recovery teams were established to improve the plant the bulk of this coal has to be transported from more distant mines, reliability and availability. These have brought about excellent results, requiring road transportation in the short and medium term, and with the consequence that there has been no load shedding since investment in a longer-term logistics infrastructure. late April 2008. Eskom has over many years benchmarked its performance against international counterparts. It is evident from This “temporary” coal demand/supply imbalance has been recent benchmarks that the performance of Eskom’s power stations accompanied by several other important adverse dynamics in the is in line with or better than many of its international peers. South African coal industry: • Ongoing deregulation of the coal mining industry, with a Environmental performance corresponding shift in the power balance away from the national Unfortunately the quality of the coal that is being supplied to some interest to that of the shareholders of the mining companies. This of the power stations is at the low end of the contractual specification, has directly impacted the quantity, quality and cost of coal supplied which sets out a broad range of quality parameters. This, together to Eskom as some miners have deliberately optimised their total with the very demanding operational regime that is being placed on business at Eskom’s expense (even to the extent of receiving the power stations as a consequence of the high demand for ongoing volume and quality penalties). electricity and the low reserve margin, has led to an increase in the • Exports of lower quality coal to India, creating direct competition emission of particulates from the coal-fired power stations. An for new coal sources that were previously only suitable for improvement in this environmental performance indicator is one of domestic use, and a marked deterioration in the coal offered to Eskom from existing multi-product mines. the top priorities for the Generation division. The division will also • Extensions of the lives of most of Eskom’s coal-fired stations from improve its monitoring of gaseous emissions, such as sulphur dioxide 40 to 60 years, beyond the contracted duration of the tied and oxides of nitrogen. Although the relative consumption of water collieries, which were originally set up to supply only for 40 years. improved slightly in the past year, this will remain one of the major These contracts start to expire as early as 2013, and in many cases focus areas for continued improvement. coal reserves have not yet been dedicated to meet the full life extensions. Coal supply • Ageing of Eskom’s existing tied collieries, resulting in deterioration Low coal stock levels at some power stations in early 2008 resulted of coal qualities and reliability of supply from these mines. in these stocks being vulnerable to excessive rain, the coal being too • Depletion of the higher grade coal reserves in Mpumalanga, wet to feed into the power stations and contributing to the shortages resulting in increased competition for the remaining reserves of electricity supply. This situation has been turned around over the suitable for supplying Eskom’s older power stations. past two years. The average coal stock levels improved from • Dramatic escalation in costs, partly driven by “real” factors (the approximately 12 days in early 2008 to 37 days at the end of March commodities boom, resource depletion and more stringent 2010. As a result of the stock build up, the coal supply is not as environmental and safety standards), but also by a diversion of vulnerable to wet coal, although excessive rain will always have a scarce resources (skills, capital, management focus) away from the negative impact on the supply of coal to the power stations. To Eskom mines to the higher margin export businesses. mitigate the effect of rain, “coarse coal” stock piles treated with special chemicals to prevent water ingress have been created at Eskom has implemented a widely syndicated coal sourcing strategy stations vulnerable to wet coal supply. based on the following eight principles: 1. Optimal portfolio of long-, short- and medium-term sources, in Long-term coal strategy order to achieve the best balance between cost, capital investment, The growth in electricity demand over the past several years has volume flexibility and security of supply, while creating sufficient resulted in an increasing erosion of Eskom’s generation reserve certainty to permit investment in long-term logistics infrastructure. margin with the result that the existing power stations have had to 2. Prices based on efficient costs and fair returns on invested capital. be operated at much higher load factors. The direct consequence of This implies a new level of cost transparency between Eskom and this has been a shortfall in coal supplied from the tied collieries (since the industry, and an equitable sharing of risk and reward. Eskom Holdings Limited 97 Integrated Repor t 2010 3. Investment in low cost, flexible coal transport infrastructure, with can hold out for prices equivalent to Eskom’s next alternative, the primary focus being conveyers and rail capacity, with a which in most cases involves a lower quality coal and substantial corresponding reduction in road transportation. transport costs. 4. Quality management and coal beneficiation to reduce the total • Limited means for Eskom to drive negotiations to conclusion in cost of ownership (TCO), aimed at reducing the load losses the necessary timeframes, since the miners are almost always attributed to poor coal quality. better off delaying until Eskom has no option but to agree to 5. Risk-based stock management to align stock levels with the their terms. dramatically changed (and constantly changing) risk profile of coal supplies. Coal quality 6. Strengthening the primary energy division to deliver on the A marked deterioration in the quality of the total coal deliveries to strategy, through a combination of increasing skills in critical areas Eskom has been the trend since 2006. A step change occurred from and putting in the systems and processes required to operate in 19,5MJ/kg to 19,0MJ/kg. The stations which suffered significant this more challenging environment. deteriorations were Duvha, Matla and Arnot. Hendrina and Kendal 7. Improved co‑operation with major stakeholders, including were affected to a lesser extent while the quality at the remainder of authorities, regulators, suppliers and local communities. the stations remained either relatively constant or showed 8. Investment in long-term infrastructure, the benefits of which will improvement over time. not accrue in the immediate future. These include underground coal gasification (UCG), water infrastructure (through contracts These trends, together with higher load factors, have resulted in with the Department of Water and Environmental Affairs) and the significant coal-related load losses and the equivalent financial loss to Waterberg rail link. Eskom is approximately R1 billion, based on replacement power assuming 5% OCGT at R2 800/MWh and mid-merit stations at Eskom has made extensive progress in implementing this strategy. R118/MWh. This has included the conclusion of multiple new coal supply contracts (of varying durations), the renegotiation of the Medupi coal Total system losses supply agreement and several unfavourable short-term agreements, The loss per station is as follows: the thorough evaluation of several initiatives to improve coal quality Duvha 1 601 214MWh 40% (now under implementation), securing funds for rail infrastructure Matla 1 506 086MWh 37,6% investments and road repairs, and the implementation of the first set Tutuka 334 234MWh 8,3% of rail projects (Camden rail container solution scheduled to go live Camden 204 507MWh 5,1% in June 2010). Kriel 166 593MWh 4% However, despite these successes, Eskom has continued to face substantial challenges in securing coal for the full lives of its power As can be seen from the above table, Duvha, Matla and Tutuka stations at efficient costs. These challenges result from several power stations accounted for 86% of the total system losses. structural shortcomings in the industry and associated legislation as follows: 2010 FIFA World CupTM readiness • Insufficient mechanisms for the country to optimise the total The reliable performance of the power stations is a critical component South African coal resource and to “reserve” coal for future use, of the successful delivery of a dependable, uninterrupted flow of coupled with the incentive implicit in the “use it or lose it” principle electricity for the 2010 FIFA World CupTM. Preparations for the for miners to seek ways to exploit deposits before their world cup have been ongoing throughout the 2009/10 financial prospecting rights expire. Similarly, miners tend to optimise the year and included the identification of potential risks to the ability resource within their boundaries and can occasionally be exploited of the power stations to produce electricity and the mitigation by players owning small adjacent deposits. actions and timelines to address these risks. Criteria were • Limited means for Eskom to drive consistent pricing and contract developed against which the readiness can be assessed and have terms in negotiations – in securing a mining right the miner has been used by Generation business leadership during on-site reviews only to indicate that the coal is intended for Eskom, but thereafter and engagements with the power station and (where applicable) mine management teams. 98 Eskom Holdings Limited Integrated Repor t 2010 Generation Business continued The Generation Business contribution: Ensured Primary Energy • That all primary energy is contracted • Water, coal stock supplies and/or liquid fuels are adequate to meet capacity requirements • Co‑ordinated the fast tracking of a number of projects to expand network capacity and strengthen identified critical 2010 sites Enterprises • Since the build programme started in 2005, Gourikwa, Ankerlig and the return to service of the Komati, Camden and Grootvlei power stations have reinforced supply security Ensured • Plant reliability and availability Generation • Sufficient coal stock levels • No planned maintenance will be done over the extended 2010 FIFA World CupTM period • Security readiness reviews for national key points Capacity expansion programme Although the funding constraints delayed the placing of certain contracts related to the Medupi and Kusile projects, and resulted in the suspension of other capacity expansion projects (such as Nuclear-1), the capacity expansion programme has shown remarkable growth.The significant number of commissioned projects is evidence of the progress that has been made from inception in 2005 to date: Some 4 905,5MW of generating capacity has been installed, 2 825,4km of high-voltage (400kV and 765kV) transmission lines have been constructed and 11 730MVA transmission capacity has been commissioned through the construction and refurbishment of substations. Performance Targets Actual Actual Actual 2010 2010 2009 2008 Generation capital expenditure (Rm) 43 566 29 467RA 25 984 11 004 Transmission capital expenditure (Rm) 6 888 4 246RA 4 451 2 394 Generation capacity installed (MW) 420 452 RA 1 770 RA 1 061 Transmission lines installed (kilometres) 428 600RA 418RA 246 Transformers installed (MVA) 1 365 1 630RA 1 255 RA 1 295 RA – Reasonable assurance provided by the independent assurance provider (refer page 169). Construction of the Medupi power station in Lephalale, Limpopo province, is well advanced. Eskom Holdings Limited 99 Integrated Repor t 2010 Safety Work groups Safety of our staff and contractors is a key priority for Eskom. The The Mpumalanga Eskom Forum has introduced work groups that safety performance at the return to service and new build will ensure a co‑ordinated approach in dealing with specific issues. construction sites has been good when compared to international These work groups focus on Kusile, environment and water, roads benchmarks, but can nevertheless still be improved and will remain a and mining, existing operations and return to service and focus area. empowerment and economic development. Stakeholder engagements Eskom has also engaged in extensive communication and stakeholder Multiple engagements with various stakeholders (including senior consultation activities on other pertinent issues in Mpumalanga from delegations from the South African government, international funding a primary energy perspective, including the impact of transportation organisations (World Bank and African Development Bank), the of coal by road in the province. Generally, there has been significant media, investor institutions have been undertaken at various new progress and commitment to this initiative and appreciation from all build sites, in particular the Medupi project, and operational power stakeholders involved. stations around the country. Future focus In line with the resolutions taken at the recent strategic planning workshops held by Eskom’s senior leadership, seven strategic shifts will be achieved in the Generation business in the next three years and will be underpinned by the divisional keys in each area of the business: 1. Delivery of the Eskom expansion programme 2. Implementation of the Eskom long-term coal supply strategy 3. An improvement of 4% in the energy availability factor (EAF) of the power stations within three years (“4 in 3” programme). 4. Energy efficiency – reduce power plant consumption. 5. Reduce carbon footprint – investigate co-firing coal-fired power This year saw the establishment of the Mpumalanga Eskom Forum stations with biomass, thereby reducing coal usage by 10%. with government, business and all recognised groups relating to 6. Operational excellence – back to basics in the operation and Eskom’s operations in the province. These platforms of engagement maintenance of power plants. include but are not limited to forums and work groups. 7. Financial excellence – 10% reduction in operating and primary energy costs. Principals Forum This forum gives strategic direction to all relevant programmes and Our strategic objectives are to create a world-class power company, operations by unlocking blockages in the system. The forum also keep the lights on, deliver on the capacity expansion programme, provides political leadership on matters relating to various focus on safety and health, reduce the environmental impact of our programmes. operations, treatment of all risk, maintain and improve quality, live within our means, care for our people and restore the confidence of Technical Forum all South Africans in their national power company, Eskom. This forum creates an enabling environment for the Eskom capacity expansion programme. This is done with the principle of advancing the socio-economic development programme by leveraging the Eskom build programme and its operations in general.This forum has also ensured a co‑ordinated response to key challenges such as road infrastructure, water, environment and mining. 100 Eskom Holdings Limited Integrated Repor t 2010 Generation division Mandate: Optimally operates and maintains Eskom’s non-nuclear electricity generating assets over its full plant lifecycle. Progress this year Highlights Challenges • No load shedding in the past 12 months • Increase in particulate emissions • Managing our maintenance schedules, within ever reducing windows • Poor coal quality supplied by the mining industry of opportunity for maintenance adversely impacting the production capability of the power stations • World-class technical performance by some of Eskom’s larger coal-fired power stations • Poor technical performance at some of our stations • Very low staff turnover, highlighting our staff commitment and • Increase in the number of unit trips resilience • Improved management of wet coal • Good financial performance despite increased maintenance expenditure • Improved water consumption Future priorities • Ensuring no incidents related to power station operations during the 2010 FIFA World CupTM • Safety of staff and contractors • Improved environmental performance by reducing particulate emissions and water consumption • Improve our technical performance, increase availability of the stations • Improved plant reliability by reducing the number of unit trips • Training and development of staff • Improve cost efficiencies • ISO 14001 certification Thava Govender, Managing Director: Generation Q: What are the main pressures on Eskom’s fleet of power stations? A: The increased demand and low reserve margin in South Africa means that we have shorter windows of opportunity to perform essential maintenance on our power stations. Many of our stations are in their midlife and require major refurbishment. Our employees and contractors at the power stations are working around the clock, 365 days a year, and this is taking its toll on them and their families. The deteriorating quality of the coal supplied to our stations has a major impact in terms of the need to burn more coal, increased emissions and ash produced (ie, increased environmental impact) and more pressure on the station equipment. Eskom Holdings Limited 101 Integrated Repor t 2010 Key focus areas for the coming year Ensuring financial sustainability as the generating Based on the challenges identified in both the internal and external licensee contexts, the Generation division will focus on supporting the We will maintain operating and capital expenditure within ±5% of following strategic thrusts of the Generation business: budget for the next five years. Ensuring no supply interruptions due to plant Reduce the carbon footprint by investigating the unavailability feasibility of co-firing with biomass Generation division will ensure that there will be no load shedding The intent is to expedite the introduction of renewables into Eskom, due to poor plant performance over the next five years. An average in support of Eskom’s response to mitigate CO2 production. of daily MW lost to forced outages (OCLF + UCLF) must not exceed 2 500MW. This will be achieved by ensuring that an Ensure energy efficiency by pursuing adequate pool of core, critical and scarce skills are available to • the reduction of power station auxiliary power consumption per operate and maintain current and future power stations. The daily unit sent out supply and demand will be balanced by optimising long- and short- • optimising boiler and turbine cycle efficiency term maintenance requirements within the real-time status of • reducing specific fuel consumption per unit output unplanned plant unavailability. The integrated Generation control centre (IGCC) will enable us to better identify and co‑ordinate Ensure operational excellence through a back-to-basics responses to operation challenges and crises. focus in plant operations In support of Eskom’s strategic shift, Generation embarked on a Risk profile programme to improve the energy availability factor (EAF) of the The division implemented the new Eskom integrated risk management power stations by 4% within three years (“4 in 3” programme). The (IRM) process, built on the ISO 31000 standard. All business unit focus is on the factors that will enhance the performance of the managers are responsible for managing risk within their respective existing power stations to provide reliable and sustainable supply of areas. All business and operational risks are captured and managed electricity within the tight operating environment that prevails. thorough a newly adopted IRM system. The following generation division risks were identified at Generation executive level. Risk Treatment plans Security of supply is breached • Requested NERSA authorisation for inclusion of gas turbines capacity as additional (demand and reserves) maintenance space • Generation and NERSA interaction on a quarterly basis as a platform for engagement on Generation issues • Maintain required system reserve requirement namely 1 700MW of real time reserve, 2 500 MW of unplanned which equals 4 200MW in planning mode • Achieve least cost dispatch (coal driven) and more emphasis on demand-side interventions • Outages continually monitored through short-term energy risk forum which is held weekly Further deterioration of safety • Visible felt leadership (behavioural safety observation, senior leadership inspections) performance • Cardinal rule enforcement Compliance to environmental • Implement air quality strategy requirements • A long-term plan to change to bag filters • Improve coal quality 102 Eskom Holdings Limited Integrated Repor t 2010 Generation division continued Plans for 2010 – 2013 • sustain a motivated, high performing workforce to give effect to The division will: the Eskom strategic objectives • ensure zero harm to its employees, contractors, the public and the • have processes, systems and technology that enable superior natural environment performance • meet the balanced expectations of major stakeholders, weighing • drive to achieve its medium-term objectives, underpinned by the up the benefits and risks to all involved eg, meeting our obligation following strategic thrusts: to supply while managing a reduced tariff increase – pursuing various strategies to enhance energy efficiency • ensure no supply interruptions due to plant unavailability during – seeking to reduce its carbon footprint (for example, co-firing the 2010 FIFA World Cup , and respond quickly and effectively TM with biomass) to restore continuity of supply in the event of a unforeseen – ensure operational excellence through a focus on back-to- supply interruption basics in plant operations. • ensure its financial sustainability as the generating licensee – financial excellence Technical performance Actual Actual Actual Measure Description Target 2010 2009 2008 UCF measures the plant availability and Unit capability factor (UCF) (%) provides an indication of how well the plant 86,5 85,86 86,07 86,24 l is operated and maintained EAF measures plant availability (UCF above), Energy availability factor plus energy losses not under the control of (EAF) (%) plant management (external) and internal 85,5 85,21 85,32 84,85 l non-engineering constraints UAGS measures the reliability of service Unplanned automatic provided to the electrical grid and the grid separations number of supply interruptions per 2,40 2,80 2,93 2,80 l (UAGS/7 000 hours) operating period (7 000 hours on average) UCLF measures the lost energy due to Unplanned capability loss unplanned production interruptions factor (UCLF) (%) resulting from equipment failures and other 4,50 5,10RA 4,38RA 5,13 l plant conditions PCLF-planned energy loss is energy that was not produced during the period Planned capability loss factor (PCLF) (%) because of planned shutdowns or load 9,0 9,04 9,54 8,63 l reductions due to causes under plant management control Difference between net system capability Reserve margin (including imports) (%) and the system’s maximum load 15 – 19 16,4 10,6 5,6 l requirements (peak load or peak demand) GLF generation load factor (net) indicates the extent to which the generation fleet Generation load factor (GLF) (%) was loaded on average over the year to 66,6 66,2 67,02 72,29 l produce the energy demanded from the power stations RA – Reasonable assurance provided by the independent assurance provider (refer page 169). Eskom Holdings Limited 103 Integrated Repor t 2010 The continuous growth in demand for electricity prior to early 2008, The low reserve margin in the South African electricity supply system and the resurgence in the electricity demand growth towards the has, since 2006, resulted in shorter windows of opportunity to end of 2009 and beginning 2010, combined with limited increased perform essential maintenance on our power stations, as well as less electricity generation capacity, has resulted in a significant increase in opportunity to schedule the major refurbishments required by the the production required from existing power stations. This increased older power stations. The decrease in electricity demand which demand for production has, in many instances, led to plant resulted in a lower load factor experienced in 2008 and 2009 in components being stressed beyond their design operating comparison to previous years provided more opportunity for parameters. maintenance, resulting in higher PCLF in 2009 and 2010 compared to 2008. Scheduling of more short-term outages also contributed to The generation recovery process in 2008/09 resulted in improved increased planned outages. availability and reliability for those plant areas for which priority focus was given. However, other plant areas like coal handling and Boiler tube leaks recovery progress particulate emission reduction systems have shown a deterioration The generation recovery process in 2008/09 also identified in performance as a result of the demanding operating regime of the opportunities to reduce and improve the management of boiler tube 2010 Eskom Integrated Annual Report Generation Business coal-fired power stations and variation in coal qualities. leaks, including a review of works management principles and further refinements to future maintenance activities. All the identified actions For further details on our environmental performance improvement initiatives go to www.eskom.co.za/annreport10xxx from the recovery process have been formally committed. Plant performance has steadily recovered, and we have seen a reduction in load losses due to boiler tube leaks as a result of the focused management in this area. Boiler tubes are arranged to obtain maximum heat transfer Note the scale to a man Eskom’s 600MW coal-fired boilers are more than 30 stories high with over 600 kilometres of tubing arranged around and inside the boiler Eskom’s 600MW coal-fired boilers are more than 30 storeys high with over 600 kilometres of tubing arranged around and inside the boiler. 104 Eskom Holdings Limited Integrated Repor t 2010 Generation division continued Benchmarking For further information on maintenance activities, go to Technical performance indicators www.eskom.co.za/annreport10/006.html Generation has over many years benchmarked its performance against international counterparts. It is evident from recent benchmarks that Eskom’s plant performance aligns closely with that of VGB (the European technical association for the electricity and heat generation industries with 427 member organisations from High load factors 32 countries, representing a collective capacity of 500 000MW). In order to deliver on its obligation to meet the ever-increasing demand for electricity in South Africa with limited system The availability performance of Eskom’s generating plant in capacity expansion, Eskom has been forced to operate its comparison to aggregate VGB member performance (excluding existing power stations up to and often beyond their design Eskom) compares as follows: limits. In some instances this has resulted in increased degradation rates and introduced new failure mechanisms, Benchmarking EAF all coal all sizes 1999 – 2008 which necessitated the re-evaluation of current maintenance 96 VGB units (excluding Eskom) strategies. For example, the scope of inspections for phenomena 100 such as fly ash erosion of boiler tubes has had to be increased since wear is no longer occurring in the same areas where 90 previous history would have predicted. EAF (%) 80 70 Plant monitor for generators Eskom has developed a unique generator monitoring system 60 that includes partial discharge, stray flux, electromagnetic 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 VGB median VGB best quarter VGB worst quarter interference, shaft monitoring and fault diagnostic modules, all Eskom median Eskom best quarter Eskom worst quarter combined into a host system. From the above it is clear that Eskom’s plant generally performs We have applied for patents for the design of some of the better than the comparative VGB plant sets, but is showing a declining modules and 44 partial discharge monitors have already been trend emanating from increased operating pressure on the electricity sold to a South American utility. production infrastructure. Monitors are currently in operation at two Eskom power When comparing the load factor of Eskom’s assets with that of the stations with the rollout to other power stations scheduled for VGB members, the following graph indicates that Eskom has generally upcoming planned maintenance shutdowns. experienced a more severe increase in operating conditions, thus implying that we have done slightly better than international Some major successes of the application of these monitors are: counterparts in maintaining plant availability under adverse operating • integration of the system as part of a programme where it is conditions. Eskom has a higher load factor compared to VGB plants, applied to every generator being returned to service; which is indicative of the lower reserve margin in South Africa. • Duvha and Koeberg power station rotor interventions in 2007, where data from the modules allowed slightly damaged Benchmarking LF all coal all sizes 1999 – 2008 rotors to be operational for a longer time than expected; and 96 VGB units (excluding Eskom) • detection of a failing Koeberg rotor bearing in 2009. If this 100 had not been detected, the machine could have failed 90 catastrophically. Koeberg nuclear stations’ performance is 80 discussed in more detail in the nuclear division section on 70 page 114. LF (%) 60 50 40 30 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 VGB median VGB best quarter VGB worst quarter Eskom median Eskom best quarter Eskom worst quarter Eskom Holdings Limited 105 Integrated Repor t 2010 Similarly, the comparison of forced plant failures (UCLF) in the • Waste management reviews of all power stations were undertaken following graph reflects levels in Eskom that are generally better than during the year to ensure improved waste management practices the average of the VGB members. The slope of the increasing trend • Water management and ground water reviews were completed in recent years is reflective of the ongoing harsh operating conditions to identify areas for improvement and forced failures. • The stabilisation of our water use performance. Water used as part of the process to generate electricity improved slightly Benchmarking UCLF all coal all sizes 1999 – 2008 96 VGB units (excluding Eskom) from 1,35RA to 1,34RA L/kWh sent out (see details of actions taken 10 on page 107) • Hendrina, Arnot and Komati power stations were awarded the 8 blue drop certification status by the Department of Water Affairs 6 as water service providers UCLF (%) • Several major modifications were completed on particulate 4 emission abatement equipment and related plant, which will result in improved performance in the next financial year 2 0 Challenges 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 • A decline in the particulate emission performance from the coal- VGB median VGB best quarter VGB worst quarter Eskom median Eskom best quarter Eskom worst quarter fired power stations to 0,39RAkg/MWh sent out (2009: 0,27RA) • Inability to meet the requirements of the particulate emission Environmental performance licences Highlights • Unauthorised water releases • Generation Peaking business unit achieved ISO 14001 certification • Several other business units successfully completed phase 1 certification audits for ISO 14001 Key Generation environmental performance indicators Target 2010 2009 2008 Water used at power stations (including Koeberg) (ML) n/a 316 202 323 190 322 666 Specific water consumption (L/kWh sent out)1 <1,36 1,34RA 1,35RA 1,32 l Nitrous oxide (N2O) (t) n/a 2 825 2 801 2 872 Carbon dioxide (CO2) (Mt)2 n/a 224,7RA 221,7RA 223,6 Sulphur dioxide (SO2) (kt)2 n/a 1 856RA 1 874RA 1 950 Nitrogen oxide (NOx) as NO2 (kt)2 n/a 959RA 957LA 984 Relative particulate emissions, (kg/MWh sent out)3 <0,24 0,39RA 0,27RA 0,21 l Particulate emissions (kt) n/a 88,27RA 55,64RA 50,84 l Ash produced (Mt) n/a 36,01RA 36,66LA 36,04 l Ash sold (Mt) n/a 2,0RA 2,1 2,4 Ash recycled n/a 5,6%RA 5,7% 7,0% Ash disposed of on Eskom ash dumps and dams (Mt) n/a 33,89RA 34,56 33,6 Number of environmental legal contraventions (number)4 n/a 33 64 32 l Number of environmental legal contraventions reported in terms of Eskom’s operational health dashboard (number)4 0 0 7 4 l Materials containing asbestos disposed of (tons)5 n/a 209,8 2 879,7 88,8 Material containing polychlorinated biphenyls (PCBs) thermally destructed (tons) n/a 0,9 0 10 RA – Reasonable assurance provided by the independent insurance provider (refer page 169). LA – Limited assurance provided by the independent insurance provider (refer page 169). 1. Volume of water consumed per unit of generated power from coal-fired power stations sent out, excluding Komati and Grootvlei power stations. 2. Calculated figures based on coal characteristics and the power station design parameters. SO2 and CO2 emissions are based on coal analysis and using coal burnt tonnages. For 2010, includes Camden, Grootvlei and Komati and the gas turbine power stations as well as oil consumed during power station start-ups and for CO2 the underground coal gasification pilot (flaring). 3. The overall particulate emission performance figure is based on individual coal-fired power station performance. For certain power stations, emission figures are based on best estimates. Excludes Grootvlei and Komati coal-fired power stations as these are not yet in full commercial operation. 4. Under certain conditions, contraventions of environmental legislation are classified in terms of the Eskom OHD index. These include instances where censure was received from authorities, non-reporting to authorities as may be legally required, non-reporting in Eskom, a repeat legal contravention, or when the contravention was not addressed adequately. Managing directors can escalate any significant environmental legal contravention to the OHD. 5. Quantities of waste disposed of at registered waste sites. 106 Eskom Holdings Limited Integrated Repor t 2010 Generation division continued Atmospheric emissions • replacement of secondary air heater packs on four of the six units The generation of electricity at Eskom coal and liquid fuel-fired at Kendal power station power stations results, inter alia, in the release of combustion gases • refurbishment of the SO3 plants for all units at Kriel power station and particulate matter.These gases and particulates have the potential • refurbishment of common SO3 plant at Matla power station to adversely impact local and regional air quality. • completion of most of the short-term ESP improvement plan at Tutuka power station, which included repairing the defective ESP The reduction of particulate emissions from coal-fired power station fields, modifying the rapping system, air-heater and ESP washing stacks has been a focus since the early 1980s. Significant reductions in and ESP controller optimisation the quantity of particulates emitted have been achieved through the • replacement of pulse jet fabric filters at Majuba and Hendrina use of various particulate abatement technologies, such as power stations electrostatic precipitators (ESPs), whose efficiency has been further enhanced through sulphur trioxide (SO3) flue gas conditioning, skew The nature of these actions is such that they do not result in an flow technology and modern control systems. Some power stations immediate reduction in particulate emissions, but rather a reduction have been retrofitted with pulse jet fabric filters. over a number of years.Thus positive improvements are expected to become evident during the next financial year (2010/11). There was Although the relative quantity of particulates emitted from the coal- however a reduction in the number of exemptions requested from fired power stations compared to the amount of electricity generated emission licence conditions from 160 in 2008/09 to 135 in 2009/10. is significantly less than the 1980s, there has been an increasing trend over the most recent years, resulting in relative particulate emissions Ambient air quality monitoring being the highest in the past decade. This year saw the finalisation and gazetting of ambient air quality standards for major pollutants including sulphur dioxide, nitrogen Particle emissions dioxide and particulate matter. Emissions from Eskom do not result in non-compliance with ambient air quality standards in any populated Dec ’00 areas in the vicinity of power stations. Dec ’01 Dec ’02 Eskom has carried out ambient air quality monitoring for more than Dec ’03 20 years. Ambient monitoring is conducted to measure the impact of Dec ’04 Eskom’s emissions on people residing in the vicinity of power stations; 12 mmi Mar ’05 to measure the change in air quality as a result of commissioning new Mar ’06 power stations; to measure long-term trends in air quality; and to gain Mar ’07 a greater understanding of atmospheric chemistry and Eskom’s Mar ’08 influence on the environment. Mar ’09 Mar ’10 Water 0 0,05 0,1 0,15 0,2 0,25 0,3 0,35 0,4 0,45 Eskom, as a strategic water user, has a responsibility to play a leading kg/MWh sent out role in the management of this precious resource. Eskom continues Actual Annual target to implement water management improvement measures and monitoring and improvement of water consumption at our The poor particulate emissions performance from the coal-fired power stations. power stations in 2009/10 is the result of: • deteriorating coal qualities at some power stations The specific water consumption of 1,34RA L/kWhSO (2009: 1,35RA) • continued reduced opportunity for maintenance owing to the (for the power stations excluding the Grootvlei and Komati return to lower reserve margin service power stations) was better than the target of 1,36L/kWhSO. • continued running of power stations at higher load factors • refurbishment work on critical pollution abatement equipment Specific water consumption (sulphur trioxide injection plants) at Kriel and Matla power stations. Dec ’00 During such a refurbishment the emissions increase due to the Dec ’01 absence of the sulphur trioxide injection. This refurbishment takes Dec ’02 place approximately once in 20 years. Successful refurbishment Dec ’03 results in long-term emission reductions Dec ’04 12 mmi The deteriorating emission performance has been identified as Mar ’05 an area of significant concern, resulting in Eskom developing a Mar ’06 comprehensive particulate emission reduction plan. This plan Mar ’07 focuses on specific plant maintenance regimes, upgrades and Mar ’08 technology retrofits. Mar ’09 Mar ’10 Over the past two years the actions that have been implemented 0 0,3 0,6 0,9 1,2 1,5 included the following: l/kWh sent out • installation and optimisation of SO3 plants to improve the Actual Annual target performance of the electrostatic precipitators (ESPs) at Matimba power station RA – Reasonable assurance provided by independent assurance provider (refer page 169). Eskom Holdings Limited 107 Integrated Repor t 2010 The positive performance was the result of For further details on our environmental performance • above normal rainfall during the year which resulted in improved improvement initiatives go to recovery of dirty water www.eskom.co.za/annreport10/007.html • a power station dispatching programme that favoured water efficient stations • maintenance and repair of water leaks • improved recovery as a result of reuse and recycle Air quality monitoring Water management and sewage plant reviews were conducted at all Eskom’s research team has been undertaking investigative air coal-fired power stations to assess the status and effectiveness of water management practices, and to promote water conservation quality monitoring on a regional scale since the late 1970s using and water demand management. The management reviews revealed state-of-the-art equipment. Currently there are 13 sites, various deficiencies such as unaccounted water losses, water leaks, including a “super-site” at Elandsfontein, measuring most of the ageing plant, poor coal quality leading to load losses and higher criteria pollutants as stipulated by the Department of demineralised water consumption and opportunities to reduce water consumption. Environmental Affairs under the Air Quality Act. Waste The air quality monitoring network is accredited by the South All waste, general and hazardous, produced at the power stations is African National Accreditation Service (SANAS). By identifying disposed of at licensed landfill sites. Of particular relevance is the commitment to phase out polychlorinated biphenyls (PCBs) and long-term pollution trends and atmospheric chemistry asbestos-containing materials. Generation division disposed of processes, Eskom is able to assess compliance with ambient air 0,9 tons of PCB contaminated material (2009: 0) and 209,8 tons quality standards and also predict long-term environmental of asbestos (2009: 2 879,7 tons). impacts. By enhancing our knowledge and understanding of the Ash effects of power station emissions on atmospheric chemistry at Of the approximately 36,01 million tons (2009: 36,7 million tons) RA LA a regional and global scale, Eskom will be able to minimise our of ash produced at the coal-fired power stations 5,6%RA (2009: 5,7%) industry’s impact on the environment. was reused. Some of the ash from Lethabo, Majuba, Matla, Kriel, and Kendal is was the first in the division to achieve ISO 14001 certification, during used for the production of cement. The remaining ash is safely this financial year. The remaining stations are all at various stages of disposed of and managed at ash dams and dumps adjacent to the the certification process and are on track to meeting their respective power station.These ash disposal sites are continually rehabilitated to target dates. ensure the mitigation of any fugitive dust that may arise. Partnering with non-government organisations Environmental impact assessments The Ingula Partnership, between Eskom, Birdlife South Africa and The undertaking of environmental impact assessments (EIAs) plays a Middelpunt Wetland Trust, was formed six years ago to provide a critical role in ensuring informed decision making regarding Eskom’s forum for discussion and management decision taking related to capacity expansion programme and modifications on existing plant environmental issues on 8 000 hectares of land purchased for such as waste disposal sites and the extension of ash dams. conservation around the Ingula pumped-storage scheme. Environmental authorisations are issued by the national Department of Environmental Affairs (DEA). Participation by other organisations interested in environmental aspects of the pumped-storage scheme was enabled by creating a EIAs were initiated for two future coal-fired power stations and one working committee – the Ingula Advisory Committee: Conservation. nuclear power station in 2008 and 2007, respectively. This year This facilitates transparency, further discussion and input of advice Generation received approval of scoping for these projects which to the partnership. Meetings of the working committee are held are now well advanced in the EIA phase. Several smaller EIAs were regularly, the participants of which include representatives from the completed during 2009/10 for a landfill site, extension to existing ash national Department of Agriculture, the KwaZulu-Natal and Free dams as well as infrastructure associated with new build projects, State environmental departments and the Ekangala Grassland Trust. such as the Kusile rail project, the Medupi landfill site and the A comprehensive conservation plan is being implemented, which cemetery at Ingula. includes the possible declaration of the area as a nature reserve and the wetland as a Ramsar site. Significant achievements have been Environmental management systems made this year, including the initiation of the alien vegetation Generation division has committed to achieving ISO 14001 eradication programme, the development of an erosion rehabilitation certification by March 2011. The Generation peaking business unit plan and the completion of most of the baseline studies. RA – Reasonable assurance provided by the independent assurance provider (refer page 169). LA – Limited assurance provided by the independent assurance provider (refer page 169). 108 Eskom Holdings Limited Integrated Repor t 2010 Primary Energy division Mandate: Optimally identifies, develops, sources, procures and delivers the required amounts of primary energy (water, sorbent, coal, liquid fuels), to power station specification, to the required locations, on time and at minimum cost over the full plant lifecycle of Eskom’s non-nuclear generating assets. Progress this year Highlights Challenges • A 17-year coal supply agreement for the supply of coal from the Goedgevonden • The decline in coal deliveries over the colliery to Majuba power station was signed between Eskom, ARMCoal and 2009 festive season due to the Xstrata. The signing marked the end of three years of negotiations between the underperformance of the coal mines parties supplying Eskom, increased electricity • Detailed analyses on coal-related load losses have been completed for some power demand and the impact of rain resulted in stations the system coal stock days falling to 37 days as at 31 March 2010, below the • An innovative, containerised rail solution has been developed for Camden power target 42 days. Plans have been station whereby modified rail containers will be loaded with coal at the mine site, implemented to facilitate stock day trucked to the nearest siding and then loaded onto flatbed wagon trains destined recovery to the target level for Camden. This will reduce the number of trucks on the road which are required to deliver coal directly to Camden • The breakdown in the working relationship with coal transporters led to • Primary Energy has been reorganised to improve business processes a truck blockade at Eskom’s head office in • The Medupi coal supply agreement was concluded prior to the financial crisis of April 2009. Fortunately there was minimal 2008. In the past year, Eskom and the supplier have re-negotiated certain impact on the coal stockpiles at the commercial parameters to ensure alignment to the changing economic conditions power stations • Several short/medium-term coal supply contracts which were concluded under the emergency situation of 2008, were favourably re-negotiated in 2009 Future priorities • Road coal haulage in Mpumalanga has raised the issue of overall road safety in the province due to deteriorating road conditions and public and truck driver behaviour • Over the next three years, Primary Energy will continue to implement its long-term coal supply strategy. The coal sourcing strategy which is currently in place will enable Eskom to develop an optimal portfolio of long-, medium- and short-term coal supply agreements which are dependent on the life and quality of the resource • The division will ensure the necessary capital investments for the dedicated mines, enabling them to supply the required tonnages and quality to Eskom • Major emphasis will also be placed on investigating, designing and implementing low-cost, flexible, coal transport solutions, which will relieve the impact of coal trucks on our roads Dan Marokane, Managing director: Primary Energy Q: How is Eskom addressing the coal trucking issue? A: We continue to spend significant effort on managing the challenges of transporting 36Mt of coal (road and rail) per year (about 25% of annual coal purchases) to our coal-fired power stations. The current model mix has 6Mt of this volume being transported by rail to Majuba power station and the remainder being transported by road to Majuba and other power stations. We remain fully committed to the strategic imperative of migrating coal transport from road to rail. This migration strategy has been debated with our stakeholders, including the road transporters and the communities on the coal routes.The road transporters acknowledge the compelling rationale for the rail migration strategy. Regular progress meetings are held with the road transporters and all relevant matters pertaining to the rail strategy are disseminated, including the approval of a rail solution for Camden power station and progress on the World Bank funding being secured for the construction of the heavy haul coal line to Majuba power station. Eskom Holdings Limited 109 Integrated Repor t 2010 Primary Energy update identified the key positions in the division and vacant positions have Over the past year, Primary Energy has undergone an extensive been advertised. Primary Energy will acquire the requisite skills and exercise focusing on its organisational structure. The structure was experience from the market. Extensive focus is currently on developed based on an international benchmarking exercise and on implementing processes and systems that will improve contract the principles of organisational design. The structure was approved management while strengthening governance practices. A number of and is currently being implemented in the division. This exercise also legacy issues in different contracts will also receive attention. Risk profile Risk Treatment plans Reduced coal purchases and inadequate Engage and manage the coal suppliers and the coal supply agreements to ensure maximum coal qualities caused by non-performance efficiency and performance of the coal mines • C  ontinual engagement with the relevant authorities to improve and maintain the road Deterioration of road infrastructure network caused by heavy rains and lack of road maintenance by the relevant authorities • O  ptimisation of the rail network, thus decreasing the need for coal to be transported by road Embark on various initiatives to ensure that the rail network is optimised Reduced rail performance caused by Eskom is in the process of establishing rail off-loading facilities at power stations which will inefficiencies across the coal value chain be supplied by mine loading sites in the central basin of Mpumalanga leading to coal being transported by Short-term containerised coal solutions will be implemented at some stations because road at extra cost these solutions are cost effective and relatively quick to implement Eskom aims to move over 18Mtpa of coal from road to rail in the foreseeable future • Prioritise and fast track off-take agreements Delays in implementation of new water • Trigger specialist studies on water resource availability and impact supply infrastructure leading to late • Support strategic environmental studies around impact of water use for future power delivery of water to new power stations generation developments • Obtain explicit or implicit guarantees from government for water infrastructure funding Coal quality and quantity Coal quantity procured has been below the business requirements in the current year due to underperformance of the tied mines operated by the major mining companies supplying Eskom. Stockpiles at all the stations have been kept at above their minimum levels and total system stock is within the expected range. Eskom has also embarked on several initiatives to ensure that the correct quality of coal reaches each power station. These initiatives will continue over the next few years. Performance – coal purchased and burnt Target Actual Actual Actual 2010 2010 2009 2008 Coal burnt (M tons) 122,50 122,70 121,16 125,30 Coal purchased (M tons) 123,94 121,82 132,66 119,63 Coal stock days 42 37RA 41LA 13 RA – Reasonable assurance provided by the independent assurance provider (refer page 169). LA – Limited assurance provided by the independent assurance provider (refer page 169). For the year under review, the largest impacts on coal costs were lower volumes than planned (4,1Mt) from the long-term coal supply agreements with tied mines resulting in a higher level of short/medium-term coal being procured (with its associated transport costs) to fill Eskom’s coal demand gap. 110 Eskom Holdings Limited Integrated Repor t 2010 Primary Energy division continued Long-term coal supply strategy requirements of Medupi power station and the associated Eskom has developed a long-term coal supply strategy in order to developments but excluding water for flue gas desulphurisation meet the requirements of the current and future power stations.The (FGD). In the interim, Medupi power station will have adequate key elements of this strategy are: water supply, using the existing surplus from Matimba power • to develop an optimal portfolio of long-, medium- and short-term station, to cater for Medupi’s first three units fully commissioned coal supply agreements without FGD. • to invest in low-cost, flexible, coal transport infrastructure • to improve the consistency and quality of coal supplied to the MCWAP phase 2 involves the abstraction and transfer of water power stations from the Crocodile West River to the Lephalale area. Phase 2 will • to intensively engage with all major stakeholders support future water requirements beyond Eskom’s needs in the region and Medupi’s FGD and is planned to be completed by Long-term water strategy October 2015. The concerns of growing water scarcity; lack of access to water to meet basic human needs; depleted environmental flows; growing In addition, the Vaal River eastern subsystem augmentation pollution from land use activities; human health concerns and the project (VRESAP) was declared operational by DWA in June 2009. implications of climate change on the hydrological cycle and yields Eskom has requested the DWA to investigate potential have brought water to the forefront as a strategic area for us.This has infrastructure bottlenecks in their water supply systems and this resulted in us understanding that we will no longer be able to easily study is expected to be completed by end April 2011. Eskom is access relatively cheap and clean water and that we must consider also working closely with the DWA to mitigate potential water limited supplies and the implications of our water use and discharge deficits in the Vaal River system. This water feeds all the power on watersheds, ecosystems, and communities. The increase in stations in the Mpumalanga province. demand for water together with deterioration in water quality will result in increases in the cost of water, requiring recovery from the Eskom has engaged with the DWA’s national water resources electricity tariff. planning directorate to ensure water resources and infrastructure planning needs are factored into the integrated resources plan. The Eskom, as a strategic water user, has an added responsibility to play a DWA has also initiated and completed various water resources leading role in the management of this precious resource, while studies and strategies to ensure plans are implemented timeously to leveraging its role of setting a foundation for growth and development meet the electricity generation and related development needs as well as creating a sustainable economy, not harmful to the of the country. environment. Further, pronounced water scarcity and deteriorating quality in key The key water supply infrastructure projects that have been identified catchments, along with heightened expectations among important to deliver water to Medupi, Kusile and the return-to-service stations stakeholders including consumers and investors, has created a are the Mokolo and Crocodile Water Augmentation Project compelling business case for our overall water management strategy, (MCWAP) and the Komati Water Scheme Augmentation Project including a water demand management strategy. This strategy takes (KWSAP), respectively. into account the scenarios related to the future cost of water. The KWSAP is awaiting Public Finance Management Act approval The key elements of the water strategy are: before the water supply agreements between Eskom and the • to meet the water quality objectives of the various catchments Department of Water Affairs (DWA) can be signed. The • to efficiently manage water cost increases into the future environmental authorisation is expected by end May 2010 and water • to actively influence policy, strategy, planning, legislative and delivery planned by end May 2012. regulatory environment related to water • to meet the water requirements for existing and new The MCWAP phase 1 water supply agreements are planned to be power stations concluded by end June 2010 with water delivery planned for end April 2013. This will provide sufficient capacity for all the water Eskom Holdings Limited 111 Integrated Repor t 2010 • to develop long-term water plans to ensure security of Impact of primary energy costs water supply on the business • to develop and implement a water conservation and water Primary Energy division recognises the need to accurately budget demand management strategy and forecast for coal expenditure so as to allow the business to • to engage stakeholders on water challenges and solutions adequately prepare for future coal costs. The MYPD 2 application submitted to NERSA is an example of how a robust and Liquid fuels (diesel and kerosene) strategy comprehensive plan was created based on defined and defendable Eskom’s total installed capacity from liquid fuel-fired stations (open- assumptions. This was critical to ensure that the cost of coal was cycle gas turbine stations) totals 2 426MW. These plants provide adequately accounted for in Eskom’s revenue application. assurance of supply to the Western Cape during periods when Koeberg nuclear power station is not operational, when there There is also a strategy to enter into new long-term agreements with is a general shortage of generating plant to meet demand or coal suppliers, which will reduce pricing uncertainty into the future. when problems are experienced with the transmission lines to the The implementation of the long-term coal supply strategy will Western Cape. necessitate major engagements with key stakeholders, such as mining houses, labour, government and Transnet. Eskom has already started Because of the high cost of generation from the liquid fuel-fired engaging with stakeholders to discuss and resolve coal supply issues stations, Eskom strives to restrict the use of this plant to peak hours in the national interest. or during emergencies. During 2010 we were able to contain the usage and produced only 49GWh from these stations. Other initiatives are to maximise tonnages from relatively less expensive long-term contracts, without affecting the life of the mines, There are specific challenges around the fuel procurement and fuel as well as optimising lower cost rail transport for stations that storage for the liquid fuels plant. The first concerns the pattern of normally receive their coal by road. usage of this plant. As it is used as back-up plant, the uncertainty around the timing and extent of usage is high. The second is that suppliers require long lead times for orders of liquid fuel. Maintaining a stock of fuel is one way of overcoming this challenge. Eskom is aware that this comes at a cost in terms of working capital and regularly reviews the stock levels required. The biggest drivers of the cost of fuel for this plant are the price of oil and the exchange rate, which resulted in the price of fuel fluctuating significantly. Overall, the average price for the current year has decreased by 36% compared to 2009. Consumption decreased by 52% during 2010 because of the increased availability of the nuclear power station and an overall decrease in demand for electricity. 2010 2009 2008 Diesel and kerosene consumed (million litres) 16,1RA 28,9LA 345,9 RA – Reasonable assurance provided by the independent assurance provider (refer page 169). LA – Limited assurance provided by the independent assurance provider (refer page 169). Truck loads coal at the coal-yard at Matimba power station in Lephalale. 112 Eskom Holdings Limited Integrated Repor t 2010 Primary Energy division continued Road repairs will conduct all road repairs and Eskom will pay a shadow toll While Eskom does not have an obligation to repair roads, the to SANRAL based on Eskom’s beneficial use of the roads for organisation has spent R161 million in the last financial year on coal haulage. repairs to the roads used to transport coal to the power stations. For the coming financial year, a total amount of R950 million will be spent Environmental performance on repairing and maintaining this network of roads. Part of Eskom’s Highlights long-term strategy is to maximise the use of rail to transport coal. • Environmental and water strategies are in place and plans are being implemented However, in the short term, it is imperative that these roads are • Inclusion of environmental conditions in new coal suppliers repaired and maintained in order to provide an adequate supply of contracts coal to the power stations and ensure safe driving for the communities. • Completion of the water and waste water management reviews at all coal-fired power stations In 2009, the government and the South African National Roads • Water use licence authorisations and permits issued for Eskom Agency Limited (SANRAL) agreed that SANRAL will be responsible operations for road maintenance. However, for the coming financial year, Eskom, in its MYPD 2 application to NERSA, requested an amount for road Challenges repairs to allow for time for the new arrangements to be finalised. • Repair of roads required to improve coal transport was started This was granted by NERSA. Beyond the next financial year, SANRAL before obtaining the required environmental authorisation Key primary energy environmental performance indicators Target 2010 2009 2008 Number of environmental legal contraventions 0 1 1 n/a l Number of environmental legal contraventions reported in terms of Eskom’s operational health dashboard1 0 0 0 n/a l 1. Under certain conditions, contraventions of environmental legislation are classified in terms of the Eskom operational health dashboard (OHD) index. These include instances where censure was received from authorities, non-reporting to authorities as may be legally required, non-reporting in Eskom, a repeat legal contravention, or when the contravention was not addressed adequately. Looking forward • Eskom aims to implement its water demand management strategy to reduce its water losses (evaporative, seepage and spillages) and continuously achieve improvement in its water use performance (litres per kWh sent out) by setting stretch targets • Investigating mine water treatment and reuse at power stations • Conducting activities in a self-regulatory manner, complying with legal and regulatory requirements and reducing long-term environmental liabilities Eskom Holdings Limited 113 Integrated Repor t 2010 Safety – coal transport In March 2010, Eskom joined the Trans-African Concessions (TRAC) Some 26Mt of coal was transported by road in the past year, N4 road safety project 2010 in Mpumalanga. The focus is to prevent primarily in the Mpumalanga province. Due to the high number of accidents by increasing the visibility of all emergency role players and road incidents and fatalities, a public safety awareness initiative was to have a complete emergency team stationed at one place, from where a co‑ordinated response to emergency calls will decrease started jointly with the Departments of Public Works, Roads and reaction time. Transport. Various stakeholders such as the Bethal community, truck owners, traffic departments, SAPS, the Department of Health, There was also a visit to Mpumalanga to identify critical or risky areas Mercedes Benz, Dunlop, Rotran and truck drivers were invited to where coal truck drivers are challenged due to poor road conditions. a workshop to discuss how the target of “zero harm for all” could Eskom recognises the urgent need for a sound and realistic road be achieved. repair plan to be developed and shared with all concerned stakeholders. Eskom has also built two new junior traffic training centres to educate children on road safety in areas where coal trucks travel. Five areas were identified for these centres: Ermelo, Hendrina, Morgenzon, Perdekop and Kinross. Train downloads coal at Majuba power station near Volksrust. 114 Eskom Holdings Limited Integrated Repor t 2010 Nuclear division Mandate: Performs activities relating to the optimal operation and maintenance of Eskom’s nuclear generation assets over their full plant lifecycle. Progress this year Highlights Challenges • Significant worker radiation dose reduction • Decision for new nuclear capacity (Nuclear-1 project) not finalised (awaiting IRP2) • Reduced staff turnover Future priorities • Formalisation of Koeberg lifespan at 60 years • Koeberg steam generator replacement project • EIA process for new nuclear sites • DRA for future nuclear capacity Clive le Roux, Senior general manager: Nuclear Q: What is Eskom’s view on the future nuclear expansion programme? A: Other than coal-fired power stations, the only feasible alternative for base load electricity in South Africa is nuclear power stations. Because the existing nuclear power station at Koeberg is a pressurised water reactor, this remains the preferred nuclear technology for a new fleet of reactors. The South African government is currently considering the way forward in terms of the expansion of South Africa’s nuclear power generation capacity. Eskom Holdings Limited 115 Integrated Repor t 2010 Key focus areas in 2010 Eskom remains a member of the European Mutual Association for During the year under review, the Nuclear division concentrated on Nuclear Insurance and uses this membership to reduce the cost of providing nuclear energy in accordance with world-class nuclear insurance for the business and to network with other nuclear utilities safety and technical performance requirements. This was achieved on common risk and insurance issues. through the development of supportive nuclear safety values and beliefs, continuous effort to ensure operational excellence and During 2009 Koeberg celebrated its 25th consecutive year of safe adherence to the fundamentals of sound financial management. operation of unit 1 with unit 2 about to reach that milestone during 2010. This remarkable feat, combined with the current condition of New techniques, and a concerted drive to change behaviours, the plant, makes it feasible to consider a plant operational lifespan of resulted in the total radiation dose emitted to the Koeberg workforce 60 years in line with international trends. A formal decision in this in the execution of work in radiological controlled zones, being regard is anticipated in the coming year. reduced significantly. This achievement was maintained during the year, even though considerable work was conducted within narrowly In an effort to ensure public participation, the division undertook defined timeframes during the outage period. awareness activities through various media, community forum initiatives and effective communication strategies. In addition, A suite of technical modifications was completed on both units. continuous support was provided to the South African government These safety modifications have further reduced the probability of with regards to initiatives aimed at the development of a future accidents and public risk, which remains below limits prescribed by nuclear power industry. regulation. Risk profile Eskom continues to actively participate in the international nuclear The nuclear division has implemented an integrated risk management domain through its affiliation to the World Association of Nuclear practice that is aligned to that of Eskom. Pursuant to this policy, the Operators (WANO), the International Atomic Energy Agency nuclear division has identified risks and appropriate risk mitigation (IAEA) and the Institute of Nuclear Power Operators (INPO).This techniques. The more important risks are listed hereunder. facilitates benchmarking of performance, periodic safety reviews, definition of standards, dissemination of best practices and training of industry personnel. Risk Treatment plans Threats to production To improve the availability of the Koeberg units, future planned upgrades are part of the ongoing asset management strategy, and are planned in a prioritised manner for future outages The extent of the reliance of Koeberg This is addressed through continuous dialogue between the Koeberg operators and the and the Western Cape on the network operators, to ensure that risks on the transmission network and at Koeberg are transmission network understood and appropriate contingencies plans are devised Delays in the establishment of The agency has many responsibilities that directly influence the operations of nuclear National Radioactive Waste Disposal installations. Eskom is actively involved with the Department of Energy and its consultants Management Agency in the establishment of the agency. Eskom has evaluated the different strategies for managing used fuel and is ready to make proposals to the agency when established 116 Eskom Holdings Limited Integrated Repor t 2010 Nuclear division continued Key performance indicators Power station net capacity Koeberg MW 1800 Electricity production 2010 2009 2008 Koeberg nuclear GWh 12 806 13 004 11 317 Technical performance WANO’s PWR best Target Actual Actual Actual quartile 2010 2010 2009 2008 UCLF 0,08% 2,56% 2,12% 5,70% 4,40% l EAF n/a 80,18% 82,0% 83,3% 72,3% l UCF 94,34% 82,65% 83,2% 83,4% 75,6% l PCLF % n/a 14,79% 14,68 10,90 20,10 l UAGS/7000h n/a 1,42 1,42 0,47 1,56 l WANO – World Association of Nuclear Operators (2009 Quarter 4 results) Nuclear capacity increase Pebble-bed modular reactor (PBMR) update The nuclear division continued with the project definition activities The nuclear division has performed the role of the eventual client including, among others, the feasibility study, the environmental and licence applicant for the PBMR demonstration plant. The EIA impact assessments, investigation of site suitability, identification of report has been issued to government for review and an transmission line routes, geotechnical and other studies required to environmental authorisation is anticipated before the end of 2010. support an application to the national nuclear regulator for a nuclear installation licence. Due to government’s decision to stop funding the PBMR Company (Pty) Limited and thus its subsequent winding down, the direction of This work has advanced to the stage where a draft EIA report has the client office has shifted towards ensuring that intellectual property been issued for public comment and public meetings regarding the acquired thus far is captured for possible future application, should draft report have been held. Three sites, namely, Duynefontein, the project continue. The future of the client office is dependent on Bantamsklip and Thyspunt have been considered in the EIA. the business strategy of the PBMR Company (Pty) Limited. Koeberg nuclear power station. Eskom Holdings Limited 117 Integrated Repor t 2010 Nuclear fuel The safety performance of Koeberg for 2009 has been above the Nuclear fuel is procured and delivered to Koeberg nuclear power WANO median performance indicators relative to pressurised water reactors of similar design. station in accordance with government-authorised contracts for the supply of enriched uranium and for the supply of nuclear fuel Nuclear Safety and Assurance, a separate department within the fabrication services for the nuclear fuel assemblies. A second fuel Generation business with its own technical experts and resources, fabrication vendor was established during the year to ensure flexibility provides independent assurance on nuclear safety and compliance and competition in the fuel market. These contracts are sufficient to with licence requirements. In line with international best practice, provide the fuel demand for Koeberg for the next eight years. Eskom has a three-tier system of nuclear safety governance. The sustainability committee of the board (the top tier), dedicates several meetings a year to nuclear matters. The meetings are attended by international nuclear experts who bring a broad perspective to the deliberations. The Nuclear Management Committee (middle tier), presided over by the chief officer (Generation business), monitors, reviews and makes recommendations on issues such as nuclear policy, standards, benchmarks and rules, and Eskom’s overall business requirements. The safety review committees (third tier), bring together experts from various parts of Eskom to evaluate nuclear safety issues and make recommendations to senior management and the other tiers. A significant reduction in core damage frequency (CDF) has been achieved, primarily due to hardware modifications implemented during recent outages. This large reduction in the baseline core damage frequency has significantly reduced the potential impact of human fallibility and equipment failure on safety. A total of R720 million Nuclear safety has been spent to date on upgrades to ensure the overall plant safety Eskom’s nuclear safety performance as measured by the INPO index of Koeberg. has shown cumulative improvement since the beginning of 2009. The overall inherent level of safety reflected in the graph below is at INPO index two-yearly trend world standard compared to the IAEA guidance for existing plants. Apr ’08 Koeberg core damage frequency (CDF) May ’08 Jun ’08 1,00E-04 7,61E-05 Core damage frequency (per unit per year) Jul ’08 Aug ’08 Sep ’08 3,57E-05 Oct ’08 1,93E-05 Nov ’08 Dec ’08 1,00E-05 Jan ’09 8,74E-06 Feb ’09 Mar ’09 Apr ’09 May ’09 Jun ’09 Jul ’09 1,00E-06 Jan ’05 Jul ’05 Jan ’06 Jul ’06 Jan ’07 Jul ’07 Jan ’08 Jul ’08 Jan ’09 Jul ’09 Jan ’10 Aug ’09 Sep ’09 Oct ’09 IAEA limit for existing plants IAEA limit for new plants Nov ’09 Dec ’09 The Koeberg design and technical practice is aligned to that of the Jan ’10 Feb ’10 Electricité de France (EdF) CP1 reference plant, while the Mar ’10 management processes and training philosophy are aligned to that of 40 45 50 55 60 65 70 75 80 85 90 95 100 % the US nuclear industry. Station score monthly average INPO US all units median 2010 index 118 Eskom Holdings Limited Integrated Repor t 2010 Nuclear division continued Environmental performance Highlights Challenges • Issued the EIAs for public review for the environmental impact • Relatively high volume of low-level radiological waste due to major assessments for the Nuclear-1 and pebble bed modular reactor projects and dose reduction initiatives at Koeberg nuclear power projects station • ISO 14001 phase 1 certification audit successfully completed Key nuclear division environmental performance indicators Target 2010 2009 2008 Environmental legal contraventions (number) 0 0 0 0 l Specific water consumption by station (L/kWh) n/a 0,038 0,043 0,039 Potable water consumption (Ml) n/a 492,6 589,3 479,1 Low-level radioactive waste generated (net) n/a 137,8 140,8 180,3 Intermediate-level radioactive waste generated (net) (m3) n/a 47,1 23,9 16,5 Low-level radioactive waste transported to Vaalputs (m ) 3 n/a 216,0 RA 189,0RA 270,0 Intermediate-level radioactive waste transported to Vaalputs (m ) 3 n/a 266,0 RA 473,6RA 418,0 Public radiation exposure due to effluents released (mSv) <0,25 0,0040 0,0045 0,0047 l RA – Reasonable assurance provided by the independent insurance provider (refer page 169). Low-level waste is stored in steel drums at Vaalputs waste disposal site in the Northern Cape. Eskom Holdings Limited 119 Integrated Repor t 2010 Industrial and radiological safety performance 2010 2009 2008 Nuclear division fatalities Number 0 0 0 Contractor fatalities (commuting) Number 1 0 0 Lost-time injuries (including contractors) Number 10 10 11 Refuelling outages Number 1 1 2 Worker collective radiation exposure (both units) mSv 717,83 937,61 2 793,64 Nuclear waste management A further role of the agency is to formulate the national strategy The low and intermediate level radioactive waste from Koeberg for the management of used nuclear fuel. Used fuel from Koeberg is sealed in steel drums and concrete containers, respectively. is stored at the power station in either specially designed fuel This waste is disposed of at Vaalputs, a near-surface disposal site pools or used fuel storage casks in accordance with specified for radioactive waste, licensed by the national nuclear regulator. regulatory requirements. Due to recent regulatory changes NECSA (Nuclear Energy Corporation of South Africa) is no longer appointed to operate Looking forward Vaalputs, so the transport of waste to Vaalputs has been temporarily • Reduction in low-level radiological waste quantities suspended. The National Radioactive Waste Management Agency • ISO 14001 environmental management system certification during under the governance of the Department of Energy is responsible 2010 for appointing the operator of Vaalputs. 120 Eskom Holdings Limited Integrated Repor t 2010 Generation Business Engineering division Mandate: Provides specialist engineering services to ensure the continued operation of existing power stations and to design new power generation assets. Progress this year Highlights Challenges • Establishment of engineering competence to deliver design • Increased pressure to run ageing plant beyond design requirements for Eskom life • Completion of phase 1 of the engineering framework development • Skills and competency gaps in critical input areas • Generation engineering design infrastructure (GEDI) project progress • Safety performance • Modern Power Systems Power Plant Innovation Award for Medupi plant Future priorities • Rollout of the engineering framework • Provide engineering support to Generation to ensure sustainable long-term plant health in current high-demand conditions • Engineering enhancements to reduce our environmental impact • Establish and embed use of a common engineering system platform across entire Generation business Matshela Koko, Senior general manager: Generation Business Engineering Q: What are the main challenges facing engineering in Eskom? A: Eskom is in the middle of a capacity expansion programme while simultaneously operating and maintaining a large fleet of power stations supplying power to South Africa. These dual programmes have put tremendous pressure on Eskom’s ability to provide effective and efficient engineering services and support. Furthermore, the large number of interfaces that engineering is required to manage makes the total Eskom design integration a great challenge. Our engineering capability is fully engaged in assisting the generation division to operate the current generating fleet assets at optimal levels without undue risks. On the other hand, Eskom’s engineering capability in design is gaining international recognition – the Modern Power Systems Innovation Design Award for the Medupi plant is evidence of this. Eskom Holdings Limited 121 Integrated Repor t 2010 Key strategy The components of the integrated engineering management The division provides assurance of engineering integrity and framework include engineering operating and governance integration across the Generation business – this is done through frameworks, critical engineering processes and operating procedures, enterprise level engineering governance in a common engineering design codes, appropriate configuration management systems and framework that supports Eskom as an asset-intensive business. It also supporting engineering tools.The building blocks towards establishing drives engineering as a vital part of the Generation business portfolio, engineering excellence, are centred on engineering resources, skills providing world-class engineering solutions to sustain the technical and competencies, and directed by the engineering governance integrity of assets. framework, underpinned by strong engineering values. The engineering excellence programme The benefit of this “one engineering mindset” approach is that it will The engineering excellence programme was initiated to establish an empower the Eskom fleet of power generating units to perform at integrated engineering management framework, to technically world-class levels of technical performance; despite the challenges of govern engineering inputs from across the Generation business, low reserve margins and the constraints of shorter windows of ensuring the integrity of the design base, the operating technical opportunity for maintenance activities. specifications and the maintenance baselines. Business principles Engineering Compliance principles Communication Engineering governance structure Guide Policies Standards Engineering governance Managed Implemented Monitored by by by Governance Best Procedures process practices Supported by Training Tools Constant Knowledge improvement management 122 Eskom Holdings Limited Integrated Repor t 2010 Generation Business Engineering division continued Plans for 2010 – 2013 The Generation engineering design A number of activities were initiated in 2009 to establish a sound infrastructure (GEDI) project foundation for Generation business engineering. An engineering In late 2008, the Generation engineering design infrastructure (GEDI) six‑point plan was developed, centred on the Eskom vision. project was launched. The GEDI project builds on previous investments made by Eskom in technology such as a common The period 2010 to 2013 will be used to fully establish, rollout engineering system platform (SmartPlant Enterprise), by using such and implement the integrated engineering management framework technology on build projects to fast-track optimisation of the across the Generation business. To complete the framework, an configuration and align the technology with Eskom-specific needs. To engineering toolbox will be defined and established that will enable this end, the GEDI project is partnering with the Kusile project to the Eskom engineer to deliver the services accurately and efficiently, create an Eskom coal technology reference plant in collaboration with the confidence of world-class approaches and applications. with the implementation partner (Black & Veatch). In the process, fully intelligent piping and instrumentation diagrams (P&IDs) will be created, as well as a full 3D plant model and a boiler internal 3D model for Kusile. This has the additional benefit in that Medupi Engineering Framework Process driven engineering and Kusile are of similar design as far as the boilers and turbines are concerned, so this information will also be re-usable at Medupi • Do not duplicate efforts power station. • Effectively use smart plant Engineering Engineering enterprise tools to ensure Governance and design design integrations Black & Veatch has also provided assistance in the development Framework processes • Engineering intensive nature of the engineering framework, by providing access to their work of asset creation activities processes and methodology. In addition to this, the division has Standards • Design work in Eskom must Engineering access to the RWE framework for O&M processes. This dual procedures have the same process and design methodology approach ensures that the division will develop an engineering design processes codes • Processes should ensure business process framework that suppor ts the entire plant re-use across plants and lifecycle from conceptual design right through to business areas decommissioning. • Consistent application of Engineering processes, standards and systems In phase 1 of the GEDI project, extensive work was completed to throughout Generation create inter-operability between the SmartPlant Enterprise Business engineering platform and plant process and performance simulation software like Flownex. This creates an extremely powerful tool to analyse the impact of plant operational changes, and the ability to The structured approach has led to the development of an simulate occurrence events when tied up with the Generation Plant engineering framework, which has as key elements, the following Data Store (PDS). • The required engineering governance and practices needed to sustain a world-class engineering organisation • Standardised, repeatable and audit-able engineering and design processes • Standards, procedures and design codes to enable and support all engineering activities throughout all phases of projects and plant asset lifecycles. • The required systems, technology and design tools to support engineering and design activities throughout all phases of projects and plant asset lifecycles. Eskom Holdings Limited 123 Integrated Repor t 2010 Risk profile Technical challenges Treatment plans Environmental challenges Flue gas desulphurisation plant for coal-fired stations High-pressure pipe work health Risk-based inspection programme – introduce plant risk classification system to deterioration strategically manage replacements High energy demand resulting in increased pressure to run plant beyond Improve analysis and introduction of high tech plant health monitoring tools design life limits Ageing plant Pro-active analysis and mitigation to deal with emergent failure trends In order to deal with these risks, structural adjustments have been aligned to support a zero error requirement and thereby maximise made to improve internal agility and resilience. Specific skills have availability. been dedicated to review and improve costing models and estimation techniques as well as 3D modelling and best practice technical design Engineering support on environmental challenges methodologies. Our integrated approach to these risks will be a key Eskom’s commitment to the reduction of emissions from the power principle in managing them. station operations is dependent on enhanced engineering solutions and the implementation of cleaner technologies. Some of the areas Challenges receiving attention from engineering in support of these commitments Engineering support for maximising plant availability include: Eskom is currently in an environment where plants are being run at • The installation of flue gas desulphurisation (FGD) plants at the higher load factors and with limitations on the available time to do coal-fired stations.The first FGD plant will be installed at the Kusile maintenance. The situation is further compounded by the power station, with plans in place to retrofit the Medupi plant with requirement to replace components at several stations that have FGD plant. reached the end of their design life. Engineering processes, • Upgrades will also be carried out on the particulate emission maintenance philosophies and operating specifications are being control plants at various power stations A three-dimensional drawing of the new Medupi power station in Lephalale. 124 Eskom Holdings Limited Integrated Repor t 2010 Enterprises division Mandate: Builds Eskom’s assets, takes the lead role for project development for the group; and is the custodian of Eskom Enterprises (Pty) Limited and its subsidiaries. The enterprises division also offers strategic and commercial lifecycle services to the line divisions. Progress this year Highlights Challenges • The safety performance was excellent – an LTIR of 0,26 • Sadly two contractors passed away (including contractors) • Underspend on capital expenditure due to funding constraints • The following shareholder compact targets were exceeded: • Uncertainty about funding for projects MW installed and commissioned, transmission lines built and MVA installed • Postponement of the Majuba rail project due to funding constraints • Two units at Grootvlei were commissioned and we upgraded three units at Arnot power station • Industrial action at Medupi, but this has been resolved through project labour agreements • The Tabor-Spencer high-voltage line was commissioned • Excellent co‑operation between Eskom and contractors given the urgency of the projects • Tremendous progress on Medupi, Kusile and Ingula Future priorities • Completion of RTS projects, construction and commissioning of Medupi, Kusile, Ingula and Transmission projects within budget, on schedule and meeting all quality requirements • Plan to be certified to the ISO 14001 environmental management system standard during 2011. This will see the construction sites of Medupi, Kusile and Ingula all having certified environmental management systems Kobus Steyn Acting managing director: Enterprises Q: What factors contribute to increased costs on the capacity expansion projects? A: The cost at completion components for a typical capacity expansion project is split between components that fall outside Eskom’s control: And those within Eskom’s control: • Escalation • Total value of packages (scope) • Costs of cover • Owner’s development cost • Borrowing cost capitalised • Transmission • Total value of packages (price) • Contingency The contribution of the above components for the cost movements in the capacity expansion programme between 2007 and 2008 for Medupi, Kusile and Ingula combined are illustrated in the pie chart below: 11% 12% Scope 3% Price 5% 11% Owners development cost 3% 1% Borrowing cost capitalised Escalation Transmission Cost of cover Contingencies 54% Eskom Holdings Limited 125 Integrated Repor t 2010 Capacity expansion programme lines and substations is making significant inroads in strengthening the The capacity expansion programme has shown remarkable growth. transmission network. The significant number of commissioned projects is evidence of the Total system capacity added per five-year period progress that has been made so far. In an effort to meet the expected quality standards and deadlines, formal project assurance is used to 2021 – 2028 track project schedules, cost and safety risks. 2016 – 2020 2011 – 2015 Despite the global recession, Eskom has successfully managed to 2006 – 2010 negotiate and secure most of the fundamental contracts. Building a 2001 – 2005 coal-fired power station is a mammoth task which takes approximately 1996 – 2000 eight years (not including project development which typically takes 1991 – 1995 five to seven years to produce a bankable document). As such, 1986 – 1990 keeping the construction costs fixed to a specific amount is a 1981 – 1985 challenge which Eskom will continue to grapple with. 1976 – 1980 1969 – 1975 So far, the following portfolios of the Eskom capacity expansion 0 5 000 10 000 15 000 20 000 MW programme are on track in terms of schedule and capital expenditure: new coal (Kusile and Medupi) and the peaking projects (Ingula and Gas 1 projects). The return-to-service stations are not doing so well Risk profile in terms of schedule but one of the RTS stations (Camden) has been Enterprises division has adopted the corporate risk management completed and all units fully commissioned. Undoubtedly, the policy and standard as developed by group risk management and will “breather” for Eskom as it walks the tightrope between supply and be incorporating these principles into its business planning process. demand will be further enhanced when Ingula, Medupi and Kusile Although the CURA risk management information system will only power stations come on line. Once completed, the Ingula pumped- be rolled out in the division during the 2010/2011 financial year, risks storage scheme will generate electricity during peak periods from departments and business units have been captured in this specifically. The team that is building and refurbishing transmission system for inclusion in the group risk management reports. Risk Treatment plans Insufficient funding has resulted in Closely monitoring the deployment of available funds, so as to optimise the execution selected work-packages being delayed programme, and is actively supporting the group finance division in its efforts to source and may further result in the projects additional funding not being delivered as required by the integrated resource plan Delays to critical approvals (including The processes for up-front environmental approval have been reviewed and project investment decisions, regulatory development efforts are continuing in order to prepare robust business cases for future approvals and granting of servitudes) projects The non-placement of selected work Existing Eskom storage facilities will be used where possible but additional facilities may packages (as a result of funding need to be constructed in order to prevent damage. Continual review of project schedules constraints) has created a risk that will include such scenarios in order to allow for pro-active management some components and equipment may be delivered ahead of their revised installation date without adequate storage facilities The integrated risk management process has also identified aspects of financial, commercial, safety, environment, quality, information and human resource management where opportunities for business process improvements have been identified. 126 Eskom Holdings Limited Integrated Repor t 2010 Enterprises division continued Build project update Project: Medupi power station Technology: Coal, dry cooling, flue gas desulphurisation (FGD) – commissioning of FGD plant planned for 2018 Output: 4 764MW (6 x 794MW units) Location: Lephalale Completion date: First unit in 2012 and completion in 2015 Progress: Eskom contracted PB Power, an international engineering consulting firm, to provide support with the execution of the Medupi power station project. A multi-package procurement strategy was selected for the project. The boiler package was awarded to Hitachi Power, the turbine package to Alstom and the generator transformer package to Siemens. The main civil works package was awarded to a joint venture company comprised of Murray & Roberts, Grinaker LTA and Concor. The site on which Medupi is being constructed was first accessed in May 2007 to commence the site preparation activities. As of 28 February 2010, the progress against the schedule for the procurement and commercial processes was as follows: • Number of package contracts placed – 19 • Number of package contracts not yet placed – 13 • Percentage of contracts placed (by value) – 92% • Progress has been made on the air cool condensers – the first phase has been completed and handed over • The structure of the turbine hall has been completed • Transmission integration is well underway with major focus on phase 1 for the substation and lines May 2007 February 2010 Project: Grootvlei power station Technology: Coal (return to service) Output: 1 200MW (6 x 200MW units) Location: Balfour Completion date: End of August 2010 Progress • Unit 1 went into commercial operation on 31 March 2008 • Unit 2 went into commercial operation on 27 March 2009 • Unit 4 went into commercial operation on 21 October 2009 • Unit 3 went into commercial operation on 9 March 2010 • Work is in progress on units 5 and 6 Eskom Holdings Limited 127 Integrated Repor t 2010 Project: Kusile power station Technology: Coal, dry cooling, flue gas desulphurisation Output: 4 800MW (6 x 800MW units) Location: Emalahleni Completion date: 2017 Progress: Construction entered into its second year in the first quarter of 2009. The terracing (site preparation and underground drain lines) contractor continued their work and four other contractors started work during the year. The site services contractor, also built facilities for the Kusile management team and other contractors – a new construction management office, medical and fire services building and two canteens. Progress was made on the construction of a potable water treatment facility and a sewage treatment plant. Kusile civil works joint venture (KCW JV) were awarded the main civil works contract to build the foundations for the plant, which started early in the year. They started work on the piling to support the foundations for the unit 1 boiler, turbine and air-cooled condenser. By the end of 2009 the unit 1 boiler main concrete structure (lift shaft) had reached 116m. Three 56m air-cooled condenser support columns can also be seen from the N4 and N12. The Kusile project is now a visible landmark. A new access road to connect the site to the N4 (north of the plant) has been surveyed and clearance has started. A new water supply pipeline for Kusile from Kendal power station is being laid. Approximately R16 billion of the budget will be spent locally. This will be spent on items such as accommodation, training and associated facilities, catering and services, laundry and supplies, fill material, and other smaller contracts for goods and services available in the Nkangala district. May 2008 January 2010 Project: Komati power station Technology: Coal (return to service) Output: 1 000MW (4 x 125MW and 5 x 100MW units) Location: Middelburg Completion date: 2012 Progress: • Unit 9 went into commercial operation on 5 January 2009 • Unit 8 went into commercial operation on 31 March 2009, adding an additional 125MW to the national grid • Unit 7 is expected by the end of August 2010 • Komati is expected to be completed in 2012 128 Eskom Holdings Limited Integrated Repor t 2010 Enterprises division continued Project: Ingula pumped storage scheme Technology: Pumped storage Output: 1 332MW (4 x 333MW units) Location: Ladysmith Completion date: 2014 Progress: • Construction on the main-underground works is progressing well – it is 30% complete, with the excavation of over 3,5km of tunnels and 300 metres of shafts. The top section of the huge turbine/generator cavern, some 26 metres wide and 184 metres long, has also been completed. This cavern is the largest of its kind in the world • Construction on the Bedford Dam is well underway with 14 months of the construction period completed.The dam is 60% complete. Some 700 000 of the 1 million m3 of rockfill had been placed and the intake tower is 42m above foundation level • The Bramhoek Dam is 75% complete with the expected date for impoundment in April 2010 and completion in October 2010. Some 52 000m3 of the 74 000m3 of roller compacted concrete has been placed • 62,2km of roads have been handed over • The machine hall crown tunnel, which forms the first part of the staged excavation of this large underground cavern, has been completed to its full 175-metre length. Cable anchors are being installed in the crown in preparation for opening up each side to the full 26-metre width • Other work on the go includes excavation of the tailrace outfall structure and channel, which is about 90% complete • Some 1,6 million tons of aggregate has been quarried and crushed to date – this is being used for the dams, main underground works and high-voltage yard February 2008 April 2010 Project: Arnot capacity increase project (phase 2) Technology: Coal Output: 2 400MW (upgrade from 2 220MW to 2 400MW) Location: Middelburg Completion date: December 2010 Progress: • Unit 3 achieved sectional completion on 17 December 2008 • Unit 2 achieved sectional completion on 25 March 2009 • Unit 6 achieved sectional completion on 27 March 2009 • Unit 4 achieved sectional completion on 19 March 2010 • Unit 1 achieved sectional completion on 19 March 2010 • Unit 5 is expected to achieve sectional completion on 28 March 2011 Eskom Holdings Limited 129 Integrated Repor t 2010 Project: Sere Technology: Wind energy Output: 100MW (50 x 2MW units) Location: Koekenaap, West Coast Progress: Development work, including viable funding plan nearing completion and construction expected early in 2011. Transmission expansion projects Line construction progress: The completion dates for the transmission projects are as follows: • 765kV: strengthening projects March 2012 • Northern Grid: November 2016 • Central Grid: September 2012 • Cape Grid: December 2012 By the end of 2010 the power delivery team will have completed the 400kV strengthening of the Nelson Mandela Bay area, as well as the 275kV and 400kV strengthening in the Polokwane area in Limpopo.The network strengthening in Johannesburg North should be complete by end 2010 and the first phase of the Vaal strengthening by end 2011, and phase 2 by end 2012. The 765kV strengthening (operated at 400kV) of the Empangeni area will be finalised by the end of 2011, and the 765kV project from Zeus to Omega to strengthen supply to the Western Cape region by mid-2012. The Ingula and Medupi 400kV integration into the national grid is planned for the end of 2013. Future of renewable projects Benchmarking build costs globally Project Sere (100MW wind power project on the West Coast) is For comparison purposes, the costs of a power station can be progressing, with funding approved by the World Bank and other measured in a number of ways, two of which are the “cost to multilateral development banks. Construction is expected early in 2011. completion” and the “levelised cost of electricity” 1 measures. Eskom has a portfolio of wind projects and other renewable energy Capital or overnight cost (USD/kW) is defined as the cost to projects (including wind, and concentrating solar power) at various completion if the station was built overnight. Because of this, overnight stages of development in line with national renewable objectives and costs exclude escalation on equipment, labour and commodity prices Eskom’s own renewable energy strategy. that could occur during construction. It also excludes the financing charges (like interest during construction) incurred while the plant is The work undertaken by the South African government to determine being built. the potential and options for the country to reduce its greenhouse gas emissions, the long-term mitigation scenarios (LTMS), was clear Benchmarking capital costs for the purposes of comparison is usually about the need for renewables – together with nuclear and clean quoted as a USD/kW overnight cost. coal as options to reduce emissions from electricity generation. For renewables, the challenge is to scale up in the next few years, so that Comparisons are difficult due to site-specific conditions, differing implementation at a larger scale is feasible and more affordable in plant design specifications and the variability in market conditions future. The central problem is cost – and much depends on what from year to year. Notwithstanding this, benchmarking is a useful technology learning happens in South Africa and in other countries. indication of how the cost of a plant compares to other plants. 1. Levelised costs include all costs over lifetime on plant, ie, initial investments, operation and maintenance, fuel and cost of capital. 130 Eskom Holdings Limited Integrated Repor t 2010 Enterprises division continued Benchmarks are usually a point in time and are not always straight • The US Department of Energy (2008) quotes a US$2 000 – forward. Only high-level broad conclusions can be made, particularly 4 000/kW range. if the underlying assumptions are different. Some key considerations • McKinsey currently estimates new European coal-fired plants at when benchmarking are: between US$1 800 and US$2 250/kW. • to ascertain whether the technologies are comparable • to adjust the capital costs to the same point in time viz. the same Medupi and Kusile, Eskom’s new coal-fired power stations, will be base year as the study being compared between USD2 000/kW and USD2 350/kW, as calculated in • comparing the same capacity ie, gross or net capacity FY2008/9, which is comparable to the 2008 benchmark studies with • the use of similar components for comparison the same cost components. If calculated at the current exchange rate, • the consideration of contextual issues such as localisation, supply the number would be between USD2 200/kW and USD2 500 even chain, economic cycles/parameters and economies of scale though the rand cost of the project has not changed. The impact of the exchange rate on the capital cost benchmark quoted in USD International benchmarking studies for similar coal-fired plants are as illustrates the point that benchmarking information must be used follows: with care. Even though the plant cost estimates in rand stay the same, • Lazard (2008) quotes a range of US$2 550 – 5 350/kW. the R/USD rate, which is completely de-linked from the cost • The Electric Power Research Institute (2007) quotes a range dynamics of the plant, creates the impression that plant cost has US$2 500 – 3 700/kW. increased from USD2 000/kW to USD2 500/kW. • A CRS report (2008) noted an average overnight cost of US$2 519/kW. The main conclusion is that Eskom’s capital expansion costs are comparable with the costs of similar projects internationally. Environmental performance Key enterprises division environmental performance indicators Target 2010 2009 2008 Environmental legal contraventions (number) 0 15 24 10 l Environmental legal contraventions reported in terms of Eskom’s operational health dashboard1 (number) 0 0 3 0 l Materials containing asbestos disposed of (tons)1 n/a 73,6 279,4 n/a Materials containing polychlorinated biphenyls (PCBs) thermally destructed (tons) n/a 1,2 1,4 n/a 1. Under certain conditions, contraventions of environmental legislation are classified in terms of the Eskom operational health dashboard (OHD) index. These include instances where censure was received from authorities, non-reporting to authorities as may be legally required, non-reporting in Eskom, a repeat legal contravention, or when the contravention was not addressed adequately. Managing directors can escalate any significant environmental legal contravention to the OHD. 2. Quantities of waste disposed of at registered waste sites Highlights We can already report significant investment in new manufacturing • Effective management and compliance with the conditions of and training facilities: environmental authorisations • a new boiler fabrication facility is being built in Nigel specifically for Medupi Challenges • training facilities are being set up in Pretoria for pressure part • Fifteen cases of non-compliance with environmental requirement manufacturing (2009: 24).Waste, water and biodiversity management in particular • a training school is being established in Wadeville for structural represent areas for improvement. steel manufacturing Percentage of local content in capacity expansion Local content of capacity expansion contracts contracts placed during the year 73,9%RA One of the components of Eskom’s major build contracts is the RA – Reasonable assurance provided by the independent assurance provider promotion of local industries by stimulating local expenditure on the (refer page 169). new power stations in terms of manufacturing components, such as, LA – Limited assurance provided by the independent assurance provider (refer page 169). but not limited to, boilers and turbines. Eskom Holdings Limited 131 Integrated Repor t 2010 The following components are already being manufactured locally: • enhancing learnerships and establishing learnership programmes air-cooled condensers, major pumps, heaters, main cranes, LP outer in skills areas that have been identified as core and critical to the casings and feed water tanks. business • involvement in community development and upliftment through Our main contractors, in line with their CSDP commitments, have youth programmes, Eskom mathematics and science school cumulatively subcontracted from the inception of the build projects and the awarding of bursary schemes programme some R51,12 billion locally – R12,7 billion with local • enhancement and development of existing skills base within the suppliers; R5,81 billion with black women-owned businesses and division through structured training curricula and programmes R4,6 billion with small and medium enterprises. This translates to such as the Eskom learning faculty with a wide variety of training over 52% of the build programme spend awarded to local contractors programmes and over 45% of the local portion being shared with empowerment • tertiary education support programmes contractors. • development of a strategy to maximise the use of South African resources for welding on-site Stimulating economies around capacity • ensure skills transfer from contractors and consultants to Eskom expansion projects employees Considering that an average six-unit coal-fired power station takes up to eight years to build, the impact on the communities around these There are currently 220 engineers-in-training, of which 190 graduated projects is massive. The Medupi, Kusile and Ingula projects have in January 2010. About 400 Eskom bursaries have been allocated, of already shown the following positive spin-offs for the adjacent which 99% are technically oriented – engineering, civil, quantity communities: surveyors and control and instrumentation. • it is expected that the Medupi project will impact the Lephalale GDP by about 95%. Kusile will impact the Delmas town GDP by Definite plans are in place to liaise with secondary schools and around 25%. The Ingula projects will impact the Ladysmith town tertiary institutions to ensure identification of the required talent and GDP by about 1% skills and to ensure that training programmes are aligned and relevant. • more than 3 000 skills will be developed through partnerships with suppliers and educational institutions The cumulative learners recruited since inception of the capacity • there are about 7 500 people currently on site at Medupi – of expansion programme up to and including the first quarter of the which around 4 500 are from Lephalale 2009/10 financial year is 1 502 against a target of 4 992. • at Kusile we have employed some 1 625 people from the local area • some 1 300 local people are working on the Ingula project • at Medupi the MPS joint venture plans to invest R10 million in a Did you know? brick-making plant to be owned by local black women • Medupi will require enough concrete to build four • the build projects are impacting all the following sectors in the Greenpoint stadiums communities around them: catering, laundry, housing, house • 71 tons of steel was used to reinforce the foundation for the maintenance, hotels, entertainment, training facilities, security, lift shaft schools, policing, churches, medical care, banks and financial • It took 575 tons of steel to build the lift shaft services, shops and transport • Parts and cement weighing the same as seven super tankers will be transported over land Training and development • The total height of the lift shaft is 119,55m Enterprises division competes with utilities in major industrial • The lift shaft was completed on 4 August 2009, three days countries for rare skills, therefore constant focus is being directed ahead of schedule despite stoppages caused by the strike towards resource planning to ensure that resources across projects action that lasted eight days are optimally leveraged and that the appropriate skills are acquired, • The Ingula pumped-storage scheme consists of an upper and lower dam, both having approximately 22 million m3 water developed and nurtured. supply.The dams, 6,6km apart, are connected by underground waterways, through an underground powerhouse, which will Active focus is directed towards the following in order to ensure house 4 x 333MW pump turbines effective skills management: • the development of young professionals through structured mentoring and coaching programmes Customer Network Business 135 Overview 153 Distribution division 140 System Operations and Planning 153 Future priorities 154 Risk profile division 154 Distribution system performance 141 Key focus areas in 2010 156 Demand-side management (DSM) 2010 141 Risk profile 158 Customer service 142 Status of the power supply system in South Africa 158 Tariffs 142 Power conservation programme 160 Management of total energy losses 143 Ten-year Transmission development plan (TDP) 161 Free basic electricity (FBE) 144 Demand and energy forecasting 162 Electrification 145 Integrated resource plan 162 Environmental performance 146 Transmission division 147 Risk profile 147 Transmission system performance 148 Benchmarking Transmission’s performance 148 Maintenance and refurbishment 149 Environmental impact assessments and land acquisitions 150 Copper and pylon theft 150 Contracting with SADC utilities 151 Westcor 151 Key customer update 151 Environmental performance 134 Eskom Holdings Limited Integrated Repor t 2010 Customer Network Business Erica Johnson Chief officer: Customer Network Business Q: Why do residential customers pay more for electricity than industrial customers? Is it true that residential customers cross-subsidise industrial customers? A: It is not true that industrial customers are subsidised by residential customers. There is a common misconception that residential customers subsidise industrial customers. This is understandable when prices are compared in isolation – 29 cents per kWh on average for industry as compared with 64 cents per kWh for suburban households. However, direct comparison in this manner is incorrect – the cost of supply must be taken into account. It costs substantially less, per kWh, to supply a large industrial customer than a household, the former currently costing an average of 27 cents versus 68 cents per kWh for the latter. The subsidisation is therefore the other way around. Mandate: Accountable for the network and customer services business in Eskom. This entails the planning, operations and maintenance of the transmission and distribution network, the management of the customer base, long-term electricity capacity planning and the revenue stream. Progress this year Highlights Challenges • Eskom is ready for the 2010 FIFA World CupTM • Unacceptably high levels of theft of equipment and • A substantial increase in the solar water heater rebates electricity is affecting plant performance and increasing cost offered by Eskom, in some cases up to 120%, is set to bring • Non-payment by large and residential customers environmentally friendly solar-heated geysers within the • Employee security is becoming an issue financial reach of thousands of South Africans wishing to reduce their home energy costs Future priorities • Facilitating the participation of independent power producers at local and regional level • Vibrant energy trade in sub-Saharan Africa • Intensified demand management and regional inflow of green power • Acquiring the right skills • Improved asset management • Integration of energy and power delivery planning into Eskom’s strategic planning • Step changes in safety and security • Integrated demand management across all Eskom divisions Eskom Holdings Limited 135 Integrated Repor t 2010 Financial results System security Trans- The country’s electricity system is under pressure. We have a low mission reserve margin, and as long as this situation prevails, we will always be and System at risk of supply interruptions. Operations Customer and Distri- Network R millions Planning bution Business However, the power system has performed well over the past year, 2010 and there has not been an incident of load shedding. Indeed, more than two years have passed since the devastating load-shedding • Total revenue 29 492 43 577 73 069 incidents of 2008. We are committed to ensuring that the national • Profit for the year 2 080 290 2 370 electricity supply situation remains stable and that the electricity • Total assets 28 438 43 995 72 433 necessary for the country’s growth and advancement is provided. • Capital expenditure 7 143 7 079 14 222 The reduced electricity demand levels in 2009, mainly due to the 2009 economic downturn, have since been returning to normal activity • Total revenue 20 548 32 542 53 090 levels. In fact, the demand for electricity is averaging about 9% • Profit/(loss) for the year (6 596) 1 288 (5 308) higher in March 2010 than it was in March 2009 and is in line with • Total assets 22 504 38 372 60 876 2007 levels. • Capital expenditure 6 665 6 615 13 280 The tight system conditions are expected to continue during the remaining maintenance months, but will improve as all power stations Overview come back into operation during the winter season. This winter will The Customer Network Business (CNB) was established in February also coincide with a special event, the 2010 FIFA World Cup™.There 2008, as a result of the need to sharpen our operational focus on is a very low likelihood of load shedding prior to and during the 2010 security of supply. FIFA World Cup™, but we need to be vigilant as South Africans throughout this period. Thereafter, the system will be extremely tight, CNB’s 19 615 employees ensure that 390 338km of power lines, as the power station maintenance season starts again. 3 500 substations, and 344 369 transformers deliver electricity optimally to our approximately 4,5 million direct customers. The business comprises Eskom’s customer services, network asset management, system operations and capacity planning functions organised into three main divisions, namely, System Operations and Planning, Transmission and Distribution. A dedicated project office was also established to oversee Eskom’s preparations for the 2010 FIFA World Cup™ from a security of supply perspective up to and including our areas of responsibility. The CNB footprint spans the country and requires appropriate levels of resources and indicators to manage risk in an effective manner. Technical system performance International performance benchmarks indicate that Transmission and System Operations and Planning are within top quartile performance, but Distribution system performance requires improvement. In this regard, urgent attention is being given to reducing the number and duration of customer interruptions, particularly in rural areas where huge distances covered by technical staff to repair faults lead to long restoration times. Eskom workers maintain around 390 000km of power lines across the country. 136 Eskom Holdings Limited Integrated Repor t 2010 Customer Network Business continued The system challenges we face until the new capacity comes into Integrated demand management project commission will be that of meeting the demand while creating Eskom will aggressively pursue demand management as a key maximum opportunities to undertake generation plant maintenance. solution to manage the projected shortfall in the next few years until This will require a tight trade-off in terms of controlling costs with the next new baseload power stations start coming online from respect to usage of the expensive open-cycle gas turbine (OCGT) 2012. This includes the reorganisation of all demand management stations. The indications are that more OCGT usage will be required activities into a single business division. over the forthcoming years. Eskom is in the process of developing and implementing a number System adequacy of demand management initiatives. Firstly, an extensive demand- Ensuring that the system adequately meets the future electricity side management (DSM) programme drives energy efficiency by needs of the country for economic growth and prosperity has shifted rolling out new technologies and encouraging customer behaviour from only increasing supply-side resources to including intensive change through communications and awareness campaigns. demand management in the process. Ensuring delivery on increasing Secondly, initiatives such as demand market participation, the utility supply-side resources and managing demand requires an integrated load management, and advanced metering infrastructure are approach to planning with focused interventions. targeted at managing load − with secondary energy efficiency benefits. Inherent in the Eskom suite of demand management Integrated resource planning solutions is the power conservation programme − a risk mitigation The Department of Energy (DoE) is accountable for the country’s solution that could be implemented in a short space of time energy plan and the related electricity generation capacity plan − the should the need arise. integrated resource plan (IRP). The system operator within the Customer Network Business provides the resources to develop the System resilience plan under the policy guidance of the DoE. Decisions on how much The electricity crisis of 2008 and the fact that it will take several years capacity is needed, who should build it, the technology to be adopted to regain a healthy reserve margin have highlighted the need to and the publication of the plan lie within the Energy Ministry.The first target a range of measures to increase the resilience of the system IRP was published at the end of 2009. The second IRP is currently and society as a whole. under development and is expected to be published during the second half of 2010. This is an opportunity for active engagement for South Africa on economic growth projections, electricity demand Some of the key areas on which Eskom is focusing to build resilience projections and technology choices balanced against affordability. are defined as the ability to: • Identify, anticipate and adapt rapidly to vulnerabilities arising Energy efficiency from changes in the internal and external environment. Energy efficiency and conservation are essential. In all our stakeholder • Operate at elevated levels of stress without failure for extended interactions, we are stressing the importance of saving electricity periods of time. wherever possible. This will assist with the constraints on the power • Respond to a shock by containing the impact (severity/duration) system and help customers run their businesses and homes more of the event. efficiently and at a lower cost. Eskom will play its role in assisting • Recover quickly in a co-ordinated manner. South Africa to migrate to an energy conserving culture. In the short • Implement learning from near misses and recovery experiences. to medium term energy efficiency and conservation are essential for power system stability. This conservation drive presents a good Significantly increasing situational awareness and the ability of the opportunity for long-term climate change support by reducing the organisation to visualise operational trends and emerging risks at the carbon footprint from electricity production and delivery. frontlines of the organisation are critical. Eskom Holdings Limited 137 Integrated Repor t 2010 Eskom has embarked on an intense resilience building initiative and 4. 2010 Marketing and Communication, which co-ordinates and has implemented the following: leads the internal and external Eskom 2010 marketing and • The establishment of regional reliability teams, which are aimed at communication initiatives. developing a consolidated view of supply risks and societal 5. 2010 DSM, which links into the overall Eskom DSM programme resilience in each of the Eskom supply regions. This focused risk and seeks to fast-track specific DSM initiatives for the event. management (across all Eskom divisions operating in the region) 6. 2010 Greening, which co-ordinates the overall Eskom greening significantly increases the ability to identify and respond to current contributions in support of the Department of Environmental Affairs Greening 2010 initiatives. and emerging vulnerabilities. 7. 2  010 Security, which co-ordinates the overall Eskom 2010 • The development of a national code of practice, which addresses security-related initiatives and efforts with the various security load shedding and curtailment under system emergencies, structures and agencies, such as SAPS. restoration of supply after a regional or national blackout, the 8. 2010 IT, which co-ordinates the overall Eskom 2010 IT support- identification and treatment of critical loads and essential load related initiatives. requirements of customers. 9. 2010 Telecommunications, which co-ordinates the overall Eskom • Undertaking emergency simulations and exercises – both at a 2010 telecommunications-related initiatives. technical level and multi-stakeholder exercises (for example, 10. 2010 HR, which co-ordinates the overall Eskom 2010 HR- communication and interaction with stakeholders) to deal with related initiatives. power outages. Stakeholder collaboration The system resilience drive within Eskom is ultimately aimed at Eskom, through the Association of Municipal Electricity Undertakings ensuring that there is a high degree of emergency preparedness to (AMEU), was a founding partner and catalyst for the establishment be in a position to respond to events while managing a constrained of the 2010 Electricity Supply Industry (ESI) forum, which consisted power system. of Eskom, 2010 FIFA World Cup™ host municipalities, the Department of Energy, the FIFA Local Organising Committee, 2010 FIFA World Cup™ readiness the National Energy Regulator of South Africa (NERSA), and The successful delivery of a reliable, uninterrupted flow of electricity National Treasury. The forum assesses the total electricity for the FIFA 2010 World Cup™ has been a major focus for the last requirements of the 2010 FIFA World Cup™, addresses challenges three years. A dedicated team has driven Eskom’s internal and monitors the status of preparations. preparations and co-ordinated the broad-based collaborative efforts and partnerships required for an event of this magnitude. Potential SAPP members will undertake all necessary maintenance on their risks to supply continuity were identified and addressed by the team. generators prior to the event, so ensuring that maximum plant capacity is available in southern Africa during the event. Ten “project platforms” ensured that the entire electricity supply- chain from power station to stadium would operate effectively and Simultaneously, considerable effort has been put into ensuring that all that all risks were identified and managed. The project platforms are members of the public are aware of the need to conserve energy as follows: and promote energy efficiency for the duration of the event. 1. Technical and Capacity National, which co-ordinates efforts across Generation, including Nuclear, Primary Energy, System Operations and Transmission. See www.eskom.co.za/annreport10/008.html for detail 2. Technical and Capacity SAPP, which co-ordinates efforts between on the divisional contributions to the project. Eskom and our partners in the Southern African Power Pool. 3. Technical and Capacity Regional, which co-ordinates efforts across Transmission, Distribution, the municipalities and host cities. 138 Eskom Holdings Limited Integrated Repor t 2010 Customer Network Business continued Energy loss management The Finance division report contains further details on the results of Due to the nature of the network, technical losses are an inherent the negotiations on page 41. feature of power systems. There is continued focus to keep technical losses to a minimum. For the financial year, the overall energy losses Customer service levels were 8,45% against a budget of 8,76% of generation supplied and Key Sales and Customer Services (KSACS) customers are largely imported energy.The total energy losses for the Distribution network serviced through customer executives allocated per region. and Transmission network are 5,87% and 3,27%, respectively. This Interaction via face-to-face and telephonic means is important to distribution figure compares favourably with the international ensure that Eskom is continually made aware of the key industrial benchmark. Continued efforts are made, as far as possible, to manage customer issues so that they are dealt with timeously. Regular surveys losses to minimum levels. are conducted with KSACS customers to assess issues ranging from communication to service quality. For this financial year, the KSACS customer service level was 98% against a target of 103%. This Theft has regrettably broadened from cables to transmission tower performance is currently under review, and new strategies are being components and other equipment. Municipalities are experiencing a developed to improve this figure. similar challenge, which points to the need for a country-wide security initiative to reverse the current trends. We estimate non- Distribution customers are serviced through call centres, walk-in technical losses to be between 1,3% and 2,1% of total energy centres, customer executives and electronic channels such as internet losses and 1,5% to 2,4% of distribution energy losses. and cellphone SMS. Once again, this interface is important for understanding and resolving customer challenges in a timeous Renegotiating long-term price agreements manner. Customer service in the Distribution environment is Eskom entered into long-term negotiated pricing agreements (NPAs) measured through the customer service index, and for this financial with large industrial customers during the period of excess capacity year, 85,05% was achieved against a target of 82,65%. However, the and low-cost electricity in South Africa in the nineties, with a view to Customer Network Business is currently looking at new strategies to stimulating economic development in the country and the SADC further enhance the current customer service levels. A project to region. These agreements were designed on a risk-sharing basis over look at integrated customer strategies that are comparable to best the contract term. The current environment within South Africa has practice has been initiated. made it necessary for Eskom to reflect on its experiences with NPAs and to review the overall expected contribution from the Customer service performance levels are in line with historical existing NPAs. performance, but the results also show that much work is needed to rebuild Eskom’s reputation following the load-shedding incidents in Of concern to Eskom was the considerable deviation of the contract 2008 and the recent electricity price increase announcements. price of these NPAs from the standard tariff going forward, resulting Improved communication with customers and the public regarding in significant under-recovery. In addition to the sustainability of these the outlook for security of electricity and electricity prices in the contracts, the embedded derivative volatility arising from most of country is essential. these agreements also prompted a re-examination of these agreements. Security of our staff We have staff that experience varied challenges from a security The key challenge in addressing these concerns was to engage the point of view, specifically when dealing with situations of illegal counter-parties to amend the agreements, as the counter-parties had connections. Staff members are required to travel to remote sites, no contractual obligation to renegotiate the current price levels. The during periods of outages and other technical problems. This counter-parties willingly engaged Eskom to find a solution. We are operational requirement places them in danger of armed robbery, pleased to confirm that a new pricing addendum has been vehicle hijacking and violent attacks. The number of incidents in concluded for one of the negotiated pricing agreements which is this area is not acceptable. Interventions by security forces effective from 1 March 2010, while terms sheet have been agreed for are required to mitigate this situation. the other contracts. Future focus areas Eskom is in negotiations with the parties to finalise these contracts Our resolve is to manage the power system to ensure no load during 2011. shedding despite the current constraints.The acceleration of demand Eskom Holdings Limited 139 Integrated Repor t 2010 management programmes and regional inflow of power will be Electricity and equipment theft is an ongoing focus area. Eskom crucial to system security and to diversify the energy mix in South requires the suppor t of the South African security ser vices to Africa. Linked to this is the focus on strengthening the energy trade par tner with us more vigorously to combat this challenging opportunities in sub-Saharan Africa. issue. Given the long-term capacity requirements for a secure electricity We aim to ensure that the lessons we learn as we navigate our way system of new players entering the electricity market is supported. through a constrained environment both financially and technically Eskom is facilitating the participation of independent power will make us resilient while we deal with these challenges. producers at local and regional level by establishing power purchase programmes and engaging in the debates on an appropriate industry Finally, as Eskom and South Africa, we need to intensify our focus on structure for South Africa. skills development initiatives to deliver on our mandate now and into the future. Given that Eskom’s Distribution and Transmission networks are ageing, the implementation of network infrastructure investment Conclusion plans is key to meeting the increasing demand and remaining in line I wish to thank all the staff for their tireless efforts in carrying out with regulatory requirements. We are in the process of developing their duties. They are displaying high levels of commitment despite reliability criteria for the Distribution network. This will require the uncertainty and Eskom’s reputational loss. I encourage Eskom engagements with NERSA in order to update the Distribution code employees to continue taking pride in their work, serving our regulations. A discussion with NERSA on the appropriate funding customers and country diligently ensuring that the lights stay on and levels to meet the Transmission and Distribution regulatory Eskom stays in business. requirements will also be a priority. As a key supplier for the 2010 FIFA World CupTM, Eskom has been energising its employees towards strengthening the system for 2010. 140 Eskom Holdings Limited Integrated Repor t 2010 System Operations and Planning division Mandate: Provides an integrative function for the reliable development, operation and risk management of the interconnected power system. Progress this year Highlights Challenges • We have not had load shedding since late April 2008, which has • Funding constraints delaying investment required to achieve an required continual co-ordination between System Operations adequate power system and Generation • Completion of a detailed capital investment plan, integrating all aspects of the business and indicating the key decisions that have to be made in 2010 to ensure security of supply through to 2028 • The successful integration of several units from the return-to- service programme • The enhancement of the resilience teams in the regions and the emergency preparedness protocols in Eskom, greatly improving Eskom’s ability to anticipate, respond and recover from technical system shocks • Power purchase agreements signed with independent power producers Future priorities • Reframing the energy efficiency drive to create a positive message of sustainability, affordability and enhancing security of supply • Creating an enabling environment to introduce new players and technologies into the electricity market • No load shedding until 2012 • Ensure that our planning processes provide a coherent and clear decision framework to meet reliability standards and strategic priorities • Sustainable skills development • Financial sustainability • Invest in the Transmission network to ensure compliance with the NERSA approved reliability standards progressively Kannan Lakmeeharan Managing director: System Operations and Planning Q: How are you preparing for an independent system operator (ISO)? A: We are ensuring that all stakeholders have information and a common fact base on the enablers for an ISO and what form and shape such an ISO could take. Position papers have been prepared for Eskom and external stakeholders on a possible transition path to a desired end state. A project team has also been set up to deal with change management and process management once decisions on the transition path have been made. Internally we are focusing on regulatory, financial and governance ring-fencing of the system operator. As the current system operator we are positioned to operate as the single buyer of electricity from IPPs, and now that funds are being made available we will be signing up more IPPs in future. Eskom Holdings Limited 141 Integrated Repor t 2010 Key focus areas in 2010 • Ensuring a fault-free 2010 FIFA World CupTM and ensuring that the requirements for a secure power system to 2012 are understood and implemented • A 10-year transmission development plan that is made available for public engagement • Supporting the Department of Energy in developing the IRP • Supporting the implementation of an energy conservation scheme • Increasing the resilience of our technical systems and processes • Developing the requirements for Eskom’s technical investment plan to support the direction of the integrated resource plan Risk profile Risk Treatment plans Execute a robust IRP planning process • Together with Department of Energy engage with stakeholders to resolve governance to ensure an adequate expansion framework, verification of assumptions and agreement on process programme • Develop an integrated decision-making framework that allows us to be flexible and nimble • Develop an open database to provide energy planning data for consistency in independent studies and for verification • Develop a related investment plan to support the flexibility and robustness of the IRP process Sufficient integration and executability of • OEM and construction capability assessment through integrated supply chain management: long-term expansion plans combined through supply chain management most of the long lead time equipment requirements with investment leading to an ability to have been communicated to suppliers and agreements are being put into place. This still meet customer needs has to be done in terms of communicating Transmission’s construction requirements • Asset creation process enhancement, monitoring and reporting • Sustainable funding model for Transmission investment • Alignment of new Transmission planning process with the new IRP process • Align Distribution master plans Maintain coal quality, coal stockpile days • SO&P is in constant contact with Generation production and sales regarding outages on and coal handling as a result of logistical generation units and liquid fuel usages. Studies are constantly being done as new situations constraints leading to reduced plant arise availability • Assist with the change in operating regime to allow recovery of fuel supply • SO&P to engage with Primary Energy and Generation to raise the profile of control measures and treatment plans Manage the reserve margin to respond • Development of an alternate Eskom PCP strategy to develop internal capability to the real-time demands of the power • Continuation with the voluntary PCP system to have the ability to respond to • Sign up MTPPP power purchase agreements customer demands • Integration with the integrated demand-management programme • Project to ensure/resolve to do no load shedding Avoid the loss of supply capability at • Work towards ensuring the reliability and security of supply at all Transmission substations Transmission substations due to • Adequate spares levels maintained equipment loss or failure and/or operating errors leading to load shedding and brown out in the worst case 142 Eskom Holdings Limited Integrated Repor t 2010 System Operations and Planning division continued Status of the power supply system in South scenario (averaging 3% electricity consumption growth rate over a Africa 20-year period). This may change as part of the IRP development Demand has returned to 2007 levels in March 2010. If energy process. efficiency measures are not put in place by the winter of 2010, the power system will be tight beyond winter 2010 and in 2011 as we go In order to power the South African economy and ensure an back into our generation maintenance season. The risk of adequate reserve margin, 20GW of additional generation capacity is interruptions increases. required by 2020 and up to 40GW by 2030. Eskom’s current capacity expansion programme is well advanced and together with IPP While the peak demand during the winter of 2009 was 35 850MW, projects could contribute at least 14GW by 2017 to this requirement. the current forecast peak for 2010 is 37 240MW. Eskom’s older coal-fired power stations will probably start to be de- commissioned from 2023 onwards. It is possible that up to 50GW of Medium-term outlook – up to 2017/18 capacity up to 2030 will have to be built or sourced from demand- Medupi and Kusile power stations must be completed. A third base- side options to cater for the increase in demand and to replace the load power station will possibly be needed by 2017. Decisions have decommissioned plant. to be made in the next year to ensure that water and transmission network infrastructure is planned for such a station. Power conservation programme In January 2008, Eskom was requested by the then Department of Continued focus on energy efficiency to maintain a healthy reserve Minerals and Energy (DME) to develop the power conservation margin and to slow the rate of increase in the demand for electricity, programme (PCP) on behalf of national government to assist in could enable us to delay the need for the third baseload station and addressing the energy challenge by creating space to do essential allow the development of other technologies to be used. The role of generation plant maintenance and allow space for growth. nuclear and renewable energy to fulfil the energy needs of the country in the future will have to be concluded in the coming The key components of PCP include the energy conservation two years. scheme (ECS) to reduce energy consumption by approximately 10% and electricity growth management to manage new electrical Under most scenarios, the adequacy of supply in 2012/13 is a serious connections in line with available supply capacity. While the global concern. DSM and energy efficiency are essential over the next three economic downturn of the past two years created some breathing years to ensure system adequacy. It is estimated that there is an space, national consumption has returned to the “pre-economic opportunity of an 8% to 15% reduction in energy usage in the next crisis” levels and the security of supply is once again threatened five to 10 years through energy efficiency initiatives. unless specific strategies, such as PCP, are implemented to create additional space. If worse than planned generation performance occurs (from 86% to 84% availability) this would result in higher risk and reduced system PCP can be implemented in a relatively short space of time adequacy especially between 2011 and 2013. Relatively high load (9‑12 months from finalisation of the rules) to provide the bulk of the factor supply-side options are needed in this timeframe (such as co- required demand reduction. In addition, PCP will provide the pricing generation). signal to ensure the uptake on other solutions such as demand-side management, particularly among larger consumers. Most of the large Long-term outlook consumers in the target market of the proposed first phase are Current net installed generation capacity in South Africa and preparing themselves for the implementation of PCP, and prefer this contracted imported generation amounts to around 43,5GW. route in order to ensure security of supply. Specific discussions have Current expansion plans are based on the moderate growth been held with the Energy-intensive User Group in this regard. Eskom Holdings Limited 143 Integrated Repor t 2010 NERT process Ten-year transmission development plan (TDP) As part of addressing the energy challenges, government set up the The South African Grid Code requires that Eskom annually publishes national electricity response team (NERT) under the leadership of a transmission development plan, outlining the plans to expand and the Department of Energy. Its objective is to co-ordinate and facilitate develop the network into the future, as well as indicating the level of all implementation activities that are taking place as part of the capital expenditure to be invested in the South African transmission response to the electricity challenge. network.The TDP is based on assumptions of new demand in various parts of the country, as well as the proposed new power stations. It Eskom handed over the accountability for PCP finalisation and is therefore important to update the plan periodically as new implementation to the Department of Energy during the second information comes to light. In addition, a stakeholder forum is held half of 2008. In turn, the Department of Energy requested NERSA annually to disseminate the TDP to key stakeholders. to promulgate rules for PCP. Refer to www.eskom.co.za/annreport10/009.html for details of how Eskom has prepared for PCP.. Liveline teams maintain high-voltage lines under live conditions to reduce inconvenience to customers. 144 Eskom Holdings Limited Integrated Repor t 2010 System Operations and Planning division continued Major TDP transmission assets expected to be installed structure will allow for the increasing system demand to be supplied and the power from new power stations to be integrated more TDP new asset Total efficiently into the transmission network and distributed where required. HVDC lines (km) 1 700 765kv lines (km) 6 770 400kv lines (km) 8 355 Demand and energy forecasting The demand forecast is the prediction of future electricity 275kv lines (km) 831 requirements by the electricity users covered within the scope of the Transformers 250MVA+ 103 IRP. Transformers <250MVA 29 Total installed MVA 67 840 The long-term forecast covers the total requirement for electricity to Capacitors 19 be generated to meet the needs of South Africa, including the needs Total installed MVAr 2 366 of neighbouring states and international customers, as contracted for Reactors 56 in accordance with cross-border co-operation protocols. Total installed MVAr 14 600 The long-term forecast includes the total energy requirements of all consumers, irrespective of whether or not they do self-generation or A significant number of new transmission lines are expected to co-generation. Demand-side initiatives that are planned (not yet be added to the system – over 6 700km of 765kV and over 8 realised) are excluded from the forecast, since these are handled in 300km of 400kV lines over the ten-year TDP period. This is due the planning process. to the major network reinforcements required for the supply to the Cape (south and west grids) and the supply to the east grid. The annual energy and demand forecasts are used as one major The integration of new power stations in the developing Limpopo input to the electricity generation planning process, essentially setting west power pool (Medupi and potential future coal stations – energy and demand requirements that have to be met with the Coal 3 close to Matimba and a potential IPP in Botswana) also planned-for power generation resources. requires significant lengths of transmission line as the power stations are very remote from the main load centres. New The long-term forecast for electrical energy is the key input from HVDC power lines will be required to transpor t the electricity which the long-term demand forecast is derived. The long-term from any future power stations in the Waterberg area to other energy forecast and the long-term demand forecast determine the par ts of the country. energy and capacity requirements, respectively, that must be met through the integrated resource plan (IRP). The large number of 400kV transmission lines is also the result of a more meshed transmission 400kV network to provide higher The output of the forecasting process is the total annual energy reliability within the grids and thus improve the levels of network requirement for more than 20 years, inclusive of losses, that will security. require electricity production from existing and future generation resources. The moderate load forecast is flanked by a high and low These new transmission lines form part of the long-term strategy to forecast, reflecting the cone of uncertainty. develop a main transmission backbone from which regional power corridors can be supported. These power corridors will connect The official energy forecast submitted as part of the MYPD 2 generation pools to each other and to the major load centres in the process including exports is shown below: country. This backbone and regional power corridor network 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 Forecast sales (TWh) 215 218 229 236 242 250 261 Percentage sales growth (4,3) 1,3 5,1 2,8 2,7 3,4 4,2 Eskom Holdings Limited 145 Integrated Repor t 2010 The official energy forecast is used as one of the major inputs into on new generation capacity. The regulations clarify the role of the the hourly maximum demand forecast model to generate annual Depar tment of Energy as the energy planner who is therefore maximum (peak) demand forecast. accountable for electricity generation planning in South Africa. The Depar tment of Energy gazetted the first integrated resource The other major inputs to the hourly maximum demand forecast plan (IRP) on 29 January 2010. model are the electricity demand profiles. These are developed using the historical customer electricity usage and modelled to determine The IRP requires the completion of the current Eskom generation the expected demand profiles per sector using load research models build programme and the introduction of independent power and expertise. producers (IPPs). It needs to meet the needs of a growing economy and be consistent with government’s energy policy Integrated resource plan (such as emission targets, the use of renewable energy, nuclear On 5 August 2009 the Depar tment of Energy promulgated, in energy and the promotion of an energy efficiency culture in terms of the Electricity Regulation Act, the electricity regulations South Africa). The IRP reflects capacity and DSM requirements for 2009 to 2013 in MW: Return to DoE MTPPP Wind, Total service Medupi Kusile Ingula IPP REFIT solar Other capacity DSM 2009 772 – – – – – – – 772 432 2010 683 – – – – 343 150 30 1 206 923 2011 404 – – – 1 020 518 – 55 1 997 1 343 2012 – 738 – – – 284 – – 1 022 2 118 2013 – 738 723 666 – 300 – – 2 427 3 056 Total 1 859 1 476 723 666 1 020 1 445 150 85 7 424 The options for IPPs and co-generation included in Eskom’s MYPD 2 Eskom has publicly stated that the electricity needs of the country can application and the subsequent approval by NERSA of the allowed only be met if IPPs are introduced. At the end of 2009 the regulator expenditure for IPPs is shown in the tables below: approved the mechanism in terms of which Eskom may recover the cost arising from purchases from IPPs and, on 24 February 2010, the Capacity (MW) 2011 2012 2013 regulator furthermore approved, as part of the multi-year price determination 2 (MYPD 2), the funds that Eskom may employ during MTPPP 417 417 417 the next three financial years to purchase power from IPPs. REFIT 100 445 725 Total 517 862 1 142 Eskom is awaiting finalisation of the enabling environment, which includes inter alia: an appropriate government support package, determination of the “buyer” in terms of the new generation regulations, a guideline on the targets for each of the renewable Allowed expenditure technologies set out under the IRP and the NERSA rules for evaluation. (R million) 2011 2012 2013 MTPPP 2 246 2 416 2 480 Once a fully supportive, enabling environment is in place, Eskom will be in a position to run a procurement process for the REFIT programme REFIT 58 1 883 3 339 including all other IPP programmes as prescribed in the IRP by the Total 2 304 4 299 5 819 Minister of Energy (in accordance with the new generation regulations). The first MTPPP contracts are currently close to being signed. The IRP 1 also includes the Depar tment of Energy OCGT IPP Further details on the IRP are reflected in the regulatory and legal (1 020MW) in 2011 and 300MW of MTPPP/REFIT in 2013. framework section on page 89. The costs associated with these options were not included as part of the allowed expenditure for IPPs and co-generation in the MYPD 2 and therefore do not feature in the tables above. 146 Eskom Holdings Limited Integrated Repor t 2010 Transmission division Mandate: Optimally operates and maintains the lifecycle of the South African transmission network, while managing key customer relationships and trading energy internationally. Progress this year Highlights Challenges • Safety record • The theft of steel structures is on the increase • Improved stakeholder engagement through forums with key • A number of incidents took place where network failures were customers directly coupled to asset theft, and where our staff were • Environmental legal compliance threatened • Continued co-operation with SADC countries • Problems with gaining access to land are slowing down our efforts to strengthen the national grid • Apollo DC/AC converter upgraded – now world class • The lower than budgeted sales to the key industrial customers, • Progress was made with the implementation of the voluntary which was mainly caused by the global economic problems power conservation programme (PCP) with our key industrial customers • Term sheets have been agreed for the majority of the national pricing agreement contracts and Eskom is negotiating with the parties to finalise the contracts • Term sheets have been agreed for the majority of the national pricing agreement contracts and Eskom is negotiating with the parties to finalise the contracts • Mozal pricing agreement successfully renegotiated Future priorities • Promote projects in the SADC region, particularly those that connect South Africa to renewable energy sources and new power pools • Pay special attention to payment of accounts and general revenue management, including guarantees • Honouring the regulator’s licence conditions as required by the grid code • Ensure availability of the transmission network, especially during the 2010 FIFA World CupTM • Improved transmission asset management practices and processes as part of continual operational improvement • Conclude remaining negotiations with key industrial customers with negotiated pricing agreements which expose Eskom to embedded derivatives Mongezi Ntsokolo Managing Director: Transmission Q: What are the key challenges in maintaining a secure power grid in South Africa? A: Given the age of many of our main networks, maintenance and other asset management practices are crucial, with the added challenge of maintaining assets with constrained budgets. Other than maintaining the existing infrastructure, we also need timeous and efficient expansion of the transmission network to improve security of supply.This requires in-depth planning, approval processes such as EIAs and stakeholder engagement before buying land and starting tender processes for the actual construction work. The transmission network is spread all over South Africa – covering nearly 29 000km – and our personnel have to travel long distances on deteriorating roads. Operating safety is and will remain a challenge. An unfortunate issue that seems to be escalating is threats to the physical security of our people and assets. In response we are developing a security improvement plan that deals with securing our people and addressing cable and lattice theft. Eskom Holdings Limited 147 Integrated Repor t 2010 Risk profile IRM standard and policy. Risks are included in every business area’s Management throughout Transmission is responsible for the operational plan as well as the divisional business plan to ensure integrated risk management (IRM) capability. Transmission has integration and that risks are identified against Eskom and the implemented IRM structures which are aligned to the new Eskom division’s functional objectives. Risk Treatment plans Legacy agreements which are not cost There is an engagement strategy in place regarding these agreements and the agreements are reflective recognised in the regulatory environment. An energy-intensive user strategy is also being developed. Any future negotiated pricing agreements will continue to be recognised and approved by NERSA Dissatisfied customers Efforts will continue to expand customer engagement and analyse survey feedback through the KeyCare tool. There are ongoing strategies to improve service levels. Customer forums are held on a regular basis, led by the Chief Executive, Chief Operating Officer (Customer Network Business), Managing Director (Transmission) and General Manager (Key Sales and Customer Service) Unavailability of the Transmission network The implementation of the asset management project will assist in improving the life-cycle management of plant, review of policies, procedures and processes. There is also a continual review of emergency preparedness plans and testing of the plant to look into multiple failures and response strategies Funding constraints Treatments include cash-saving initiatives, analysis of monthly cash flow projections, prioritisation of capital projects, short- and long-term cost efficiencies. A capital review committee has been constituted and will monitor project progress on a quarterly basis. A stakeholder engagement plan has been compiled and audits are performed to measure adherence to the grid code criteria Customers defaulting on payment Eskom has implemented a credit management policy that guides the process of when to cut off the electricity supply of defaulting customers and criteria to be complied with before payment extensions may be granted. Security guarantees are analysed on a regular basis to ensure that adequate securities are in place and that the “good payer” principle is adhered to and managed Transmission system performance Actual 2008 (includes Measure Description Target Actual Actual load (and unit) of measure 2010 2010 2009 shedding) Comments Number of Interruptions affecting the ≤35 31 31 49 Target achieved interruptions continuity of supply l Number of Total number of system ≤3,40 4,09 RA 4,21 RA 3,56 Not achieved, poor l system minutes lost (for incidents of performance primarily due to minutes lost less than one system minute) the loss of large loads and the inflexibility of the network during contingencies Number of Records number of incidents Achieved l major incidents with a severity greater than one system minute. – severity degree one ≤2 11 RA 3RA 5 Incident initiated by a third (≥ 1 but less than 10) party and exacerbated by a transmission breaker failure – severity degree two 0 0 0 0 (≥ 10 but less than 100) – severity degree three (≥ 100) 0 0 1 1 Number of Number of transmission ≤2,45 2,54 2,46 2,31 Not achieved, due to tower l line faults line faults per 100km design limitations for extreme wind conditions and high unseasonable rainfall impacts RA – Reasonable assurance provided by the independent assurance provider (refer page 169). 1. A major incident (degree 1) took place on 19 February 2010, at Ararat substation in the northern grid. The Minpro number one and number two 88kV (distribution) lines tripped due to a construction vehicle colliding with the number two line. The Ararat-Minpro number one 88kV breaker (transmission breaker) failed to close, resulting in an interruption of supply. On investigation, a defective latch was found on the breaker and this was cleaned. There was an interruption of supply with a total of 1,16 system minutes lost. 148 Eskom Holdings Limited Integrated Repor t 2010 Transmission division continued Transmission’s 2010 interruption performance is stable relative to the 2009 performance. The target for the total number of interruptions on the system was achieved. The total number of Invubu 275kV gas insulated substation investigation system minutes lost (for incidents of less than one system minute) Since the complete stripping down and rebuilding of the has, however, performed below expectation. This was due to the loss Invubu 275kV substation in Richards Bay in the late nineties, of plant or circuits carrying large loads and the inflexibility of the there have been a number of isolator operating rod failures. network to support the load through alternative supply points After the last failure in 2009, the substation was bypassed and (unfirm and constrained networks). a full investigation initiated. There was a substantial improvement in major incidents (more During the investigation it was discovered that some of the severe interruptions) which reduced from three major incidents in operating rods appeared to have scrape marks on them, 2009 to one major incident this year, even though the risk on the possibly due to contact misalignment. This anomaly was network for such types of incidents has not yet been reduced. Line identified as the cause of the failures. faults increased compared to last year due to a few tower structures The research team performed a series of high-voltage tests with inappropriate designs for extreme wind conditions, high under controlled conditions to test the failure theory. These unseasonable rainfall and weaknesses in the installation and tests, as well as computer simulations and material analyses, maintenance of bird guard devices (to prevent bird streamer faults). confirmed that advanced scrape damage due to contact Vigilant post fault investigation, root cause analysis and targeted misalignment will lead to failure. As it is impossible to view the corrective action remain our prime methods of curtailing these faults contacts directly once an isolator has been assembled, the team at the lowest cost. devised an innovative and unique video system to perform internal inspection of the rod clearances. This system was used Benchmarking Transmission’s performance to identify all misaligned contacts and will be used again when Transmission again participated in the International Transmission suspect rods are removed and replaced. The substation is Operations and Maintenance Study (ITOMS™). This benchmark is scheduled to return to service at the end of 2010. primarily focused on maintenance and plant performance. Numerous Repairs costs less than R15 million as opposed to a possible international transmission companies participate in this study in R300 million to replace the substation if the root cause had not order to compare maintenance performance and identify best been found. transmission industry practices worldwide. Benchmarking Transmission’s system performance indices against other similar utilities remains challenging due to differences in data capturing between utilities. However, the data validation obtained from 27 utilities worldwide has been completed and the final report is being compiled. Maintenance and refurbishment The average age of plant in the transmission network is 32 years.The oldest substations and lines are 53 years old. This calls for high-level network plant and equipment maintenance and continual refurbishment and replacement of plant that has reached the end of its useful life. The transmission grid has over 63 500 plant items requiring maintenance. By end of March 2010 a total of 36 356 works orders had been issued and 35 756 completed – 98,3% of all maintenance required was completed. Approximately 25% of the issued maintenance work orders can only be performed when the power is off, so these are delayed until there Isolator operating rod Eskom Holdings Limited 149 Integrated Repor t 2010 is a planned outage, so as not to inconvenience customers. The commissioning of new substations and lines also demanded more time from grid staff, resulting in further delays in the performance of 705A compact cross-rope 765kV tower maintenance. Research is currently involved in the verification and testing of a new generation of compact towers to make optimal use of Transmission is in the process of implementing a revised organisational limited servitudes, and to review the aesthetical characteristics structure and business processes based on asset management of transmission lines and towers. principles in line with the PAS551 standard. To this end, Transmission is in the process of performing plant health, criticality and risk The 705A is a new compact cross-rope 765kV suspension assessments to help determine plant end-of-life and optimise tower. The tower offers a strategic advantage as opposed to its maintenance and refurbishment strategies. conventional lattice type predecessors in that it offers a reduction in steel and foundation costs. The compact structure During 2010 the following major refurbishment projects were should not compromise the technical performance of the completed: tower, hence an exercise was undertaken to determine the • Arnot high-voltage yard electrical, mechanical and liveline operability and maintainability • Batteries and chargers nationally (done on a rolling two-year basis) of the tower. • Remote terminal units at seven substations Although this structure is not cheaper on a per-pylon basis, • 500MVA Hermes transformer and 315MVA transformer from significant operational cost savings can be achieved on long- Bighorn distance links (typically over 200km), due to favourable capacitance and inductance characteristics of the delta phase Note that the timing of some refurbishment projects were re-phased configuration. The verification aspects currently being in line with Eskom’s cash flow savings initiative. conducted include the reliability, liveline, cost savings and electrical characteristics. Environmental impact assessments and land acquisitions The process of acquiring land, land rights and environmental authorisation to build electricity infrastructure has become increasingly challenging. Over the years we have learnt that we should initiate this process at least three to four years before the construction process can begin. However, even these timeframes seem insufficient given the urgency of most projects and the demanding nature of the consultation process during the EIA process. The detailed participation process experienced in recent years is a positive indication that the public are exercising their democratic right to be heard and play an active role in making our process robust and credible. Despite this challenge Eskom is still committed to ensuring an inclusive and informed participation process to ensure maximum participation by all interested and affected parties. This in turn increases the success rate of our projects. For details on activities to enhance stakeholder relationships go to www.eskom.co.za/annreport10/010.html 1. International specification and guideline for the optimised management of physical assets 150 Eskom Holdings Limited Integrated Repor t 2010 Transmission division continued Expropriation Copper and pylon theft The biggest challenge experienced with land and servitude acquisition In the year under review the Transmission division suffered losses is the inability to match the landowners’ expectation of their land amounting to R5,3 million due to conductor theft and R5,5 million values. Eskom is prepared to acquire land and servitudes at market due to theft of steel tower lattices (pylon theft). These incidents values as determined by professional valuators. However, landowner continue to be a concern and various initiatives are in place to expectations are normally above the market value, sometimes combat them. resulting in a deadlock during negotiations. In the high prevalence areas aggressive awareness campaigns have As a last resort, Eskom would resort to expropriation. This is not the been successfully launched with the view to informing the public of best approach since it: the negative effects of conductor and tower-member theft to the • affects the long-term relationship between Eskom and the security and cost of electrical supply. Moreover, we continue with landowner deployment of new technologies as well as the expansion of our • is a long process that normally affects the project delivery times intelligence activities to combat these incidents. • is a process controlled by the state and therefore the decision made by the responsible minister becomes binding on all parties Contracting with SADC utilities involved, leaving little room for negotiation. Eskom is a founding member of the Southern African Power Pool (SAPP) which facilitates the relationship and contracting with the Due to difficulty in acquiring servitudes on the following projects, utilities and end-use customers in the SADC region.This provides the Eskom has in 2010 initiated the process of expropriating six servitudes platform for a regional energy market, where Eskom is able to pursue on the Mercury-Zeus 765kV line, the Spitskop-Dinaledi 400kV line additional import options from potential regional power sources. and the Mercury-Ferrum 499kV line. The bulk of the exports into SADC are made as firm supply in terms Eskom’s relationship with landowners who have our infrastructure of bilateral agreements. In addition Eskom participates in the SAPP on their properties requires attention. Disputes regarding claims by day-ahead market which trades electricity on a day-ahead basis when property owners against Eskom, often result in a deadlock during short-term surplus energy is available. negotiations for new servitude rights. These claims involve “act of God” incidents, and often involve fire claims. Eskom’s insurance cover Eskom is a net exporter (exports exceed imports) of electricity to does not cover every claim forwarded by property owners, especially the region: losses as a result of an “act of God”. Eskom’s insurance only covers • Exports = 6,30% of the total electricity available in South Africa cases where Eskom is legally liable. Property owners express extreme • Imports = 5,39% of the total electricity available in South Africa frustration and dissatisfaction with the manner in which these claims • Net exports = 0,93% are assessed and adjudicated. This is affecting the success of many projects. Most of Eskom’s current exports are to the national utilities of Botswana (BPC), Namibia (NamPower), Swaziland (SEC) and Eskom insurance management services (EIMS) settles all claims Lesotho (LEC). Eskom also has trading relationships with Zimbabwe speedily in cases where there is legal liability on the part of Eskom. (ZESA) and Zambia (ZESCO), but these agreements are for non- However, where no legal liability exists, the affected business units firm power when surplus capacity exists and during emergency within Eskom normally take a business decision as the case may situations. In addition Eskom exports to three end-use customers, no longer be an insurance matter. It is also noted that this is a one in Mozambique and two in Namibia. reactive solution as it happens long after relationships with the landowner have been tarnished. A more pro-active solution is The bulk of the imports are currently received from the Cahora still required. Bassa hydro scheme in Mozambique, with non-firm imports received on occasion from other regional utilities. Eskom has been purchasing approximately 1 250MW from Cahora Bassa for a number of years Eskom Holdings Limited 151 Integrated Repor t 2010 and this agreement is effective until 2030. We also have an agreement Environmental performance for an additional 250MW and this agreement is valid until 2014. The Transmission’s environmental policy commits to: original and additional agreements are concluded at different prices. • comply with applicable legislation and other requirements • establish an environmental management system, including The SADC region has considerable potential primary energy capacity, prevention of pollution that is economically viable and sustainable specifically hydro and natural gas, and these primary energy sources • educate, train and motivate our employees about environmental offer a future supply option into South Africa. These will not only issues assist with the growing capacity requirements in South Africa, but • promote open communication on environmental issues among will also assist in reducing the country’s dependence on coal with employees and stakeholders its associated carbon emissions. Eskom is currently engaging in a number of such potential projects in the region. One such project is Highlights noted below: • reduction in number of cases of non-compliance with environmental legislation. This was attributed to the controls and Westcor oversight mechanisms implemented at all the Transmission The aim of the Westcor project was to build a 3 500MW hydro business units station (Inga 3) on the Congo river in the Democratic Republic of • development and implementation of biodiversity and land Congo (DRC) as well as a transmission system through Angola, management environmental management plans for 330 existing Namibia, Botswana and into South Africa. The national utilities of power lines based on a phase-in approach: the proposed target of these five countries had formed the Westcor joint venture to develop 90% for 2010 was achieved (2009: 80%) this project. • all Transmission business units were recommended for ISO 14001 and re-certification was achieved in August 2009 At the SADC energy ministers’ meeting regarding Westcor held in Kinshasa in February 2010, the President of the DRC announced that Challenges the Inga 3 capacity should be opened up to all members of SADC. • an increase in the number of environmental complaints related to As a result of a changing mandate it was decided to close the power line construction projects Westcor company and the project. It is possible that this move will • increase in the number of oil spills provide the impetus to develop the Grand Inga concept on the • higher collision rate of Ludwig’s Bustards with high-voltage Congo river. transmission power lines in the De Aar area of the Karoo region Key customer update The key sales and customer services team is the interface with major key customers (those customers using a minimum of 100GWh of energy a year). The KeyCare total quality index measures the satisfaction of about 120 key customers. An independent research house conducts interviews with senior managers in the companies to measure our performance and produces a 12-month moving average KPI of these segments (the KeyCare index). The KeyCare index performance was 98% against a target of 103% (2009: 101%). The main reasons for not meeting target were the capacity constraints and the price increases. 152 Eskom Holdings Limited Integrated Repor t 2010 Transmission division continued Key transmission division environmental performance Transmission maintains nearly 29 000km of overhead power lines, indicators which means our divisional footprint needs to be monitored and managed closely through environmental management plans. The Target Actual Actual Actual 2010 2010 2009 2008 significant environmental impacts such as avian impact in terms of biodiversity are managed and controlled through our partnership Number of with the Endangered Wildlife Trust (EWT). environmental legal contraventions l – number 0 1 20 1 In line with the Stockholm Convention, Transmission is committed to Number of the phasing out of PCBs by 2025. A phase-out strategy and stringent environmental legal management practices have been developed in this regard. These contraventions cover the handling, testing and labelling of PCB-contaminated reported in terms of l Eskom’s operational equipment, the compiling of inventories and the development of health dashboard1 phase-out plans that meet the requirements of the Stockholm – number 0 0 2 0 Convention. Materials containing asbestos disposed of – tons2 n/a 21,5 391,4 169,0 Environmental expenditure Funds are allocated for environmental capital and operational Material containing poly-chlorinated expenditures. These amounted to R65,9 million on capital projects biphenyls (PCBs) (2009: R93,1 million) and R31,7 million on operational environmental thermally destructed activities (2009: R82,4 million). The increase in capital expenditure is – tons2 n/a 3,7 489,2 0 due to the capital expansion programme. The largest component 1. Under certain conditions, contraventions of environmental legislation are classified in terms of the Eskom operational health dashboard (OHD) index. was on waste disposal, animal interaction and on capital expenditure These include instances where censure was received from authorities, non- on environmental impact assessments for power lines and substation reporting to authorities as may be legally required, non-reporting in Eskom, a repeat legal contravention, or when the contravention was not addressed construction projects, waste and sewage management, rehabilitation adequately. Managing directors can escalate any significant environmental of land and control of vegetation. legal contravention to the OHD. 2. Quantities of waste disposed of at registered waste sites. Looking forward For this reporting period, one (2009: 20) environmental legal • an assessment needs to be done to determine the readiness and contravention was recorded relating to an oil spill at a substation site. appropriateness of moving from many business unit ISO 14001 certifications to one environmental management system certificate • development and implementation of biodiversity and land management environmental management plans for all the 330 existing transmission power lines Eskom Holdings Limited 153 Integrated Repor t 2010 Distribution division Mandate: Manage the retail business and optimally operate and maintain the Eskom distribution network, while playing an active role in the restructuring of the electricity distribution industry (EDI). Progress this year Highlights Challenges • Customer service index score of 85,05% against a target • Collisions and electrocutions of birds on distribution power of 82,65% lines • Environmental index (compliance) score of 105,5 against a • Large power debtor days of 18,88 days against a target of target of 100 16 days • Small power user debtor days of 40,53 days against a target • Demand-side management savings of 372MW against a target of 45 days of 432MW • Electrification connections of 149 901 against a target of • SAIDI technical performance of 54,41 interruption hours per 145 615 annum against a target of ≤50,00 hours per annum • Implementation of on-line vending resulting in improved • SAIFI technical performance of 24,65 interruption events per customer accessibility annum against a target of ≤23,50 events per annum • Sadly two Distribution employees and eight contract workers passed away during the financial year Future priorities • Continue with appropriate network maintenance and investment levels • Continue with the business optimisation plan to drive service and financial efficiency • Enhancing skills • Enhanced focus on our revenue management and non-technical loss management • Continue development of initiatives to protect the poor and improve payment affordability • Support government initiatives such as the universal access plan and solar water heating Ayanda Noah Managing director: Distribution division Q: How is Eskom driving energy efficiency nationally? A: During the past 10 years, the Eskom DSM initiative has grown into a concerted national electricity saving effort, which has been driven and managed by Eskom with the joint participation and buy- in from government, NERSA, municipal, residential, commercial, and industrial sectors. The key objective of DSM is to implement measurable and sustainable demand reduction interventions, using energy efficiency and load reduction technologies that “hardwire” energy savings via customer purchasing patterns (technology choices) and behavioural changes (usage patterns). From a business perspective, DSM is extremely beneficial to South Africa because the measures have been proven internationally and locally for the short, medium, and long term to: • be the most cost-effective mechanism for demand reduction; • have the least economic impact; • have the quickest time to implement; • be one of the most effective climate change mitigation strategies; • be a strong resource to improve overall energy productivity; and • create sustainable jobs in terms of installation and maintenance of systems 154 Eskom Holdings Limited Integrated Repor t 2010 Distribution division continued Key focus areas – providing viable electricity solutions to informal settlements, and • Anticipate, understand, provide for and respond to our current – contributing to B-BBEE and small business development in a and future customer needs sustainable manner • Work towards a seamless working relationship with all our key • Continue to play an active role in the EDI restructuring process stakeholders • Continue to focus on energy efficiency and demand management • Continue to make sustainable contributions to social delivery • Continue to enhance our internal business processes and business through initiatives such as enablers – reducing public safety incidents through awareness • Grow our human capital through retention of core, critical and – demonstrated climate change deliverables scarce skills, complemented by effective skills and talent – delivering on the universal electrification access expectations management Risk profile Risk Treatment plans Networks becoming overloaded • Identify, develop and enhance the skills required for the optimal running of the technical business • Refurbishment prioritisation for ageing networks • Enhance our approach to illegal connections and energy theft • Encourage energy efficiency among our customers • Enhance and implement sound asset management principles • Develop an effective supply chain for equipment Energy theft escalating • Ongoing execution of the enhanced energy losses programme • Launch a public and social awareness campaign to counter the culture of non-payment and energy theft • Meter audits on all customer categories • Engage with law enforcement authorities to improve litigation success • Successful prosecution of offenders Equipment theft and vandalism escalates • Proactive patrol of installations and lines in high-risk areas • Ongoing awareness initiatives • Engage Eskom contractors in controlling materials and implementation of security measures • Use new technology to monitor and track equipment theft • Interact and co-operate with government departments and other industry stakeholders • Increased capacity for the specialised conductor theft teams in high-risk areas • Successful prosecution of offenders Inability to reduce or contain demand • Develop and implement demand-side solutions to support security of supply growth through demand-side manage­ • Create a culture of energy efficiency ment (DSM), energy efficiency and power • Integrate demand initiatives across the organisation conservation programme (PCP) • Develop funding and investment solutions for energy efficiency, DSM and customers implementation initiatives • Influence and contribute to the policy and regulatory environment Inadequate skills and capacity to effectively • Strengthen the organisational capacity to manage the evolving skills challenge and efficiently operate the Distribution • Co-ordinate all functional skills development and capacity creation business • Standardise the approach to training, training materials and training curriculum • Strengthen coaching and mentoring • Capture and transfer specialised knowledge across the organisation Inability to collect all the revenue due to • Use advanced technology to curb energy theft and reduce revenue losses increased tariffs • Normalisation of credit management practices (disconnections) • Removal of illegal connections • Launch a public social awareness campaign to counter the culture of non-payment • Provide infrastructure in informal settlements to improve revenue collection • Improve meter reading practices Eskom Holdings Limited 155 Integrated Repor t 2010 Distribution system performance Description Target Actual Actual Actual Measure of measure (and unit) 2010 2010 2009 2008 Comments Distribution supply Distribution network ≤8,70 12,30 9,17 10,36 Target not achieved. See comments for loss index (DSLI) unavailability index DSLI and RSLI below. l (minutes per month) Reticulation supply Total reticulation network ≤2,20 2,43 2,16 2,24 Target not achieved. See comments for l loss index (RSLI) unavailability index DSLI and RSLI below. (hours per annum) Reticulation supply Unplanned reticulation ≤1,60 1,84 1,70 1,68 Target not achieved. See comments for l loss index (RSLI) network unavailability index DSLI and RSLI below. (hours per annum) System average Reliability of supply index ≤23,50 24,65 24,16 25,36 Target not achieved. See comments for interruption (number per annum) RA RA SAIFI and SAIDI below. frequency index l (SAIFI) System average Availability of supply index ≤50,00 54,41 51,51 55,51 Target not achieved. See comments for interruption (hours per annum) RA RA SAIFI and SAIDI below. duration index l (SAIDI) RA – Reasonable assurance provided by the independent assurance provider (refer page 169). Comments regarding DSLI and RSLI performance Distribution continues to focus on the following key initiatives to Distribution has started with various initiatives to improve the improve SAIFI and SAIDI performance and to reduce the impact of accuracy of the reporting of DSLI and RSLI due to process and data planned/unplanned outages on customers: integrity challenges. These initiatives were not completed by the end • increased use of live-line techniques of the 2010 financial year and will continue into the next financial • increased network visibility and remote control of switching year.The reported performance for DSLI and RSLI is therefore a best devices estimate of our performance, and this needs to be taken into • improved outage management and co-ordination consideration for year-on-year evaluation and comparative analysis. • implementation of enhanced asset management processes (PAS55 standard) Comments regarding SAIFI and SAIDI performance • increased maintenance and refurbishment expenditure SAIDI and SAIFI performance have marginally deteriorated since the • focus on improvement plans for worst performing networks previous year. Business plan targets have also not been achieved because of the slower than anticipated benefit realisation for Refer to www.eskom.co.za/annreport10/011.html for detail on distribution performance and benchmarks. Distribution’s network performance improvement initiatives, resource constraints, impact of conductor/equipment theft on resources and network performance and adverse weather conditions during the financial year.There has been an increased focus during the year on planned work. 156 Eskom Holdings Limited Integrated Repor t 2010 Distribution division continued Currently these projects are performing at 2 118MW due to a deterioration in performance as measured by measurement and Utility load manager verification professionals. The utility load manager (ULM) system is a demand-side management (DSM) solution. The ULM system has been deployed in pilot areas and the results have to date proven to be successful. This system can limit the load available to a residential premise on a “real-time” basis. This reduction in load will be based on power reductions required to maintain the stability of the electricity network. This load reduction differs from other solutions as it gives customers a choice (which appliances to use when) and basically encourages them to be energy efficient. The ultimate goal is to instil behavioural change in energy Soli Philander and the winner of the Polar heart rate monitor at the Cape Argus users. If consumers can be motivated to be more energy Pedal Power challenge efficient, both the peak and base power loads on the national grid can be reduced, thus relieving some of the strain presently experienced by the power stations. Initially, Eskom DSM focused on realising energy and average demand savings during the evening weekday peak period (18:00 to 20:00) If deployed successfully, the ULM system will potentially free up through energy services company projects in the industrial and over 5 000MW of power from the residential sector. It can also commercial sectors and hot water load management within municipal be used to prevent load shedding in South Africa, and minimise environments. Given the urgent need to reduce demand, the focus the impact of lack of supply capacity to the economy. expanded to include mass energy efficient product rollouts that could be rapidly implemented.These included energy-efficient lighting Demand-side management (DSM) 2010 using compact fluorescent lamps (CFLs), solar water heaters and Given the constrained power system, it is critical that South Africa improving the efficiency of electric motors and pumps. adopts an energy savings culture. The constraints on Eskom’s energy supply will continue until Medupi power station becomes operational Eskom is continuing its efforts to raise public awareness of generation from 2012. To manage this, there is a need to remove a certain and transmission capacity constraints and encouraging energy-saving amount of energy from the system through co-generation, DSM and behaviour through extensive communication campaigns and a substantial shift in energy saving behaviour. strengthening relationships with customers, municipalities and the public. Historically Eskom DSM was working to effect a reduction of DSM cumulative performance relative to Eskom targets 3 000MW by March 2011 and a further 5 000MW by March 2026. FY However, due to the financial pressure on the company the planned 2010 demand target of 3 000MW will now only be achieved by March 2013. FY This involves the installation of energy-efficient technologies to alter 2009 the load and demand profile of the country. These technical solutions FY are seen as hardwiring energy-efficiency measures which ensure a 2008 higher level of security of supply in the short to medium term. FY 2007 The energy efficiency and DSM policy from the Department of FY 2006 Energy guides the implementation of DSM, with energy and demand savings being verified by independent university measurement and FY 2005 verification professionals. Verifiable short-term DSM savings are 0 500 1 000 1 500 2 000 2 500 included in NERSA’s multi-year price determination (MYPD) process. Demand savings (MW) Eskom target Achieved – verified EA tracking The current year’s saving during weekday evening peak periods was 372MWRA, against the target of 432MW. This has increased the cumulative saving to 2 372MW since the inception of DSM in 2003. RA – Reasonable assurance provided by the independent assurance provider (refer page 169). Eskom Holdings Limited 157 Integrated Repor t 2010 (residential, commercial and industrial) will provide a much needed boost for this programme. Solar water heating rebates The SWH rebate scheme: Eskom’s solar water heating strategy is an initiative that could The solar water heating programme offers an incentive to consumers lead to a reduction in demand of approximately 530MW on the national grid and a favourable contribution to reducing to replace existing conventional electric geysers with solar heating carbon emissions. At the core of the strategy is a rebate offered geysers. The strategy is to create a sustainable solar water heating to home owners, aimed at stimulating the uptake of solar water industry in South Africa and to install 250 000 solar water heaters heaters, as it is believed the current high capital cost of solar over three years. We processed and settled 3 455 rebate claims systems is limiting the rate of market uptake. A substantially during the current financial year for qualifying installed systems. increased rebate offer was launched to the market during January 2010, increasing the rebate amount on some systems Since the launch of the Eskom solar water heating programme, by up to 120%. certain processes have been modified as a better understanding of the solar environment developed. Eskom is encouraging solar heating Research will be conducted to ascertain whether the related industries to comply with the South African Bureau of introduction of “green bond” finance, can be used to reduce Standards (SABS) and other applicable regulatory and legislative the cost of solar water heating to the end user. The insurance requirements. We hope that, through increased demand and local industry is encouraged to promote solar water heating systems as a replacement option to their clients. Santam joined the manufacturing capacity, more competitive prices will materialise. programme and is piloting the rollout of this offer. Initially in the first year the programme focused on developing the industry, which meant the uptake was low. With the increase of the rebate by as high as 120% on some of the solar water heating systems, we expect future increases in market uptake. Future priorities The key focus areas of the DSM programme will include the following: • hot water strategy targeting solar water heating/heat pumps energy and water-saving shower heads and regulators • industrial process optimisation including compressed air • lighting and heating/air-conditioning Solar water heating • continued rollout of compact fluorescent lamps (CFLs) The objective of the solar water heating programme is to reduce the • demand response load associated with heating water, which is believed to be • national energy efficiency awareness campaign and specific approximately 40% of total load for an average household. The emergency response communication system – Power Alert programme is also in support of the government drive to install one million solar water heating geysers over the next five years. Research is underway to develop innovative energy solutions in At the core of the strategy is a rebate offered to home owners, the areas of energy efficiency, demand-side management (DSM) aimed at stimulating the uptake of solar water heaters, as it is believed and customer behavioural change. The purpose is to reduce that the current high capital cost of solar heating systems is limiting energy use on the power system. the rate of market uptake. Eskom has entered into a partnership with the insurance industry to offer a solar water heating system as a water heating replacement option to their clients. Other strategic The focus is on understanding the energy consumption initiatives currently under consideration are the introduction of behaviour of our customers and developing the right “green bonds”, partnerships with plumbing and do it yourself (DIY) methodologies to influence a change towards energy efficiency. retail outlets to provide approved systems to their customers, larger We are also gaining new insights in the area of load research. corporate drives to promote employee and municipal rollouts. It is This will help to develop the right tools for accurate load envisaged that policy and regulatory amendments to enforce forecasting and analysis. utilisation of efficient water heating for new building developments Refer to www.eskom.co.za/annreport10/012.html for more details on the DSM programme. 158 Eskom Holdings Limited Integrated Repor t 2010 Distribution division continued Customer service external customer service perception surveys and four internal Eskom’s efficiency is important to South Africa’s economic prosperity, customer service process measures. The 12-month moving average transformation and sustainable development. By monitoring index score on 31 March 2010 was 85,05% (2009: 84,74%) against a customer satisfaction, we can plan pro-actively to ensure that we target of 82,65%. deliver the required quality of service at the appropriate time and price. We use a range of statistical perception surveys, conducted by The business uses these results to identify which aspects of service an independent research organisation, to measure customers’ require improvement. Once action plans have been reprioritised and satisfaction with the service delivered. implemented, success can be tracked by monitoring the trends in results on specific service aspects. Customer service index Eskom uses a composite index to measure the service delivered to its Distribution customers. The index combines the results of two Customer service index results: Target Actual Actual Actual 2010 2010 2009 2008 Benchmark Regulatory 12mma% 12mma% 12mma% 12mma% (2007) Standard4 External customer perception surveys: – Enhanced MaxiCare ≥88,85 92,95 92,80 89,15 n/a n/a l – CustomerCare ≥80,00 80,70 81,70 82,53 n/a n/a l Internal performance measures: – Restoration time <7,5 hours ≥80,00 72,15 72,80 75,96 Q3 90,00 l – Minor projects quotations <30 days ≥80,00 90,00 85,00 82,00 n/a 95,00 l – Minor projects connections <90 days ≥80,00 78,00 73,00 83,00 Q3 95,00 l – Contact centre service level ≥80,00 82,60 84,00 75,00 Q2 80,00 l – Weighted customer service index ≥82,65 85,05 84,74 82,11 l Eskom was placed in the 2nd quartile of performance on contact Tariffs centre service level in the 2007 benchmarking study. The minimum NERSA decision on Eskom’s price increase for the 2010 standard specified in NRS047-1:2005 is 80%. The deterioration in financial year performance is partly due to the growth in call volumes queued into On 25 June 2009 NERSA made the following determination on the contact centres, which increased by 29% to 5,3 million calls by tariffs: 31 March 2010 (2009: 4,1 million). The ongoing good service levels • a 31,3% price increase on the average standard tariff was approved despite this growth can be attributed to improved performance from 1 July 2009 to 31 March 2010 (nine months) management, resource planning and optimisation, as well as an • the 31,3% increase included the 2c/kWh levy on the sale of improved balance of call flow between sites. The contact centres electricity generated from non-renewable sources (“environmental also demonstrated an improved ability to handle emergency levy”). The 2c/kWh must be recovered within the 31,3% tariff increase situations. • the approved price increase on the average standard tariffs included a limited price increase of 15% for both Eskom and Refer to www.eskom.co.za/annreport10/013.html for more information about the measuring of customer municipalities’ poor customers (Homelight 1 and 2 tariffs). It must satisfaction. be noted that this is an interim measure until the implementation of inclining block rate tariffs to protect the poor. The full implementation of the inclined block rate methodology will occur in the multi-year price determination 2 (MYPD 2) 4. Regulatory standard: NPS047-1:2005 Eskom Holdings Limited 159 Integrated Repor t 2010 The Eskom tariffs implemented on 1 July 2009 were the restructured Retail tariff restructuring plan tariffs that incorporate stronger energy price signals, especially The price of any product influences the way in which customers use impacting more energy-intensive users. Together with the the product. Our electricity tariffs are therefore designed to send out environmental levy charge, these tariffs recover the NERSA-approved signals that resemble the cost to supply the electricity. Customers are annual revenue requirements. As in the past, all the charges and guided, through price signals, to use electricity in an economic and components of the tariffs were adjusted with annual average price efficient way. Eskom’s tariffs are designed to support both energy and increases for standard tariffs, differentiated by local authority and capacity efficiency. Energy efficiency is supported through energy non-local authority tariffs. rates that are time-of-day and seasonally differentiated, while cost- reflective network charges ensure that the networks are used in an Eskom also recognises the importance of the protection for the poor optimal way as customers pay for what they use and for what they at a time of increasing prices and that this requires a sustainable reserve on the network for their own requirement. solution. Currently, we have with the guidance of NERSA implemented different types of subsidies to address the affordability of mainly our The tariffs are designed to be as non-discriminatory as possible by residential and rural consumers. As Eskom only directly supplies 40% taking into account the needs of all customers on a fair and equitable of these affected consumers, addressing the affordability of electricity basis. Our tariff options are based on consumers’ demand sizes, with requires a national approach. National policy on protection for the charges differentiated in terms of location and voltage for the larger poor needs to deal not only with electricity, but also with the supply points. provision of other basic services and grants. Any changes to this national policy remain the accountability of the relevant government Effective 1 July 2009, NERSA approved the retail tariff structural departments. changes designed to recover the Eskom revenue requirement and to contain cost-reflective signals for economic efficiency and sustainability. NERSA decision on Eskom’s price increase for the 2011 The restructuring plan updated the tariffs with the latest cost financial year associated with energy, network and customer service. Eskom requested a nominal increase of 35% for 2010/11. NERSA in its determination allowed for an annual average price increase of This restructuring of the tariffs saw energy rates increasing and 24,8%. The average price increase was then applied to Eskom’s tariffs network charges and most service charges proportionally reducing: after taking into account NERSA’s decision regarding protection of • for higher load factor customers the tariff restructuring resulted in poor, which resulted in different tariff categories having different higher increases than the average price increase as they are more increases applied to the tariffs. NERSA also decided on the energy intensive users of electricity introduction of an inclining block rate tariff for residential customers, • for small power users, the impact of the restructuring was minimal. thereby replacing Eskom’s existing residential tariff structures.This has only been implemented for conventional residential customers, while The price increase implemented to the retail tariffs on implementation for prepayment residential customers remains a 1 July 2009 challenge and is under discussion with NERSA. The price increase determined by NERSA was based on the average price paid for electricity. Individual tariffs saw increases that differed Refer to MYPD 2 on page 90 from the average increase due to the following: • in an effort to protect the poor, the NERSA decision included a For detail on Eskom’s price increases over the past 17 years lower increase for Eskom’s Homelight tariff customers.The capping go to www.eskom.co.za/annreport10/014.html of the Homelight tariffs to a 15% increase meant a shortfall in revenue, which was applied to non-local authority tariffs, resulting Changes to retail tariffs in 2009/10 in these tariffs seeing increases higher than the average increase. In addition to the price increase Eskom also implemented the This resulted in the increase in subsidies for the Homelight tariffs. following in 2009: Local authority tariffs were not impacted as NERSA expected them to provide a similar subsidy to their customers 160 Eskom Holdings Limited Integrated Repor t 2010 Distribution division continued • because the environmental levy was introduced as a separate charge, the price increase applied to all individual tariff rates had to be adjusted accordingly Pole-top fires Pole-top fires on distribution and transmission wooden pole Increase on tariff rates excluding the environmental levy structures cause power trips and cost money and time to repair. Far more importantly, in some cases, people and animals Increase make contact with energised low-hanging conductors resulting applied to from pole-top fires. The mitigation of pole-top fires is therefore tariff rates % receiving significant attention within Eskom. Total Eskom average excluding the Results from extensive outdoor laboratory tests and field environmental levy: 24,08 investigations assist us in updating applicable standards and Local-authority tariffs 23,23 procedures, in order to provide a high-quality product that is Non local-authority tariffs (excluding Homelight) 26,18 able to better withstand the impact on the network and Non local-authority Eskom Homelight tariff thereby reduce safety risks. (billed and prepaid) 11,30 Average increase including the environmental levy Average price increase In the current 2010 financial year the total Distribution energy losses % were 5,87%, of which non-technical losses is estimated to be between 1,5% and 2,4%. Compared to other utilities globally, Eskom continues Total Eskom average including the environmental levy: 31,30 to perform well with regards to energy loss management. The Local-authority tariffs 31,30 international benchmark exercise carried out in 2007 puts Eskom in Non local-authority tariffs (excluding Homelight) 33,60 1 the first quartile of the top performing distribution utilities in terms Non local-authority Eskom Homelight tariff of total energy losses. The Eskom result is within the benchmark (billed and prepaid) 15,00 parameters of 5,60% to 12,07%. Even though we compare favourably with other utilities globally, this Management of total energy losses continues to be a key focus area in our business. We are currently Energy losses reflect the difference between the quantity of energy preparing to launch a public and social campaign to augment the sent out from the power stations and the quantity sold to the various work done under the energy loss management programme (ELP). customers at the end of the value chain. Losses are categorised as The level of energy losses has improved due to increased technical or non-technical in nature. interventions in the management thereof. These actual results • Technical energy losses naturally occur when electrical energy is achieved are better than the target energy losses allowed for transferred from one point to another.The medium through which by NERSA. electrical energy is transferred imposes a resistance to the flow and thereby some of the energy is dissipated as heat. • Non-technical energy losses can be calculated as the difference between total energy losses and technical losses. These are typically caused by electricity theft (illegal connections, meter tampering), data and billing errors, etc. 1. The Homelight tariff was capped by NERSA to a 15% increase. This meant that the 31,3% for other non-local authorities was increased to 33,6% to cater for the Homelight subsidy. Eskom Holdings Limited 161 Integrated Repor t 2010 Total actual losses are as follows: Target 2010 2009 2008 Energy losses 2010 GWh GWh GWh Total Eskom energy flow 246 705 240 673 250 414 Total distribution network energy flow1 218 663 214 313 223 102 Actual loss – Distribution 12 839 11 706 12 195 Actual loss – Transmission 8 009 7 407 7 832 Total actual loss 20 848 19 113 20 027 NERSA MYPD allowance 21 131 20 558 21 428 Energy loss % Total distribution loss ≤6,00% 5,87% 5,46% 5,47% Total transmission loss ≤3,30,% 3,27% 3,08% 3,13% Total Eskom loss ≤8,76% 8,45% 7,94% 8,00% For internal evaluation purposes we estimate technical losses to Free basic electricity (FBE) range between 60% and 75% of total losses within Distribution, while Government aims to bring relief to low-income households through 100% is estimated for the Transmission networks. The actual the national electricity basic services support tariff, thereby ensuring percentage in Distribution is influenced by factors such as network optimal socioeconomic benefits from the national electrification design, network topology, load distribution on the network and programme. Qualifying customers are eligible for 50kWh of free network operations. electricity per month. Free basic electricity Unit of Description measure 2010 2009 2008 Municipalities contracted to provide FBE number 243 243 241 Municipal contracts rolled out % 99 99 98 Customers approved by municipalities for FBE number 1 308 357 1 289 804 1 298 747 Customers’ meters reconfigured to receive FBE number 1 294 997 1 233 012 1 268 986 Reconfigured FBE customer meters in the year average % 99 96 98 Amount invoiced to contracted municipalities Rm 308 197 242 Cumulative tariff differential and cost under-recoveries2 Rm 165 141 60 Refer to www.eskom.co.za/annreport10/015.html for more information regarding free basic electricity. Revenue split by customer category – 2010 4,7% 6,1% 6,4% Foreign Municipalities and water Rail 25,5% Mining 41,5% Industry Commerce and agriculture Residential 14,5% 1,3% 1. Inclusive of energy flows to KSACS customers. 2. Tariff differentials and cost under-recoveries have been cumulative since 2006. 162 Eskom Holdings Limited Integrated Repor t 2010 Distribution division continued Electrification Funding is currently made available for new connections and The Department of Energy began funding the integrated national infrastructure development projects that are part of the INEP going electrification programme (INEP) in April 2001. Eskom implements forward. We expect that the average cost of infrastructure the programme in its licensed areas of supply on the Department of development and the cost per connection will increase as we Energy’s behalf . Operating costs relating to this electrification 1 electrify communities in more remote rural areas. In addition, programme are incurred by Eskom as the licensed distributor technical specifications for network design have been enhanced to supplying electricity to its consumers. better accommodate future growth in electricity demand and to improve the quality and reliability of the electricity supply in these Since the inception of the electrification programme in 1991, a total areas. of 3 901 054 (2009: 3 751 153) homes have been electrified. Electrification programme Unit of Target Actual Actual Actual measure 2010 2010 2009 2008 Total connections number 145 615 149 901 112 965 168 538 l – Direct connections, excluding farm workers number 145 226 149 028 111 903 167 164 l – Farm worker connections number 389 873 1 062 1 374 l Total capital investment Rm 1 207 1 086 798 1 022 l – Reticulation and connections Rm 1 028 914 682 910 l – Sub-transmission infrastructure development Rm 177 169 113 108 l – Farm worker connection incentives paid Rm 2 3 3 4 l Government aims to achieve universal access to electricity by 2014. Meeting the future universal access programme requirements is primarily dependent on the availability of funding from DoE via the INEP. Eskom continues to engage with DoE and other key stakeholders regarding the planning, funding and other requirements needed to achieve universal access. Electrification of grid schools and clinics Unit of Target Actual Actual Actual measure 2010 2010 2009 2008 Capital investment Rm 323 142 108 88 l Total connections Number 1 048 774 479 751 l The electrification of schools and clinics is funded by the DoE through Environmental performance the National Electrification Fund. This programme is focused on Highlights electrifying specifically identified schools and clinics. The target • Containing compliance with environmental legislation through number of connections was increased during the course of the improved controls and oversight mechanisms current financial year due to an additional special schools programme • Training of staff and contractors in environmental laws from DoE. This programme will continue to receive focus with the • Maintaining an 80% response to wildlife interactions within objective of completion in the 2010/11 financial year. four months Challenges • Number of complaints related to cutting of trees • Collisions and electrocutions of birds on distribution power lines 1. Electrification within the licensed areas of supply of a municipality is carried out by that municipality. Eskom Holdings Limited 163 Integrated Repor t 2010 Key distribution division environmental performance indicators Target Actual Actual Actual 2010 2010 2009 2008 Number of environmental legal contraventions 0 4 5 3 l Number of environmental legal contraventions reported in terms of Eskom’s operational health dashboard1 0 0 0 2 l Materials containing asbestos disposed of – tons2 n/a 16,2 40,2 49,2 Material containing polychlorinated biphenyls (PCBs) thermally destructed – tons2 n/a 13,3 15,0 7,4 Over and above the legal requirement of obtaining an environmental Looking forward authorisation through the undertaking of EIAs, many of the • Ensuring continual improvement in the effective implementation Distribution powerline projects do not require authorisation. These of conditions of environmental authorisations, including projects are, however, subjected to internal environmental screening environmental management plans. so as to ensure environmental duty of care and informed decision • Focus on the quality of and use of geographical information making. systems used to complete the Distribution environmental screening studies for those projects not required to obtain an Through formal environmental management systems with allocated environmental authorisation. environmental roles and responsibilities, the division ensures the • Review of the environmental questions raised in the internal risk provision of electricity to Eskom’s customers while reducing its audit system. environmental impact. • Finalisation of the Distribution climate change strategy. During this year the division had four cases (2009: five) of activities that resulted in environmental legal contraventions as a result of not fully complying with the conditions of environmental Urban distribution automation authorisations. Eskom has more than 280 000km of medium voltage (MV) lines to provide power to its customers. Distribution The thousands of kilometres of power lines impact wildlife and in automation (DA) can improve power network reliability by particular birds. This has resulted in a long-standing partnership with making the grid “smart” by integrating protection and control the Endangered Wildlife Trust (EWT) which assists in mitigation of technologies. Such “smart” networks can automatically detect these environmental impacts. the occurrence and location of faults, and automatically switch circuit breakers and switches to restore supply as quickly as Distribution, and the rest of Eskom, continues to maintain a register possible; all without any human intervention. of all PCB-contaminated equipment so as to ensure the long-term commitment to the phasing out of PCBs by 2025. DA systems therefore ensure that “healthy” parts of the network are restored as quickly as possible through intelligent, Environmental expenditure automatic switching. The result is improved network reliability Funds are allocated for environmental capital and operational and customer satisfaction. expenditures. These amounted to R84 million on capital projects Eskom’s urban DA project is investigating the technical and (2009: R79,2 million). On the other hand R32,4 million was generated financial benefits of DA technology through a number of pilot through recycling efforts. systems. The study also includes a cost-benefit analysis. This will help to make electricity delivery more reliable into the future. 1. Under certain conditions, contraventions of environmental legislation are classified in terms of the Eskom operational health dashboard (OHD) index. These include instances where censure was received from authorities, non-reporting to authorities as may be legally required, non-reporting in Eskom, a repeat legal contravention, or when the contravention was not addressed adequately. Managing directors can escalate any significant environmental legal contravention to the OHD. 2. Quantities of waste disposed of at registered waste sites. Supporting the Eskom business Eskom Enterprises (Pty) Limited 166 Financial results 166 Structure 168 Key focus areas in 2010 168 Performance indicators 168 Disposals 166 Eskom Holdings Limited Integrated Repor t 2010 Eskom Enterprises (Pty) Limited Mandate: Offers strategic and commercial lifecycle services to Eskom and is the custodian of Eskom’s non-regulated businesses Progress this year Highlights Challenges • Containment of costs to Eskom • One contractor fatality recorded • Significant improvement in overall safety performance • Contract management issues in Roshcon • Disposal of investment in arivia.kom for value • Low utilisation of the helicopter fleet and fixed wing aircraft • Completion of the non-core disposals process begun in • Contractual difficulties experienced by Eskom Energie 2007 Manantali Future priorities • Manage stakeholder relationships by delivering the expected returns to the shareholder • Ensure financial sustainability • Improve service quality by improving operational efficiency and SHEQ performance • Focus on skills – through retention strategy, talent management and pipelining of skills – to grow the capacity and capabilities of the group • Improved project management, particularly in Roshcon division • Disposal of the fixed wing aircraft • Arriving at and implementing direction concerning future involvement in South Dunes Coal Terminal (SDCT) and Golang Coal Financial results R millions 2010 2009 Total revenue 6 876 8 271 Profit for the year 152 468 Total assets 7 295 8 122 Capital expenditure 509 515 Structure The group is structured as follows: Eskom Enterprises (Pty) Limited Local subsidiaries African concessions Rotek Industries (Pty) Limited Eskom Uganda Limited Roshcon (Pty) Limited Eskom Energie Manantali SA South Dunes Coal Terminal (Pty) Limited Golang Coal (Pty) Limited Note: Only operating companies are depicted Eskom Holdings Limited 167 Integrated Repor t 2010 Brian Dames Chief Executive Officer: Eskom Enterprises Q: What is Eskom’s longer-term strategy in the rest of Africa? A: At the moment, the focus of the Eskom Enterprises group is on servicing the needs of its main customer, being Eskom Holdings Limited. However, should the group have surplus capacity, it will source external work, firstly in South Africa, then in the SADC countries. At the moment there is no drive to expand into Africa. Les Carlo Chief Operating Officer: Eskom Enterprises Q: Which of the subsidiaries have performed well this past year? A: On a financial level, the Eskom Enterprises group did not perform well against budget during the 2010 financial year, since the group was badly affected by a reduction in work for Eskom Holdings Limited, due to the widely publicised financial pressures in Eskom. However, Eskom Enterprises (Pty) Limited did perform better than budget, mainly due to cost savings measures implemented in Telecomms, the main operating division. 168 Eskom Holdings Limited Integrated Repor t 2010 Eskom Enterprises continued The Eskom Enterprises group supports the Eskom business by The group operates and maintains the Eskom group private providing plant lifecycle support and plant maintenance, including telephone network, and provided the IT function to the Eskom return-to-service work, network protection and measurement, and group, until the sale of its investment in arivia.kom. Various other supporting the build programme for all the main Eskom line divisions. support services are provided. Key focus areas in 2010 Risk profile • Effective cash management Risk Treatment plans • Safety improvement initiatives • Extraction of value from assets Low forward order Identify areas within Eskom to book add value • Disposal of arivia.kom • Eskom Energie Manantali arbitration Disposals During the year ended 31 March 2010, 56 lost-time incidents (2009: Eskom Enterprises disposed of its 58,5% shareholding in arivia.kom 86) were reported, covering employees and contractors. Regrettably, for a consideration of R235 million, which resulted in a reversal of there was one fatal incident during the year (2009: five), being a R34 million of the impairment loss of R195 million incurred in the contractor, as a result of a vehicle accident. The employee lost-time previous year. A five-year IT service outsourcing contract was signed incidence rate declined significantly from 0,50 in 2009 to 0,34 during on behalf of Eskom with the new owners of arivia.kom – T-Systems the current financial year, while the contractor lost-time incident rate South Africa. declined from 0,43 in 2009 to 0,24 at year end. Performance indicators Target Actual Actual Actual Performance measure 2010 2010 2009 2008 Socio-economic measures LTIR – employees 0,20 0,34 0,50 0,39 l LTIR – contractors 0,40 0,24 0,43 Not measured l Fatalities – employees Nil Nil 3 1 l Fatalities – contractors Nil 1 2 2 l Eskom Holdings Limited 169 Integrated Repor t 2010 Independent assurance report on sustainability information To the directors of Eskom Holdings Limited Our work has been undertaken to enable us to express the conclusions contained in this report solely to the directors of Eskom We have undertaken an assurance engagement on selected in accordance with the terms of our engagement, and for no other performance information presented in the 2010 Eskom Integrated purpose. We do not accept or assume liability to any party other Annual Report (the report) of Eskom Holdings Limited (Eskom). than Eskom, for our work, for this report, or for the conclusions we have reached. The directors are responsible for the preparation and presentation of the selected performance information presented in the report, Assurance standards used the identification of stakeholders and stakeholder reporting We conducted our engagement in accordance with the ISAE 30002 requirements, material issues, for commitments with respect to and AA1000AS (2008)3. sustainability performance, establishing and maintaining appropriate performance management and internal control systems, and the The scope of an AA1000AS (2008) engagement conforms to the selection of the performance information which forms the subject requirements of a Type 2 assurance engagement which covers not of our engagement. The directors are also responsible for the only the nature and extent of the organisation’s adherence to the selection and application of the following criteria in the evaluation AA1000APS (2008) principles of inclusivity, materiality and of the subject matter: responsiveness, but also evaluates the reliability of the selected • The AA1000APS (2008) for the three principles of inclusivity, 1 performance information. Reasonable and limited assurance are materiality and responsiveness (the AA1000APS (2008) principles); terms used in an ISAE 3000 engagement to distinguish between the • The Global Reporting Initiative (GRI) G3 Guidelines, supported two types of assurance and are consistent with a high and moderate by Eskom’s internally developed reporting guidelines, which are level of assurance respectively which are the terms used in an available on request from Eskom, for the selected performance AA1000AS (2008) engagement. data; and • The GRI G3 Guidelines for the B+ application level. The scope of our engagement The scope of our engagement included the provision of: Our responsibility is to express assurance conclusions on the selected 1. Limited assurance on Eskom’s alignment with AA1000APS information based on our work performed. We believe that the (2008) principles as described on page 13 of the report. evidence obtained from our work performed provides an appropriate basis for conclusions expressed in this report. 2. Assurance, as described below, on the ‘selected performance information’. We comply with the appropriate requirements of the International (a) Reasonable assurance on the following performance data, Federation of Accountants (IFAC) Code of Ethics for Professional marked with an ‘RA’ on the relevant pages of the report: Accountants and have systems and processes in place to monitor • Technical performance parameters – Unplanned capability compliance with the code and to prevent conflicts regarding loss factor, system minutes lost, major incidents, system independence. Our work was carried out by a multi-disciplinary average interruption frequency index (SAIFI) and system team of health, safety, social, environmental and assurance specialists average interruption duration index (SAIDI) and National with extensive experience in sustainability reporting. Load Shedding (Generation induced) OR unserved energy 1. AA1000 AccountAbility Principles Standard (2008), issued by AccountAbility 2. International Standard on Assurance Engagements 3000: Assurance engagements other than audits or reviews of historical information, issued by the International Auditing and Accounting Standards Board 3. AA1000 Assurance Standard (2008) issued by AccountAbility 170 Eskom Holdings Limited Integrated Repor t 2010 Independent assurance report on sustainability information continued • Environmental performance parameters – Coal Summary of work performed purchased – stock days, specific water consumption, liquid Our work was performed to obtain the evidence that we considered fuel usage at the Open Cycle Gas Turbines, demand side necessary for our engagement. The procedures selected depend on management monitoring and verification, particulate our judgement including the risks of material misstatement of the emissions, carbon dioxide emissions, sulphur dioxide selected information in the report, whether due to fraud or error. In emissions, nitrogen oxides emissions, low level radioactive making those risk assessments we considered internal control waste disposed, intermediate level radioactive waste relevant to the preparation of the report. Our evidence-gathering disposed, polychlorinated biphenyls (PCBs) thermally procedures are more limited than where reasonable assurance is destructed, asbestos disposed, ash disposed and expressed. environmental legal contraventions • Social performance parameters – Skills and development Our work included the following evidence-gathering procedures: (Eskom trainees/bursars-learner pipeline, number of • Interviews with management and senior executives at corporate, engineering trainees/apprentices, additional number of operational divisions and site level to evaluate the application of non-Eskom learners on Eskom-sponsored learning), human the GRI G3 Guidelines and the AA1000APS (2008) principles resource operational measurements (race, gender, and to obtain an understanding of the general control disabilities), corporate social investment spend, employee environment, taking into account the maturity of the application and contractor work related fatalities, employee lost time of AA1000APS (2008) in South Africa and at Eskom. injury rate (LTIR) • Evaluating evidence provided by management and senior • Economic parameters – Generation capacity installed and executives at corporate level to substantiate the accuracy of commissioned, transmission lines installed, transmission statements made during the interviews as well as systems in Mega Volt Amperes (MVA) installed, generation capital place at corporate, divisional and site level. expenditure, transmission capital expenditure, percentage of • Evaluating and testing of process and systems and inspecting local content in new-build contracts, cost of electricity, ratio of documentation at corporate, operational divisions and site level debt to equity (the debt: equity ratio) and interest cover. to generate, collate, aggregate, monitor and report the selected (b) Limited assurance on the following performance data, sustainability performance information for the year. marked with an ‘LA’ on the relevant pages of the report: • Visiting business units including Koeberg (nuclear power station), • Environmental performance parameters – Internal Arnot (coal power station),Tutuka (coal power station), Matimba energy efficiency (non-essential energy consumption) (coal power station), Lethabo (coal power station), Matla (coal • Social performance parameters – Broad-Based Black power station), Kendal (coal power station), Kriel (coal power Employment Equity (B-BBEE) Expenditure-Company station), Hendrina (coal power station),Transmission division, the (top 295 suppliers) North West Distribution region, Northern Distribution Region, Central Distribution Region, Capital Expansion (Enterprises), 3. Limited assurance on Eskom’s self-declaration of the GRI B+ Roshcon (Enterprises) and Rotek (Enterprises). Application Level (page 169). • Conducting an application level check on the report to ensure all disclosure requirements of the GRI B+ application level have The above is collectively referred to as the ‘selected information’. been adhered to. Eskom Holdings Limited 171 Integrated Repor t 2010 • Evaluating whether the information presented in the report is Observations consistent with our overall knowledge and experience of The key observations below do not affect our conclusions. sustainability management and performance at Eskom and is not inconsistent with information contained in the annual financial On the AA1000APS principles of inclusiveness, statements that are included in the Annual Report. materiality and responsiveness In relation to the principle of inclusiveness, Eskom has an extensive Conclusions stakeholder engagement process in place and has identified a broad 1. On the AA1000APS (2008) principles of range of relevant stakeholders. However, as discussed on page 14, the inclusiveness, materiality and responsiveness process is currently not centrally co-ordinated and integrated. Eskom Based on our work performed, nothing has come to our have taken several steps to improve the effectiveness of their attention that causes us to believe that Eskom’s assertions stakeholder engagement processes. relating to their alignment with the AA1000APS (2008) principles of inclusivity, materiality and responsiveness, In relation to the principle of materiality, as discussed on page 13, described on page 13, is not fairly stated. Eskom has implemented a group-wide risk management framework for the identification and analysis of risks. This process will benefit 2. On the selected performance information from a more effective stakeholder engagement process. The process In our opinion, the selected 2009/2010 performance information of determining which material issues to report on and meaningfully set out in 2(a) above for the year ended 31 March 2010, is fairly analysing the chosen material issues within the report in proportion stated in all material respects in accordance with the GRI G3 to the magnitude of the risk to Eskom and to stakeholders is an area Guidelines, supported by Eskom’s internally developed reporting for future focused sustainability reporting. guidelines. In relation to the principle of responsiveness, as the improvements Based on our work performed, nothing has come to our described in the preceding paragraphs are addressed, the issue of attention that causes us to believe that the selected 2009/2010 responsiveness to stakeholder concerns is expected to improve. performance information set out in 2(b) above for the year ended 31 March 2010, is not fairly stated in all material respects in accordance with the GRI G3 Guidelines, supported by Eskom’s KPMG Services (Pty) Limited internally developed reporting guidelines. 3. On Eskom’s self-declaration on the GRI G3 B+ Application Level Based on our work performed, nothing has come to our Per PD Naidoo AH Jaffer attention that causes us to believe that Eskom’s self-declaration Director Director of a B+ Application Level, is not fairly stated in all material Johannesburg Johannesburg respects in accordance with the GRI G3 Guidelines. 10 June 2010 10 June 2010 Consolidated financial statements Section contents Page Page Currency of financial statements 173 4 Critical accounting estimates and judgements 224 Statement of responsibilities and approval 174 5 Segment information 227 Report of the audit committee 175 6 Property, plant and equipment 230 Statement by company secretary 175 7 Intangible assets 233 Independent auditors’ report 176 8 Investment in equity-accounted investees 234 Directors’ report 177 9 Investment in subsidiaries 236 Statements of financial position 180 10 Financial instruments with group companies 238 Income statements 181 11 Future fuel supplies 239 Statements of comprehensive income 181 12 Deferred tax 239 Statements of changes in equity 182 13 Financial instruments 240 Statements of cash flows 184 14 Embedded derivative assets and liabilities 250 Notes to the consolidated financial statements: 15 Derivatives held for risk management 251 1 General information 186 16 Finance lease receivables 254 2 Summary of significant accounting policies: 17 Trade and other receivables 254 2.1 Basis of preparation and measurement 186 18 Inventories 254 2.2 Consolidation 188 19 Service concession arrangements 255 2.3 Segment reporting 189 20 Share capital 256 2.4 Foreign currency translation 189 21 Payments made in advance 257 2.5 Property, plant and equipment 190 22 Non-current assets and liabilities held-for-sale 257 2.6 Intangible assets 190 23 Deferred income 261 2.7 Capitalisation of borrowing costs 191 24 Retirement benefit obligations 262 2.8 Service concession arrangements 191 25 Provisions 264 2.9 Leases 192 26 Finance lease liabilities 265 2.10 Impairment of non-financial assets 193 27 Trade and other payables 265 2.11 Financial instruments 193 28 Payments received in advance 265 2.12 Inventories 197 29 Revenue 266 2.13 Future fuel supplies 198 30 Other income 266 2.14 Share capital 198 31 Net fair value loss on financial instruments, 266 2.15 Equity reserve 198 excluding embedded derivatives 2.16 Income tax 198 32 Employee benefit expense 266 2.17 Deferred tax 198 33 Depreciation and amortisation expense 266 2.18 Payments received in advance 198 34 Net impairment loss 267 2.19 Deferred income 198 35 Other operating expenses 267 2.20 Insurance contracts 199 36 Finance income 267 2.21 Employee benefits 199 37 Finance cost 268 2.22 Provisions 200 38 Income tax 268 2.23 Revenue recognition 200 39 Cash generated from operations 270 2.24 Finance income 201 40 Guarantees and contingent liabilities 271 2.25 Finance cost 201 41 Commitments 274 2.26 Dividend income 201 42 Related-party transactions 274 2.27 Dividend distribution 201 43 Events after the reporting date 276 2.28 Non-current assets and liabilities held-for-sale 201 44 Restatement of comparatives 277 3 Financial risk management 201 45 Directors’ remuneration 280 Currency of financial statements The financial statements are expressed in South African rand (R). The following are approximate values of R1,00 to the selected currencies and one unit of the selected currencies to the rand: R1,00 to the selected currency one unit of the selected currency to the rand March March March March 2010 2009 2010 2009 EUR 0,10 0,08 9,92 12,63 USD 0,14 0,11 7,34 9,49 GBP 0,09 0,07 11,11 13,57 CHF 0,14 0,12 6,94 8,33 JPY 12,50 10,35 0,08 0,10 SEK 0,98 0,87 1,02 1,15 CAD 0,14 0,13 7,23 7,69 AUD 0,15 0,15 6,73 6,67 NOK Currency Abbreviation 0,81 Currency 0,71 1,24 1,41 Abbreviation Euro EUR Swedish krona SEK United States dollar USD Canadian dollar CAD Pound sterling (United Kingdom) GBP Australian dollar AUD Swiss franc CHF Norwegian krone NOK Japanese yen JPY 174 Eskom Holdings Limited Integrated Repor t 2010 Statement of responsibilities and approval The Public Finance Management Act requires the directors to ensure Should Eskom not receive adequate funding for its planned activities, that Eskom Holdings Limited (Eskom) and its subsidiaries (the group) the board undertakes to curtail its activities in order to balance its keep full and proper records of their financial affairs. The financial cash flow requirements. statements should fairly present the state of affairs of Eskom and the group, its financial results, its performance against predetermined Based on the information and explanations given by management, objectives for the year and its financial position at the end of the year the internal audit function and discussions held with the independent in terms of International Financial Reporting Standards. external auditors, the directors are of the opinion that the internal accounting controls are adequate to ensure that the financial records To enable the directors to meet the above mentioned responsibilities, may be relied upon for preparing the financial statements, and that the Eskom board of directors sets standards and management accountability for assets and liabilities is maintained. implements systems of internal control. The controls are designed to provide cost-effective assurance that assets are safeguarded, and In the opinion of the directors, based on the information available to that liabilities and working capital are efficiently managed. Policies, date, the financial statements fairly present the financial position of procedures, structures and approval frameworks provide direction, Eskom and the group at 31 March 2010 and the results of its accountability and division of responsibilities, and contain self- operations and cash flows for the year. monitoring mechanisms. The controls throughout Eskom focus on those critical risk areas identified by operational risk management The financial statements of Eskom and the group for the year ended and confirmed by executive management. Both management and the 31 March 2010 have been approved by the board of directors and internal audit department closely monitor the controls, and actions signed on its behalf on 10 June 2010 by taken to correct deficiencies as they are identified. The financial statements are the responsibility of the directors. The external auditors are responsible for independently auditing the financial statements in accordance with International Standards of Auditing and the Public Audit Act. MP Makwana PS O’Flaherty Nothing significant has come to the attention of the directors to Acting chairman Finance director indicate that any material breakdown has occurred in the functioning 10 June 2010 10 June 2010 of these controls, procedures and systems during the year under review. The financial statements of Eskom and the group have been prepared in terms of International Financial Reporting Standards, the Companies Act of South Africa, 61 of 1973, as amended and the Public Finance Management Act, 1 of 1999. These financial statements are based on appropriate accounting policies, supported by reasonable and prudent judgements and estimates and are prepared on the going-concern basis. Refer to the directors’ report on page 177 for further information. Eskom Holdings Limited 175 Integrated Repor t 2010 Report of the audit committee Report of the audit committee in terms of the preparing the financial statements, and accountability for assets and Public Finance Management Act, 1 of 1999 liabilities is maintained. The audit committee reports that it has adopted appropriate formal Nothing significant has come to the attention of the audit committee terms of reference as its audit committee charter, has regulated its to indicate that any material breakdown in the functioning of these affairs in compliance with this charter, and has discharged all of its controls, procedures and systems has occurred during the year under responsibilities contained therein. review. In the conduct of its duties, the audit committee has, inter alia, Having considered the matters set out in section 270A(5) of the reviewed the following: Companies Act of South Africa as amended by the Corporate Laws • the effectiveness of the internal control systems Amendment Act, the audit committee is satisfied with the • the risk areas of the entity’s operations covered in the scope of independence and objectivity of the external auditors. internal and external audits • the adequacy, reliability and accuracy of financial information The audit committee has evaluated the financial statements of Eskom provided by management Holdings Limited and the group for the year ended 31 March 2010 • accounting and auditing concerns identified as a result of internal and, based on the information provided to the audit committee, and external audits considers that they comply, in all material respects, with the • the entity’s compliance with legal and regulatory provisions requirements of the Companies Act of South Africa, 61 of 1973, as • the effectiveness of the assurance and forensic department amended, the Public Finance Management Act, 1 of 1999, as amended, • the activities of the assurance and forensic department, including and International Financial Reporting Standards. The audit committee its annual work programme, co-ordination with the external concurs with the adoption of the going-concern premise in the auditors, the reports of significant investigations and the responses preparation of the financial statements. The audit committee has of management to specific recommendations therefore, at their meeting held on 3 June 2010, recommended the • preparation of the annual financial statements on the going- adoption of the financial statements by the board of directors. concern basis and related cash flow projections • the independence of and objectivity of the external auditors The audit committee is of the opinion, based on the information and explanations given by management and the assurance and forensic department and discussions with the independent external auditors JRD Modise on the result of their audits, that the internal accounting controls are Chairman adequate to ensure that the financial records may be relied upon for 10 June 2010 Statement by company secretary In terms of section 268G(d) of the Companies Act, 61 of 1973, as amended, I certify that the company has lodged with the Registrar of Companies all such returns as are required of a public company in terms of the Act, and that all such returns are true, correct and up to date. B Mbomvu Company secretary 10 June 2010 176 Eskom Holdings Limited Integrated Repor t 2010 Independent auditors’ report to the shareholder – Minister of Public Enterprises Report on the annual financial statements Report on other legal and regulatory We have audited the group annual financial statements and annual requirements financial statements of Eskom Holdings Limited (Eskom) which In terms of the Public Audit Act of South Africa and General Notice comprise the directors’ report, the consolidated and separate 1570 of 2009, issued in Government Gazette No 32758 of statements of financial position at 31 March 2010, the consolidated 27 November 2009, we include below our findings on the report on and separate income statements and statements of comprehensive performance against predetermined objectives, compliance with laws income, statement of changes in equity and cash flows for the year and regulations and internal control. then ended, and the notes to the financial statements which contain a summary of significant accounting policies and other explanatory Report on performance against predetermined objectives notes as set out on pages 177 to 285. We are required by the Auditor-General to undertake a limited assurance engagement on the performance against the shareholder Directors’ responsibility for the annual financial statements compact as set out on pages 34 and 35 of the Integrated report, in The company’s directors, who constitute the accounting authority for which the actual performance of the company for the year ended Eskom Holdings Limited, are responsible for the preparation and fair 31 March 2010 is compared with target key performance indicators presentation of these financial statements in accordance with (predetermined objectives) and report thereon to those charged International Financial Reporting Standards, and in the manner with governance. In this report we are required to report our findings required by the Public Finance Management Act and the coming from our engagement relating to non-compliance with Companies Act of South Africa. This responsibility includes: designing, regulatory requirements, where the reported information was implementing and maintaining internal control relevant to the inadequately presented or not received timeously, and where we preparation and fair presentation of financial statements that are free have evaluated reported information to be useful or reliable. We from material misstatement, whether due to fraud or error; selecting report that we have no significant findings. and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Compliance with laws and regulations Our audit of the annual financial statements, described in our report Auditors’ responsibility concerning the annual financial statements on the financial statements, did not reveal any material non- Our responsibility is to express an opinion on these financial compliance with applicable laws and regulations relating to financial statements based on our audit.We conducted our audit in accordance matters, financial management and related matters as required by the with International Standards on Auditing. Those standards require Public Finance Management Act of South Africa (which includes the that we comply with ethical requirements and plan and perform the relevant National Treasury Regulations) and the Companies Act of audit to obtain reasonable assurance whether the financial statements South Africa. are free from material misstatement. Internal control An audit involves performing procedures to obtain audit evidence We considered internal control relevant to our audit of the financial about the amounts and disclosures in the financial statements. The statements, and the report on performance against predetermined procedures selected depend on the auditor’s judgement, including objectives and compliance with laws and regulations, but not for the the assessment of the risks of material misstatement of the financial purpose of expressing an opinion on the effectiveness of internal statements, whether due to fraud or error. In making those risk control. The matters reported in this report are limited to the assessments, the auditor considers internal control relevant to the deficiencies identified during our audit. Our opinion on the financial entity’s preparation and fair presentation of the financial statements statements, as expressed in our report on the financial statements, in order to design audit procedures that are appropriate in the is unmodified. circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes KPMG Inc SizweNtsaluba vsp evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Director: AH Jaffer Director: SY Lockhat Registered auditor Registered auditor Opinion In our opinion, the financial statements present fairly, in all material 10 June 2010 10 June 2010 respects, the consolidated and separate financial position of Eskom Holdings Limited at 31 March 2010 and its consolidated and 85 Empire Road 20A Morris Street East separate statements of financial performance and consolidated and Parktown Woodmead separate cash flows for the year then ended in accordance with 2193 2191 International Financial Reporting Standards, and in the manner required by the Public Finance Management Act of South Africa and the Companies Act of South Africa. Eskom Holdings Limited 177 Integrated Repor t 2010 Directors’ report The directors are pleased to present their report for the year ended Capital expenditure including borrowing cost capitalised is disclosed 31 March 2010. in notes 6 and 7 to the annual financial statements. An amount of R57 003 million (2009: R47 099 million) was spent during the year. Principal activities, state of affairs and business The future funding of the capital expansion programme is discussed review in the Finance division section on page 44. The principal activities of the Eskom group are described on For more detailed information on the performance for the year, the inside front cover in the Profile section. refer to the annual financial statements on pages 173 to 285 and Sustainability reporting in Eskom on pages 11 to 171. State of affairs and business overview The operating profit for the year for the Eskom group, before fair Share capital and shareholder value gains and losses and net finance costs, was R10 193 million The Government of the Republic of South Africa is the sole (2009: loss of R333 million) and for the company a profit of shareholder of Eskom Holdings Limited. The shareholder’s R8 351 million (2009: loss of R2 636 million). representative is the Minister of Public Enterprises. The profit for the year for the Eskom group was R3 620 million Dividends (2009: loss of R9 668 million) after taking into account the net fair No dividend was declared during the current and prior year, after value profit on embedded derivatives of R2 284 million (2009: loss of taking into account the resource impact of the future build R9 514 million). programme, the current capital structure, and the dividend policy. The profit for the year for the company was R3 187 million Going concern (2009: loss of R10 137 million) after taking into account the net fair The funding gap over the next seven years based on the plan value profit on embedded derivatives of R2 283 million (2009: loss formulated by Eskom after the multi-year price determination tariff of R9 506 million). ruling and as communicated in the public domain during April and May 2010, indicated that Eskom is facing cumulative cash Eskom applied for a 34% price increase for the 2009/10 period and shortfalls of R115 billion by 2013 and R190 billion by 2017 (the year received a 31,3% increase. For the period 2010/11 to 2012/13 in which the Kusile power station is fully commissioned). Eskom submitted a proposed price increase application of 45% on 30 September 2009, followed by a revised application of 35% on These amounts, however, include capital expenditure of R144 billion 30 November 2009. Nersa held public hearings on the application in relating to capacity expansion projects beyond Kusile which have as all nine provinces during January 2010, for the first time ever. yet not been approved by either the board or by the Department On 24 February 2010 Nersa awarded Eskom a price determination of Energy’s (DoE) Integrated Resource Plan (IRP2) process. of 24,8% (2010/11), 25,8% (2011/12) and 25,9% (2012/13). Further information in this regard is set out on page 90 in the Regulatory and With regard to capacity expansion projects beyond Kusile, Eskom’s Legal Framework section. position is that once this IRP2 has been published by DoE later this year, indicating the new capacity requirements, they will need to be The forward electricity price curve used to value embedded pre-funded at inception to avoid a repeat of Eskom’s current financial derivatives at 31 March 2010 was the applicable tariff determined by position. Nersa as referred to above.The curve assumes two additional annual increases of 25% and CPI thereafter. A sensitivity analysis for the As a result, during the early part of calendar year 2010, Eskom embedded derivatives appears in note 4 to the annual financial secured a mandate from its shareholder to formally pursue a much statements on page 224. broader range of potential financing solutions, and it has engaged advisors to evaluate these as well as specific funding opportunities The special pricing agreements link the price of electricity to around the Kusile power station that is currently under construction commodity prices which resulted in embedded derivatives in our in eMalahleni in Mpumalanga. financial statements. The large changes in commodity prices and other variables used to fair value them resulted in volatility in our This support from government is in addition to the R60 billion loan results. It therefore became a priority to renegotiate these contracts committed during the previous financial year (R40 billion received to to eliminate the embedded derivatives. By year end the contract with date) and the R176 billion government guarantee (R117 billion used Mozal had been successfully renegotiated, while the others were at to date) provided to enable Eskom to raise debt. an advanced stage in the negotiation, which we estimate will be concluded by the end of the 2011 financial year. These negotiations The World Bank has approved Eskom’s request for a R28 billion loan had a significant impact in reducing the carrying value of the net to co-finance the Medupi power plant in Lephalale, Limpopo embedded derivative exposure. province. These funds combine favourable financing rates with a structured repayment profile. This approval clears the way for the Eskom succeeded in removing the link of its power price to the full construction of Medupi power station and is catalytic for market price of aluminium. Eskom now sells electricity to Mozal at a South Africa’s commitment to renewable energy and lower carbon rand price and have taken off any derivatives. technologies such as large-scale solar thermal and wind power. 178 Eskom Holdings Limited Integrated Repor t 2010 Directors’ report The above initiatives are expected to result in cash stability over the Interests of directors and officers next seven years (excluding the R144 billion estimated in the period Details of directors’ and officers’ interests in the Eskom incentive for capacity expansion beyond Kusile). scheme is disclosed in note 45 to the annual financial statements. Refer to page 293 for Eskom’s ethics policies and their application Even though this funding plan requires final government approval and regarding interests in contracts. implementation, the Eskom board believes that Eskom is a going concern over the next 18 months as its expected working capital Research and development activities resources, by way of cash generated from operations and existing Research is driven by the sustainability and innovation business unit. cash on hand, together with current undrawn secured facilities are It focuses predominantly on applied, rather than pure research, and sufficient to meet Eskom’s present working capital and capital outputs are linked to the strategic and operational needs of Eskom. expenditure needs during that period. In order to remain relevant, a portion of research resources are allocated to technology innovation and emerging technology options. Directors Our research expenditure for the year amounted to R197 million Currently the board consists of nine non-executive directors, (2009: R207 million). Research and development activities are the acting chairman and the finance director. Mr RM Godsell discussed in greater detail within the research blocks within the resigned as chairman on 9 November 2009 and Mr PJ Maroga Corporate Services section on pages 51 to 163 and in other resigned as chief executive on 28 October 2009. Mr PM Makwana divisional reports. was appointed as acting chairman with executive powers on 12 November 2009. Mr PS O’Flaherty was appointed as finance Employee information director from 1 January 2010. Mr AJ Morgan resigned on 31March The Eskom group had a staff complement of 39 222 men and 2010. women at the end of the financial year. Training has always been a major focus area and this past year R758 million (2009: The board of directors and their details are discussed on page 26 and R823 million) was spent on training and developing our staff. on page 288 in the Corporate governance report. The staff turnover during the year was a low 3,5%, but with the build programme underway, we face a number of skills-related Remuneration of directors and members of Exco challenges. The management of human resources is discussed The remuneration of the directors and the executives who were in the Human Resources section on page 76. members of Exco during the financial year, is disclosed in note 45 to the annual financial statements, on page 280. Safety Safety remains a major area of concern for Eskom as we have to Company secretary report the death of two employees and 14 contract workers in The details of the company secretary and her declaration in terms of the past year. Sadly 41 members of the public died in 2010, with section 268G(d) of the Companies Act are disclosed in her statement vehicle accidents and electrical contacts remaining the major on page 175. causes. Much work and effort continues to be put into safety awareness. Auditors The statutory auditors for the forthcoming financial year will be Environmental issues appointed at the annual general meeting scheduled for 28 June 2010. While we are responding to the demand of electricity by building new capacity, ensuring financial stability and driving energy efficiency, Eskom’s policy is, where possible, not to use the external auditors for we understand that the long-term nature of our business has an non-audit services. In cases where the external auditors are to be impact on environmental sustainability into the future. We therefore used for non-audit services, the prior approval of the board’s audit continue to strive for a balance between the different legs of committee must be obtained. sustainability. Bearing this in mind, our long-term planning processes take into account a lower carbon future for South Africa. Eskom’s Internal control response to climate change and limiting the impact on the An effective internal control framework is the responsibility of the environment is discussed on page 52 in the Corporate Services board. The control framework provides cost-effective assurance that section and divisional reports. the assets of the organisation are safe guarded and that the liabilities and working capital are efficiently managed. Corporate social investment Eskom is committed to good corporate citizenship through its These controls are monitored and evaluated through the audit corporate social investment (CSI) initiatives. Eskom does not consider committee. Refer to the Governance section on page 293 and the donations and grants to political party activities, trade union activities statement of responsibilities and approval on page 174 for further and religious organisations unless it is a non-profit organisation and detail on internal control and integrated risk management. has an outreach programme that directly benefits the community, for example, Aids hospice. Refer also to page 68 in the Corporate Subsidiaries, associated and joint venture companies Services section. The investment of Eskom in subsidiaries, associate and joint venture companies is disclosed in notes 8 and 9 in the annual financial statements. Refer also to the organisational structure on page 6. Eskom Holdings Limited 179 Integrated Repor t 2010 Information required by the Public Finance Fraud Management Act During the financial year investigations into incidents of fraud suffered by the group, amounting to R13,4 million (2009: Performance in terms of the shareholder compact R3,1 million), were finalised. Of this amount, R7,3 million (2009: Rnil) The performance of Eskom against the shareholder compact key was recovered. The existing internal control measures in the performance indicators is shown in the table on page 34 in the affected areas as well as similar areas have been reviewed and Profile section. enhanced. Disciplinary, criminal as well as civil proceedings have been instituted against those involved. Reasons for not meeting the targets on the shareholder compact: • Internal energy efficiency Promotion of Access to Information Act Metering and monitoring is still outstanding at some key facilities, hence not all potential savings are as yet being reported. Metered Refer to www.eskom.co.za/annreport10/016.html for information is also required for the development of the Eskom statistics relating to requests received during the year in terms baseline. The targeted savings (percentage savings) will be of the Promotion of Access to Information Act. determined once the Eskom baseline is completed • Generation and transmission capital expenditure Management of energy losses Energy losses reflect the difference between the quantity of energy As a result of funding constraints, the capital expenditure was sent out from the power stations and the quantity sold to the various delayed on a number of projects, which would otherwise have customers at the end of the value chain. Losses are categorised as been on target technical or non-technical in nature. Refer to page 160 for more details regarding energy losses. • Additional number of non-Eskom learners on Eskom-sponsored learning The definition of non-Eskom learners only included the The energy losses are as follows: Dr Straszacker and Van der Bijl Eskom-sponsored scholarships. 2010 2009 2008 The University of Technology merit bursars also sponsored by Energy losses Target Actual Actual Actual Eskom, were unintentionally omitted from the definition, but % % % % included in the target. Hence the number reported being below target Total distribution loss ≤6,00 5,87 5,46 5,47 Total transmission loss ≤3,30 3,25 3,08 3,13 Losses through criminal conduct and irregular or fruitless and wasteful expenditure Total Eskom loss ≤8,76 8,45 7,94 8,00 In terms of the materiality framework agreed with the shareholder, any losses due to criminal conduct or irregular or fruitless and wasteful expenditure, that individually (or collectively where items are closely related) exceed R10 million must be reported. Irregular or fruitless and wasteful expenditure During the year the company underpaid value-added tax to the South African Revenue Service as a result of compilation errors. Due to the late payment, an additional amount of R47 million was paid as interest and penalties. Certain internal control enhancements relating to the preparation of returns have since been implemented. Disciplinary action was instituted, which resulted in a dismissal. Losses due to criminal conduct Conductor theft Losses due to conductor theft (including copper, cable, trans- formers and tower-related structures) totalled R45,6 million (2009: R38 million), and involved 2 580 incidents (2009: 2 343 incidents). Actions to combat conductor theft are managed by the Eskom Conductor Theft Committee in collaboration with other affected state-owned enterprises and the South African Police Services. The combined effort resulted in 367 arrests (2009: 480 arrests). R6,3 million worth of stolen material was recovered (2009: R4,7 million). 180 Eskom Holdings Limited Integrated Repor t 2010 Statements of financial position at 31 March 2010 Group Company 2010 2009 2010 2009 Note Rm Rm Rm Rm Assets Non-current assets 203 162 154 160 199 723 155 528 Property, plant and equipment 6 187 905 138 642 187 008 138 328 Intangible assets 7 1 305 851 1 177 740 Investment in equity-accounted investees 8 196 182 95 95 Investment in subsidiaries 9 – – 2 341 2 341 Future fuel supplies 11 3 768 3 510 3 768 3 510 Deferred tax assets 12 79 56 – – Investment in securities 13 2 392 3 558 1 923 3 153 Loans receivable 13 4 110 – – – Embedded derivative assets 13, 14 – 1 135 – 1 135 Derivatives held for risk management 13, 15 – 586 – 586 Finance lease receivables 13, 16 532 536 532 536 Trade and other receivables 13, 17 19 23 23 23 Payments made in advance 21 2 856 5 081 2 856 5 081 Current assets 42 953 41 106 41 622 39 092 Financial instruments with group companies 13, 10 – – 2 461 1 279 Inventories 18 7 378 6 581 7 287 6 438 Taxation 88 89 – – Payments made in advance 21 1 413 1 086 1 384 1 006 Investment in securities 13 2 797 4 360 1 584 3 320 Loans receivable 13 6 – – – Embedded derivative assets 13, 14 110 231 110 231 Derivatives held for risk management 13, 15 112 1 251 112 1 251 Finance lease receivables 13, 16 13 11 13 11 Trade and other receivables 13, 17 9 391 8 191 8 247 7 073 Financial trading assets 13 6 104 924 5 553 562 Cash and cash equivalents 13 15 541 18 382 14 871 17 921 Non-current assets held-for-sale 22 20 4 036 – – Total assets 246 135 199 302 241 345 194 620 Equity Capital and reserves attributable to owner of the company 70 222 59 349 67 119 56 701 Non-controlling interest – 229 – – Total equity 70 222 59 578 67 119 56 701 Liabilities Non-current liabilities 132 700 95 349 130 544 94 456 Debt securities issued 13 59 322 44 253 58 538 44 253 Borrowings 13 34 628 12 796 34 153 12 369 Embedded derivative liabilities 13, 14 4 583 8 219 4 583 8 219 Derivatives held for risk management 13, 15 3 626 786 3 626 786 Deferred tax liabilities 12 5 262 6 098 4 834 5 871 Deferred income 23 7 036 5 536 7 036 5 536 Retirement benefit obligations 24 6 988 6 061 6 823 5 919 Provisions 25 8 494 8 883 8 194 8 731 Finance lease liabilities 13, 26 632 537 965 761 Trade and other payables 13, 27 1 134 1 466 797 1 297 Payments received in advance 28 995 714 995 714 Current liabilities 43 213 42 362 43 682 43 463 Financial instruments with group companies 13, 10 – – 1 897 1 853 Debt securities issued 13 2 880 3 324 2 141 3 324 Borrowings 13 9 143 13 811 9 094 13 809 Embedded derivative liabilities 13, 14 139 43 138 41 Derivatives held for risk management 13, 15 4 644 2 626 4 644 2 626 Deferred income 23 342 494 342 494 Retirement benefit obligations 24 210 184 210 184 Provisions 25 2 010 1 498 1 447 1 246 Finance lease liabilities 13, 26 52 15 74 45 Trade and other payables 13, 27 16 331 16 701 16 370 16 248 Payments received in advance 28 1 883 1 471 1 802 1 403 Taxation 66 15 10 10 Financial trading liabilities 13 5 513 2 180 5 513 2 180 Non-current liabilities held-for-sale 22 – 2 013 – – Total liabilities 175 913 139 724 174 226 137 919 Total equity and liabilities 246 135 199 302 241 345 194 620 Eskom Holdings Limited 181 Integrated Repor t 2010 Income statements for the year ended 31 March 2010 Group Company Restated 1 Restated1 2010 2009 2010 2009 Note Rm Rm Rm Rm Continuing operations Revenue 29 71 209 54 177 70 064 53 090 Primary energy2 (29 100) (24 884) (29 100) (24 884) Employee benefit expense 32 (17 390) (15 135) (15 984) (14 102) Depreciation and amortisation expense 33 (5 726) (4 918) (5 953) (4 745) Net impairment loss 34 (652) (989) (654) (1 011) Other operating expenses 35 (8 148) (8 584) (10 022) (10 984) Operating profit/(loss) before net fair value loss and net finance cost 10 193 (333) 8 351 (2 636) Other income 30 557 610 1 589 1 422 Net fair value loss on financial instruments, excluding embedded derivatives 31 (5 945) (2 392) (6 097) (2 303) Net fair value profit/(loss) on embedded derivatives 2 284 (9 514) 2 283 (9 506) Operating profit/(loss) before net finance cost 7 089 (11 629) 6 126 (13 023) Net finance cost (1 237) (1 167) (1 303) (1 275) Finance income 36 1 614 3 152 1 577 3 104 Finance cost 37 (2 851) (4 319) (2 880) (4 379) Share of profit of equity-accounted investees, net of tax 8 14 37 – – Profit/(loss) before tax 5 866 (12 759) 4 823 (14 298) Income tax 38 (2 080) 3 786 (1 636) 4 161 Profit/(loss) for the year from continuing operations 3 786 (8 973) 3 187 (10 137) Discontinued operations Loss for the year from discontinued operations 22 (166) (695) – – Profit/(loss) for the year 3 620 (9 668) 3 187 (10 137) Attributable to: Owner of the company 3 642 (9 705) 3 187 (10 137) Non-controlling interest (22) 37 – – 3 620 (9 668) 3 187 (10 137) Statements of comprehensive income for the year ended 31 March 2010 Group Company Restated 1 Restated1 2010 2009 2010 2009 Note Rm Rm Rm Rm Profit/(loss) for the year 3 620 (9 668) 3 187 (10 137) Other comprehensive loss (6 155) (313) (6 162) (327) Available-for-sale financial assets – net change in fair value (25) 33 (17) 17 Cash flow hedges Effective portion of changes in fair value (8 450) (411) (8 450) (411)    Changes in fair value (8 604) (816) (8 604) (816)   Ineffective portion of changes in fair value reclassified to profit or loss 154 405 154 405  Net amount transferred to initial carrying amount of hedged items (51) (66) (51) (66) Foreign currency translation differences for foreign operations 13 2 – – Net actuarial loss on post-retirement medical aid benefits 24 (317) (55) (317) (55) Income tax on other comprehensive loss 38 2 675 184 2 673 188 Total comprehensive loss for the year (2 535) (9 981) (2 975) (10 464) Attributable to: Owner of the company (2 513) (10 018) (2 975) (10 464) Non-controlling interest (22) 37 – – (2 535) (9 981) (2 975) (10 464) 1. Refer note 44. 2. Primary energy relates to the acquisition of coal, uranium, water, gas and diesel that are used in the generation of electricity. 182 Eskom Holdings Limited Integrated Repor t 2010 Statements of changes in equity for the year ended 31 March 2010 Attributable to owner of the company Share Equity Cash Avail- Un- Insur- Foreign Accu- Total Non- Total capital1 reserve2 flow able- realised ance currency mulated con- equity hedge for-sale fair value reserve6 trans- profit8 trolling reserve3reserve4 reserve5 lation interest reserve7 Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm Group Balance at 31 March 2008 – – 5 471 (137) (485) 86 (2) 55 990 60 923 206 61 129 Loss for the year – – – – – – – (9 705) (9 705) 37 (9 668) Other comprehensive (loss)/income, net of tax – – (299) 24 – – 14 (52) (313) – (313) Available-for-sale financial assets  Net change in fair value – – – 24 – – – – 24 – 24 Cash flow hedges  Effective portion of changes in fair value – – (251) – – – – – (251) – (251)  Net amount transferred to initial carrying amount of hedged items – – (48) – – – – – (48) – (48) Foreign currency translation differences on foreign operations – – – – – – 14 (12) 2 – 2 Net actuarial loss on post- retirement medical aid benefits – – – – – – – (40) (40) – (40) Subordinated loan from shareholder – 8 444 – – – – – – 8 444 – 8 444 Other movements on non-controlling interest – – – – – – – – – (14) (14) Transfer between reserves – – – – (1 164) 36 – 1 128 – – – Balance at 31 March 2009 – 8 444 5 172 (113) (1 649) 122 12 47 361 59 349 229 59 578 Profit for the year – – – – – – – 3 642 3 642 (22) 3 620 Other comprehensive (loss)/income, net of tax – – (5 922) (18) – – 13 (228) (6 155) – (6 155) Available-for-sale financial assets  Net change in fair value – – – (18) – – – – (18) – (18) Cash flow hedges  Effective portion of changes in fair value – – (5 885) – – – – – (5 885) – (5 885)  Net amount transferred to initial carrying amount of hedged items – – (37) – – – – – (37) – (37) Foreign currency translation differences on foreign operations – – – – – – 13 – 13 – 13 Net actuarial loss on post- retirement medical aid benefits – – – – – – – (228) (228) – (228) Subordinated loan from shareholder – 13 393 – – – – – – 13 393 – 13 393 Sale of investment in subsidiary – – – (22) 15 – – – (7) (207) (214) Transfer between reserves – – – – 550 (67) – (483) – – – Balance at 31 March 2010 – 21 837 (750) (153) (1 084) 55 25 50 292 70 222 – 70 222 Eskom Holdings Limited 183 Integrated Repor t 2010 Attributable to owner of the company Share Equity Cash Avail- Un- Accu- Total capital1 reserve2 flow able- realised mulated hedge for-sale fair value profit8 reserve3 reserve4 reserve5 Rm Rm Rm Rm Rm Rm Rm Company Balance at 31 March 2008 – – 5 473 (159) (497) 53 904 58 721 Loss for the year – – – – – (10 137) (10 137) Other comprehensive (loss)/income, net of tax – – (299) 12 – (40) (327) Available-for-sale financial assets  Net change in fair value – – – 12 – – 12 Cash flow hedges Effective portion of changes in fair value – – (251) – – – (251)  Net amount transferred to initial carrying amount of hedged items – – (48) – – – (48) Net actuarial loss on post-retirement medical aid benefits – – – – – (40) (40) Subordinated loan from shareholder – 8 444 – – – – 8 444 Transfer between reserves – – – – (1 136) 1 136 – Balance at 31 March 2009 – 8 444 5 174 (147) (1 633) 44 863 56 701 Profit for the year – – – – – 3 187 3 187 Other comprehensive loss, net of tax – – (5 922) (12) – (228) (6 162) Available-for-sale financial assets Net change in fair value – – – (12) – – (12) Cash flow hedges  Effective portion of changes in fair value – – (5 885) – – – (5 885)  Net amount transferred to initial carrying amount of hedged items – – (37) – – – (37) Net actuarial loss on post-retirement medical aid benefits – – – – – (228) (228) Subordinated loan from shareholder – 13 393 – – – – 13 393 Transfer between reserves – – – – 550 (550) – Balance at 31 March 2010 – 21 837 (748) (159) (1 083) 47 272 67 119 Dividends proposed No dividend has been proposed in the current or prior year. 1. Nominal amount. 2. The equity reserve comprises the day-one gain on initial recognition of the subordinated loan from the shareholder (refer note 13.5). 3. The cash flow hedge reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments (comprising forward exchange contracts, interest rate swaps and cross-currency swaps) related to hedged transactions that have not yet occurred. The cross-currency swap hedges foreign exchange rate risk of the future interest payments and the principal repayment on a euro-denominated loan. 4. The available-for-sale reserve comprises the cumulative net change in the fair value of available-for-sale financial assets until the investments are derecognised. 5. The cumulative net change in the fair value of derivatives that have not been designated as cash flow hedging instruments is recognised in profit or loss. The unrealised portion of the net change in fair value is not distributable and has been reallocated from a distributable reserve (accumulated profit) to a non-distributable reserve. 6. The insurance reserve is a contingency reserve created in terms of the Short-term Insurance Act, 1998. 7. The foreign currency translation reserve comprises exchange differences resulting from the translation of the results and financial position of foreign operations. 8. Accumulated profit is the amount of cumulative profit retained in the business after tax. 184 Eskom Holdings Limited Integrated Repor t 2010 Statements of cash flows for the year ended 31 March 2010 Group Company Restated 1 Restated1 2010 2009 2010 2009 Note Rm Rm Rm Rm Cash flows from operating activities Cash generated from operations 39 18 416 5 155 17 604 5 406 Net cash flows from financial trading assets (4 908) 1 616 (4 871) 1 635 Net cash flows from financial trading liabilities 3 040 (2 330) 3 040 (2 330) Net cash flows from current derivatives held for risk management (4 726) 7 607 (4 726) 7 607 Net cash flows from non-current assets held-for-sale 34 – – – Income taxes (paid)/refunded (210) (284) – 60 Net cash from operating activities 11 646 11 764 11 047 12 378 Cash flows from investing activities Proceeds from disposal of property, plant and equipment 118 124 92 101 Proceeds from disposal of intangible assets 23 – – – Proceeds from disposal of investments in equity-accounted investees – 101 – – Acquisitions of property, plant and equipment (47 466) (43 151) (46 946) (43 126) Acquisitions of intangible assets (698) (481) (644) (422) Expenditure on future fuel supplies (1 168) (1 523) (1 168) (1 523) Increase in deferred income 1 737 1 173 1 737 1 173 Proceeds from disposal of investments in subsidiary companies – 17 – – Decrease in non-current trade and other receivables 163 157 – (14) Increase in non-current loans receivable (1 343) – – – Decrease/(increase) in finance lease receivables 2 (122) 2 (122) Non-current assets and liabilities held-for-sale (224) (84) – – Proceeds from disposal of non-current assets held-for-sale 76 – – – Dividends received – non-current assets held-for-sale 166 – – – Dividends received – other 12 52 166 30 (Decrease)/increase in non-current trade and other payables (332) 792 (500) 621 Net cash used in investing activities (48 934) (42 945) (47 261) (43 282) Cash flows from financing activities Debt raised 60 107 53 959 60 107 53 790 Debt securities issued 16 286 10 205 16 286 10 205 Subordinated loan from shareholder2 30 000 10 000 30 000 10 000 Borrowings 13 821 33 754 13 821 33 585 Debt repaid (20 351) (23 492) (20 576) (23 492) Debt securities issued (2 263) (5 085) (2 393) (5 085) Borrowings (18 088) (18 407) (18 183) (18 407) Net cash flows from financial instruments with group companies – – (1 147) (206) Net cash flows from non-current assets held-for-sale 24 – – – Decrease in investment in securities 2 806 7 366 3 051 7 768 Increase/(decrease) in finance lease liabilities 40 (27) (50) (22) Net cash flows from non-current derivatives held for risk management (4 179) 1 817 (4 179) 1 817 Interest received 1 512 3 117 1 465 3 074 Interest paid (5 577) (3 869) (5 507) (4 226) Net cash from financing activities 34 382 38 871 33 164 38 503 Net (decrease)/increase in cash and cash equivalents (2 906) 7 690 (3 050) 7 599 Cash and cash equivalents at beginning of the year 18 382 10 893 17 921 10 322 Cash and cash equivalents at beginning of the year transferred from/(to) non-current assets held-for-sale 65 (201) – – Cash and cash equivalents at end of the year 13.1 15 541 18 382 14 871 17 921 Eskom Holdings Limited 185 Integrated Repor t 2010 Group Company Restated 1 Restated1 2010 2009 2010 2009 Note Rm Rm Rm Rm Reconciliation of net cash flow to movement in net debt Net increase in debt securities issued 14 023 5 120 13 893 5 120 Net increase in borrowings 25 733 25 347 25 638 25 178 Net cash flows from financial instruments with group companies – – (1 147) (206) Decrease in investment in securities 2 806 7 366 3 051 7 768 Increase/(decrease) in finance lease liabilities 40 (27) (50) (22) Net cash flows from derivatives held for risk management (8 905) 9 424 (8 905) 9 424 Net debt raised 33 697 47 230 32 480 47 262 Portion on subordinated loan from shareholder allocated to equity (13 393) (8 444) (13 393) (8 444) Non-cash flow movements 20 929 3 647 19 728 3 730 Cash and cash equivalents at beginning of the year transferred (from)/to non-current assets held-for-sale (65) 201 – – Net increase/(decrease) in cash and cash equivalents for the year 2 906 (7 690) 3 050 (7 599) Movement in net debt for the year 44 074 34 944 41 865 34 949 Net debt at beginning of the year 50 011 15 067 52 316 17 367 Net debt at end of the year 94 085 50 011 94 181 52 316 Analysis of net debt Debt securities issued 13 62 202 47 577 60 679 47 577 Borrowings 13 43 771 26 607 43 247 26 178 Finance lease liabilities 13, 26 684 552 1 039 806 Financial instruments with group companies 13, 10 – – (564) 574 Derivatives held for risk management 13, 15 8 158 1 575 8 158 1 575 114 815 76 311 112 559 76 710 Cash and cash equivalents 13 (15 541) (18 382) (14 871) (17 921) Investment in securities 13 (5 189) (7 918) (3 507) (6 473) Net debt at end of the year 94 085 50 011 94 181 52 316 1. Refer note 44. 2. Includes R23 445 million (2009: R1 575 million) which is included in borrowings (refer note 13.5). The remainder of the balance is recognised in equity. 186 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements for the year ended 31 March 2010 1. General information Functional and presentation currency Eskom Holdings Limited (Eskom), a public company and Items included in the financial statements of each of the holding company of the group, is incorporated and group’s entities are measured using the currency of the domiciled in the Republic of South Africa. Eskom is a primary economic environment in which the entity operates vertically integrated operation that generates, transmits and (functional currency). The consolidated financial statements distributes electricity to industrial, mining, commercial, are presented in rand (rounded to the nearest million unless agricultural, redistributors, and residential customers and to otherwise stated), which is the company’s functional and international customers in southern Africa. The nature of presentation currency. the businesses of the significant operating subsidiaries is set out in note 9. Changes in accounting policies and comparability The group has adopted certain new standards, amendments 2. Summary of significant accounting policies and interpretations to existing standards which were The principal accounting policies applied in the preparation effective for the group for the financial year beginning on or of these separate and consolidated financial statements are after 1 April 2009. The effects of adopting these standards set out below. These policies have been consistently applied are discussed in note 44. to all years presented, unless otherwise stated. Standards, interpretations and amendments to published 2.1 Basis of preparation and measurement standards that are not yet effective Statement of compliance The following new standards, amendments and The consolidated financial statements of Eskom at and for interpretations to existing standards have been published the year ended 31 March 2010 comprise the company and that are applicable for future accounting periods but have its subsidiaries (together referred to as the group) and the not been adopted early by the group: group’s interest in associates and joint ventures. The separate and consolidated financial statements have been prepared in IAS 24 Related party disclosures accordance with International Financial Reporting Standards (effective 1 January 2011) (revised) (IFRS) and in the manner required by the Public Finance The revised IAS 24 provides a partial exemption for Management Act, I of 1999, and the Companies Act of government-related entities. The revised standard still South Africa, 61 of 1973, as amended. requires disclosures that are important to users of financial statements but eliminates requirements to disclose Basis of measurement information that is costly to gather and of less value to users. The separate and consolidated financial statements are It achieves this balance by requiring disclosure about these prepared on the historical basis except for the following transactions only if they are individually or collectively financial instruments which are measured at fair value: significant. The revised standard also amends the definition of a related party. The standard is applicable retrospectively. • embedded derivative assets and liabilities The group is still determining the impact of the revised • financial instruments classified under held-for-trading standard on the financial statements. • financial instruments classified under available-for-sale IAS 27 Consolidated and separate financial statements The preparation of financial statements in conformity with (effective 1 July 2009) (revised) IFRS requires management to make judgements, estimates In accordance with the amended IAS 27, acquisitions of and assumptions that affect the application of accounting additional non-controlling equity interests in subsidiaries policies and the reported amounts of assets, liabilities, have to be accounted for as equity transactions. Disposals of income and expenses. Actual results may differ from these equity interests while retaining control are also accounted estimates. The estimates and underlying assumptions are for as equity transactions. When control of an investee is reviewed on an ongoing basis. Revisions to accounting lost, the resulting gain or loss relating to the transaction will estimates are recognised in the period in which the estimates be recognised in profit or loss. are revised. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates It has always been the group’s accounting policy to treat all are significant to the consolidated financial statements, are acquisitions of additional interests in subsidiaries, as well as disclosed in note 4. disposals of interests in subsidiaries, as equity transactions. The Eskom Holdings Limited 187 Integrated Repor t 2010 group will, however, change its accounting policy relating to the Amendments to IFRS 7 Financial instruments: Disclosures which loss of control when an equity interest is retained. In future, require enhanced disclosures about fair value measurements when control is lost through sale or otherwise, the resulting and liquidity risk of financial instruments. The amendment gain or loss recognised in profit or loss will include any will not have an impact on the group’s financial statements. remeasurement to fair value of the retained equity interest. IFRS 2 Share-based payment (effective 1 January 2010) The amendments to IAS 27 also require that losses (amended) (including negative other comprehensive income as detailed in IFRS 2 provides that an entity receiving goods or services in the revised IAS 1) have to be allocated to the non-controlling a share-based payment transaction, that is settled by any interest even if doing so causes the non-controlling interest other entity in the group or any shareholder of such an to be in a deficit position. The group will in future change its entity in cash or other assets, is now required to recognise accounting policies on the allocation of losses to non- the goods or services received in its financial statements.This controlling interests. In the past, losses were allocated only amendment is not expected to have a significant impact on until the non-controlling interests had a zero balance. The the group’s financial statements. amendments to IAS 27 have resulted in consequential amendments being made to IAS 28 Investment in associates IFRS 3 Business combinations (effective 1 July 2009) and IAS 31 Interest in joint ventures. (revised) IFRS 3 applies to all new business combinations that occur IAS 32 Financial instruments: Presentation after 1 April 2010.The statement requires that all transaction (effective 1 February 2010) costs be expensed and the contingent purchase The amendment to IAS 32 in respect of the classification of consideration be recognised at fair value on acquisition date. rights issues states that rights issues offered pro rata to all of For successive share purchases, any gain or loss, on the an entity’s existing shareholders in the same class for a fixed difference between the fair value and the carrying amount amount of currency, should be classified as equity regardless of the previously held equity interest in the acquiree, will of the currency in which the exercise price is denominated. have to be recognised in profit or loss. For future business The amendment is not expected to have an impact on the combinations, the group will change its accounting policy to group’s financial statements. be in line with the revised IFRS 3. IAS 39 Financial instruments: Recognition and IFRS 5 Non-current assets held-for-sale and discontinued measurement (effective 1 July 2009) operations (effective 1 January 2010) IAS 39 provides additional guidance on the designation of a The amendment to IFRS 5 specifies the disclosures required hedged item. The amendment clarifies the designation of a in respect of non-current assets (or disposal groups) one-sided risk in a hedged item and inflation in a financial classified as held-for-sale or discontinued operations. hedged item. The group is still determining the impact of the Disclosures in other IFRS do not apply to such assets amendment on the financial statements. (or disposal groups) unless those IFRS require specific disclosures in respect of non-current assets (or disposal IAS 39 Financial instruments: Recognition and groups) classified as held-for-sale or discontinued operations; measurement and IFRIC 9: Reassessment of embedded or disclosures about measurement of assets and liabilities derivatives (effective 1 July 2009) within a disposal group that are not within the scope of the The amendments to IAS 39 and IFRIC 9 clarify that on measurement requirement of IFRS 5 and such disclosures reclassification of a financial asset out of the fair value through are not already provided in the other notes to the financial profit or loss category, all embedded derivatives have to be statements. assessed and, if necessary, separately accounted for in the financial statements. IFRS 9 Financial instruments (effective 1 January 2013) IFRS 9 addresses the initial measurement and classification of The amendments will not have an impact on the group’s financial assets and replaces the relevant sections of IAS 39 financial statements as the group does not intend to Financial instruments: Recognition and measurement. IFRS 9 reclassify any of its financial assets out of the fair value retains but simplifies the mixed measurement model and through profit or loss category. establishes two primary measurement categories for financial assets: amortised cost and fair value. The basis of IFRS 1 First-time adoption of International Financial classification depends on the entity’s business model and the Reporting Standards (effective 1 July 2010) contractual cash flow characteristics of the financial asset. The amendment to IFRS 1 relieves first-time adopters of The group is still determining the impact of the standard on IFRS from providing the additional disclosures included in the financial statements. 188 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 2. Summary of significant accounting policies ended 31 March 2010 and had an impact on the financial (continued) statements: 2.1 Basis of preparation and measurement (continued) • IFRIC 18 Transfers of assets from customers Standards, interpretations and amendments to published • IFRS 7 Financial instruments: Disclosures standards that are not yet effective (continued) • IFRS 8 Operating segments IFRIC 14 IAS 19 – The limit on a defined benefit asset, • IAS 1 Presentation of financial statements minimum funding requirements and their interaction (effective 1 January 2011) (amended) Various improvements to IFRS The amendment applies in the limited circumstances when A number of standards have been amended as part of the an entity is subject to minimum funding requirements and International Accounting Standards Board’s (IASB) annual makes an early payment of contributions to cover those improvement project. Management is in the process of requirements. The amendment permits such an entity to considering the relevant amendments to the standards and treat the benefit of such an early payment as an asset on the determining the financial implications and impact on the basis that the entity has a future economic benefit. The group. amendment is not expected to have an impact on the group’s financial statements. 2.2 Consolidation Investment in subsidiaries IFRIC 17 Distribution of non-cash assets to owners Subsidiaries are all entities (including special-purpose (effective 1 July 2009) entities) over which the group has the power to govern the IFRIC 17 provides guidance on when and how a liability for financial and operating policies to obtain benefits from the certain distributions of non-cash assets is recognised and activities of the entity. The existence and effect of potential measured, and how to account for settlement of that liability. voting rights that are currently exercisable or convertible are The interpretation is currently expected to have no impact considered when assessing whether the group controls on the financial statements. another entity. Subsidiaries are consolidated from the date on which control is transferred to the group. They are de- IFRIC 19 Extinguishing financial liabilities with equity consolidated from the date that control ceases. instruments (effective 1 July 2010) IFRIC 19 provides guidance on how to account for the Investments in subsidiaries are accounted for at cost less extinguishment of a financial liability by the issue of equity impairment losses in the separate financial statements of instruments. The interpretation clarifies the requirements of the company. IFRS when an entity renegotiates the terms of a financial liability with its creditor and the creditor agrees to accept Business combinations the entity’s shares or other equity instruments to settle the The purchase method of accounting is used to account for financial liability fully or partially. The interpretation is not the acquisition of subsidiaries by the group. The cost of an expected to have an impact on the group’s financial acquisition is measured as the fair value of the assets given, statements. equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to Standards, interpretations and amendments to published the acquisition. Identifiable assets acquired and liabilities and standards that are effective and applicable to the group contingent liabilities assumed in a business combination are The following standards, interpretations and amendments measured initially at their fair values at the acquisition date, were effective and applicable to the group for the year irrespective of the extent of any non-controlling interest. ended 31 March 2010, but had no impact on the financial The excess of the cost of acquisition over the fair value of statements: the group’s share of the identifiable net assets acquired is • IAS 23 Borrowing costs recorded as goodwill. If the cost of acquisition is less than • IAS 32 Financial instruments: Presentation the fair value of the net assets of the subsidiary acquired, the • IFRS 1 First-time adoption of International Financial Reporting difference is recognised directly in profit or loss. Standards and IAS 27 Consolidated and separate financial statements Inter-company transactions, balances and unrealised gains on • IFRS 2 Share-based payment transactions between group companies are eliminated. • IFRIC 13 Customer loyalty programmes Unrealised losses are also eliminated, but are considered an • IFRIC 15 Agreements for the construction of real estate impairment indicator of the asset transferred. Accounting • IFRIC 16 Hedges of a net investment in a foreign operation policies of subsidiaries have been changed where necessary, to ensure consistency with the policies adopted by the group. The following standards, interpretations and amendments were effective and applicable to the group for the year Eskom Holdings Limited 189 Integrated Repor t 2010 Transactions with non-controlling interests decision-maker. The chief operating decision-maker, who is The group applies a policy of accounting for transactions responsible for allocating resources and assessing with non-controlling interests as transactions with parties performance of the operating segments, has been identified external to the group. Disposals to non-controlling interests as the group executive committee (Exco). result in gains or losses for the group that are recorded in profit or loss. Purchases from non-controlling interests result An operating segment is a component of the group that in goodwill, being the difference between any consideration engages in business activities from which it may earn paid and the relevant share acquired of the carrying value of revenues and incur expenses, including revenues and net assets of the subsidiary. expenses that relate to transactions with any of the group’s other components. An operating segment’s results are Investment in equity-accounted investees reviewed regularly by Exco to make decisions about Associates are all entities over which the group has significant resources to be allocated to the segment and assess influence but no control over the financial and operating performance, and for which discrete financial information is policies, generally linked to a shareholding of between 20% available. and 50% of the voting rights. 2.4 Foreign currency translation Joint ventures are contractual arrangements whereby two Transactions and balances or more parties undertake an economic activity that is Foreign currency transactions are translated into the subject to joint control. functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains or Investments in associates and joint ventures are accounted losses resulting from the settlement of such transactions and for at cost less impairment losses in the separate financial from the translation at year end exchange rates of monetary statements of the company. These investments are assets and liabilities denominated in foreign currencies are accounted for using the equity method of accounting and recognised in profit or loss, except when recognised in are initially recognised at cost in the financial statements of other comprehensive income for qualifying cash flow hedges. the group. The group’s investment in associates and joint ventures includes goodwill (net of any accumulated Changes in the fair value of monetary securities denominated impairment loss) identified on acquisition. in foreign currency classified as available-for-sale are analysed between translation differences resulting from changes in The group’s share of its associates’ and joint ventures’ post- the amortised cost of the security, and other changes in the acquisition profits or losses is recognised in profit or loss carrying amount of the security. Translation differences within share of profit of equity-accounted investees, and its relating to changes in the amortised cost are recognised in share of post-acquisition movement in reserves is recognised profit or loss and other changes in the carrying amount are in reserves. The cumulative post-acquisition movements are recognised in other comprehensive income within available- adjusted against the carrying amount of the investment. for-sale financial assets. When the group’s share of losses in an associate or joint venture equals or exceeds its interest in the associate or Translation differences on non-monetary financial assets are joint venture, including any other unsecurable receivables, reported as part of the fair value gain or loss. Translation the group does not recognise further losses, unless it has differences on non-monetary financial assets and liabilities, incurred obligations or made payments on behalf of the such as equities held at fair value through profit or loss, are associate or joint venture. recognised in profit or loss as part of the fair value gain or loss. Translation differences on non-monetary financial Unrealised gains on transactions between the group and its assets, such as equities classified as available-for-sale, are associates or joint ventures are eliminated to the extent of recognised in other comprehensive income within available- the group’s interest in the associates or joint ventures. for-sale financial assets. Unrealised losses are also eliminated, unless the transaction provides evidence of an impairment of the asset transferred. Foreign loans are initially recognised at the exchange rate Accounting policies of associates or joint ventures have prevailing at transaction date and are translated at spot at been changed where necessary to ensure consistency with every reporting date. The exchange differences resulting the policies adopted by the group. from the mark to spot on foreign loans, except foreign loans accounted for in terms of cash flow hedge accounting, 2.3 Segment reporting are recognised in profit or loss within finance income or Operating segments are reported in a manner consistent finance cost. with the internal reporting provided to the chief operating 190 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 2. Summary of significant accounting policies Land is not depreciated. Depreciation on other assets is (continued) calculated using the straight-line method to allocate their 2.4 Foreign currency translation (continued) cost to their residual values over their estimated useful lives, Foreign operations as follows: The assets and liabilities of foreign operations, including Years goodwill and fair value adjustments arising on acquisition, Buildings and facilities 10 to 40 are translated to rand at exchange rates at the reporting Plant – Generation 6 to 80 date. The income and expenses of foreign operations, – Transmission 5 to 40 excluding foreign operations in hyperinflationary economies, – Distribution 10 to 35 are translated to rand at the average exchange rate. The – Test, telecommunication and other plant 3 to 20 group does not have any foreign operations in Equipment and vehicles 1 to 10 hyperinflationary economies. The depreciation method, residual values and useful lives of assets are reviewed, and adjusted if appropriate, at each Foreign currency differences arising as a result of the above reporting date. are recognised in other comprehensive income within foreign currency translation reserve. Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate 2.5 Property, plant and equipment items (major components) of property, plant and equipment. Land and buildings comprise mainly office, power station, substation, workshop and related buildings. Gains or losses on disposals are determined by comparing proceeds with the carrying amount. These gains or losses Property, plant and equipment is stated at cost less are included in profit or loss within other income or other accumulated depreciation and impairment losses. Cost operating expenses. includes: • any costs directly attributable to bringing the asset to the 2.6 Intangible assets location and condition necessary for it to be capable of Goodwill operating in the manner intended by management Goodwill represents the excess of the cost of an acquisition • the initial estimate of the costs of dismantling and over the fair value of the group’s share of the net identifiable removing the item and restoring the site on which it is assets of the acquired subsidiary/associate/joint venture at located, the obligation for which an entity incurs either the date of acquisition. Goodwill on acquisition of when the item is acquired or as a consequence of having subsidiaries is included in intangible assets. Goodwill on used the item during a particular period for purposes acquisition of associates and joint ventures is included in other than to produce inventories during that period investments in equity-accounted investees and is tested for • borrowing costs (refer note 2.7) impairment as part of the overall balance. Separately recognised goodwill is tested annually for impairment and Costs may also include transfers from equity of any gains or carried at cost less accumulated impairment losses. losses on qualifying cash flow hedges of foreign currency Impairment losses on goodwill are not reversed. Gains or purchases of property, plant and equipment. losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when Goodwill is allocated to cash-generating units for the it is probable that future economic benefits associated with purpose of impairment testing. The allocation is made to the item will flow to the group and the cost of the item can those cash-generating units or groups of cash-generating be measured reliably. The carrying amount of the replaced units that are expected to benefit from the business part is derecognised. All other repairs and maintenance are combination in which the goodwill arose. The group charged to profit or loss during the financial period in which allocates goodwill to each business segment in each country they are incurred. in which it operates. Works under construction are stated at cost which includes Licences cost of materials and direct labour and any costs incurred in Licences are shown at historical cost. Licences have a finite bringing it to its present location and condition. Materials useful life and are carried at cost less accumulated used in the construction of property, plant and equipment amortisation and impairment losses. Amortisation is are stated at weighted average cost. calculated using the straight-line method to allocate the cost of licences over their estimated useful life. Eskom Holdings Limited 191 Integrated Repor t 2010 Computer software • management intends to complete the intangible asset and Acquired computer software licences are capitalised on use or sell it the basis of the costs incurred to acquire and bring to use • there is an ability to use or sell the intangible asset the specific software. These costs are amortised over their • it can be demonstrated how the intangible asset will estimated useful lives. If software is integral to the generate probable future economic benefits functionality of related equipment, then it is capitalised • adequate technical, financial and other resources to as part of the equipment. complete the development and to use or sell the intangible asset are available Costs associated with developing or maintaining computer • the expenditure attributable to the intangible asset during software programmes are recognised as an expense as its development can be measured reliably incurred. Costs that are directly associated with the development of identifiable and unique software products Research and other development expenditure that do not controlled by the group, and that will probably generate meet these criteria is recognised in profit or loss within economic benefits exceeding costs beyond one year, are other operating expenses. Development costs previously recognised as intangible assets and amortised as above. recognised as an expense are not recognised as an asset in Costs include employee costs incurred as a result of a subsequent period. Capitalised development costs are developing software and an appropriate portion of relevant recorded as intangible assets and amortised from the point overheads. at which the asset is ready for use on a straight-line basis over its useful life. Rights Rights consist mainly of servitudes and rights of way under 2.7 Capitalisation of borrowing costs power lines. Rights are not amortised as they have an Borrowing costs attributable to the construction of qualifying indefinite useful life. A servitude right is granted to Eskom assets are capitalised as part of the cost of these assets over for an indefinite period. The life of the servitude will remain the period of construction to the extent that the assets are in force as long as the transmission or distribution line is financed by borrowings. The capitalisation rate applied is the used to transmit electricity. weighted average of the borrowing costs applicable to the borrowings of the entities in the group unless an asset is A servitude will only become impaired if the line to which financed by a specific loan, in which case the specific rate is the servitude is linked is derecognised. In practice a used. derecognised line will be refurbished or replaced by a new line. The likelihood of the impairment of a servitude right is 2.8 Service concession arrangements remote. A service concession arrangement is an arrangement involving an operator constructing and/or upgrading, Concession assets operating and maintaining infrastructure used to provide a Concession assets consist of rights to charge for the usage public service for a specified period of time. The operator is of the infrastructure under service concession arrangements paid for its services over the period of the arrangement. The (refer note 19). Concession assets are capitalised on the arrangement is governed by a contract that sets out basis of the cost of capital expenditure incurred in respect of performance standards, mechanisms for adjusting prices and service concession arrangements (which is the fair value at arrangements for arbitrating disputes. The grantor (the initial recognition), including borrowing costs on qualifying party that grants the service arrangement) controls the capital expenditures. Subsequent to initial recognition, the infrastructure, and the operator is required to return to the concession assets are measured at cost less accumulated grantor the infrastructure at the end of the arrangement. amortisation and impairment losses. Concession assets are amortised over their estimated useful life, which is the Intangible asset concession period during which they are available for use. The group recognises an intangible asset arising from a service concession arrangement to the extent that it Research and development receives a right to charge for the usage of the concession Research expenditure is recognised as an expense as infrastructure. Intangible assets received as consideration for incurred. Costs incurred on development projects (relating providing construction services in a service concession to the design and testing of new or improved products) are arrangement are measured at fair value upon initial recognised as intangible assets when the following criteria recognition. Subsequent to initial recognition, the intangible are fulfilled: asset is measured at cost less accumulated amortisation and • it is technically feasible to complete the intangible asset so impairment losses. that it will be available for use or sale 192 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 2. Summary of significant accounting policies Each lease payment is allocated between the liability and (continued) finance charges so as to achieve a constant rate on the 2.8 Service concession arrangements (continued) finance balance outstanding. The corresponding rental Intangible asset (continued) obligations, net of finance charges, are included in other Intangible assets arising from a service concession short-term and other long-term payables. The interest arrangement are included within intangible assets under element of the finance cost is charged to profit or loss within concession assets. finance cost over the lease period so as to produce a constant periodic rate of interest on the remaining balance Financial asset of the liability for each period. The property, plant and The group recognises a financial asset arising from a service equipment acquired under finance leases are depreciated or concession arrangement to the extent that it has an amortised over the shorter of the useful life of the asset and unconditional right to receive cash or another financial asset the lease term. from or at the direction of the grantor, for the construction, upgrade or operation services of concession assets. Financial Finance lease liabilities are derecognised in accordance with assets recognised as a result of the service concession the derecognition requirements for financial liabilities (refer arrangement are measured at fair value upon initial note 2.11). Derivatives embedded in leases are accounted recognition. Subsequent to initial recognition, the financial for in accordance with the requirements for embedded asset is accounted for in accordance with IAS 39 Financial derivatives (refer note 2.11). Instruments: Recognition and measurement (refer note 2.11, non-derivative financial instruments). Cost plus coal contracts are treated as finance leases where the group is the lessee. Financial assets arising from a service concession arrangement are included within trade and other receivables Finance leases – where the group is the lessor under other receivables (refer note 17). When property, plant and equipment are leased out under a finance lease, the present value of the lease payments is Construction or upgrade services recognised as a receivable.The difference between the gross The group accounts for revenue and costs relating to receivable and the present value of the receivable is construction or upgrade services in accordance with IAS 11 disclosed as unearned finance income within finance lease Construction contracts. receivables. Operation services Lease income is recognised over the term of the lease using The group accounts for revenue relating to operation the net investment method, which reflects a constant services in accordance with IAS 18 Revenue. periodic rate of return. Contractual obligations to maintain and restore the Finance lease receivables are assessed for impairment and infrastructure derecognised in accordance with the requirements for The group accounts for the contractual obligations to financial assets (refer note 2.11). Derivatives embedded in maintain or restore the infrastructure in accordance with leases are accounted for in accordance with the requirements IAS 37 Provisions, contingent liabilities and contingent assets. for embedded derivatives (refer note 2.11). The provision to restore the infrastructure is included within provisions. Premium power supplies are treated as finance leases where the group is the lessor. 2.9 Leases A lease is an agreement whereby the lessor conveys to the Fair value lessee, in return for a payment, or series of payments, the The fair value of finance lease receivables and finance lease right to use an asset for an agreed period of time. liabilities is determined by discounting the future cash flows with respect to the finance lease at the interest rate implicit Finance leases – where the group is the lessee in the lease. The group leases certain property, plant and equipment. Leases of property, plant and equipment where the group Operating leases has substantially all the risks and rewards of ownership are Leases where substantially all of the risks and rewards of classified as finance leases. Finance leases are capitalised at ownership are not transferred to the group are classified as the lease’s commencement at the lower of the fair value of operating leases. Payments made under operating leases the leased asset and the present value of the minimum lease (net of any incentives received from the lessor) are charged payments. Eskom Holdings Limited 193 Integrated Repor t 2010 to profit or loss within other operating expenses on a straight- attributable transaction costs related to financial assets at fair line basis over the period of the lease. value through profit or loss are recognised in profit or loss on initial recognition when incurred. Subsequent to initial Leases where substantially all of the risks and rewards of recognition, non-derivative financial assets are measured per ownership are not transferred to the lessee (ie the group is asset category (as stated below). The appropriate the lessor) are classified as operating leases. Payments classification of the financial asset is determined at the time received under operating leases are recognised in profit or of commitment to acquire the financial asset. loss within other income on a straight-line basis over the period of the lease. When entering into a transaction, the financial instrument is recognised initially at the transaction price which is the best 2.10 Impairment of non-financial assets indicator of fair value. Where fair value of the financial Assets that have an indefinite useful life, for example land, are instrument is different from the transaction price a day-one not subject to amortisation or depreciation and are tested gain or loss may arise. The day-one gain or loss is immediately annually for impairment. Assets that are subject to recognised in profit or loss (except for embedded derivatives amortisation or depreciation are reviewed for impairment and the subordinated loan from shareholder) within net fair whenever events or changes in circumstances indicate that value gain/(loss) on financial instruments, excluding embedded the carrying amount may not be recoverable.   An impairment derivatives, provided that the fair value has been determined loss is recognised for the amount by which the asset’s based on market-observable data. carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less Held-to-maturity investments costs to sell and value in use. For the purposes of assessing Held-to-maturity investments are non-derivative financial impairment, assets are grouped at the lowest levels for assets with fixed or determinable payments and fixed which there are separately identifiable cash flows (cash- maturity that management has both the ability and intent to generating units). Non-financial assets other than goodwill hold to maturity. that were subject to impairment are reviewed for possible reversal of the impairment at each reporting date. Subsequent to initial recognition, held-to-maturity invest- Impairment (loss)/reversal is recognised in profit or loss ments are measured at amortised cost using the effective within net impairment (loss)/reversal. interest method, less any accumulated impairment losses. 2.11 Financial instruments The amortised cost of a financial asset is the amount at 2.11.1 Non-derivative financial instruments which the financial asset is measured at initial recognition Recognition, measurement and derecognition of financial minus principal payments, plus or minus the cumulative assets amortisation using the effective interest method and minus Non-derivative financial assets comprise investment in any reduction for impairment or uncollectibility. securities, financial instruments with group companies, financial trading assets, loans receivable, trade and other receivables, The effective interest rate is the rate that discounts the finance lease receivables and cash and cash equivalents. estimated future cash receipts of the financial asset exactly to its net carrying amount. Cash and cash equivalents comprise balances with local and international banks, monies in call accounts, short-term Financial assets at fair value through profit or loss assets and money market assets with an original maturity of An instrument is classified at fair value through profit or loss less than 90 days. Bank overdrafts are shown within if it is held-for-trading or is designated as such upon initial borrowings in current liabilities on the statement of recognition. An instrument may only be designated at fair financial position. value through profit or loss when certain criteria are met. The group has elected not to designate financial assets at fair All non-derivative financial assets are recognised on the date value through profit or loss. of commitment to purchase (trade date). Non-derivative financial assets are derecognised when the rights to receive A financial asset is classified as held-for-trading if it is: cash flows from the investments have expired or the group • acquired for the purpose of selling it in the short term has transferred substantially all the risks and rewards of • part of a portfolio of identified financial instruments that ownership. Realised gains or losses on derecognition are is managed together and for which there is evidence of a determined using the FIFO (first in first out) method. recent pattern of short-term profit taking • a derivative instrument Non-derivative financial assets plus any directly attributable transaction costs are recognised initially at fair value. Directly 194 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 2. Summary of significant accounting policies The fair value of trade and other receivables is estimated as (continued) the present value of future cash flows, discounted at the 2.11 Financial instruments (continued) market rate of interest at the reporting date. 2.11.1 Non-derivative financial instruments (continued) Financial assets at fair value through profit or loss (continued) Impairment (held-to-maturity investments, Subsequent to initial recognition, changes in the fair value of loans and receivables) these financial assets are recognised in profit or loss within A review for impairment indicators is carried out at each net fair value gain/(loss) on financial instruments, excluding financial year end to determine whether there is any embedded derivatives. objective evidence that a financial asset not carried at fair value through profit or loss is impaired. A financial asset is Loans and receivables considered to be impaired if objective evidence indicates The trade and other receivables of the group are classified that one or more events have had a negative effect on the as loans and receivables. Loans and receivables are non- estimated future cash flows of that asset. In the case of derivative financial assets with fixed or determinable equity securities classified as available-for-sale, a significant or payments that are not quoted in an active market, other prolonged decline in the fair value of the security below its than: cost is considered to be an indicator that the securities are • those that management intends to sell immediately or in impaired. the short term, which are classified as held-for-trading • those that upon initial recognition are designated as An impairment loss in respect of a financial asset measured available-for-sale at amortised cost is calculated as the difference between its • those for which the group may not recover substantially carrying amount and the present value of the estimated all of its initial investment, other than because of credit future cash flows discounted at the original effective interest deterioration, which shall be classified as available-for-sale rate. An impairment loss in respect of an available-for-sale financial asset is calculated by reference to its fair value. Subsequent to initial recognition, loans and receivables are measured at amortised cost using the effective interest Individually significant financial assets are tested for method, less any accumulated impairment losses. impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar Available-for-sale assets credit risk characteristics. Available-for-sale financial assets are those assets that are designated as such or do not qualify to be classified as fair All impairment losses are recognised in profit or loss within value through profit or loss, held-to-maturity or loans and net impairment loss. In the case of available-for-sale financial receivables. assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less Subsequent to initial recognition, available-for-sale financial any impairment loss on that financial asset previously assets are measured at fair value and changes therein, other recognised in profit or loss – is removed from other than impairment losses and foreign exchange gains and comprehensive income and recognised in profit or loss. losses (for monetary items), are recognised in other comprehensive income within available-for-sale financial An impairment loss is reversed if the reversal can be related assets. When the asset is derecognised, the cumulative gain objectively to an event occurring after the impairment loss or loss in equity is transferred to profit or loss. was recognised. For financial assets carried at amortised cost and available-for-sale financial assets that are debt securities, Fair value the reversal is recognised in profit or loss within net The fair values of trading assets, available-for-sale assets and impairment loss. For available-for-sale financial assets that are assets carried at amortised cost are based on quoted bid equity securities, a subsequent increase in fair value is prices. For assets that are not quoted in an active market, recognised directly in other comprehensive income. valuation techniques are used. Where pricing models are used, inputs are based on market-related measures at the Where an asset has been impaired, the carrying amount of reporting date. Where discounted cash flow techniques are the asset is reduced through an allowance account. used, estimated future cash flows are based on management’s best estimates and the discount rate is a market-related rate for a financial asset with similar terms and conditions at the reporting date. Eskom Holdings Limited 195 Integrated Repor t 2010 Recognition, measurement and derecognition of financial Fair value liabilities The fair value of financial trading liabilities is based on quoted Non-derivative financial liabilities comprise debt securities offer prices. For liabilities that are not quoted in an active issued, borrowings, financial instruments with group companies, market, valuation techniques are used. Where pricing financial trading liabilities, finance lease liabilities and trade and models are used, inputs are based on market-related other payables. measures at the reporting date. Where discounted cash flow techniques are used, estimated future cash flows are based Non-derivative financial liabilities are recognised initially at on management’s best estimates and the discount rate is a fair value plus any directly attributable transaction costs market-related rate for a financial liability with similar terms except for financial liabilities at fair value through profit or and conditions at the reporting date. loss. Directly attributable transaction costs related to liabilities recognised at fair value through profit or loss are 2.11.2 Financial guarantees recognised in profit or loss on initial recognition when Recognition incurred. Subsequent to initial recognition, non-derivative Financial guarantees are contracts that require the group to financial liabilities are measured at amortised cost or fair make specified payments to reimburse the holder for a loss value as per the relevant liability category (as described that may occur because a specified receivable fails to make below). payment when due in accordance with the terms of a debt instrument. All non-derivative financial liabilities are recognised on the date of commitment (trade date) and are derecognised Financial guarantee liabilities are initially recognised at fair when the obligation expires, is discharged or cancelled. value, and the initial fair value is amortised over the life of Realised gains and losses are determined using the FIFO the financial guarantee.The guarantee liability is subsequently method. carried at the higher of this amortised cost and the present value of any expected payment (when a payment under the Financial liabilities at fair value through profit or loss guarantee has become probable). Financial guarantees are (held-for-trading) included within other liabilities. An instrument is classified at fair value through profit or loss if it is held-for-trading or is designated as such upon initial Fair value recognition. An instrument may only be designated at fair Financial guarantees are valued initially by taking into account value through profit or loss when certain criteria are met. discounted future cash flows adjusted according to the The group has not elected to designate financial liabilities at probability of occurrence of the trigger event. The resultant fair value through profit or loss. guarantee is raised as a liability, with the costs being charged to profit or loss. The unprovided portion is disclosed as a A financial liability is classified as held-for-trading if it is: contingent liability.   As a result of using discounted cash flows, • incurred principally for the purpose of selling or interest rate risk may arise due to the possibility of the actual repurchasing it in the near term yields on assets being different from the rates assumed in • part of a portfolio of identified financial instruments that the discounting process. is managed together and for which there is evidence of a recent pattern of short-term profit taking, or 2.11.3 Derivative financial instruments and hedging activities • a derivative instrument Recognition A derivative is a financial instrument whose value changes in Subsequent to initial recognition, financial liabilities at fair response to an underlying variable, requires little or no initial value through profit or loss continue to be measured at fair investment and is settled at a future date.   All derivatives are value. classified as held-for-trading instruments, unless they meet the criteria for hedge accounting and have been designated Financial liabilities at amortised cost for purposes of applying hedge accounting. Derivatives are Financial liabilities that are not held-for-trading are classified initially recognised at fair value and re-measured subsequently as financial liabilities at amortised cost. Debt securities issued, at fair value. Fair values are obtained from quoted market including foreign loans, that are not held-for-trading are prices, discounted cash flow models and options pricing classified as held at amortised cost. Subsequent to initial models which consider current market and contractual recognition, these liabilities are measured at amortised cost prices for the underlying instruments as well as the time using the effective interest method. The trade and other value of money. payables of the group are classified as financial liabilities at amortised cost. 196 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 2. Summary of significant accounting policies portion and the forward points portion which is not (continued) designated (as part of the hedge) is recognised immediately 2.11 Financial instruments (continued) in profit or loss within net fair value gain/(loss) on financial 2.11.3 Derivative financial instruments and hedging activities instruments, excluding embedded derivatives. (continued) Recognition (continued) When the forecast transaction occurs, any cumulative gain All derivative instruments of the group are included in the or loss existing in equity at that time is included in the initial statement of financial position as derivatives held for risk cost or other carrying amount of the asset or liability. management. Realised and unrealised gains or losses for derivatives used for economic hedging are recognised in When a hedging instrument expires, is sold or a hedge no profit or loss within net fair value gain/(loss) on financial longer meets the criteria for hedge accounting, any instruments, excluding embedded derivatives. Realised and cumulative gain or loss existing in equity at that time remains unrealised gains or losses for derivatives used for cash flow in other comprehensive income until the forecast transaction hedging are recognised in other comprehensive income occurs. When a forecast transaction is no longer expected within cash flow hedges. to occur, the cumulative gain or loss that was reported in equity is immediately transferred to profit or loss within the Hedge accounting relevant expense category. The method of recognising the resulting gain or loss on the derivative depends on whether the derivative is designated Economic hedging as a hedging instrument, and if so, the nature of the item Certain derivative instruments do not qualify for hedge being hedged. Derivatives can be designated as: accounting and are used for economic hedging. Changes in • hedges of the fair value of recognised liabilities and assets the fair value of these derivative instruments are recognised (fair value hedge) in profit or loss within net fair value gain or loss on financial • hedges of a particular risk associated with a recognised instruments, excluding embedded derivatives. liability, asset or a highly probable forecast transaction (cash flow hedge) 2.11.4 Repurchase and resale agreements • hedges of a net investment in a foreign operation (net Securities sold subject to repurchase agreements are investment hedge) disclosed in the financial statements as financial assets. The liability to the counterparty is recorded as repurchase The group applies only cash flow hedge accounting. agreements and is included in financial trading liabilities. The group documents, at the inception of the transaction, Securities purchased under agreements to resell are the relationship between hedging instruments and hedged recorded as repurchase agreements and are included in items, as well as its risk management objectives and strategy financial trading assets. for undertaking various hedging transactions. The group also documents its assessment, both at hedge inception and on The difference between the sale and repurchase price or an ongoing basis, of whether the derivatives that are used in purchase and resale price is treated as interest accrued over hedging transactions are highly effective in offsetting changes the life of the repurchase or resale agreement using the in fair values or cash flows of hedged items. effective-yield method. Movements on the hedging reserve are shown in other 2.11.5 Embedded derivatives comprehensive income within cash flow hedges. The full fair Recognition value of a hedging derivative is classified as a non-current An embedded derivative is a component of a hybrid asset or liability when the remaining period of the hedged (combined) instrument that also includes a non-derivative item is more than 12 months; it is classified as a current host contract, with the effect that some of the cash flows of asset or liability when the remaining period of the hedged the combined instrument vary in a way similar to those of a item is less than 12 months. Trading derivatives are classified standalone derivative. An embedded derivative causes as current assets or liabilities. some or all of the cash flows that otherwise would be required by the contract to be modified according to a Cash flow hedges specified interest rate, financial instrument price, commodity The effective portion of changes in the fair value of price, foreign exchange rate, index of prices or rates, or derivatives that are designated and qualify as cash flow other variable.The hybrid contract is the entire contract and hedges is recognised in other comprehensive income within the host contract is the main body of the contract excluding cash flow hedges. The gain or loss relating to the ineffective the embedded derivative. Eskom Holdings Limited 197 Integrated Repor t 2010 An embedded derivative is separated from the host contract fair valuing the whole contract and deducting from it the fair and accounted for as a derivative if: value of the host contract. • the economic characteristics and risks of the embedded derivative are not closely related to the economic Where there is no active market for the embedded characteristics and risks of the host contract derivatives, valuation techniques are used to ascertain their • a separate instrument with the same terms as the fair values. Financial models are developed incorporating embedded derivative would meet the definition of a valuation methods, formulae and assumptions. The valuation derivative and methods include the following: • the combined instrument is not measured at fair value • swaps: electricity tariff is swapped for a commodity in a with changes in fair value recognised in profit or loss foreign currency • forwards: electricity tariff or other revenue or expenditure The determination of the host contract of an electricity is based on a foreign currency contract (which includes an embedded derivative) is based • options: electricity tariff or other revenue is based on an on the standard electricity tariff specified in the contract and embedded derivative floor or cap on foreign consumer or where no standard tariff is specified, the tariff that would production price indices or interest rates. The Monte normally apply to such a customer. Carlo simulation technique is used to produce various cap and floor strike prices Fair value Embedded derivatives are disclosed separately from The fair value of embedded derivatives is adjusted, where derivatives held for risk management. The changes in fair value applicable, to take into account the inherent uncertainty are included in net fair value gain/(loss) on embedded relating to the future cash flows of embedded derivatives derivatives in profit or loss. The impact of the fair value gains such as liquidity, model risk and other economic factors. or losses is taken into account in the calculation of current and deferred taxation. The more important assumptions, which include the following, are obtained either with reference to the Embedded derivatives that are not separated are effectively contractual provisions of the relevant contracts or from accounted for as part of the hybrid instrument. independent market sources where appropriate: • spot and forward commodity prices Non-option based derivatives are separated on terms • spot and forward foreign currency exchange rates that result in a fair value at the date of inception of zero. • spot and forward interest rates Option-based derivatives are separated on the terms • forecast sales volumes stated in the contracts and will not necessarily have a • spot and forward consumer and foreign production price fair value equal to zero at the initial recognition of the indices embedded derivative resulting in day-one gains. These day- • spot and forward electricity prices one gains or losses are spread equally over the period of • liquidity, model risk and other economic factors the agreement. The fair value will depend on the strike price at inception. 2.12 Inventories Coal, maintenance spares and consumables The valuation at initial recognition is adjusted for cash flows Inventories are stated at the lower of cost and net realisable since inception. The value of the embedded derivatives value. Cost is determined on the weighted average basis and which involve a foreign currency is first determined by includes expenditure incurred in acquiring inventories, calculating the future cash flows and then discounting production and conversion costs and other costs incurred in the cash flows by using the relevant interest rate curve bringing inventory to present location and condition. and only then is the net present value of the cash flows converted at the relevant rand/foreign currency spot rate Nuclear fuel to the reporting currency. Nuclear fuel is stated at the lower of cost and net realisable value. Cost is determined on the FIFO basis. Nuclear fuel The determination of the host contract of an electricity consists of raw materials, fabricated fuel assemblies and fuel contract is based on the standard electricity tariff specified in in reactors. the contract and where no standard tariff is specified, the tariff that would normally apply to such a customer. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling The fair value of the embedded derivative is determined on expenses. Costs of inventories include the transfer from the basis of its terms and conditions. If this is not possible, equity of any gains/losses on qualifying cash flow hedges then the value of the embedded derivative is determined by relating to purchases of raw materials. 198 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 2. Summary of significant accounting policies 2.17 Deferred tax (continued) Deferred tax is recognised, using the statement of financial 2.13 Future fuel supplies position method, on temporary differences arising between Coal the tax bases of assets and liabilities and their carrying Non-refundable advances to suppliers, together with related amounts in the financial statements. Deferred tax is not borrowing costs thereon, are deferred in the statement of accounted for if it arises from initial recognition of an asset financial position within future fuel supplies and amortised or liability in a transaction other than a business combination against the cost of coal supplied on the basis of the estimated that at the time of the transaction, affects neither accounting life of the asset procured by the suppliers. nor taxable profit or loss. However, deferred tax is provided in respect of the temporary differences arising on the assets Repayable advances to suppliers are capitalised, and the and provisions created in respect of decommissioning and related interest earned is credited to profit or loss within nuclear waste management and closure, pollution control finance income and the refunds are repaid in terms of and rehabilitation. Deferred tax is determined using tax the agreements. rates (and laws) enacted or substantively enacted at the reporting date and that are expected to apply when the Nuclear related deferred tax asset is realised or the deferred tax Fuel assemblies in the process of fabrication are stated at liability is settled. cost within future fuel supplies, which includes the non- refundable advance payments made in terms of the Deferred tax assets are recognised to the extent that it is agreement. Hedge accounting is applied to foreign exchange probable that future taxable profit will be available against contracts entered into with respect to the purchase of which the temporary differences can be utilised. Deferred nuclear fuel, with the effective portion being capitalised tax assets are reviewed at each reporting date and reversed during the fabrication period. Advance payments in terms if it is no longer probable that the related tax benefits will be of agreements are capitalised. realised. 2.14 Share capital Deferred tax is provided on temporary differences arising Ordinary shares are classified as equity. on investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is 2.15 Equity reserve controlled by the group and it is probable that the temporary The subordinated loan from the shareholder is held at difference will not reverse in the foreseeable future. amortised cost. The market value of the loan at inception is calculated for each tranche utilising the expected cash flows 2.18 Payments received in advance which are discounted at market rates to determine the Payments received in advance consist mainly of upfront effective interest rates. The effective interest rates for each capital contributions for the construction of assets and tranche remain constant over the life of the loan tranche. funding for electrification. From 1 July 2009, upfront capital The future cash flows are re-assessed annually and the loans contributions are recognised in profit or loss within other are remeasured at each reporting period. Although the revenue, excluding electricity revenue when the customer is loan is interest bearing, the interest payment terms could connected to the electricity network. potentially be favourable and are dependent on the liquidity and gearing of Eskom. The change in the loan value with 2.19 Deferred income respect to interest amortised and the remeasurement is Cross-border leases reflected in the profit or loss in finance cost and is eligible for Income realised on cross-border lease transactions is capitalisation as borrowing costs. deferred. This income is recognised over the period that Eskom is exposed to the risk of a cancellation event on the 2.16 Income tax contract and is allocated to profit or loss on the same basis Income tax expense comprises current and deferred tax. as the risk exposure profile. Income tax expense is recognised in profit or loss except to the extent that it relates to items recognised in other Grants comprehensive income, in which case it is recognised in Government grants received relating to the creation of other comprehensive income. electrification assets are included in non-current liabilities as deferred income and are credited to profit or loss within Current tax is expected tax payable on taxable income for depreciation and amortisation expense on a straight-line basis the year, using tax rates enacted or substantively enacted at over the expected useful lives of the related assets when the reporting date, and any adjustment to tax payable in these assets have been placed in commercial operation. respect of previous years. Eskom Holdings Limited 199 Integrated Repor t 2010 Government grants which become receivable as assets and liabilities are recognised initially at fair value and compensation for expenses or losses already incurred, or subsequently measured at amortised cost using the effective for the purpose of giving immediate financial support to interest method, less provision for impairment. the entity with no future related costs are recognised in profit or loss within other income for the period in which A full contingency reserve of 10% of net premium income is they become receivable. maintained in Escap Limited in terms of the Short-term Insurance Act, 53 of 1998. Capital contributions received from customers Contributions paid in advance by electricity customers 2.21 Employee benefits relating to the construction of regular distribution and Annual and performance bonus transmission assets (with a standard supply) are credited to The group recognises a liability for annual and performance profit or loss within other revenue, excluding electricity revenue bonuses. A liability for annual bonuses is accrued on a on a straight-line basis over the expected useful lives of the proportionate basis as services are rendered. A provision related assets when these assets have been placed in for performance bonus is raised on the estimated amount commercial operation up to 30 June 2009.  From 1 July 2009 payable in terms of the incentive scheme which is based on the contributions paid in advance are credited to profit or the employee’s performance in the applicable year. loss within other revenue, excluding electricity revenue when the customer is connected to the electricity network (refer Occasional and service leave note 2.18). The group recognises a liability for occasional and service leave as the leave is of a long-term nature. An actuarial 2.20 Insurance contracts valuation is performed on an annual basis for occasional and The group, through its subsidiary – Escap Limited (Escap), service leave. The accrued liabilities are determined by issues contracts that transfer insurance risk. An insurance valuing all future leave expected to be taken and payments contract is one under which one party (the insurer) accepts expected to be made in respect of benefits up to the significant insurance risk from another party (the valuation date.   Allowance has been made in the calculations policyholder) by agreeing to compensate the policyholder for the assumed benefit options employees will exercise, as or other beneficiary, if a specified uncertain future event well as salary increases and investment returns up to the (the insured event) adversely affects the policyholder or date the benefit is received. All actuarial gains or losses and other beneficiary. The group insures accident and health, past service costs are recognised immediately in profit or engineering, guarantee, liability, motor, property, loss within employee benefit expense. The present values of transportation and miscellaneous classes of short-term the benefit are determined by using the yield of long-dated insurance business. corporate bonds (or government bonds where high-quality corporate bonds are not available). At each reporting date, liability adequacy tests are performed to ensure the adequacy of the claims liabilities. In performing Pension obligations these tests, current best estimates of future contractual cash Retirement benefits are provided for employees through the flows and claims handling and administration expenses are Eskom Pension and Provident Fund. Contributions to the used. Where a shortfall is identified an additional provision is fund are based on a percentage of pensionable emoluments made and the company recognises the deficiency in profit or and are expensed in the period in which they are incurred. loss. Post-retirement medical aid obligations Contracts are entered into with reinsurers, under which the The liability for post-retirement medical aid is the present group is compensated for losses on one or more contracts value of the obligation by using long-dated corporate bonds issued by it and that meet the classification requirements for (or government bonds where high-quality corporate bonds insurance contracts. The benefits to which Escap is entitled are not available) which have maturities similar to the liability. under its reinsurance contracts held are recognised as Provision is made by accounting, through profit or loss, for reinsurance assets in the statement of financial position. the estimated cost over the expected period to retirement Amounts recoverable are dependent on the expected of the employees. The cost to the employer, in the form of claims and benefits arising under the related reinsured employer contributions, is determined by using the projected insurance contracts.   Amounts due from or due to reinsurers unit credit method, with actuarial valuations being carried are measured consistently with the amounts associated with out at reporting date. Actuarial gains or losses are the reinsured insurance contracts and in accordance with recognised in other comprehensive income within net the terms of each reinsurance contract. Reinsurance liabilities actuarial gain or loss on post-retirement medical aid benefits are primarily premiums payable for reinsurance contracts immediately. No deferred recognition mechanism is applied. and are recognised as an expense when due. Reinsurance 200 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 2. Summary of significant accounting policies waste. The charge to profit or loss is based on the latest (continued) available cost information and is included in primary energy. 2.21 Employee benefits (continued) Post-retirement medical aid obligations (continued) Closure, pollution control and rehabilitation The entitlement to these benefits is usually conditional on Expenditure on property, plant and equipment for pollution control is capitalised and depreciated over the useful lives of the employee remaining in service up to retirement. All the assets. The cost of current ongoing programmes to employees qualify for post-retirement medical aid, except prevent and control pollution and to rehabilitate the for new employees appointed on or after 1 June 2003 at a environment is charged to profit or loss within primary managerial level. energy as incurred, unless a present legal or constructive obligation exists to recognise such expenditure, in which 2.22 Provisions case a provision is created based on the best estimates Provisions are recognised when the group has a present available. legal or constructive obligation as a result of a past event, when it is probable that an outflow of resources will be A provision is raised for the estimated cost of closure, required to settle the obligation and when the amount can pollution control and rehabilitation during and at the end of be reliably estimated. Provisions are not recognised for the life of the mines where a legal or constructive obligation future operating losses. exists to pay coal suppliers. Closure, pollution control and rehabilitation costs capitalised are written off over the Provisions are determined by discounting the expected estimated useful life of the power station. future cash flows using a pre-tax discount rate that reflects current market assessments of the time value of money and, Service concession arrangements where appropriate, the risks specific to the liability. The A provision is raised for contractual obligations to maintain increase in the provision due to the passage of time is and restore the infrastructure (refer note 2.8). These recognised as finance cost. contractual obligations to maintain or restore infrastructure, except for any upgrade element, are recognised and The provisions below are restated on an annual basis to measured at the best estimate of the expenditure that reflect changes in measurement that result from changes in would be required to settle the present obligation at the the estimated timing or amount of the outflow of resources end of the reporting period. embodying economic benefits required to settle the obligation, or a change in discount rate, which shall be 2.23 Revenue recognition accounted for as follows: Revenue comprises the fair value of the consideration • changes in the liability shall be added to, or deducted received or receivable for the sale of goods and services in from, the cost of the related asset in the current period the ordinary course of the group’s activities. Revenue is • the amount deducted from the cost of the asset shall shown, net of value added tax, estimated returns, rebates and discounts, but includes the 2c/kWh environmental levy not exceed its carrying amount. The excess shall be introduced from 1 July 2009. recognised in profit or loss • any additions to the cost of an asset shall be reviewed in The group recognises revenue when the amount of revenue terms of the normal impairment principles can be reliably measured, it is probable that future economic benefits will flow to the entity and specific criteria have been Decommissioning and nuclear waste management met for each of the group’s activities as described below.The Nuclear and other generation plant amount of revenue is not considered to be reliably measured A provision is raised for the estimated decommissioning until all contingencies relating to the sale have been resolved. cost of nuclear and other generation plant and capitalised The group bases its estimates on historical results, taking into to the cost of nuclear or other generation plant when consideration the type of customer, the type of transaction it is commissioned.   The estimated cost of decommissioning and the specifics of each arrangement. at the end of the productive life of plant is based on engineering estimates and reports from independent Revenue is recognised as follows: experts. Decommissioning costs capitalised to the cost of Sale of goods nuclear or other generation plant is written off on a straight- Sale of goods is recognised when significant risks and line basis over the estimated useful life of the plant. rewards of ownership have passed and the collectibility of the related receivable is reasonably assured. Spent nuclear fuel A provision is raised, over the life of the plant, for the Electricity revenue is recognised when electricity is management of spent nuclear fuel assemblies and radioactive consumed by the customer. Eskom Holdings Limited 201 Integrated Repor t 2010 Sale of services 2.25 Finance cost Sale of services is recognised in the reporting period in Finance cost comprises interest payable on borrowings and which the services are rendered, by reference to the stage interest resulting from the unwinding of discount on liabilities. of completion of the specific transaction assessed on the Borrowing costs which are not capitalised (refer note 2.7) basis of the actual service provided as a proportion of the are recognised in profit or loss using the effective interest total services to be provided. method. Other revenue 2.26 Dividend income Other revenue is recognised when the significant risks and Dividend income is recognised when the right to receive rewards of ownership are transferred to the buyer and the payment is established. amount of revenue can be measured reliably. 2.27 Dividend distribution Construction contracts Dividend distribution to the shareholder is recognised as a Contract revenue includes the initial amount agreed in the liability in the financial statements of the group in the period contract plus any variations in contract work to the extent in which the dividends are approved by the shareholder. that it is probable that they will result in revenue and can be measured reliably. As soon as the outcome of a construction 2.28 Non-current assets and liabilities held-for-sale contract can be estimated reliably, contract revenue is Assets and liabilities which meet the definition of held-for- recognised in profit or loss within other revenue, excluding sale under IFRS 5 Non-current assets held-for-sale and electricity revenue in proportion to the stage of completion discontinued operations, except for assets excluded from of the contract. the scope of IFRS 5 for measurement purposes, are stated at the lower of their carrying amount and fair value The stage of completion is assessed by reference to the less costs to sell if their carrying amount is recovered contract costs incurred to the reporting date as a principally through a sale transaction rather than through percentage of total estimated costs for each contract. continuing use. When an outcome of a construction contract cannot be estimated reliably, contract revenue is recognised only 3. Financial risk management to the extent of contract costs incurred that are likely to The group has an integrated risk management framework. be recoverable.   An expected loss on a contract is recognised The group’s approach to risk management is based on risk immediately in profit or loss. governance structures, risk management policies, risk identification, measurement and reporting. Three types of Service concession arrangements risks are reported as part of the risk profile, namely Revenue relating to construction or upgrade services under operational, strategic and business continuity risks. a service concession arrangement (refer note 2.8) is Operational risks are events, hazards, variances or recognised based on the stage of completion of the work opportunities which could influence the achievement of performed, consistent with the group’s accounting policy on Eskom’s compliance and operational objectives. For Eskom, recognising revenue on construction contracts. a strategic risk is a significant unexpected or unpredictable change or outcome beyond what was factored into the Operation or service revenue is recognised in the period in organisation’s strategy and business model which could have which the services are provided by the group. When the an impact on the group’s performance. Business continuity group provides more than one service in a service risks are those events, hazards, variances and opportunities concession arrangement the consideration received is which could influence the continuity of Eskom. One of the allocated by reference to the relative fair values of the key risks for Eskom, identified both under the operational services delivered. and strategic risk categories, is the financial sustainability of Eskom. The financial risks, as defined by IFRS 7 Financial 2.24 Finance income instruments: Disclosures, and the management thereof, form Finance income comprises interest receivable on loans, part of this key risk area. For more information on risk, refer advances, trade receivables, finance lease receivables and to page 292 in the Corporate governance report and income from financial market investments. Interest income is page 18 in the Sustainability reporting in Eskom section. recognised as it accrues in profit or loss, using the effective interest method. 202 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 3. Financial risk management (continued) investments and, secondly to project and maximise the rate The board of directors (the board) has delegated the of return of financial market investments. management of enterprise-wide risk to the risk management committee which operates through various subcommittees. Responsibility and governance One of the committee’s objectives is to ensure that the The treasury credit risk committee, a subcommittee of the group is not unduly exposed to financial risks. Most of the risk management committee, manages counterparty credit financial risks arising from financial instruments are managed risk which arises from the treasury activities in the financial in the centralised treasury function of the group, except for markets. This committee is chaired by the finance director instruments such as trade and finance lease receivables and and reports on a quarterly basis to the risk management trade and finance lease payables which are managed by the committee. The activities of the committee are guided by other divisions and subsidiaries. the terms of reference that are updated and approved by the risk management committee. The group’s exposure to risk, its objectives, policies and processes for managing the risk and the methods used to The terms of reference set out the minimum acceptable measure it have been consistently applied in the years standards to be adhered to by those responsible for credit- presented, unless otherwise stated. related transactions within the treasury department. The terms of reference are aligned to the Exco credit risk The exposure of the centralised treasury function to the governance standards and are supplemented by appropriate major financial risks is unique to its activities and therefore policies and procedures. different to those of the divisions and subsidiaries within the Eskom group. A distinction is therefore made The committee: between the treasury department and other divisions and • assesses the credit quality of counterparties and types of subsidiaries in the group in respect of financial risk instruments used management where relevant. • approves credit limits • facilitates and manages the issuing of financial guarantees The group has exposure to the following risks as a result of by the group its financial instruments: • ensures that transactions with counterparties are • credit risk (refer note 3.1) supported by trading agreements, where applicable • market risk (refer note 3.2) • approves methodologies used for the management of • liquidity risk (refer note 3.3) counterparty exposure 3.1 Credit risk The senior credit risk adviser in the risk assessment division Credit risk is the risk of financial loss to the group if a provides feedback on all treasury credit risk-related matters customer or other counterparty (including government and to the treasury management, finance director, treasury financial institutions) to a financial instrument fails to meet its credit risk committee and risk management committee. contractual obligations. Credit risk arises primarily from the sale of goods and services in the ordinary course of business The management of credit risk is governed by the following and the centralised treasury activities. Credit risk includes policies: counterparty risk and delivery or settlement risk. • trading in financial instruments is conducted and entered into with selected counterparties after credit limits have Counterparty risk is the risk that a counterparty is unable to been authorised. Individual risk limits are set based on meet its financial and/or contractual obligations during the internal and external ratings in line with limits set by the period of a transaction. Delivery or settlement risk is the risk board. All credit limits are approved by the treasury that a counterparty does not deliver on its contractual credit risk committee. The use of credit limits is regularly commitment on maturity date (including the settlement of monitored money and delivery of securities). • only banks and financial institutions with an independent minimum rating of A1 are accepted. If there are no 3.1.1 Management of credit risk independent ratings,  the credit quality of the counterparty Financial instruments managed by the treasury function is assessed, taking into account its financial position, past Credit risk arises from cash and cash equivalents, investment experience and other factors in securities, derivatives held for risk management, financial • all exposures are mark-to-market. Transaction or close- trading assets and deposits made with counterparties. out netting takes place in accordance with the terms and Processes are in place to identify, measure, monitor, control conditions of the underlying trading agreements and report credit risk. The objective of Eskom’s credit risk • minimum credit-rating requirements for financial management framework is firstly to protect cash and institutions are maintained to assess the risk categories by Eskom Holdings Limited 203 Integrated Repor t 2010 rating class and to ascertain the probability of default Electricity supply agreements are entered into with key inherent in each rating class international customers who comprise utility companies • approved concentration risk parameters and collateral and governments of neighbouring countries. These management procedures are in place customers are not required to provide any security unless they default on their payment terms. Concentration of credit risk is managed by setting credit risk limits at a counterparty-specific level. Concentration credit Key large power users comprise mainly South African risk limits are used as second tier limits in relation to commercial, industrial and mining customers. Some key counterparty credit limits. Counterparty-specific exposure is large power users are not required to provide any monitored against a set concentration of credit risk limits in security if they have an acceptable credit rating from an relation to the total credit risk exposure to all counterparties. approved rating agency. New customers are required to provide security equivalent to the value of three Credit risk measurement, monitoring and reporting months’ estimated consumption. Existing customers are Risk is measured by determining a default probability per required to provide security to the value of three counterparty (expressed through an internal risk rating) months’ consumption if they default on their payment which is then applied to the market value of the investment terms. placed to determine the capital at risk. Non-key customers (other than large power users and The treasury department’s policies and practices are small power users) are required to provide security designed to preserve the independence and integrity of equivalent to between one to three months’ decision making and ensure credit risks are accurately consumption at the commencement of the supply assessed, properly approved, continually monitored and agreement. The level of security is reviewed when a actively managed. customer defaults on their payment obligation or requires additional electricity supply capacity in which Aggregate credit exposure, hold-limit exceptions and risk case they are required to either provide security or profile changes are reported to Exco and the risk increase their existing security to an amount equivalent management committee on a quarterly basis. There is to between one to three months’ of recent consumption regular detailed reporting of limit utilisation, limit breaches before supply will commence. Redistributors are not and customer concentrations to ensure these are required to provide any security and are currently re- appropriately managed and monitored. evaluated based on their payment history to determine if any security is necessary.    Eskom is currently developing Impairment assessments are performed to evaluate the a municipal model to manage any associated risk credit risk exposure. The assessments focus on the following exposure. areas: • significant financial difficulty of the issuer or counterparty Payment terms vary between customer classes as • high probability of bankruptcy follows: • breach of contract • key international customers: 10 to 45 days • key and other large power users: Financial instruments managed by other divisions and individually negotiated up to a maximum of 15 days subsidiaries • small power users: 30 days (a) Electricity receivables Eskom supplies electricity to customers in its licensed Interest is charged at market-related rates on balances areas of supply. A large proportion of the residential in arrears. customers are on a prepaid basis. The group has well-established credit control Eskom’s exposure to credit risk is influenced by the procedures that monitor activity on customer accounts individual characteristics of each customer.   In monitoring and allow for remedial action should the customer not credit risk, customers are grouped according to their comply with payment terms. These procedures include credit characteristics, including whether they are large an internal collection process, follow up with the or small power users, geographic location, ageing customer either telephonically or in person,    negotiations profile, security (deposits and guarantees) held and of mutually acceptable payment arrangements and the payment history. issue of a notice of disconnection of supply and letters of demand. Non-payment will result in disconnection of The main classes of electricity receivables are supply and the customer’s account being closed. The international, local large and local small power users. legal collection process is pursued thereafter. 204 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 3. Financial risk management (continued) (b) Other trade receivables 3.1 Credit risk (continued) Eskom Enterprises (Pty) Limited provides plant life- 3.1.1 Management of credit risk (continued) cycle support, plant maintenance work, network Financial instruments managed by other divisions and protection and measurement mainly to Eskom. Credit subsidiaries (continued) exposure is managed, among others, by setting credit (a) Electricity receivables (continued) limits which are reviewed and approved by management The decision to impair overdue amounts is assessed on on a regular basis. Ongoing credit evaluations are the probability of recovery based on the customer’s performed on the financial position of debtors. Interest credit risk profile. is charged on balances in arrears. In the event of default, a collection process is initiated. Impairment is considered Progress on the collection process is reviewed on a on an individual account basis. Debtors are considered regular basis and if it is evident that the amount will not to be impaired when alternative collection methods to be recovered, it is recommended for write-off in terms recover outstanding debt has failed. of the Eskom policy and delegation of authority. The process of recovery continues unless it is confirmed (c) Other receivables that there is no prospect of recovery or the costs of Other receivables include recoverable work, employee such action will exceed the benefits to be derived. debtors, inter-group balances (company only) and Amounts written off are determined after taking into sundry debtors. account the value of the security held. Recoverable work is mainly project work carried out by The total cumulative allowance for impairment Eskom on behalf of external parties. The projects for electricity receivables at 31 March 2010 was include repairing damaged power lines, moving of R2,15 billion (2009: R2,69 billion) (refer note 3.1.2(a)). power lines or underground cables and engineering- A substantial portion relates to outstanding debt in related work. problematic areas. The collection of revenue from small power users in Soweto remains a challenge. The (d) Finance lease receivables enhancement of credit control strategies and Finance lease receivables mainly comprise premium monitoring of payment levels in this area continue to power supply contracts. The supply of electricity to receive management attention. The payment levels customers may be either in the form of standard or from these customers, expressed as a percentage of premium power supply. billed revenue, was 32% (2009: 33%). A standard supply is the least-cost technically acceptable Eskom is currently testing the strategy of secured split solution as defined in the Distribution Network Code metering and debt recovery via prepayment as a key whereas the premium power supply is where the approach to minimise the risk of non-collection. customer’s requirement exceeds the specifications of a Significant stakeholder and political support at local and standard supply. Premium supply customers may national government level is required to ensure the already have a standard supply from Eskom but wish to successful rollout of this new strategy going forward. reserve dedicated additional equipment to provide a backup supply. This is achieved through the installation In addition, the following strategies are currently in of dedicated premium supply equipment for which the operation and are largely successful in other high-risk customer is required to pay the full capital costs. areas of non-paying customers. These include: • disconnections Connection charges for premium supply contracts can • conversion to prepayment be repayable on a monthly basis over a maximum • increased internal debt management capacity period of 25 years. • use of debt collectors • payment arrangements The credit risk exposure resulting from premium supply • focus on early identification and letters of demand contracts is managed in a similar manner as for the • increased securities standard supply contracts. Security is required from • efficient internal process, for example system customers for premium supply assets which covers automation of credit and collections such as irrecoverable costs in the event of the early termination automated notices and letters of demand of the supply contract. Premium supply customers Eskom Holdings Limited 205 Integrated Repor t 2010 have maintained a good payment history with Eskom individual loan amount as a percentage of the total over the years. The standard payment terms are home loan book at 31 March 2010 was 0,01% also applicable to the connection charge relating to the (2009: 0,01%). premium supply equipment which is billed monthly to the customer. In the event of default, the debtor is notified verbally and in writing.   If payment has not been received for a (e) Insurance activities period exceeding three months,   a process to foreclose Escap Limited (Escap), a 100% subsidiary of Eskom, on the loan is initiated and the property is sold by acts as the primary insurer for the group. It insures public auction or repossessed.   Should the property be the accident and health, engineering liability, motor, sold by public auction,   a reserve value is set that takes property, transportation and miscellaneous classes into account the value of the property,     arrear rates and of the short-term insurance business. It also insures taxes, legal costs and commissions payable. If the motor vehicles in terms of Eskom’s employee vehicle reserve value is not achieved, the property is allowance scheme. repossessed and is held for resale. Escap self-insures the group up to agreed limits by risk EFC entered into a securitisation arrangement with category whereafter the risks are covered by the Nqaba Finance 1 (Pty) Limited (Nqaba), a special- reinsurance market. purpose entity. The securitising of the home loan book converted the loan assets into marketable securities Reinsurers traded on the South African Bond Exchange.The special The creditworthiness of reinsurers is regularly assessed purpose entity is consolidated in the annual financial by the Escap risk management committee, especially statements of the EFC group. EFC is the preferential prior to finalisation of any contract. Minimum credit shareholder of Nqaba which entitles it to all the residual ratings and credit limits per counterparty are set. The profits (residual cash after priority payments). major reinsurers used during the financial year had market security ratings of A- or higher (based on EFC provides a first-loss credit enhancement loan equal Standard and Poor’s ratings). Although there was a to 2% of the notes in issue which bears interest at 30% write-off of R6,7 million in the prior year,   Escap has not per annum.     At 31 March 2010 the loan was R63 million experienced any other write-offs in the past three (2009: R39 million). As servicer of Nqaba,   EFC earns a years, and management is confident that the group’s servicing fee equal to 0,35% of the quarterly outstanding exposure in respect of the possibility of default by its loan book balance. At the end of the financial year, reinsurers remains minimal. the net asset value of Nqaba was R16 million (2009: R26 million). (f) Loans receivable Home and personal loans are made available to employees in the group via Eskom Finance Company (Pty) Limited (EFC).   Credit risk policies are in place which require various criteria to be met prior to the approval of a loan.   These criteria include the valuation of property, affordability and credit history of the employee. The amounts advanced are secured by first mortgages over the property purchased and are repayable over an average period of up to 26 years.   The risk of default by the employee is reduced as the monthly instalments are deducted from the employee’s salary. Employees who are no longer in the employ of the group are required to arrange for a monthly debit order to settle the monthly instalment.   Loans are not extended where the purchase price of the property exceeds its open market value.   The weighted average 206 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 3. Financial risk management (continued) 3.1 Credit risk (continued) 3.1.2 Credit exposure The carrying amount of financial assets represents the maximum credit exposure at the reporting date (refer note 13). The following table represents an analysis per credit rating level (as determined by rating agencies) of the credit risk of financial assets, except for embedded derivatives, trade and other receivables and financial instruments with group companies. Investment in securities Financial Cash and Derivatives Finance Held-to- Loans and Available- trading cash held for risk lease maturity receivables for-sale assets equivalents management receivables Rm Rm Rm Rm Rm Rm Rm 2010 Group AAA – – 1 934 5 022 – – – AA – – – – 1 – – A1+ – – 2 137 1 078 7 915 104 – A1 – 549 – – 7 267 8 – A2 – – – – – – 4 Unrated – 569 – 4 358 – 541 – 1 118 4 071 6 104 15 541 112 545 Company AAA – – 1 934 5 022 – – – AA – – – – 1 – – A1+ – – 1 024 527 7 857 104 – A1 – 549 – – 6 783 8 – A2 – – – – – – 4 Unrated – – – 4 230 – 541 – 549 2 958 5 553 14 871 112 545 2009 Group AAA – – 1 873 – 394 – – AA+ – – – – – – 4 AA – – – – 1 – – AA- – – – – – – 3 A+ – – – – 381 – – A1+ – – 3 109 517 12 216 1 555 – A1 104 2 427 – 407 5 378 282 – BBB- – – – – – – 9 Unrated – 405 – – 12 – 531 104 2 832 4 982 924 18 382 1 837 547 Company AAA – – 1 873 – 394 – – AA+ – – – – – – 4 AA – – – – 1 – – AA- – – – – – – 3 A+ – – – – – – – A1+ – – 2 069 155 12 144 1 555 – A1 104 2 427 – 407 5 378 282 – BBB- – – – – – – 9 Unrated – – – – 4 – 531 104 2 427 3 942 562 17 921 1 837 547 No credit limits were exceeded during the reporting period, nor does management expect any losses from non-performance by these counterparties. Eskom Holdings Limited 207 Integrated Repor t 2010 Group Company 2010 2009 2010 2009 Note Rm Rm Rm Rm The maximum exposure to credit risk for trade and other receivables per class was: Electricity receivables 6 964 4 810 6 964 4 810 International 297 176 297 176 Local large power users 5 535 3 812 5 535 3 812 Local small power users 1 109 786 1 109 786 Service delivery framework 1 23 36 23 36 Other trade receivables 300 305 – – International 32 26 – – Local 268 279 – – Other receivables 2 146 3 099 1 306 2 286 Recoverable work 67 106 67 106 Employee debtors 47 43 47 43 Inter-company debtors – – 223 704 Reinsurance debtors 424 437 – – Value added tax receivable 207 1 064 193 1 064 Concession debtors 517 655 – – Sundry debtors 884 794 776 369 Total trade and other receivables 17 9 410 8 214 8 270 7 096 The analysis per credit rating level of the credit risk of trade and other receivables was: AAA 2 – 2 – AA+ 32 – 32 – AA 287 – 287 – AA- 527 – 527 – A+ 301 1 064 301 1 064 A1+ 584 557 201 454 A1 38 – 38 – A3 200 38 200 38 BBB- 43 – 43 – Unrated 7 396 6 555 6 639 5 540 9 410 8 214 8 270 7 096 The maximum exposure to credit risk for loans receivable was (classified as non-current assets held-for-sale in 2009): 4 116 – The maximum exposure to credit risk for non-current assets held-for-sale was: Trade and other receivables 22 – 344 Loans receivable 22 – 2 787 Finance lease receivables 22 – 26 – 3 157 1. Negotiated agreement with stakeholders in residential areas which is a specific initiative aimed at resolving the non-payment of accounts. 208 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 3. Financial risk management (continued) 3.1 Credit risk (continued) 3.1.2 Credit exposure (continued) (a) Electricity receivables Group and company Carrying Not impaired1 Impaired2 amount Not Days past due Not Days past due past due past due 0-15 16-45 46-75 >75 0-15 16-45 46-75 >75 2010 Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm Individually assessed for impairment International 297 224 59 1 – 13 – – – – – Gross 308 224 59 1 – 13 1 1 1 1 7 Impairment (11) – – – – – (1) (1) (1) (1) (7) Local large power users 5 535 5 260 84 57 32 40 3 1 2 2 54 Gross 5 983 5 260 84 57 32 40 40 10 41 31 388 Impairment (448) – – – – – (37) (9) (39) (29) (334) Not Days past due past due 0-30 31-60 >60 Rm Rm Rm Rm Collectively assessed for impairment Local small power users 1 109 590 95 58 366 Gross 2 356 620 134 96 1 506 Impairment (1 247) (30) (39) (38) (1 140) Service delivery framework 23 4 1 1 17 Gross 465 13 4 4 444 Impairment (442) (9) (3) (3) (427) Total carrying amount 6 964 Eskom Holdings Limited 209 Integrated Repor t 2010 Group and company Carrying Not impaired1 Impaired2 amount Not Days past due Not Days past due past due past due 0-15 16-45 46-75 >75 0-15 16-45 46-75 >75 2009 Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm Individually assessed for impairment International 176 35 – 1 – – 119 – 15 4 2 Gross 552 35 – 1 – – 150 – 15 10 341 Impairment (376) – – – – – (31) – – (6) (339) Local large power users 3 812 3 576 190 24 8 2 5 1 1 – 5 Gross 4 010 3 576 190 24 8 2 26 22 27 26 109 Impairment (198) – – – – – (21) (21) (26) (26) (104) Not Days past due past due 0-30 31-60 >60 Rm Rm Rm Rm Collectively assessed for impairment Local small power users 786 377 40 29 340 Gross 1 694 415 95 90 1 094 Impairment (908) (38) (55) (61) (754) Service delivery framework 36 7 3 2 24 Gross 518 14 5 4 495 Impairment (482) (7) (2) (2) (471) Total carrying amount 4 810 Electricity receivables include an amount of R75 million (2009: R34 million) relating to receivables that were renegotiated3. These electricity receivables would have been past due had their terms not been renegotiated. Interest is accrued on all arrear debts and R216 million (2009: R401 million) was credited to profit or loss within finance income. 1. Receivables past due but not impaired are receivables where contractual payment terms are past due but the group believes that impairment is not required on the basis of the level of security or collateral available and the stage of collection of amounts owed to the group. 2. Impaired receivables are receivables for which the group determines that it is probable that it will be unable to collect all amounts due in accordance with the contractual payment terms. 3. Receivables with renegotiated terms are receivables that have been restructured due to the deterioration in the customer’s financial position and where the group has made concessions that it would not otherwise consider. 210 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 3. Financial risk management (continued) 3.1 Credit risk (continued) 3.1.2 Credit exposure (continued) (b) Other trade receivables Group Carrying Not impaired Impaired amount Not Days past due Not Days past due past due past due 0-30 31-60 61-90 >90 0-30 31-60 61-90 >90 Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm 2010 Individually assessed for impairment International 32 16 15 – 1 – – – – – – Gross 32 16 15 – 1 – – – – – – Impairment – – – – – – – – – – – Local 268 205 13 7 10 17 16 – – – – Gross 281 205 13 7 10 17 17 – – 1 11 Impairment (13) – – – – – (1) – – (1) (11) Total carrying amount 300 2009 International 26 25 – – – – – – – – 1 Gross 29 25 – – – – – – – – 4 Impairment (3) – – – – – – – – – (3) Local 279 237 32 4 – 6 – – – – – Gross 287 237 32 4 – 6 – – – – 8 Impairment (8) – – – – – – – – – (8) Total carrying amount 305 (c) Other receivables Other receivables comprise mainly receivables for which there are no specific repayment terms. Group Company 2010 2009 2010 2009 Rm Rm Rm Rm Recoverable work 67 106 67 106 Gross 67 106 67 106 Impairment – – – – Employee receivables 47 43 47 43 Gross 48 45 48 45 Impairment (1) (2) (1) (2) Inter-company receivables – – 223 704 Gross – – 223 704 Impairment – – – – Reinsurance receivables 424 437 – – Gross 424 437 – – Impairment – – – – Value added tax receivable 207 1 064 193 1 064 Gross 207 1 064 193 1 064 Impairment – – – – Concession receivables 519 655 – – Gross 521 665 – – Impairment (2) (10) – – Sundry receivables 882 794 776 369 Gross 1 097 964 991 539 Impairment (215) (170) (215) (170) Total carrying amount 2 146 3 099 1 306 2 286 Factors considered for impairment per class include: – Sundry and employee receivables: long-outstanding debt or amounts handed over to debt collectors. Eskom Holdings Limited 211 Integrated Repor t 2010 (d) Loans receivable Group Carrying Not Days past due amount past due 0-30 31-60 >60 2010 Rm Rm Rm Rm Rm Collectively assessed for impairment Loans receivable 4 116 4 037 10 10 59 Home loans 4 134 4 042 11 11 70 Impairment (18) (5) (1) (1) (11) Total carrying amount 4 116 Loans receivable include an amount of R61 million (2009: R59 million) relating to receivables that were renegotiated. These loans receivable would have been past due had their terms not been renegotiated. (e) Non-current assets held-for-sale Group Carrying Not impaired Impaired amount Not Days past due Not Days past due past due past due 0-30 31-60 >60 0-30 31-60 >60 2009 Rm Rm Rm Rm Rm Rm Rm Rm Rm Individually assessed for impairment Trade and other receivables 344 258 33 13 33 7 – – – Gross 403 258 33 13 33 14 1 – 51 Impairment (59) – – – – (7) (1) – (51) Not Days past due past due 0-30 31-60 >60 Rm Rm Rm Rm Collectively assessed for impairment Loans receivable 2 787 2 709 18 9 51 Home loans 2 799 2 713 18 9 59 Impairment (12) (4) – – (8) Total carrying amount 3 131 212 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 3. Financial risk management (continued) 3.1 Credit risk (continued) 3.1.2 Credit exposure (continued) Group Company 2010 2009 2010 2009 Note Rm Rm Rm Rm (f) Security relating to amounts receivable The security held against trade and other receivables for the group comprises guarantees and deposits. The estimate of the fair value of the security held is: Electricity receivables 2 674 2 252 2 674 2 252 Local large power users 1 935 1 601 1 935 1 601 Local small power users 734 649 734 649 Service delivery framework 5 2 5 2 Other receivables – 23 – 23 Recoverable work – 12 – 12 Employee debtors – 4 – 4 Sundry debtors – 7 – 7 Total 2 674 2 275 2 674 2 275 The total amount of the security above includes R1 935 million (2009: R1 407 million) relating to electricity receivables (international and large power users) which were not impaired and Rnil (2009: R20 million) relating to other receivables that were not impaired. Loans receivable secured by mortgage loans 3 882 2 799 (g) Allowance for impairment The movement in the allowance for impairment in respect of trade and other receivables during the year was: Balance at beginning of the year 2 157 1 365 2 136 1 349 Impairment loss recognised (net of reversals) 34 583 832 601 855 Write offs (361) (40) (373) (68) Balance at end of the year 2 379 2 157 2 364 2 136 Comprising: Electricity receivables 2 148 1 964 2 148 1 964 Other trade receivables 13 11 – – Other receivables 218 182 216 172 2 379 2 157 2 364 2 136 Eskom establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables. This allowance consists of a specific loss component that relates to individual exposures, and a collective loss component established for groups of similar customers in respect of losses that have been incurred but not yet identified. (h) Financial guarantees issued The group’s maximum exposure as a result of financial guarantees issued was R188 million (2009: R2 107 million) and R475 million (2009: R2 257 million) for the company (refer note 40.1 for more information on financial guarantees issued). Eskom Holdings Limited 213 Integrated Repor t 2010 3.2 Market risk Market risk is the risk that the fair value or future cash flows of financial instruments will fluctuate because of changes in foreign exchange rates, commodity prices, interest rates and equity prices. A significant part of the market risk encountered arises from financial instruments that are managed centrally within the treasury function of the group or from contracts containing embedded derivatives. The objective of the group’s market risk management policy is to protect and enhance the statement of financial position and profit or loss by managing and controlling market risk exposures and to optimise the funding of business operations and facilitate capital expansion. Financial instruments managed by the treasury function The treasury department is responsible for managing market risk within the risk management framework approved by Exco and the board. The overall authority for the management of market risks within the treasury department is vested in the asset and liability committee (Alco) and the credit risk committee.   Measurement and reporting occurs on a daily and/or monthly basis and is performed by an independent section within the treasury department. Financial derivatives are used to manage market risk. Financial instruments managed by other divisions and subsidiaries Market risk arises mainly from changes in foreign exchange rates and to a limited extent from changes in commodity prices and equity prices. The divisions and subsidiaries are responsible for identifying the exposure arising from these risks. They liaise with the centralised treasury function to hedge (economic and cash flow hedges) these exposures appropriately on their behalf. Embedded derivatives Eskom entered into a number of agreements to supply electricity to electricity-intensive industries where the revenue from these contracts is based on commodity prices and foreign currency rates (mainly USD) or foreign production price indices.   This gives rise to embedded derivatives that require separation as a result of the different characteristics of the embedded derivative and the host contract. The contractual periods vary from one year up to a maximum of 18 years.   Certain of these contracts are currently being renegotiated. The net impact on profit or loss of changes in the fair value of the embedded derivatives for the group is a fair value gain of R2 284 million (2009: R9 514 million loss) and a fair value gain of R2 283 million (2009: R9 506 million loss) for the company. At 31 March 2010, the embedded derivative assets amounted to R110 million (2009: R1 366 million) for the group and R110 million (2009: R1 366 million) for the company.     The embedded derivative liabilities at 31 March 2010 were R4 722 million (2009: R8 262 million) for the group and R4 721 million (2009: R8 260 million) for the company. The valuation methods and inputs are discussed in the accounting policies (refer note 2.11.5, page 196) and the valuation assumptions are disclosed under critical accounting estimates and judgements (refer note 4, page 224).   Risks arising from these contracts are discussed under the relevant risk areas as follows: • currency risk (refer note 3.2.1, page 216) • commodity risk (refer note 3.2.2, page 216) • interest rate risk (refer note 3.2.3, page 218) • other price risk (refer note 3.2.5, page 219) Electricity contracts that contain embedded derivatives are considered for economic hedging.   Hedging in respect of commodity risk and foreign currency exposure resulting from these embedded derivatives takes place on a short-term basis up to a maximum of five years. The South African Reserve Bank currently allows Eskom to hedge commodity price risk up to a maximum of five years with a foreign or local party. Loans receivable Market risks in respect of loans receivable, arise from changes in interest rates and market prices. Market risk is monitored and analysed through the treasury department and reported to the EFC finance committee. A strategy aimed at protecting the EFC group from changes in market risk that may have a negative impact on earnings has been implemented.   Funds to finance operations are raised over the short term, usually for periods of three to six months, but not exceeding one year.   This enables the pricing of assets to be matched with changes in the pricing of liabilities.   The cost of funding is based on prevailing conditions in the South African money market.   Rates charged on outstanding loans receivable are based on movements in the South African Reserve Bank repurchase rate. 214 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 3. Financial risk management (continued) 3.2 Market risk (continued) 3.2.1 Currency risk Currency risk arises primarily from purchasing imported goods and services directly from overseas or indirectly via local suppliers, foreign sales and foreign borrowings.   The group is exposed to foreign exchange risk arising from future commercial transactions and recognised assets and liabilities that are denominated in a currency other than the functional currency of the group.   All transactions in excess of R50 000 are hedged (ie economic or cash flow hedges). Currency exposure is identified by the business and hedged by the central treasury department.   All hedging activities are conducted and managed by the treasury department. Hedging instruments consist principally of forward exchange contracts, most of which have a maturity of less than one year from the reporting date,   but which are rolled over at maturity when necessary.   The group also uses currency swaps.   The hedging instrument is entered into once the exposure is firm and ascertainable. The major exposure to foreign currency risk at 31 March, based on notional amounts, was (in million): 2010 EUR USD GBP JPY SEK AUD CHF CAD NOK Group Assets Trade and other receivables – 12 – – – – – – – Liabilities Debt securities issued (500) – – – – – – – – Borrowings (90) (291) – (10 256) – – – – – Trade and other payables (155) (6) (29) (1 143) (50) (4) (2) (1) – Gross statement of financial position exposure (745) (285) (29) (11 399) (50) (4) (2) (1) – Estimated forecast sales1 – 155 – – – – – – – Estimated forecast purchases2 (2 552) (364) (19) (9 724) (170) – (23) (10) (2) Gross exposure (3 297) (494) (48) (21 123) (220) (4) (25) (11) (2) Derivatives held for risk management 3 299 490 49 21 123 214 3 24 11 2 Other exposures covered by company3 (7) – – – – – – – – Net exposure (5) 4 (4) 4 1 – (6) 4 (1) 4 (1) 4 – – Company Assets Trade and other receivables – 12 – – – – – – – Liabilities Debt securities issued (500) – – – – – – – – Borrowings (90) (291) – (10 256) – – – – – Trade and other payables (144) (5) (29) (1 143) (50) (4) (1) (1) – Gross statement of financial position exposure (734) (284) (29) (11 399) (50) (4) (1) (1) – Estimated forecast sales1 – 155 – – – – – – – Estimated forecast purchases2 (2 552) (364) (19) (9 724) (170) – (23) (10) (2) Gross exposure (3 286) (493) (48) (21 123) (220) (4) (24) (11) (2) Derivatives held for risk management 3 299 490 49 21 123 214 3 24 11 2 Group exposures covered by company (11) (1) – – – – (1) – – Net exposure 2 (4)4 1 – (6)4 (1)4 (1)4 – – Eskom Holdings Limited 215 Integrated Repor t 2010 2009 EUR USD GBP JPY SEK AUD CHF CAD NOK Group Assets Investment in securities 15 – – – – – – – – Trade and other receivables 7 38 – – – – – – – Liabilities Debt securities issued (500) – – – – – – – – Borrowings (100) (291) – (3 400) – – – – – Trade and other payables (215) (15) (2) (166) (42) – (3) – – Gross statement of financial position exposure (793) (268) (2) (3 566) (42) – (3) – – Estimated forecast sales1 – 112 – – – – – – – Estimated forecast purchases2 (3 132) (369) (52) (12 210) (324) – (3) (16) (1) Gross exposure (3 925) (525) (54) (15 776) (366) – (6) (16) (1) Derivatives held for risk management 3 950 658 54 15 813 332 – 6 15 – Other exposures covered by company3 (31) (21) (2) (34) – – – – – Net exposure (6) 4 112 5 (2) 3 (34) 4 – – (1) 4 (1)4 Company Assets Investment in securities 15 – – – – – – – – Trade and other receivables 7 38 – – – – – – – Liabilities Debt securities issued (500) – – – – – – – – Borrowings (100) (291) – (3 400) – – – – – Trade and other payables (208) (5) (1) (166) (41) – (2) – – Gross statement of financial position exposure (786) (258) (1) (3 566) (41) – (2) – – Estimated forecast sales1 – 112 – – – – – – – Estimated forecast purchases2 (3 132) (369) (52) (12 210) (324) – (3) (16) (1) Gross exposure (3 918) (515) (53) (15 776) (365) – (5) (16) (1) Derivatives held for risk management 3 950 658 54 15 813 332 – 6 15 – Group exposures covered by company (38) (31) (2) (34) (1) – (1) – – Net exposure (6)4 1125 (1) 3 (34)4 – – (1)4 (1)4 1. Represents foreign denominated sales for the next 12 months. 2. Represents future purchases contracted for. 3. Cover relates to exposure of a non-controlled wholly owned entity. 4. Cover can only be taken on firm commitments where there is certainty of 90% take up.   Cover is taken out when orders are placed. 5. Cover relating to forecast sales of R103 million was taken out on 30 April 2009.   In addition, cover was not taken out relating to a forecast sale of R20 million that is in dispute.   Included is an amount of R12 million where cover can only be taken on firm commitments where there is certainty of 90% take up. 216 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 3. Financial risk management (continued) 3.2 Market risk (continued) 3.2.1 Currency risk (continued) The following significant exchange rates applied during the year (rand values for one unit of selected currencies): Average rate Reporting date mid-spot rate 2010 2009 2010 2009 EUR 10,90 12,31 9,92 12,63 USD 7,75 8,79 7,34 9,49 GBP 12,29 14,72 11,11 13,57 CHF 7,27 7,69 6,94 8,33 JPY 0,08 0,09 0,08 0,10 SEK 1,06 1,22 1,02 1,15 CAD 7,09 7,69 7,23 7,69 AUD 6,60 6,67 6,73 6,67 NOK 1,28 1,45 1,24 1,41 Sensitivity analysis The group is mainly exposed to euros and United States dollars.   The sensitivity analysis has been performed on the same basis as the prior year. The analysis assumes that all other variables, in particular interest rates,   remain constant and are: Group and company 2010 2010 2009 2009 1% 1% 1% 1% increase decrease increase decrease Rm Rm Rm Rm Profit/(loss), excluding embedded derivatives Total exposure 207 (219) 218 (219) Rand/euro exposure 10 (10) 125 (123) Rand/USD exposure 191 (203) (7) 9 Equity, excluding embedded derivatives Total exposure 196 (200) 85 (86) Rand/euro exposure 192 (197) 13 (13) Rand/USD exposure 4 (4) 1 (1) Profit/(loss) – embedded derivatives1 Rand/USD exposure 107 (110) 422 (418) 3.2.2 Commodity risk The group is exposed to commodity risk where commodities are either used directly (eg coal or liquid fuels) or indirectly as a component of plant, equipment or inventory (eg aluminium, copper or steel). The revenue from certain customised pricing arrangements are linked to commodity prices. The exposures are hedged economically by means of futures and/or options. Economic hedging is applied where it is practical (a relevant hedging instrument exists) based on the most optimal economic solution and in compliance with the South African Reserve Bank requirements. The underlying exposure to commodity price risk could result in embedded derivatives. Where the embedded derivatives are closely related to the host contracts, the embedded derivatives are not accounted for separately. Where the embedded derivatives are not closely related to the host contracts, the contracts have been valued and accounted for separately. At year end only the customised pricing arrangements gave rise to commodity-linked (aluminium) embedded derivatives (refer note 3.2 on page 213). Commodities used directly Eskom purchases coal that is used in the generation of electricity from mines and is exposed to price and supply risks. Eskom has entered into long-term supply agreements with mines to ensure continuous supply of coal. In the fixed price contracts the price escalation is fixed, whereas Eskom pays for all the operational costs of the collieries where the contracts are on a cost-plus basis.The contracts are monitored closely and managed to ensure costs are maintained within acceptable levels. All production requirements above those of the long-term contracts are supplied via short- to medium-term contracts which usually have a transport element included in the purchase price. Refer to page 109 for further information on coal. Eskom Holdings Limited 217 Integrated Repor t 2010 There is also price risk exposure in the long-term primary energy water supply agreements entered into with the Department of Water Affairs (DWA) where Eskom pays for a portion of the operational costs incurred by DWA on certain of the water schemes. Refer to page 110 for further information on water. Eskom is exposed to price risk on the diesel that is used for the generation of electricity at its open-cycle gas turbine power stations. The price of diesel is a function of the crude oil and USD exchange rates. Refer to page 111 for further information on diesel. Commodities used indirectly The exposure where commodities formed a part of plant, equipment or inventory was relatively small at year end, but is increasing as the capital expansion programme progresses. Eskom hedges all its base metal exposures (aluminium, copper, zinc and nickel) during the year via commodity swaps (refer note 15). Sensitivity analysis From a commodity perspective the group is exposed mainly to changes in the aluminum price. The sensitivity analysis has been performed on the same basis as the prior year. The analysis assumes that all other variables remain constant and the possible impact on profit or loss is: Group and company 2010 2010 2009 2009 1% 1% 1% 1% increase decrease increase decrease Rm Rm Rm Rm Profit/(loss), excluding embedded derivatives Aluminium options 1 (1) (14) 15 Profit/(loss), including embedded derivatives1 Aluminium price 91 (91) 363 (363) The periods of the hedging instrument and that of the hedged item are not the same because of South African Reserve Bank regulations that limit the number of years which can be hedged. 3.2.3 Interest rate risk Interest rate risk is the risk that the group’s financial position may be adversely affected as a result of changes in interest rate levels, yield curves and spreads. The group’s interest rate risk arises mainly from short-term borrowings and forward exchange contracts. Borrowings and debt securities issued at variable rates expose the group to cash flow interest rate risk. Long-term borrowings and debt securities issued at fixed rates expose the group to fair value interest rate risk. The group’s policy is to restrict the maximum effective portion of the external debt (excluding the trading portfolio which is managed within the constraints of the treasury policy and control manual) exposed to an interest rate reset within the next 12-month period to 40%. Sensitivity analysis The group analyses its interest rate exposure on a dynamic basis by conducting a sensitivity analysis. This involves determining the impact on profit or loss of defined interest rate shifts.   For each simulation, the same interest rate shift is used for all currencies. The sensitivity analysis for interest rate risk assumes that all other variables, in particular foreign exchange rates, remain constant. The calculation excludes borrowing costs capitalised in terms of the group’s accounting policy. The analysis relates to variable-rate instruments and has been performed on the same basis as the prior year. 1. Impact on profit or loss is before calibration adjustments. 218 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 3. Financial risk management (continued) 3.2 Market risk (continued) 3.2.3 Interest rate risk (continued) The simulation is performed on a monthly basis to verify that the maximum loss potential is within the limit set by management. The results of the simulation are included in the table below. The South African rand and the United States dollar interest rates are used in determining the fair value of embedded derivatives. The sensitivity analysis below indicates the impact on profit or loss if these rates change. The sensitivity analysis assumes that all other variables remain constant and has been prepared on the same basis as for the prior year. Group Company 2010 2010 2009 2009 2010 2010 2009 2009 +100 -100 +100 -100 +100 -100 +100 -100 basis basis basis basis basis basis basis basis points points points points points points points points Rm Rm Rm Rm Rm Rm Rm Rm Profit/(loss), excluding embedded derivatives Rand interest rates (19) 19 (4) 4 1 (2) 6 (6) Profit/(loss), including embedded derivatives1 Rand interest rates 437 (455) 3 443 (3 842) 437 (455) 3 443 (3 842) USD interest rates (273) 283 (2 885) 3 189 (273) 283 (2 885) 3 189 A significant portion of the floating debt issued has been hedged with interest rate swaps. Accordingly, cash flow hedge accounting is applied and the changes due to interest rates are allocated to equity. Fixed and floating rate debt The fixed and floating rate debt percentages at 31 March were: Group Company 2010 2010 2009 2009 2010 2010 2009 2009 Fixed Floating Fixed Floating Fixed Floating Fixed Floating % % % % % % % % Continuing operations 91 9 90 10 91 9 90 10 Non-current assets held-for-sale – – 27 73 – – – – 3.2.4 Equity price risk Equity price risk arises from listed shares held by Escap. Changes in the fair value of equity securities held by the group will fluctuate because of changes in market prices, caused by factors specific to the individual equity issuer, or factors affecting all similar equity securities traded on the market. All the equity investments are listed on the JSE Limited (JSE). A 2% increase in the equity portfolio at the reporting date would have increased profit or loss by R7,9 million (2009: R5 million) after tax. An equal change in the opposite direction would have decreased profit or loss by the same amount. There will be no impact on equity. The analysis assumes that all other variables remain constant and is performed on the same basis as for the prior year. Movements of financial assets and equity prices are monitored on a monthly basis and equity price changes assessed against the JSE Shareholder Weighted Index as a benchmark. Eskom Holdings Limited 219 Integrated Repor t 2010 3.2.5 Other price risk Inflation price risk arises from embedded derivatives as discussed under note 3.2 on page 213. The risk arises from movements in the electricity tariffs, the United States production price index (PPI) and the South African consumer price index (CPI). The following is the sensitivity analysis of the change in the value of the embedded derivatives (relating to customised pricing agreements) as a result of changes in electricity tariffs, the South African CPI or the United States PPI. This analysis has been performed on the same basis as the prior year. The analysis assumes that all other variables remain constant and the possible impact on profit or loss is: Group and company 2010 2010 2009 2009 1% 1% 1% 1% increase decrease increase decrease Rm Rm Rm Rm Profit/(loss), including embedded derivatives1 Electricity tariffs (95) 95 (3 085) 2 852 South African CPI (316) 309 (3 489) 3 193 United States PPI 39 (39) 129 (134) 3.3 Liquidity risk Liquidity risk is the risk that the group will not have sufficient financial resources to meet its obligations when they fall due, or will have to do so at excessive cost. This risk can arise from mismatches in the timing of cash flows from revenue and capital and operational outflows. Funding risk arises when the necessary liquidity to fund illiquid asset positions, such as building new electricity capacity, cannot be obtained at the expected terms and when required. The objective of the group’s liquidity and funding management is to ensure that all foreseeable operational, capital expansion and loan commitment expenditure can be met under both normal and stressed conditions. The group has adopted an overall statement of financial position approach, which consolidates all sources and uses of liquidity, while aiming to maintain a balance between liquidity, profitability and interest rate considerations. The management of consolidated liquidity and funding risk is centralised in the treasury department in accordance with practices and limits set by the Exco and the board. The group’s liquidity and funding management process includes: • projecting cash flows and considering the cash required by the group and optimising the short-term liquidity requirements as well as the long-term funding • monitoring financial position liquidity ratios • maintaining a diverse range of funding sources with adequate back-up facilities • managing the concentration and profile of debt maturities • actively managing the funding risk by evaluating optimal entry points into the various markets per the official funding plan • maintaining liquidity and funding contingency plans Eskom has an established corporate governance structure and process for managing the risks regarding guarantees and contingent liabilities (refer note 40). All significant guarantees issued by Eskom are approved by the board, and are managed on an ongoing basis through the quarterly meetings of the treasury credit committee, and by the risk management committee of the board. The guarantees are administratively managed by the treasury department. Updated guarantee schedules are compiled every month, taking cognisance of any changed risk factors, and are submitted to each of the committees for consideration and action, if necessary. Risk factors and assumptions affecting probability calculations are reassessed twice a year and presented to the above committees. Eskom's guarantees are diverse and unlinked, such that a trigger event for any one guarantee is unlikely to precipitate a trigger event in respect of other guarantees. Given that there would be forewarning of payments required in terms of the other guarantees, and considering the amounts of the guarantees, it is expected that Eskom will be able to raise the required liquidity to effect any required payments. 1. Impact on profit or loss is before calibration adjustments. 220 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 3. Financial risk management (continued) 3.3 Liquidity risk (continued) Primary sources of funding and unused facilities The primary sources to meet Eskom's liquidity requirements are revenue, cash inflows from maturing financial assets purchased, funds committed by government, as well as local and foreign debt issued in the market. To supplement these liquidity sources under stress conditions, overdraft facilities (for which there was no requirement to use), undrawn loans, financing and guarantee facilities are in place as indicated below. Group and company 2010 2009 Currency m m Japan Bank for International Cooperation (JBIC) Untied facility JPY 14 300 21 000 Tied facility JPY 30 000 30 000 European Investment Bank EUR 88 113 KFW Bankengruppe EUR – 250 General banking facilities ZAR 2 500 700 Subordinated loan from shareholder ZAR 20 000 50 000 Government guarantees – uncommitted ZAR 91 116 150 000 – Domestic Multi-term Note programme ZAR 18 110 – African Development Bank loan facility EUR 930 – African Development Bank loan facility ZAR 10 630 – Export Credit Agency floating rate facility EUR 530 – Export Credit Agency fixed rate facility EUR 250 – Export Credit Agency loan facility EUR 1 890 – The World Bank has approved the South African government’s request for a USD3,75 billion loan to co-finance the Medupi power station in Lephalale, Limpopo province. These funds combine favourable financing rates with a structured repayment profile. This approval clears the way for the full construction of Medupi power station and is catalytic for South Africa’s commitment to renewable energy and lower carbon technologies such as large-scale solar thermal and wind power. Key indicators used for liquidity management Duration Management has set minimum duration limits to help optimise returns for the group on its debt portfolio. Group policy is to ensure that the external debt portfolio (excluding the trade portfolio) has a minimum duration of five years,    should it exceed R10 billion. The duration limits are independently monitored and reported to Alco on a monthly basis and to Exco and the risk management committee on a quarterly basis. The duration (a weighted average term to maturity measure based on future cash flows) of the debt measured at fair value at 31 March was: Group Company 2010 2009 2010 2009 Years Years Years Years Continuing operations 6,75 6,28 6,75 6,28 Non-current assets held-for-sale – 1,70 – – Liquid assets Liquid assets are investments identified as having the potential to be quickly converted into cash. These investments include negotiable certificates of deposit and floating rate notes as disclosed in investment in securities (refer note 13.1 and 13.2). The liquid assets were: Group Company 2010 2009 2010 2009 Rm Rm Rm Rm Continuing operations 17 408 21 234 15 627 20 824 Capital expenditure ratio The capital expenditure ratio1 measures whether there are liquid funds available to invest in capital expenditure. The capital expenditure ratio for the period was: Group Company 2010 2009 2010 2009 % % % % Continuing operations 38 12 36 12 Eskom Holdings Limited 221 Integrated Repor t 2010 Contractual cash flows The table below indicates the contractual undiscounted cash flows of the group’s financial assets and liabilities (refer note 13) on the basis of their earliest possible contractual maturity.   The undiscounted cash flows in respect of the group's financial assets are presented net of impairment losses and include estimates where there are no contractual repayment terms or the receivable is past due.   The cash flows of the group’s financial liabilities are indicated on a gross undiscounted basis.   The cash flows for derivatives are presented as gross inflows and outflows even though physically they are settled simultaneously. The table contains only cash flows relating to financial instruments and commitments (financial guarantees and loan commitments). It does not include future cash flows expected from the normal course of business and related commodity linked pricing agreements. Carrying amount Cash flows Non- Current Nominal 0 to 3 4 to 12 1 to 5 More current inflow or months months years than outflow 5 years 2010 Rm Rm Rm Rm Rm Rm Rm Group Financial assets Investment in securities 2 392 2 797 5 962 2 192 1 277 852 1 641 Loans receivable 4 110 6 10 079 135 404 1 954 7 586 Derivatives held for risk management – 112 1 063 287 776 – – Finance lease receivables 532 13 1 400 22 63 329 986 Trade and other receivables 19 9 391 9 410 8 803 588 18 1 Financial trading assets – 6 104 7 138 487 1 720 1 090 3 841 Cash and cash equivalents – 15 541 15 541 15 541 – – – 7 053 33 964 50 593 27 467 4 828 4 243 14 055 Financial liabilities Debt securities issued 59 322 2 880 145 960 2 620 4 095 25 741 113 504 Borrowings 11 183 9 143 35 031 1 394 9 084 4 917 19 636 Subordinated loan from shareholder 23 445 – 77 114 – – 8 808 68 306 Derivatives held for risk management 3 626 4 644 40 985 6 743 30 089 3 802 351 Finance lease liabilities 632 52 2 240 58 152 672 1 358 Trade and other payables 1 134 16 331 17 936 12 775 3 556 1 203 402 Financial trading liabilities – 5 513 10 430 699 457 1 400 7 874 99 342 38 563 329 696 24 289 47 433 46 543 211 431 Company Financial assets Financial instruments with group companies – 2 461 2 571 936 1 635 – – Investment in securities 1 923 1 584 4 298 528 1 277 852 1 641 Derivatives held for risk management – 112 1 063 287 776 – – Finance lease receivables 532 13 1 400 22 63 329 986 Trade and other receivables 23 8 247 8 270 7 659 588 22 1 Financial trading assets – 5 553 6 027 271 825 1 090 3 841 Cash and cash equivalents – 14 871 14 871 14 871 – – – 2 478 32 841 38 500 24 574 5 164 2 293 6 469 Financial liabilities Financial instruments with group companies – 1 897 1 897 161 1 736 – – Debt securities issued 58 538 2 141 144 438 1 882 4 095 24 957 113 504 Borrowings 10 708 9 094 34 452 1 362 8 988 4 466 19 636 Subordinated loan from shareholder 23 445 – 77 114 – – 8 808 68 306 Derivatives held for risk management 3 626 4 644 40 985 6 743 30 089 3 802 351 Finance lease liabilities 965 74 2 595 58 173 807 1 557 Trade and other payables 797 16 370 17 636 13 246 3 124 864 402 Financial trading liabilities – 5 513 10 430 699 457 1 400 7 874 98 079 39 733 329 547 24 151 48 662 45 104 211 630 1. The ratio is calculated as cash generated from operations divided by capital expenditure (excluding finance cost capitalised) on property, plant and equipment and intangible assets. 222 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 3. Financial risk management (continued) 3.3 Liquidity risk (continued) Carrying amount Cash flows Non- Current Nominal 0 to 3 4 to 12 1 to 5 More current inflow or months months years than outflow 5 years 2009 Rm Rm Rm Rm Rm Rm Rm Group Financial assets Investment in securities 3 558 4 360 9 830 4 262 133 2 086 3 349 Derivatives held for risk management 586 1 251 6 128 1 843 3 166 710 409 Finance lease receivables 536 11 1 516 20 62 348 1 086 Trade and other receivables 23 8 191 8 214 7 486 705 21 2 Financial trading assets – 924 927 815 112 – – Cash and cash equivalents – 18 382 18 693 18 693 – – – 4 703 33 119 45 308 33 119 4 178 3 165 4 846 Financial liabilities Debt securities issued 44 253 3 324 134 777 3 017 3 299 20 560 107 901 Borrowings 11 221 13 811 27 636 4 491 10 235 618 12 292 Subordinated loan from shareholder 1 575 – 10 000 – – – 10 000 Derivatives held for risk management 786 2 626 63 041 8 090 48 229 5 542 1 180 Finance lease liabilities 537 15 1 880 27 82 405 1 366 Trade and other payables 1 466 16 701 18 726 13 570 3 131 1 686 339 Financial trading liabilities – 2 180 2 069 44 101 241 1 683 59 838 38 657 258 129 29 239 65 077 29 052 134 761 Company Financial assets Financial instruments with group companies – 1 279 1 292 1 127 165 – – Investment in securities 3 153 3 320 8 385 2 788 567 1 681 3 349 Derivatives held for risk management 586 1 251 6 128 1 843 3 166 710 409 Finance lease receivables 536 11 1 516 20 62 348 1 086 Trade and other receivables 23 7 073 7 096 6 394 679 21 2 Financial trading assets – 562 565 453 112 – – Cash and cash equivalents – 17 921 18 235 18 235 – – – 4 298 31 417 43 217 30 860 4 751 2 760 4 846 Financial liabilities Financial instruments with group companies – 1 853 1 915 643 1 272 – – Debt securities issued 44 253 3 324 134 777 3 017 3 299 20 560 107 901 Borrowings 10 794 13 809 27 164 4 491 10 235 146 12 292 Subordinated loan from shareholder 1 575 – 10 000 – – – 10 000 Derivatives held for risk management 786 2 626 63 041 8 090 48 229 5 542 1 180 Finance lease liabilities 761 45 2 311 44 131 619 1 517 Trade and other payables 1 297 16 248 18 104 15 836 412 1 401 455 Financial trading liabilities – 2 180 2 069 44 101 241 1 683 59 466 40 085 259 381 32 165 63 679 28 509 135 028 Eskom Holdings Limited 223 Integrated Repor t 2010 Non-current assets held-for-sale Carrying amount Cash flows Non- Current Nominal 0 to 3 4 to 12 1 to 5 More current inflow or months months years than outflow 5 years Rm Rm Rm Rm Rm Rm Rm 2010 Financial assets Cash and cash equivalents – 9 9 9 – – – 2009 Financial assets Loans receivable 2 779 8 7 945 113 334 1 655 5 843 Finance lease receivables 18 8 33 3 8 22 – Trade and other receivables – 344 344 322 22 – – Cash and cash equivalents – 428 428 266 162 – – 2 797 788 8 750 704 526 1 677 5 843 Financial liabilities Debt securities issued 1 127 266 1 393 266 – 1 127 – Borrowings 2 6 8 – 6 2 – Trade and other payables – 305 305 305 – – – 1 129 577 1 706 571 6 1 129 – 3.4 Capital management Eskom manages accumulated profit and the hedging, fair value, equity and insurance reserves as capital. The equity reserve comprises the day-one gains that result from the initial recognition of the subordinated loan tranches received from the shareholder. The day-one gains are included in equity as it is considered to be a contribution from the shareholder (refer note 13.5). Eskom is obliged to pay interest on the loan when the solvency and debt leverage conditions per the agreement are satisfied. Future projections result in the day-one gains. The objective of capital management is to ensure that Eskom is sustainable over the long term.   There were no changes to Eskom’s approach to capital management during the financial year. The major items that impact the equity of Eskom include: • the revenue received from electricity sales (which is a function of price and sales volumes) • the cost of funding the business • the cost of operating the electricity business • the cost of expanding the business to ensure that capacity growth is in line with electricity sales demand (funding and additional depreciation) • taxation • dividends Eskom uses the Integrated Strategic Electricity Planning process which forecasts the growth in electricity demand for the long term and evaluates the alternative means to meet and manage that demand. This information flows into the planning process. The planning process will determine a forward electricity price curve which will be an indication of the size of the price increases which Eskom requires to be sustainable over the long term. The tariff increases for the electricity business is subject to the process laid down by the National Energy Regulator of South Africa (NERSA). The current regulatory framework applicable to Eskom is a multi-year, incentive-based method of adjusting electricity prices. The electricity business is currently in a major expansion phase. There is national consensus that the capital expansion programme continues. The funding related to new generating, transmitting and other capacity is envisaged to be obtained from cash generated by the business, shareholder support and funds borrowed on the local and overseas markets. The adequacy of price increases allowed by the regulator and the level and timing of shareholder support are key factors in the sustainability of Eskom. Eskom is in discussion with government and key stakeholders to agree on and implement an appropriate funding model. This will take into account a holistic and integrated approach to tariffs, borrowing and equity. It is clear, however, that any capacity expansion beyond the Kusile project will need to be carried out in a prefunded/project finance type manner in order to ensure the stability of Eskom's statement of financial position. Refer to page 90 and 158 for further information on electricity prices. The debt to equity ratio plays an important role in the credit ratings given to Eskom which in turn influences the cost of funding. The debt equity ratio including long-term provisions at 31 March 2010 for the group was 1,55 (2009: 1,22) and 1,68 (2009: 1,29) for the company. The government as the sole shareholder and the board has the responsibility to ensure that the company is adequately capitalised to ensure continuity of supply and that the business is attractive to investors to enable Eskom to fund the expansion programme. 224 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 4. Critical accounting estimates and judgements Estimates and judgements are evaluated continually and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The group makes estimates and assumptions concerning the future.The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. (a) Embedded derivatives Eskom has entered into a number of agreements to supply electricity to electricity-intensive industries where the revenue from these contracts is linked to commodity prices and foreign currency rates (mainly USD) or foreign production price indices that give rise to embedded derivatives. Subsidiaries of Eskom Enterprises also entered into sales contracts where the revenue is based on the USD, foreign production price indices and foreign interest rates that give rise to embedded derivatives. The embedded derivatives have been divided into three categories: • commodity and/or foreign currency derivatives • foreign currency or interest rate derivatives • production price and foreign currency derivatives Valuation The fair value of embedded derivatives is determined by using a forward electricity price curve. Valuation assumptions The forward electricity price curve used to value embedded derivatives at 31 March 2010 was the applicable tariff determined by Nersa on 24 February 2010. This forward curve is based on the average electricity price increase indicated by Nersa in the price applications for the 2010/11, 2011/12 and 2012/13 financial years. These rates are 24,8%, 25,8% and 25,9% and assumes two additional annual increases of 25% and CPI thereafter. The forward electricity price curve used to value embedded derivatives at 31 March 2009 was 26,2% for the 2010 financial year, 25% plus CPI for the next two years and CPI thereafter. The contracted electricity price used to value embedded derivatives is based on a combination of the factors in the table below over the contracted period. Forecast sales volumes are based on the most likely future sales volumes which have been back-tested against historic volumes. The fair value of embedded derivatives takes into account the inherent uncertainty relating to the future cash flows of embedded derivatives, such as liquidity, model risk and other economic factors. The renegotiation of the Mozal contract has significantly reduced the value of embedded derivatives. The negotiations regarding the other commodity-linked contracts are continuing. The following valuation assumptions for the future electricity price curve discussed above for the valuation of embedded derivatives were used and are regarded as the best estimates by the board: 2010 Year ended 31 March Input Unit 2010 20111 20121 20131 20141 20151 Aluminium USD per ton 2 262 2 408 2 495 2 568 2 633 2 688 Rand/USD USD per rand 0,14 – – – – – Rand interest rates Continuous actual/365 days (%) 6,44 7,21 6,92 7,30 7,65 7,92 Dollar interest rates Annual actual/360 days (%) 0,23 1,10 1,20 1,82 2,35 2,78 United States PPI Year-on-year (%) (1,63) 4,89 1,85 3,00 1,28 2,28 South African CPI Year-on-year (%) (2,02) 7,85 6,70 6,21 6,79 6,59 Eskom Holdings Limited 225 Integrated Repor t 2010 2009 Year ended 31 March Input Unit 2009 2010 1 20111 20121 20131 20141 Aluminium USD per ton 1 357 1 498 1 642 1 769 1 875 1 970 Rand/USD USD per rand 0,11 – – – – – Rand interest rates Continuous actual/365 days (%) 9,31 7,44 7,53 7,84 8,08 8,24 Dollar interest rates Annual actual/360 days (%) 0,43 1,29 1,46 1,75 2,04 2,30 United States PPI Year-on-year (%) (0,84) (3,62) 2,36 2,17 0,41 2,59 South African CPI Year-on-year (%) 10,30 6,38 5,70 5,50 5,46 6,95 Sensitivity analysis The approximate change in the value of embedded derivatives if one of the inputs is changed is disclosed in note 3.2 Financial risk management – market risk on page 213. The carrying amount of the embedded derivative assets for the group and company is R110 million (2009: R1 366 million). The carrying amount of the embedded derivative liabilities for group is R4 722 million (2009: R8 262 million) and R4 721 million (2009: R8 260 million) for company. (b) Post-retirement medical benefits The group provides post-retirement medical benefits to its retirees. The post-retirement medical benefits plan is unfunded. Valuation The estimated present value of the anticipated expenditure for both in-service and retired members is actuarially valued using the projected unit method. This method treats the accrued service liability separately from the current cost liability. The accrued service liability (on the valuation assumptions) is based on the completed service to the valuation date. The current cost is the cost of providing the benefit over the next year. Valuation assumptions The principal actuarial assumptions used were: Group and company 2010 2009 % % Long-term interest rate before tax 8,90 8,75 Long-term medical aid inflation 7,40 7,25 Sensitivity analysis The carrying amount of the provision would be an estimated R689 million (2009: R847 million) lower had the medical inflation rate used in the valuation decreased by 1% and R794 million (2009: R1 057 million) higher had the medical inflation rate increased by 1%. The carrying amount of the post-retirement medical benefits liability for group is R7 190 million (2009: R6 238 million) and R7 033 million (2009: R6 103 million) for company. 1. Forward curve based on financial years. 226 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 4. Critical accounting estimates and judgements (continued) (c) Occasional and service leave The group recognises a liability for occasional and service leave as the leave is of a long-term nature. Valuation An actuarial valuation is done on an annual basis for occasional and service leave. The accrued liability is determined by valuing all future leave expected to be taken and payments to be made in respect of benefits up to the valuation date. The present value of the benefits is determined by using the yield of long-dated corporate bonds (or government bonds where high quality corporate bonds are not available). Valuation assumptions The principal actuarial assumptions used were: Group and company 2010 2009 % % Long-term investment returns 8,9 8,8 Long-term general price inflation 5,4 5,3 Salary increases 6,9 6,8 Leave usage 5,0 5,0 The assumptions made in respect of resignation, death and retirement rates are the same as for the post-retirement medical aid liability. Sensitivity analysis Based on current experience, only 5% of the leave is utilised. If the rate at which leave is utilised is 10%, then the liability will increase by R38 million (2009: R36 million). The carrying amount of the occasional and service leave liability for group is R781 million (2009: R705 million) and R730 million (2009: R662 million) for company. (d) Decommissioning, mine closure and rehabilitation Nuclear and other generation plant, and spent nuclear fuel Provision is made for the estimated decommissioning cost of nuclear and other generation plant and for the management of nuclear fuel assemblies and radioactive waste. Closure, pollution control and rehabilitation Provision is made for the estimated cost of closure, pollution control, rehabilitation and mine employee benefits at the end of the life of the mines, where a constructive and contractual obligation exists to pay coal suppliers. Valuation The provision is determined by discounting the estimated decommissioning and nuclear spent fuel management costs. Valuation assumptions The discount rate used for nuclear plant, coal plants, spent fuel and closure, pollution control and rehabilitation was 6,4% (2009: 5,3%) for the group and company. Eskom Holdings Limited 227 Integrated Repor t 2010 Estimated payment dates The estimated payment dates of the costs are: Group and company 2010 2009 Nuclear plant 2025 – 2039 2025 – 2039 Coal plants 2021 – 2063 2021 – 2063 Spent nuclear fuel 2010 – 2079 2010 – 2079 Closure, pollution control and rehabilitation 2009 – 2073 2009 – 2073 Sensitivity analysis The carrying amount of the provision would be an estimated R1 489 million (2009: R1 866 million) higher had the 6,4% (2009: 5,3%) real discount rate used in the calculation of the provision decreased by 1% and R1 131 million (2009: R1 565 million) lower had the 6,4% (2009: 5,3%) real discount rate increased by 1%. (e) Equity portion of subordinated loan from shareholder The value of the equity portion of the loan from the shareholder is the difference between the amount advanced and the calculated loan value on the day the tranches are drawn down. The loan value is calculated using Eskom’s long-term financial plan to forecast the leverage ratio and the interest cover to determine in which years interest will be payable over the period of the loan. These expected interest flows and the capital redemption are discounted at market-related rates to determine the loan amounts. Once the equity portion of a tranche is recorded it does not change. 5. Segment information Management has determined the reportable segments, as described below, based on the reports regularly provided and reviewed and used by the group Exco to make strategic decisions and assess performance of the segments. The group’s reportable segments are strategic divisions that offer different services. The following summary describes the operations in each of the group’s reportable segments: Generation Consists of Generation and Primary Energy divisions. These divisions procure primary energy and generate electricity for sale to the Transmission and Distribution divisions. Transmission Consists of Transmission and Systems Operations and Planning divisions. These divisions provide, operate and maintain the transmission network for transmitting and selling bulk electricity to key large and international customers. Distribution The Distribution division sells electricity to redistributors, small and large customers. Eskom Enterprises group The Eskom Enterprises group supports the Eskom group through providing plant lifecycle support and maintenance, including return-to-service work, network protection and measurement. The Eskom Enterprises group also operates and maintains the Eskom group private telephone network and operates electricity generation concessions in Mali and Uganda. Other operating segments Relates to segments which are below the quantitative thresholds for determining a reportable segment in terms of IFRS 8 Operating segments. These include the group’s insurance and employee housing loan businesses, which did not meet any of the quantitative thresholds for determining reportable segments in 2010 or in 2009. 228 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 5. Segment information (continued) The segment information provided to Exco for the reportable segments for the year ended 31 March 2010 is as follows: Gener- Trans- Distri- Eskom Other Corp- Inter- Group ation mission bution Enter- operating orate seg- prises seg- and ment group ments other trans- actions 2010 Rm Rm Rm Rm Rm Rm Rm Rm Continuing operations External revenue – 26 487 43 577 786 359 – – 71 209 Inter-segment revenue 49 732 3 005 – 6 090 715 – (59 542) – Total revenue 49 732 29 492 43 577 6 876 1 074 – (59 542) 71 209 Primary energy (26 874) (2 224) (2) – – – – (29 100) Employee benefit expense (4 947) (1 000) (5 642) (1 379) (27) (4 395) – (17 390) Depreciation and amortisation expense (3 100) (618) (2 079) 226 (1) (154) – (5 726) Net impairment (loss)/reversal (25) (123) (457) 9 (11) (49) 4 (652) Inter-segment purchases (1 857) (24 275) (30 713) – – (2 697) 59 542 – Operating expenditure (5 379) (781) (3 741) (5 546) (564) 6 553 1 310 (8 148) Operating profit/(loss) before net fair value gain/(loss) and net finance cost 7 550 471 943 186 471 (742) 1 314 10 193 Other income 156 207 278 10 37 1 076 (1 207) 557 Net fair value (loss)/gain on financial instruments, excluding embedded derivatives (4 188) 85 (39) (4) 152 (1 955) 4 (5 945) Net fair value profit on embedded derivatives – 2 283 – 1 – – – 2 284 Operating profit/(loss) before net finance cost 3 518 3 046 1 182 193 660 (1 621) 111 7 089 Net finance cost (3 429) (242) (450) 147 (129) 2 821 45 (1 237)  Finance income 105 71 219 250 162 1 185 (378) 1 614  Finance cost (3 534) (313) (669) (103) (291) 1 636 423 (2 851) Share of (loss)/profit of equity- accounted investees – – – (3) – 17 – 14 Profit before tax 89 2 804 732 337 531 1 217 156 5 866 Income tax 103 (724) (442) (221) (147) (575) (74) (2 080) Profit for the year from continuing operations 192 2 080 290 116 384 642 82 3 786 Discontinued operations Profit for the year from discontinued operations – – – 36 – 4 (206) (166) Profit for the year 192 2 080 290 152 384 646 (124) 3 620 Other information Segment assets 131 039 28 438 43 995 7 267 7 411 37 878 (10 109) 245 919 Investments in equity-accounted investees – – – 18 – 178 – 196 Non-current assets held-for-sale – – – 10 – 10 – 20 Total assets 131 039 28 438 43 995 7 295 7 411 38 066 (10 109) 246 135 Segment liabilities 110 425 22 752 25 647 3 702 5 895 15 461 (7 969) 175 913 Capital expenditure (including borrowing costs capitalised) 40 484 7 143 7 079 509 – 1 916 (128) 57 003 Eskom Holdings Limited 229 Integrated Repor t 2010 Segment information for the year ended 31 March 2009 is as follows: Gener- Trans- Distri- Eskom Other Corp- Inter- Group ation mission bution Enter- operat- orate seg- prises ing seg- and ment group ments other trans- actions 2009 Rm Rm Rm Rm Rm Rm Rm Rm Continuing operations External revenue – 20 548 32 542 728 359 – – 54 177 Inter-segment revenue 33 790 – – 7 543 696 – (42 029) – Total revenue 33 790 20 548 32 542 8 271 1 055 – (42 029) 54 177 Primary energy (23 073) (1 810) (1) – – – – (24 884) Employee benefit expense (4 253) (883) (4 922) (1 000) (24) (4 053) – (15 135) Depreciation and amortisation expense (2 212) (565) (1 882) (171) (2) (86) – (4 918) Net impairment (loss)/reversal (70) (406) (447) 16 (4) (88) 10 (989) Inter-segment purchases (3 156) (15 948) (19 455) – – (3 470) 42 029 – Operating expenditure (4 992) (777) (4 235) (6 701) (921) 7 233 1 809 (8 584) Operating (loss)/profit before net fair value gain/(loss) and net finance cost (3 966) 159 1 600 415 104 (464) 1 819 (333) Other Income 225 103 396 95 65 744 (1 018) 610 Net fair value (loss)/gain on financial instruments, excluding embedded derivatives (3 122) (36) 13 (8) (89) 842 8 (2 392) Net fair value (loss)/gain on embedded derivatives – (9 511) – (8) – 5 – (9 514) Operating (loss)/profit before net finance cost (6 863) (9 285) 2 009 494 80 1 127 809 (11 629) Net finance cost (2 019) 153 (305) 201 (105) 900 8 (1 167)  Finance income 47 153 206 254 192 2 702 (402) 3 152  Finance cost (2 066) – (511) (53) (297) (1 802) 410 (4 319) Share of profit of equity-accounted investees – – – 22 – 15 – 37 (Loss)/profit before tax (8 882) (9 132) 1 704 717 (25) 2 042 817 (12 759) Income tax 2 345 2 536 (416) (192) 19 (308) (198) 3 786 (Loss)/profit for the year from continuing operations (6 537) (6 596) 1 288 525 (6) 1 734 619 (8 973) Discontinued operations (Loss)/profit for the year from discontinued operations – – – (57) – 22 (660) (695) (Loss)/profit for the year (6 537) (6 596) 1 288 468 (6) 1 756 (41) (9 668) Other information Segment assets 93 671 22 504 38 372 7 096 3 027 40 033 (9 619) 195 084 Investments in equity-accounted investees – – – 21 – 161 – 182 Non-current assets held-for-sale – – – 1 005 2 877 173 (19) 4 036 Total assets 93 671 22 504 38 372 8 122 5 904 40 367 (9 638) 199 302 Segment liabilities 69 504 18 779 21 115 3 869 2 084 28 528 (6 168) 137 711 Non-current liabilities held-for-sale – – – 609 2 677 3 (1 276) 2 013 Total liabilities 69 504 18 779 21 115 4 478 4 761 28 531 (7 444) 139 724 Capital expenditure (including borrowing costs capitalised) 31 864 6 665 6 615 515 – 1 955 (515) 47 099 230 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 5. Segment information (continued) Inter-segment purchases and revenue for the 2010 financial year were allocated between the Generation, Transmission and Distribution segments based on cost recovery plus return on assets. In comparison, the 2009 inter-segment revenue and purchases allocation between segments were based on the specific allocation per Nersa’s price determination which was not done for the 2010 price determination. In addition, unallocated amounts as reported in the 2009 financial period have now been allocated to the reportable segments. Exco assesses the performance of the operating segments based on a measure of profit or loss consistent with that of the financial statements. The amounts provided to Exco with respect to total assets and liabilities are measured in terms of IFRS. These assets and liabilities are allocated based on the operation of the segment and the physical location of the assets. Group Revenues Non-current assets 2010 2009 2010 2009 Geographical information Rm Rm Rm Rm South Africa 68 251 51 528 195 932 148 176 Foreign countries 2 958 2 649 98 90 71 209 54 177 196 030 148 266 The group’s reportable segments operate mainly in South Africa, which is Eskom’s country of domicile. Revenue is allocated based on the country in which the customer is located after eliminating inter-company transactions. There are no significant revenues derived from a single external customer by any of the reportable segments. Non-current assets disclosed for geographical information comprises non-current assets other than deferred tax assets and financial instruments. Group Company Cost Accumu- Carrying Cost Accumu- Carrying lated value lated value depre- depre- ciation ciation and and impair- impair- ment ment losses losses 2010 Rm Rm Rm Rm Rm Rm 6. Property, plant and equipment Owned assets Land 696 – 696 668 – 668 Buildings and facilities 4 751 (1 464) 3 287 4 623 (1 413) 3 210 Plant – Generation 87 810 (32 441) 55 369 87 810 (32 441) 55 369 – Transmission 16 976 (6 482) 10 494 16 976 (6 482) 10 494 – Distribution 49 999 (19 252) 30 747 49 999 (19 252) 30 747 Regular distribution 35 132 (11 961) 23 171 35 132 (11 961) 23 171 Electrification 14 867 (7 291) 7 576 14 867 (7 291) 7 576 – Test, telecommunication and other plant 2 225 (972) 1 253 505 (383) 122 Equipment and vehicles 7 650 (3 913) 3 737 6 762 (3 700) 3 062 Total in commission 170 107 (64 524) 105 583 167 343 (63 671) 103 672 Works under construction 81 636 (253) 81 383 82 223 (214) 82 009 Construction materials 575 (1) 574 575 (1) 574 252 318 (64 778) 187 540 250 141 (63 886) 186 255 Leased assets 755 (390) 365 1 230 (477) 753 Mining assets 573 (324) 249 573 (324) 249 Plant – – – 31 (23) 8 Equipment and vehicles 182 (66) 116 626 (130) 496 253 073 (65 168) 187 905 251 371 (64 363) 187 008 Eskom Holdings Limited 231 Integrated Repor t 2010 Group Company Cost Accumu- Carrying Cost Accumu- Carrying lated value lated value depre- depre- ciation ciation and and impair- impair- ment ment losses losses 2009 Rm Rm Rm Rm Rm Rm Owned assets Land 572 – 572 544 – 544 Buildings and facilities 3 449 (1 372) 2 077 3 358 (1 329) 2 029 Plant – Generation 80 083 (29 766) 50 317 80 083 (29 766) 50 317 – Transmission 15 139 (6 076) 9 063 15 139 (6 076) 9 063 – Distribution 43 151 (17 482) 25 669 43 151 (17 482) 25 669 Regular distribution 29 604 (10 735) 18 869 29 604 (10 735) 18 869 Electrification 13 547 (6 747) 6 800 13 547 (6 747) 6 800 – Test, telecommunication and other plant 2 270 (1 496) 774 461 (324) 137 Equipment and vehicles 6 543 (3 585) 2 958 5 926 (3 363) 2 563 Total in commission 151 207 (59 777) 91 430 148 662 (58 340) 90 322 Works under construction 46 406 (154) 46 252 46 955 (154) 46 801 Construction materials 691 – 691 691 – 691 198 304 (59 931) 138 373 196 308 (58 494) 137 814 Leased assets 621 (352) 269 965 (451) 514 Mining assets 573 (310) 263 573 (310) 263 Plant 23 (18) 5 31 (23) 8 Equipment and vehicles 25 (24) 1 361 (118) 243 198 925 (60 283) 138 642 197 273 (58 945) 138 328 Reconciliation Carry- Additions Transfer Change Dis- Impair- Reversal Depre- Carry- of movements ing and (to)/from in rate posals ment of impair- ciation ing value transfers1 non- of decom- losses ment value begin- current mission- losses end of ning assets ing year of year held-for- provision sale and cost estimate 2010 Rm Rm Rm Rm Rm Rm Rm Rm Rm Group Owned assets Land 572 126 – – (2) – – – 696 Buildings and facilities 2 077 1 306 – – (3) – – (93) 3 287 Plant 85 823 18 196 – (1 117) (51) (11) 3 (4 980) 97 863 Equipment and vehicles 2 958 1 523 (11) – (56) – – (677) 3 737 Works under construction 46 252 35 178 – – (7) (40)2 – – 81 383 Construction materials 691 (116) – – – – – (1) 574 138 373 56 213 (11) (1 117) (119) (51) 3 (5 751) 187 540 Leased assets 269 92 50 – – – – (46) 365 Mining assets 263 – – – – – – (14) 249 Plant 5 (5) – – – – – – – Equipment and vehicles 1 97 50 – – – – (32) 116 Total property, plant and equipment 138 642 56 305 39 (1 117) (119) (51) 3 (5 797) 187 905 1. Included in additions and transfers are borrowing costs capitalised of R8 234 million (2009: R3 436 million) for the group and company. 2. Impairment recognised because of the uncertainty surrounding the completion of identified projects. 232 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 Carry- Additions Transfer Change Dis- Impair- Reversal Depre- Carry- ing and (to)/from in rate posals ment of impair- ciation ing value transfers1 non- of decom- losses ment value begin- current mission- losses end of ning assets ing year of year held-for- provision sale and cost estimate Rm Rm Rm Rm Rm Rm Rm Rm Rm 6. Property, plant and equipment (continued) Reconciliation of movements (continued) 2010 Company Owned assets Land 544 126 – – (2) – – – 668 Buildings and facilities 2 029 1 271 – – (2) – – (88) 3 210 Plant 85 186 17 976 – (1 117) (37) (11) 3 (5 268) 96 732 Equipment and vehicles 2 563 1 180 – – (45) – – (636) 3 062 Works under construction 46 801 35 255 – – (7) (40)1 – – 82 009 Construction materials 691 (116) – – – – – (1) 574 137 814 55 692 – (1 117) (93) (51) 3 (5 993) 186 255 Leased assets 514 285 – – – – – (46) 753 Mining assets 263 – – – – – – (14) 249 Plant 8 – – – – – – – 8 Equipment and vehicles 243 285 – – – – – (32) 496 Total property, plant and equipment 138 328 55 977 – (1 117) (93) (51) 3 (6 039) 187 008 Group Company 2010 2009 2010 2009 Note Rm Rm Rm Rm Borrowing costs on general borrowings are capitalised at an average rate of 10,03% (2009: 9,60%). Borrowing costs on funds borrowed specifically for the purpose of obtaining a qualifying asset are capitalised at the actual rate obtained for the specific funds borrowed. The average specific rate for the year was 19,70% (2009: 11,08%). This rate includes the capitalisation of the remeasurement of the subordinated loan from the shareholder. The amounts capitalised during the year were 37 8 234 3 436 8 234 3 436 Details of land and buildings are available for examination at the registered offices of the respective businesses. Included in generation plant are assets leased to an international party and leased back under cross-border lease agreements with a carrying value of – 3 456 – 3 456 The cross-border lease transaction was terminated on 15 April 2009. Eskom has thereby been released from all the financial and operating obligations which arose due to this agreement. The total depreciation charge for property, plant and equipment is disclosed in profit or loss in the following categories: 5 797 5 023 6 039 4 861  Depreciation and amortisation expense 33 5 783 5 009 6 025 4 847  Primary energy 14 14 14 14 Eskom Holdings Limited 233 Integrated Repor t 2010 Group Company Cost Accumulated Carrying Cost Accumulated Carrying amortisation value amortisation value and and impairment impairment losses losses Rm Rm Rm Rm Rm Rm 7. Intangible assets 2010 Rights 839 (222) 617 838 (221) 617 Computer software 2 627 (2 002) 625 2 520 (1 960) 560 Concession assets 81 (18) 63 – – – Total 3 547 (2 242) 1 305 3 358 (2 181) 1 177 2009 Rights 642 (222) 420 641 (221) 420 Computer software 2 144 (1 776) 368 2 081 (1 761) 320 Concession assets 79 (16) 63 – – – Total 2 865 (2 014) 851 2 722 (1 982) 740 Reconciliation of movements Carrying Additions Transfer Amortisation Disposals Carrying value and transfers from non- value end beginning current of year of year assets held-for-sale Rm Rm Rm Rm Rm Rm 2010 Group Rights 420 197 – – – 617 Computer software 368 476 1 (220) – 625 Concession assets 63 25 – (2) (23) 63 Total 851 698 1 (222) (23) 1 305 Company Rights 420 197 – – – 617 Computer software 320 447 – (207) – 560 Total 740 644 – (207) – 1 177 Amortisation of intangible assets of R222 million (2009: R150 million) for the group and of R207 million (2009: R139 million) for the company is included within depreciation and amortisation expense (refer note 33) in profit or loss. 1. Impairment recognised because of the uncertainty surrounding the completion of identified projects. 234 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 Group Company 2010 2009 2010 2009 Note Rm Rm Rm Rm 8. Investment in equity-accounted investees Investment in associates 8.1 – – – – Investment in joint ventures 8.2 196 182 95 95 196 182 95 95 8.1 Investment in associates Balance at beginning of the year – – – – Share of profit 1 – 11 – – Disposal of investment – (11) – – Balance at end of the year – – – – Directors’ valuation – – – – The group’s share of the results of its principal associates, all of which are unlisted, and its share of the assets (including goodwill) and liabilities are: Country of Assets Liabilities Revenues Profit Interest held Name incorporation Rm Rm Rm Rm % Group 2010 Directly held  Uitenhage Electricity Supply Company (Pty) Limited2,3 South Africa 10 9 40 – 33  Western Power Corridor Company (Pty) Limited Botswana – – – – 20 10 9 40 – 2009 Directly held  Uitenhage Electricity Supply Company (Pty) Limited2,3 South Africa 11 10 38 – 33  Western Power Corridor Company (Pty) Limited Botswana – – – – 20 Indirectly held  Ash Resources (Pty) Limited4,5 South Africa – – – 11 – 11 10 38 11 Where the above entities’ financial year ends differ from that of Eskom, financial information has been obtained from published information or management accounts as appropriate. Eskom Holdings Limited 235 Integrated Repor t 2010 Group Company 2010 2009 2010 2009 Rm Rm Rm Rm 8.2 Investment in joint ventures Balance at beginning of the year 182 173 95 95 Share of profit1 14 26 – – Other movements – (17) – – Balance at end of the year 196 182 95 95 Directors’ valuation 222 182 203 160 Investments are accounted for at cost in the company. The share of profits since acquisition is accounted for in the group. The group’s share of the results of its principal joint ventures, all of which are unlisted, and its share of the assets (including goodwill) and liabilities are: Name Main business Country of Interest Non- Current Non- Current Profit/ Invest- Indebted- incorporation held current assets current liabilities (loss) ment at ness assets liabilities cost % Rm Rm Rm Rm Rm Rm Rm Group 2010 Directly held  Motraco – Electricity Mozambique 33 252 98 146 59 17 95 – Mozambique transmission Transmission Company SARL4 Indirectly held  Trans Africa Projects Engineering South Africa 50 3 56 – 41 (3) – – (Pty) Limited4 services  Trans Africa Projects Engineering Mauritius 50 – – – – – – – Limited (Mauritius)4 services  Transpoint Telecom- South Africa 50 – – – – – – – (Pty) Limited munications 255 154 146 100 14 95 – 2009 Directly held  Motraco – Electricity Mozambique 33 368 129 235 103 15 95 – Mozambique transmission Transmission Company SARL4 Indirectly held  Trans Africa Projects Engineering South Africa 50 2 56 – 37 11 – – (Pty) Limited4 services  Trans Africa Projects Engineering Mauritius 50 – – – – – – – Limited (Mauritius)4 services  Transpoint Telecom- South Africa 50 – – – – – – – (Pty) Limited munications 370 185 235 140 26 95 – 1. Share of profit is after tax. 2. Year end is 30 June. 3. The company ceased trading on 30 November 2008 and is expected to be wound up during the 2011 financial year. 4. Year end is 31 December. 5. The investment was disposed of during the 2009 financial year. 236 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 Group Company 2010 2009 2010 2009 Rm Rm Rm Rm 9. Investment in subsidiaries Shares at cost 388 388 Indebtedness 1 953 1 953 Provision for impairment – – Total interest in subsidiaries 2 341 2 341 Directors’ valuation 1 5 167 4 790 Aggregate attributable after tax profits of subsidiary companies 539 525 Aggregate attributable after tax losses of subsidiary companies – (29) Financial instruments with subsidiaries are disclosed in note 10. Name Main business Country Issued/ Interest Invest- Indebted- of incor- stated share held ment ness poration capital at cost R % Rm Rm 2010 Directly held  Eskom Finance Company Finance (employee housing loans) South Africa 4 000 100 4 – (Pty) Limited2  Escap Limited Insurance South Africa 379 500 000 100 380 –  Gallium Insurance Insurance Isle of Man 4 000 000 100 4 – Company Limited3,5  Eskom Enterprises Non-regulated electricity supply South Africa 99 000 100 4 1 9536 (Pty) Limited industry activities and electricity supply and related services outside South Africa  PN Energy Services Maintenance of electrical and South Africa 1 500 000 100 4 – (Pty) Limited7 telecommunication distribution network  The National Navigation Dormant South Africa 1 542 850 100 4 – Collieries and Estate Company Limited Indirectly held  Golang Coal (Pty) Limited Coal exports South Africa 1 000 67 – –  Eskom Enterprises Operations management Nigeria 100 100 – – Global West Africa5, 8  Eskom Energie Energy supply Mali 1 000 100 – – Manantali SA5, 8  Eskom Uganda Limited5, 8 Operations management Uganda 100 100 – –  Pebble Bed Modular Reactor driven generation project South Africa 100 100 – – Reactor (Pty) Limited9  Technology Services Technical consulting South Africa 100 100 – – International (Pty) Limited  Rotek Industries Maintenance and services South Africa 4 000 100 – – (Pty) Limited  Rosherville Properties Properties South Africa 1 100 – – (Pty) Limited  Roshcon (Pty) Limited10 Construction South Africa 1 100 – –  Airborne Laser Solutions Aerial surveying technologies South Africa 1 100 – – (Pty) Limited  South Dunes Coal Coal exports South Africa 4 000 50 – – Terminal (Pty) Limited  arivia.kom (Pty) Limited3,10,11 Information technology services South Africa 1 709 616 59 – – 388 1 953 Eskom Holdings Limited 237 Integrated Repor t 2010 Name Main business Country Issued/ Interest Invest- Indebted of incor- stated held ment ness poration share at cost capital R % Rm Rm 2009 Directly held  Eskom Finance Company (Pty) Finance (employee housing South Africa 4 000 100 4 – Limited3 loans)  Escap Limited Insurance South Africa 379 500 000 100 380 –  Gallium Insurance Company Insurance Isle of Man 4 000 000 100 4 – Limited3,5  Eskom Enterprises Non-regulated electricity South Africa 99 000 100 4 1 9536 (Pty) Limited supply industry activities and electricity supply and related services outside South Africa  PN Energy Services Maintenance of electrical and South Africa 1 500 000 100 4 – (Pty) Limited7 telecommunication distribution network  The Natal Navigation Dormant South Africa 1 542 850 100 4 – Collieries and Estate Company Limited Indirectly held  Golang Coal (Pty) Limited Coal exports South Africa 1 000 67 – –  Eskom Enterprises Global West Operations management Nigeria 100 100 – – Africa5,8  Eskom Energie Manantali SA5,8 Energy supply Mali 1 000 100 – –  Eskom Uganda Limited 5,8 Operations management Uganda 100 100 – –  Pebble Bed Modular Reactor Reactor driven generation South Africa 100 100 – – (Pty) Limited9 project  Technology Services Technical consulting South Africa 100 100 – – International (Pty) Limited  Rotek Industries (Pty) Limited Maintenance and services South Africa 4 000 100 – –  Rosherville Properties Properties South Africa 1 100 – – (Pty) Limited  Roshcon (Pty) Limited10 Construction South Africa 1 100 – –  Airborne Laser Solutions Aerial surveying technologies South Africa 1 100 – – (Pty) Limited  Lunsemfwa Hydro Power Operations and maintenance Zambia 1 825 51 – – Company5,8,12 services  South Dunes Coal Terminal Coal exports South Africa 4 000 50 – – (Pty) Limited  arivia.kom (Pty) Limited3,10 Information technology South Africa 1 709 616 59 – – services 388 1 953 1. Includes investments classified as non-current assets held-for-sale. 2. Eskom Finance Company (Pty) Limited was reclassified as part of continuing operations during the 2010 financial year. 3. Classified as non-current assets and liabilities held-for-sale (refer note 22). 4. Nominal. 5. Issued/stated capital in foreign currency. 6. The equity loan to Eskom Enterprises (Pty) Limited is interest free. 7. The activities of PN Energy Services (Pty) Limited is being integrated into Eskom. 8. Year end is 31 December. 9. Pebble Bed Modular Reactor (Pty) Limited is not consolidated as it is not considered to be controlled by Eskom Enterprises. 10. The subsidiaries of arivia.kom (Pty) Limited and Roshcon (Pty) Limited have not been disclosed. 11. The investment in arivia.kom (Pty) Limited was disposed of during the 2010 financial year. 12. The investment in Lunsemfwa Hydro Power Company was disposed of during the 2009 financial year. 238 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 10. Financial instruments with group companies Eskom Eskom Escap Carrying Fair Finance Enterprises value value Company Rm Rm Rm Rm Rm 2010 Financial assets Loans and receivables Loan to subsidiaries 2 454 7 – 2 461 2 461 Maturity analysis 2 454 7 – 2 461 2 461 Non-current – – – – – Current 2 454 7 – 2 461 2 461 Financial liabilities Liabilities at amortised cost Borrowings 27 1 244 626 1 897 1 897 Commercial paper – – 626 626 626 Loan from subsidiaries 27 1 244 – 1 271 1 271 Maturity analysis 27 1 244 626 1 897 1 897 Non-current – – – – – Current 27 1 244 626 1 897 1 897 2009 Financial assets Available-for-sale financial assets Investment in securities – Floating rate notes 551 – – 551 551 Loans and receivables Loan to subsidiaries 721 7 – 728 728 1 272 7 – 1 279 1 279 Maturity analysis 1 272 7 – 1 279 1 279 Non-current – – – – – Current 1 272 7 – 1 279 1 279 Financial liabilities Liabilities at amortised cost Borrowings – 1 384 469 1 853 1 853 Commercial paper – – 436 436 436 Loan from subsidiaries – 1 384 33 1 417 1 417 Maturity analysis – 1 384 469 1 853 1 853 Non-current – – – – – Current – 1 384 469 1 853 1 853 The loan to and from subsidiaries is payable on demand. The effective interest rate on commercial paper is 7,34% (2009: 11,77%). Commercial paper is payable within 12 months. The above balances exclude trade and other receivables and payables balances between Eskom and group companies.These balances are disclosed as part of trade and other receivables and trade and other payables. Eskom Holdings Limited 239 Integrated Repor t 2010 Group Company 2010 2009 2010 2009 Note Rm Rm Rm Rm 11. Future fuel supplies Coal 3 397 3 132 3 397 3 132 Balance at beginning of the year 3 132 2 543 3 132 2 543 Additions 656 856 656 856 Amortised during the year1 (293) (233) (293) (233) Transfer to inventories (98) (34) (98) (34) Nuclear 371 378 371 378 Balance at beginning of the year 378 42 378 42 Additions 368 667 368 667 Amortised during the year1 (3) (3) (3) (3) Transfer from equity (51) (66) (51) (66) Transfer to inventories (321) (262) (321) (262) 3 768 3 510 3 768 3 510 12. Deferred tax Deferred tax assets Balance at beginning of the year 56 8 – – Transfer from profit or loss 38 23 70 – – Transfer to deferred tax liabilities – (22) – – 79 56 – – Comprising 79 56 – – Property, plant and equipment (22) (15) – – Provisions 90 68 – – Other 11 3 – – Deferred tax liabilities Balance at beginning of the year 6 098 10 229 5 871 10 220 Transfer from/(to) profit or loss 38 1 839 (3 924) 1 636 (4 161) Transfer to statement of comprehensive income (2 675) (184) (2 673) (188) Transfer from deferred tax assets – (22) – – Other – (1) – – 5 262 6 098 4 834 5 871 Comprising 5 262 6 098 4 834 5 871 Property, plant and equipment 17 296 14 619 17 102 14 557 Inventories 654 406 654 406 Provisions (5 181) (5 205) (5 180) (5 168) Tax losses (3 974) (2 814) (3 969) (2 809) Embedded derivative assets and liabilities (1 291) (1 930) (1 291) (1 930) Available-for-sale financial assets 57 62 57 62 Cash flow hedges 134 2 714 134 2 714 Post-retirement medical aid benefits (104) (15) (104) (15) Payments received in advance (2 816) (1 853) (2 816) (1 853) Other 487 114 247 (93) Unused tax losses available for offset against future taxable income 14 513 10 050 14 175 10 032 1. Amortisation of future fuel is included in profit or loss within primary energy. 240 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 13. Financial instruments Accounting classifications and fair values The classification of each class of financial assets and liabilities, and their fair values are: Held-for- Held-to- Loans and Available- Liabilities Other Total Fair trading maturity receivables for-sale at assets and carrying value amortised liabilities1 amount cost 2010 Note Rm Rm Rm Rm Rm Rm Rm Rm Group Financial assets Non-current – – 4 598 1 923 – 532 7 053 7 053 Investment in securities 13.2 – – 469 1 923 – – 2 392 2 392 Embedded derivative assets 14.1 – – – – – – – – Derivatives held for risk management 15 – – – – – – – – Finance lease receivables 16 – – – – – 532 532 532 Loans receivable 13.10 – – 4 110 – – – 4 110 4 110 Trade and other receivables 17 – – 19 – – – 19 19 Current 6 471 – 25 318 2 148 – 137 34 074 34 074 Finance lease receivables 16 – – – – – 13 13 13 Loans receivable 13.10 – – 6 – – – 6 6 Investment in securities 13.2 – – 649 2 148 – – 2 797 2 797 Embedded derivative assets 14.1 – – – – – 110 110 110 Derivatives held for risk management 15 98 – – – – 14 112 112 Trade and other receivables 2 17 – – 9 391 – – – 9 391 9 391 Financial trading assets 13.3 6 104 – – – – – 6 104 6 104 Cash and cash equivalents 13.1 269 – 15 272 – – – 15 541 15 541 Total financial assets 6 471 – 29 916 4 071 – 669 41 127 41 127 Financial liabilities Non-current 767 – – – 95 084 8 074 103 925 105 423 Debt securities issued 13.4 – – – – 59 322 – 59 322 60 154 Borrowings 13.5 – – – – 34 628 – 34 628 35 294 Embedded derivative liabilities 14.2 – – – – – 4 583 4 583 4 583 Derivatives held for risk management 15 767 – – – – 2 859 3 626 3 626 Finance lease liabilities 26 – – – – – 632 632 632 Trade and other payables 27 – – – – 1 134 – 1 134 1 134 Current 6 120 – – – 28 354 4 228 38 702 38 883 Trade and other payables2 27 – – – – 16 331 – 16 331 16 331 Finance lease liabilities2 26 – – – – – 52 52 52 Debt securities issued 13.4 – – – – 2 880 – 2 880 2 885 Borrowings 13.5 – – – – 9 143 – 9 143 9 319 Financial trading liabilities 13.3 5 513 – – – – – 5 513 5 513 Embedded derivative liabilities 14.2 – – – – – 139 139 139 Derivatives held for risk management 15 607 – – – – 4 037 4 644 4 644 Total financial liabilities 6 887 – – – 123 438 12 302 142 627 144 306 Eskom Holdings Limited 241 Integrated Repor t 2010 Held-for- Held-to- Loans and Available- Liabilities Other Total Fair trading maturity receivables for-sale at assets and carrying value amortised liabilities1 amount cost 2010 Note Rm Rm Rm Rm Rm Rm Rm Rm Company Financial assets Non-current – – 23 1 923 – 532 2 478 2 478 Investment in securities 13.2 – – – 1 923 – – 1 923 1 923 Embedded derivative assets 14.1 – – – – – – – – Derivatives held for risk management 15 – – – – – – – – Finance lease receivables 16 – – – – – 532 532 532 Trade and other receivables 17 – – 23 – – – 23 23 Current 5 920 – 25 859 1 035 – 137 32 951 32 951 Financial instruments with group companies 10 – – 2 461 – – – 2 461 2 461 Finance lease receivables2 16 – – – – – 13 13 13 Investment in securities 13.2 – – 549 1 035 – – 1 584 1 584 Embedded derivative assets 14.1 – – – – – 110 110 110 Derivatives held for risk management 15 98 – – – – 14 112 112 Trade and other receivables2 17 – – 8 247 – – – 8 247 8 247 Financial trading assets 13.3 5 553 – – – – – 5 553 5 553 Cash and cash equivalents 13.1 269 – 14 602 – – – 14 871 14 871 Total financial assets 5 920 – 25 882 2 958 – 669 35 429 35 429 Financial liabilities Non-current 767 – – – 93 488 8 407 102 662 104 160 Debt securities issued 13.4 – – – – 58 538 – 58 538 59 370 Borrowings 13.5 – – – – 34 153 – 34 153 34 819 Embedded derivative liabilities 14.2 – – – – – 4 583 4 583 4 583 Derivatives held for risk management 15 767 – – – – 2 859 3 626 3 626 Finance lease liabilities 26 – – – – – 965 965 965 Trade and other payables 27 – – – – 797 – 797 797 Current 6 120 – – – 29 502 4 249 39 871 40 052 Financial instruments with group companies 10 – – – – 1 897 – 1 897 1 897 Trade and other payables 2 27 – – – – 16 370 – 16 370 16 370 Finance lease liabilities 2 26 – – – – – 74 74 74 Debt securities issued 13.4 – – – – 2 141 – 2 141 2 146 Borrowings 13.5 – – – – 9 094 – 9 094 9 270 Financial trading liabilities 13.3 5 513 – – – – – 5 513 5 513 Embedded derivative liabilities 14.2 – – – – – 138 138 138 Derivatives held for risk management 15 607 – – – – 4 037 4 644 4 644 Total financial liabilities 6 887 – – – 122 990 12 656 142 533 144 212 1. Includes finance lease receivables and payables, embedded derivatives and derivatives used for cash flow hedges. 2. The carrying amounts of these financial instruments approximate their fair values. The effect of discounting is not expected to be material. 242 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 13. Financial instruments (continued) Accounting classifications and fair values (continued) Held-for- Held-to- Loans and Available- Liabilities Other Total Fair trading maturity receivables for-sale at assets and carrying value amortised liabilities1 amount cost 2009 Note Rm Rm Rm Rm Rm Rm Rm Rm Group Financial assets Non-current 586 100 1 620 1 861 – 1 671 5 838 5 835 Investment in securities 13.2 – 100 1 597 1 861 – – 3 558 3 555 Embedded derivative assets 14.1 – – – – – 1 135 1 135 1 135 Derivatives held for risk management 15 586 – – – – – 586 586 Finance lease receivables 16 – – – – – 536 536 536 Trade and other receivables 17 – – 23 – – – 23 23 Current 1 451 4 27 808 3 121 – 966 33 350 33 365 Finance lease receivables 16 – – – – – 11 11 11 Investment in securities 13.2 – 4 1 235 3 121 – – 4 360 4 375 Embedded derivative assets 14.1 – – – – – 231 231 231 Derivatives held for risk management 15 527 – – – – 724 1 251 1 251 Trade and other receivables 2 17 – – 8 191 – – – 8 191 8 191 Financial trading assets 13.3 924 – – – – – 924 924 Cash and cash equivalents 13.1 – – 18 382 – – – 18 382 18 382 Total financial assets 2 037 104 29 428 4 982 – 2 637 39 188 39 200 Financial liabilities Non-current 123 – – – 58 515 9 419 68 057 68 040 Debt securities issued 13.4 – – – – 44 253 – 44 253 43 701 Borrowings 13.5 – – – – 12 796 – 12 796 13 331 Embedded derivative liabilities 14.2 – – – – – 8 219 8 219 8 219 Derivatives held for risk management 15 123 – – – – 663 786 786 Finance lease liabilities 26 – – – – – 537 537 537 Trade and other payables 27 – – – – 1 466 – 1 466 1 466 Current 2 900 – – – 33 836 1 964 38 700 38 655 Trade and other payables2 27 – – – – 16 701 – 16 701 16 701 Finance lease liabilities2 26 – – – – – 15 15 15 Debt securities issued 13.4 – – – – 3 324 – 3 324 3 154 Borrowings 13.5 – – – – 13 811 – 13 811 13 936 Financial trading liabilities 13.3 2 180 – – – – – 2 180 2 180 Embedded derivative liabilities 14.2 – – – – – 43 43 43 Derivatives held for risk management 15 720 – – – – 1 906 2 626 2 626 Total financial liabilities 3 023 – – – 92 351 11 383 106 757 106 695 Eskom Holdings Limited 243 Integrated Repor t 2010 Held-for- Held-to- Loans and Available- Liabilities Other Total Fair trading maturity receivables for-sale at assets and carrying value amortised liabilities1 amount cost 2009 Note Rm Rm Rm Rm Rm Rm Rm Rm Company Financial assets Non-current 586 100 1 215 1 861 – 1 671 5 433 5 430 Investment in securities 13.2 – 100 1 192 1 861 – – 3 153 3 150 Embedded derivative assets 14.1 – – – – – 1 135 1 135 1 135 Derivatives held for risk management 15 586 – – – – – 586 586 Finance lease receivables 16 – – – – – 536 536 536 Trade and other receivables 17 – – 23 – – – 23 23 Current 1 089 4 26 957 2 632 – 966 31 648 31 663 Financial instruments with group companies 10 – – 728 551 – – 1 279 1 279 Finance lease receivables2 16 – – – – – 11 11 11 Investment in securities 13.2 – 4 1 235 2 081 – – 3 320 3 335 Embedded derivative assets 14.1 – – – – – 231 231 231 Derivatives held for risk management 15 527 – – – – 724 1 251 1 251 Trade and other receivables2 17 – – 7 073 – – – 7 073 7 073 Financial trading assets 13.3 562 – – – – – 562 562 Cash and cash equivalents 13.1 – – 17 921 – – – 17 921 17 921 Total financial assets 1 675 104 28 172 4 493 – 2 637 37 081 37 093 Financial liabilities Non-current 123 – – – 57 919 9 643 67 685 67 668 Debt securities issued 13.4 – – – – 44 253 – 44 253 43 701 Borrowings 13.5 – – – – 12 369 – 12 369 12 904 Embedded derivative liabilities 14.2 – – – – – 8 219 8 219 8 219 Derivatives held for risk management 15 123 – – – – 663 786 786 Finance lease liabilities 26 – – – – – 761 761 761 Trade and other payables 27 – – – – 1 297 – 1 297 1 297 Current 2 900 – – – 35 234 1 992 40 126 40 081 Financial instruments with group companies 10 – – – – 1 853 – 1 853 1 853 Trade and other payables 2 27 – – – – 16 248 – 16 248 16 248 Finance lease liabilities 2 26 – – – – – 45 45 45 Debt securities issued 13.4 – – – – 3 324 – 3 324 3 154 Borrowings 13.5 – – – – 13 809 – 13 809 13 934 Financial trading liabilities 13.3 2 180 – – – – – 2 180 2 180 Embedded derivative liabilities 14.2 – – – – – 41 41 41 Derivatives held for risk management 15 720 – – – – 1 906 2 626 2 626 Total financial liabilities 3 023 – – – 93 153 11 635 107 811 107 749 1. Includes finance lease receivables and payables, embedded derivatives and derivatives used for cash flow hedges. 2. The carrying amounts of these financial instruments approximate their fair values. The effect of discounting is not expected to be material. 244 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 Group Company 2010 2010 2009 2009 2010 2010 2009 2009 Carrying Fair Carrying Fair Carrying Fair Carrying Fair value value value value value value value value Rm Rm Rm Rm Rm Rm Rm Rm 13. Financial instruments (continued) 13.1 Cash and cash equivalents Bank balances 7 114 7 114 1 252 1 252 6 489 6 489 841 841 Unsettled deals 269 269 394 394 269 269 394 394 Fixed deposits 8 158 8 158 16 736 16 736 8 113 8 113 16 686 16 686 15 541 15 541 18 382 18 382 14 871 14 871 17 921 17 921 Made up as follows: 15 541 15 541 18 382 18 382 14 871 14 871 17 921 17 921 Held-for-trading 269 269 – – 269 269 – – Loans and receivables 15 272 15 272 18 382 18 382 14 602 14 602 17 921 17 921 13.2 Investment in securities Held-to-maturity Preference shares – – 104 96 – – 104 96 Maturity analysis – – 104 96 – – 104 96 Non-current – – 100 92 – – 100 92 Current – – 4 4 – – 4 4 Loans and receivables 1 118 1 118 2 832 2 852 549 549 2 427 2 447 Preference shares – – 2 142 2 154 – – 2 142 2 154 Foreign fixed deposits – – 183 199 – – 183 199 Fixed deposits – – 102 94 – – 102 94 Loan to Richards Bay Coal Terminal 569 569 405 405 – – – – Deposit – cross-border lease 549 549 – – 549 549 – – Maturity analysis 1 118 1 118 2 832 2 852 549 549 2 427 2 447 Non-current 469 469 1 597 1 602 – – 1 192 1 197 Current 649 649 1 235 1 250 549 549 1 235 1 250 Available-for-sale 4 071 4 071 4 982 4 982 2 958 2 958 3 942 3 942 Government bonds 1 933 1 933 1 873 1 873 1 933 1 933 1 873 1 873 Negotiable certificates of deposits 2 136 2 136 1 040 1 040 1 025 1 025 – – Floating rate notes – – 2 069 2 069 – – 2 069 2 069 Other 2 2 – – – – – – Maturity analysis 4 071 4 071 4 982 4 982 2 958 2 958 3 942 3 942 Non-current 1 923 1 923 1 861 1 861 1 923 1 923 1 861 1 861 Current 2 148 2 148 3 121 3 121 1 035 1 035 2 081 2 081 Total investment in securities 5 189 5 189 7 918 7 930 3 507 3 507 6 473 6 485 Maturity analysis 5 189 5 189 7 918 7 930 3 507 3 507 6 473 6 485 Non-current 2 392 2 392 3 558 3 555 1 923 1 923 3 153 3 150 Current 2 797 2 797 4 360 4 375 1 584 1 584 3 320 3 335 Encumbered assets Eskom has concluded sale and repurchase transactions of commercial paper, comprising Eskom bonds and government bonds, with approved counterparties. Application of trade date accounting resulted in the continued recognition of this commercial paper even though legal title has passed from Eskom to the counterparty. At year end, Eskom has sold, and is committed to repurchase commercial paper after year end with a fair value of R2 825 million (2009: R5 508 million). Of this amount, R2 156 million (2009: R4 775 million) relates to government securities and R669 million (2009: R733 million) relates to Eskom bonds. No impairment loss was recognised on the held-to-maturity, loans and receivables and available-for-sale investment in securities. Eskom Holdings Limited 245 Integrated Repor t 2010 Group Company 2010 2010 2009 2009 2010 2010 2009 2009 Carrying Fair Carrying Fair Carrying Fair Carrying Fair value value value value value value value value Rm Rm Rm Rm Rm Rm Rm Rm 13.3 Financial trading assets and liabilities Financial trading assets Negotiable certificates of deposits 803 803 558 558 803 803 558 558 Repurchase agreements 1 552 1 552 4 4 1 552 1 552 4 4 Other money market securities 4 4 – – 4 4 – – Listed shares 551 551 362 362 – – – – Government bonds 3 194 3 194 – – 3 194 3 194 – – 6 104 6 104 924 924 5 553 5 553 562 562 Financial trading liabilities Eskom bonds 3 681 3 681 1 035 1 035 3 681 3 681 1 035 1 035 Short-sold government bonds 315 315 468 468 315 315 468 468 Commercial paper issued 798 798 673 673 798 798 673 673 Repurchase agreements 11 11 4 4 11 11 4 4 Unsettled deals 708 708 – – 708 708 – – 5 513 5 513 2 180 2 180 5 513 5 513 2 180 2 180 13.4 Debt securities issued 62 202 63 039 47 577 46 855 60 679 61 516 47 577 46 855 Eskom bonds 52 452 52 479 38 156 37 471 52 452 52 479 38 156 37 471 Electrification participation notes 980 985 1 082 1 093 980 985 1 082 1 093 Promissory notes 159 213 136 195 159 213 136 195 Commercial paper 1 523 1 523 – – – – – – Eurorand zero coupon bonds 2 127 2 890 1 882 2 704 2 127 2 890 1 882 2 704 Foreign bonds 4 961 4 949 6 321 5 392 4 961 4 949 6 321 5 392 Maturity analysis 62 202 63 039 47 577 46 855 60 679 61 516 47 577 46 855 Non-current 59 322 60 154 44 253 43 701 58 538 59 370 44 253 43 701 Current 2 880 2 885 3 324 3 154 2 141 2 146 3 324 3 154 Included in total debt securities issued is an amount of R21 875 million (2009: R13 659 million) that relates to bonds held by related parties in the form of state entities. Bonds are bearer instruments and it is therefore unknown if the initial counterparty still holds the bonds. 246 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 13. Financial instruments (continued) 13.4 Debt securities issued (continued) Group Company 2010 2009 2010 2009 2010 2009 2010 2009 Currency Security Interest rate Nominal Maturity Carrying value Carrying value Number % % m m Date Rm Rm Rm Rm Eskom bonds 51 505 37 400 52 452 38 156 52 452 38 156 ZAR E160 – 14,59 – 79 Nov 09 – 81 – 81 ZAR EL151 3,00 – 4 000 – Jun 15 4 181 – 4 181 – ZAR ES18 1 9,55 – 6 160 – Apr 18 6 314 – 6 314 – ZAR E1702 10,13 10,13 11 805 11 805 Aug 19 14 482 14 607 14 482 14 607 ZAR ES09 – 14,51 – 2 209 Jun 09 – 2 276 – 2 276 ZAR ES231 9,73 – 4 450 – Jan 23 4 617 – 4 617 – ZAR ES26 1 9,09 8,96 12 431 10 169 Apr 26 11 637 9 568 11 637 9 568 ZAR ES33 1 8,68 8,68 12 659 13 138 Sep 33 11 221 11 624 11 221 11 624 Electrification participation notes ZAR EPN 20,70 20,30 796 796 Apr 10 980 1 082 980 1 082 Promissory notes 320 320 159 136 159 136 ZAR PN04 16,03 16,03 90 90 Feb 12 68 58 68 58 ZAR PN05 16,10 16,10 60 60 Feb 13 39 33 39 33 ZAR PN06 16,13 16,13 60 60 Feb 14 33 28 33 28 ZAR PN07 15,34 15,34 20 20 Aug 20 4 4 4 4 ZAR PN08 15,08 15,08 20 20 Aug 21 4 3 4 3 ZAR PN09 14,80 14,80 35 35 Aug 22 6 5 6 5 ZAR PN10 14,61 14,61 35 35 Aug 23 5 5 5 5 Eurorand zero coupon bonds 17 500 17 500 2 127 1 882 2 127 1 882 ZAR n/a 13,92 13,92 2 000 2 000 Dec 18 638 561 638 561 ZAR n/a 13,35 13,35 8 000 8 000 Aug 27 907 801 907 801 ZAR n/a 11,88 11,88 7 500 7 500 Dec 32 582 520 582 520 Foreign bonds EUR n/a 4,08 4,08 500 500 Mar 13 4 961 6 321 4 961 6 321 1 526 – 1 523 – – – Commercial ZAR n/a 8,62 – 742 – May 10 739 – – – paper ZAR n/a 7,58 – 784 – May 11 784 – – – Total 62 202 47 577 60 679 47 577 Eskom Holdings Limited 247 Integrated Repor t 2010 Group Company 2010 2010 2009 2009 2010 2010 2009 2009 Carrying Fair Carrying Fair Carrying Fair Carrying Fair value value value value value value value value Rm Rm Rm Rm Rm Rm Rm Rm 13.5 Borrowings 43 771 44 613 26 607 27 267 43 247 44 089 26 178 26 838 Direct placings 988 1 010 5 510 5 688 988 1 010 5 510 5 688 Export credit facilities 5 830 6 306 1 559 1 621 5 830 6 306 1 559 1 621 Floating rate notes 3 835 4 126 3 847 4 146 3 835 4 126 3 847 4 146 Commercial paper 9 149 9 190 13 189 13 313 9 149 9 190 13 189 13 313 Subordinated loan from shareholder 23 445 23 457 1 575 1 572 23 445 23 457 1 575 1 572 Bank overdraft – – 3 3 – – 3 3 Unsettled deals – – 495 495 – – 495 495 Rand loans 524 524 429 429 – – – – Maturity analysis 43 771 44 613 26 607 27 267 43 247 44 089 26 178 26 838 Non-current 34 628 35 294 12 796 13 331 34 153 34 819 12 369 12 904 Current 9 143 9 319 13 811 13 936 9 094 9 270 13 809 13 934 Group Company 2010 2009 2010 2009 2010 2009 2010 2009 Currency Interest rate Nominal Maturity Carrying value Carrying value % % m m Date Rm Rm Rm Rm Direct placings 984 2 993 988 5 510 988 5 510 ZAR 5,00 5,00 – 1 Sep 11 – 1 – 1 ZAR – 12,25 – 2 000 Aug 28 – 2 039 – 2 039 USD – 2,78 – 291 Sep 28 – 2 765 – 2 765 ZAR 7,39 9,83 984 701 Sep 31 988 705 988 705 Export credit facilities 12 581 3 514 5 830 1 559 5 830 1 559 EUR 1,16 5,07 90 114 May 19 865 1 230 865 1 230 JPY 1,41 1,48 10 200 3 400 May 20 805 329 805 329 USD 1,54 – 291 – Aug 281 2 132 – 2 132 – ZAR 8,54 – 2 000 – Aug 281 2 028 – 2 028 – Floating rate notes1 3 800 3 800 3 835 3 847 3 835 3 847 ZAR – 10,75 – 3 800 Mar 10 – 3 847 – 3 847 ZAR 7,87 – 1 800 – Aug 26 1 817 – 1 817 – ZAR 8,04 – 2 000 – Aug 33 2 018 – 2 018 – Commercial paper 9 590 13 805 9 149 13 189 9 149 13 189 ZAR – 12,26 – 1 352 Apr 09 – 1 345 – 1 345 ZAR – 12,63 – 2 374 Jun 09 – 2 339 – 2 339 ZAR – 11,97 – 3 415 Sep 09 – 3 291 – 3 291 ZAR – 10,18 – 6 664 Mar 10 – 6 214 – 6 214 ZAR 7,18 – 1 187 – Apr 10 1 170 – 1 170 – ZAR 7,51 – 2 703 – Jun 10 2 633 – 2 633 – ZAR 7,50 – 5 700 – Sep 10 5 346 – 5 346 – Subordinated loan from shareholder 40 000 10 000 23 445 1 575 23 445 1 575 ZAR 7,52 7,96 5 000 5 000 Dec 38 3 072 1 195 3 072 1 195 ZAR 8,95 9,82 5 000 5 000 Mar 39 3 197 380 3 197 380 ZAR 9,43 – 7 500 – Jun 39 4 464 – 4 464 – ZAR 9,15 – 7 500 – Sep 39 4 316 – 4 316 – ZAR 9,57 – 7 500 – Dec 39 4 122 – 4 122 – ZAR 8,81 – 7 500 – Mar 40 4 274 – 4 274 – Bank overdraft – 3 – 3 Unsettled deals – 495 – 495 Rand loans 524 429 – – Total 43 771 26 607 43 247 26 178 1. Government guaranteed. 2. Earliest in a range of maturity dates is indicated for this instrument. 248 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 13. Financial instruments (continued) 13.5 Borrowings (continued) Subordinated loan from shareholder The group negotiated a subordinated loan of R60 billion (2009: R60 billion) from the shareholder. The draw down for the year was R30 billion (2009: R10 billion). Eskom is obliged to pay interest on the loan when Eskom is solvent and the debt leverage conditions per the agreement are satisfied. The interest on the subordinated loan is not cumulative. The loan has been classified as a financial liability in accordance with IAS 32 Financial instruments: Presentation and has been measured at amortised cost. The loan was initially measured at fair value and the difference between the fair valued amount and the advanced amount accounted for under borrowings gave rise to a day-one gain. This day-one gain is disclosed in equity, under equity reserve (refer page 182). The amounts drawn down in the previous year were remeasured at their initial effective rate due to expected changes in cash flows based on Eskom’s current long-term financial view. 13.6 Collateral obtained Eskom has called upon security deposits and guarantees from customers who have defaulted on their accounts. The carrying amount of the security deposits and guarantees which were called upon is R81 million (2009: R30 million). 13.7 Collateral held Eskom has bought commercial paper from approved counterparties and has committed to sell this commercial paper back to the counterparties in the following financial year. Although Eskom has legal title to the commercial paper at year end, it has not been recognised as such on the statement of financial position due to the application of trade date accounting. This has also resulted in the recognition of a loan receivable with a fair value of R2 824 million (2009: R5 425 million) at year end. Of this amount, R2 155 million (2009: R1 035 million) relates to government securities and R669 million (2009: R4 386 million) to Eskom bonds. The total loan receivable is secured by commercial paper of an equivalent fair value. 13.8 Collateral placed Eskom has provided collateral security in the form of letters of credit from banks in respect of the cross-border lease transactions. Assets to the value of Rnil (2009: R2 144 million), included under loans and receivables, Rnil (2009: R100 million), included under held-to-maturity and Rnil (2009: R530 million), included under derivatives held for risk management, have been pledged to the letter of credit providers. The collateral has been provided to hedge the beneficiary against its exposure to the loss of its remaining investment in the cross-border leases and the cost of replacing the transaction in the event of cancellation or default. The calculation of the beneficiary’s exposure is influenced by pledged securities in the form of US treasury notes which are marked-to-market semi-annually. The exposure amount was adjusted accordingly. The cross-border lease transaction was terminated on 15 April 2009 (refer note 6). Pursuant to the termination of the cross-border lease transaction, the letters of credit mentioned above are being negotiated for termination in stages with the issuing banks, depending on the maturity of the underlying structures. The carrying amount of the collateral placed of Rnil (2009: R905 million) matured and was returned to Eskom. The unwinding of the remaining assets linked to the letters of credit is being negotiated. In terms of the credit support annexure of the International Swaps and Derivatives Association/International Securities Market Association agreements, Eskom placed R459 million (2009: Rnil) reflected in available-for-sale assets as collateral as a result of changes in the market value of the financial instruments traded in the market. Eskom Holdings Limited 249 Integrated Repor t 2010 13.9 Fair value hierarchy The table below analyses financial instruments carried at fair value. The different levels have been identified 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 financial liability that are not based on observable market data (unobservable inputs). Note Level 1 Level 2 Level 3 Total Rm Rm Rm Rm 2010 Group Investment in securities classified as available-for-sale 13.2 1 933 2 138 – 4 071 Embedded derivative assets 14.1 – – 110 110 Derivatives held for risk management 15 – 112 – 112 Financial trading assets 13.3 3 746 2 358 – 6 104 5 679 4 608 110 10 397 Embedded derivative liabilities 14.2 – – 4 722 4 722 Derivatives held for risk management 15 – 8 270 – 8 270 Financial trading liabilities 13.3 3 996 1 517 – 5 513 3 996 9 787 4 722 18 505 Company Investment in securities classified as available-for-sale 13.2 1 933 1 025 – 2 958 Embedded derivative assets 14.1 – – 110 110 Derivatives held for risk management 15 – 112 – 112 Financial trading assets 13.3 3 195 2 358 – 5 553 5 128 3 495 110 8 733 Embedded derivative liabilities 14.2 – – 4 721 4 721 Derivatives held for risk management 15 – 8 270 – 8 270 Financial trading liabilities 13.3 3 996 1 517 – 5 513 3 996 9 787 4 721 18 504 2009 Group Investment in securities classified as available-for-sale 13.2 1 873 3 109 – 4 982 Embedded derivative assets 14.1 – – 1 366 1 366 Derivatives held for risk management 15 – 1 837 – 1 837 Financial trading assets 13.3 362 562 – 924 2 235 5 508 1 366 9 109 Embedded derivative liabilities 14.2 – – 8 262 8 262 Derivatives held for risk management 15 – 3 412 – 3 412 Financial trading liabilities 13.4 1 503 677 – 2 180 1 503 4 089 8 262 13 854 Company Investment in securities classified as available-for-sale 13.2 1 873 2 069 – 3 942 Embedded derivative assets 14.1 – – 1 366 1 366 Derivatives held for risk management 15 – 1 837 – 1 837 Financial trading assets 13.3 – 562 – 562 1 873 4 468 1 366 7 707 Embedded derivative liabilities 14.2 – – 8 260 8 260 Derivatives held for risk management 15 – 3 412 – 3 412 Financial trading liabilities 13.4 1 503 677 – 2 180 1 503 4 089 8 260 13 852 There have been no transfers between the fair value hierarchy levels (2009: no transfers). 250 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 13. Financial instruments (continued) 13.9 Fair value hierarchy (continued) A reconciliation has been performed for fair value measurements in level 3 of the fair value hierarchy as follows: Group Company 2010 2009 2010 2009 Rm Rm Rm Rm Embedded derivative assets Carrying value beginning of year 1 366 7 702 1 366 7 696 Net fair value loss on embedded derivatives1 (1 256) (6 336) (1 256) (6 330) Carrying value at end of year 110 1 366 110 1 366 Embedded derivative liabilities Carrying value beginning of year 8 262 5 084 8 260 5 084 Net fair value (loss)/gain on embedded derivatives1 (3 540) 3 178 (3 539) 3 176 Carrying value at end of year 4 722 8 262 4 721 8 260 Refer note 3.2 for a sensitivity analysis disclosing the effect of fair value changes that would result if one or more of the inputs were to be changed. Group 2010 2009 Rm Rm 13.10 Loans receivable Secured by mortgages 3 893 – Other 241 – 4 134 – Allowance for impairment (18) – 4 116 – Maturity analysis 4 116 – Non-current 4 110 – Current 6 – In prior years the loans receivable advanced by EFC were included under non-current assets held-for-sale. Refer to note 22. Current Non-current Total Total non-current After 1 year 1 – 5 years 5 years Rm Rm Rm Rm Rm 14. Embedded derivative assets and liabilities 14.1 Embedded derivative assets 2010 Group Commodity and/or foreign currency 110 – – – 110 Company Commodity and/or foreign currency 110 – – – 110 2009 Group Commodity and/or foreign currency 231 235 900 1 135 1 366 Company Commodity and/or foreign currency 231 235 900 1 135 1 366 1. Included within net fair value loss on embedded derivatives in profit or loss. Eskom Holdings Limited 251 Integrated Repor t 2010 Current Non-current Total Total non-current After 1 year 1 – 5 years 5 years Rm Rm Rm Rm Rm 14.2 Embedded derivative liabilities 2010 Group Commodity and/or foreign currency – 3 291 1 3 292 3 292 Foreign currency or interest rate 1 – – – 1 PPI and foreign currency 138 965 326 1 291 1 429 139 4 256 327 4 583 4 722 Company Commodity and/or foreign currency – 3 291 1 3 292 3 292 PPI and foreign currency 138 965 326 1 291 1 429 138 4 256 327 4 583 4 721 2009 Group Commodity and/or foreign currency 27 2 353 4 463 6 816 6 843 Foreign currency or interest rate 2 – – – 2 PPI and foreign currency 14 336 1 067 1 403 1 417 43 2 689 5 530 8 219 8 262 Company Commodity and/or foreign currency 27 2 353 4 463 6 816 6 843 PPI and foreign currency 14 336 1 067 1 403 1 417 41 2 689 5 530 8 219 8 260 The embedded derivative instruments comprise a combination of swaps, forwards and options. The liability has been significantly reduced as a result of renegotiating certain special pricing agreements relating to commodity linked revenue contracts. Assets Liabilities Notional amount Rm Rm Rm 15. Derivatives held for risk management 2010 Group and company Derivatives held for economic hedging 98 1 374 10 451 Foreign exchange derivatives 38 1 090 7 208 Swaps – 767 2 790 Foreign exchange contracts 38 299 3 899 Cross-border lease – 24 519 Interest rate derivatives – 1 637 Forward rate agreements – 1 637 Commodity derivatives 60 283 2 606 Aluminium options – 184 337 Swaps 60 99 2 269 Derivatives held for cash flow hedging 14 6 896 43 979 Foreign exchange contracts 14 4 037 31 323 Interest rate swap – 355 3 800 Cross-currency swap – 2 504 8 856 Total derivatives held for risk management 112 8 270 Maturity analysis 112 8 270 Derivatives held for economic hedging 98 1 374 Non-current – 767 Current 98 607 Derivatives held for cash flow hedging 14 6 896 Non-current – 2 859 Current 14 4 037 252 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 Assets Liabilities Notional amount Rm Rm Rm 15. Derivatives held for risk management (continued) 2009 Group and company Derivatives held for economic hedging 1 113 843 17 232 Foreign exchange derivatives 615 559 10 477 Swaps 530 36 519 Foreign exchange contracts 85 523 9 958 Interest rate derivatives 57 4 3 726 Forward rate agreements – 4 936 Swaps 57 – 2 790 Commodity derivatives 441 280 3 029 Aluminium options 437 66 2 570 Swaps 4 214 459 Derivatives held for cash flow hedging 724 2 569 52 217 Foreign exchange contracts 724 1 415 41 492 Interest rate swap – 463 3 800 Cross-currency swap – 691 6 925 Total derivatives held for risk management 1 837 3 412 Maturity analysis 1 837 3 412 Derivatives held for economic hedging 1 113 843 Non-current 586 123 Current 527 720 Derivatives held for cash flow hedging 724 2 569 Non-current – 663 Current 724 1 906 The hedging practices and accounting treatment are disclosed in note 2.11.3 in the accounting policies (refer page 195). The group uses forward exchange contracts, cross-currency swaps and interest rate swaps for cash flow hedging. Only the changes in cash flows attributable to movements in the spot exchange rates are hedged. • Foreign exchange contracts: used to hedge the changes in the cash flows resulting from the purchase of services and goods denominated mainly in US dollars, euro and yen. • Cross-currency swap: used to hedge the currency risk arising from the fixed rate bonds (denominated in euro and yen) issued by the group. • Interest rate swaps: used to hedge the interest expense variability of the issued floating rate notes. During the year R154 million (2009: R405 million) was recognised in profit or loss as ineffectiveness arising from cash flow hedges. In 2009 a spot adjustment from the implied spot rate of R13,85 to the actual spot rate of R13,04 on the day that the euro cross-currency swap was re-couponed resulted in a R405 million loss recycled out of equity to profit or loss. There were no transactions for which cash flow hedge accounting had to be ceased in the current or comparative financial years as a result of highly probable cash flows no longer being expected to occur. Eskom Holdings Limited 253 Integrated Repor t 2010 Cash flow hedges The periods in which the cash flows of derivatives designated as cash flow hedges are expected to occur are: Carrying Undiscounted 0 to 3 4 to 12 1 to 5 More than amount cash flows months months years 5 years Rm Rm Rm Rm Rm Rm 2010 Group and company Forward exchange contracts Assets 14 (120) 31 (151) – – Liabilities (4 037) (31 203) (5 231) (25 972) – – Interest rate swaps Liabilities (355) (888) (17) (50) (124) (697) Cross-currency swaps Liabilities (2 504) (2 852) (85) 123 (3 123) 233 (6 882) (35 063) (5 302) (26 050) (3 247) (464) 2009 Group and company Forward exchange contracts Assets 724 441 20 421 – – Liabilities (1 415) (2 374) (56) (2 318) – – Interest rate swaps Liabilities (463) (1 295) 10 (49) (76) (1 180) Cross-currency swaps Liabilities (691) (904) (6) (14) (990) 106 (1 845) (4 132) (32) (1 960) (1 066) (1 074) Gains or losses recognised in the hedging reserve in equity are recognised in profit or loss in the periods during which the hedged forecast transaction affects profit or loss. The periods in which the cash flows associated with derivatives are expected to impact profit or loss are: Carrying Undiscounted 0 to 3 4 to 12 1 to 5 More than amount cash flows months months years 5 years Rm Rm Rm Rm Rm Rm 2010 Group and company Forward exchange contracts Assets 14 (120) 31 (151) – – Liabilities (4 403) (31 569) (5 237) (25 977) (186) (169) Interest rate swaps Liabilities (355) (888) (17) (50) (124) (697) Cross-currency swaps Liabilities (2 504) (2 852) (85) 123 (3 123) 233 (7 248) (35 429) (5 308) (26 055) (3 433) (633) 2009 Group and company Forward exchange contracts Assets 724 441 20 421 – – Liabilities (7 957) (8 916) (106) (2 517) (232) (6 061) Interest rate swaps Liabilities (463) (1 295) 10 (49) (76) (1 180) Cross-currency swaps Liabilities (691) (904) (6) (14) (990) 106 (8 387) (10 674) (82) (2 159) (1 298) (7 135) 254 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 Group Company 2010 2009 2010 2009 Note Rm Rm Rm Rm 16. Finance lease receivables Gross receivables 1 400 1 516 1 400 1 516 Unearned finance income (855) (969) (855) (969) Present value of minimum lease payments 545 547 545 547 Maturity analysis of gross receivables from finance leases Due within one year 85 82 85 82 Due between one and five years 329 348 329 348 Due after five years 986 1 086 986 1 086 1 400 1 516 1 400 1 516 Future finance charges (855) (969) (855) (969) 545 547 545 547 Maturity analysis of net investment in finance leases Non-current 532 536 532 536 Due between one and five years 62 66 62 66 Due after five years 470 470 470 470 Current Due within one year 13 11 13 11 545 547 545 547 The finance lease receivables are raised in terms of IFRIC 4 Determining whether an arrangement contains a lease. Average implicit rate (%) 13 13 13 13 17. Trade and other receivables Trade receivables 9 315 7 090 9 112 6 774 Other receivables 2 474 3 281 1 522 2 458 11 789 10 371 10 634 9 232 Allowance for impairment of trade and other receivables 3.1.2(g) (2 379) (2 157) (2 364) (2 136) 9 410 8 214 8 270 7 096 Maturity analysis 9 410 8 214 8 270 7 096 Non-current 19 23 23 23 Current 9 391 8 191 8 247 7 073 18. Inventories Coal 2 838 2 741 2 838 2 741 Nuclear fuel 929 945 929 945 Maintenance spares and consumables 3 611 2 895 3 520 2 752 7 378 6 581 7 287 6 438 The group and company reversed R2 million of a previous inventory write-down (2009: Rnil). The amount reversed has been included in net impairment loss in profit or loss (refer note 34). Eskom Holdings Limited 255 Integrated Repor t 2010 19. Service concession arrangements The Eskom Group operates two service concessions for the generation and/or transmission of electricity, through its operations in Mali and Uganda. Mali Eskom Energie Manantali (EEM) entered into an operation and maintenance agreement with La Société de Gestion de L’Energie de Manantali (SOGEM) in 2001 to operate and maintain a 200MW hydro-electricity facility in Mali and supply power to the national electrical companies in Mali, Senegal and Mauritania. The dam, hydro-electric generating plant and eastern and western transmission networks together constitute the “energy assets” in terms of the agreement. The concession period is 15 years (ends December 2017). EEM is entitled to a fixed annual fee to operate the concession. Although EEM is responsible for the billing of electricity supplied, it merely collects and distributes the proceeds from the sale of electricity. The annual fee does not cover additional expenditure to be incurred on the energy assets. EEM is responsible for the day-to-day maintenance, repairs and replacement of the energy assets. In terms of this requirement, a fund is to be set up by SOGEM, to which EEM is to contribute 10% of annual revenues to cover the cost of major overhauls. This fund has not yet been set up. EEM has, however, made provisions amounting to 10% of revenues. The assets remain the property of SOGEM and will revert to them at the end of the concession period. At that point EEM will have no further obligations in respect of the energy assets. The agreement does not contain a renewal option. A provision of R198 million (2009: R101 million) has been raised in the group as an onerous contract as the expected future operating costs exceed the expected future revenue. A claim was recently lodged with SOGEM for the reimbursement of expenditure on the energy assets. Given the uncertainty of the outcome of the claim, it is not considered prudent to recognise an asset. Uganda Eskom Uganda Limited (Eskom Uganda) entered into an operation and maintenance agreement with Uganda Electricity Generation Company Limited (UEGCL) in 2002, which is linked to a power purchase agreement concluded with Uganda Electricity Transmission Company Limited (UETCL). In terms of the agreements, Eskom Uganda operates and maintains two hydro-electric power stations in Uganda, from which it supplies electricity to UETCL. The dams, powerhouses, related switchyard facilities, high voltage substation, land and movable property together constitute the “energy assets” in terms of the agreement. The concession period is 20 years (ends in December 2023). Eskom Uganda is entitled to receive revenue from UETCL, based on electricity supplied at tariffs regulated by the Electricity Regulatory Authority of Uganda. It also receives a fee to cover it for investment in additional energy assets where required. This has been recognised as an intangible asset. The plant remains the property of UEGCL and will revert to UEGCL at the end of the concession period. At that point Eskom Uganda will have no further obligations in respect of the plant. 256 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 19. Service concession arrangements (continued) 2010 2009 Eskom Eskom Total Total Manantali Uganda Rm Rm Rm Rm Income statements Revenue 79 144 223 266 (Loss)/profit for the year before tax (118) 22 (96) (110) Taxation – (7) (7) (5) (Loss)/profit for the year after tax (118) 15 (103) (115) Statements of financial position Property, plant and equipment 35 – 35 27 Intangible assets – 63 63 63 Inventory 23 19 42 32 Trade and other receivables1 614 38 652 1 002 Cash and cash equivalents 44 37 81 74 Total assets 716 157 873 1 198 Provisions 253 13 266 154 Borrowings 26 19 45 65 Trade and other payables1 649 36 685 1 003 Other liabilities – 9 9 13 Total liabilities 928 77 1 005 1 235 Group Company 2010 2009 2010 2009 R R R R 20. Share capital Authorised 1 000 ordinary shares of R1 each 1 000 1 000 1 000 1 000 Issued 1 ordinary share of R1 1 1 1 1 In terms of the memorandum and articles of association, the unissued share capital is under the control of the Government of the Republic of South Africa, represented by the Department of Public Enterprises, as the sole shareholder. Eskom Holdings Limited 257 Integrated Repor t 2010 Group Company 2010 2009 2010 2009 Rm Rm Rm Rm 21. Payments made in advance Payments made in advance 4 207 6 115 4 178 6 035 Environmental rehabilitation trust fund 62 52 62 52 4 269 6 167 4 240 6 087 Maturity analysis 4 269 6 167 4 240 6 087 Non-current 2 856 5 081 2 856 5 081 Current 1 413 1 086 1 384 1 006 Payments made in advance to suppliers are primarily to reserve manufacturing capacity for the future construction of assets and for future goods and services. These amounts will be used as partial settlement towards the future amounts payable to the suppliers. There is no contractual right to receive a refund in cash or another financial instrument from the suppliers. In the event of default or non-performance, there are performance bonds in place that can be used to recover outstanding payments made in advance. Payments made in advance also includes contributions made by Eskom to an environmental rehabilitation trust fund. The fund was established to fund Eskom’s financial obligation in respect of the rehabilitation of certain coal mines from which Eskom sources its coal for the generation of electricity. Eskom’s access to the fund assets is restricted as the Department of Energy (DoE) will only release the funds once a mine closure certificate is obtained. 22. Non-current assets and liabilities held-for-sale A discontinued operation is a component which has been disposed of or is classified as held-for-sale as it is intended to be sold and it represents a separate major line of business or geographical area of operations. Directly held subsidiary – Eskom Finance Company (Pty) Limited The assets and liabilities of Eskom Finance Company (Pty) Limited (EFC) have historically been presented as held-for-sale in comparative periods following the approval of the Eskom board of directors in prior financial periods to dispose of the company. As a result of events and circumstances beyond Eskom’s control, albeit that an active programme and plan was implemented, attempts to dispose of the company as a going concern did not materialise. The process was not actively pursued during the current financial period, as Eskom is reassessing the business model and strategic role of the company to the group. Taking cognisance of the above, and the uncertainty surrounding the future role of the company, the activities of EFC have been reclassified to continuing operations during the current year. Directly held subsidiary – Gallium Insurance Company Limited The assets and liabilities of Gallium Insurance Company Limited (Gallium) have been presented as held-for-sale after approval by the Eskom Board of Directors to close down the company. A commutation/novation agreement was entered into between Gallium and Escap Limited (Escap) in respect of the insurance business written by Gallium between March 2006 and March 2009. This has the effect of transferring any potential claim liabilities to Escap. The closure of Gallium is expected to be completed by 31 March 2011. Indirectly held subsidiaries, associates and joint ventures The investment in arivia.kom (Pty) Limited (arivia) was previously classified as non-current assets held-for-sale. The company was disposed of on 4 January 2010. During the year, certain aviation assets in Eskom Enterprises were classified as held-for-sale in terms of IFRS 5. 1. Includes concession debtors of R519 million (2009: R655 million) which relates to amounts to be collected by EEM on behalf of SOGEM which will settle the outstanding amount included in trade and other payables. 258 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 22. Non-current assets and liabilities held-for-sale (continued) A consolidated analysis of the results of these discontinued operations, and the result recognised on the remeasurement of assets is: 2010 2009 arivia.kom Gallium Total Inter- Total Total before company inter- elimina- company tions elimina- tions Rm Rm Rm Rm Rm Rm Income statements Revenue 1 174 – 1 174 (566) 608 557 Other income 2 – 2 – 2 1 Employee benefit expense (335) – (335) – (335) (797) Net impairment reversal/(loss) 34 – 34 – 34 (195) Depreciation and amortisation expense (24) – (24) – (24) (28) Loss on disposal of investment (8) – (8) – (8) – Other operating expenses (812) (1) (813) 566 (247) (447) Operating profit/(loss) before net finance income 31 (1) 30 – 30 (909) Finance income 19 5 24 (7) 17 44 Finance cost (4) – (4) – (4) (2) Profit/(loss) before tax 46 4 50 (7) 43 (867) Income tax (10) – (10) (199) (209) 172 Profit/(loss) for the year from discontinued operations 36 4 40 (206) (166) (695) The loss from discontinued operations includes operating expenditure which will still be incurred by the continuing operations after these entities have been disposed of. Eskom Holdings Limited 259 Integrated Repor t 2010 2010 2009 arivia.kom Gallium Aviation Inter- Total Total assets company elimina- tions Note Rm Rm Rm Rm Rm Rm Statements of cash flows Operating cash flows 36 (2) – – 34 327 Investing cash flows (64) (160) – – (224) (462) Financing cash flows 24 – – – 24 (79) Total cash flows (4) (162) – – (166) (214) Statements of financial position Assets Non-current assets – – 11 – 11 3 199 Property, plant and equipment – – 11 – 11 119 Intangible assets – – – – – 24 Loans receivable – – – – – 2 779 Finance lease receivables 22.2 – – – – – 18 Deferred tax assets – – – – – 259 Current assets – 9 – – 9 837 Trade and other receivables – – – – – 344 Inventories – – – – – 49 Loans receivable – – – – – 8 Cash and cash equivalents – 9 – – 9 428 Finance lease receivables 22.2 – – – – – 8 Total assets – 9 11 – 20 4 036 Liabilities Non-current liabilities – – – – – 1 351 Debt securities issued – – – – – 1 127 Borrowings – – – – – 2 Provisions – – – – – 222 Current liabilities – – – – – 662 Trade and other payables – – – – – 305 Debt securities issued – – – – – 266 Borrowings – – – – – 6 Provisions – – – – – 85 Total liabilities – – – – – 2 013 260 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 22. Non-current assets and liabilities held-for-sale (continued) 22.1 Accounting classifications and fair values The classification of each class of financial assets and liabilities for all discontinued operations, and their fair values are: Held-for- Held-to- Loans and Available- Liabilities Other Total Fair trading maturity receivables for-sale at assets carrying value amortised and amount cost liabilities Rm Rm Rm Rm Rm Rm Rm Rm 2010 Financial assets Cash and cash equivalents – – 9 – – – 9 9 2009 Financial assets Non-current assets – – 2 779 – – 18 2 797 2 797 Loans receivable – – 2 779 – – – 2 779 2 779 Finance lease receivables – – – – – 18 18 18 Current – – 780 – – 8 788 788 Loans receivable – – 8 – – – 8 8 Trade and other receivables – – 344 – – – 344 344 Cash and cash equivalents – – 428 – – – 428 428 Finance lease receivables – – – – – 8 8 8 Total financial assets – – 3 559 – – 26 3 585 3 585 Financial liabilities Non-current – – – – 1 129 – 1 129 1 129 Debt securities issued – – – – 1 127 – 1 127 1 127 Borrowings – – – – 2 – 2 2 Current – – – – 577 – 577 577 Trade and other payables – – – – 305 – 305 305 Debt securities issued – – – – 266 – 266 266 Borrowings – – – – 6 – 6 6 Total financial liabilities – – – – 1 706 – 1 706 1 706 2010 2009 Rm Rm 22.2 Finance lease receivables Gross receivables – 33 Unearned finance income – (7) Present value of minimum lease payments – 26 Maturity analysis of gross receivables from finance leases Due within one year – 11 Due between one and five years – 22 – 33 Unearned finance income – (7) – 26 Maturity analysis of net investment in finance leases Non-current Due between one and five years – 18 Current Due within one year – 8 – 26 Eskom Holdings Limited 261 Integrated Repor t 2010 2010 2009 Govern- Capital Cross- Total Total ment contri- border grant butions lease received from customers Rm Rm Rm Rm Rm 23. Deferred income Group and company Balance at beginning of the year 4 439 1 569 22 6 030 5 182 Additions and transfers 1 173 564 – 1 737 1 173 Income recognised (279) (88) (22) (389) (325) Balance at end of the year 5 333 2 045 – 7 378 6 030 Maturity analysis 5 333 2 045 – 7 378 6 030 Non-current 5 019 2 017 – 7 036 5 536 Current 314 28 – 342 494 Group and company 2010 2009 Note Rm Rm The total income recognised for the group and company of R389 million (2009: R325 million) is disclosed in profit or loss in the following categories: Depreciation and amortisation expense 33 (279) (241) Other income 30 (22) (22) Other revenue (88) (62) (389) (325) Government grant The government’s transitional electrification programmes are managed by Eskom on behalf of the DoE. The funding for the electrification of homes is provided by the DoE. Eskom retains ownership of and responsibility for the electrification assets created upon conclusion of the agreement. Capital contributions received from customers Contributions relating to the construction of electricity network assets that were paid in advance by electricity customers up to 30 June 2009 were recognised as deferred income (refer note 2.19). Cross-border lease The deferred income arose from benefits realised through the cross-border lease transaction concluded between Eskom and Edison Capital over certain generating plant (refer note 6). The present value of the lease and leaseback commitments was settled in full on commencement of the transaction and a profit resulted. The cross-border lease transaction was terminated on 15 April 2009. 262 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 Group Company 2010 2009 2010 2009 Note Rm Rm Rm Rm 24. Retirement benefit obligations Post-retirement medical benefits 24.2 7 190 6 238 7 033 6 103 Gratuities 24.3 8 7 – – 7 198 6 245 7 033 6 103 Maturity analysis 7 198 6 245 7 033 6 103 Non-current 6 988 6 061 6 823 5 919 Current 210 184 210 184 The total charge in profit or loss and other comprehensive income is disclosed in the following categories: Pension benefits 24.1 1 179 983 1 108 930 Post-retirement medical benefits 24.2 1 136 838 1 114 817 Gratuities 24.3 1 – – – 2 316 1 821 2 222 1 747 24.1 Pension benefits The amounts recognised in profit or loss are: Contributions 32 1 179 983 1 108 930 The total charge is included in employee benefit expense in profit or loss. The net benefit asset at the reporting date is not accounted for in the financial statements. The rules of the Eskom Pension and Provident Fund state that any deficit on the valuation of the fund will be funded by increases in future contributions or reductions in benefits. If there is a substantial surplus on the valuation of the fund, future contributions may be decreased or benefits may be improved as determined by the trustees of the fund. The Eskom Pension and Provident Fund is registered in terms of the Pension Funds Act, 1956 as amended. All employees are members of the fund. Contributions comprise 20,8% of pensionable emoluments of which members pay 7,3%. The assets of the fund are held separately from those of the group in respect of funds under the control of the trustees. The fund was actuarially valued on the IAS 19 Employee Benefits basis on 31 March 2010 (previous valuation at 31 March 2009). The actuarial present value of retirement benefits at 31 March 2010 was R52 216 million (2009: R47 566 million), while the fair value of the fund’s assets was R60 345 million (2009: R48 946 million). The principal actuarial assumptions used were: Long-term investment return before tax (%) 8,9 8,8 8,9 8,8 Future general salary increases (%) 6,9 6,8 6,9 6,8 Future pension increases (inflation) (%) 5,4 5,3 5,4 5,3 In-service mortality SA56-62 SA56-62 SA56-62 SA56-62 composite composite composite composite plus plus plus plus allowance allowance allowance allowance for HIV for HIV for HIV for HIV Pensioner mortality PA (90) PA (90) PA (90) PA (90) less 1 year less 1 year less 1 year less 1 year Eskom Holdings Limited 263 Integrated Repor t 2010 Group Company 2010 2009 2010 2009 Note Rm Rm Rm Rm 24.2 Post-retirement medical benefits The group has anticipated expenditure in terms of continued contributions to medical aid subscriptions in respect of employees who retire. The estimated present value of the anticipated expenditure for both in-service and retired members was calculated by independent actuaries. Present value of unfunded obligations 7 190 6 238 7 033 6 103 Unrecognised actuarial losses – – – – Liability in the statement of financial position 7 190 6 238 7 033 6 103 Movement in the liability Balance at beginning of the year 6 238 5 562 6 103 5 447 Total expense charged to profit or loss and other comprehensive income 1 136 838 1 114 817 Contributions paid (184) (162) (184) (161) Balance at end of the year 7 190 6 238 7 033 6 103 The amounts recognised in profit or loss and other comprehensive income are: Current service cost 285 265 263 244 Finance cost 534 518 534 518 Net actuarial loss recognised for the year 317 55 317 55 1 136 838 1 114 817 The charge is disclosed in profit or loss and statement of comprehensive income in the following categories: Employee benefit expense 32 285 265 263 244 Finance cost 37 534 518 534 518 Net actuarial loss recognised for the year 317 55 317 55 1 136 838 1 114 817 Refer note 4(b) for the sensitivity analysis and principal actuarial assumptions used. 24.3 Gratuities The estimated cost of gratuities is accounted for over the potential working life of the qualifying employees based on the assessment by independent actuaries, which takes into account the probability of employees remaining in the applicable group company’s employment. Movement in the liability Balance at beginning of the year 7 8 – – Total expense charged to profit or loss (current service cost) 1 – – – Payments made – (1) – – Balance at end of the year 8 7 – – The total charge is disclosed in profit or loss in the following category: Employee benefit expense 32 1 – – – 264 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 2010 2009 Power Mine- Leave3 Annual Other5 Total Total station- related and related closure, perform- environ- pollution ance mental control bonus4 restora- and tion1 rehabili- tation2 Rm Rm Rm Rm Rm Rm Rm 25. Provisions Group Balance at beginning of the year 6 578 1 563 705 1 123 412 10 381 7 124 Provision raised/(reversed) for the year (1 016) (112) 265 1 736 499 1 372 3 048 Raised/(reversed) to the income statement (442) – 265 1 736 499 2 058 2 177 Capitalised to property, plant and equipment, inventory and future fuel (574) (112) – – – (686) 871 Finance cost 280 168 – – – 448 1 431 Unwinding of discount 844 171 – – – 1 015 964 Change in discount rate applied to provision (564) (3) – – – (567) 467 Provisions used – – (189) (1 479) (29) (1 697) (1 222) Balance at end of the year 5 842 1 619 781 1 380 882 10 504 10 381 Maturity analysis 5 842 1 619 781 1 380 882 10 504 10 381 Non-current 5 842 1 619 734 – 299 8 494 8 883 Current – – 47 1 380 583 2 010 1 498 Company Balance at beginning of the year 6 578 1 563 662 1 041 133 9 977 6 716 Provision raised/(reversed) for the year (1 016) (112) 256 1 705 13 846 3 030 Raised/(reversed) to the income statement (442) – 256 1 705 13 1 532 2 159 Capitalised to property, plant and equipment, inventory and future fuel (574) (112) – – – (686) 871 Finance cost 280 168 – – – 448 1 431 Unwinding of discount 844 171 – – – 1 015 964 Change in discount rate applied to provision (564) (3) – – – (567) 467 Provisions used – – (188) (1 425) (17) (1 630) (1 200) Balance at end of the year 5 842 1 619 730 1 321 129 9 641 9 977 Maturity analysis 5 842 1 619 730 1 321 129 9 641 9 977 Non-current 5 842 1 619 730 – 3 8 194 8 731 Current – – – 1 321 126 1 447 1 246 1. Provision is made for the estimated decommissioning cost of nuclear and other generation plant and for the management of nuclear fuel assemblies and radioactive waste (refer note 4d). 2. Provision is made for the estimated cost of closure, pollution control, rehabilitation and mine employee benefits at the end of the life of the mines, where a constructive and contractual obligation exists to pay coal suppliers (refer note 4d). 3. The group recognises a liability for occasional and service leave as the leave is of a long-term nature (refer note 4c). 4. The annual bonus equals one month’s salary for employees on Tuned Assessment of Skills and Knowledge (TASK) grading levels 1 to 13. Employees on TASK grading levels 14 to 26 can choose to spread their bonus amount over the year or take it as a 13th cheque. The performance bonus is based on the performance of the company and employees. 5. Includes provision made for contractual obligations to maintain and restore the infrastructure under service concession arrangements, onerous contracts and guarantees. Eskom Holdings Limited 265 Integrated Repor t 2010 Group Company 2010 2009 2010 2009 Rm Rm Rm Rm 26. Finance lease liabilities Gross finance lease liabilities to subsidiaries – – 661 435 Other gross finance lease liabilities 2 240 1 880 1 934 1 876 Gross finance lease liabilities 2 240 1 880 2 595 2 311 Future finance charges on finance leases (1 556) (1 328) (1 556) (1 505) Present value of finance lease liabilities 684 552 1 039 806 Maturity analysis of gross lease liability Due within one year 210 109 231 175 Due between one and five years 672 405 807 619 Due after five years 1 358 1 366 1 557 1 517 2 240 1 880 2 595 2 311 Future finance charges (1 556) (1 328) (1 556) (1 505) 684 552 1 039 806 Maturity analysis of net lease liability Non-current 632 537 965 761 Due between one and five years 145 36 280 167 Due after five years 487 501 685 594 Current Due within one year 52 15 74 45 684 552 1 039 806 The finance lease liabilities are raised in terms of IFRIC 4 Determining whether an arrangement contains a lease. Average implicit interest rate or incremental borrowing rate (%) 17 18 17 18 27. Trade and other payables Trade and other payables 13 027 13 985 13 478 14 370 Accruals 3 298 3 253 2 549 2 246 Deposits 1 140 929 1 140 929 17 465 18 167 17 167 17 545 Maturity analysis 17 465 18 167 17 167 17 545 Non-current 1 134 1 466 797 1 297 Current 16 331 16 701 16 370 16 248 Non-current trade and other payables consist mainly of retention payables that are payable after 12 months. 28. Payments received in advance Upfront capital contributions 1 782 1 547 1 782 1 547 Grant funding 658 471 658 471 Other 438 167 357 99 2 878 2 185 2 797 2 117 Maturity analysis 2 878 2 185 2 797 2 117 Non-current 995 714 995 714 Current 1 883 1 471 1 802 1 403 Payments received in advance are allocated to deferred income when the related assets have been placed in commercial operation (refer note 2.18). The total charge to profit or loss relating to upfront capital contributions for the group and the company since 1 July 2009 amounted to R111 million. 266 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 Group Company 2010 2009 2010 2009 Note Rm Rm Rm Rm 29. Revenue Electricity revenue 69 834 52 996 69 834 52 996 Other revenue, excluding electricity revenue 1 375 1 181 230 94 71 209 54 177 70 064 53 090 30. Other income Insurance proceeds – – 279 342 Management fee income – 27 641 601 Government grant – 149 – 149 Deferred income 23 22 22 22 22 Net surplus on disposal of property, plant and equipment – 34 – 47 Operating lease income 180 146 187 151 Dividend income 12 52 166 30 Sale of scrap 111 80 111 80 Other income 232 100 183 – 557 610 1 589 1 422 31. Net fair value loss on financial instruments, excluding embedded derivatives Gain on financial trading assets held-for-trading 318 181 166 181 Gain on financial trading liabilities held-for-trading 1 55 1 55 Loss on financial trading assets held-for-trading (46) (90) (46) (1) Loss on financial trading liabilities held-for-trading (294) (478) (294) (478) Net loss on derivatives held for risk management (economic hedges) held-for-trading1 (6 391) (1 425) (6 391) (1 425) Net loss on financial liabilities measured at amortised cost 621 (230) 621 (230) Ineffective portion of changes in fair value of cash flow hedges (reclassified from equity) (154) (405) (154) (405) (5 945) (2 392) (6 097) (2 303) 32. Employee benefit expense Salaries and other staff costs 15 719 13 644 14 438 12 706 Pension benefits 24.1 1 179 983 1 108 930 Post-retirement medical aid benefits 24.2 285 265 263 244 Gratuities 24.3 1 – – – Direct training and development 206 243 175 222 17 390 15 135 15 984 14 102 33. Depreciation and amortisation expense Depreciation of property, plant and equipment 6 5 783 5 009 6 025 4 847 Amortisation and impairment of intangible assets 7 222 150 207 139 Deferred income recognised (government grant on electrification) 23 (279) (241) (279) (241) 5 726 4 918 5 953 4 745 Eskom Holdings Limited 267 Integrated Repor t 2010 Group Company 2010 2009 2010 2009 Note Rm Rm Rm Rm 34. Net impairment loss Impairment 666 1 005 668 1 026 Property, plant and equipment 6 51 155 51 155 Inventory 20 18 16 16 Loans receivable 12 – – – Trade and other receivables (net of reversals) 3.1.2 (g) 583 832 601 855 Reversal (5) (6) (5) (5) Property, plant and equipment 6 (3) (6) (3) (5) Inventory 18 (2) – (2) – Bad debts recovered (9) (10) (9) (10) 652 989 654 1 011 35. Other operating expenses Managerial, technical and other fees 1 799 1 988 1 787 1 969 Research and development 197 207 197 207 Operating lease expense 334 247 288 243 Auditors’ remuneration2 60 57 47 44 Onerous contract 97 101 – – Net loss on disposal of property, plant and equipment 1 – 1 – Loss on disposal of shares – 90 – – Repairs and maintenance, transport and other expenses 5 660 5 894 7 702 8 521 8 148 8 584 10 022 10 984 36. Finance income3 Held-to-maturity investments – 45 – 45 Loans and receivables 1 121 1 943 1 056 1 856 Interest income 1 303 1 954 1 238 1 867 Exchange differences (182) (11) (182) (11) Available-for-sale financial assets 439 1 061 282 941 Interest received from subsidiaries – – 166 159 Interest earned on finance lease receivables 54 103 73 103 1 614 3 152 1 577 3 104 1. Includes forward exchange contract premium of R3 498 million (2009: R2 531 million) for the group and company. 2. There were no non-audit services rendered by the group’s statutory auditors. 3. Finance income includes preference dividends received of R105 million (2009: R273 million) for both the group and the company. 268 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 Group Company 2010 2009 2010 2009 Note Rm Rm Rm Rm 37. Finance cost Debt securities issued 3 864 3 864 3 703 3 673 Interest expense 4 726 3 845 4 565 3 654 Exchange differences – (107) – (107) Cash flow hedges reclassified from equity (862) 126 (862) 126 Borrowings 6 138 1 846 6 108 1 839 Interest expense 1 796 1 860 1 766 1 858 Exchange differences (930) (68) (930) (73) Subordinated loan from shareholder 1 5 272 22 5 272 22 Cash flow hedges reclassified from equity – 32 – 32 Borrowing costs capitalised to property, plant and equipment 2 6 (8 234) (3 436) (8 234) (3 436) Unwinding of discount 1 549 1 482 1 549 1 482 Post-retirement medical benefit 24.2 534 518 534 518 Provisions 25 1 015 964 1 015 964 Change in discount rate of provisions (567) 467 (567) 467 Interest paid to subsidiaries – – 175 231 Interest paid on finance lease payables 101 96 146 123 2 851 4 319 2 880 4 379 38. Income tax Current tax 260 208 – – Current year 266 223 – – Over provision in prior years (6) (15) – - Secondary tax on companies 2 – – – Deferred tax 12 1 816 (3 994) 1 636 (4 161) Reversal/(originating) of temporary differences 2 971 (1 829) 2 800 (2 033) Tax losses (1 160) (1 867) (1 160) (1 867) Originating tax loss for the current period (1 352) (1 861) (1 352) (1 861) Tax loss prior year adjustment 192 (6) 192 (6) Over/(under) provision in prior years 5 (298) (4) (261) Tax from discontinued operations 2 – – – Total income tax in profit or loss 2 080 (3 786) 1 636 (4 161) Eskom Holdings Limited 269 Integrated Repor t 2010 2010 2009 Before Tax Net Before Tax Net tax benefit of tax tax (expense)/ of tax benefit Rm Rm Rm Rm Rm Rm Income tax recognised in other comprehensive income Group Available-for-sale financial assets (25) 7 (18) 33 (9) 24 Cash flow hedges – effective portion of changes in fair value (8 501) 2 579 (5 922) (477) 178 (299) Effective portion of changes in fair value (8 450) 2 565 (5 885) (411) 160 (251)  Net amount transferred to initial carrying amount of hedged items (51) 14 (37) (66) 18 (48) Foreign currency translation differences 13 – 13 2 – 2 Net actuarial loss on post-retirement medical aid benefits (317) 89 (228) (55) 15 (40) (8 830) 2 675 (6 155) (497) 184 (313) Company Available-for-sale financial assets (17) 5 (12) 17 (5) 12 Cash flow hedges (8 501) 2 579 (5 922) (477) 178 (299) Effective portion of changes in fair value (8 450) 2 565 (5 885) (411) 160 (251)  Net amount transferred to initial carrying amount of hedged items (51) 14 (37) (66) 18 (48) Foreign currency translation differences – – – – – – Net actuarial loss on post-retirement medical aid benefits (317) 89 (228) (55) 15 (40) (8 835) 2 673 (6 162) (515) 188 (327) Group Company 2010 2009 2010 2009 % % % % Reconciliation of effective tax rate Taxation as a percentage of profit before tax 35,44 29,67 33,92 29,09 Taxation effect of: Exempt income 0,48 (0,94) 0,87 (0,63) Expenses not deductible for tax purposes (2,94) 1,99 (2,81) 1,44 Controlled foreign operations income (0,03) 0,05 (0,02) 0,04 Prior year adjustment (3,35) (2,38) (3,89) (1,86) Secondary tax on companies (0,03) – – – Deferred tax asset not raised (1,52) – – – Other (0,05) (0,39) (0,07) (0,08) Standard tax rate 28 28 28 28 1. Finance cost on the subordinated loan from shareholder includes R4 570 million (2009: Rnil) relating to the remeasurement of the loan. 2. Borrowing cost capitalised includes R4 570 million (2009: Rnil) relating to the remeasurement of the subordinated loan from the shareholder. 270 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 Group Company 2010 2009 2010 2009 Rm Rm Rm Rm 39. Cash generated from operations Profit/(loss) before tax 5 866 (12 759) 4 823 (14 298) Adjustments for: 13 689 20 284 13 563 21 289 Depreciation and amortisation expense 5 726 4 918 5 953 4 745 Depreciation expense – primary energy 14 14 14 14 Net impairment loss (excluding bad debts recovered) 661 999 663 1 021 Net loss/(surplus) on disposal of property, plant and equipment 1 (34) 1 (47) Net loss on disposal of shares – 90 – – Increase in provisions 2 344 2 390 1 795 2 350 Decrease in deferred income (110) (84) (110) (84) Amortisation of future fuel 296 236 296 236 Other non-cash items – (44) – – Finance income (1 614) (3 152) (1 577) (3 104) Finance cost 2 851 4 319 2 880 4 379 Dividend income (12) (52) (166) (30) Net fair value loss on financial instruments including embedded derivatives 3 661 11 906 3 814 11 809 Share of profit of equity-accounted investees (14) (37) – – Non-current assets held-for-sale (115) (1 185) – – 19 555 7 525 18 386 6 991 Changes in working capital (1 139) (2 370) (782) (1 585) Increase in inventories (334) (2 374) (383) (2 530) Increase in trade and other receivables (1 762) (3 804) (1 775) (2 814) Decrease in loans receivable 2 – – –- Decrease/(increase) in payments made in advance 1 898 (1 911) 1 847 (1 890) Increase in trade and other payables 245 6 248 663 6 174 Expenditure incurred on provisions (1 881) (1 386) (1 814) (1 361) Increase in payments received in advance 693 857 680 836 18 416 5 155 17 604 5 406 Eskom Holdings Limited 271 Integrated Repor t 2010 Group Company 2010 2009 2010 2009 Rm Rm Rm Rm 40. Guarantees and contingent liabilities Eskom issues guarantees for strategic and business purposes to facilitate other business transactions. 40.1 Financial guarantees (a) Long-term debt raised by Motraco Mozambique Transmission Company SARL (Motraco), a private joint venture company between Eskom, Electricidade de Mocambique and Swaziland Electricity Board, owns transmission lines connecting the South African, Mozambican and Swaziland national grids to establish a secure source of electrical power for the Mozal aluminium smelter in Maputo, Mozambique. Eskom has guaranteed the long-term debt raised by Motraco. At 31 March 2010 the outstanding amount was USD26 million (2009: USD32 million), which translates into R188 million (2009: R304 million). The loans of USD26 million mature on 6 September 2019. The guarantees would be triggered if Motraco was unable to meet its obligations in terms of the long-term debt. The risk of default resulting from the political risk in Mozambique is mitigated through a guarantee arranged with an established international insurance company, which specialises in facilitating investments in high risk, low income countries. The risk adjusted credit exposure of Motraco is calculated by applying a rating agency’s annual default probabilities. Applying the default probability of 0,24% (2009: 0,26%), the financial liability in respect of these guarantees is calculated as R1 million at 31 March 2010 (2009: R1 million). This amount has been raised as a provision in the current year,  and is included in other provisions (refer note 25). The default probability trend into the future is seen to be positive, and changes in variables will not have a significant impact on profit or loss. No payments have been made in terms of these guarantees since their inception in 1999. The unprovided portion, disclosed as a contingent liability amounted to 187 303 187 303 (b) Letters of credit for the cross-border lease transactions Eskom has provided collateral security in the form of letters of credit from banks in respect of the cross-border lease transaction (refer note 6). The collateral security has been provided to hedge the beneficiary against its exposure to the loss of its remaining investment in the cross-border leases and the cost of replacing the transaction in the market if the lease and leaseback transactions are cancelled. Eskom is ultimately responsible for meeting any potential losses to the banks that may arise should a cancellation event occur. A cancellation event will occur if there is an event of default, an event of loss of the asset, or economic obsolescence of the asset. The calculation of the beneficiary’s exposure is influenced by pledged securities in the form of US treasury notes that are marked-to- market semi-annually.  The exposure amount is adjusted accordingly. Eskom has guaranteed the payment and facility-related obligations of a special purpose company, established as part of the cross-border lease transaction, in favour of all parties to whom the company has such obligations in terms of the lease and leaseback operative documents. In terms of the cross-border lease, Eskom’s potential liability of USDnil (2009: USD283 million) has been fully collateralised, with USDnil (2009: USD419 million) having been deposited with the providers of letters of credit. At 31 March 2010 the amount guaranteed was USDnil (2009: USD190 million) which, at the year end exchange rate, translates to – 1 803 – 1 803 The cross-border lease agreement was terminated on 15 April 2009. 272 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 Group Company 2010 2009 2010 2009 Rm Rm Rm Rm 40. Guarantees and contingent liabilities (continued) 40.1 Financial guarantees (continued) (c) EFC loans to Eskom group employees Eskom Finance Company (Pty) Limited (EFC) has granted loans (secured by mortgage bonds on the properties) to employees of the Eskom group. Eskom group companies have issued guarantees to EFC to the extent to which the loan values of employees exceed the current value of the mortgage security. At 31 March 2010 the guaranteed amounts were R303 million (2009: R161 million) for the group and R287 million (2009: R150 million) for the company. Historically EFC has absorbed any losses incurred, and has not called up any guarantee payments. Eskom’s guarantee exposure is therefore governed by the default probability of EFC, which is influenced by the risk of significant fluctuations in interest rates that might cause employees to default on their repayments. The risk adjusted credit exposure of EFC is calculated by applying a rating agency’s annual default probabilities. The default probability for the unsecured portion of the EFC loan book (representing 10% of the loan book) is calculated at 28% (2009: 26%), while the secured portion of the loan book (90% of the loan book) is calculated at 0,10% (2009: 0,52%). Applying the combined default probability, the financial liability in respect of this guarantee is calculated for the company at R1 million (2009: R2 million). This amount has been included as a provision in Eskom in the current year,  and is included in other provisions (refer note 25). Changes in variables will not have a significant impact on profit or loss. The unprovided portion, disclosed as a contingent liability amounted to – – 286 148 Summary of financial guarantees Unprovided portion 187 2 106 473 2 254 Amounts provided in other provisions 1 1 2 3 Total financial guarantees 188 2 107 475 2 257 40.2 Other guarantees (a) Guarantees to SARS for customs duty Customs duty and import VAT are normally due upon declaration of imported goods at the port of entry (harbour or airport).   The South African Revenue Services (SARS) allows Eskom up to a maximum of 37 days after declaration date before the customs duty and import VAT must be settled on the deferment account. SARS requires Eskom to provide a bank guarantee to secure the debt when it becomes due. All conditions of the deferral of the customs duty and import VAT have been met. The total amount disclosed as a contingent liability amounted to 183 183 183 183 Eskom Holdings Limited 273 Integrated Repor t 2010 Group Company 2010 2009 2010 2009 Rm Rm Rm Rm (b) Eskom Pension and Provident Fund Eskom has indemnified the Eskom Pension and Provident Fund against any loss resulting from negligence, dishonesty or fraud by the fund’s officers or trustees. (c) Eskom Enterprises performance bonds Eskom Enterprises (Pty) Limited has performance bonds totalling R43 million (2009: R54 million) with respect to various contracts. The probability of having to pay out in terms of the performance bonds is calculated after assessing the likelihood of meeting the contract deliverables. Probable future payments are then discounted and the amount raised as a liability. The project management processes in place confirm that all but one of the contracts should meet the project deliverables. As a result of this contractual dispute, the R27 million (2009: R35 million) performance bond for this contract has a high probability of being called up. The full amount has been raised as a provision in the current year and is included in other provisions (refer note 25). Eskom Enterprises (Pty) Limited has not been required to make any previous performance bond payments. The total amount disclosed as a contingent liability amounted to 16 19 – – (d) Conflict of interest guarantee A subsidiary of Eskom Enterprises (Pty) Limited issued a conflict of interest guarantee to a customer, that restricts Eskom Enterprises from trading outside a specific area in Mali. There is currently no possibility of Eskom Enterprises trading outside the specified area. The total contingent liability amounts to 51 65 – – (e) Rental guarantees Some Eskom Enterprises group companies issued rental guarantees to various property owners to guarantee the rental on the properties they occupy. The guarantees have various dates of expiry. The total amount disclosed as a contingent liability amounted to 15 10 – – 40.3 Other contingent liabilities (a) Legal claims Legal claims are in process against Eskom as a result of contractual disputes with various parties. On the basis of the evidence available it appears that no obligation is present. The claims are disclosed as a contingent liability and amounted to 71 434 152 434 (b) Pledges South Dunes Coal Terminal (Pty) Limited signed a loan agreement with Investec Bank for the funding of the Richards Bay Coal Terminal Phase V expansion project. All rights, title and interest in and to the loan to Richards Bay Coal Terminal, the South Dunes Coal Terminal (Pty) Limited Throughput Agreement Rights and Entitlement and certain other accounts are pledged as security for the loan. The unused loan facility, disclosed as a contingent liability, amounts to – 50 – – 274 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 Group Company 2010 2009 2010 2009 Rm Rm Rm Rm 41. Commitments 41.1 Capital expenditure Estimated capital expenditure 227 206 213 805 224 995 211 181 Contracted 113 061 99 446 112 520 98 990 Approved, not yet contracted for 114 145 114 359 112 475 112 191 The expenditure is expected to be incurred as follows: 227 206 213 805 224 995 211 181 Due within one year 65 594 76 101 64 489 75 404 Due between two and five years 159 005 135 324 157 899 133 397 Due after five years 2 607 2 380 2 607 2 380 This expenditure will be financed through shareholder support, debt (refer to funding strategy on page 44 for further information) and internally generated funds. 41.2 Operating leases Group as lessee The future minimum lease payments payable under non-cancellable operating leases are: 199 127 182 111 Due within one year 95 70 87 60 Due between two and five years 103 57 94 51 Due after five years 1 – 1 – Group as lessor The future minimum lease payments receivable under non-cancellable operating leases are: 589 1 004 589 1 004 Due within one year 59 88 59 88 Due between two and five years 261 317 261 317 Due after five years 269 599 269 599 41.3 Supply of water Eskom has entered into long-term agreements with the Department of Water Affairs to reimburse the department for the cost incurred in supplying water to Eskom. This cost is regarded as part of primary energy in profit or loss. 41.4 Coal Eskom has entered into long-term agreements with suppliers for coal purchases. The annual cost of coal is regarded as part of primary energy in profit or loss. 42. Related-party transactions The group is 100% controlled by its shareholder, the government, represented by the Minister of Public Enterprises. Eskom (and its subsidiaries) constitute a Schedule 2 public entity in terms of the Public Finance Management Act. The related party disclosure is required in terms of IAS 24 Related Party Disclosures and the specific guidance given by the South African Institute of Chartered Accountants. The related parties of Eskom consist mainly of government departments, state-owned enterprises, subsidiaries of Eskom and other public entities in the national sphere of government, as well as key management personnel of Eskom or its shareholder and close family members of these related parties. The list of public entities in the national sphere of government was provided by National Treasury on its website www.treasury.gov.za. It also provided the names of subsidiaries of public entities. The comparative information has been based on the list of public entities and their subsidiaries effective at 31 March 2009. In addition, related parties comprise associates and joint ventures of the group and post-retirement benefit plans for the benefit of employees. Eskom Holdings Limited 275 Integrated Repor t 2010 Group Company 2010 2009 2010 2009 Rm Rm Rm Rm The following transactions were carried out with related parties: Sales of goods and services1 3 452 2 589 4 237 3 463 Shareholder, including government departments 454 349 322 252 State-owned enterprises in the national government sphere 1 866 1 144 1 854 1 081 Eskom subsidiaries – – 929 1 034 Eskom associates – 3 – 3 Joint ventures in which Eskom is a partner 1 132 1 093 1 132 1 093 Government grant funding for electrification Department of Energy 1 427 1 027 1 427 1 027 Purchases of goods and services2 2 145 1 756 9 500 10 845 Shareholder, including government departments 593 469 593 468 State-owned enterprises in the national government sphere 324 306 301 303 Eskom subsidiaries – – 7 449 9 144 Joint ventures in which Eskom is a partner 49 – 49 – Eskom Pension and Provident Fund (contributions) 1 179 981 1 108 930 Finance income 262 141 428 300 Shareholder, including government departments 1 141 1 141 State-owned enterprises in the national government sphere 261 – 261 – Eskom subsidiaries – – 166 159 Finance cost 6 319 1 011 6 494 1 242 Shareholder, including government departments 5 274 1 011 5 274 1 011 State-owned enterprises in the national government sphere 1 045 – 1 045 – Eskom subsidiaries – – 175 231 Lease income 68 37 75 42 State-owned enterprises in the national government sphere 68 37 68 37 Eskom subsidiaries – – 7 5 Lease expenses 1 – 3 1 State-owned enterprises in the national government sphere 1 – 1 – Eskom subsidiaries – – 2 1 Finance lease finance cost Eskom subsidiaries – – 45 27 Environmental levy State-owned enterprises in the national government sphere 3 699 – 3 699 – Receivables and amounts owed by related parties 4 959 2 380 5 395 4 277 Shareholder, including government departments 4 705 1 835 4 686 1 814 State-owned enterprises in the national government sphere 133 162 127 107 Eskom subsidiaries – – 461 1 973 Joint ventures in which Eskom is a partner 121 383 121 383 Allowance for impairment losses 171 454 170 452 Shareholder, including government departments 170 164 170 164 State-owned enterprises in the national government sphere 1 2 – – Joint ventures in which Eskom is a partner – 288 – 288 1. Goods and services are sold to related parties on an arm’s length basis at market-related prices. 2. Goods and services are bought from related parties on an arm’s length basis at market-related prices. 276 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 Group Company 2010 2009 2010 2009 Rm Rm Rm Rm 42. Related-party transactions (continued) Guarantees 175 975 175 975 175 975 175 975 Shareholder, including government departments 175 970 175 970 175 970 175 970 State-owned enterprises in the national government sphere1 5 5 5 5 Payables and amounts owed to related parties 2 62 703 24 436 64 395 28 032 Shareholder, including government departments 62 329 23 687 62 329 23 687 – Borrowings 22 329 13 687 22 329 13 687 – Subordinated loan from shareholder 40 000 10 000 40 000 10 000 State-owned enterprises in the national government sphere 370 749 370 749 Eskom subsidiaries – – 1 692 3 596 Eskom Pension and Provident Fund 4 – 4 – Payments made in advance Eskom subsidiaries – – – 4 Payments received in advance State-owned enterprises in the national government sphere 158 – 158 – Indirect transactions – assets at nominal value 4 195 1 873 4 195 2 412 Eskom subsidiaries – – – 539 Government bonds 4 195 1 873 4 195 1 873 Indirect transactions – liabilities at nominal value Short-sold government bonds 315 468 315 468 Loans to subsidiaries Eskom subsidiaries – – 796 1 853 43. Events after the reporting date There were no significant events after the reporting date. 1. The guarantees from state-owned enterprises are for future or unpaid electricity consumption accounts. 2. Purchase transactions with related parties are at an arm’s length basis with payment terms of 30 days from invoice date. Eskom Holdings Limited 277 Integrated Repor t 2010 44. Restatement of comparatives New and revised standards and interpretations The following new, revised and amended standards and interpretations were implemented during the financial year, but had no significant impact on the financial statements: – IAS 23 Borrowing costs – IAS 32 Financial instruments: Presentation – IFRS 1 First-time adoption of International Financial Reporting Standards and IAS 27 Consolidated and separate financial statements – IFRS 2 Share-based payment – IFRIC 13 Customer loyalty programmes – IFRIC 15 Agreements for the construction of real estate – IFRIC 16 Hedges of a net investment in a foreign operation The following new and revised standards and interpretations, which had an impact on the financial statements, were implemented during the financial year: – IFRS 7 Financial instruments: Disclosures – IFRS 8 Operating segments – IAS 1 Presentation of financial statements – IFRIC 18 Transfers of assets from customers IFRS 7 Financial instruments: Disclosures The implementation of the amendment to IFRS 7 Financial instruments: Disclosures did not result in a restatement of comparative figures as the amendment is in respect of disclosure requirements. The amendment introduces a three-tier hierarchy disclosure for fair value measurement based on the significant inputs (refer note 13.9) and also clarifies and enhances existing disclosure about the nature and extent of liquidity risk arising from financial instruments. IFRS 8 Operating segments As of 1 April 2009, the group determines and presents its operating segments based on the information that is internally provided to the group executive committee (Exco), which is the group's chief operating decision maker. This change in accounting policy is due to the adoption of IFRS 8 Operating segments. Previously, operating segments were determined and presented in accordance with IAS 14 Segment reporting. Comparative segment information has been represented in conformity with the transitional requirements of such standard. The change in accounting policy did not result in a financial impact on the financial statements as the change is in respect of disclosure requirements. Refer note 5. IAS 1 Presentation of financial statements The effect of the restatement of comparative figures to comply with the new IAS 1 Presentation of financial statements and the reclassification of other line items on the statements of financial position, statements of comprehensive income, statements of changes in equity and statements of cash flows is indicated below. IFRIC 18 Transfers of assets from customers The group also implemented IFRIC 18 Transfers of assets from customers which is prospectively effective for the transfer of assets from customers received on or after 1 July 2009. The group has previously (up to 30 June 2009) credited the contribution paid in advance by electricity customers relating to the construction of regular distribution and transmission assets to profit or loss on a straight-line basis over the expected useful lives of the related assets when these assets were placed into commercial operation. From 1 July 2009, the contributions paid in advance are credited to profit or loss within other revenue when the customer is connected to the electricity network. Eskom Finance Company (Pty) Limited (EFC) The results of Eskom Finance Company (Pty) Limited (EFC), a 100% held subsidiary, was classified as a non-current asset held-for-sale in the previous financial years. The results of EFC was treated as continuing operations for the 2010 financial year. The comparative information for the group in the consolidated income statement has been restated in line with IFRS 5 Non-current assets held-for-sale and discontinued operations to reflect the results of EFC as a continuing operation (refer note 22). This is presented below: Statement of financial position at 31 March 2009 There have been no restatements made to the statement of financial position at 31 March 2009. 278 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 44. Restatement of comparatives (continued) Group Company Previously Adjust- Restated Previously Adjust- Restated reported ments reported ments Rm Rm Rm Rm Rm Rm Income statement for the year ended 31 March 2009 Continuing operations Revenue 53 826 351 54 177 53 090 – 53 090 Primary energy (25 351) 467 (24 884) (25 351) 467 (24 884) Employee benefit expense (15 166) 31 (15 135) (14 157) 55 (14 102) Depreciation and amortisation (4 916) (2) (4 918) (4 745) – (4 745) Net impairment loss (1 213) 224 (989) (1 239) 228 (1 011) Other operating expenses (8 591) 7 (8 584) (10 996) 12 (10 984) Operating (loss)/profit before net fair value loss and net finance cost (1 411) 1 078 (333) (3 398) 762 (2 636) Other income 586 24 610 1 422 – 1 422 Net fair value loss on financial instruments, excluding embedded derivatives (2 370) (22) (2 392) (2 281) (22) (2 303) Net fair value loss on embedded derivatives (9 514) – (9 514) (9 506) – (9 506) Operating (loss)/profit before net finance cost (12 709) 1 080 (11 629) (13 763) 740 (13 023) Net finance cost (314) (853) (1 167) (590) (685) (1 275) Finance income 3 370 (218) 3 152 3 322 (218) 3 104 Finance cost (3 684) (635) (4 319) (3 912) (467) (4 379) Share of profit of equity-accounted investees 37 – 37 – – – Loss before tax (12 986) 227 (12 759) (14 353) 55 (14 298) Income tax 3 805 (19) 3 786 4 176 (15) 4 161 Loss for the year from continuing operations (9 181) 208 (8 973) (10 177) 40 (10 137) Discontinued operations Loss for the year from discontinued operations (527) (168) (695) – – – Loss for the year (9 708) 40 (9 668) (10 177) 40 (10 137) Eskom Holdings Limited 279 Integrated Repor t 2010 Group Company Previously Adjust- Restated Previously Adjust- Restated reported ments reported ments Rm Rm Rm Rm Rm Rm Statements of comprehensive income for the year ended 31 March 2009 Loss for the year (9 708) 40 (9 668) (10 177) 40 (10 137) Other comprehensive loss – (313) (313) – (327) (327) Available-for-sale financial assets – net change in fair value – 33 33 – 17 17 Cash flow hedges Effective portion of changes in fair value – (411) (411) – (411) (411) Changes in fair value – (816) (816) – (816) (816)  Ineffective portion of changes in fair value recycled to profit or loss – 405 405 – 405 405  Net amount transferred to initial carrying amount of hedged items – (66) (66) – (66) (66) Foreign currency translation – 2 2 – – – Net actuarial loss on post-retirement medical aid benefits – (55) (55) – (55) (55) Income tax on other comprehensive income – 184 184 – 188 188 Total comprehensive loss for the year (9 708) (273) (9 981) (10 177) (287) (10 464) Statements of changes in equity There have been no restatements to the statement of changes in equity. Statements of cash flows for the year ended 31 March 2009 Cash flows from operating activities 12 762 – 12 762 13 013 – 13 013 Cash generated from operations 5 133 22 5 155 5 384 22 5 406 Net cash flows from current derivatives held for risk management 7 629 (22) 7 607 7 629 (22) 7 607 280 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 45. Directors’ remuneration1 Remuneration philosophy Eskom links management remuneration to the performance of the organisation and an individual’s contribution. Market factors are also crucial as rewards and remuneration must be kept at levels that will assist us in retaining key leadership skills. Basic salary is augmented by short- and long-term incentives. International and local benchmarks are considered to ensure executive packages are aligned with those offered by companies of similar stature to Eskom. We aim to remunerate in line with the median of the market to recruit and retain the best management team to lead our business. The executive remuneration strategy is constantly reviewed to stay aligned with the Department of Public Enterprises remuneration guidelines and abreast with best practices. Remuneration committee The human resources and remuneration committee helps the board to apply policy relating to the remuneration of directors and executives as set by our shareholder. The policy also covers the nomination of executives for senior positions and conditions of service. Refer page 292. The committee enhances business performance by: • approving, guiding and influencing key human resources policies and strategies • monitoring compliance with the Employment Equity Act • guiding strategies to achieve equity in Eskom • approving the principles governing reward and incentive schemes Non-executive directors Remuneration of non-executive directors is benchmarked against the norms for companies of similar size and is in line with guidelines issued by the shareholder. Remuneration proposals from the human resources and remuneration committee are forwarded to the board. The board then makes recommendations to the shareholder. Non-executive directors receive a fixed monthly fee and are reimbursed for out-of-pocket expenses incurred in fulfilling their duties. Executive management committee (Exco) members The committee makes recommendations to the board concerning the remuneration of the chief executive, and approves the remuneration of the other Exco members. The remuneration is considered in accordance with a framework approved by the shareholder. The board recommendation on the remuneration of the chief executive has to be approved by the shareholder. Factors influencing the remuneration of the Exco members include level of skill, experience, contribution to organisational performance and success of the group. Remuneration includes a basic package and short and long-term incentives. Every year, the human resources and remuneration committee reviews the structure of these packages to ensure an appropriate balance between fixed and variable remuneration and short and long-term incentives and rewards. The finance director, chief operating officers and managing directors have permanent employment contracts based on Eskom’s standard conditions of service. Six months’ notice is required. Eskom Holdings Limited 281 Integrated Repor t 2010 Remuneration structure The remuneration of the Exco members includes the following components: Guaranteed amount They receive a guaranteed pay package with remuneration based on cost to company.   This comprises a fixed cash portion and compulsory benefits (medical aid, life cover and pension). The guaranteed amount is reviewed annually to keep remuneration in line with the market. Short-term incentives These reward the achievement of individual predetermined performance objectives and targets as set by the chief executive in performance contracts with each Exco member. The human resources and remuneration committee approves the targets set for the chief executive. The short-term incentive scheme is calculated as a percentage of pensionable earnings. Long-term incentives These are designed to attract, retain and reward the Exco members for meeting the organisational objectives set by the shareholder. A market-benchmarked long-term incentive and deferred bonus scheme have been approved effective from 1 April 2005. Long-term incentive scheme A number of performance shares (award performance shares) were awarded to the Exco members on 1 April 2005, 2006, 2007 and 2008. Award performance shares and deferred bonus shares to be awarded as at 1 April 2009 are deferred pending the outcome of an investigation into the remuneration policy of state-owned enterprises. The value of the performance shares is deemed to be R1 at grant date, and is escalated at a money-market rate to determine the value at reporting date. The board has set performance conditions in line with the Eskom business plan and shareholder compact over a three-year performance period. Performance covers financial and non-financial targets in areas such as ensuring business sustainability of Eskom, ensuring reliability of supply to all South Africans, ensuring that future power needs for South Africa are adequately provided for and supporting the developmental objectives of South Africa, with an agreed weighting in each category. Awards only vest if, and to the extent that, these targets are met. Potential vesting percentages range from 0% to 100%. A threshold and a stretch target are set for each measure, with an expected (on target) vesting of 50%. Performance parameters are complemented by a set of gatekeeper conditions. If gatekeeper requirements are not met, the board at its discretion may adjust the vesting percentages even though targets have been met. The following gatekeeper conditions trigger a review of vesting percentages: • if the lost-time incident rate is greater than 0,31 • if the sustainability committee gives an unfavourable safety report • if Eskom’s audited annual financial statements show a financial loss • if the auditors qualify Eskom’s annual financial statements • if a significant PFMA contravention occurs • enhancement of Eskom’s reputation The vesting period for award performance shares is three years from the date of grant. At the end of that period, the human resources and remuneration committee decides the amounts to be paid in line with: • the percentage of award performance shares that vest, based on the performance conditions achieved • the value of the award performance shares based on the grant value, escalated at a money market rate In addition to the performance conditions, vesting of award performance shares is dependent on the scheme participant remaining in Eskom's employment throughout the vesting period. The award lapses if employment ceases during the vesting period (other than for permitted reasons). 1. Includes remuneration of Exco members (chief executive, finance director, chief operating officers and managing directors) who are senior executives and not directors of Eskom. 282 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 45. Directors’ remuneration (continued) Deferred bonus scheme Eskom offered bonus shares to the Exco members, non-Exco members and senior general managers participating in the scheme. Participants had the right to accept a certain number of bonus shares as a percentage of their annual bonus after tax. Eskom determined the value of the bonus shares at R1 escalated at a money market rate over the three-year performance period. Participants then receive a matching amount equal to the value of the bonus shares at the end of the performance period in addition to the value of the accepted bonus shares. If employment ceases (other than for permitted reasons) during the performance period, only the value (without any matching award) of the bonus shares which were originally accepted by the participant will be paid. Payment is made on termination of employment. Share awards – vested Award performance shares awarded on 1 April 2007 vested on 31 March 2010 with an expected vesting rate of 31,02%, due to the achievement of non-financial performance conditions over the three-year period. The cash value of the vested shares is payable in June 2010 at R1,34 per share based on the money market rate. Deferred bonus shares taken up on 1 April 2007 became fully vested and qualified for the one-for-one share match on 31 March 2010 in terms of the scheme. These shares are valued at R1,34 per share. The remuneration value of the bonus shares therefore adds up to R0,34 per share (related to the interest earned at a money market rate) plus R1,34 per share related to the matching share. Shares vested on 31 March 2010 are: Name Award Award Award Deferred Deferred performance performance performance bonus shares bonus shares vested on shares vested on shares payable vested on at R1,68 31 March 2010 31 March 2010 at R1,34 per share 31 March 2010 per share at a rate of 31,02% Number Number R Number R BA Dames 1 974 000 612 335 820 529 – – EL Johnson 1 190 000 369 138 494 645 94 441 158 661 SJ Lennon 1 599 845 496 272 665 004 – – Other 1 7 794 603 2 417 886 3 239 967 210 252 353 223 Share awards – vesting The current estimated vesting values of the award performance shares is R1,28 per share for the 1 April 2008 awards (vesting 31 March 2011). The value of the performance shares allocated does not take into account the impact of performance conditions over the applicable three-year performance periods. The value estimated for the 2008 bonus shares is R1,28 per share.The vesting percentage of 26,9% is an estimate. Shares awarded on 1 April 2008 are: Name Outstanding Award Award Deferred Deferred award performance performance bonus shares bonus shares performance shares vesting on shares payable vesting on payable in shares vesting on 31 March 2011 in June 2011 31 March 2011 June 2011 at 31 March 2011 at a rate of 26,9% R1,28 per share R1,56 per share Number Number R Number R BA Dames 2 122 050 570 831 730 664 – – EL Johnson 1 642 200 441 752 565 442 – – SJ Lennon 1 715 834 461 559 590 796 150 000 234 000 Other1 13 477 829 3 625 536 4 640 686 497 449 776 020 Eskom Holdings Limited 283 Integrated Repor t 2010 Scheme details The details of the scheme are: Long-term Deferred Long-term Deferred incentive plan2 bonus plan2 incentive plan bonus plan Date of grant 1 April 2009 1 April 2009 1 April 2008 1 April 2008 Number granted – – 25 649 031 647 449 Contractual life 3 years 3 years 3 years 3 years Vesting conditions Variable vesting Three-year Variable vesting Three-year depending on the service depending on the service achievement period achievement period of performance of performance conditions conditions Method of settlement Cash Cash Cash Cash Expected attrition of employee (%) – – – – Expected outcome of performance conditions (%) – – 26,90 Not applicable Reconciliation of performance 2010 2010 2009 2009 share movements Number Number Number Number Number of performance shares Outstanding at beginning of year 56 260 002 1 192 508 74 345 360 2 441 158 Granted during the year – 647 449 25 649 031 – Forfeited during the year (12 264 771) – (12 956 274) (162 067) Settled during the year (12 478 871) (887 815) (15 298 866) (1 020 259) Adjustment in performance share value – – (15 479 249) (681 004) Adjustment to deferred bonus plan – – – 614 680 Outstanding at end of year 31 516 360 952 142 56 260 002 1 192 508 Carrying amount of liability (R’000) 9 307 1 144 16 979 1 816 Intrinsic value of liabilities relating to vested rights (R’000) 9 307 1 144 16 979 1 816 1. Non-Exco F-Band employees. 2. Award performance shares and deferred bonus shares to be awarded effective 1 April 2009 were deferred pending the outcome of an investigation into the remuneration policy of state-owned enterprises. 284 Eskom Holdings Limited Integrated Repor t 2010 Notes to the consolidated financial statements continued for the year ended 31 March 2010 45. Directors’ remuneration1 (continued) Share awards – vested and paid Shares awarded on 1 April 2006 and redeemed during the year are: 2010 2009 Name Award Deferred Total Total performance bonus shares shares redeemed in redeemed in December December 20092 20092 R’000 R’000 R’000 R’000 BA Dames 756 – 756 728 SJ Lennon 785 215 1 000 890 ME Letlape – – – 815 PJ Maroga 835 222 1 057 681 B Nqwababa – – – 679 Other1 4 250 1 072 5 322 4 795 6 626 1 509 8 135 8 588 Details of emoluments paid The following schedule sets out the emoluments due to the directors of Eskom for the current year (other than the share awards above): 2010 2009 Name Salaries/ Short- Short- Other Total Total fees term term payments3 bonus bonus payment1 payment2 R’000 R’000 R’000 R’000 R’000 R’000 Directors Non-executive directors R Godsell4 613 – – 369 982 740 VM Moosa5 – – – – – 350 PM Makwana6 1 311 – – 55 1 366 478 M Bello7 – – – – – 133 LC Cele 478 – – – 478 478 BM Count7 – – – – – 166 D Dube8 398 – – – 398 282 LG Josefsson 542 – – – 542 582 H B Lee8 313 – – – 313 221 WB Lucas-Bull 449 – – – 449 449 E Marshall9 – – – – – 199 J Mirenge8 427 – – – 427 302 JR Modise 495 – – – 495 495 V Mohanlal Rowjee7 – – – – – 133 AJ Morgan10 535 – – – 535 535 SA Mpambani7 – – – – – 142 U Zikalala11 449 – – – 449 449 Executive directors PJ Maroga12 3 447 – 1 266 54 4 767 4 960 B Nqwababa13 – – – – – 2 168 PS O'Flaherty14 825 289 – – 1 114 – Total directors 10 282 289 1 266 478 12 315 13 262 Exco members BE Bulunga17 371 130 – – 501 – BA Dames15 3 295 1 219 946 230 5 690 2 979 EL Johnson16 2 859 1 001 717 38 4 615 2 535 SJ Lennon 2 308 783 587 29 3 707 2 139 ME Letlape18 – – – – – 1 471 Total Exco members 8 833 3 133 2 250 297 14 513 9 124 Eskom Holdings Limited 285 Integrated Repor t 2010 2010 2009 R’000 R’000 Housing loans to Exco members at 31 March PJ Maroga12 – 3 009 BA Dames 3 231 3 287 EL Johnson 542 883 3 773 7 179 The interest rate loan from Eskom Finance Company (Pty) Limited at 31 March 2010 was 8,5% (2009: 12,5%). The loans are repayable over a maximum period of 30 years.19 The following board and Exco members were directors of Eskom directly held subsidiary companies. Fees paid for attendance of meetings were all paid to Eskom Holdings. Eskom Enterprises (Pty) Limited20 BA Dames – – EL Johnson – – SJ Lennon – – B Nqwababa21 – – Eskom Finance Company (Pty) Limited22 B Nqwababa21 – 10 Escap Limited 22 B Nqwababa21 – 27 PS O’Flaherty23 10 – 1. Short-term incentive bonus awarded for the 2010 financial year. 2. The board deferred allocation in respect of the short-term incentive awards for the 2009 financial year. A targeted saving of R22 billion was set by the board and achieved in December 2009.   Payments were made in December 2009. 3. Fees related to security services and operating vehicle expenditure. 4. Appointed as chairman of the board on 17 July 2008. Resigned as chairman of the board on November 2009. 5. Conclusion of contract on 17 July 2008. 6. Appointed as acting chairman/chief executive on 12 November 2009. 7. Resigned from the board effective 17 July 2008. 8. Appointed to the board on 17 July 2008. 9. Deceased September 2008. 10. Resigned from the board effective 31 March 2010. 11. Surname changed from Nene to Zikalala. 12. Resigned as chief executive and member of the board effective October 2009. 13. Resigned from Eskom and board on 31 December 2008. 14. Appointed as finance director and member of the board on 1 January 2010. In addition, the director was paid a two year retention bonus of R1,3 million. Should the director leave the company in the period to 31 December 2010, then the full amount is repayable to the company; and should the director leave the company in the year ending 31 December 2011, then half of the bonus is repayable to the company. 15. Appointed as chief officer Generation on 1 February 2008. 16. Appointed as chief officer Networks and Customer Services on 1 February 2008. 17. Appointed as managing director on 1 February 2010. 18. Resigned from Eskom effective 31 December 2008. 19. On resignation the terms and conditions of the loan are renegotiated. 20. Paid by Eskom. 21. Resigned from the board on 31 December 2008. 22. Fees paid to Eskom. 23. Appointed to the board on 1 January 2010. Ensuring best practice Corporate governance 288 Introduction 288 Companies Act and King III Report 288 Shareholding and shareholder compact 288 Governing bodies 292 Compliance with Public Finance Management Act (PFMA) 292 Integrated risk management 293 Ethical business conduct 293 Internal control 293 Assurance and forensics 294 Security risk management 294 Nuclear safety 294 Corporate citizenship and sustainability 295 Subsidiaries 288 Eskom Holdings Limited Integrated Repor t 2010 Corporate governance Introduction welcomes these developments and are using them as an opportunity As a state-owned enterprise (SOE), it is critical for Eskom to fulfil its for the organisation to review its entire governance framework mandate in a manner that is in keeping with governance best (2010 Governance Review).To this end provisions impacting Eskom’s practices and, in particular, with regard to accountability, transparency, operations are being identified, assessed and addressed; gaps, if any, fairness and responsibility. are filled through action plans and regular monitoring and reporting to the various governance structures. Eskom is at an advanced stage The year under review remained demanding for Eskom. It was of readiness for the implementation of the new Companies Act and marked by interaction with various stakeholders and more King III. importantly with NERSA and customers regarding the company’s application for a multi-year price determination (MYPD). Also Shareholding and shareholder compact notable is the interaction between Eskom and its shareholder on The government of the Republic of South Africa is Eskom’s sole issues affecting the organisation, including the leadership of the shareholder. The shareholder representative is the Minister of Public company. It was necessary for the governance processes, systems and Enterprises. structures (governance framework) to deal with a number of issues in a coherent and effective manner. Each year, Eskom, in consultation with the Minister of Public Enterprises, agrees on its performance objectives, measures and The leadership is well aware of the challenges regarding funding for indicators in line with government treasury regulations under the the capital expansion programme and this remains a priority. At the PFMA. The annual targets are annexed to a list of principles agreed same time Eskom had to focus on the operations of the business and between Eskom and its shareholder (the shareholder compact) there was a need for in-depth consideration of a number of issues. and regular reports are provided. The performance of the The increased engagements have been beneficial to Eskom’s organisation against the performance objectives is indicated in the governance processes, and the company has committed to improve shareholder compact on page 34. its communication with stakeholders. The compact does not interfere with the normal principles of More frequent meetings of the board of directors and the executive company law. The relationship between the shareholder and board is management committee were required. These challenges demand preserved. The board ensures that proper internal controls are in astute governance practices that will ensure that the business remains place and that Eskom is effectively managed. The compact promotes sustainable in the long term. good governance by helping to clarify the board and shareholder roles and responsibilities and ensures consensus on Eskom’s mandate Companies Act and King III report and key objectives. The company has adhered to the statutory duties and responsibilities imposed by the Companies Act as augmented by the Public Finance A special and an annual general meeting were held during the year. Management Act (PFMA). Eskom’s systems and processes are reviewed to ensure that compliance is monitored in this regard. In Governing bodies addition, Eskom is also guided on best practices by international Composition of the board developments as well as the King reports on Corporate Governance Eskom has a unitary board structure with a majority of independent for South Africa (King II – 2002 until King III came into effect non-executive directors. The directors, appointed by the shareholder, in 2009) and the Protocol on Corporate Governance in the are drawn from diverse backgrounds (local and international). Their Public Sector – 2002. contributions to the board, consisting of a wide range of experience and professional skills, are invaluable.These skills are supplemented at To ensure that Eskom’s governance framework continues to be of a committee level by external committee members. Ms S Sebotsa, an superior standard and is aligned with statutory and governance best external committee member, resigned in February 2010. practice developments, a Companies Act task team and a King III task team were established in 2009. The objectives of the teams are to The chairman of the board, Mr RM Godsell, and the chief executive, ensure compliance with the new Companies Act, 2008, which comes Mr PJ Maroga resigned in November and October 2009, respectively. into effect later in 2010, and application of King III principles and Mr Makwana was appointed as the acting chairman and granted the practices, which came into effect in March 2010, respectively. Eskom executive powers of a chief executive to fill the vacated position on Eskom Holdings Limited 289 Integrated Repor t 2010 the board of directors as an interim measure. In effect, Mr Makwana Its aim is to ensure that Eskom remains a sustainable and viable became an acting chairman with executive powers. Eskom is cognisant business of global stature. Its responsibilities are facilitated by a well- of the governance risk of having an executive chairman, although it developed governance structure through board committees, strives to adhere to best governance principles and practices. The including the executive management committee (Exco), as well as unusual circumstances that Eskom faced necessitated that, as an subcommittees of Exco and a comprehensive delegation-of-authority interim measure, a suitably experienced, skilled and available person framework. This framework assists decision making without diluting be appointed to lead Eskom through a difficult period. director accountability and responsibility. Mr AJ Morgan resigned as a non-executive director at the Integral to the 2010 Governance Review is an analysis of the end of March 2010 after serving on the board for nine years. mandates, composition and level of authority delegated to the Mr PS O’Flaherty was appointed as the executive director responsible governing structures within Eskom to ensure that its governance for the finance function in January 2010. At the end of the period system continues to support the company’s strategic objectives and under review, the board comprised eight non-executive directors, is adaptable to the changing Eskom environment. It is anticipated that one executive director and the executive chairman. this review will lead to a rationalisation of committees, speedier decision making and cost efficiencies, thereby enhancing corporate Eskom’s articles of association stipulate that the shareholder will, after governance in Eskom. consulting the board, appoint a chairman, chief executive and non- executive directors. The remaining executive directors are appointed Board evaluation and performance by the board after obtaining shareholder approval. The shareholder A performance evaluation of the board and individual directors is is in the process of filling the vacancies on the Eskom board. conducted at the end of the financial year. Any shortcomings are addressed and areas of strength consolidated. The performance of Good corporate governance requires that the composition of the board committees is evaluated against their terms of reference. The board be reviewed on a regular basis. The rotation of directors at human resources and remuneration committee facilitates the regular intervals is accepted as standard practice since it ensures evaluation of senior management. that the board remains dynamic and does not become stagnant in terms of its thinking and abilities. However, it is important that the Director induction and orientation process is managed in such a way that the rotation of directors does New directors and external committee members have to complete not lead to a disruption in the operations of the business and that the an induction programme to improve their understanding of Eskom’s board is well-balanced in terms of skills, expertise and demographics legislative framework, governance processes, delegation of authority (race, gender and people with disabilities). and business operations. Continual training programme that addresses the needs of each director or group of directors is in place. The term of office of non-executive directors is a maximum of three Directors are briefed on new legislation and regulations. The years; this will be subject to review at the next annual general induction and training include visits to certain business sites. meeting. Retiring directors are eligible for re-appointment. Awareness and training on the new Companies Act and King III has been conducted and will continue. Executive directors are full-time employees and as such are subject to Eskom’s conditions of service. Board and board committee meeting attendance As a result of the challenges facing the company, additional board Board meetings are scheduled annually in advance. Special meetings meetings were held during the year and these are reflected in the are convened as necessary to address specific issues. Directors or meeting attendance table below. The purpose of the additional external committee members unable to attend meetings may use briefing sessions was to keep directors informed of key developments electronic communication facilities. The attendance of the 14 board as they unfolded and to allow directors an opportunity to express meetings during the reporting period is reflected below. their views on the developments and strategies on an ongoing basis. Eskom directors were called on to commit significant additional time Delegation of authority to the business of Eskom during this critical period. The board has the authority to lead, control, manage and conduct the business of Eskom, including the authority to delegate its powers. 290 Eskom Holdings Limited Integrated Repor t 2010 Corporate governance continued Human resources Governance Investment Sustain‑ and Risk and General Members Board Audit and finance Tender ability development management Exco nominations meetings Number of meetings 14 7 6 10 4 5 4 13 1 1 M Makwana 12 3 1 – – 5 – 6 1 1 JP Maroga 1 6 – 3 – 2 3 – 5 – – R Godsell2 9 – – – – 3 – – – – LCZ Cele 13 7 – 10 – – – – – – D Dube 12 – – 10 – 5 – – 1 1 LG Josefsson 6 3 – – 4 – – – – 1 WE Lucas-Bull 10 – 6 – 3 1 3 – – – – HB Lee 4 – 1 – – – – – – – JRD Modise 11 7 – – – – 4 – – – AJ Morgan4 12 – 5 7 – – 4 – – 1 U Zikalala 5 9 – – 10 4 – 4 – – 1 J Mirenge 9 5 5 – – – – – – 1 PS O’Flaherty 6 2 2 2 – – – – 4 – – External board members BL Fanaroff – – – – 4 4 – – – – MJ Husain – – – 4 – – – – – – MM Matutu – – – – 4 – – – – – S Sebotsa7 – – 3 – – – – – – – Executive management BA Dames – – – – – – – 13 – – E Johnson – – – – – – – 12 – – SJ Lennon – – – – – – – 13 – – E Pule8 – – – – – – – 10 – – I du Plessis 9 – – – – – – – 10 – – BE Bulunga10 – – – – – – – 3 – – 1. Member resigned on 28 October 2009. 2. Member resigned on 8 November 2009. 3. Member joined committee late in the year. 4. Member resigned with effect from 31 March 2010. 5. Member changed surname from Nene. 6. Member was appointed with effect from 1 January 2010. 7. External committee member resigned with effect from 30 February 2010. 8. Member released from acting position on 31 January 2010. 9. Member released from acting position on 31 December 2009. 10. Member was appointed on 1 February 2010. Directors’ remuneration The company secretary monitors Eskom’s compliance with the Please refer to note 45 to the annual financial statements for details PFMA, the Companies Act and other relevant legislation, and reports of directors’ remuneration. to the board on these issues. Company secretarial function Ms Terresa Nonkululeko Msomi resigned as company secretary at Directors have unrestricted access to the advice and service of the the end of December 2009, and Ms Bongiwe Mbomvu was appointed company secretary. Directors may seek independent professional in her place on 1 April 2010. advice with the authority of the board and at Eskom’s expense, should they deem this necessary. Eskom Holdings Limited 291 Integrated Repor t 2010 Board committees The committee considers and makes recommendations on the Several committees assist the board in carrying out its responsibilities. appointment and retention of the external auditors and ensures that Their recommendations and reports to the board ensure such appointments comply with legislation, the fees paid and the transparency and full disclosure of committee activities. Each terms of engagement, pre-approves the nature and extent of any committee operates within terms of reference that define the non-audit services and evaluates their independence, objectivity and composition, role, responsibilities and delegated authority of the effectiveness. committee. The board from time to time sets up committees for specific (ad hoc) purposes. All committees, except Exco, comprise a The assurance and forensic general manager and the external majority of independent non-executive directors. An independent auditors have unrestricted access to the chairman of the committee non-executive director serves as chairman in each case. Committee and the chairman of the board. The committee reviews the accuracy, meeting attendance is reflected above. reliability and credibility of statutory financial reporting. It also reviews the annual financial statements and the Eskom group annual report, In addition to the terms of reference, a board committee exercises as presented by management prior to board approval. its delegated authority in accordance with specific policies approved by the board from time to time. Seven committee meetings were held during the review period.They were also attended by the external auditors, the finance director and Audit committee relevant company officials. The committee comprised four independent non-executive directors until November 2009, when Mr Makwana was appointed as acting Investment and finance committee chairman and stopped being a member. The committee monitors The committee currently comprises four independent non-executive the internal control system to protect Eskom’s interests and assets. directors, the acting chairman and finance director. Ms S Sebotsa, an external committee member, resigned as a member of the committee. The committee also reviews any accounting and auditing concerns The committee reviews the investment strategy and makes raised by internal and external audit, the annual financial statements recommendations to the board. It evaluates and approves business and the interim reports, the accompanying reports to shareholders, cases for new ventures or projects, approves criteria and guidelines the preliminary announcement of results and any other for investments and approves investments within its delegated announcement regarding the company’s results or other financial authority. Investment decisions are made within a framework of information to be made public. Refer to page 175 for the report of policies that guide such decisions and which are approved by the audit committee detailing how it carried out its functions. the board. The committee ensures that an effective internal audit function is in Six committee meetings were held during the period under review. place and that the roles and functions of external audit and internal audit are sufficiently clarified and co‑ordinated to provide an objective Tender committee overview of the operational effectiveness of the company’s systems The committee comprises four independent non-executive directors, of internal control, risk management, governance and reporting. The and Mr MJ Husain, an external committee member. The tender committee also has to assess the performance of the internal audit committee assists the board decisions, tenders and contracts within function, and the adequacy of available internal audit resources. its delegated authority and approves procurement policies. It ensures that Eskom’s procurement system, which drives its approved In addition, the committee considers and appropriately deals with investments, is equitable, transparent, competitive and cost effective. any complaints received relating to the financial statements, accounting practices or internal audit, whether from within or outside Ten committee meetings were held. of Eskom. 292 Eskom Holdings Limited Integrated Repor t 2010 Corporate governance continued Sustainability committee risks. Further information on the risk management processes is set The committee comprises three independent non-executive out on page 18. directors, the acting chief executive and Messrs BL Fanaroff and MM Matutu, external committee members. This committee deals Executive management committee (Exco) with integrated sustainability issues and makes recommendations on The Exco comprises the chief executive, the finance director and policies, strategies and guidelines, particularly related to safety, health, three divisional managing directors. Mr Makwana has chaired the environment, quality and nuclear issues. Exco since November 2009. The committee assists the chief executive in guiding the overall direction of the business and in The committee also scrutinises nuclear safety at Eskom facilities to exercising executive control. Its task is to assist with the effective ensure that standards exceed all regulatory and internal requirements management of the day-to-day operations of the business. and remain consistent with international best practice. Thirteen Exco meetings were held. Attendance is reflected above. Four committee meetings were held. Exco is assisted by its procurement, operations, investment and capital assurance, nuclear management and sustainability and safety Human resources and remuneration committee subcommittees. This committee comprises two independent non-executive directors, the acting chairman of the board and Mr BL Fanaroff, an external Compliance with the Public Finance committee member. Management Act (PFMA) The board is the accounting authority in terms of the PFMA and The committee, inter alia, makes recommendations on remuneration Eskom is listed as a Schedule 2 public entity. This Act also applies to and other human resources-related policies. subsidiaries and entities owned or controlled by Eskom.They are also classified as Schedule 2 entities. Five committee meetings were held. The PFMA regulates financial management and governance. Eskom Nomination and governance committee ensures that all directors and employees are aware of the provisions The committee comprises two independent non-executive directors of the PFMA through regular training programmes. Directors comply and the acting chief executive. It deals with board and committee with their fiduciary duties as set out in the PFMA. Board responsibilities composition, succession planning, board and committee training are also specified in the PFMA. and evaluation and exercises oversight of governance matters, including ethics. Integrated risk management The effective management of risk is central to the achievement of One meeting was held. Eskom’s vision of together, building the power-base for sustainable growth and development in South Africa. By understanding and Risk management committee managing risk, we can provide greater certainty and security for our The committee comprises three independent non-executive employees, our customers and all our stakeholders. directors and the finance director. Synergy between the risk management committee and the audit committee is achieved by The Eskom board, through the risk management committee, having the chairman of the audit committee as a member of the acknowledges its overall accountability for ensuring an effective risk management committee. The committee ensures that the results-driven, IRM process. Exco has implemented a risk monitoring company’s risk management strategies and processes are aligned system that enables management to respond appropriately to all with best practice. significant risks that could impact on business objectives. Four committee meetings were held during the year, covering the Responsibility for the management of risk resides with line integrated risk management strategy and processes, risk tolerance management in all divisions and projects. Those accountable for the and appetite, risk accountabilities, major risk exposures and emerging management of risks also ensure that the necessary controls remain in place and are effective at all times. Control effectiveness focuses on Eskom Holdings Limited 293 Integrated Repor t 2010 improving our ability to manage risk effectively, so that we can quickly Besides these developments, Eskom provided ongoing ethics and confidently act on opportunities to improve and sustain the awareness, training, and an ethics advisory service, which are essential quality and continuity of supply, create value and achieve sustained to maintaining an ethical culture within the workplace.The board and growth. Exco are kept informed of the ethical culture and issues of concern through quarterly ethics status reports. Risk management in Eskom is performed at departmental, regional, divisional and subsidiary level and is reported upward to corporate Internal control (bottom-up). After consolidation of these integrated risk reports, Management is responsible for establishing an effective internal Exco and the board risk management committee review and evaluate control environment, which is developed and maintained on an the risk profile to determine the major operational, strategic and ongoing basis to provide reasonable assurance to the board regarding: business continuity risks (top-down). • the integrity and reliability of the financial statements • the safeguarding of Eskom’s assets Ethical business conduct • economic and efficient use of resources Good corporate governance is about effective ethical leadership, • compliance with applicable legislation and regulations which requires leadership that demonstrates ethics in decision • the verification of the accomplishment of established goals and making, leads by example and oversees the management of ethics objectives within the organisation. • the detection and minimisation of fraud, potential liability, loss and material misstatement Eskom’s board is accountable for Eskom’s ethics management programme and the operational responsibilities lie with Exco These controls are contained in organisational policies and assisted by the ethics office, which is located within the corporate procedures, structures and approval frameworks, and they provide governance department. direction, establish accountability and ensure adequate segregation of duties. They each contain self-monitoring mechanisms. The ethics office assists the chief executive in setting the framework, rules, standards and boundaries for ethical behaviour, and provides The board ensures that an effective internal control framework is ethics training and an advisory service to employees, assisting established and maintained. The internal audit function within the them in dealing effectively with ethics issues and ethical dilemmas assurance and forensic department monitors the operation of the in the workplace. internal control systems and reports findings and recommendations for improvement to management and the audit committee. Following the implementation of Eskom’s code of ethics, The Way, in 2009, the supplementary code procedure was developed through The audit committee monitors and evaluates the duties and stakeholder engagement. The latter provides assistance to directors responsibilities of management, and of internal and external audit to and employees in applying the code of ethics in their daily activities ensure that all major issues reported have been satisfactorily resolved. and decision making, in dealing with specific ethics issues in the Finally, the audit committee reports all important matters considered workplace, and providing information regarding other ethics-related necessary to the board. policies that have to be complied with. Assurance and forensics Eskom’s conflict of interest policy, the declaration of interest During the period under review the corporate departments of audit, procedure, the electronic declaration form, and declaration technical audit, technical investigations as well as forensic and anti- monitoring procedure have all been revised in line with the proposed corruption were integrated into the assurance and forensic new Companies Act and King III. A separate electronic declaration department (AFD). system and procedure for board members has also been developed, which replaces the manual declaration process. Eskom is also a signatory to the UN Global Compact that includes an anti-corruption clause, as well as the World Economic Forum’s Partnership Against Corruption Initiative. 294 Eskom Holdings Limited Integrated Repor t 2010 Corporate governance continued In line with the requirements of the PFMA and good governance, provides independent assurance on nuclear safety and compliance AFD provides the audit committee and management with with licence requirements. independent, objective assurance, consulting and forensic services designed to add value to and improve Eskom’s operations. The In line with international best practice, Eskom has a three-tier department brings a systematic, disciplined approach to the system of nuclear safety governance. The sustainability committee evaluation and improvement of the effectiveness of risk management, of the board (the top tier) dedicates several meetings a year control and governance processes. to nuclear matters. The meetings are attended by international nuclear experts who bring a broad perspective to the deliberations. AFD is governed by international standards and best practices, The middle tier, the nuclear management subcommittee presided published by recognised professional institutes. over by the chief officer of the generation business, monitors, reviews and makes recommendations on issues such as nuclear policy, A risk-based audit approach is followed by assurance and forensic. standards, benchmarks and rules and Eskom’s overall business The audit plan is based on the risk assessment and other requirements. The third tier, the safety review committees, brings considerations, such as the achievement of organisational business together experts from various parts of Eskom to evaluate nuclear objectives.The audit plan is updated as required (minimum quarterly) safety issues and make recommendations to senior management to reflect significant changes in the risk profile resulting from changes and other tiers. in the business operations, changes in customer needs or regulatory requirements. Corporate citizenship and sustainability In Eskom’s view, being a good corporate citizen means that its AFD is supported by the board and audit committee and is business must be run in an ethical manner, taking into account authorised to have unrestricted access to all functions, records, its impact on all stakeholders. In addition, it means that Eskom needs property and personnel. External auditors independently audit to contribute to the realisation of the hopes and aspirations of and report on the financial statements and the sustainability South Africa. indicators reflected in this report. These reports are included on pages 169 and 176. This includes contributing to a safe working environment, environmental responsibility, promoting the Accelerated and shared Security risk management growth initiative for South Africa (AsgiSA) and corporate social The board ensures that an integrated crime prevention plan is responsibility and improving the life of all South Africans. implemented to minimise exposure to criminal acts, particularly fraud. The security risk management department addresses these The chief executive, as chief safety officer and chairman of Exco’s threats. Its work covers crime prevention, detection, response and sustainability and safety subcommittee, is accountable for overall investigation. sustainability and safety performance. Where serious fraud, corruption and irregularities are suspected, The sustainability and safety subcommittee guides our strategy and forensic investigations (a department of assurance and forensic) sets performance targets on sustainability, occupational health and establish the facts to enable management to deal appropriately with safety and environmental matters, in line with Eskom’s safety health the matter and prevent a recurrence. and environment policy, the National Environmental Management Act, 107 of 1998, as amended, and the Occupational Health and Nuclear safety Safety Act, 85 of 1993, as amended. Strategies are reviewed by the The nuclear safety assurance function is kept independent from the sustainability committee of the board. electricity production function by dividing Eskom’s nuclear infrastructure into two. The nuclear business area is directly Exco’s operations subcommittee assesses occupational health, safety accountable to the chief officer (generation business) for all aspects and environmental performance and reviews major incidents to of electricity production at Koeberg power station, including safety. ensure that corrective action is taken. The nuclear safety and assurance section, a separate department in generation business, with its own technical experts and resources, Eskom Holdings Limited 295 Integrated Repor t 2010 The objective of government’s AsgiSA programme is to promote Eskom’s other wholly owned operating subsidiaries include Eskom economic growth and halve poverty and unemployment by 2014. Finance Company (Pty) Limited, Eskom Development Foundation Eskom’s contribution to this initiative as well as rural development is and Escap Limited. centrally co‑ordinated and facilitated through the corporate services division. Eskom’s most significant contribution to AsgiSA is through its All Eskom’s subsidiaries are subject to Eskom group policies, core business of supplying reliable electricity. Eskom also leverages governance and financial control. They comply with the PFMA and associated activities, including its corporate social investment (CSI) Companies Act, or their equivalent legislation where they are foreign- programmes, for the development of the disadvantaged. registered, and follow good governance principles and practices. Eskom’s CSI contributes to the development of the disadvantaged While each subsidiary remains accountable to Eskom through a and promotes, inter alia, skills development, job creation, education formal shareholder compact, Eskom is also developing a subsidiary and health. Many CSI initiatives are executed by the Eskom governance framework in accordance with principle 2.24 of King III Development Foundation. to facilitate the flow of information between the holding company and its subsidiary companies. Subsidiaries Eskom Enterprises (Pty) Limited and its subsidiaries, a wholly owned subsidiary of Eskom Holdings, provides lifecycle support and plant maintenance, network protection and support for the build programme for all Eskom divisions. It also has subsidiaries in South Africa, Mali and Uganda. Eskom staff at Koeberg volunteer over weekends to tutor high school learners in maths and science. 296 Eskom Holdings Limited Integrated Repor t 2010 Tables 1 Statistical overview 2010 2009 2008 2007 2006 Sales Total sold (GWh)1, 2 218 591 214 850 224 366 218 120 207 921 Growth/(reduction) in GWh sales (%) 1,7 (4,2) 2,9 4,9 (18,9)3 Electricity output Total produced by Eskom stations (GWh (net)) 232 812 228 944 239 109 232 445 221 988 Coal-fired stations (GWh (net)) 215 940 211 941 222 908 215 211 206 606 Hydro-electric stations (GWh (net)) 1 274 1 082 751 2 443 1 141 Pumped storage stations (GWh (net)) 2 742 2 772 2 979 2 947 2 867 Gas turbine stations (GWh (net)) 49 143 1 153 62 78 Wind energy (GWh (net)) 1 2 1 2 3 Nuclear power station (GWh (net)) 12 806 13 004 11 317 11 780 11 293 Total purchased for Eskom system (GWh) 13 754 12 189 11 510 11 483 10 310 Total electricity for Eskom system (Eskom stations 246 566 241 133 250 619 243 928 232 298 and purchased) (GWh)4 Total consumed by Eskom (GWh)5 3 695 3 816 4 136 3 937 3 814 Total available for distribution (GWh)2 242 871 237 317 246 483 239 991 228 484 Plant performance indicators Total power station nominal capacity (MW) 44 175 44 193 43 037 42 618 42 011 Total power station net maximum capacity (MW) 40 870 40 506 38 747 37 761 36 398 Peak demand on integrated Eskom system (MW) 35 850 35 959 36 513 34 807 33 461 Average energy availability – EAF (UCF) (%)6 85,2 (85,9) 85,3 (86,1) 84,8 (86,2) 87,5 (88,6) 87,4 (88,7) Generation load factor (%)8 66,2 67,0 72,3 72,4 69,7 Integrated Eskom system load factor (EUF) (%) 77,7 78,6 85,2 82,7 79,8 Environmental indicators Specific water consumption (ℓ/kWh sent out)9 1,34RA 1,35RA 1,32 1,35 1,32 Significant legal contraventions reported (number)10 0 1211 6 0 1 Customer satisfaction (Enhanced PreCare/MaxiCare) (ratio)12 99,65 99,84 97,21 100,80 101,06 Net raw water consumption (Mℓ) 316 202 323 190 322 666 313 064 291 516 Liquid fuels (diesel and kerosene) (Mℓ) 16,1RA 28,9LA 345,9 11,3 – Coal burnt (Mt) 122,7 121,2 125,3 119,1 112,1 Average calorific value (MJ/kg) 19,22 19,10 18,51 19,06 19,58 Average ash content (%) 29,56 29,70 29,09 29,70 29,10 Average sulphur content (%) 0,81 0,83 0,87 0,86 0,88 Overall thermal efficiency (%) 33,1 33,4 33,4 33,9 33,8 Line losses (%) 8,5 7,9 8,0 8,4 8,2 Nitrous oxide (N2O) (t)13 2 825 2 801 2 872 2 730 3 134 Carbon dioxide (CO2) (Mt)13 224,7RA 221,7RA 223,6 208,9 203,7 Sulphur dioxide (SO2) (kt)13 1 856RA 1 874RA 1 950 1 876 1 763 Nitrogen oxide (NOx) as NO2 (kt)13 959RA 957LA 984 930 877 Relative particulate emissions (kg/MWh sent out)14 0,39RA 0,27RA 0,21 0,20 0,21 Particulate emissions (kt)14 88,27RA 55,64RA 50,84 46,08 45,76 Ash produced (Mt) 36,01RA 36,66LA 36,04 34,16 33,40 Ash sold (Mt) 2,0RA 2,1 2,4 2,2 1,8 Asbestos disposed (tons)18 321,4RA 3 590,8LA 321 6 060 – PCB thermally destructed (tons)18 19,1RA 505,6LA 17 10 – Radiation release (mSv)15 0,0040 0,0045 0,0047 0,0034 0,0049 Low-level radioactive waste generated (cubic metres)16 137,8 140,8 180,3 94,5 90,2 Intermediate-level radioactive waste generated (cubic metres)16 47,1 23,9 16,5 49,8 52,7 Low-level radioactive waste disposed of (cubic metres)18 216,0RA 189,0RA 270,0 135 91,0 Intermediate-level radioactive waste disposed of (cubic metres)18 266,0RA 473,6RA 418,0 436 52,0 Low-level nuclear waste – fuel racks (cubic metres) (cumulative)17 0 (697) 0 (697) 0 (697) 0 (697) 0 (697) Spent nuclear fuel, number of elements (cumulative figure) 56 (1 785) 56 (1 729) 112 (1 673) 56 (1 561) 52 (1 505) Eskom Holdings Limited 297 Integrated Repor t 2010 1. Sales prior to 2005 include internal sales. 2. Difference between electricity available for 2005 distribution and electricity sold is due to transmission (15 months) 2004 2003 2002 2001 2000 and other losses. 3. Actual sales growth was 0,8% when compared to the 12-months 1 April 2004 to 31 March 2005. 256 453 206 799 196 980 187 957 181 511 178 193 And recorded as such. 30,5 5,0 4,8 3,5 1,8 2,8 4. Includes Eskom electricity produced and delivered to neighbouring countries. 273 404 220 152 210 218 197 737 189 590 189 307 5. Used by Eskom for pumped storage facilities and 251 914 202 171 194 046 181 651 175 223 172 362 synchronous condenser mode of operation. 903 720 777 2 357 2 061 1 343 6. Capacity hours available times 100 divided by total 3 675 2 981 2 732 1 738 1 587 2 591 capacity hours in a year. – – – – – 1 7. Represents the 12-month moving average for 1 April 2004 to 31 March 2005. – – – – – – 8. kWh produced times 100 divided by average net 16 912 14 280 12 663 11 991 10 719 13 010 maximum capacity times hours in a year. 12 197 9 818 8 194 9 496 9 200 5 294 9. Volume of water consumed per unit of generated 285 601 229 970 218 412 207 233 198 790 194 601 power from coal fired power stations sent out, excluding Komati and Grootvlei power stations. 5 043 4 040 3 664 2 354 2 177 3 478 10. 2000 to 2002 reported in terms of the revised 280 558 225 930 214 748 204 879 196 613 191 123 definition of the operational health dashboard. From 2008, repeat legal contraventions are included in the criteria. 42 011 42 011 42 011 42 011 42 011 41 298 11. The 2009 annual report reported the environmental 36 208 36 208 36 208 36 208 36 208 35 584 legal contraventions in terms of the operational 34 195 34 195 31 928 31 621 30 599 29 188 health dashboard. During the 2009/10 reporting period, one environmental legal contravention 89,5 (89,9)7 89,5 (90,0) 87,5 (88,7) 89,3 (91,7) 92,0 (92,5) 92,1 (92,8) regarding illegal disposal of waste was identified 69,0 69,2 66,3 62,3 59,8 60,6 following an investigation. This was a repeat legal 78,0 77,4 76,8 74,0 73,4 74,7 contravention in previous year and recorded as such. 12. Reflects the environmental element of Enhanced MaxiCare. The Enhanced MaxiCare replaced the 1,277 1,26 1,29 1,27 1,26 1,21 PreCare/MaxiCare from January 2005. 37 2 2 3 2 3 13. Calculated figures are based on coal characteristics 93,10 8,31 8,47 8,57 8,43 8,82 and the power station design parameters. Gaseous 347 135 277 557 271 940 251 611 239 233 228 759 emissions are based on coal analysis and tonnages of coal burnt in 2009/10. From 2009 includes – – – – – – Camden, Grootvlei and the gas turbine power 136,4 109,6 104,4 96,5 94,1 92,5 stations as well as oil consumed during power 19,36 19,42 19,41 19,54 19,42 19,50 station start-ups. From 2010, total CO2 includes the contribution from the Underground Coal 29,60 29,60 28,90 28,40 28,80 28,60 Gasification pilot project (flaring). 0,87 0,87 0,92 0,92 0,93 0,90 14. The overall particulate performance figure is based 34,0 34,0 34,2 34,1 34,1 34,4 on individual power station performance. For certain 8,27 7,8 8,3 8,2 7,2 7,4 power stations, emission figures are based on best estimates. 3 552 2 924 2 580 2 246 2 154 2 093 15. The limit set by the National Nuclear Regulator is 247,0 197,7 190,1 175,2 169,3 161,2 ≤ 0,25mSv. 2 236 1 779 1 728 1 494 1 500 1 505 16. These are the net volumes produced in a 12-month 994 797 760 702 684 674 moving window. 0,267 0,27 0,28 0,29 0,31 0,35 17. Waste as a result of re-racking of spent fuel pools 72,83 59,17 58,65 57,53 59,64 66,08 at Koeberg power station. 40,80 33,10 29,80 26,20 26,50 24,60 18. Information not available for previous years. 2,0 1,6 1,2 1,3 1,2 1,1 RA – Reasonable assurance provided by the independent – – – – – – assurance provider (refer page 169). – – – – – – LA – Limited assurance provided by the independent assurance provider (refer page 169). 0,00797 0,0087 0,0123 0,0060 0,0192 0,0059 80,3 81,4 100,5 111,9 82,6 61,6 47,2 36,8 30,1 45,8 22,1 41,2 – – – – – – – – – – – – 0 (697) 697 – – – – 104 (1 453) 56 (1 405) 104 (1 349) 48 (1 245) 104 (1 197) 52 (1 093) 298 Eskom Holdings Limited Integrated Repor t 2010 Tables continued 2. Power station capacities at 31 March 2010 Name of station Location Number Total Total net Generators in Other and designed nominal maximum reserve storage generation capacity of installed capacity nominal Total generator capacity rating rating sets MW MW MW1 Number MW MW2 Coal-fired stations (13) 37 755 34 658 9 1 150 – Arnot 3, 9 Middelburg, 1x370; 1x390; 2x396; 2x400 2 352 2 232 – – – Mpumalanga Camden 3, 4,10 Ermelo 2x200; 2x195; 2x190; 1x170; 1 520 1 440 – – – 1x180 Duvha 3 Witbank 6 x 600 3 600 3 450 – – – Grootvlei 4 Balfour 6 x 200 1 200 760 2 400 – Hendrina 3, 10 Mpumalanga 8 x 200; 1x 195; 1x 170 1 965 1 865 – – – Kendal 3, 5 Witbank 6 x 686 4 116 3 840 – – – Komati 4,10 Middelburg, 5 x 100; 2 x 125; 2 x 95 940 170 7 750 – Mpumalanga Kriel 3 Bethal 6 x 500 3 000 2 850 – – – Lethabo 3 Viljoensdrift 6 x 618 3 708 3 558 – – – Majuba 3, 5 Volksrust 3 x 657; 3 x 713 4 110 3 843 – – – Matimba 3, 5 Lephalale 6 x 665 3 990 3 690 – – – Matla 3 Bethal 6 x 600 3 600 3 450 – – – Tutuka 3 Standerton 6 x 609 3 654 3 510 – – – Gas/liquid fuel turbine stations 6 (4) 2 426 2 409 – – – Acacia Cape Town 3 x 57 171 171 – – – Ankerlig Atlantis 4 x 149,2; 5 x 148,3 1 338 1 327 – – – Gourikwa Mossel Bay 5 x 149,2 746 740 – – – Port Rex East London 3 x 57 171 171 – – – Hydro-electric stations (6) 661 600 – – 61 Colley Wobbles Mbashe River 3 x 14 42 – – – 42 First Falls Umtata River 2x3 6 – – – 6 Gariep 7 Norvalspont 4 x 90 360 360 – – – Ncora Ncora River 2 x 0,4; 1 x 1,3 2 – – – 2 Second Falls Umtata River 2 x 5,5 11 – – – 11 Vanderkloof 7 Petrusville 2 x 120 240 240 – – – Pumped storage schemes 8 (2) 1 400 1 400 – – – Drakensberg Bergville 4 x 250 1 000 1 000 – – – Palmiet Grabouw 2 x 200 400 400 – – – Wind energy (1) Klipheuwel 2 Klipheuwel 1 x 1,75; 1 x 0,66; 1 x 0,75 3 3 – – – Nuclear power station (1) Koeberg 3 Cape Town 2 x 965 1 930 1 800 – – – Total power station capacities (27) 44 175 40 870 9 1 150 61 1. Difference between nominal and net maximum capacity reflects auxiliary power consumption and reduced capacity caused by age of plant and/or low coal quality. 2. Operational but not included for capacity management purposes. 3. Base-load station. 4. Return-to-service station. 5. Dry-cooled unit specifications are based on design back-pressure and ambient air temperature. 6. Stations used for peaking or emergency supplies. 7. Use restricted to peaking, emergencies and availability of water in Gariep and Vanderkloof dams. 8. Pumped storage facilities are net users of electricity. Water is pumped during off-peak periods so that electricity can be generated during peak periods. 9. At Arnot two units were fully uprated and four partially uprated in the capacity increase project. 10. Due to technical constraints, some units at these stations have been de-rated. Eskom Holdings Limited 299 Integrated Repor t 2010 3. Environmental implications of using or saving one kilowatt-hour of electricity1 If electricity consumption is measured in: Factor 1 Factor 2 (total energy (total energy sold)2 generated)2 KWh MWh GWh TWh Coal use 0,56 0,54 kilogram ton thousand tons (kT) million tons Water use 3 1,45 1,38 litre kilolitre megalitre thousand megalitres Ash produced 165 157 gram kilogram ton thousand tons (kT) Particulate emissions 0,40 0,39 gram kilogram ton thousand tons (kT) CO2 emissions 4 1,03 0,98 kilogram ton thousand tons (kT) million tons SOx emissions 4 8,49 8,10 gram kilogram ton thousand tons (kT) NOx emissions 4 4,39 4,17 gram kilogram ton thousand tons (kT) Use of table: Multiply electricity consumption or saving by the relevant factor to determine the environmental implication. Example 1 (using factor 1): Example 3 (using factor 2): Used 90 kWh of electricity Used 90 kWh of electricity Water consumption: 90 x 1,45 = 130,2 Water consumption: 90 x 1,38 = 124,2 Therefore 130,2 litres of water used Therefore 124,2 litres of water used Example 2 (using factor 1): Example 4 (using factor 2): Used 90 GWh of electricity Used 90GWh of electricity CO2 emissions 90 x 1,03 = 92,7 CO2 emissions 90 x 0,98 = 88,2 Therefore 92,7 thousand tons emitted Therefore 88,2 thousand tons emitted 1. Factor 1 figures are calculated based on total energy sold by Eskom while Factor 2 figures are based on total energy generated by Eskom (but excluding electricity used for pumping water for the pumped storage schemes). Further information can be obtained through the Eskom environmental helpline. Contact details appear on IBC. 2. Figures represent the 12-month period from 1 April 2009 to 31 March 2010. 3. Volume of water used at all Eskom power stations. 4. Calculated figures are based on coal characteristics and the power station design parameters. SO2 and CO2 emissions are based on coal analysis and tonnages of coal burnt in 2009/10. From 2009 includes Camden, Grootvlei and the gas turbine power stations as well as oil consumed during power station start-ups. From 2010, total CO2 includes the contribution from the Underground Coal Gasification pilot project (flaring). 300 Eskom Holdings Limited Integrated Repor t 2010 Tables continued 4. Transmission and distribution equipment in service at 31 March 2010 2010 2009 2008 Power lines Transmission power lines (km)1 28 482 28 243 28 164 765kV 1 153 1 153 1 153 533kV DC (monopolar) 1 035 1 035 1 035 400kV 16 582 16 343 16 1902 275kV 7 390 7 390 7 3482 220kV 1 333 1 333 1 3332 132kV 989 989 1 1052 Distribution power lines (km) 46 018 45 302 44 680 165-132kV 24 514 23 856 23 296 88-33kV 21 504 21 446 21 384 Reticulation power lines (km) 22kV and lower 305 151 297 783 293 424 Total all power lines (km) 379 651 371 328 366 268 Underground cables (km) 10 687 10 379 9 921 165 – 132kV 197 179 170 22kV and lower 10 490 10 200 9 751 Total transformer capacity (MVA) 223 398 219 232 215 776 Transmission (MVA)3 123 990 122 860 122 180 Distribution and reticulation (MVA) 99 408 96 372 93 596 Total transformers (number) 344 369 333 945 324 437 Transmission (number) 399 394 387 Distribution and reticulation (number) 343 970 333 551 324 050 1. Transmission power line lengths as per Geographic Information System (GIS) distances. 2. Base of definition: transformers rated ≥ 30MVA and primary voltage ≥ 132kV. 3. Transformer power line lengths for 2009 have been restated to correct for one power line not reported before. Eskom Holdings Limited 301 Integrated Repor t 2010 5. Sale of electricity and revenue per category of customer Customers 2010 2009 2008 Category number number number Local 4 463 291 4 360 997 4 152 302 Redistributors 773 769 766 Residential 1 4 325 550 4 223 708 4 016 689 Commercial 47 984 47 603 46 496 Industrial 2 925 2 935 2 966 Mining 1 134 1 144 1 153 Agricultural 84 415 84 329 83 722 Traction 510 509 510 International 10 10 10 Utilities 7 7 7 End users across the border 3 3 3 4 463 301 4 361 007 4 152 312 Sold 2010 2009 2008 Category GWh GWh GWh Local 205 364 202 202 210 458 Redistributors 90 712 88 345 89 941 Residential1 10 350 10 392 10 423 Commercial 8 889 8 642 8 373 Industrial 55 816 54 815 61 510 Mining 31 733 32 177 32 373 Agricultural 5 010 4 913 4 848 Traction 2 854 2 918 2 990 International 13 227 12 648 13 908 Utilities 4 109 3 525 4 553 End users across the border 9 118 9 123 9 355 218 591 214 850 224 366 Sales to countries in southern Africa, GWh 13 227 12 648 13 908 Botswana 2 684 1 959 2 181 Mozambique 8 326 8 243 8 491 Namibia 1 459 1 573 2 087 Zimbabwe 6 – 107 Lesotho 121 107 50 Swaziland 597 756 770 Zambia 33 10 222 Short-term energy market 2 1 – – 302 Eskom Holdings Limited Integrated Repor t 2010 Tables continued 5. Sale of electricity and revenue per category of customer (continued) Revenue 2010 2009 2008 Category Rm Rm Rm Local 66 970 50 766 41 585 Redistributors 27 973 20 362 16 220 Residential1 6 622 5 493 4 599 Commercial 3 642 2 704 2 061 Industrial 15 089 11 762 10 524 Mining 9 599 7 360 5 768 Agricultural 2 954 2 225 1 723 Traction 1 091 860 690 International 2 972 2 334 1 971 Utilities 1 561 978 860 End users across the border 1 411 1 356 1 111 Gross electricity revenue 69 942 53 100 43 556 Less: Revenue capitalised 3 (108) (104) (35) Electricity revenue per note 29 69 834 52 996 43 521 Levies included in revenue: The EDI restructuring levy4 n/a 594 416 The environmental levy5 3 263 n/a n/a 1. Prepayments and public lighting are included under residential. 2. The short-term energy market consists of all the utilities in the southern African countries that form part of the Southern African Power Pool. Energy is traded on a daily, weekly and monthly basis as there is no long-term bilateral contract. 3. Revenue from the sale of production while testing generation plant capitalised to plant. 4. The EDI restructuring levy was paid over to EDI Holdings (Pty) Ltd in 2008 and 2009 in terms of MYPD 1. 5. The environmental levy is a 2c/kWh tax, effective from 1 July 2009, payable for electricity produced from non-renewable sources (coal, nuclear and petroleum). The levy is raised on the total electricity production volumes and is recovered through sales. Eskom Holdings Limited 303 Integrated Repor t 2010 Awards From left to right: Eddie Laubscher (National Deputy Information Officer: Eskom Eskom’s Hendrina power station received a special mention at the International Holdings Limited), Lorraine Molepo (Human Rights Commission) and Mukelani Du Pont Annual Safety Awards Dimba (Open Democracy Advice Commission). Golden Key Award for Public Body of the Year International Du Pont Annual Safety Awards (2009) Eskom’s Hendrina power station received a special mention at the The South African Human Rights Commission announced Eskom International Du Pont Annual Safety Awards ceremony held in Holdings Limited the overall winner of this year’s openness and Düsseldorf, Germany on 4 November 2009. responsiveness award – the Golden Key Award for Public Body of the Year (2009). Du Pont made the following comment on Hendrina’s achievement: “The overall quality of the projects that were sent in to apply for a total Held annually on the International Right to Know Day (28 September), of 29 projects in 70 category entities was outstanding, which makes your the Golden Key Awards are a joint effort between the South African achievement particularly significant.” Human Rights Commission and the Open Democracy Advice Centre. They are aimed at giving recognition to government The project centred around the safety performance improvement at departments, deputy information officers and private institutions for Hendrina over a three-year period which was a five-fold improvement, best practice in nurturing positive sentiment to openness and setting decreasing from a lost-time injury rate (LTIR) of 0,51 (equates to five up enabling organisational systems and procedures that promote LTIs) in 2006/7 to an all-time low of 0,10 (equates to one LTI) in compliance with the provisions of the Promotion of Access to 2008/9. Hendrina’s total recordable injury rate (TRIR) also decreased Information Act (PAIA). from 2,94 to 1,64 over the same period. Eskom received the Golden Key Award for Best National Department as well as the Best Institution (overall). 304 Eskom Holdings Limited Integrated Repor t 2010 Awards continued Komosa Award This loan will be used to fund part of the eligible foreign content of Eskom’s Medupi and Kusile power station turbine contracts with On 6 November 2009 Eskom was the recipient of the Komosa French supplier Alstom S & E Africa (Pty) Limited. The facility Award (Komosa is the Sotho word for raise up). agreements were signed between Eskom as borrower and five French banks as lenders; BNP Paribas, Calyon, Société Générale, This award is presented by the Department of Public Works to Natixis and CIC. companies in the public sector who facilitate the creation of work opportunities for poor and unemployed people in South Africa. The Eskom received another Best Deal of 2009 Award for the objective of this programme is to create 4,5 million job opportunities €705 million (USD979 million) loan concluded on 11 December during the next five years. 2009.The loans, covered by Germany’s Euler Hermes, will be used to fund part of the foreign content of the Kusile boiler contract with The Development department from the Corporate Services division Hitachi Power Europe. A total of four international lenders (KfW took up the challenge and for the 2008 financial year reported that Ipex-Bank, HSBC, Bank of Tokyo-Mitsubishi UFJ and Deutsche Bank) in the Distribution division, 19 895 job opportunities were created and three South African lenders (Standard Bank of South Africa from 2 482 projects. Limited, Nedbank Capital and Rand Merchant Bank – a division of FirstRand Bank Limited) participated in the transaction. In 2009, the Development department continued supporting the Expanded Public Works Programme (EPWP) initiative and reported the creation of 36 308 job opportunities. This represents 6,37% of the total of 570 019 job opportunities created in the country during Most Ideal Employer in Engineering award this period. Eskom was voted the Most Ideal Employer in Engineering by South Africa’s engineering students on 18 December 2009. The Distribution business is currently the main focus but Eskom’s other divisions are in the process of being incorporated. The announcement was made at the annual Magnet Communications’ Ideal Employer Awards. The awards are a culmination of the Magnet Fossil Fuel Foundation Award Student Survey, an independent research report conducted at 23 South African universities. The Council of the Fossil Fuel Foundation of Africa recognised the outstanding achievement by the Eskom underground coal gasification More than 26 000 students took part in the survey and once again project team for the development of underground coal gasification. Eskom was hailed the most desirable company to work for in South Africa. The implementation of this technology is considered a major achievement and will contribute to national and international Eskom has a holistic approach of developing engineering skills and efforts to use coal optimally and protect the environment. The this proved popular among the younger generation once again. The council congratulated Eskom for the insight and courage to organisation has achieved this through its programmes that undertake such an ambitious project which has demonstrated the encourage female learners to study mathematics and science and skills and expertise of South African scientists and engineers. other programmes that develop female engineers within the organisation. Best Deal of 2009 awards The (Global Trade Review Magazine) has honoured Eskom with a Best Deal of 2009 Award for the €1,185 billion fixed interest rate loan, covered by Coface, the French export credit agency (ECA). Eskom Holdings Limited 305 Integrated Repor t 2010 Glossary Baseload plant Baseload power stations, largely coal-fired and nuclear, are designed to operate continuously The actual over-recovery against that allowed by NERSA in the multi-year price Clawback determination or even under recovery whereby Eskom will claw back A technology for producing electricity from otherwise lost waste heat as it exits from one or Combined cycle more gas (combustion) turbines Daily peak The maximum amount of energy demanded in one day by electricity consumers Removing a facility (eg, reactor) from service, and subsequent actions of safe storage, Decommissioning dismantling and making the site available for unrestricted use Planning, implementing and monitoring activities to encourage consumers to use electricity Demand-side management (DSM) more efficiently, including both the timing and level of electricity demand A financial instrument that causes some or all cash flows that would otherwise be required Embedded derivative by a contract to be modified according to a specified variable such as a currency A measure of power station availability taking account of energy losses not under the Energy availability factor (EAF) control of plant management and internal non-engineering constraints Programmes to reduce energy used by specific end-use devices and systems, typically Energy efficiency without affecting the services provided Eskom sustainability performance index Index covering technical, economic, environmental and social measures to score sustainable (ESPI) performance Flashover Electrical insulation breakdown Shutdown of a generating unit, transmission line or other facility for emergency reasons or a Forced outage condition in which generating equipment is unavailable for load due to unanticipated breakdown Amount of electricity deemed sufficient to provide basic electricity services to a poor Free basic electricity (FBE) household Human resources sustainability index A measure of Eskom’s ability to achieve its human resources objectives (HRSI) A non-executive is director who is not a full-time salaried employee of the company or its subsidiary: • is not the representative of a shareholder • has not been employed by the company and is not a member of the immediate family of Independent non-executive director an individual who is, or has been in any of the past three financial years, employed by the company in any executive capacity • is not a professional adviser to the company • is not a significant supplier to, or customer of the company International financial reporting Global accounting standards that require transparent and comparable information in general standards (IFRS) purpose financial statements issued by the International Accounting Standards Board 306 Eskom Holdings Limited Integrated Repor t 2010 Glossary continued Any entity, other than Eskom, that owns or operates, in whole or in part, one or more Independent power producer (IPP) independent power production facilities Load that can be interrupted in the event of capacity or energy deficiencies on the supply Interruptible load system Power whose delivery can be curtailed by the supplier, usually in agreement between Eskom Interruptible power and the customer Basic unit of electric energy equal to one kilowatt of power supplied to or taken from an Kilowatt-hour (kWh) electric circuit steadily for one hour; one kilowatt-hour equals 1 000 watt-hours Load Amount of electric power delivered or required at any specific point on a system Activities to influence the level and shape of demand for electrical energy so demand conforms Load management to the present supply situation, long-term objectives and constraints Load profile Information on a customer’s electricity use over time, sometimes shown as a graph The transfer of loads from peak to off-peak periods; eg, in situations where a utility does not Load shifting expect to meet demand during peak periods but has excess capacity in off-peak periods Scheduled and controlled power cuts by rotating available capacity between all customers Load shedding when demand is greater than supply to avoid total blackouts in the supply area Lost-time incident rate A proportional representation of the occurrence of lost-time injuries over 12 months Maximum demand Highest demand of load within a specified period Megawatt One million watts Megawatt-hour (MWh) One thousand kilowatt-hours or one million watt-hours Mid-merit power generation Installations that generate electricity when electricity demand is higher than average Mothballed Plant (ie, power stations) placed in long-term storage Non-technical losses The difference between total losses and technical losses is referred to as non-technical losses Outage The period in which a generating unit, transmission line, or other facility is out of service Off-peak Period of relatively low system demand Maximum power used in a given period, traditionally between 07:00 – 10:00 and 18:00 – Peak demand 21:00 Eskom Holdings Limited 307 Integrated Repor t 2010 Generating equipment normally operated only during hours of highest daily, weekly or Peaking capacity seasonal loads Peak-load plant Usually gas turbines or a pumped-storage scheme used during peak-load periods An association of two or more interconnected electricity supply systems that agree to co- Power pool ordinate operations and seek improved reliability and efficiencies Primary Energy Energy embodied in natural resources (eg, coal, liquid fuels, sunlight, wind, uranium) A pumped-storage scheme consists of a lower and an upper reservoir with a power station/ pumping plant between the two. During off-peak periods the reversible pump/turbines use Pumped-storage scheme electricity to pump water from the lower to the upper reservoir. During peak demand, water is allowed to run back into the lower reservoir through the turbines thereby generating electricity Difference between net system capability and the system’s maximum load requirements (peak Reserve margin load or peak demand) Nuclear fuel that has been irradiated in and permanently removed from a nuclear reactor. At Koeberg power station approximately 52 fuel assemblies (one third of the fuel assemblies) are Spent fuel removed from each of the two reactors on average every 16 months, and stored on site in the spent fuel pools in the respective fuel buildings next to the respective reactors Planning, implementing and monitoring supply-side activities to create opportunities for cost- Supply-side management (SSM) effective purchase, management, generation, transmission and distribution of electricity and all other associated activities The international benchmark for measuring the severity of interruptions to customers. One System minutes system minute is equivalent to the loss of the entire system for one minute at annual peak Technical losses Technical losses are the naturally occurring losses that depend on the power systems used Unplanned automatic grid separations A measure of the reliability of the service provided to the electrical grid that logs the number (UAGS) of supply interruptions per operating period Unit capability factor (UCF) A measure of power station availability indicating how well plant is operated and maintained All occasions when a power station unit has to be shut down and taken out of service. Energy Unplanned capability loss factor (UCLF) losses due to outages are considered unplanned if they are not scheduled at least four weeks in advance 308 Eskom Holdings Limited Integrated Repor t 2010 Glossary continued Energy terms Units of power Units of energy Power is generated per unit of time Energy is power multiplied by time Power is expressed in watts (W) 1kW (kilowatt) = 1 000W 1kWh (kilowatt hour) = 1kW expended over one hour 1MW (megawatt) = 1 000kW 1MWh (megawatt hour) = 1 000kWh 1GW (gigawatt) = 1 000 000kW or 1 000MW 1GWh (gigawatt hour) = 1 000 000kWh or 1 000MWh Voltage 1kV (kilovolt) = 1 000V Presentation currency R1 million = R1 000 000 R1 billion = R1 000 000 000 Definitions of ratios Interest cover: operating (loss)/profit before fair value loss on Average total cost of electricity sold: total operating expenditure embedded derivatives and net finance cost divided by net finance and net finance cost (including fair value adjustment on financial cost adjusted for borrowing cost capitalised, unwinding of discount instruments) divided by external sales. on provisions and interest paid on finance lease. Debt:equity including long-term provisions: net financial assets and Liquidity: current assets divided by current liabilities. liabilities plus non-current retirement benefit obligations and non- current provisions divided by total equity. Net pre-tax interest coverage: (loss)/profit before tax adjusted by finance costs divided by finance costs. Debt:equity: net financial assets and liabilities divided by total equity. Return on average equity: (loss)/profit for the year divided by EBITDA interest coverage: operating (loss)/profit before fair value average equity. loss on embedded derivatives and net finance cost adjusted for net impairment loss, depreciation and amortisation expense, divided by Return on total assets: operating (loss)/profit before fair value loss finance costs. on embedded derivatives and net finance cost expressed as a percentage of total assets. Funds from operations/average total debt: net cash from operating activities divided by the average total financial liabilities. Solvency: total assets divided by total liabilities. Funds from operations/capex: net cash from operating activities Total operating expenditure/revenue: total operating expenditure divided by capital expenditure. divided by revenue. Funds from operations/net interest coverage: net cash from Value created per employee: value created divided by number of operating activities divided by total net finance cost adjusted for employees. borrowing cost capitalised, unwinding of discount on provisions and interest paid on finance lease. Eskom Holdings Limited 309 Integrated Repor t 2010 Abbreviations and acronyms Accelerated and Shared Growth Initiative for Energy availability factor – the ratio of the AsgiSA South Africa available energy generation over a given time EAF period to the reference energy generation Black economic empowerment, legislated in over the same time period South Africa under the Preferential BEE Procurement Policy Framework Act, (5 of B-BBEE EAL Eskom Academy of Learning 2000) and Broad-based Black Economic Empowerment Act, (53 of 2003) Earnings before interest, tax, depreciation and EBITDA amortisation Besa Bond Exchange of South Africa Electricity distribution industry, currently being EDI BWO Black women-owned businesses restructured in RSA Clean development mechanism (address EFC Eskom Finance Company CDM climate change) EIA Environmental impact assessment CFL Compact fluorescent lamps ELI Eskom learning institutions CO2 Carbon dioxide EMPs Environmental management plans CPI Consumer price index Competitive Supplier Development EMS Environmental management system CSDP Programme EWT Endangered Wildlife Trust CSI Corporate social investment Exco Eskom executive management committee CSP Concentrating solar plant Free basic electricity of 50kWh/month to FBE CV Calorific value assist low-income households (RSA) FGD Flue gas desulphurisation DEA Department of Environmental Affairs (RSA) FPM Fine particulate matter DoE Department of Energy (RSA) GDP Gross domestic product DMP Demand market participation Department of Provincial and Local GHG Greenhouse gas DPLG Government GIS Geographic information system DPE Department of Public Enterprises (RSA) GPS Global positioning system DSLI Distribution supply loss index GWh Gigawatt-hour (1 000MWh) DWA Department of Water Affairs (RSA) 310 Eskom Holdings Limited Integrated Repor t 2010 Abbreviations and acronyms continued HRSI Human resources sustainability index ML Megalitre (1 000 000 litres) HVDC High-voltage direct current mSv Millisievert IFRS International Financial Reporting Standards Mt Mega tons ILO International Labour Organisation MVA Mega volt ampere Inep Integrated national electrification programme MYPD Multi-year price determination IPCC Intergovernmental Panel on Climate Change NEEA National Energy Efficiency Agency Nuclear Energy Corporation of South Africa IPP Independent power producer Necsa (RSA) IRM Integrated risk management Nepad New Partnership for Africa’s Development National Energy Regulator of South Africa Isep Integrated strategic electricity planning NERSA (RSA) This international standard specifies NEMA National Environmental Management Act ISO 14001 requirements for an environmental management system NGO Non-governmental organisation KPI Key performance indicator NNR National Nuclear Regulator (RSA) kt Kilotons (1 000 tons) NOx/NO2 Nitrogen oxide kWh Kilowatt-hour N 2O Nitrous oxide kWh SO Kilowatt-hour sent out NPI National Productivity Institute LME London Metals Exchange OCGT Open-cycle gas turbine Living standards measure (indicates economic LSM status) Other capability loss factor – unplanned OCLF losses not under management control ie, LTIR Lost-time incidence rate weather MMI Monthly moving index OEM Original equipment manufacturer MW Megawatt OHSA Occupational Health and Safety Act MWh Megawatt-hour (1 000kWh) OMS Outage management system Eskom Holdings Limited 311 Integrated Repor t 2010 PCB Polychlorinated biphenyls Sm3 Standard cubic metre PBMR Pebble-bed modular reactor TOU Time-of-use (tariff) PCP Power conservation programme TQI Total quality index Planned capability loss factor – ratio of the energy not produced over a given time period, UCF Unit capability factor PCLF due to planned shutdowns, to the maximum amount of energy which could be produced UCG Underground coal gasification over the same time period Unplanned capability loss factor – ratio of the PFMA Public Finance Management Act (RSA) unplanned energy losses over a given time UCLF period to the maximum amount of energy RED Regional electricity distributor which could be produced over the same time period RSLI Reticulation supply loss index ULM Utility load manager Saavi South African Aids Vaccine Initiative UN United Nations South African Centre for Essential Community United Nations Framework Convention on SACECS UNFCCC Services Climate Change SADC Southern African Development Community VAT Value added tax (RSA) SAIDI System average interruption duration index Voluntary counselling and testing (HIV/Aids VCT RSA) SAIFI System average interruption frequency index Wano World Association of Nuclear Operators Sapp Southern African Power Pool Wildlife and Environment Society of WESSA South Africa SHE Safety, health and environment World Business Council for Sustainable WBCSD Development SMME Small, medium and micro enterprises ZLED Zero liquid effluent discharge SME Small and medium enterprises SOE State-owned enterprise SO2 Sulphur dioxide SO3 Sulphur trioxide 312 Eskom Holdings Limited Integrated Repor t 2010 GRI index An index to the 2010 integrated report based on the Global Reporting Initiative (GRI) sustainability reporting guideline criteria is provided in the table. Strategy and analysis GRI reference Description Reference(s) in integrated report Page 1.1 – 1.2 Statement from senior Letter from the acting chairman 24 – 25 decision makers, on Integrated risk management 22 – 25 sustainability including description of impacts, risk Divisional and business area overviews 38, 52, 76, 86, 94, and opportunities 134, 166 Organisational profile GRI reference Description Reference(s) in integrated report Page 2.1 – 2.10 Organisational profile: details Scope of report IFC and scale of organisation, Key facts 1–3 ownership, changes and awards received Southern African grid map 5 Organisational structure 6 Leadership overview – letter from the acting chairman 24 – 25 Tables 296 Awards 303 – 304 Corporate governance 288 Report parameters GRI reference Description Reference(s) in integrated report Page 3.1 – 3.13 Report profile, scope and Scope of report IFC boundaries. Countries in which we operate IFC GRI content index Assurance Electricity: from power station to customer 4 Application of the GRI principles 13 Materiality 13 Stakeholder engagement 14 Executive performance overview 30 Performance against the shareholder compact 34 Management approach 38, 52, 76, 86, 94, 134, 166 Contact information IBC Independent assurance report to the directors 169 of Eskom Holdings Limited Statement of responsibilities and approval 174 Independent auditors’ report to the Minister of Public 176 Enterprises GRI Index 312 IFC – Inside front cover. IBC – Inside back cover. Eskom Holdings Limited 313 Integrated Repor t 2010 Governance, commitments and engagements GRI reference Description Reference(s) in integrated report Page 4.1 – 4.17 Governance Organisational structure 6 Commitments to external Sustainability 12 initiatives Stakeholder engagement Stakeholder engagement 14 Eskom reputation and engagement with stakeholders 17 Risk management 18 – 19 Board of directors 26 Executive management committee 28 Executive performance overview 30 Performance in terms of the shareholder compact 34 Employee relations 82 Regulatory and Legal Framework 86 Stakeholder engagement 99 Stakeholder collaboration 137 Corporate governance 288 Management approach and performance indicators Economic performance indicators (EC) GRI reference Description Reference(s) in integrated report Page EC 1 Economic performance Financial performance overview 40 EC4 Economic performance Funding gap 44 EC 6 Market presence Procurement and supply chain 47 EC 8 Indirect economic impacts Road repairs, free basic electricity 112, 161 EC 9 Indirect economic impacts Letter from the Acting Chairman 24 – 25 314 Eskom Holdings Limited Integrated Repor t 2010 GRI index continued Environmental performance indicators (EN) GRI reference Description Reference(s) in integrated report Page EN1 Materials Electricity: from power station to customer 4 Energy Water EN2 Ash disposal 296 Biodiversity Emissions, effluents and EN3 wastes Direct energy consumption by primary energy source 296 Product and services EN5 Internal energy efficiency and demand side 56, 156 management EN6 Energy initiatives 56, 156 EN9 Long term water strategy 110 – 111 EN14 Biodiversity 59 EN16 Total direct CO2 emissions 296 EN17 NOx emissions 296 EN18 Key focus areas for the coming year 101 EN20 Air emissions (NOx, SO2, particulates) 296 EN22 Waste 58, 107, 118, 296 EN23 Legal contraventions 58 EN26 Environmental impact initiatives 54, 56, 99 Eskom Holdings Limited 315 Integrated Repor t 2010 Social performance indicators: Labour practices and decent work (LA) GRI reference Description Reference(s) in integrated report Page LA1 Employment, occupational Human resources 79 – 81 health and safety, training and education, diversity and equal LA2 Employee staff turnover 79 opportunity LA7 Safety 60 LA8 Health and wellness 82 LA10 Training interventions 80 LA113 Composition of board 26 – 29 Social performance indicators: Human rights (HR) GRI reference Description Reference(s) in integrated report Page HR5 Freedom of association and Employee relations 82 collective bargaining Social performance indicators: Society (SO) GRI reference Description Reference(s) in integrated report Page SO1 Community, public policy Contributing to society 68 – 73 SO5 Climate change 55 – 56 Product responsibility performance indicators (PR) GRI reference Description Reference(s) in integrated report Page PR1 Customer health and safety Safety – public safety 59 – 60 316 Eskom Holdings Limited Integrated Repor t 2010 GRI index continued A 400 ton generator stator at Kendal power station is lowered onto a self-propelled trailer for maintenance. 1970 – 1990 1990 – 2010 Contact information Integrated Report 2010 Two hydro stations were commissioned for peak load. The decision was taken to build Electrification started on a massive scale and the real price of electricity was reduced to Koeberg, the first nuclear station in Africa. stimulate economic growth. In 2001 Eskom Gas turbine, coal and pumped storage received the Global Power Company of the Telephone Websites and email stations were commissioned. Escom was Year Award. Eskom was converted to a renamed to Eskom in 1987 and an company in 2002. Surplus electricity ran out Eskom head office: +27 11 800 8111 Eskom environmental: envhelp@eskom.co.za Electricity Council replaced the 1990 – 2010 and power shortages became apparent in Eskom Group Communications: +27 11 800 2323 Eskom annual report: www.eskom.co.za/annreport10/ TO Commission Electrification started on a massive scale and the real 2007 S PIC ITH RE W price of electricity was reduced to stimulate economic Eskom Development Foundation: +27 11 800 8111 Eskom Development Foundation: www.eskom.co.za/csi HI OME EED C BL growth. In 2001 Eskom received the Global Power : E: Company of the Year Award. Eskom was converted to a NB SIZ Eskom website: www.eskom.co.za FIT 310 company in 2002. Surplus electricity ran out and power TO 40 X shortages became apparent in 2007 2 Ethics office advisory service: +27 11 800 2791/3187 Company registration number: 2002/015527/06 or ethics@eskom.co.za 1970 – 1990 Confidential fax line: +27 11 507 6358 Two hydro stations were commissioned for peak load. The decision was taken to build Koeberg, the first nuclear station in Africa. Gas turbine, coal and pumped storage stations were BE commissioned. Escom was renamed to Eskom in 1987 and an Physical address: Postal address: TO IC ED S P LI Electricity Council replaced the Commission Eskom Eskom -RE PP HI SU Megawatt Park PO Box 1091 2 Maxwell Drive Johannesburg 1984 Sunninghill 2000 Koeberg, Africa’s first Nuclear Power Sandton Station is built Integrated Repo r t 2010 2157 Eskom Holdings Secretariat 1950 – 1970 Bongiwe Mbomvu (Company secretary) Generation capacity increased by 130% PO Box 1091 Johannesburg 2000 www.eskom.co.za 1950 Vaal and Klip power stations built 1923 Electricity Supply Commission established 1923 – 1929 1930 – 1950 1950 – 1970 The Electricity Supply New goldfields on the Soaring growth in the Vaal Commission (Escom) was Witwatersrand and the rise Triangle and Witwatersrand, established. Dr Hendrik in gold price boosted Eskom’s capacity doubled by On the path to recovery van der Bijl was the first electricity demand.Vaal and extending existing stations and Chairman. Witbank, Colenso Klip power stations were building new ones. R376 million and Salt River Power Stations built and the distribution was spent on new plant. Capacity were commissioned network was extended increased by 130% 1970 – 1990 1990 – 2010 Contact information Integrated Report 2010 Two hydro stations were commissioned for peak load. The decision was taken to build Electrification started on a massive scale and the real price of electricity was reduced to Koeberg, the first nuclear station in Africa. stimulate economic growth. In 2001 Eskom Gas turbine, coal and pumped storage received the Global Power Company of the Telephone Websites and email stations were commissioned. Escom was Year Award. Eskom was converted to a renamed to Eskom in 1987 and an company in 2002. Surplus electricity ran out Eskom head office: +27 11 800 8111 Eskom environmental: envhelp@eskom.co.za Electricity Council replaced the 1990 – 2010 and power shortages became apparent in Eskom Group Communications: +27 11 800 2323 Eskom annual report: www.eskom.co.za/annreport10/ TO Commission Electrification started on a massive scale and the real 2007 S PIC ITH RE W price of electricity was reduced to stimulate economic Eskom Development Foundation: +27 11 800 8111 Eskom Development Foundation: www.eskom.co.za/csi HI OME EED C BL growth. In 2001 Eskom received the Global Power : E: Company of the Year Award. Eskom was converted to a NB SIZ Eskom website: www.eskom.co.za FIT 310 company in 2002. Surplus electricity ran out and power TO 40 X shortages became apparent in 2007 2 Ethics office advisory service: +27 11 800 2791/3187 Company registration number: 2002/015527/06 or ethics@eskom.co.za 1970 – 1990 Confidential fax line: +27 11 507 6358 Two hydro stations were commissioned for peak load. The decision was taken to build Koeberg, the first nuclear station in Africa. Gas turbine, coal and pumped storage stations were BE commissioned. Escom was renamed to Eskom in 1987 and an Physical address: Postal address: TO IC ED S P LI Electricity Council replaced the Commission Eskom Eskom -RE PP HI SU Megawatt Park PO Box 1091 2 Maxwell Drive Johannesburg 1984 Sunninghill 2000 Koeberg, Africa’s first Nuclear Power Sandton Station is built Integrated Repo r t 2010 2157 Eskom Holdings Secretariat 1950 – 1970 Bongiwe Mbomvu (Company secretary) Generation capacity increased by 130% PO Box 1091 Johannesburg 2000 www.eskom.co.za 1950 Vaal and Klip power stations built 1923 Electricity Supply Commission established 1923 – 1929 1930 – 1950 1950 – 1970 The Electricity Supply New goldfields on the Soaring growth in the Vaal Commission (Escom) was Witwatersrand and the rise Triangle and Witwatersrand, established. Dr Hendrik in gold price boosted Eskom’s capacity doubled by On the path to recovery van der Bijl was the first electricity demand.Vaal and extending existing stations and Chairman. Witbank, Colenso Klip power stations were building new ones. R376 million and Salt River Power Stations built and the distribution was spent on new plant. Capacity were commissioned network was extended increased by 130%