20 Shift performance, grow Annual financial statements sustainably 2014 Contents Page Page Statement of directors’ responsibilities and approval 2 5 Segment information 59 Report of the audit and risk committee 3 6 Property, plant and equipment 62 7 Intangible assets 64 Statement by company secretary 3 8 Investment in equity-accounted investees 65 Directors’ report 4 9 Investment in subsidiaries 66 Independent auditors’ report to Parliament and 10 Future fuel supplies 67 the shareholder – Minister of Public Enterprises 12 11 Deferred tax 67 Statements of financial position 14 12 Investment in securities 68 Income statements 15 13 Loans receivable 68 Statements of comprehensive income 15 14 Derivatives held for risk management 68 Statements of changes in equity 16 15 Finance lease receivables 70 16 Payments made in advance 71 Statements of cash flows 17 17 Trade and other receivables 71 Notes to the financial statements 18 18 Inventories 72 1 General information 18 19 Financial trading assets and liabilities 72 2 Summary of significant accounting policies: 18 20 Cash and cash equivalents 72 2.1 Basis of preparation and measurement 18 21 Non-current assets and liabilities held-for-sale 73 2.2 Consolidation 18 22 Service concession arrangements 74 2.3 Segment reporting 19 23 Share capital 75 2.4 Foreign currency translation 19 24 Debt securities and borrowings 75 2.5 Property, plant and equipment 20 25 Embedded derivatives 77 2.6 Intangible assets 20 26 Deferred income 77 2.7 Impairment of non-financial assets 21 27 Employee benefit obligations 78 2.8 Capitalisation of borrowing costs 21 28 Provisions 80 2.9 Service concession arrangements 21 29 Finance lease liabilities 81 2.10 Leases 21 30 Trade and other payables 81 2.11 Financial instruments 22 31 Payments received in advance 81 2.12 Inventories 25 32 Revenue 81 2.13 Future fuel supplies 25 33 Primary energy 82 2.14 Share capital 26 34 Net employee benefit expense 82 2.15 Equity reserve 26 35 Depreciation and amortisation expense 82 2.16 Income tax 26 36 Net impairment loss 82 2.17 Deferred tax 26 37 Other operating expenses 83 2.18 Payments received in advance 26 38 Other income 83 2.19 Deferred income 26 39 Net fair value loss on financial instruments, 2.20 Reinsurance contracts 26 excluding embedded derivatives 83 2.21 Employee benefit obligations 26 40 Finance income 83 2.22 Provisions 27 41 Finance cost 84 2.23 Revenue recognition 27 42 Income tax 84 2.24 Finance income 28 43 Cash generated from operations 85 2.25 Finance cost 28 44 Guarantees and contingent liabilities 86 2.26 Dividend income 28 45 Commitments 87 2.27 Dividend distribution 28 46 Related-party transactions 88 2.28 Non-current assets and liabilities held-for-sale 28 47 Events after the reporting date 90 2.29 Related-party transactions 28 48 Restatement of comparatives 90 2.30 Transfers of assets from customers 28 49 Directors’ remuneration 91 2.31 Net debt 28 50 New standards and interpretations 95 3 Critical accounting estimates and judgements 29 51 Information required by the Public Finance 4 Financial risk management: 32 Management Act 97 4.1 Credit risk 32 52 Pro forma revaluation of property, plant and 4.2 Market risk 41 equipment (unaudited) 98 4.3 Liquidity risk 46 Appendix – Abbreviations and acronyms 99 4.4 Capital management and going concern 50 4.5 Accounting classifications and fair values 51 The annual financial statements have been prepared under the supervision of the finance director, TBL Molefe CA(SA). The financial statements have been audited in compliance with section 30 of the Companies Act. The audited financial statements of the group and Eskom as at and for the year ended 31 March 2014 are available for inspection at the company’s registered office and on the Eskom website at www.eskom.co.za and were published on 11 July 2014. 2014 Annual Financial Statements 1 Statement of directors’ responsibilities and approval The Public Finance Management Act requires the directors to ensure Based on the above, the directors are satisfied that Eskom and the that Eskom Holdings SOC Limited (Eskom) and its subsidiaries group have access to adequate resources and facilities to be able to (the group) keep full and proper records of their financial affairs. The continue its operations for the foreseeable future. Accordingly the annual financial statements should fairly present the state of affairs of board have continued to adopt the going-concern basis in preparing Eskom and the group, its financial results, its performance against the financial statements. predetermined objectives for the year and its financial position at the end of the year in terms of International Financial Reporting Standards The preparation and fair presentation of the Eskom and group annual and the Public Finance Management Act (PFMA). financial statements are the responsibility of the directors. The external auditors are responsible for independently auditing the financial To enable the directors to meet the above mentioned responsibilities, statements in accordance with International Standards on Auditing and the Eskom board of directors sets standards and management the Public Audit Act. implements systems of internal control. The controls are designed to provide cost-effective assurance that assets are safeguarded, and that The annual financial statements of Eskom and the group have been liabilities and working capital are efficiently managed. Policies, prepared in terms of International Financial Reporting Standards, the procedures, structures and approval frameworks provide direction, requirements of the Companies Act of South Africa and the Public accountability and division of responsibilities, and contain self‑monitoring Finance Management Act. These annual financial statements are mechanisms. The controls throughout Eskom and the group focus on based on appropriate accounting policies, supported by reasonable those critical risk areas identified by operational risk management and and prudent judgements and estimates and are prepared on the going- confirmed by executive management. Both management and the concern basis. internal audit department closely monitor the controls, and actions are Based on the information and explanations given by management, the taken to correct deficiencies as they are identified. internal audit function (audit and forensic) and discussions held with the The directors have made an assessment of the ability of Eskom and independent external auditors, the directors are of the opinion that the the group to continue as a going concern in the foreseeable future. internal accounting controls are adequate to ensure that the financial records may be relied upon for preparing the annual financial The directors reviewed Eskom’s and the group’s performance for the statements, and that accountability for assets and liabilities is year ended 31 March 2014 and the cash flow forecast for the Multi-Year maintained. Price Determination (MYPD) 3 period ending 31 March 2018. The audit and risk committee has reviewed the going-concern basis Eskom did not receive a cost reflective tariff in the National Energy and the effectiveness of Eskom and the group’s internal controls and Regulator of South Africa (NERSA) MYPD 3 decision which created a considers the systems appropriate for the effective operation of Eskom revenue shortfall of R225 billion over the MYPD 3 period which has and the group. The committee has evaluated Eskom and the group’s placed tremendous strain on the financial and operating sustainability annual financial statements and has recommended their approval to of the group. The board has critically examined its activities and costs the board. The audit and risk committee’s approval is set out on page 3. in order to balance its cash flow requirements through the Business Productivity Programme to identify cost saving and efficiency Nothing significant has come to the attention of the directors to indicate opportunities to close the revenue shortfall. that any material breakdown has occurred in the functioning of these controls, procedures and systems during the year under review. Eskom submitted an application to NERSA for the MYPD 2 period during August 2013 regarding variances between costs and revenues In the opinion of the directors, based on the information available to assumed in MYPD 2 compared to the actual costs incurred and date, the annual financial statements fairly present the financial revenue received by Eskom. This is referred to as the regulatory position of Eskom and the group at 31 March 2014 and the results of clearing account (RCA). The NERSA electricity sub-committee has its operations and cash flow information for the year then ended. made a recommendation on the RCA to the NERSA board and a The Eskom and group annual financial statements for the year ended decision is awaited during the first quarter of the new financial year. 31 March 2014 have been prepared under the supervision of the The recommendation includes an RCA balance in favour of Eskom for finance director, TBL Molefe CA(SA), and approved by the board of implementation in the next financial year. directors and signed on 29 May 2014 by: The board is pursuing alternative funding options, including potential government support. The board will not compromise the going concern status while ensuring security of supply and has not approved any capital expenditure beyond the Kusile project. ZA Tsotsi MC Matjila TBL Molefe In assessing the ability to raise funds, the current economic climate Chairman1 Interim chief executive1 Finance director1 as well as Eskom’s and the sovereign’s credit ratings have been taken 29 May 2014 29 May 2014 29 May 2014 into account. 1. Authorised directors. 2 Eskom Holdings SOC Limited Report of the audit and risk committee Report in terms of the Public Finance Management assurance activities. The committee also oversees the establishment Act and Companies Act, section 94(7)(f) of effective systems of internal control to provide reasonable assurance that Eskom’s financial and non-financial objectives are achieved. The audit and risk committee reports that it has adopted appropriate formal terms of reference as its audit and risk committee charter, has The audit and risk committee is of the opinion, based on the information regulated its affairs in compliance with this charter, and has discharged and explanations given by management and the assurance and all of its responsibilities contained therein. forensic department and discussions with the independent external auditors that: In the conduct of its duties, the audit and risk committee has, inter alia, • the expertise, resources and experience of the finance function are reviewed the following: adequate • Going-concern assumption • the system and process of risk management and compliance - robustness of budgets and business results processes are adequate - cash flow projections for the 15 months ending 30 June 2015 • the internal accounting controls are adequate to ensure that the - regulatory clearing account mechanism (MYPD 2) financial records may be relied upon for preparing the financial - cost saving opportunities to close the revenue shortfall statements, and accountability for assets and liabilities is maintained - capital projects, including the capacity expansion programme • the information contained in the integrated report and the - funding plan to finance the capacity expansion programme up to supplementary and divisional report on the Eskom website is reliable the Kusile project and does not contradict the financial information of the integrated report or the annual financial statements • Finance function • the effectiveness of the assurance and forensic department is - the expertise, resources and experience of the finance function adequate and the internal audit charter was approved by the audit • Internal control, management of risks and compliance and risk committee with legal and regulatory provisions • having considered the matters set out in section 94(8) of the - the effectiveness of the internal control systems Companies Act of South Africa and is satisfied with the independence - all factors and risks that may impact on the integrity of the and objectivity of the external auditors integrated report and the supplementary and divisional report • Eskom and the group have access to adequate resources and - the effectiveness of the system and process of risk management facilities to be able to continue its operations for the foreseeable including the following specific risks: future, supporting the going-concern assumption ○ financial reporting Nothing significant has come to the attention of the audit and risk ○ internal financial controls committee to indicate that any material breakdown in the functioning of ○ fraud risks relating to financial reporting these controls, procedures and systems has occurred during the year ○ information technology risks relating to financial reporting under review. ○ the effectiveness of the entity’s compliance with legal and regulatory provisions The audit and risk committee has evaluated the financial statements of • Financial and sustainability information provided Eskom and the group for the year ended 31 March 2014 and based on - the adequacy, reliability and accuracy of financial information the information provided to the audit and risk committee, considers that provided by management they comply, in all material respects, with the requirements of the - the disclosure of sustainability issues in the integrated report and Companies Act of South Africa, the Public Finance Management Act, supplementary and divisional report to ensure that it is reliable and and International Financial Reporting Standards. The audit and risk it does not conflict with the financial information committee concurs with the board of directors and management that the adoption of the going-concern premise in the preparation of the • Internal and external audit financial statements is appropriate. The audit and risk committee has - the effectiveness of the assurance and forensic department therefore, at their meeting held on 27 May 2014, recommended the (internal audit) adoption of the financial statements by the board of directors. - the activities of the assurance and forensic department, including its annual work programme, coordination with the external auditors, the reports of significant investigations and the responses of management to specific recommendations - the independence and objectivity of the external auditors - accounting and auditing concerns identified as a result of internal B Luthuli and external audits, including reportable irregularities Chairman Eskom is applying a combined assurance model to ensure coordinated 29 May 2014 assurance activities. The audit and risk committee oversees the Statement by company secretary In terms of section 88(2)(e) of the Companies Act of South Africa, I certify that the company has filed with the Companies and Intellectual Property Commission all such returns and notices in terms of this Act, and all such returns appear to be true, correct and up to date. A van der Merwe Company secretary 29 May 2014 2014 Annual Financial Statements 3 Directors’ report for the year ended 31 March 2014 The directors are pleased to present their report for the year ended Performance in terms of the shareholder compact 31 March 2014. The South African government, represented by the Minister of Public Principal activities, state of affairs and business Enterprises, is Eskom’s sole shareholder. review Each year, in consultation with the shareholder, Eskom agrees on its Eskom Holdings SOC Limited (Eskom) is South Africa’s primary performance objectives, measures and indicators, as well as its annual electricity supplier. The company, which is wholly owned by the South targets, in line with the Public Finance Management Act of South Africa African government, generates, transmits and distributes electricity to (PFMA). Annual targets are annexed to a list of principles agreed to by industrial, mining, commercial, agricultural and residential customers. Eskom and its shareholder (the shareholder compact) and quarterly It also sells electricity to municipalities, which in turn redistribute it to reports are provided. Eskom annually prepares a corporate plan to businesses and households within their areas. comply with the requirements of section 52 of the PFMA as well as section 29 of National Treasury regulations, and to support internal Eskom’s head office is in Johannesburg. It also has operations across Eskom policies. The consolidated corporate plan with all its annexures South Africa and maintains a small office in London, primarily for is submitted to the Department of Public Enterprises and National quality control of the equipment being manufactured for the capacity Treasury annually in February. The latest plan covers the four year expansion programme. period from 1 April 2014 to 31 March 2018 and the focus is on Eskom’s response plan to its changing environment. Eskom has several subsidiaries: • Eskom Enterprises SOC Limited (Eskom Enterprises) group. Through The table on the next page sets out Eskom’s performance in terms of Rotek Industries SOC Limited and Roshcon SOC Limited, the Eskom the key performance indicators (KPIs) in the shareholder compact. Enterprises group provides life-cycle support and plant maintenance, network protection and support for Eskom’s expansion programme in South Africa. It has two subsidiaries with an interest in electricity operations and maintenance concessions in Africa: one covers Mali, Senegal and Mauritania, while the other operates in Uganda. Eskom Energie Manantali s.a (concession in Mali) has been classified as a discontinued operation at 31 March 2014 • Eskom Finance Company SOC Limited (EFC) grants home loans to Eskom employees • Escap SOC Limited, Eskom’s wholly owned captive insurance company, manages and insures Eskom’s business risk • Eskom Development Foundation NPC is a wholly owned non-profit company that manages Eskom’s corporate social investment While most of Eskom’s business is within South Africa, the company also buys and sells electricity in the Southern African Development Community region. 4 Eskom Holdings SOC Limited Shareholder compact performance 2013/14 Key performance Key performance indicator Unit Target Target Actual Actual Actual areas 2013/14 achieved 2013/14 2012/13 2011/12 Employee lost-time incidence rate Index 0.36 0.31 0.401 0.41 Focus on safety (LTIR) Maintenance backlog reduction based Number – – – n/a on the Eskom technical governance committee approval Keep the lights on Integrated demand management (IDM) MW 379.0 409.6 595.0 365.0 demand savings Internal energy efficiency GWh 15.0 19.4 28.9 45.0 Put customer at Customer service index Index 88.7 86.6 86.8 85.6 the centre Normal unplanned capability loss % ≤10.00 12.61 12.12 7.97 factor (UCLF)2 Less: Constrained UCLF3 % – – 1.63 3.41 – Underlying UCLF 4 % – – 10.98 8.71 – Improve operations Energy availability factor (EAF) % 80.00 75.13 77.65 81.99 Total system minutes lost for events Minutes 3.40 3.05 3.52 4.73 <1 minute System average interruption duration Hours 45.0 37.0 41.9 45.8 index (SAIDI)5 Generation capacity installed and MW 100 120 261 535 commissioned Transmission lines installed km 770.0 810.9 787.1 631.0 Deliver capacity expansion Transmission capacity installed and MVA 3 790 3 790 3 580 2 525 commissioned Generation new build capacity Days 30.00 48.90 43.48 n/a milestones (Medupi, Kusile and Ingula) deviation Reduce Relative particulate emissions kg/MWh 0.36 0.35 0.35 0.31 environmental footprint in existing Water usage per kWh sent out L/kWh 1.39 1.35 1.42 1.34 6 fleet Implement coal Coal road-to-rail migration Mt 11.48 11.58 10.12 8.50 haulage and the road-to-rail migration plan Key: – Actual performance met or better than target. – Actual performance did not achieve the target. – Actual performance almost met the target. 1. One noise-induced hearing loss late report by Generation and one lost-time injury incident for Distribution resulted in the signed off LTIR of 2012/13 changing from 0.39 to 0.40. 2. Normal UCLF – measures the lost energy due to unplanned energy losses resulting from equipment failures and other plant conditions. 3. Constrained UCLF – UCLF as a result of emissions and short-term related UCLF due to system constraints to meet the “Keep the lights on” objective. This is apportioned between planned capability loss factor and other capability loss factor (unplanned losses not under management control). 4. Underlying UCLF – UCLF that is the difference between normal and constrained UCLF and that is still within Generation’s control. 5. SAIDI is an availability of supply index – the average duration (hours) of a sustained interruption the customer would experience per annum (number of hours per annum). 6. The volume of water consumed per unit of generated power from commissioned power stations. 2014 Annual Financial Statements 5 Directors’ report (continued) for the year ended 31 March 2014 Shareholder compact performance 2013/14 (continued) Key performance Key performance indicator Unit Target Target Actual Actual Actual areas 2013/14 achieved 2013/14 2012/13 2011/12 Cost of electricity (excluding R/MWh 453.40 541.92 496.24 374.19 depreciation) Interest cover Ratio 1.18 0.65 0.27 3.27 Ensure financial sustainability1 Debt/equity (including long-term Ratio 2.17 2.21 1.96 1.69 provisions) Free funds from operations (FFO) as % 9.11 9.21 8.55 15.06 a % of total debt Training spend as a % of gross % 5.00 7.87 – – employee benefit costs2 Engineers Number 2 007 1 962 2 144 2 273 Build strong skills (total pipeline or Technicians Number 780 815 835 844 new enrolments) Artisans Number 2 619 2 383 2 847 2 598 Youth programme3 Number 5 000 4 325 5 701 5 159 Local sourcing in procurement % 52.0 54.6 80.2 77.2 Procurement from Broad-Based Black % 75.0 93.9 86.3 73.2 Economic Empowerment (B-BBEE) compliant companies Procurement from black youth-owned % 1.0 1.0 1.0 – companies Employment equity – disability % 3.00 2.99 2.59 2.49 Maximise Racial equity in senior management, % 61.0 59.5 58.3 53.9 socio-economic % of black employees contribution Gender equity in senior management, % 30.0 28.9 28.2 24.3 % of female employees Racial equity in professionals and % 71.0 71.2 69.6 65.7 middle management, % of black employees Gender equity in professionals and % 36.0 35.8 34.6 32.4 middle management, % of female employees Key: – Actual performance met or better than target. – Actual performance did not achieve the target. – Actual performance almost met the target. 1. The original year to 31 March 2014 budget which was included in the shareholder compact was subsequently revised and the differences mainly result from additional operating expenditure allocated to Generation. The revised budget ratios are as follows: • Cost of electricity (excluding depreciation), R/MWh 463.25 • Interest cover (excluding remeasurement of the subordinated loan from the shareholder) 0.98 • Debt/equity (including long-term provisions) 2.19 • FFO as a % of total debt 10.51 2. This is a new measure, effective from 1 April 2013. 3. Includes learners trained by Eskom, as well as learners trained by Eskom’s suppliers. 6 Eskom Holdings SOC Limited The reasons for the variances between the actual compared to the Improve operations targeted KPI performance for the year are as follows: • Normal unplanned capability loss factor (actual worse than target by 2.61%): Focus on safety - Partial load losses continue to contribute significantly to the • Employee lost-time incidence rate (actual exceeded target by 0.05): system’s total unplanned losses. The UCLF for these losses was - Eskom’s internal safety measures are having a positive effect, with 5.24%, contributing 42% to the system UCLF. The main reasons internal lost-time incidence rate decreasing to 0.31 in 2014, from for the partial load losses were problems at the draught plant, coal 0.40 in 2013 mills, turbine, gas cleaning and feed-water systems - The internal fatality count remains high at five fatalities - During the year to March 2014, there were 210 UCLF boiler-tube - There were 18 contractor fatalities in the year. Contractor failures recorded with a UCLF of 2.18%, contributing 17% to the management is one of Eskom’s occupational hygiene and safety system UCLF. This is higher in both number and UCLF contribution strategic elements. Given the strategic importance of contractors when compared to the previous year when a total number of across Eskom, substantial efforts are required to introduce safe 191 failures and UCLF contribution of 1.95% was recorded systems of work across the entire organisation to ensure continued safety performance improvement in Eskom’s drive for zero harm • Energy availability factor (actual worse than target by 4.87%): - Eskom did not meet its EAF target, mostly due to an increase in Keep the lights on unplanned plant unavailability and energy losses due to incorrect • Maintenance backlog reduction based on the Eskom technical quality coal being delivered, mainly at Tutuka and Arnot power governance committee approval (actual equals target): stations - Maintenance backlog reduction has been included in the • Total system minutes lost for events <1 minute (actual exceeded shareholder compact based on revised definitions of maintenance target by 0.35 minutes): backlog. This measure tracks the status of approved scheduled - The good performance of the system minutes (<1) and major backlog maintenance incidents has been underpinned by the sustained reduction of line - The nine maintenance outages scheduled were completed during faults and plant failures, as well as effective risk management the year to March 2014. The backlog of scheduled technical governance related outages was therefore achieved during • System average interruption duration index (actual exceeded target the year by 8 hours): - The sustained improvement in SAIDI interruption performance • Integrated demand management demand savings (actual exceeded during the year is attributed to the establishment of additional target by 30.6MW): customer network centres to increase the operational footprint and - IDM is benefiting from the development of more flexible funding enable a quicker response to network interruptions, reduced options introduced to the programme over the last two years. network downtime by maximising live-line work for planned Deeper penetration into the commercial and industrial sectors has maintenance, implementation of a revised network reliability been realised through the standard offer and standard product planning standard to improve the reliability of the network, programmes increased network visibility, improved reliability centred - The residential mass roll-out programme has been a large maintenance and focused management attention that ensures contributor to the demand savings. Phase 2 of the compact disciplined execution of all initiatives fluorescent lamps programme has been completed and 87MW of these savings have been verified during the year. This includes the Deliver capacity expansion compact fluorescent lamps roll‑out as well as Eskom’s contribution • Generation capacity installed and commissioned (actual exceeded to the government’s solar water heating initiative target by 20MW): - Eskom’s Power Alert and 5pm to 9pm campaigns continued to - The commissioning of the Komati unit 3 was successfully reduce power demand during the evening peak. The average completed on 26 September 2013 at 90MW capacity weekday evening peak impact for the period under review for all - The Grootvlei unit 5 additional 30MWs capacity was commissioned colours (green, orange and red) was 224MW on 10 April 2013 after replacement of superheaters. The unit is • Internal energy efficiency (actual exceeded target by 4.4GWh): now re-rated at a generated maximum continuous rate of 190MW - Eskom aimed to improve the internal energy efficiency of its • Transmission lines installed (actual exceeded target by 40.9km) and facilities (power plant and buildings) by implementing efficiency capacity installed and commissioned (actual equals target): programmes that focus on lighting, heating, ventilation and - The target for kilometres of power lines built was exceeded. The air‑conditioning. Annualised energy savings of 19.4GWh were construction on the Eros Vuyani line was delayed due to access achieved from new IDM projects for the year ended 31 March 2014 restrictions as a result of community issues and therefore construction on the Neptune Vuyani 400kV line had to be Put customer at the centre accelerated to enable feeding of the two 250MVA transformers at • Customer service index (actual worse than target by 2.1): Vuyani from the Neptune side. Work on the Mercury Mookodi - Eskom narrowly missed reaching its customer service index 400kV line had to be accelerated to energise the two 250MVA target, reporting an overall rating of 86.6% against a target of transformers at Mookodi due to national control not permitting 88.7%. The main reasons cited by customers for dissatisfaction energisation of the transformers from the Ferrum side were tariff increases, the threat of load shedding, metering accuracy, the speed of installing new connections, the quality of • Generation new build capacity milestones (Medupi, Kusile and supply, outage management and slow response for quotations and Ingula) (actual worse than target by 18.9 days): connections on small projects - Eskom placed a contract with an alternative contractor for the engineering and manufacturing of the boiler protection systems as a result of the contractor’s performance regarding the continued failure of control and instrumentation factory acceptance tests at Medupi - The Kusile power station project has also been impacted by overall poor contractor performance - Regrettably, six contractors died in an accident at the Ingula pump storage scheme in October 2013. All work on the inclined high- pressure shaft has been stopped in terms of the Mine Health and Safety Act pending review by the mine health and safety inspectorate. The statutory processes and reviews regarding this accident are still in progress. This has caused a delay in the project 2014 Annual Financial Statements 7 Directors’ report (continued) for the year ended 31 March 2014 Reduce environmental footprint in existing fleet Maximise socio-economic contribution • Relative particulate emissions (actual exceeded target by 0.01kg/MWh): • Local sourcing in procurement (actual exceeded target by 2.6%): - Particulate emission performance was marginally better than the - Target performance was exceeded with a total of 547 contracts, target and remained consistent with the prior year performance, worth R5.6 billion, which were awarded as part of the capacity indicating that maintenance measures and technological advances expansion programme. The local content committed amounted to are starting to yield environmental benefits R3.1 billion or 54.6% of the total contract value • Water usage per kWh sent out (actual exceeded target by 0.04L/kWh): • Procurement from B-BBEE compliant companies (actual exceeded - Eskom formed water-management task teams to reduce freshwater target by 18.9%): consumption and legal contraventions relating to water use - Initiatives to ensure B-BBEE compliance have brought about - Eskom met its target for specific water usage and the improvement improvements in Eskom’s transformation performance. Eskom’s on the prior year’s performance can be attributed to an increase total measured procurement spend (including primary energy) in the proportion of energy generated by the dry-cooled stations amounted to R133.5 billion for the year, of which R125.4 billion during the year. Increased opportunities for maintenance, (93.9%) was attributable to B-BBEE compliant suppliers implementation of initiatives identified by the water-management • Procurement from black youth-owned companies (actual equals task teams, good rains and the increased recovery of water target): compared to the previous year also contributed to the improvement - Strategies are being developed to improve procurement from black-owned businesses, with a particular focus on black youth- Implement coal haulage and the road-to-rail migration plan owned and black women-owned businesses. Total measured • Coal road-to-rail migration (actual exceeded target by 0.10Mt): procurement spend from black youth-owned businesses met the - Eskom transported 11.58Mt of coal by rail during 2014, exceeding target for the year the target of 11.48Mt and improving performance by 14% relative to the prior year • Employment equity – disability (actual worse than target by 0.01%): - The disability ratio has stabilised with the number of appointment Ensure financial sustainability of employees with disabilities matching the attrition of employees • Cost of electricity, excluding depreciation (actual worse than target with disabilities. The current trends and reduced opportunities by R88.52/MWh) and interest cover, excluding remeasurement of the have resulted in the target not being reached for 2014 subordinated loan from the shareholder (actual worse than target • Racial (actual worse than target by 1.5%) and gender (actual worse by 0.53): than target by 1.1%) equity in senior management and racial (actual - The cost of electricity is higher than target and the interest cover exceeded target by 0.2%) and gender (actual below target by 0.2%) of 0.65 is worse than target due to overspent primary energy cost equity in professionals and middle management: of R7.7 billion. This was mainly as a result of the increased use of - The marginal differences are due to the freeze on recruitment to liquid fuel by the open-cycle gas turbine fleet. The ratios are also limit employee numbers which reduced the opportunities to impacted by the decline in sales volumes as a portion of Eskom’s improve on the current targets costs are fixed • Debt/equity including long-term provisions (actual worse than target State of affairs and business overview by 0.04) and FFO as a % of total debt (actual exceeded target by Results of operations 0.1%): The net profit for the year for the Eskom group was R7.1 billion (2013: - The actual ratio and percentage reported are both marginally R5.2 billion). The 8% tariff increase resulted in a 7.4% average increase different to the target in electricity revenue per kWh. This increase was offset by a 10.2% Build strong skills (total pipeline or new enrolments) increase in operating costs per kWh compared to the previous year. • Training spend as a % of gross manpower costs (actual exceeded Group revenue for the year to 31 March 2014 was R139.5 billion target by 2.87%): (2013: R128.8 billion). The electricity sales of 217 903 GWh for the year - Eskom’s Academy of Learning mandate is to close Eskom’s represents an increase of 0.6% compared to the previous year competency gap by addressing, co-ordinating and integrating all (2013: 216 561 GWh). learning needs of employees, as well as enhancing performance throughout Eskom, by focusing on business needs, and catering The primary energy costs for the year amounted to R69.8 billion for all facets of the learning value chain and learning operations (2013: R60.7 billion). This included R10.6 billion (2013: R5.0 billion) - Eskom has also partnered with higher learning and basic education relating to the fuel for the open-cycle gas turbines in an effort to keep institutions to promote access to quality education, particularly in the lights on. The cost of primary energy as a percentage of electricity the fields of maths and science, as part of its external development revenue was 51% (2013: 48%). programme Group gross employee costs (before capitalisation) for the year to • Engineers (actual below target by 45), technicians (actual exceeded 31 March 2014 amounted to R31.3 billion (2013: R28.6 billion). target by 35), artisans (actual below target by 236) and youth Employee costs of R5.7 billion (2013: R5.1 billion) were capitalised to programme (actual below target by 675): capital projects during the year. - The composite target for the number of technicians was exceeded for the year ended 31 March 2014 Group annual impairment loss on trade and other receivables was - Eskom reviewed the learner numbers and decided to re-align the 1.10% (2013: 0.82%) of the external electricity revenue for the year to learner pipeline from 14.5% of staff complement to a more 31 March 2014. Electricity receivables before allowance for impairment sustainable level of 6% phased in over the next five years. The increased from R16.7 billion at 31 March 2013 to R20.3 billion at engineering and artisans target was not achieved as a result of 31 March 2014. The allowance for impairment for trade and other this decision receivables increased from R4.3 billion to R5.7 billion over the same - The under-performance of the country’s youth programme period due to an increase in municipality receivables. (Strategic Youth Development Initiative) is due to lack of funding Group other operating expenses for the year was R19.2 billion (2013: R23.0 billion), consisting primarily of IDM and repairs and maintenance costs. IDM costs amounted to R1.4 billion in 2014 (2013: R3.0 billion), while net repairs and maintenance costs were R8.2 billion (2013: R4.7 billion). 8 Eskom Holdings SOC Limited Negotiated pricing agreements (NPAs) that were linked to commodity Research and development activities prices, resulted in embedded derivatives in the financial statements. The research and development department has made good progress The forward electricity price curve used to value the embedded on its portfolio for the year, especially on 18 high priority projects. Key derivatives at 31 March 2014 was based on the current MYPD 3 amongst these is the online boiler monitor, Waterberg coal evaluation approved tariff of 8%, whereafter a forecasted return on the regulatory and high frequency electrostatic precipitator projects which are all on assets base is used until maturity. A sensitivity analysis for the track. The focus on high impact, high value project identification and embedded derivatives appears in note 4.2 to the annual financial delivery will continue. This requires increased effort on project statements. The net impact on the income statement of changes in the management systems and practices and alignment with the needs of fair value of the embedded derivatives was a fair value gain of the business. R2.1 billion for the year (2013: R5.9 billion loss). The loss in 2013 was mainly due to the decision to account for the full term of the underlying The research expenditure for the year to 31 March 2014 was negotiated pricing agreement contracts at 31 March 2013. The profit R156 million (2013: R195 million). for the current year is mainly as a result of the changes in the United Employee information States dollar and rand exchange and interest rates. Embedded derivative liabilities amounted to R9.3 billion (2013: R11.5 billion). The group had a staff complement of 46 919 (2013: 47 295), inclusive of fixed-term contractors. Training has always been a major focus area Net finance cost for the group for the year after capitalising borrowing and this past year 7.87% of gross manpower costs was spent on costs and including the unwinding of interest on provisions was training and developing staff. R4.8 billion (2013: R3.0 billion income). Gross finance income was R2.5 billion (2013: R2.8 billion) while the gross finance cost excluding Transformation borrowing costs capitalised and the unwinding of interest on provisions Transformation is both a business and social imperative. The group was R17.6 billion (2013: R1.1 billion). The borrowing costs capitalised continues to contribute to South Africa’s economic transformation in for the year was R13.3 billion (2013: R3.7 billion), while the unwinding line with available resources and all performance targets on B-BBEE of interest amounted to R2.9 billion (2013: R2.4 billion). The gross attributable expenditure measures were exceeded for the year. finance cost as well as borrowing costs capitalised for the prior year In addition, the local sourcing in the capacity expansion programme for was impacted by the remeasuring of the subordinated loan from the the year was 54.6%. shareholder which amounted to an income of R17.3 billion. The Eskom continues to strive for a fair representation of people with remeasurement of the loan is based on the MYPD 3 price path. disabilities. The group currently has 2.77% (2013: 2.43%) employees No remeasurement was required in the current year. with recognised disabilities, as per the Employment Equity Act of South Additions to property, plant and equipment and intangible assets Africa. Racial equity in senior management is 59.3% (2013: 58.4%) and excluding borrowing cost capitalised, amounted to R59.4 billion 70.6% (2013: 69.0%) in professionals and middle management. Gender (2013: R57.4 billion) and is disclosed in notes 6 and 7 to the annual equity in senior management is 28.8% (2013: 28.5%) and 34.9% financial statements. Total capital expenditure will be funded from (2013: 34.0%) in professionals and middle management. operating cash flows and debt financing (raised locally and internationally). Supply development and localisation performance Local supplier development aims to enhance efforts in local supplier At 31 March 2014, R272 billion or 90.5% of the R300 billion borrowing development and localisation. During 2014, the group’s total programme had been secured. The R300 billion borrowing programme procurement spend was R130 billion (2013: R117 billion). is based on the original funding requirements at April 2010 and covers the period 1 April 2010 to 31 March 2017. Further funding requirements, Eskom’s capacity expansion programme continues to support including those resulting from the lower than expected MYPD 3 tariff affirmative procurement and industrialisation. Committed local content determination, are not included in this borrowing programme. spend in capacity expansion projects for 2014 was R3.1 billion (2013: R3.4 billion), equivalent to 54.6% (2013: 80.2%) of total The MYPD 3 tariff award of an average of 8% a year from 2013 to 2018 contracted value against a target of 52%. is considerably lower than the 16% average per year that Eskom requested. Eskom implemented the Business Productivity Programme The group’s B-BBEE attributable spend targets are in line with the (BPP) which focuses on the reduction of the cost base, increased Codes of Good Practice, which prescribe a minimum of 50% for the productivity and revisions of the Eskom business model and strategy first five years that the codes are in effect. With 93.9% B-BBEE in order to close the revenue shortfall. Cash savings of between attributable spend, Eskom exceeded its B-BBEE target of 75% for R50 billion and R60 billion is targeted over the MYPD 3 period. the year. Events subsequent to reporting date Management of energy losses There were no significant events after the reporting date. Energy losses reflect the difference between the quantity of energy sent out from the power stations and the quantity sold to the various Subsidiaries, associates and joint venture companies customers at the end of the value chain. Losses are categorised as The investment of Eskom in subsidiaries, associate and joint venture technical or non-technical in nature. Technical energy losses are a companies is disclosed in notes 8 and 9 in the annual financial natural result of electrical energy being transferred from one point to statements. another with some of the energy being dissipated as heat. Non‑technical energy losses are typically caused by theft (illegal connections, meter A task team has been set up to develop a project plan and strategy for tampering and illegal vending of prepaid electricity) or errors in billing. the disposal of EFC in terms of a directive from the shareholder. The technical losses were estimated for internal evaluation purposes Performance management of Eskom subsidiaries as accounting for between 60% and 75% of the total energy losses in The performance of Eskom’s local wholly owned subsidiaries is the distribution networks. The actual percentage in the Distribution managed and monitored regularly through shareholder compacts with division is influenced by factors such as network design, network Eskom and annual business plans and budgets that are approved by topology, load distribution on the network and network operations. the respective boards of directors of the subsidiaries. Technical losses account for all of the energy losses for the transmission The performance results of all operating subsidiaries are reported networks. monthly to, and reviewed by Eskom’s executive management committee Energy losses Actual Actual (Exco). A centralised proactive and co-ordinated approach under the 2014 2013 accountability of the group executive: Enterprise Development has been implemented which will facilitate timeous approval of shareholder Distribution loss (%) 7.13 7.12 compacts and ongoing monitoring thereof. Transmission loss (%) 2.34 2.80 Eskom loss (%) 8.88 9.08 2014 Annual Financial Statements 9 Directors’ report (continued) for the year ended 31 March 2014 Safety for the foreseeable future and to complete its current committed Improving Eskom’s safety record is paramount. The following safety- capacity expansion programme. improvement initiatives are being implemented to bring the number of Directors fatalities and injuries down to zero: The board currently consists of 12 non-executive directors and two • A key performance indicator was introduced to monitor compliance executive directors (the chief executive and the finance director). with safety behaviours • A health and safety agreement between Eskom and its trade unions The current directors are: was concluded Non-executive directors • The Eskom contractor safety management plan was approved. Zola Tsotsi (67) (chairman) In terms of the plan, a safety, hygiene, environment and security Collin Matjila (52)2 inspectorate unit will be formed to ensure adherence to legislative Bernie Fanaroff (66) requirements in these fields Queendy Gungubele (55) • Eskom’s zero harm dashboard monitors the progress of key strategic Neo Lesela (44) safety initiatives across the organisation Bajabulile Luthuli (41) While the LTIR performance improved over the last three years, Chwayita Mabude (44) Eskom’s safety performance remains a challenge, with five (2013: Yasmin Masithela (40) three) Eskom employee fatalities and 18 (2013: 16) contractor employee Boni Mehlomakulu (41) fatalities being reported during 2014. The progressive LTIR is a Mafika Mkwanazi (60) proportional representation of the occurrence of lost-time incidences Phenyane Sedibe (44) over 12 months per 200 000 working hours. The actual LTIR performance Lily Zondo (45) was 0.31 (2013: 0.40) against a target of 0.36 for 2014. Executive directors Environmental issues Brian Dames (48)1,2 (chief executive) Tsholofelo Molefe (45)3 (finance director) Environmental controls and oversight mechanisms are in place through the environmental management systems to ensure controls over those Remuneration activities that have the potential to impact the environment and ensure The remuneration of the directors and the executives, who were informed decision-making through obtaining of environmental approvals members of Exco during the financial year, is disclosed in note 49 to and permits for proposed projects. the annual financial statements. Eskom seeks to ensure that its Environmental legal contraventions have reduced from the prior year directors and officers are appropriately qualified and trained for their through focused attention on the Eskom drive to achieve zero role on the board and its committees. In terms of Eskom’s ethics policy, environmental incidents. The majority of contraventions still relate to all interests in contracts have to be declared upfront. emissions and water-management challenges on site. There were The board of directors is accountable for the organisation’s ethics 32 environmental legal violations during the current year, down from management programme. Eskom has a code of ethics, supplementary 47 in 2013. There were two project specific activities that resulted in code procedure and conflict of interest policy in place which is revised environmental legal contraventions in terms of the operational health regularly. Directors declare their interests in accordance with these dashboard. Eskom received two environmentally related administrative annually. fines with a value of R2.6 million for contraventions declared in previous financial years. Company secretary The details of the company secretary and her declaration in terms of Corporate social investment section 88(2)(e) of the Companies Act is disclosed in her statement on Eskom recognises the need to align its corporate social investment page 3. (CSI) activities to that of its business strategies and the communities in which Eskom operates. As a corporate citizen Eskom’s CSI initiatives Auditors are aimed to contribute to the wellbeing of communities; but also The statutory auditors for the forthcoming financial year will be towards skills development, education and enterprise development and appointed at the annual general meeting scheduled for 11 July 2014. in turn promoting jobs, alleviating poverty and improving employability. An amount of R132.9 million (2013: R194.3 million) was committed to Eskom’s policy is to not use the external auditors for non-audit services. CSI initiatives during the year. Eskom’s policy is not to make donations In exceptional cases where the external auditors are to be used for to any political parties. non-audit services, the prior approval of the audit and risk committee must be obtained. Share capital and shareholder The Government of the Republic of South Africa is the sole shareholder Internal control of Eskom Holdings SOC Limited. The shareholder’s representative is The board, through the audit and risk committee, is responsible for the Minister of Public Enterprises. Eskom currently has 1 ordinary share ensuring that internal controls are effective and adequately reported on of R1 issued. for auditing and regulatory purposes. In line with King III, Eskom applies a combined assurance model to ensure coordinated assurance Dividends activities. The combined assurance model provides the audit and risk No dividend was declared during the current and prior year, and none committee with an overview of significant risks, as well as the is proposed after taking into account the resource impact of the effectiveness of critical controls to mitigate these risks. The principles capacity expansion programme and the current capital structure. for the combined assurance model are embedded in the combined assurance framework. Eskom’s internal audit function is managed by Going concern the assurance and forensics department which reports directly to the The board has given particular attention to the assessment of the going audit and risk committee. concern of the group as discussed in the statement of directors’ responsibilities and approval on page 2 and is of the view that the group For more information refer to the report of the audit and risk committee has access to adequate resources to continue in operational existence on page 3. 1. Brian Dames resigned as chief executive with effect from 31 March 2014. 2. Independent non-executive director, Collin Matjila, was appointed interim chief executive effective 1 April 2014. 3. Paul O’Flaherty resigned as finance director with effect from 10 July 2013. Caroline Henry (senior general manager: Treasury) acted in the position of chief financial officer in the interim. Tsholofelo Molefe, previously group executive: Group Customer Services was appointed as finance director effective from 14 January 2014. 10 Eskom Holdings SOC Limited Combined assurance Combined assurance helps management identify duplication of assurance work, any potential assurance shortfalls, and improvement plans for the gaps identified. It also helps focus assurance providers, to better achieve consensus on the key risks the company faces and reduce the risk of failing to identify significant risks. The combined assurance model provides three lines of defence against risk: • Line 1 – line management and managerial controls Line management is responsible for managing risk and performance • Line 2 – functional areas Supports management in executing its duties and provides a layer of control over risk management. It consists of risk management, compliance (including ISO 9001 and 14001), safety, health, environment, quality and the associated frameworks, policies, reporting and oversight • Line 3 – independent, objective internal and external assurance providers The third line of defence is independent of management and provides independent, objective assurance A combined assurance forum has been established to implement and embed the combined assurance framework principles. The forum consists of the three lines of defence, with the objective of: • Ensuring co-ordinated and relevant assurance activities focusing on key risks • Improving collaboration between different assurance providers • Improving reporting to the board and committees, including minimising repetition of reports being reviewed by different committees • Reducing assurance fatigue and minimising disruptions to the business • Providing the audit and risk committee with a better basis for exercising its oversight function The assurance and forensic department is responsible for driving combined assurance within Eskom. External auditors independently audit the financial statements and selected sustainability information. Tabling of the Eskom Holdings SOC Limited annual financial statements in Parliament The group annual financial statements of Eskom Holdings SOC Limited for the year ended 31 March 2013 were approved by the board of directors on 30 May 2013, and tabled in parliament on 5 August 2013. 2014 Annual Financial Statements 11 Independent auditors’ report to Parliament and the shareholder – Minister of Public Enterprises Report on the financial statements Report on other legal and regulatory requirements We have audited the financial statements of the group and Eskom Public Audit Act Requirements Holdings SOC Limited (Eskom) as set out on pages 14 to 97, which In accordance with the Public Audit Act of South Africa (PAA), and the comprise the statements of financial position as at 31 March 2014, General Notice issued in terms thereof, we report the following findings income statements, statements of comprehensive income, changes in relevant to the reported performance against predetermined objectives, equity and cash flows for the year then ended, and the notes, compliance with laws and regulations as well as internal control. We comprising a summary of significant accounting policies and other performed tests to identify reportable findings as described under each explanatory information to the financial statements. subheading but not to gather evidence to express assurance on these matters. Accordingly, we do not express an opinion or conclusion on Directors’ responsibility for the financial statements these matters. The board of directors, which constitutes the accounting authority, is responsible for the preparation and fair presentation of these financial Predetermined objectives statements in accordance with International Financial Reporting We performed procedures to obtain evidence about the usefulness and Standards and the requirements of the Public Finance Management reliability of the information in the Performance in terms of the Act of South Africa and the Companies Act of South Africa and for such shareholder compact section included in the directors’ report as set out internal control as the directors determines is necessary to enable the on pages 4 to 8 of the financial statements, and reported thereon to the preparation of financial statements that are free from material directors. The procedures performed were limited to the following misstatement, whether due to fraud or error. selected objectives: • keep the lights on Auditors’ responsibility for the financial statements • put customer at the centre Our responsibility is to express an opinion on these financial statements • deliver capital expansion based on our audit. We conducted our audit in accordance with the • ensure financial sustainability Public Audit Act of South Africa, the General Notice issued in terms • build strong skills (total pipeline or new enrolments) thereof and International Standards on Auditing. Those standards • maximising socio-economic contribution require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial The reported performance against predetermined objectives was statements are free from material misstatement. evaluated against the overall criteria of usefulness and reliability. An audit involves performing procedures to obtain audit evidence about The usefulness of information in the reported performance against the amounts and disclosures in the financial statements. The procedures predetermined objectives relates to whether it is presented in selected depend on the auditors’ judgement, including the assessment accordance with the National Treasury’s annual reporting principles of the risks of material misstatement of the financial statements, and whether the reported performance is consistent with the planned whether due to fraud or error. In making those risk assessments, the objectives. The usefulness of information further relates to whether auditor considers internal control relevant to the entity’s preparation indicators and targets are well defined, verifiable, specific, measurable and fair presentation of the financial statements in order to design audit and time bound and relevant as required by the National Treasury procedures that are appropriate in the circumstances, but not for the Framework for managing programme performance information. purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness The reliability of the information in the reported performance against of accounting policies used and the reasonableness of accounting predetermined objectives is assessed to determine whether it is valid, estimates made by management, as well as evaluating the overall accurate and complete. presentation of the financial statements. We report that there were no material findings on the Performance in We believe that the audit evidence we have obtained is sufficient and terms of the shareholder compact section included in the directors’ appropriate to provide a basis for our audit opinion. report concerning the usefulness and reliability of the information for the selected objectives. Opinion Additional matter In our opinion, these financial statements present fairly, in all material Although no material findings concerning the usefulness and reliability respects, the consolidated and separate financial position of Eskom of the reported performance against predetermined objectives were Holdings SOC Limited as at 31 March 2014, and its consolidated and identified, we drew attention to the following matter in our report to the separate financial performance and consolidated and separate cash directors: flows for the year then ended in accordance with International Financial Reporting Standards and the requirements of the Public Finance Achievement of planned targets Management Act of South Africa and the Companies Act of South Africa. Refer to the information in the Performance in terms of the shareholder compact section included in the directors’ report as set out on Other reports required by the Companies Act pages 4 to 8 of the financial statements for information on the As part of our audit of the financial statements for the year ended achievement of planned targets for the year. 31 March 2014, we have read the report of the audit and risk committee, the statement by the company secretary and the directors’ report for Compliance with laws and regulations the purpose of identifying whether there are material inconsistencies We performed procedures to obtain evidence that the entity has between these reports and the audited financial statements. These complied with applicable laws and regulations regarding financial reports are the responsibility of the respective preparers. Based on matters, financial management and other related matters. We did not reading these reports we have not identified material inconsistencies identify any instances of material non-compliance with specific matters between these reports and the audited financial statements. However, in key applicable laws and regulations as set out in the General Notice we have not audited these reports and accordingly do not express an issued in terms of the PAA. opinion on these reports. 12 Eskom Holdings SOC Limited Internal control We considered internal control relevant to our audit of the financial statements, the Performance in terms of the shareholder compact section included in the directors’ report and compliance with laws and regulations, but not for the purpose of expressing an opinion on the effectiveness of internal control. We did not identify any deficiencies in internal control that we considered sufficiently significant for inclusion in this report. Other reports Investigations in progress and completed During the financial year under review the group initiated investigations into alleged irregularities and fraud within the procurement and asset management environments. No material findings were identified relating to those investigations completed during the year. At the reporting date, certain investigations are still ongoing. Agreed-upon procedure engagement As requested by Eskom Holdings SOC Limited, the following engagement was conducted for the period 1 April 2013 to 31 March 2014: • National Treasury consolidation template KPMG Inc SizweNtsalubaGobodo Inc Registered auditor Registered auditor Per HG Motau Per JE Strauss Charted Accountant (SA) Charted Accountant (SA) Registered Auditor Registered Auditor Director Director 29 May 2014 29 May 2014 85 Empire Road 20A Morris Street East Parktown Woodmead 2193 2191 2014 Annual Financial Statements 13 Statements of financial position at 31 March 2014 Group Company 2014 2013 2014 2013 Note Rm Rm Rm Rm Assets Non-current assets 439 869 378 775 433 440 372 014 Property, plant and equipment 6 401 373 341 429 402 207 341 772 Intangible assets 7 3 016 2 842 2 810 2 629 Investment in equity-accounted investees 8 318 296 95 95 Investment in subsidiaries 9 – – 2 337 2 337 Future fuel supplies 10 8 744 8 121 8 744 8 121 Deferred tax assets 11 339 25 – – Investment in securities 12 4 841 8 574 4 841 8 574 Loans receivable 13 8 654 8 425 – – Derivatives held for risk management 14 9 361 5 420 9 361 5 420 Finance lease receivables 15 520 538 520 538 Payments made in advance 16 2 676 2 646 2 509 2 520 Trade and other receivables 17 27 459 16 8 Current assets 64 977 53 241 66 862 55 297 Loans to subsidiaries 1 – – 6 665 6 223 Inventories 18 12 422 12 251 12 135 11 980 Taxation 47 64 – – Investment in securities 12 6 066 8 776 3 319 6 336 Loans receivable 13 329 114 – – Derivatives held for risk management 14 2 812 1 906 2 812 1 906 Finance lease receivables 15 18 17 18 17 Payments made in advance 16 2 764 1 833 2 761 1 849 Trade and other receivables 17 16 578 14 925 16 882 15 114 Financial trading assets 19 4 265 2 735 3 226 2 042 Cash and cash equivalents 20 19 676 10 620 19 044 9 830 Non-current assets held-for-sale 21 147 8 – – Total assets 504 993 432 024 500 302 427 311 Equity Capital and reserves attributable to owner of the company 119 784 109 139 114 671 105 642 Liabilities Non-current liabilities 310 915 264 446 308 716 261 893 Debt securities and borrowings 24 234 562 190 776 233 042 189 406 Embedded derivatives 25 7 871 10 095 7 870 10 095 Derivatives held for risk management 14 310 840 310 840 Deferred tax liabilities 11 19 461 15 806 18 842 15 920 Deferred income 26 12 518 10 907 12 518 10 907 Employee benefit obligations 27 9 922 10 282 9 674 10 053 Provisions 28 21 157 20 087 21 093 20 022 Finance lease liabilities 29 488 501 705 770 Trade and other payables 30 1 037 2 598 1 073 1 326 Payments received in advance 31 3 589 2 554 3 589 2 554 Current liabilities 74 181 58 439 76 915 59 776 Loans from subsidiaries1 – – 2 453 2 003 Debt securities and borrowings 24 20 258 12 180 19 774 11 482 Embedded derivatives 25 1 461 1 386 1 461 1 385 Derivatives held for risk management 14 1 197 572 1 197 572 Deferred income 26 774 662 774 662 Employee benefit obligations 27 4 561 3 629 4 256 3 408 Provisions 28 9 601 6 648 9 102 5 978 Finance lease liabilities 29 12 10 64 56 Trade and other payables 30 28 531 28 999 30 062 29 898 Payments received in advance 31 2 127 2 989 2 114 2 977 Taxation 1 9 – – Financial trading liabilities 19 5 658 1 355 5 658 1 355 Non-current liabilities held-for-sale 21 113 – – – Total liabilities 385 209 322 885 385 631 321 669 Total equity and liabilities 504 993 432 024 500 302 427 311 1. Previously named financial instruments with group companies. 14 Eskom Holdings SOC Limited Income statements for the year ended 31 March 2014 Group Company Restated1 Restated1 2014 2013 2014 2013 Note Rm Rm Rm Rm Continuing operations Revenue 32 139 506 128 775 138 313 127 362 Primary energy 33 (69 812) (60 748) (69 812) (60 748) Net employee benefit expense 34 (25 622) (23 564) (22 384) (20 776) Depreciation and amortisation expense 35 (11 937) (9 960) (11 934) (9 787) Net impairment loss 36 (1 557) (1 039) (1 549) (1 021) Other operating expenses 37 (19 177) (23 039) (24 340) (24 922) Operating profit before net fair value loss and net finance (cost)/income 11 401 10 425 8 294 10 108 Other income 38 962 1 126 1 873 2 252 Net fair value loss on financial instruments, excluding embedded derivatives 39 (620) (1 655) (753) (1 666) Net fair value gain/(loss) on embedded derivatives 2 149 (5 942) 2 149 (5 942) Operating profit before net finance (cost)/income 13 892 3 954 11 563 4 752 Net finance (cost)/income (4 772) 3 003 (4 619) 3 138 Finance income 40 2 475 2 796 2 622 2 904 Finance cost 41 (7 247) 207 (7 241) 234 Share of profit of equity-accounted investees after tax 8 43 35 – – Profit before tax 9 163 6 992 6 944 7 890 Income tax 42 (2 137) (1 856) (1 520) (2 117) Profit for the year from continuing operations 7 026 5 136 5 424 5 773 Discontinued operations Profit for the year from discontinued operations 21 63 47 – – Profit for the year 7 089 5 183 5 424 5 773 Attributable to: Owner of the company 7 089 5 183 5 424 5 773 Non-controlling interest 2 – – – – 7 089 5 183 5 424 5 773 Statements of comprehensive income for the year ended 31 March 2014 Group Company 2014 2013 2014 2013 Note Rm Rm Rm Rm Profit for the year 7 089 5 183 5 424 5 773 Other comprehensive income 3 556 853 3 605 916 Items that may be reclassified subsequently to profit or loss 2 925 1 418 2 948 1 467 Available-for-sale financial assets – net change in fair value (377) 43 (376) 43 Cash flow hedges Effective portion of changes in fair value 5 697 2 791 5 697 2 791 Changes in fair value 5 951 2 900 5 951 2 900 Ineffective portion of changes in fair value reclassified to profit or loss (254) (109) (254) (109) Net amount transferred to initial carrying amount of hedged items (1 226) (799) (1 226) (799) Foreign currency translation differences on foreign operations (23) (49) – – Income tax thereon 42 (1 146) (568) (1 147) (568) Items that may not be reclassified subsequently to profit or loss 631 (565) 657 (551) Remeasurement of post-employment medical benefits 27.1 882 (772) 912 (765) Income tax thereon 42 (251) 207 (255) 214 Total comprehensive income for the year 10 645 6 036 9 029 6 689 Total comprehensive income for the year attributable to: Owner of the company 10 645 6 036 9 029 6 689 Non-controlling interest 2 – – – – 10 645 6 036 9 029 6 689 1. Refer to note 48. 2. Nominal amount. 2014 Annual Financial Statements 15 Statements of changes in equity for the year ended 31 March 2014 Attributable to owner of the company Share Equity Cash flow Available- Unrealised Insurance Foreign Accu- Total Non- Total capital1 reserve2 hedge for-sale fair value reserve6 currency mulated controlling equity reserve3 reserve 4 reserve5 translation profit8 interest1 reserve7 Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm Group Balance at 31 March 2012 – 30 520 1 712 290 (2 251) 90 66 72 676 103 103 – 103 103 Profit for the year – – – – – – – 5 183 5 183 – 5 183 Other comprehensive income/(loss), net of tax – – 1 436 31 – – (49) (565) 853 – 853 Transfers between reserves – – (189) – (1 397) (90) – 1 676 – – – Balance at 31 March 2013 – 30 520 2 959 321 (3 648) – 17 78 970 109 139 – 109 139 Profit for the year – – – – – – – 7 089 7 089 – 7 089 Other comprehensive income/(loss), net of tax – – 3 219 (271) – – (23) 631 3 556 – 3 556 Transfers between reserves – – – – (4 096) – – 4 096 – – – Balance at 31 March 2014 – 30 520 6 178 50 (7 744) – (6) 90 786 119 784 – 119 784 Company Balance at 31 March 2012 – 30 520 1 712 291 (2 251) – – 68 681 98 953 – 98 953 Profit for the year – – – – – – – 5 773 5 773 – 5 773 Other comprehensive income/(loss), net of tax – – 1 436 31 – – – (551) 916 – 916 Transfers between reserves – – (189) – (1 397) – – 1 586 – – – Balance at 31 March 2013 – 30 520 2 959 322 (3 648) – – 75 489 105 642 – 105 642 Profit for the year – – – – – – – 5 424 5 424 – 5 424 Other comprehensive income/(loss), net of tax – – 3 219 (271) – – – 657 3 605 – 3 605 Transfers between reserves – – – – (4 096) – – 4 096 – – – Balance at 31 March 2014 – 30 520 6 178 51 (7 744) – – 85 666 114 671 – 114 671 Dividends proposed No dividend has been proposed in the current or prior year. There are no restrictions on the distribution of dividends. 1. Nominal amount. 2. The equity reserve comprises the day-one gain on initial recognition of the subordinated loan from the shareholder. Refer to note 24. 3. The cash flow hedge reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments (forward exchange contracts, interest rate and cross-currency swaps) related to hedged transactions. The cross-currency swaps hedge interest and foreign exchange rate risk of the future interest payments and principal repayments on bonds and loans (denominated in US dollar, euro and yen). 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 financial instruments 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. 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. 16 Eskom Holdings SOC Limited Statements of cash flows for the year ended 31 March 2014 Group Company Restated1 2014 2013 2014 2013 Note Rm Rm Rm Rm Cash flows from operating activities Cash generated from operations 43 20 633 28 784 19 150 28 847 Net cash flows (used in)/from financial trading assets (1 471) 1 701 (1 250) 1 743 Net cash flows from/(used in) financial trading liabilities 4 383 (2 317) 4 383 (2 317) Net cash flows from/(used in) current derivatives held for risk management 10 278 (331) 10 278 (331) Net cash flows (used in)/from non-current assets held-for-sale 21 (23) 48 – – Income taxes paid (184) (216) – – Net cash from operating activities 33 616 27 669 32 561 27 942 Cash flows used in investing activities Proceeds from disposal of property, plant and equipment 28 36 23 10 Acquisitions of property, plant and equipment (52 137) (53 445) (52 658) (53 742) Acquisitions of intangible assets (1 023) (1 887) (953) (1 820) Expenditure on future fuel supplies (2 675) (2 533) (2 675) (2 533) Decrease/(increase) in non-current trade and other receivables 434 (136) (6) 10 Increase in non-current loans receivable (229) (990) – – Decrease in finance lease receivables 17 37 17 37 Net cash flows from non-current assets held-for-sale 21 7 46 – – Dividends received 27 34 21 16 Dividends received – investment in equity-accounted investees 21 – – – (Decrease)/increase in non-current trade and other payables (1 677) 479 (369) (85) Net cash used in investing activities (57 207) (58 359) (56 600) (58 107) Cash flows from financing activities Debt securities and borrowings raised 44 142 31 120 43 681 31 072 Debt securities and borrowings repaid (8 014) (7 149) (7 488) (7 064) Net cash flows from/(used in) net loans to subsidiaries – – 32 (290) Decrease in investment in securities 5 748 5 047 6 058 4 988 Decrease in finance lease liabilities (11) (31) (58) (72) Interest received 2 768 2 765 2 884 2 891 Interest paid (11 838) (9 968) (11 856) (9 925) Net cash from financing activities 32 795 21 784 33 253 21 600 Net increase/(decrease) in cash and cash equivalents 9 204 (8 906) 9 214 (8 565) Cash and cash equivalents at beginning of the year 10 620 19 450 9 830 18 395 Foreign currency translation (23) (49) – – Cash and cash equivalents at beginning of the year attributable to non-current assets held-for-sale (125) 125 – – Cash and cash equivalents at end of the year 20 19 676 10 620 19 044 9 830 Reconciliation of net cash flow to movement in net debt Net increase in debt securities and borrowings 36 128 23 971 36 193 24 008 Net cash flows from/(used in) net loans to subsidiaries – – 32 (290) Decrease in investment in securities 5 748 5 047 6 058 4 988 Increase in loans receivable (459) (1 034) – – Decrease in finance lease liabilities (11) (31) (58) (72) Net cash flows from/(used in) derivatives held for risk management 10 278 (331) 10 278 (331) Net debt raised 51 684 27 622 52 503 28 303 Non-cash flow movements 1 416 (13 223) 1 374 (13 151) Foreign currency translation 23 49 – – Cash and cash equivalents at beginning of the year attributable to non-current assets held-for-sale 125 (125) – – Net (increase)/decrease in cash and cash equivalents (9 204) 8 906 (9 214) 8 565 Movement in net debt for the year 44 044 23 229 44 663 23 717 Net debt at beginning of the year 161 044 137 815 166 840 143 123 Net debt at end of the year 205 088 161 044 211 503 166 840 Analysis of net debt Debt securities and borrowings 24 254 820 202 956 252 816 200 888 Finance lease liabilities 29 500 511 769 826 Net loans to subsidiaries – – (4 212) (4 220) Derivatives held for risk management 14 (10 666) (5 914) (10 666) (5 914) 244 654 197 553 238 707 191 580 Cash and cash equivalents 20 (19 676) (10 620) (19 044) (9 830) Investment in securities 12 (10 907) (17 350) (8 160) (14 910) Loans receivable 13 (8 983) (8 539) – – Net debt at end of the year 205 088 161 044 211 503 166 840 1. Refer to note 48. 2014 Annual Financial Statements 17 Notes to the financial statements for the year ended 31 March 2014 1. General information from the date on which control is transferred to the group. They are deconsolidated from the date that control ceases. Eskom Holdings SOC Limited (Eskom), a state-owned company and holding company of the group, is incorporated and domiciled Investments in subsidiaries are accounted for at cost less in the Republic of South Africa. Eskom is a vertically integrated impairment losses in the separate financial statements of the operation that generates, transmits and distributes electricity to company. industrial, mining, commercial, agricultural, redistributors (ie municipalities), and residential customers and to international Disposal of subsidiaries customers in southern Africa. The nature of the businesses of When the group ceases to have control in an entity, any retained the significant operating subsidiaries is set out in note 9. interest in the entity is remeasured to its fair value at the date when control is lost, with the change in carrying amount 2. Summary of significant accounting policies recognised in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the The principal accounting policies applied in the preparation of retained interest as an associate, joint venture or financial asset. these separate and consolidated financial statements are set out In addition, any amounts previously recognised in other below. The nature and effect of the changes to the accounting comprehensive income in respect of that entity are accounted for policies are discussed in note 50.2. as if the group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in 2.1 Basis of preparation and measurement other comprehensive income are reclassified to profit or loss. Statement of compliance The consolidated financial statements of Eskom at and for the Business combinations year ended 31 March 2014 comprise the company and its The group uses the acquisition method of accounting to account subsidiaries (together referred to as the group) and the group’s for business combinations. The consideration transferred for the interest in associates and joint ventures. The separate and acquisition of a subsidiary is the fair values of the assets consolidated financial statements have been prepared in transferred, the liabilities incurred and the equity interests issued accordance with International Financial Reporting Standards by the group. The consideration transferred includes the fair (IFRS) and the requirements of the Public Finance Management value of any asset or liability resulting from a contingent Act (PFMA), and the Companies Act of South Africa. The financial consideration arrangement. Acquisition-related costs are statements have been prepared on the going-concern basis. expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are Basis of measurement measured initially at their fair values at the acquisition date. The separate and consolidated financial statements are prepared On an acquisition-by-acquisition basis, the group recognises any on the historical cost basis except for the following items which non-controlling interest in the acquiree either at fair value or at are measured at fair value: the non-controlling interest’s proportionate share of the acquiree’s • investment in securities net assets. • derivatives held for risk management • financial trading assets The excess of the consideration transferred, the amount of any • financial trading liabilities non-controlling interest in the acquiree and the acquisition-date • embedded derivatives fair value of any previous equity interest in the acquiree over the • non-current assets and liabilities held-for-sale fair value of the group’s share of the identifiable net assets acquired is recorded as goodwill. If this is less than the fair value The preparation of financial statements in conformity with IFRS of the net assets of the subsidiary acquired in the case of a requires management to make judgements, estimates and bargain purchase, the difference is recognised directly in profit assumptions that affect the application of accounting policies or loss. and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. The Intercompany transactions, balances and unrealised gains on estimates and underlying assumptions are reviewed on an transactions between group companies are eliminated. ongoing basis. Revisions to accounting estimates are recognised Unrealised losses are also eliminated, but are considered an in the period in which the estimates are revised. The areas impairment indicator of the asset transferred. Accounting policies involving a higher degree of judgement or complexity, or areas of subsidiaries have been adjusted where necessary, to ensure where assumptions and estimates are significant to the consistency with the policies adopted by the group. consolidated financial statements, are disclosed in note 3. If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity Functional and presentation currency interest in the acquiree is remeasured to fair value at the Items included in the financial statements of each of the group’s acquisition date; any gains or losses arising from such entities are measured using the currency of the primary economic remeasurement are recognised in profit or loss. environment in which the entity operates (functional currency). The consolidated financial statements are presented in South Any contingent consideration to be transferred by the group is African rand (rounded to the nearest million unless otherwise recognised at fair value at the acquisition date. Subsequent stated), which is the company’s functional currency and the changes to the fair value of the contingent consideration that is presentation currency of the group. deemed to be an asset or liability is recognised in accordance with International Accounting Standard (IAS) 39 Financial Changes in accounting policies and comparability instruments: recognition and measurement either in profit or loss The group has consistently applied the accounting policies to all or as a change to other comprehensive income. Contingent periods presented in these consolidated financial statements consideration that is classified as equity is not remeasured, and except for the new or revised statements and interpretations its subsequent settlement is accounted for within equity. implemented during the year. The nature and effect of the changes to the accounting policies are discussed in note 50.2. Transactions with non-controlling interests The group treats transactions with non-controlling interests that 2.2 Consolidation do not result in a loss of control as transactions with equity Investment in subsidiaries owners of the group. For such purchases from non-controlling Subsidiaries are entities (including structured entities) controlled interests, the difference between any consideration paid and the by the group. The group controls an entity when it is exposed to, relevant share acquired of the carrying value of net assets of the or has rights to variable returns from its involvement with the subsidiary is recorded in equity. Gains or losses on disposals to entity and has the ability to affect those returns through its power non-controlling interests that do not result in a loss of control are over the entity’s relevant activities. Subsidiaries are consolidated also recorded in equity. 18 Eskom Holdings SOC Limited Joint arrangements If the financial statements of the associate or joint venture are A joint venture is an arrangement in which the group has joint prepared as of a different date to that of the group, adjustments control whereby the group has rights to the net assets of the are made to the financial statements of the associate or joint arrangement, rather than direct rights to its assets and direct venture for significant transactions and events that occur between obligations for its liabilities. the date of the financial statements of the associate or joint venture and the date of the financial statements of the group to A joint operation is an arrangement in which the group has joint enable the financial statements of the associate or joint venture control whereby the group has direct rights to the assets and to be used for the equity accounting of the associate or joint obligations for the liabilities relating to the arrangement. The venture. The maximum time period between the date of the group entity that is a joint operator of a joint operation accounts financial statements of the associate or joint venture and the date for its portion of the following in its separate financial statements: of financial statements of the group is three months. • assets, including its share of any assets held jointly • liabilities, including its share of any liabilities incurred jointly 2.3 Segment reporting • revenue from the sale of its share of the output arising from Operating segments are reported in a manner consistent with the the joint operation internal reporting provided to the chief operating decision-maker. • share of the revenue from the sale of the output by the joint The chief operating decision-maker, who is responsible for operation allocating resources and assessing performance of the operating • expenses, including its share of any expenses incurred jointly segments, has been identified as the group executive management committee (Exco). Common control transactions The group accounts for common control transactions in the An operating segment is a component of the group that engages consolidated financial statements using the book value in business activities from which it may earn revenues and incur (predecessor) basis of accounting. In applying the book value expenses, including revenues and expenses that relate to basis, the acquirer in a common control transaction recognises transactions with any of the group’s other components. An the assets and liabilities acquired using the book values in the operating segment’s results are reviewed regularly by Exco to financial statements of the relevant entity. Any difference make decisions about resources to be allocated to the segment between the consideration paid and the book values of the and assess performance, and for which discrete financial assets and liabilities acquired is recognised directly in equity. information is available. The company also accounts for common control transactions in 2.4 Foreign currency translation the separate financial statements using the book value basis of Transactions and balances accounting. In applying the book value basis, the acquirer Foreign currency transactions are translated into the functional recognises the cost of its investment at the carrying amount of currency using the exchange rates prevailing at the dates of the the investment recognised in the separate financial statements transactions. Foreign exchange gains and losses resulting from of the transferring entity. Any difference between the consideration the settlement of such transactions and from the translation at paid and the cost of investment acquired is recognised directly year end exchange rates of monetary assets and liabilities in equity. denominated in foreign currencies are recognised in profit or loss, except when recognised in other comprehensive income for Investment in equity-accounted investees qualifying cash flow hedges. Associates are all entities over which the group has significant influence but not control or joint control over the financial and Changes in the fair value of monetary securities denominated in operating policies, generally linked to a shareholding of 20% or foreign currency classified as available-for-sale are analysed more of the voting rights. between translation differences resulting from changes in the amortised cost of the security, and other changes in the carrying Investments in associates and joint ventures are accounted for amount of the security. Translation differences relating to at cost less impairment losses in the separate financial statements changes in the amortised cost are recognised in profit or loss of the company. These investments are accounted for using the and other changes in the carrying amount are recognised equity method of accounting in the financial statements of the in other comprehensive income within available-for-sale group. The group’s investment in associates and joint ventures financial assets. includes goodwill (net of any accumulated impairment loss) Non-monetary items are measured at historical cost. Translation identified on acquisition. differences on non-monetary financial assets and liabilities, such The group’s share of its associates’ and joint ventures’ post- as equities held at fair value through profit or loss, are recognised acquisition profits or losses is recognised in profit or loss within in profit or loss as part of the fair value gain or loss. Translation share of profit of equity-accounted investees, and its share of differences on non-monetary financial assets, such as equities post-acquisition movements in other comprehensive income is classified as available-for-sale, are recognised in other recognised directly in other comprehensive income. The comprehensive income within available-for-sale financial assets. cumulative post-acquisition movements are adjusted against the Foreign loans are initially recognised at the exchange rate carrying amount of the investment. When the group’s share of prevailing at transaction date and are translated at spot rate at losses in an associate or joint venture equals or exceeds its every reporting date. Foreign exchange gains and losses that interest in the associate or joint venture, including any other relate to loans and receivables, debt securities issued and unsecured receivables, the group does not recognise further borrowings are presented in profit or loss within net fair value losses, unless it has incurred obligations or made payments on gain/loss on financial instruments, excluding embedded behalf of the associate or joint venture. derivatives. Unrealised gains on transactions between the group and its Foreign operations associates or joint ventures are eliminated to the extent of the The assets and liabilities of foreign operations, including goodwill group’s interest in the associates or joint ventures. Unrealised and fair value adjustments arising on acquisition, are translated losses are also eliminated, but are considered an impairment to rand at the prevailing exchange rates at the reporting date. indicator of the asset transferred. Accounting policies of The income and expenses of foreign operations, excluding associates or joint ventures have been adjusted where necessary foreign operations in hyperinflationary economies, are translated to ensure consistency with the policies adopted by the group. to rands at the average exchange rate. The group does not have any foreign operations in hyperinflationary economies. 2014 Annual Financial Statements 19 Notes to the financial statements (continued) for the year ended 31 March 2014 2. Summary of significant accounting policies 2.6 Intangible assets (continued) Goodwill Goodwill represents the excess of the cost of an acquisition over 2.4 Foreign currency translation (continued) the fair value of the group’s share of the net identifiable assets Foreign operations (continued) of the acquired subsidiary/associate/joint venture at the date of Foreign currency differences arising as a result of the above are acquisition. Goodwill on acquisition of subsidiaries is included in recognised in other comprehensive income within the foreign intangible assets. Goodwill on acquisition of associates and joint currency translation reserve. ventures is included in investments in equity-accounted investees and is tested for impairment as part of the overall balance. 2.5 Property, plant and equipment Separately recognised goodwill is tested annually for impairment Land and buildings comprise mainly office, power station, and carried at cost less accumulated impairment losses. substation, workshop and related buildings. Impairment losses on goodwill are not reversed. Gains or losses Property, plant and equipment is stated at cost less accumulated on the disposal of an entity include the carrying amount of depreciation and impairment losses. Cost includes: goodwill relating to the entity sold. • any costs directly attributable to bringing the asset to the Goodwill is allocated to cash-generating units (CGUs) for the location and condition necessary for it to be capable of purpose of impairment testing. The allocation is made to those operating in the manner intended by management CGUs or groups of CGUs that are expected to benefit from the • the initial estimate of the costs of dismantling and removing business combination in which the goodwill arose. The group the item and restoring the site on which it is located, the allocates goodwill to each business segment in each country in obligation for which an entity incurs either when the item is which it operates. acquired or as a consequence of having used the item during a particular period for purposes other than to produce Licences inventories during that period Licences are shown at historical cost. Licences have a finite • borrowing costs (refer to note 2.8) useful life and are carried at cost less accumulated amortisation • transfers from equity of any gains or losses on qualifying cash and impairment losses. Amortisation is calculated using the flow hedges of foreign currency purchases of property, plant straight-line method over a period of two to five years in order to and equipment allocate the cost of licences over their estimated useful life. Subsequent costs are included in the asset’s carrying amount or Computer software recognised as a separate asset, as appropriate, only when it is Acquired computer software is capitalised on the basis of the probable that future economic benefits associated with the item costs incurred to acquire and bring to use the specific software. will flow to the group and the cost of the item can be measured Amortisation is calculated using the straight-line method over a reliably. When part of an asset is being replaced, the carrying period of two to five years in order to allocate the cost of amount of the replaced part is derecognised. Repairs and computer software over their estimated useful life. If software is maintenance are charged to profit or loss during the financial integral to the functionality of related equipment, then it is period in which they are incurred. capitalised as part of the equipment. Works under construction are stated at cost which includes cost of materials and direct labour and any directly attributable costs Costs that are directly associated with the development of incurred in bringing it to its present location and condition. identifiable and unique software products controlled by the Materials used in the construction of property, plant and group, and that will probably generate economic benefits equipment are stated at weighted average cost. exceeding costs beyond one year are recognised as intangible assets and amortised as above. Costs include employee costs Spare parts classified as strategic and critical spares are incurred as a result of developing software, borrowing costs if recognised as property, plant and equipment. relevant (refer to note 2.8) and an appropriate portion of relevant overheads. Costs associated with maintaining computer software Land is not depreciated. Depreciation on other assets is programs are recognised as an expense as incurred. calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows: Rights Rights consist mainly of servitudes and rights of way under Years power lines. Rights are not amortised as they have an indefinite Buildings and facilities 10 to 40 useful life. A servitude right is granted to Eskom for an indefinite Plant period. Intangible assets with an indefinite life are required to be • Generation 6 to 80 tested annually for impairment and carried at cost less accumulated impairment losses per IAS 36 Impairment of assets. • Transmission 5 to 40 The life of the servitude will remain in force as long as the • Distribution 10 to 35 transmission or distribution line is used to transmit electricity. It is • Test, telecommunication and other plant 3 to 20 management’s assessment that a servitude will only become impaired if the line to which the servitude is linked is derecognised. Equipment and vehicles 1 to 10 In practice, a derecognised line will be refurbished or replaced by a new line and then the likelihood of an impairment of a The depreciation method, residual values and useful lives of servitude right is remote. assets are reviewed, and adjusted if appropriate, at each reporting date. Concession assets Concession assets consists of rights to charge for the usage of Where parts of an item of property, plant and equipment have the infrastructure under service concession arrangements. different useful lives, they are accounted for as separate items Concession assets are capitalised on the basis of the cost of (major components) of property, plant and equipment. capital expenditure incurred in respect of service concession Gains or losses on disposals are determined by comparing arrangements (which is the fair value at initial recognition), proceeds with the carrying amount. These gains or losses are including borrowing costs on qualifying capital expenditures included in profit or loss within other income or other operating (refer to note 2.8). Subsequent to initial recognition, the expenses. concession assets are measured at cost less accumulated amortisation and impairment losses. Concession assets are amortised over their estimated useful life, which is the concession period during which they are available for use. Refer to note 2.9 and 22. 20 Eskom Holdings SOC Limited Intangible assets arising from a service concession arrangement Financial asset are included within intangible assets under concession assets. The group recognises a financial asset arising from a service concession arrangement to the extent that it has an unconditional Research and development right to receive cash or another financial asset from or at the Research expenditure is recognised as an expense as incurred. direction of the grantor, for the construction, upgrade or operation Costs incurred on development projects (relating to the design services of concession assets. Financial assets recognised as a and testing of new or improved products) are recognised as result of the service concession arrangement are measured at intangible assets when the following criteria are fulfilled: fair value upon initial recognition. Subsequent to initial recognition, • it is technically feasible to complete the intangible asset so that the financial asset is accounted for in accordance with it will be available for use or sale IAS 39 Financial instruments: recognition and measurement. • management intends to complete the intangible asset and use Refer to note 2.11. or sell it • there is an ability to use or sell the intangible asset Financial assets arising from a service concession arrangement • it can be demonstrated how the intangible asset will generate are included within trade and other receivables under other probable future economic benefits receivables. Refer to note 17. • adequate technical, financial and other resources to complete the development and to use or sell the intangible asset are Construction or upgrade services available The group accounts for revenue and costs relating to construction • the expenditure attributable to the intangible asset during its or upgrade services in accordance with IAS 11 Construction development can be measured reliably contracts. Other development expenditure that does not meet these criteria Operation services is recognised in profit or loss within other operating expenses. The group accounts for revenue relating to operation services in Development costs previously recognised as an expense are not accordance with IAS 18 Revenue. recognised as an asset in a subsequent period. Capitalised development costs are recorded as intangible assets and Contractual obligations to maintain and restore the amortised from the point at which the asset is ready for use on infrastructure a straight-line basis over its useful life. The group accounts for the contractual obligations to maintain or restore the infrastructure in accordance with IAS 37 Provisions, 2.7 Impairment of non-financial assets contingent liabilities and contingent assets. The provision to The carrying amounts of the group’s non-financial assets, other restore the infrastructure is included within provisions. than inventories, deferred tax assets and tax assets, are 2.10 Leases reviewed at each reporting date to determine whether there is any indication of impairment. Assets that have an indefinite A lease is an agreement whereby the lessor conveys to the useful life, for example land and rights over servitudes, are not lessee, in return for a payment, or series of payments, the right subject to amortisation or depreciation and are tested annually to use an asset for an agreed period of time. An assessment in for impairment. Assets that are subject to amortisation or terms of International Financial Reporting Interpretations depreciation are reviewed for impairment whenever events or Committee (IFRIC) 4 Determining whether an arrangement changes in circumstances indicate that the carrying amount may contains a lease is made as to whether the arrangement is not be recoverable. An impairment loss is recognised for the dependent on the use of a specific asset and the arrangement amount by which the asset’s carrying amount exceeds its conveys the right to use an asset to determine if an arrangement recoverable amount. The recoverable amount is the higher of an contains a lease. Refer to note 6, 15 and 29. asset’s fair value less costs to sell and value in use. For the Finance leases – where the group is the lessee purposes of assessing impairment, assets are grouped at the The group leases certain property, plant and equipment. Leases lowest levels for which there are separately identifiable cash of property, plant and equipment where the group has substantially flows (cash-generating units). Non-financial assets other than all the risks and rewards of ownership are classified as finance goodwill that were subject to impairment are reviewed for leases. Finance leases are capitalised at the lease’s possible reversal of the impairment at each reporting date. commencement at the lower of the fair value of the leased asset Impairment loss or reversal is recognised in profit or loss within and the present value of the minimum lease payments. net impairment loss. Each lease payment is allocated between the liability and finance 2.8 Capitalisation of borrowing costs charges so as to achieve a constant rate on the finance balance Borrowing costs attributable to the construction of qualifying outstanding. The corresponding rental obligations, net of finance assets are capitalised as part of the cost of these assets over the charges, are included in other short-term and other long-term period of construction, until the asset is substantially ready for payables. The interest element of the finance cost is charged to intended use, to the extent that the assets are financed by profit or loss within finance cost over the lease period so as to borrowings. The capitalisation rate applied is the weighted produce a constant periodic rate of interest on the remaining average of the borrowing costs applicable to the borrowings of balance of the liability for each period. The property, plant and the entities in the group unless an asset is financed by a specific equipment acquired under finance leases are depreciated or loan, in which case the specific rate is used. amortised over the shorter of the useful life of the asset and the lease term. 2.9 Service concession arrangements A service concession arrangement is an arrangement involving Finance lease liabilities are derecognised in accordance with the an operator constructing and/or upgrading, operating and derecognition requirements for financial liabilities. Derivatives maintaining infrastructure used to provide a public service for a embedded in leases are accounted for in accordance with the specified period of time. The operator is paid for its services over requirements for embedded derivatives. Refer to note 2.11. the period of the arrangement. The arrangement is governed by a contract that sets out performance standards, mechanisms for Finance leases – where the group is the lessor adjusting prices and arrangements for arbitrating disputes. The When property, plant and equipment are leased out under a grantor (the party that grants the service arrangement) controls finance lease, the present value of the lease payments is the infrastructure, and the operator is required to return to the recognised as a receivable. The difference between the gross grantor the infrastructure at the end of the arrangement. receivable and the present value of the receivable is disclosed as unearned finance income within finance lease receivables. 2014 Annual Financial Statements 21 Notes to the financial statements (continued) for the year ended 31 March 2014 2. Summary of significant accounting policies the subordinated loan from shareholder) within net fair value (continued) gain/(loss) on financial instruments, excluding embedded derivatives, provided that the fair value has been determined 2.10 Leases (continued) based on market-observable data. If the fair value has not been Finance leases – where the group is the lessor (continued) determined solely based on market-observable data, the day- Lease income is recognised over the term of the lease using the one gain or loss is deferred in the statement of financial position net investment method, which reflects a constant periodic rate and amortised over the term of the instrument in profit or loss. of return. Held-to-maturity investments Finance lease receivables are assessed for impairment and Held-to-maturity investments are non-derivative financial assets derecognised in accordance with the requirements for financial with fixed or determinable payments and fixed maturity that assets. Derivatives embedded in leases are accounted for in management has both the ability and intent to hold to maturity. accordance with the requirements for embedded derivatives. Refer to note 2.11. Subsequent to initial recognition, held-to-maturity investments are measured at amortised cost using the effective interest Fair value method, less any accumulated impairment losses. The fair value of finance lease receivables and finance lease The amortised cost of a financial asset is the amount at which liabilities is determined by discounting the future cash flows with the financial asset is measured at initial recognition minus respect to the finance lease at the interest rate implicit in the principal payments, plus or minus the cumulative amortisation lease. using the effective interest method and minus any reduction for Operating leases impairment or uncollectibility. Leases where substantially all of the risks and rewards of The effective interest rate is the rate that discounts the estimated ownership are not transferred to the group are classified as future cash receipts of the financial asset exactly to its net operating leases. Payments made under operating leases (net of carrying amount. any incentives received from the lessor) are charged to profit or loss within other operating expenses on a straight-line basis over Financial assets at fair value through profit or loss (held-for- the period of the lease. trading) Leases where substantially all of the risks and rewards of Held-for-trading assets comprises financial trading assets. An ownership are not transferred to the lessee (ie the group is the instrument is classified at fair value through profit or loss if it is lessor) are classified as operating leases. Payments received held-for-trading or is designated as such upon initial recognition. under operating leases are recognised in profit or loss within An instrument may only be designated at fair value through profit other income on a straight-line basis over the period of the lease. or loss when certain criteria are met. The group has elected not to designate financial assets at fair value through profit or loss. 2.11 Financial instruments A financial asset is classified as held-for-trading if it is: 2.11.1 Non-derivative financial instruments • acquired for the purpose of selling it in the short term Recognition, measurement and derecognition of financial • part of a portfolio of identified financial instruments that is assets managed together and for which there is evidence of a recent Non-derivative financial assets comprise investment in securities, pattern of short-term profit taking loans to subsidiaries, financial trading assets, loans receivable, • a derivative instrument trade and other receivables, finance lease receivables and cash and cash equivalents. Subsequent to initial recognition, changes in the fair value of these financial assets are recognised in profit or loss within net Cash and cash equivalents comprise balances with local and fair value gain/(loss) on financial instruments, excluding international banks, monies in call accounts, short-term assets embedded derivatives. and money market assets with an original maturity of less than 90 days. Bank overdrafts are shown within debt securities and Loans and receivables borrowings in current liabilities on the statement of financial Loans and receivables comprises trade and other receivables, position. loans receivable, loan to subsidiaries and cash and cash equivalents. The trade and other receivables of the group are All non-derivative financial assets are recognised on the date of classified as loans and receivables. Loans and receivables are commitment to purchase (trade date). Financial assets are non-derivative financial assets with fixed or determinable derecognised when the rights to receive cash flows from the payments that are not quoted in an active market, other than: investments have expired or the group has transferred • those that management intends to sell immediately or in the substantially all the risks and rewards of ownership. Realised short term, which are classified as held-for-trading gains or losses on derecognition are determined using the • those that upon initial recognition are designated as available- last‑in-first-out (LIFO) method. for-sale Non-derivative financial assets net of any directly attributable • those for which the group may not recover substantially all of transaction costs are recognised initially at fair value. Directly its initial investment, other than because of credit deterioration, attributable transaction costs related to financial assets at fair which shall be classified as available-for-sale value through profit or loss are recognised in profit or loss on Subsequent to initial recognition, loans and receivables are initial recognition when incurred. Subsequent to initial recognition, measured at amortised cost using the effective interest method, non-derivative financial assets are measured per asset category less any accumulated impairment losses. (as stated below). The appropriate classification of the financial asset is determined at the time of commitment to acquire the Available-for-sale financial assets financial asset. Available-for-sale assets comprises investment in securities. Available-for-sale financial assets are those assets that are When entering into a transaction, the financial instrument is designated as such or do not qualify to be classified as fair value recognised initially at the transaction price which is generally the through profit or loss, held-to-maturity or loans and receivables. best indicator of fair value. Where fair value of the financial instrument is different from the transaction price a day-one gain Subsequent to initial recognition, available-for-sale financial or loss may arise. The day-one gain or loss is immediately assets are measured at fair value and changes therein, other recognised in profit or loss (except for embedded derivatives and than impairment losses and foreign exchange gains and losses 22 Eskom Holdings SOC Limited (for monetary items), are recognised in other comprehensive established the same impairment assessment as applicable to income within available-for-sale financial assets. When the asset debts that have not been renegotiated are applied to assess is derecognised, the cumulative gain or loss in equity is whether the debt then should be impaired or not. transferred to profit or loss. Recognition, measurement and derecognition of financial Impairment losses on available-for-sale financial assets are liabilities recognised by reclassifying the losses accumulated in the fair Non-derivative financial liabilities comprise debt securities and value reserve in equity, to profit or loss. The cumulative loss that borrowings, loans from subsidiaries, financial trading liabilities, is reclassified from equity to profit or loss is the difference finance lease liabilities and trade and other payables. between the acquisition cost, net of any principal repayment and amortisation, and the current fair value, less any impairment loss Non-derivative financial liabilities are recognised initially at fair recognised previously in profit or loss. Changes in impairment value net of any directly attributable transaction costs except for provisions attributable to application of the effective interest financial liabilities at fair value through profit or loss. Directly method are reflected as a component of interest income. If, in a attributable transaction costs related to liabilities recognised at subsequent period, the fair value of an impaired available-for- fair value through profit or loss are recognised in profit or loss on sale debt security increases and the increase can be related initial recognition when incurred. Subsequent to initial recognition, objectively to an event occurring after the impairment loss was non-derivative financial liabilities are measured at amortised cost recognised in profit or loss, then the impairment loss is reversed, or fair value as per the relevant liability category (as described with the amount of the reversal recognised in profit or loss. on this page). However, any subsequent recovery in the fair value of an All non-derivative financial liabilities are recognised on the date impaired available-for-sale equity security is recognised in other of commitment (trade date) and are derecognised when the comprehensive income. obligation expires, is discharged or cancelled, or there is a Fair value substantial modification to the terms of the liability. Realised The fair values of trading assets and available-for-sale assets are gains and losses are determined using the LIFO method. based on quoted bid prices if available. For assets that are not Fees paid on the establishment of loan facilities are recognised quoted in an active market, valuation techniques are used. as transaction costs of the loan to the extent that it is probable Where pricing models are used, inputs are based on market- that some or all of the facility will be drawn down. In this case, related measures at the reporting date. Where discounted cash the fee is deferred until the draw-down occurs. To the extent flow techniques are used, estimated future cash flows are based there is no evidence that it is probable that some or all of the on management’s best estimates and the discount rate is a facility will be drawn down, the fee is capitalised as a pre- market-related rate for a financial asset with similar terms and payment for liquidity services. The capitalised fees are amortised conditions at the reporting date. from the date of first draw-down to final maturity of each facility. The fair value of trade and other receivables is estimated as the present value of future cash flows, discounted at the market rate Financial liabilities at fair value through profit or loss (held- of interest at the reporting date. for-trading) Held-for-trading liabilities comprises financial trading liabilities. Impairment (held-to-maturity investments, loans and receivables) An instrument is classified at fair value through profit or loss if it A review for impairment indicators is carried out at each financial is held-for-trading or is designated as such upon initial recognition. year end to determine whether there is any objective evidence An instrument may only be designated at fair value through profit that a financial asset not carried at fair value through profit or or loss when certain criteria are met. The group has not elected loss is impaired. A financial asset is considered to be impaired if to designate financial liabilities at fair value through profit or loss. objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. A financial liability is classified as held-for-trading if it is: In the case of equity securities classified as available-for-sale, a • incurred principally for the purpose of selling or repurchasing significant or prolonged decline in the fair value of the security it in the near term below its cost or adverse changes in the technological, market • part of a portfolio of identified financial instruments that is or economic environment in which the entity operates are managed together and for which there is evidence of a recent considered to be indicators that the securities are impaired. pattern of short-term profit taking • a derivative instrument An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its Subsequent to initial recognition, financial liabilities at fair value carrying amount and the present value of the estimated future through profit or loss continue to be measured at fair value. cash flows discounted at the original effective interest rate. Financial liabilities at amortised cost Individually significant financial assets are tested for impairment Financial liabilities that are not held-for-trading are classified as on an individual basis. The remaining financial assets are financial liabilities at amortised cost. Debt securities and assessed collectively in groups that share similar credit risk borrowings, including foreign loans, that are not held-for-trading, characteristics. and loans from subsidiaries are classified as held at amortised cost. Subsequent to initial recognition, these liabilities are All impairment losses are recognised in profit or loss within net measured at amortised cost using the effective interest method. impairment loss. The trade and other payables of the group are classified as An impairment loss is reversed if the reversal can be related financial liabilities at amortised cost. objectively to an event occurring after the impairment loss was Offsetting financial instruments recognised. For financial assets carried at amortised cost and Financial assets and liabilities are offset and the net amount available-for-sale financial assets that are debt securities, the reported in the statement of financial position when there is a reversal is recognised in profit or loss within net impairment legally enforceable right to offset the recognised amounts and (loss)/reversal. there is an intention to settle on a net basis or realise the asset Where an asset has been impaired, the carrying amount of the and settle the liability simultaneously. asset is reduced through an allowance account. Loans and receivables that would otherwise have been impaired but have been renegotiated are initially accounted for as impaired debt immediately after having been renegotiated. Once a payment history in terms of the renegotiated agreement is 2014 Annual Financial Statements 23 Notes to the financial statements (continued) for the year ended 31 March 2014 2. Summary of significant accounting policies or loss within net fair value gain/(loss) on financial instruments, excluding embedded derivatives. Realised and unrealised gains (continued) or losses for derivatives used for cash flow hedging are 2.11 Financial instruments (continued) recognised in other comprehensive income within cash flow 2.11.1 Non-derivative financial instruments (continued) hedges. Fair value Hedge accounting The fair value of financial trading liabilities is based on quoted The method of recognising the resulting gain or loss on the offer prices if available. For liabilities that are not quoted in an derivative depends on whether the derivative is designated as a active market, valuation techniques are used. Where pricing hedging instrument and, if so, the nature of the item being models are used, inputs are based on market-related measures hedged. Derivatives can be designated as: at the reporting date. Where discounted cash flow techniques are • hedges of the fair value of recognised liabilities and assets used, estimated future cash flows are based on management’s (fair value hedge) best estimates and the discount rate is a market-related rate for • hedges of a particular risk associated with a recognised a financial liability with similar terms and conditions at the liability, asset or a highly probable forecast transaction (cash reporting date. flow hedge) Market-making • hedges of a net investment in a foreign operation (net Eskom partakes in market-making activities in a bid to reduce the investment hedge) funding cost of the company. Most investors place a premium on The group applies only cash flow hedge accounting. the liquidity of bonds and are therefore prepared to accept a lower yield (relative to alternative bonds) to invest in bonds where The group documents, at the inception of the transaction, the the issue sizes are large and deemed to be liquid. Eskom bonds relationship between hedging instruments and hedged items, as used for market-making are accounted for as financial liabilities well as its risk management objectives and strategy for at amortised cost. undertaking various hedging transactions. The group also documents its assessment, both at hedge inception and on an The risks of market-making include the anticipated loss on ongoing basis, of whether the derivatives that are used in turnover, typically the bid/offer spread thereon, which is partially hedging transactions are highly effective in offsetting changes in mitigated through repurchase agreement opportunities. In fair values or cash flows of hedged items. addition there is the potential negative impact on liquidity which Eskom believes is limited due to the strategy of holding sufficient Movements on the hedging reserve are shown in other liquidity buffers as well as a portfolio of liquid government bonds. comprehensive income within cash flow hedges. The full fair value of a hedging derivative is classified as a non-current asset 2.11.2 Financial guarantees or liability when the remaining period of the hedged item is more Recognition than 12 months; it is classified as a current asset or liability when Financial guarantees are contracts that require the group to the remaining period of the hedged item is less than 12 months. make specified payments to reimburse the holder for a loss that Trading derivatives are classified as current assets or liabilities. may occur because a specified counter party fails to make payment when due in accordance with the terms of a debt Cash flow hedges instrument. Insignificant day-one gains and losses are expensed in profit or loss while significant day-one gains and losses are deferred in Financial guarantee liabilities are initially recognised at fair value, the statement of financial position (derivatives held for risk and the initial fair value is amortised over the life of the financial management) and then amortised over the term of the hedging guarantee. The guarantee liability is subsequently carried at the instrument in profit or loss. Day-one gains and losses on hedging higher of this amortised cost and the present value of any instruments are predominantly a function of the inclusion of expected payment (when a payment under the guarantee has credit, liquidity and basis risk in the terms of the trading become probable). Financial guarantees are included within instrument. These risks are not included in the determination of other liabilities. a hypothetical derivative used to measure fair value movements in a hedged item and are therefore excluded from any hedge Fair value Financial guarantees are valued initially by taking into account accounting relationships. The effective portion of the changes in discounted future cash flows adjusted according to the probability the fair value of derivatives that are designated and qualify as of occurrence of the trigger event. The resultant guarantee is cash flow hedges is recognised in other comprehensive income raised as a liability, with the costs being charged to profit or loss. within cash flow hedges. The gain or loss relating to the The unprovided portion is disclosed as a contingent liability. As ineffective portion and the forward points portion which is not a result of using discounted cash flows, interest rate risk may designated (as part of the hedge) is recognised immediately in arise due to the possibility of the actual yields on assets being profit or loss within net fair value gain/(loss) on financial different from the rates assumed in the discounting process. instruments, excluding embedded derivatives. 2.11.3 Derivative financial instruments and hedging activities When the forecast transaction occurs, any cumulative gain or loss existing in other comprehensive income at that time is Recognition included in the initial cost or other carrying amount of the asset A derivative is a financial instrument whose value changes in or liability. response to an underlying variable, requires little or no initial investment and is settled at a future date. All derivatives are When a hedging instrument expires, is sold or a hedge no longer classified as held-for-trading instruments, unless they meet the meets the criteria for hedge accounting, any cumulative gain or criteria for hedge accounting and have been designated for loss existing in equity at that time remains in other comprehensive purposes of applying hedge accounting. Derivatives are initially income until the forecast transaction occurs. When a forecast recognised at fair value and remeasured subsequently at fair transaction is no longer expected to occur, the cumulative gain value. Fair values are obtained from quoted market prices, or loss that was reported in other comprehensive income is discounted cash flow models and options pricing models which immediately transferred to profit or loss within net fair value gain/ consider current market and contractual prices for the underlying (loss) on financial instruments, excluding embedded derivatives. instruments as well as the time value of money. Economic hedging All derivative instruments of the group are included in the Certain derivative instruments do not qualify for hedge accounting statement of financial position as derivatives held for risk and are used for economic hedging. Changes in the fair value of management. Realised and unrealised gains or losses for these derivative instruments are recognised in profit or loss derivatives used for economic hedging are recognised in profit 24 Eskom Holdings SOC Limited within net fair value gain/(loss) on financial instruments, excluding the whole contract and deducting from it the fair value of the host embedded derivatives. contract. 2.11.4 Repurchase and resale agreements Where there is no active market for the embedded derivatives, Securities sold subject to repurchase agreements are disclosed valuation techniques are used to ascertain their fair values. in the financial statements as financial trading assets. The Financial models are developed incorporating valuation methods, liability to the counterparty is recorded as repurchase agreements formulae and assumptions. The valuation methods include: and is included in financial trading liabilities. • swaps: electricity tariff is swapped for a commodity in a foreign currency Securities purchased under agreements to resell are recorded • forwards: electricity tariff or other revenue or expenditure is as repurchase agreements and are included in financial trading based on a foreign currency assets or in investments in securities. • options: electricity tariff or other revenue is based on an The difference between the sale and repurchase price or embedded derivative floor or cap on foreign consumer or purchase and resale price is treated as interest accrued over the production price indices or interest rates. A closed form life of the repurchase or resale agreement using the effective- analytic solution is used to produce various cap and floor strike yield method. prices 2.11.5 Embedded derivatives The fair value of embedded derivatives is adjusted, where Recognition applicable, to take into account the inherent uncertainty relating An embedded derivative is a component of a hybrid (combined) to the future cash flows of embedded derivatives such as instrument that also includes a non-derivative host contract, with liquidity, model risk and other economic factors. the effect that some of the cash flows of the combined instrument The more important assumptions, which include the following, vary in a way similar to those of a standalone derivative. An are obtained either with reference to the contractual provisions embedded derivative causes some or all of the cash flows that of the relevant contracts or from independent market sources otherwise would be required by the contract to be modified where appropriate: according to a specified interest rate, financial instrument price, • spot and forward commodity prices commodity price, foreign exchange rate, index of prices or rates, • spot and forward foreign currency exchange rates or other variable. The hybrid contract is the entire contract and • spot and forward interest rates the host contract is the main body of the contract excluding the • forecast sales volumes embedded derivative. • spot and forward foreign production price indices An embedded derivative is separated from the host contract and • spot and forward electricity prices accounted for as a derivative if: • liquidity, model risk and other economic factors • the economic characteristics and risks of the embedded 2.12 Inventories derivative are not closely related to the economic characteristics Coal, liquid fuel, maintenance spares and consumables and risks of the host contract Inventories are stated at the lower of cost and net realisable • a separate instrument with the same terms as the embedded value. Cost is determined on the weighted average basis and derivative would meet the definition of a derivative includes expenditure incurred in acquiring inventories, production • the combined instrument is not measured at fair value with and conversion costs and other costs incurred in bringing changes in fair value recognised in profit or loss inventory to present location and condition. The determination of the host contract of an electricity contract (which includes an embedded derivative) is based on the Nuclear fuel standard electricity tariff specified in the contract and where no Nuclear fuel is stated at the lower of cost and net realisable standard tariff is specified, the tariff that would best fit the profile value. Cost is determined on the first-in-first-out basis. Nuclear of such a customer. fuel consists of raw materials, fabricated fuel assemblies and fuel in reactors. Fair value Net realisable value is the estimated selling price in the ordinary Embedded derivatives are disclosed separately from derivatives held for risk management. The changes in fair value are included course of business, less applicable variable selling expenses. in net fair value gain/(loss) on embedded derivatives in profit or Costs of inventories include the transfer from equity of any gains/ loss. The impact of the fair value gains or losses is taken into losses on qualifying cash flow hedges relating to purchases of account in the calculation of current and deferred taxation. raw materials. Embedded derivatives that are not separated are effectively 2.13 Future fuel suppliers accounted for as part of the hybrid instrument. Coal Non-refundable advances to suppliers, together with related Non-option based derivatives are separated on terms that result borrowing costs thereon, are deferred in the statement of in a fair value at the date of inception of zero. Option-based financial position within future fuel supplies and amortised derivatives are separated on the terms stated in the contracts against the cost of coal supplied on the basis of the estimated and will not necessarily have a fair value equal to zero at the life of the asset procured by the suppliers. initial recognition of the embedded derivative resulting in day-one gains/(loss). These day-one gains or losses are spread equally Repayable advances to suppliers are capitalised, and the related over the period of the agreement. The fair value will depend on interest earned is credited to profit or loss within finance income the strike price at inception. and the refunds are repaid in terms of the agreements. The valuation at initial recognition is adjusted for cash flows Nuclear since inception. The value of the embedded derivatives which Fuel assemblies in the process of fabrication are stated at cost involve a foreign currency is first determined by calculating the within future fuel supplies, which includes the non-refundable future cash flows and then discounting the cash flows by using advance payments made in terms of the agreement. Hedge the relevant interest rate curve and only then is the net present accounting is applied to foreign exchange contracts entered into value of the cash flows converted at the relevant rand/foreign with respect to the purchase of nuclear fuel, with the effective currency spot rate to the reporting currency. portion being capitalised during the fabrication period. Advance The fair value of the embedded derivative is determined on the payments in terms of agreements are capitalised. basis of its terms and conditions. If this is not possible, then the value of the embedded derivative is determined by fair valuing 2014 Annual Financial Statements 25 Notes to the financial statements (continued) for the year ended 31 March 2014 2. Summary of significant accounting policies 2.18 Payments received in advance (continued) Payments received in advance consist mainly of upfront capital contributions for the construction of assets and government 2.14 Share capital grants received for electrification and energy efficiency initiatives. Ordinary shares are classified as equity. Incremental costs Upfront capital contributions are recognised in profit or loss directly attributable to the issue of ordinary shares, net of any tax within other revenue when the customer is connected to the effects, are recognised as a deduction from equity. electricity network. Government grants for energy efficiency initiatives are recognised in profit or loss within other expenses 2.15 Equity reserve when the related expenses are incurred. The subordinated loan from the shareholder is held at amortised cost. The market value of the loan at inception is calculated for 2.19 Deferred income each tranche utilising the expected cash flows which are Grants discounted at market rates to determine the effective interest Government grants received relating to the creation of rates. The effective interest rates for each tranche remain electrification assets are included in liabilities as deferred income constant over the life of the loan tranche. The future cash flows and are credited to profit or loss within depreciation and are reassessed annually and the loans are remeasured at each amortisation expense on a straight-line basis over the expected reporting period. Although the loan is interest bearing, the useful lives of the related assets. interest payment terms could potentially be favourable and are dependent on the liquidity and gearing of Eskom. The change in Capital contributions received from customers the loan value with respect to interest amortised and the Contributions paid in advance by electricity customers relating to remeasurement is reflected in the profit or loss in finance cost the construction of regular distribution and transmission assets and is eligible for capitalisation as borrowing costs. (with a standard supply) are credited to profit or loss within other revenue when the customer is connected to the electricity 2.16 Income tax network. Refer to note 2.18. Income tax expense comprises current and deferred tax. Income tax expense is recognised in profit or loss except to the extent 2.20 Reinsurance contracts that it relates to items recognised in other comprehensive income Escap SOC Limited (Escap), a wholly owned subsidiary of or equity, in which case it is recognised on that basis. Eskom, acts as the primary insurer for the group. Escap only self-insures the group up to agreed limits by risk category, Current tax is expected tax payable on taxable income for the whereafter the risks are covered by the reinsurance market. year, using tax rates (and laws) enacted or substantively enacted at the reporting date, and any adjustment to tax payable in Contracts are entered into with reinsurers, under which the group respect of previous years. is compensated for losses on one or more contracts issued by it and that meet the classification requirements for insurance Tax on dividends declared after 1 April 2012 is withheld by the contracts. The benefits to which Escap is entitled under its company on behalf of its shareholder at a rate of 15%. Amounts reinsurance contracts held are recognised as reinsurance assets withheld are recognised in equity as part of dividends paid. in the statement of financial position. Amounts recoverable are Dividends received are recognised at the gross amount with the dependent on the expected claims and benefits arising under the related withholdings tax recognised as part of tax expense. If the related reinsured insurance contracts. Amounts due from or due withholding tax is reimbursable it is recognised as an asset. to reinsurers are measured consistently with the amounts associated with the reinsured insurance contracts and in 2.17 Deferred tax accordance with the terms of each reinsurance contract. Deferred tax is recognised on temporary differences arising Reinsurance liabilities are primarily premiums payable for between the tax bases of assets and liabilities and their carrying reinsurance contracts and are recognised as an expense when amounts in the statement of financial position. Deferred tax is not due. Reinsurance assets and liabilities are recognised initially at accounted for if it arises from initial recognition of an asset or fair value and subsequently measured at amortised cost using liability in a transaction other than a business combination that the effective interest method, less provision for impairment. at the time of the transaction affects neither accounting nor taxable profit or loss. However, deferred tax is provided in 2.21 Employee benefit obligations respect of the temporary differences arising on the assets and Annual and performance bonus provisions created in respect of decommissioning and nuclear The annual and performance bonus is a short-term employee waste management and closure, pollution control and benefit which is expensed as the related services are provided. rehabilitation. Deferred tax is determined using tax rates (and A liability is recognised for the amount expected to be paid if the laws) enacted or substantively enacted at the reporting date and group has a present legal or constructive obligation to pay this that are expected to apply when the related deferred tax asset is amount as a result of past service provided by the employee and realised or the deferred tax liability is settled. the obligation can be estimated reliably. The group recognises a liability for annual and performance bonuses. A liability for Deferred tax assets are recognised for unused tax losses, annual bonuses is accrued on a proportionate basis as services unused tax credits and deductible temporary differences to the are rendered. A liability for performance bonus is raised on the extent that it is probable that future taxable profit will be available estimated amount payable in terms of the incentive scheme against which the temporary differences can be utilised. Deferred which is based on the business and employees’ performance in tax assets are reviewed at each reporting date and reversed if it the applicable year. is no longer probable that the related tax benefits will be realised. Occasional and service leave Deferred tax is provided on temporary differences arising on The liability for occasional and service leave is of a long-term investments in subsidiaries and associates, except where the nature as it is not expected to be settled wholly after 12 months timing of the reversal of the temporary difference is controlled by after the reporting period. An actuarial valuation is performed on the group and it is probable that the temporary difference will not an annual basis for occasional and service leave. The accrued reverse in the foreseeable future. liabilities are determined by valuing all future leave expected to be taken and payments expected to be made in respect of The measurement of deferred tax reflects the tax consequences benefits up to the valuation date. Allowance has been made in that would follow from the manner in which the group expects, at the calculations for the assumed benefit options employees will the reporting date, to recover or settle the carrying amount of its exercise, as well as salary increases and investment returns up assets and liabilities. 26 Eskom Holdings SOC Limited to the date the benefit is received. All actuarial gains or losses Provisions are determined by discounting the expected future and past service costs are recognised immediately in profit or cash flows using a pre-tax discount rate that reflects current loss within employee benefit expense. The present values of the market assessments of the time value of money and, where benefit are determined by using the yield of long-dated corporate appropriate, the risks specific to the liability. The increase in the bonds (or government bonds where high quality corporate bonds provision due to the passage of time is recognised as finance cost. are not available). In terms of IAS 1 Presentation of financial information there is no unconditional right to defer settlement of The provisions below are restated on an annual basis to reflect occasional and service leave for at least 12 months after the changes in measurement that result from changes in the reporting period. The full provision is therefore presented as estimated timing or amount of the outflow of resources embodying current in the statement of financial position. economic benefits required to settle the obligation, or a change in discount rate, which shall be accounted for as follows: Pension benefits • changes in the liability shall be added to, or deducted from, the Pension benefits are provided for employees through the Eskom cost of the related asset in the current period Pension and Provident Fund. Contributions to the fund are based • the amount deducted from the cost of the asset shall not on a percentage of pensionable emoluments and are expensed exceed its carrying amount. The excess shall be recognised in the period in which they are incurred. The group accounts for in profit or loss its pension obligations as a defined contribution plan in line with • any additions to the cost of an asset shall be reviewed in terms IAS 19 Employee benefits. of the normal impairment principles Post-employment medical benefits Decommissioning and nuclear waste management The liability for post-employment medical benefits is the present Nuclear and other generation plant value of the obligation by using government bonds where high A provision is raised for the estimated decommissioning cost of quality corporate bonds are not available (long-dated corporate nuclear and other generation plant and capitalised to the cost of bonds) which have maturities similar to the liability. Provision is nuclear or other generation plant when it is commissioned. The made by accounting for the estimated cost over the expected estimated cost of decommissioning at the end of the productive period to retirement of the employees. The cost to the employer, life of plant is based on engineering and technical estimates and in the form of employer contributions, is determined by using the reports from independent experts. Decommissioning costs projected unit credit method, with actuarial valuations being capitalised to the cost of nuclear or other generation plant is carried out at reporting date. Actuarial gains or losses written off on a straight-line basis over the estimated useful life are recognised in other comprehensive income within of the plant. remeasurements of post-employment medical benefits immediately. Interest expense and other expenses related to Spent nuclear fuel these benefits are recognised in profit or loss. A provision is raised for the management of spent nuclear fuel The entitlement to these benefits is usually conditional on the assemblies and radioactive waste. The charge to profit or loss is employee remaining in-service up to retirement. All employees based on the latest available cost information and is included in qualify for post-employment medical benefits, except for new primary energy. employees appointed on or after 1 June 2003 at a managerial The provisions are restated on an annual basis to reflect the level. The group accounts for its post-employment medical changes in the time value of money. The impact of the change benefits obligations as a defined benefit plan in line with in the time value of money on the provision is reflected in profit IAS 19 Employee benefits. or loss within finance cost. If the benefits are changed or curtailed, the resulting change in Closure, pollution control and rehabilitation benefits that relates to past service or the gain or loss on Expenditure on property, plant and equipment for pollution curtailment is recognised immediately in profit or loss. The group control is capitalised and depreciated over the useful lives of the recognises gains or losses on the settlement of a defined benefit assets. The cost of current ongoing programmes to prevent and plan when the settlement occurs. A settlement occurs when control pollution and to rehabilitate the environment is charged payments are made to employees to eliminate any further to profit or loss within primary energy as incurred, unless a liabilities. present legal or constructive obligation exists to recognise such A curtailment will occur when the group significantly reduces the expenditure, in which case a provision is created based on the number of employees covered by the termination plan. best estimates available. Curtailment gains and losses are accounted for as past service A provision is raised for the estimated cost of closure, pollution costs, which are recognised in profit or loss immediately in the control and rehabilitation during and at the end of the life of the period when the termination plan is amended. mines where a legal or constructive obligation exists to pay coal Termination benefits suppliers. Closure, pollution control and rehabilitation costs A liability and expense for termination benefits is recognised by capitalised are written off over the estimated useful life of the the group at the earlier of the following dates: power station. • when the group can no longer withdraw the offer of those Service concession arrangements benefits A provision is raised for contractual obligations to maintain and • when the group recognises costs for a restructuring that is restore the infrastructure. These contractual obligations to within the scope of IAS 37 Provisions, contingent liabilities and maintain or restore infrastructure, except for any upgrade contingent assets and involves the payment of termination element, are recognised and measured at the best estimate of benefits the expenditure that would be required to settle the present 2.22 Provisions obligation at the end of the reporting period. Refer to note 2.9. Provisions are recognised when the group has a present legal or 2.23 Revenue recognition constructive obligation as a result of a past event, when it is Revenue comprises the fair value of the consideration received probable that an outflow of resources will be required to settle or receivable for the sale of goods and services in the ordinary the obligation and when the amount can be reliably estimated. course of the group’s activities. Revenue is shown, net of value Provisions are not recognised for future operating losses. added tax (VAT), estimated returns, rebates and discounts. 2014 Annual Financial Statements 27 Notes to the financial statements (continued) for the year ended 31 March 2014 2. Summary of significant accounting policies 2.26 Dividend income (continued) Dividend income is recognised when the right to receive payment is established. 2.23 Revenue recognition (continued) The group recognises revenue when the amount of revenue can 2.27 Dividend distribution be reliably measured, it is probable that future economic benefits Dividend distribution to the shareholder is recognised as a will flow to the entity and specific criteria have been met for each liability in the financial statements of the group in the period in of the group’s activities as described below. The amount of which the dividends are approved by the shareholder. revenue is not considered to be reliably measured until all contingencies relating to the sale have been resolved. The group 2.28 Non-current assets and liabilities held-for-sale bases its estimates on historical results, taking into consideration Non-current assets and liabilities (or disposal groups) which the type of customer, the type of transaction and the specifics of meet the definition of held-for-sale under IFRS 5 Non-current each arrangement. assets held-for-sale and discontinued operations, except for items excluded from the scope of IFRS 5 for measurement Sale of goods purposes, are stated at the lower of their carrying amount and Sale of goods is recognised when significant risks and rewards fair value less costs to sell if their carrying amount will be of ownership have passed and the collectability of the related recovered principally through a sale transaction rather than receivable is reasonably assured. Electricity revenue is through continuing use. recognised when electricity is consumed by the user except in the case of prepaid electricity which is recognised when 2.29 Related-party transactions purchased by the customer. IAS 24 Related-party disclosures provides government related entities an exemption which eliminates the requirements to Sale of services disclose information that is costly to gather and of less value to Sale of services is recognised in the reporting period in which users. The group applies the exemption in respect of its the services are rendered, by reference to the stage of completion relationship with government related entities and local levels of of the specific transaction assessed on the basis of the actual government. Refer to note 46. service provided as a proportion of the total services to be provided. 2.30 Transfers of assets from customers Other revenue If an item of property, plant and equipment is received from Other revenue is recognised when the significant risks and customers, an assessment is made as to whether that item of rewards of ownership are transferred to the buyer and the property, plant and equipment can be recognised in accordance amount of revenue can be measured reliably. with IAS 16 Property, plant and equipment. Any related revenue is recognised in accordance with IAS 18 Revenue. Service concession arrangements Revenue relating to construction or upgrade services under a 2.31 Net debt service concession arrangement is recognised based on the The group manages its funding on a net basis by pooling funds. stage of completion of the work performed, consistent with the Net debt as disclosed in the statements of cash flows is group’s accounting policy on recognising revenue on construction calculated by totalling debt securities and borrowings, finance contracts. Refer to note 2.9. lease liabilities, loans to and from subsidiaries, derivatives held for risk management and netting off cash and cash equivalents, Operation or service revenue is recognised in the period in which investments in securities and loans receivable. the services are provided by the group. When the group provides more than one service in a service concession arrangement the consideration received is allocated by reference to the relative fair values of the services delivered. 2.24 Finance income Finance income comprises interest receivable on loans, advances, trade receivables, finance lease receivables and income from financial market investments. Interest income is recognised as it accrues in profit or loss, using the effective interest method. 2.25 Finance cost Finance cost comprises interest payable on borrowings, interest resulting from derivatives held for risk management and interest from the unwinding of discount on liabilities. Borrowing costs which are not capitalised are recognised in profit or loss (refer to note 2.8). 28 Eskom Holdings SOC Limited 3. Critical accounting estimates and judgements Embedded derivatives that are not separated are effectively accounted for as part of the hybrid instrument. Non-option based Estimates and judgements are evaluated continually and are based on historical experience and other factors, including derivatives are separated on terms that result in a fair value at expectations of future events that are believed to be reasonable the date of inception of zero. Option-based derivatives are under the circumstances. separated on the terms stated in the contracts and will not necessarily have a fair value equal to zero at the initial recognition The group makes judgements, estimates and assumptions of the embedded derivative resulting in day-one gains or losses. concerning the future. The resulting accounting estimates will, by These day-one gains or losses are recognised over the period definition, seldom equal the related actual results. The estimates of the agreement. The fair value will depend on the strike price and assumptions that have a significant risk of causing a material at inception. adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Revisions to The only significant unobservable input is the United States accounting estimates are recognised in the period in which they producer price index (PPI). are revised and future periods they affect. Valuation assumptions (a) Embedded derivatives The forward electricity curve used to value the embedded Eskom has entered into a number of agreements to supply derivatives at 31 March 2014 is based on the current MYPD 3 electricity to electricity-intensive businesses where the revenue approved tariff increase of 8% for 2014/15 to 2017/18, whereafter from these contracts is linked to commodity prices and foreign a forecasted return on the regulatory asset base is used until currency rates or foreign production price indices that give rise maturity. to embedded derivatives. The contracted electricity price used to value embedded The embedded derivatives have been divided into three derivatives is based on a combination of the factors in the table categories: on the next page over the contracted period. • commodity and/or foreign currency derivatives Forecast sales volumes are based on the most likely future sales • foreign currency or interest rate derivatives volumes based on past trends and taking into account future • United States production price and foreign currency derivatives production plans in consultation with industry specific experts Valuation and key customer executives. The fair value of embedded derivatives is determined by using a The fair value of embedded derivatives takes into account the forward electricity price curve to value the host contract and the inherent uncertainty relating to the future cash flows of embedded derivative contract is valued by using market forecasts of future derivatives, such as liquidity, model risk and other economic commodity prices, foreign currencies rand exchange rate, factors. interest rate differential, future sales volumes, production price and liquidity, model risk and other economic factors. The forecast cash flow is determined and then discounted at the relevant interest rate curve. The net present value of the cash flows is then converted at the rand/foreign currency spot rate to the reporting currency. The fair value of the embedded derivative is adjusted, where applicable, to take into account the inherent uncertainty relating to the future cash flows of embedded derivatives such as liquidity, model risk and other economic factors. The important assumptions are obtained either with reference to the contractual provisions of the relevant contracts or from independent market sources where appropriate. These assumptions are: • spot and forward commodity prices • spot and forward foreign currency exchange rates • spot and forward interest rates • forecasted sales volumes • spot and foreign production price indices • liquidity, model risk and other economic factors 2014 Annual Financial Statements 29 Notes to the financial statements (continued) for the year ended 31 March 2014 3. Critical accounting estimates and judgements (continued) (a) Embedded derivatives (continued) Valuation assumptions (continued) The following valuation assumptions for the future electricity price curve discussed on the previous page for the valuation of embedded derivatives were used and are regarded as the best estimates by the board: 2014 Year ended 31 March Input Unit 20141 20151 20161 20171 20181 20191 Aluminium USD per ton 1 716 1 865 1 939 2 005 2 068 2 127 Volatility Year-on-year (ratio) 0.22 0.22 0.22 0.22 0.22 0.22 Rand interest rates Continuous actual/365 days (%) 5.57 6.74 6.84 7.28 7.55 7.79 Dollar interest rates Annual actual/365 days (%) 0.09 0.52 0.57 1.03 1.48 1.87 United States PPI Year-on-year (%) 3.27 2.20 2.33 2.20 2.41 2.32 Rand/USD USD per rand 0.09 0.09 0.08 0.08 0.07 0.07 2013 Year ended 31 March Input Unit 2013 1 2014 1 20151 20161 20171 20181 Aluminium USD per ton 1 886 1 962 2 045 2 128 2 213 2 288 Volatility Year-on-year (ratio) 0.25 0.25 0.25 0.25 0.25 0.25 Rand interest rates Continuous actual/365 days (%) 5.10 5.66 5.42 5.71 6.00 6.32 Dollar interest rates Annual actual/365 days (%) 0.24 0.93 0.41 0.53 0.71 0.96 United States PPI Year-on-year (%) 1.14 1.49 2.21 2.47 2.42 2.38 Rand/USD USD per rand 0.11 0.10 0.10 0.09 0.09 0.08 Sensitivity analysis The approximate change in the value of embedded derivatives if one of the inputs is changed is disclosed in note 4.2 Financial risk management – market risk under currency risk (note 4.2.1), commodity risk (note 4.2.2), interest rate risk (note 4.2.3) and other price risk (note 4.2.5). The carrying amount of the embedded derivative liabilities for the group is R9 332 million (2013: R11 481 million) and R9 331 million (2013: R11 480 million) for the company. Refer to note 25. (b) Post-employment medical benefits The group recognises a liability for post-employment medical benefits to qualifying retirees. The post-employment 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 2014 2013 Discount rate (%) 9.7 8.8 Medical aid inflation (%) 8.4 8.0 Mortality table Adjusted PA (90) Adjusted PA (90) tables rated tables rated down by down by two years two years Assumptions regarding future mortality have been based on published statistics and mortality tables. The current longevities underlying the values of the defined benefit obligation at the reporting date were: Group and company 2014 2014 2013 2013 Male Female Male Female Longevities (years) 14.42 20.82 14.42 20.77 The weighted average duration of the defined benefit obligation for the group was 20.8 years (2013: 21.3 years) and for the company was 20.9 years (2013: 21.4 years). 1. Forward curve based on financial years. 30 Eskom Holdings SOC Limited Sensitivity analysis The effect of an increase or decrease in the assumptions are: Group Company Change in 2014 2014 2013 2013 2014 2014 2013 2013 assumption increase decrease increase decrease increase decrease increase decrease Rm Rm Rm Rm Rm Rm Rm Rm Effect on aggregate current service cost and finance cost Discount rate 1% (154) 199 (106) 134 (152) 196 (105) 132 Medical aid inflation 1% 318 (242) 234 (182) 312 (238) 230 (179) Future mortality 1 year 40 (40) 30 (30) 39 (39) 29 (29) Effect on post- employment medical benefit obligation Discount rate 1% (1 432) 1 834 (1 461) 1 887 (1 398) 1 792 (1 433) 1 853 Medical aid inflation 1% 1 809 (1 436) 1 848 (1 456) 1 767 (1 402) 1 819 (1 432) Future mortality 1 year 285 (284) 290 (288) 278 (277) 284 (282) The carrying amount of the post-employment medical benefits liability for the group is R10 234 million (2013: R9 993 million) and R9 981 million (2013: R9 788 million) for the company. The above sensitivity analyses are based on a change in an assumption while all other assumptions remain constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation to significant actuarial assumptions the present value of the defined benefit obligation is calculated with the projected unit credit method at the end of the reporting period which is recognised within the statement of financial position. The methods and types of assumptions used in preparing the sensitivity analysis did not change compared to the previous period. (c) Occasional and service leave The group recognises a liability for occasional and service leave. 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 2014 2013 % % Discount rate 9.7 8.8 General price inflation 6.4 6.0 Salary increases 7.9 7.5 Leave usage 4.0 4.0 The assumptions made in respect of resignation, death and retirement rates are the same as for the post-employment medical benefit liability. Refer to note 3(b). Sensitivity analysis Based on current experience, only 4% (2013: 4%) of the leave is utilised. If the rate at which leave is taken is 8% (2013: 8%), then the liability will increase by R60 million (2013: R53 million). The carrying amount of the occasional and service leave liability for the group is R1 195 million (2013: R1 086 million) and R1 138 million (2013: R1 037 million) for the company. (d) Decommissioning, mine closure and rehabilitation 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. Provision is made for the estimated mine-related closure, pollution control and rehabilitation costs at the end of the life of the mines, where a constructive and contractual obligation exists to pay coal suppliers. Valuation These provisions are determined by discounting the estimated future decommissioning and rehabilitation costs. Valuation assumptions The discount rate used for these provisions was 5.0% (2013: 4.6%) for the group and company. 2014 Annual Financial Statements 31 Notes to the financial statements (continued) for the year ended 31 March 2014 3. Critical accounting estimates and judgements (continued) (d) Decommissioning, mine closure and rehabilitation (continued) Estimated payment dates The estimated payment dates of the costs are: Group and company 2014 2013 Nuclear plant 2026 - 2041 2026 - 2040 Coal and pumped storage plants1 2018 - 2074 2018 - 2113 Spent nuclear fuel 2016 - 2105 2015 - 2105 Mine-related closure, pollution control and rehabilitation 2014 - 2073 2014 - 2073 Sensitivity analysis The carrying amount of the decommissioning, mine closure and rehabilitation provision would be an estimated R3 465 million (2013: R3 379 million) lower had the real discount rate used in the calculation of the provision increased by 1% and R4 527 million (2013: R4 511 million) higher had the real discount rate decreased by 1%. (e) Subordinated loan from shareholder The government loan was provided in tranches where each tranche has a 30-year term with an early redemption option after 10 years. Interest on the facility is only payable for those financial years where the financial results at the end of the reporting period reflect a leverage ratio of better than 12.5% and where if, after paying interest on the facility, the interest multiple remains above 2.5 times. A loan remeasurement occurs when the carrying amount of the loan is adjusted where the cash flows (interest and capital repayment) are revised for a given tranche, based on the tranche’s original effective rate to reflect the actual and revised estimated cash flows. 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 were drawn down. The loan value was 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 redemptions are discounted at the effective rate which was calculated at the inception of each tranche received to determine the loan amounts. Once the equity portion of a tranche is recorded it does not change. Refer to the statement of changes in equity. The interest payments and cash flows are determined based on Eskom’s long-term forecasts of the leverage ratio and the interest multiple, adjusted to include the potential interest on the government loan. The future cash flows are discounted using a zero curve constructed from money market and swap rates that reflect the credit worthiness of Eskom. 4. Financial risk management The group has an integrated risk management framework. The group’s approach to risk management is based on risk governance structures, risk management policies, risk identification, measurement, reporting, monitoring and continuous assessment. Three types of risks are reported as part of the risk profile, namely operational, strategic and business continuity risks. Operational risks are events, hazards, variances or opportunities which could influence the achievement of Eskom’s compliance and operational objectives. For Eskom, a strategic risk is a significant unexpected or unpredictable change or outcome beyond what was factored into the organisation’s strategy and business model which could have an impact on the group’s performance. Business continuity risks are those events, hazards, variances and opportunities which could influence the continuity of Eskom. The financial risks, as defined by IFRS 7 Financial instruments: disclosures, and the management thereof, form part of this key risk area. The board of directors (the board) has delegated the management of enterprise-wide risk to the audit and risk management committee. One of the committee’s objectives is to ensure that the group is not unduly exposed to financial risks. Most of the financial risks arising from financial instruments are managed in the centralised treasury function of the group, except for instruments such as trade and finance lease receivables and trade and finance lease payables which are managed by the other divisions and subsidiaries. The group’s exposure to risk, its objectives, policies and processes for managing the risk and the methods used to measure it have been consistently applied in the years presented, unless otherwise stated. The exposure of the centralised treasury function to the major financial risks is unique to its activities and therefore different to those of the divisions and subsidiaries within the Eskom group. A distinction is therefore made between the treasury division and other divisions and subsidiaries in the group in respect of financial risk management where relevant. The group has exposure to the following risks as a result of its financial instruments: • credit risk (refer to note 4.1) • market risk (refer to note 4.2) • liquidity risk (refer to note 4.3) • capital management and going concern (refer to note 4.4) 4.1 Credit risk Credit risk is the risk of financial loss to the group if a customer or other counterparty (including government and financial institutions) to a financial instrument fails to meet its contractual obligations. Credit risk arises primarily from the sale of electricity and related services in the ordinary course of business and financial instruments managed in the centralised treasury activities. Credit risk includes counterparty risk and delivery or settlement risk. Counterparty risk is the risk that a counterparty is unable to meet its financial and/or contractual obligations during the period of a transaction. Delivery or settlement risk is the risk that a counterparty does not deliver on its contractual commitment on maturity date (including the settlement of money and delivery of securities). 1. The timing of cash flows relating to water treatment and ground water monitoring have been re-estimated based on the latest studies. 32 Eskom Holdings SOC Limited 4.1.1 Management of credit risk Financial instruments managed by the treasury function Credit risk arises from cash and cash equivalents, investment in securities, derivatives held for risk management, financial trading assets and deposits made with counterparties. Processes are in place to identify, measure, monitor, control and report credit risk. The objective of Eskom’s credit risk management framework is firstly to protect cash and investments and, secondly to project and maximise the rate of return of financial market investments. Responsibility and governance The treasury committee manages counterparty credit risk which arises from the treasury activities in the financial markets. This committee is chaired by the finance director and reports on a quarterly basis to Exco and the board investment and finance committee. The activities of the committee are guided by the terms of reference that are updated and approved by the finance director. The terms of reference set out the minimum acceptable standards to be adhered to by those responsible for credit-related transactions within the treasury division. The terms of reference are aligned to the Exco credit risk governance standards and are supplemented by appropriate policies and procedures. The treasury committee: • assesses the credit quality of counterparties and types of instruments used • approves credit limits with such counterparties • facilitates and manages the issuing of financial guarantees by the group • ensures that transactions with counterparties are supported by trading agreements, where applicable • approves methodologies used for the management of counterparty exposure The portfolio assessment department of treasury provides feedback on all treasury credit risk-related matters to the treasury management, finance director, treasury committee and Exco. The management of credit risk is governed by the following policies: • trading in financial instruments is conducted and entered into with selected counterparties after credit limits have been authorised. Individual risk limits are set based on internal and external ratings in line with limits set by the board. All credit limits are approved by the treasury committee. The use of credit limits is regularly monitored • only financial institutions and/or counterparties with an independent minimum rating of A1 are accepted. If there are no independent ratings, the credit quality of the counterparty is assessed, taking into account its financial position, past experience and other factors • all exposures are mark-to-market. Transaction or close-out netting takes place in accordance with the terms and conditions of the underlying trading agreements • minimum credit-rating requirements for financial institutions are maintained to assess the risk categories by rating class and to ascertain the probability of default inherent in each rating class • approved concentration risk parameters and collateral management procedures are in place Concentration of credit risk is managed by setting credit risk limits at a counterparty-specific level. Concentration credit risk limits are used as second tier limits in relation to counterparty credit limits. Counterparty-specific exposure is monitored against a set concentration of credit risk limits in relation to the total credit risk exposure to all counterparties. Credit risk measurement, monitoring and reporting Risk is measured by determining a default probability per counterparty (using default probabilities assessed by rating agencies for various type of credit ratings) which is then applied to the market value of the investment placed to determine the capital at risk. The treasury division’s policies and practices are designed to preserve the independence and integrity of decision-making and ensure credit risks are accurately assessed, properly approved, continually monitored and actively managed. Aggregate credit risk exposure, hold-limit exceptions and risk profile changes are reported to Exco. There is regular detailed reporting of limits utilisation, limit breaches and customer concentrations to ensure these are appropriately managed and monitored. Impairment assessments are performed to evaluate the credit risk exposure. The assessments focus on the following areas: • significant financial difficulty of the issuer or counterparty • high probability of bankruptcy • breach of contract Financial instruments managed by other divisions and subsidiaries (a) Trade receivables (electricity) Eskom supplies electricity to customers in its licensed areas of supply. A large number of the residential customers are on a prepaid basis. Electricity supply agreements are entered into with key international customers who comprise utility companies and governments of neighbouring countries. These customers are not required to provide any security unless they default on their payment terms. Eskom’s exposure to credit risk is influenced by the individual characteristics of each customer. In monitoring credit risk, customers are grouped according to their credit characteristics, including whether they are large or small power users, geographic location, ageing profile, security (deposits and guarantees) held and payment history. The main classes of electricity receivables are international, local large and local small power users. Key large power users comprise mainly South African commercial, industrial and mining customers and redistributors (municipalities). Some key large power users are not required to provide any security if they have an acceptable credit rating from an approved rating agency. New customers are required to provide security equivalent to the value of three months’ estimated consumption. Existing customers are required to provide security to the value of three months’ consumption as collateral against default on their payment terms. 2014 Annual Financial Statements 33 Notes to the financial statements (continued) for the year ended 31 March 2014 4. Financial risk management (continued) 4.1 Credit risk (continued) 4.1.1 Management of credit risk (continued) Financial instruments managed by other divisions and subsidiaries (continued) (a) Trade receivables (electricity) (continued) Non-key customers (other than large power users and small power users) are required to provide security equivalent to between one to three months’ consumption at the commencement of the supply agreement. The level of security is reviewed when a customer defaults on their payment obligation or requires additional electricity supply capacity in which case they are required to either provide security or increase their existing security to an amount equivalent to between one to three months’ of recent consumption before supply will commence. Redistributors are not required to provide any security and are currently re-evaluated based on their payment history to determine if any security is necessary. Eskom continues to work closely with the Department of Cooperative Governance and Traditional Affairs and other government departments to resolve the systemic challenges which have given rise to municipalities’ arrear debt. Payment terms vary between customer classes as follows: • Key international customers: 10 to 45 days • Key and other large power users: individually negotiated up to a maximum of 15 days • Small power users: 30 days Interest is charged at market-related rates on balances in arrears. The group has well-established credit control procedures that monitor activity on customer accounts and allow for remedial action should the customer not comply with payment terms. These procedures include an internal collection process, follow up with the customer either telephonically or in person, negotiations of mutually acceptable payment arrangements and the issue of a notice of disconnection of supply and letters of demand. Non-payment will result in disconnection of supply and the customer’s account being closed. The legal collection process is pursued thereafter. The decision to impair overdue amounts is assessed on the probability of recovery based on the customer’s credit risk profile. Progress on the collection process is reviewed on a regular basis and if it is evident that the amount will not be recovered, it is recommended for write-off in terms of the group policy and delegation of authority. The process of recovery continues unless it is confirmed that there is no prospect of recovery or the costs of such action will exceed the benefits to be derived. Amounts written off are determined after taking into account the value of the security held. The total cumulative allowance for impairment for electricity receivables at 31 March 2014 was R5 667 million (2013: R4 204 million) (refer to note 4.1.2(g)). A substantial portion relates to outstanding debt in problematic areas. The collection of revenue from small power users in Soweto remains a challenge. The enhancement of credit control strategies and monitoring of payment levels in this area continue to receive management attention. The payment levels from these customers, expressed as a percentage of billed revenue for the year, was 16% (2013: 16%). The residential revenue management strategy, which includes Soweto, has received PFMA approval and implementation thereof is planned for the 2015 financial year. The strategy entails implementation of split metering technology and conversion of customers to prepayment. The following strategies are currently in operation in high risk areas of non-paying customers with varying levels of success. These include: • disconnections • increased internal debt management capacity • use of debt collectors • payment arrangements • focus on early identification and letters of demand • increased securities • efficient internal process, for example system automation of credit and collections such as automated notices and letters of demand Certain redistributors have fallen into arrears during the course of the financial year. Some have subsequently either settled or made significant payments towards their arrear debt. Monitoring of these redistribution payment levels continue to receive ongoing management attention and remains a high priority focus area. 34 Eskom Holdings SOC Limited (b) Other trade receivables The group’s credit exposure in respect of other trade receivables is considered to be insignificant and originates predominantly from Eskom Enterprises SOC Limited (Eskom Enterprises). (c) Other receivables Other receivables include recoverable work, employee debtors, inter-company balances (company only) and sundry receivables. Recoverable work is mainly project work carried out by Eskom on behalf of external parties. The projects include repairing damaged power lines, moving of power lines or underground cables and engineering-related work. (d) Finance lease receivables Finance lease receivables mainly comprise premium power supply equipment contracts. The supply of electricity to customers may be in the form of either standard or premium power supply. A standard power supply is the least-cost technically acceptable solution as defined in the Distribution Network Code whereas the premium power supply is where the customer’s requirement exceeds the specifications of a standard supply. Premium supply customers may already have a standard supply from Eskom but wish to reserve dedicated additional equipment to provide a backup supply. This is achieved through the installation of dedicated premium supply equipment for which the customer is required to pay the full capital costs. Connection charges for premium supply contracts can be repayable on a monthly basis over a maximum period of 25 years. The credit risk exposure resulting from premium supply contracts is managed in a similar manner as for the standard supply contracts. Security is required from customers for premium supply assets which covers irrecoverable costs in the event of the early termination of the supply contract. Premium supply customers have maintained a good payment history with Eskom over the years. The standard payment terms are also applicable to the connection charge relating to the premium supply equipment which is billed monthly to the customer. Eskom is no longer providing financing for premium supply contracts. (e) Loans receivable Home loans are made available to employees in the group via the Eskom Finance Company SOC Limited (EFC) group. 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 27 years (2013: 27 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 settle their home loans with EFC within 90 days of leaving the group’s service. Loans are not extended where the purchase price of the property exceeds its open market value. The weighted average loan amount as a percentage of the total home loan book at 31 March 2014 was 0.01% (2013: 0.01%). In the event of default, the debtor is notified verbally and in writing. If payment has not been received for a period exceeding three months, a process to foreclose on the loan is initiated and the property is sold by public auction or repossessed. Should the property be sold by public auction, a reserve value is set that takes into account the value of the property, arrear rates and taxes, legal costs and commissions payable. If the reserve value is not achieved, the property is repossessed and is held for resale. EFC entered into a securitisation arrangement with Nqaba Finance 1 (RF) Limited (Nqaba), a structured entity. The securitising of the home loan book converted the loan assets into marketable securities traded on the Bond Exchange of South Africa. The structured entity is consolidated in the annual financial statements of the EFC group. EFC is the preferential shareholder of Nqaba which entitles it to all the residual profits (residual cash after provision for secured creditors and noteholders). EFC provides a first-loss credit enhancement loan equal to 14.87% (2013: 14.87%) of the notes in issue. At 31 March 2014 the loan was R290 million (2013: R290 million). As servicer of Nqaba, EFC earns a servicing fee equal to 0.15% (2013: 0.15%) of the quarterly outstanding loan book balance. At the end of the financial year, the net asset value of Nqaba was R28 million (2013: R22 million). 2014 Annual Financial Statements 35 Notes to the financial statements (continued) for the year ended 31 March 2014 4. Financial risk management (continued) 4.1 Credit risk (continued) 4.1.2 Credit exposure The carrying amount of financial assets represents the maximum credit exposure at the reporting date. Refer to notes 12, 13, 14, 15, 17, 19 and 20. The following table represents an analysis per credit rating level (as determined by rating agencies) of the credit risk of financial assets, as indicated. Investment Loans Derivatives Finance lease Trade Financial Cash and cash in securities receivable held for risk receivables and other trading equivalents management receivables assets Rm Rm Rm Rm Rm Rm Rm 2014 Group AAA 8 160 – 465 – – – – AA+ – – – 3 – – – AA 2 747 – 7 110 – – – – A1+ – – 2 170 – 2 503 1 937 11 433 A+ – – 1 611 – – – – A – – 298 – – – – A1 – – 519 – 1 170 1 550 8 174 A- – – – 3 – – – A2 – – – – 164 163 – BBB- – – – 6 – – – A3 – – – – 91 34 67 B – – – – – 17 – Unrated – 8 983 – 526 12 653 564 2 10 907 8 983 12 173 538 16 581 4 265 19 676 Company AAA 8 160 – 465 – – – – AA+ – – – 3 – – – AA – – 7 110 – – – – A1+ – – 2 170 – 2 482 1 798 10 917 A+ – – 1 611 – – – – A – – 298 – – – – A1 – – 519 – 1 170 1 255 8 125 A- – – – 3 – – – A2 – – – – 219 – – BBB- – – – 6 – – – A3 – – – – 156 – – Unrated – – – 526 12 871 173 2 8 160 – 12 173 538 16 898 3 226 19 044 2013 Group AAA – – 1 377 – – – – AA+ 10 193 – – – – – – AA – – 3 386 3 – – – AA- – – – 3 – – – A1+ 5 304 – 1 507 – 2 666 1 845 8 389 A+ – – 681 – – – – A1 1 853 – 375 – 1 358 457 2 060 A2 – – – – 162 7 – A3 – – – 3 203 3 – B – – – – 16 – – Unrated – 8 539 – 546 10 551 423 171 17 350 8 539 7 326 555 14 956 2 735 10 620 Company AAA – – 1 377 – – – – AA+ 10 193 – – – – – – AA – – 3 386 3 – – – AA- – – – 3 – – – A1+ 2 864 – 1 507 – 2 591 1 660 7 916 A+ – – 681 – – – – A1 1 853 – 375 – 1 293 379 1 888 A2 – – – – 162 – – A3 – – – 3 203 – – B – – – – 16 – – Unrated – – – 546 10 467 3 26 14 910 – 7 326 555 14 732 2 042 9 830 36 Eskom Holdings SOC Limited Group Company 2014 2013 2014 2013 Note Rm Rm Rm Rm The maximum exposure to credit risk for trade and other receivables per class was: Electricity receivables 4.1.2(a) 14 602 12 488 14 602 12 488 International 1 044 511 1 044 511 Local large power users 11 489 9 957 11 489 9 957 Local small power users 2 028 1 986 2 028 1 986 Service delivery framework1 41 34 41 34 Other trade receivables Local 4.1.2(b) 381 396 – – Other receivables 4.1.2(c) 1 598 2 072 2 296 2 244 Recoverable work 193 120 124 91 Employee receivables 63 54 58 48 Inter-company receivables – – 1 040 934 Concession receivables 28 31 – – Sundry receivables 1 314 1 867 1 074 1 171 17 16 581 14 956 16 898 14 732 The maximum exposure to credit risk for loans receivable was (refer to note 4.1.2(d)): 13 8 983 8 539 – – The maximum exposure to credit risk for non-current assets held-for-sale was (refer to note 4.1.2(e)): Trade and other receivables 21 9 – 1. Negotiated agreement with stakeholders in residential areas which is a specific initiative aimed at resolving the non-payment of accounts. 2014 Annual Financial Statements 37 Notes to the financial statements (continued) for the year ended 31 March 2014 4. Financial risk management (continued) 4.1 Credit risk (continued) 4.1.2 Credit exposure (continued) (a) Electricity receivables Group and company Carrying Not impaired1 Impaired2 amount Not past Days past due Not past Days past due due due 0-15 16-45 46-75 >75 0-15 16-45 46-75 >75 Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm Individually assessed for impairment 2014 International 1 044 657 190 197 – – – – – – – Gross 1 058 657 190 197 – – – – – – 14 Impairment (14) – – – – – – – – – (14) Local large power users 11 489 9 033 255 101 8 34 363 246 254 303 892 Gross 13 527 9 033 255 101 8 34 371 252 265 310 2 898 Impairment (2 038) – – – – – (8) (6) (11) (7) (2 006) Not past Days past due due 0-30 31-60 >60 Rm Rm Rm Rm Collectively assessed for impairment Local small power users 2 028 1 275 291 290 172 Gross 5 498 1 361 390 376 3 371 Impairment (3 470) (86) (99) (86) (3 199) Service delivery framework 41 7 1 – 33 Gross 186 8 1 – 177 Impairment (145) (1) – – (144) 14 602 Carrying Not impaired1 Impaired2 amount Not past Days past due Not past Days past due due due 0-15 16-45 46-75 >75 0-15 16-45 46-75 >75 Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm Individually assessed for impairment 2013 International 511 490 12 9 – – – – – – – Gross 511 490 12 9 – – – – – – – Impairment – – – – – – – – – – – Local large power users 9 957 8 664 102 105 28 51 193 103 187 200 324 Gross 11 082 8 664 102 105 28 51 200 106 193 203 1 430 Impairment (1 125) – – – – – (7) (3) (6) (3) (1 106) Not past Days past due due 0-30 31-60 >60 Rm Rm Rm Rm Collectively assessed for impairment Local small power users 1 986 1 302 194 95 395 Gross 4 902 1 325 278 173 3 126 Impairment (2 916) (23) (84) (78) (2 731) Service delivery framework 34 – 1 – 33 Gross 197 – 1 1 195 Impairment (163) – – (1) (162) 12 488 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. 38 Eskom Holdings SOC Limited Electricity receivables include an amount of R169 million (2013: R157 million) relating to receivables that were renegotiated1. These electricity receivables would have been past due had their terms not been renegotiated. Interest is accrued on all arrear debts and R468 million (2013: R420 million) was credited to profit or loss within finance income. (b) Other trade receivables Group Carrying Not impaired2 Impaired3 amount Not past Days past due Not past Days past due due 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 Individually assessed for impairment 2014 Local 381 119 53 48 5 156 – – – – – Gross 393 119 53 48 5 156 – – – – 12 Impairment (12) – – – – – – – – – (12) 381 2013 Local 396 135 217 1 5 38 – – – – – Gross 412 135 217 1 5 38 – 5 – 1 10 Impairment (16) – – – – – – (5) – (1) (10) 396 (c) Other receivables Other receivables comprise mainly of receivables for which there are no specific repayment terms. Group Company 2014 2013 2014 2013 Rm Rm Rm Rm Recoverable work 193 120 124 91 Gross 194 120 125 91 Impairment (1) – (1) – Employee receivables 63 54 58 48 Gross 63 55 58 49 Impairment – (1) – (1) Inter-company receivables – – 1 040 934 Gross – – 1 040 934 Impairment – – – – Concession receivables 28 31 – – Gross 28 31 – – Impairment – – – – Sundry receivables 1 314 1 867 1 074 1 171 Gross 1 359 1 924 1 116 1 211 Impairment (45) (57) (42) (40) 1 598 2 072 2 296 2 244 Long outstanding debt or amounts handed over to debt collectors were considered for impairment per class of sundry and employee receivables. 1. 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. 2. 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. 3. 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. 2014 Annual Financial Statements 39 Notes to the financial statements (continued) for the year ended 31 March 2014 4. Financial risk management (continued) 4.1 Credit risk (continued) 4.1.2 Credit exposure (continued) (d) Loans receivable Group Carrying Not past Days past due amount due 0-30 31-60 >60 Rm Rm Rm Rm Rm Collectively assessed for impairment 2014 Loans receivable 8 983 8 862 37 19 65 Home loans 8 565 8 440 37 18 70 Other 452 439 1 1 11 Impairment (34) (17) (1) – (16) 2013 Loans receivable 8 539 8 392 44 20 83 Home loans 7 926 7 774 44 20 88 Other 641 629 1 1 10 Impairment (28) (11) (1) (1) (15) Loans receivable include an amount of R65 million (2013: R40 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 past Days past due amount due 0-30 31-60 >60 2014 Rm Rm Rm Rm Rm Trade and other receivables 9 9 – – – Gross 9 9 – – – Impairment – – – – – (f) Security relating to amounts receivable Group Company 2014 2013 2014 2013 Note Rm Rm Rm Rm The security held against trade and other receivables for the group companies comprises guarantees and deposits. The estimate of the fair value of the security held is: Electricity receivables 5 472 4 757 5 472 4 757 Local large power users 4 028 3 482 4 028 3 482 Local small power users 1 442 1 273 1 442 1 273 Service delivery framework 2 2 2 2 The total amount of the security above includes R4 017 million (2013: R3 472 million) relating to electricity receivables (international and large power users) which were not impaired. Loans receivable (home loans) secured by mortgage bonds 8 546 7 911 (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 4 278 3 346 4 245 3 319 Impairment loss recognised (net of reversals) 36 1 502 1 038 1 515 1 032 Write-offs (55) (106) (50) (106) Balance at end of the year 5 725 4 278 5 710 4 245 Comprising: Electricity receivables 5 667 4 204 5 667 4 204 Other trade receivables 12 16 – – Other receivables 46 58 43 41 17 5 725 4 278 5 710 4 245 40 Eskom Holdings SOC Limited 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 R165 million (2013: R167 million) and R1 284 million (2013: R1 208 million) for the company. Refer note 44.1 for more information on financial guarantees issued. 4.2 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 division 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 division The treasury division 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 division is vested in the asset and liability committee (Alco) and the treasury committee. Measurement and reporting occurs on a daily and/or monthly basis and is performed by an independent section within the treasury division. 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 division 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 (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 remaining contractual periods are between 6 and 15 years. The net impact on profit or loss because of changes in the fair value of the embedded derivatives for the group is a fair value gain of R2 149 million (2013: R5 942 million loss). At 31 March 2014, the embedded derivative liabilities were R9 332 million (2013: R11 481 million) for the group and R9 331 million (2013: R11 480 million) for the company. The valuation methods and inputs are discussed in the accounting policies (refer to note 2.11.5) and the valuation assumptions are disclosed under critical accounting estimates and judgements (refer to note 3(a)). Risks arising from these contracts are discussed under the relevant risk areas as follows: • currency risk (refer to note 4.2.1, page 41) • commodity risk (refer to note 4.2.2, page 43) • interest rate risk (refer to note 4.2.3, page 44) • other price risk (refer to note 4.2.5, page 45) 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 in terms of the South African Reserve Bank (SARB) regulations. Loans receivable Market risk arises in respect of loans receivable from changes in interest rates and market prices. Market risk is monitored and analysed through the treasury division 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 loan receivables are based on movements in the SARB repurchase rate. 4.2.1 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 R150 000 are hedged (ie economic or cash flow hedges). Currency exposure is identified by the business and hedged and managed by the central treasury division. 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 cross-currency swaps. The hedging instrument is entered into once the exposure is firm and ascertainable. 2014 Annual Financial Statements 41 Notes to the financial statements (continued) for the year ended 31 March 2014 4. Financial risk management (continued) 4.2 Market risk (continued) 4.2.1 Currency risk (continued) The major exposure to foreign currency risk at 31 March, based on notional amounts, was (in million): EUR USD GBP JPY SEK AUD CHF CAD NOK 2014 Group Assets Trade and other receivables 1 – – – 3 – – – – Liabilities Debt securities and borrowings (2 309) (4 226) – (16 425) – – – – – Trade and other payables (232) (382) (60) (92) (11) – – (1) (1) Gross statement of financial position exposure (2 540) (4 608) (60) (16 517) (8) – – (1) (1) Estimated forecast purchases1 (1 359) (194) (39) (998) (37) (2) (2) (2) (5) Gross exposure (3 899) (4 802) (99) (17 515) (45) (2) (2) (3) (6) Derivatives held for risk management 3 832 4 801 99 17 525 48 2 2 2 3 Net exposure (67)2 (1) – 10 3 – – (1) (3) Company Assets Trade and other receivables 1 – – – 3 – – – – Liabilities Debt securities and borrowings (2 309) (4 226) – (16 425) – – – – – Trade and other payables (230) (382) (60) (92) (11) – – (1) (1) Gross statement of financial position exposure (2 538) (4 608) (60) (16 517) (8) – – (1) (1) Estimated forecast purchases1 (1 360) (194) (39) (998) (37) (2) (2) (2) (5) Gross exposure (3 898) (4 802) (99) (17 515) (45) (2) (2) (3) (6) Derivatives held for risk management 3 830 4 801 99 17 525 48 2 2 2 3 Group exposures covered by company (2) (1) – – – – – – – Net exposure (70)2 (2) – 10 3 – – (1) (3) Group and company Derivatives held for risk management – rand equivalent 55 828 50 728 1 747 1 793 79 18 26 17 4 2013 Group Assets Trade and other receivables – – – – – – – – – Liabilities Debt securities and borrowings (2 085) (3 193) – (15 778) – – – – – Trade and other payables (134) (15) (2) (3) (61) (1) (1) (6) (4) Gross statement of financial position exposure (2 219) (3 208) (2) (15 781) (61) (1) (1) (6) (4) Estimated forecast purchases1 (1 728) (258) (13) (3 834) (36) (2) (4) (3) (4) Gross exposure (3 947) (3 466) (15) (19 615) (97) (3) (5) (9) (8) Derivatives held for risk management 3 870 3 462 16 19 615 99 2 6 9 8 Net exposure (77)2 (4) 1 – 2 (1) 1 – – Company Assets Trade and other receivables – – – – – – – – – Liabilities Debt securities and borrowings (2 085) (3 193) – (15 778) – – – – – Trade and other payables (134) (11) (2) (3) (61) (1) (1) (6) (4) Gross statement of financial position exposure (2 219) (3 204) (2) (15 781) (61) (1) (1) (6) (4) Estimated forecast purchases1 (1 728) (258) (13) (3 834) (36) (2) (4) (3) (4) Gross exposure (3 947) (3 462) (15) (19 615) (97) (3) (5) (9) (8) Derivatives held for risk management 3 870 3 462 16 19 615 99 2 6 9 8 Group exposures covered by company (1) (4) – – – – (1) – – Net exposure (78)2 (4) 1 – 2 (1) – – – Group and company Derivatives held for risk management – rand equivalent 45 747 31 890 219 1 962 139 21 56 83 12 1. Represents future purchases contracted for. 2. Certain foreign loans are hedged applying a present value strategy. As these loans are recognised at amortised cost, an exact offset will not occur when compared to the hedging instrument. 42 Eskom Holdings SOC Limited The following significant exchange rates applied for the group and company during the year: One unit of the selected currency to the rand R1.00 to the selected currency Average Reporting date Average Reporting date mid-spot rate mid-spot rate 2014 2013 2014 2013 2014 2013 2014 2013 EUR 13.57 10.96 14.57 11.82 0.07 0.09 0.07 0.08 USD 10.12 8.51 10.57 9.21 0.10 0.12 0.09 0.11 GBP 16.10 13.45 17.58 13.96 0.06 0.07 0.06 0.07 CHF 11.04 9.06 11.95 9.70 0.09 0.11 0.08 0.10 JPY 0.10 0.10 0.10 0.10 10.00 10.00 10.00 10.00 SEK 1.55 1.27 1.63 1.41 0.65 0.79 0.61 0.71 CAD 9.60 8.50 9.58 9.06 0.10 0.12 0.10 0.11 AUD 9.42 8.78 9.77 9.59 0.11 0.11 0.10 0.10 NOK 1.69 1.47 1.76 1.57 0.59 0.68 0.57 0.64 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 as follows: Group and company 2014 2013 1% increase 1% decrease 1% increase 1% decrease Rm Rm Rm Rm Profit/(loss), excluding embedded derivatives Total exposure 369 (369) 377 (377) Rand/euro exposure 273 (273) 295 (295) Rand/USD exposure 86 (86) 78 (78) Rand/other currency 10 (10) 4 (4) Equity, excluding embedded derivatives Total exposure 160 (160) 65 (65) Rand/euro exposure 142 (142) 60 (60) Rand/USD exposure 17 (17) 3 (3) Rand/other currency 1 (1) 2 (2) Profit/(loss) – embedded derivatives Rand/USD exposure 152 (156) 177 (173) 4.2.2 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 negotiated pricing arrangements is 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 SARB 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 negotiated pricing arrangements gave rise to commodity-linked (aluminium) embedded derivatives. Refer to note 3(a) on page 29. 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 linked to an index, whereas Eskom pays for all the operational and other related costs of the collieries where the contracts are on a cost-plus basis. These contracts are monitored closely and managed to ensure costs are maintained within acceptable levels. Coal requirements above those of the fixed price and cost-price long-term contracts are supplied via short-to medium-term contracts which could have a transport element included in the purchase price. 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. 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 United States dollar exchange rates. 2014 Annual Financial Statements 43 Notes to the financial statements (continued) for the year ended 31 March 2014 4. Financial risk management (continued) 4.2 Market risk (continued) 4.2.2 Commodity risk (continued) Commodities used indirectly There was no exposure where commodities formed a part of plant, equipment or inventory at year end. Eskom currently does not hedge its exposure to steel as no economic viable hedging instruments exist. The group’s quantitative exposure to commodity risk is as follows: 2014 2013 Tons Gross Hedged Net Tons Gross Hedged Net exposure exposure exposure exposure Rm Rm Rm Rm Rm Rm Copper – – – – 164 9 9 – 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 2014 2013 1% increase 1% decrease 1% increase 1% decrease Rm Rm Rm Rm Profit/(loss), including embedded derivatives1 Aluminium price 130 (130) 144 (144) The periods of the hedging instrument and that of the hedged item are not the same because of SARB regulations that limits the number of years which can be hedged. 4.2.3 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 debt securities, borrowings and forward exchange contracts. Borrowings and debt securities issued at variable rates expose the group to cash flow interest rate risk. 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%. Refer to note 24 for the group’s quantitative exposure to interest rate risk. 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 spot 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. 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 on the next page. The South African rand and the United States dollar interest rates are used in determining the fair value of embedded derivatives. The sensitivity analysis on the next page 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. 1. Impact on profit or loss is before calibration adjustment. 44 Eskom Holdings SOC Limited Group Company 2014 2013 2014 2013 +100 basis -100 basis +100 basis -100 basis +100 basis -100 basis +100 basis -100 basis points points points points points points points points Rm Rm Rm Rm Rm Rm Rm Rm Profit/(loss), excluding embedded derivatives Total exposure (66) 78 (147) 142 (66) 78 (128) 125 Rand interest rates 215 (221) 228 (236) 215 (221) 247 (253) EUR interest rates (86) 88 (133) 135 (86) 88 (133) 135 USD interest rates (185) 201 (239) 240 (185) 201 (239) 240 Other currency interest rates (10) 10 (3) 3 (10) 10 (3) 3 Equity, excluding embedded derivatives Total exposure (1 176) 1 291 (212) 208 (1 168) 1 283 (212) 208 Rand interest rates 1 648 (1 768) 1 333 (1 464) 1 656 (1 776) 1 333 (1 464) EUR interest rates (660) 717 (173) 185 (660) 717 (173) 185 USD interest rates (2 126) 2 302 (1 319) 1 431 (2 126) 2 302 (1 319) 1 431 Other currency interest rates (38) 40 (53) 56 (38) 40 (53) 56 Profit/(loss) – embedded derivatives1 Total exposure 300 (336) 442 (498) 300 (336) 442 (498) Rand interest rates 886 (950) 1 212 (1 307) 886 (950) 1 212 (1 307) USD interest rates (586) 614 (770) 809 (586) 614 (770) 809 Fixed and floating rate debt The fixed and floating rate debt at 31 March were: Group and company 2014 2013 fixed floating fixed floating % % % % Continuing operations 78 22 86 14 4.2.4 Equity price risk Equity price risk arises from listed shares invested in by Escap Limited. 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 Johannesburg Stock Exchange (JSE). A 1% increase of the share price in the equity portfolio at the reporting date would have increased profit or loss by R10 million (2013: R5 million) after tax. An equal change in the opposite direction would have decreased profit or loss by R10 million (2013: R5 million). 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. 4.2.5 Other price risk Inflation price risk arises from embedded derivatives as discussed under note 3(a). The risk arises from movements in the electricity tariffs, the United States PPI. Refer to note 25 for the group’s quantitative exposure to other price risk. 1. Impact on profit or loss is before calibration adjustment. 2014 Annual Financial Statements 45 Notes to the financial statements (continued) for the year ended 31 March 2014 4. Financial risk management (continued) 4.2 Market risk (continued) 4.2.5 Other price risk (continued) 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 and the United States PPI. The analysis assumes that all other variables remain constant and the possible impact on profit or loss is: Group and company 2014 2013 1% decrease 1% increase 1% decrease 1% increase Rm Rm Rm Rm Profit/(loss), including embedded derivatives1 Total exposure (612) 590 (561) 542 Electricity tariffs (790) 765 (791) 765 United States PPI 178 (175) 230 (223) 4.3 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 division 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 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 borrowing programme • maintaining liquidity and funding contingency plans Eskom has an established corporate governance structure and process for managing the risks regarding guarantees and contingent liabilities. 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 Exco and audit and risk committee of the board. Refer to note 44. The guarantees are administratively managed by the treasury division. 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 adjustment. 46 Eskom Holdings SOC Limited Primary sources of funding and unused facilities The primary sources to meet Eskom’s liquidity requirements are cash generated from operations, cash inflows from maturing financial assets purchased, funds committed by government, signed and committed export credit agencies and development funding institution facilities, 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, commercial paper facilities and unutilised government guarantees are in place as indicated below. Group and company 2014 2013 Currency m m Facilities available Japan Bank for International Cooperation Untied facility JPY 4 125 7 682 Tied facility JPY 8 27 929 General banking facilities ZAR 250 1 000 African Development Bank loan facility EUR 431 604 African Development Bank loan facility USD 261 265 African Development Bank loan facility ZAR 316 698 Agence Française de Développement EUR 100 – Agence Française de Développement ZAR 733 951 Clean technology fund – African Development Bank USD 95 100 Clean technology fund – World Bank USD 249 250 Export Credit Agency floating rate facility EUR 513 897 Export Credit Agency fixed rate facility EUR 594 397 World Bank USD 2 275 2 606 Development Bank of South Africa ZAR 6 000 8 000 Government guarantees (uncommitted) ZAR 196 389 196 389 Government guarantees (remaining on domestic multi-term note programme)1 ZAR 9 950 20 769 Ex-Im US USD 499 800 Kreditanstalt für Wiederaufbau USD 100 – Funds received from development financing institutions World Bank 2 USD 331 366 African Development Bank3 EUR 173 269 African Development Bank4 USD 4 – African Development Bank3 ZAR 382 4 617 Development Bank of South Africa5 ZAR 2 000 4 000 Clean technology fund – World Bank6 USD 1 – Clean technology fund – African Development Bank5 USD 5 – Agence Française de Développement5 ZAR 218 30 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 the Exco and the audit and risk committee on a quarterly basis. The duration (a weighted average term to maturity measure based on future cash flows) of the debt (including the shareholder loan, cross- currency swaps and interest rate swaps) measured at fair value at 31 March was: Group and company 2014 2013 years years Continuing operations 5.59 6.19 1. Amount included in the government guarantees – (uncommitted) of R196 389 million (2013: R196 389 million). 2. All funds received were reimbursements on payments made by Eskom to various suppliers for goods and services supplied for the construction of the Medupi power station, Sere wind farm and Majuba rail projects. 3. All funds received were reimbursements on payments made by Eskom to various suppliers for goods and services supplied for the Medupi boilers and turbines. 4. Funds received were used for the Sere wind farm project. 5. Funds received were used for bridging finance for the capacity expansion programme. 6. Funds received were used for concentrated solar power projects. 2014 Annual Financial Statements 47 Notes to the financial statements (continued) for the year ended 31 March 2014 4. Financial risk management (continued) 4.3 Liquidity risk (continued) Key indicators used for liquidity management (continued) Liquid assets Liquid assets are investments identified as having the potential to be quickly converted into cash. These investments include the instruments as disclosed in investments in securities and cash and cash equivalents. Refer to note 12 and 20. The liquid assets were: Group Company 2014 2013 2014 2013 Rm Rm Rm Rm Continuing operations 30 583 27 970 27 204 24 740 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 2014 2013 2014 2013 % % % % Continuing operations 35 50 32 50 Contractual cash flows The table below indicates the contractual undiscounted cash flows of the group’s financial assets and liabilities 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. Contractual cash flows are a function of forward exchange rates and forward interest rates and is a point in time calculation that is impacted by market conditions at that time. The table contains only cash flows relating to financial instruments and financial guarantees. 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 Total Nominal 0-3 4-12 1-5 More than current inflow or months months years 5 years outflow 2014 Note Rm Rm Rm Rm Rm Rm Rm Rm Group Financial assets Investment in securities 12 4 841 6 066 10 907 11 646 1 595 5 166 4 885 – Loans receivable 13 8 654 329 8 983 20 762 275 806 3 819 15 862 Derivatives held for risk management 14 9 361 2 812 12 173 23 902 2 268 591 (1 687) 22 730 Finance lease receivables 15 520 18 538 1 165 22 64 342 737 Trade and other receivables 17 27 16 554 16 581 16 580 16 522 31 27 – Financial trading assets2 19 – 4 265 4 265 5 438 3 478 306 212 1 442 Cash and cash equivalents 20 – 19 676 19 676 19 676 19 676 – – – 23 403 49 720 73 123 99 169 43 836 6 964 7 598 40 771 Financial liabilities Debt securities and borrowings 24 210 169 20 258 230 427 467 676 8 282 22 440 103 573 333 381 Subordinated loan from shareholder 24 24 393 – 24 393 146 356 – – – 146 356 Derivatives held for risk management 14 310 1 197 1 507 467 280 2 558 2 736 (5 107) Finance lease liabilities 29 488 12 500 1 367 25 73 396 873 Trade and other payables 30 1 037 28 229 29 266 29 498 27 294 931 1 268 5 Financial trading liabilities2 19 – 5 658 5 658 6 337 4 670 303 387 977 Financial guarantees 44 – – – 165 165 – – – 236 397 55 354 291 751 651 866 40 716 26 305 108 360 476 485 1. The ratio is calculated as cash generated from operations divided by capital expenditure (excluding borrowing costs capitalised) on property, plant and equipment and intangible assets. 2. The contractual cash flows for financial trading assets and liabilities have been disclosed based on the contractual maturity of the instrument. However, as these instruments are held-for-trading they may be sold or settled prior to contractual maturity. 48 Eskom Holdings SOC Limited Carrying amount Cash flows Non- Current Total Nominal 0-3 4-12 1-5 More than current inflow or months months years 5 years outflow 2014 Note Rm Rm Rm Rm Rm Rm Rm Rm Company Financial assets Loans to subsidiaries – 6 665 6 665 6 790 2 698 4 092 – – Investment in securities 12 4 841 3 319 8 160 8 898 36 3 977 4 885 – Derivatives held for risk management 14 9 361 2 812 12 173 23 902 2 268 591 (1 687) 22 730 Finance lease receivables 15 520 18 538 1 165 22 64 342 737 Trade and other receivables 17 16 16 882 16 898 16 897 16 850 31 16 – Financial trading assets1 19 – 3 226 3 226 4 398 2 438 306 212 1 442 Cash and cash equivalents 20 – 19 044 19 044 19 044 19 044 – – – 14 738 51 966 66 704 81 094 43 356 9 061 3 768 24 909 Financial liabilities Loans from subsidiaries – 2 453 2 453 2 583 1 880 703 – – Debt securities and borrowings 24 208 649 19 774 228 423 465 673 7 888 22 793 101 747 333 245 Subordinated loan from shareholder 24 24 393 – 24 393 146 356 – – – 146 356 Derivatives held for risk management 14 310 1 197 1 507 467 280 2 558 2 736 (5 107) Finance lease liabilities 29 705 64 769 1 698 43 130 642 883 Trade and other payables 30 1 073 29 849 30 922 31 154 28 914 931 1 304 5 Financial trading liabilities1 19 – 5 658 5 658 6 337 4 670 303 387 977 Financial guarantees 44 – 1 1 1 284 1 284 – – – 235 130 58 996 294 126 655 552 44 959 27 418 106 816 476 359 2013 Group Financial assets Investment in securities 12 8 574 8 776 17 350 18 542 5 135 4 630 8 777 – Loans receivable 13 8 425 114 8 539 18 895 215 636 2 897 15 147 Derivatives held for risk management 14 5 420 1 906 7 326 13 344 1 024 272 (1 717) 13 765 Finance lease receivables 15 538 17 555 1 252 22 65 342 823 Trade and other receivables 17 459 14 497 14 956 14 865 13 466 942 456 1 Financial trading assets1 19 – 2 735 2 735 2 439 708 260 162 1 309 Cash and cash equivalents 20 – 10 620 10 620 10 620 10 620 – – – 23 416 38 665 62 081 79 957 31 190 6 805 10 917 31 045 Financial liabilities Debt securities and borrowings 24 168 427 12 180 180 607 366 004 4 127 15 943 71 088 274 846 Subordinated loan from shareholder 24 22 349 – 22 349 146 356 – – – 146 356 Derivatives held for risk management 14 840 572 1 412 2 582 317 359 1 212 694 Finance lease liabilities 29 501 10 511 1 466 27 68 436 935 Trade and other payables 30 2 598 28 999 31 597 31 922 27 847 1 151 2 922 2 Financial trading liabilities1 19 – 1 355 1 355 670 356 47 56 211 Financial guarantees 44 – – – 167 167 – – – 194 715 43 116 237 831 549 167 32 841 17 568 75 714 423 044 1. The contractual cash flows for financial trading assets and liabilities have been disclosed based on the contractual maturity of the instrument. However, as these instruments are held-for-trading they may be sold or settled prior to contractual maturity. 2014 Annual Financial Statements 49 Notes to the financial statements (continued) for the year ended 31 March 2014 4. Financial risk management (continued) 4.3 Liquidity risk (continued) Contractual cash flows (continued) Carrying amount Cash flows Non- Current Total Nominal 0-3 4-12 1-5 More than current inflow or months months years 5 years outflow 2013 Note Rm Rm Rm Rm Rm Rm Rm Rm Company Financial assets Loans to subsidiaries – 6 223 6 223 6 318 2 691 3 627 – – Investment in securities 12 8 574 6 336 14 910 16 103 5 074 2 252 8 777 – Derivatives held for risk management 14 5 420 1 906 7 326 13 344 1 024 272 (1 717) 13 765 Finance lease receivables 15 538 17 555 1 252 22 65 342 823 Trade and other receivables 17 8 14 724 14 732 14 643 13 937 699 6 1 Financial trading assets1 19 – 2 042 2 042 1 746 15 260 162 1 309 Cash and cash equivalents 20 – 9 830 9 830 9 830 9 830 – – – 14 540 41 078 55 618 63 236 32 593 7 175 7 570 15 898 Financial liabilities Loans from subsidiaries – 2 003 2 003 2 019 1 389 630 – – Debt securities and borrowings 24 167 057 11 482 178 539 363 938 3 496 15 877 70 043 274 522 Subordinated loan from shareholder 24 22 349 – 22 349 146 356 – – – 146 356 Derivatives held for risk management 14 840 572 1 412 2 582 317 359 1 212 694 Finance lease liabilities 29 770 56 826 1 882 44 131 711 996 Trade and other payables 30 1 326 29 898 31 224 31 554 29 499 402 1 651 2 Financial trading liabilities1 19 – 1 355 1 355 670 356 47 56 211 Financial guarantees 44 – 1 1 1 208 1 208 – – – 192 342 45 367 237 709 550 209 36 309 17 446 73 673 422 781 4.4 Capital management and going concern 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. 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. Refer to note 24. The table below shows the amounts of the reserves which Eskom manages as capital: Group Company 2014 2013 2014 2013 Rm Rm Rm Rm Accumulated profit 90 786 78 970 85 666 75 489 Cash flow hedge reserve 6 178 2 959 6 178 2 959 Unrealised fair value reserve (7 744) (3 648) (7 744) (3 648) Equity reserve 30 520 30 520 30 520 30 520 119 740 108 801 114 620 105 320 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 current 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 are subject to the process laid down by the National Energy Regulator of South Africa (NERSA). The current regulatory framework applicable to Eskom is the multi-year five-year determination ending in 2018. 1. The contractual cash flows for financial trading assets and liabilities have been disclosed based on the contractual maturity of the instrument. However, as these instruments are held-for-trading they may be sold or settled prior to contractual maturity. 50 Eskom Holdings SOC Limited The electricity business is currently in a major expansion phase and the funding related to 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 foreign debt 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 believes that a capacity expansion beyond the Kusile project would 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. The financial sustainability is dependent on reaching cost reflective prices sooner rather than later. The government as the sole shareholder and the board have the responsibility to ensure that the group is adequately capitalised to ensure continuity of supply and that the business is attractive to investors to enable Eskom to fund the capacity expansion programme. Eskom did not receive a cost reflective tariff in the NERSA Multi-Year Price Determination (MYPD) 3 decision which created a revenue shortfall of R225 billion over the MYPD 3 period which have placed tremendous strain on the financial and operating sustainability of the group. The board has critically examined its activities and costs in order to balance its cash flow requirements through the Business Productivity Programme to identify cost saving and efficiency opportunities to close the revenue shortfall. Eskom submitted an application to NERSA for the MYPD 2 period during August 2013 regarding variances between costs and revenues assumed in MYPD 2 compared to the actual costs incurred and revenue received by Eskom. The NERSA electricity sub-committee has made a recommendation on the Regulatory Clearing Account (RCA) to the NERSA board and a decision is awaited during the first quarter of the new financial year. The recommendation includes an RCA balance in favour of Eskom for implementation in the next financial year. The board is pursuing alternative funding options, including potential government support. In response to the financial position resulting from the NERSA MYPD 3 determination, Eskom will trade-off its former objective of attaining a stand-alone investment grade rating and will instead aim to sustain this rating with sovereign uplift and is monitoring the relevant performance ratio’s as part of its financial policy. The free funds from operations (FFO) to total debt and total debt to earnings before interest, tax, depreciation and amortisation (EBITDA) ratios play an important role in the credit ratings given to Eskom which in turn influences the cost of funding. The board has given particular attention to the assessment of the going concern of the group and is of the view that the group has access to adequate resources to continue in operational existence for the foreseeable future and to complete its current committed capacity expansion programme. The following ratios are closely managed: Unit 2014 2013 Group EBITDA Rm 25 829 13 914 FFO Rm 27 542 18 108 Interest cover ratio 0.77 0.22 Electricity revenue per kWh c/kWh 62.82 58.49 Electricity operating costs per kWh (including depreciation and amortisation) c/kWh 59.67 54.14 FFO as percentage of gross debt % 9.73 8.04 Gross debt/ EBITDA ratio 10.96 16.20 Debt: equity (including long-term provisions) ratio 2.06 1.84 Working capital ratio 0.71 0.68 2014 2013 Rating Outlook Rating Outlook Standard & Poor’s Foreign currency BBB Negative BBB Negative Local currency BBB Negative BBB Negative Moody’s Foreign currency Baa3 Negative Baa3 Negative Local currency Baa3 Negative Baa3 Negative Fitch Ratings National Long-term (zaf) AAA Stable AA+ Stable National Short-term (zaf) F1+ Stable F1+ Stable 4.5 Accounting classifications and fair values The group has applied IFRS 13 Fair value measurement in considering the measurement of fair value where applicable. A number of the group’s accounting policies and disclosures require the measurement of fair values for both financial and non-financial assets and liabilities. Valuation processes The group has established a controlled framework with respect to the measurement of fair values. It includes a valuation team that ultimately reports to the finance director and has overall responsibility for all significant fair value measurements. The valuation team regularly reviews significant unobservable inputs and valuation adjustments. If third-party information, such as broker quotes or pricing services, is used to measure fair value, then the valuation team assesses and documents the evidence obtained from the third parties to support their conclusion that such valuations meet the requirements of IFRS, including the level in the fair value hierarchy that the resulting fair value estimate should be classified to. Principal markets The group is involved in various principal markets because of the unique funding activities undertaken by the group. The fair value will be determined by each participant in the different principal markets. The principal markets are: • capital and money markets • development financing institutions • export credit agencies 2014 Annual Financial Statements 51 Notes to the financial statements (continued) for the year ended 31 March 2014 4. Financial risk management (continued) 4.5 Accounting classifications and fair values (continued) Held-for- Loans and Available- Liabilities Other Total Total fair trading receivables for-sale at assets and carrying value amortised liabilities amount cost 2014 Note Rm Rm Rm Rm Rm Rm Rm Group Financial assets Investment in securities 12 – – 10 907 – – 10 907 10 907 Government bonds – – 8 160 – – 8 160 8 160 Negotiable certificates of deposit – – 2 747 – – 2 747 2 747 Loans receivable1,2 13 – 8 983 – – – 8 983 7 408 Secured by mortgages – 8 546 – – – 8 546 7 139 Other – 437 – – – 437 269 Derivatives held for risk management 14 2 344 – – – 9 829 12 173 12 173 Foreign exchange derivatives 2 289 – – – 9 829 12 118 12 118 Commodity derivatives 51 – – – – 51 51 Credit default swap 4 – – – – 4 4 Finance lease receivables3 15 – – – – 538 538 538 Trade and other receivables3 17 – 16 581 – – – 16 581 16 581 Financial trading assets 19 4 265 – – – – 4 265 4 265 Negotiable certificates of deposit 334 – – – – 334 334 Repurchase agreements 2 325 – – – – 2 325 2 325 Listed shares 1 039 – – – – 1 039 1 039 Government bonds 541 – – – – 541 541 Other money market securities 26 – – – – 26 26 Cash and cash equivalents 20 – 19 676 – – – 19 676 19 676 Bank balances – 10 757 – – – 10 757 10 757 Unsettled deals – 1 489 – – – 1 489 1 489 Fixed deposits – 7 361 – – – 7 361 7 361 Other – 69 – – – 69 69 6 609 45 240 10 907 – 10 367 73 123 71 548 Financial liabilities Debt securities and borrowings2 24 – – – 254 820 – 254 820 240 646 Eskom bonds – – – 102 080 – 102 080 102 274 Promissory notes – – – 35 – 35 45 Commercial paper – – – 14 635 – 14 635 14 629 Eurorand zero coupon bonds – – – 3 484 – 3 484 3 711 Foreign bonds – – – 29 100 – 29 100 30 965 Developing financing institutions – – – 49 256 – 49 256 41 910 Export credit facilities – – – 31 506 – 31 506 32 751 Subordinated loan from shareholders 4 – – – 24 393 – 24 393 14 030 Other loans – – – 331 – 331 331 Embedded derivatives 25 – – – – 9 332 9 332 9 332 Derivatives held for risk management 14 840 – – – 667 1 507 1 507 Foreign exchange derivatives 837 – – – 667 1 504 1 504 Credit default swap 3 – – – – 3 3 Finance lease liabilities3 29 – – – – 500 500 500 Trade and other payables3 30 – – – 29 266 – 29 266 29 266 Financial trading liabilities 19 5 658 – – – – 5 658 5 658 Short-sold government bonds 752 – – – – 752 752 Commercial paper issued 762 – – – – 762 762 Repurchase agreements 4 144 – – – – 4 144 4 144 6 498 – – 284 086 10 499 301 083 286 909 1. The fair value of loans receivable is based on what a market participant would be willing to pay to acquire the loans. This participant would not have the ability to garnish salaries, thus increasing the probability of default resulting in a lower fair value than Eskom’s carrying value. 2. The prospective implementation of IFRS 13 Fair value measurement, requiring adjustment for DVA (Eskom’s own credit risk) and CVA (counterparty credit risk) impacted the fair value of these instruments. 3. The fair values of these financial instruments approximate their carrying amounts. The effect of discounting is not expected to be material. 4. For further information on the subordinated loan from shareholder. Refer to note 24. 52 Eskom Holdings SOC Limited Held-for- Loans and Available- Liabilities Other Total Total fair trading receivables for-sale at assets carrying value amortised and amount cost liabilities 2014 Note Rm Rm Rm Rm Rm Rm Rm Company Financial assets Investment in securities 12 – – 8 160 – – 8 160 8 160 Government bonds – – 8 160 – – 8 160 8 160 Derivatives held for risk management 14 2 344 – – – 9 829 12 173 12 173 Foreign exchange derivatives 2 289 – – – 9 829 12 118 12 118 Commodity derivatives 51 – – – – 51 51 Credit default swap 4 – – – – 4 4 Finance lease receivables1 15 – – – – 538 538 538 Trade and other receivables1 17 – 16 898 – – – 16 898 16 898 Loans to subsidiaries1 – 6 665 – – – 6 665 6 665 Financial trading assets 19 3 226 – – – – 3 226 3 226 Negotiable certificates of deposit 334 – – – – 334 334 Repurchase agreements 2 325 – – – – 2 325 2 325 Government bonds 541 – – – – 541 541 Other money market securities 26 – – – – 26 26 Cash and cash equivalents 20 – 19 044 – – – 19 044 19 044 Bank balances – 10 194 – – – 10 194 10 194 Unsettled deals – 1 489 – – – 1 489 1 489 Fixed deposits – 7 361 – – – 7 361 7 361 5 570 42 607 8 160 – 10 367 66 704 66 704 Financial liabilities Debt securities and borrowings2 24 – – – 252 816 – 252 816 238 642 Eskom bonds – – – 102 080 – 102 080 102 274 Promissory notes – – – 35 – 35 45 Commercial paper – – – 12 962 – 12 962 12 956 Eurorand zero coupon bonds – – – 3 484 – 3 484 3 711 Foreign bonds – – – 29 100 – 29 100 30 965 Developing financing institutions – – – 49 256 – 49 256 41 910 Export credit facilities – – – 31 506 – 31 506 32 751 Subordinated loan from shareholder 3 – – – 24 393 – 24 393 14 030 Embedded derivatives 25 – – – – 9 331 9 331 9 331 Derivatives held for risk management 14 840 – – – 667 1 507 1 507 Foreign exchange derivatives 837 – – – 667 1 504 1 504 Credit default swap 3 – – – – 3 3 Finance lease liabilities1 29 – – – – 769 769 769 Trade and other payables1 30 – – – 30 922 – 30 922 30 922 Loans from subsidiaries1 – – – 2 453 – 2 453 2 453 Financial trading liabilities 19 5 658 – – – – 5 658 5 658 Short-sold government bonds 752 – – – – 752 752 Commercial paper issued 762 – – – – 762 762 Repurchase agreements 4 144 – – – – 4 144 4 144 6 498 – – 286 191 10 767 303 456 289 282 1. The fair values of these financial instruments approximate their carrying amounts. The effect of discounting is not expected to be material. 2. The prospective implementation of IFRS 13 Fair value measurement, requiring adjustment for DVA (Eskom’s own credit risk) and CVA (counterparty credit risk) impacted the fair value of these instruments. 3. For further information on the subordinated loan from shareholder. Refer to note 24. 2014 Annual Financial Statements 53 Notes to the financial statements (continued) for the year ended 31 March 2014 4. Financial risk management (continued) 4.5 Accounting classifications and fair values (continued) Held-for- Loans and Available- Liabilities at Other Total Total fair trading receivables for-sale amortised assets and carrying value cost liabilities amount 2013 Note Rm Rm Rm Rm Rm Rm Rm Group Financial assets Investment in securities 12 – – 17 350 – – 17 350 17 350 Government bonds – – 10 193 – – 10 193 10 193 Negotiable certificates of deposit – – 2 532 – – 2 532 2 532 Fixed deposits – – 4 625 – – 4 625 4 625 Loans receivable 13 – 8 539 – – – 8 539 8 539 Secured by mortgages – 7 911 – – – 7 911 7 911 Other – 628 – – – 628 628 Derivatives held for risk management 14 1 020 – – – 6 306 7 326 7 326 Foreign exchange derivatives 1 017 – – – 6 306 7 323 7 323 Commodity derivatives 3 – – – – 3 3 Finance lease receivables1 15 – – – – 555 555 555 Trade and other receivables1 17 – 14 956 – – – 14 956 14 956 Financial trading assets 19 2 735 – – – – 2 735 2 735 Negotiable certificates of deposit 193 – – – – 193 193 Repurchase agreements 778 – – – – 778 778 Listed shares 693 – – – – 693 693 Government bonds 921 – – – – 921 921 Fixed deposits 126 – – – – 126 126 Other money market securities 24 – – – – 24 24 Cash and cash equivalents 20 – 10 620 – – – 10 620 10 620 Bank balances – 10 457 – – – 10 457 10 457 Fixed deposits – 163 – – – 163 163 3 755 34 115 17 350 – 6 861 62 081 62 081 Financial liabilities Debt securities and borrowings 24 – – – 202 956 – 202 956 221 935 Eskom bonds – – – 88 063 – 88 063 95 835 Promissory notes – – – 83 – 83 115 Commercial paper – – – 8 422 – 8 422 8 422 Eurorand zero coupon bonds – – – 3 080 – 3 080 4 906 Foreign bonds – – – 16 146 – 16 146 17 645 Developing financing institutions – – – 38 089 – 38 089 40 254 Export credit facilities – – – 22 501 – 22 501 27 900 Floating rate notes – – – 3 826 – 3 826 4 112 Subordinated loan from shareholders2 – – – 22 349 – 22 349 22 349 Other loans – – – 397 – 397 397 Embedded derivatives 25 – – – – 11 481 11 481 11 481 Derivatives held for risk management 14 485 – – – 927 1 412 1 412 Foreign exchange derivatives 481 – – – 355 836 836 Interest rate swap – – – – 572 572 572 Commodity derivatives 4 – – – – 4 4 Finance lease liabilities1 29 – – – – 511 511 511 Trade and other payables1 30 – – – 31 597 – 31 597 31 597 Financial trading liabilities 19 1 355 – – – – 1 355 1 355 Short-sold government bonds 204 – – – – 204 204 Commercial paper issued 388 – – – – 388 388 Repurchase agreements 763 – – – – 763 763 1 840 – – 234 553 12 919 249 312 268 291 1. The fair values of these financial instruments approximate their carrying amounts. The effect of discounting is not expected to be material. 2. For further information on the subordinated loan from shareholder. Refer to note 24. 54 Eskom Holdings SOC Limited Held-for- Loans and Available- Liabilities at Other Total Total fair trading receivables for-sale amortised assets and carrying value cost liabilities amount 2013 Note Rm Rm Rm Rm Rm Rm Rm Company Financial assets Investment in securities 12 – – 14 910 – – 14 910 14 910 Government bonds – – 10 193 – – 10 193 10 193 Negotiable certificates of deposit – – 93 – – 93 93 Fixed deposits – – 4 624 – – 4 624 4 624 Derivatives held for risk management 14 1 020 – – – 6 306 7 326 7 326 Foreign exchange derivatives 1 017 – – – 6 306 7 323 7 323 Commodity derivatives 3 – – – – 3 3 Finance lease receivables1 15 – – – – 555 555 555 Trade and other receivables1 17 – 14 732 – – – 14 732 14 732 Loans to subsidiaries1 – 6 223 – – – 6 223 6 223 Financial trading assets 19 2 042 – – – – 2 042 2 042 Negotiable certificates of deposit 193 – – – – 193 193 Repurchase agreements 778 – – – – 778 778 Government bonds 921 – – – – 921 921 Fixed deposits 126 – – – – 126 126 Other money market securities 24 – – – – 24 24 Cash and cash equivalents 20 – 9 830 – – – 9 830 9 830 Bank balances – 9 667 – – – 9 667 9 667 Fixed deposits – 163 – – – 163 163 3 062 30 785 14 910 – 6 861 55 618 55 618 Financial liabilities Debt securities and borrowings 24 – – – 200 888 – 200 888 219 867 Eskom bonds – – – 88 063 – 88 063 95 835 Promissory notes – – – 83 – 83 115 Commercial paper – – – 6 751 – 6 751 6 751 Eurorand zero coupon bonds – – – 3 080 – 3 080 4 906 Foreign bonds – – – 16 146 – 16 146 17 645 Developing financing institutions – – – 38 089 – 38 089 40 254 Export credit facilities – – – 22 501 – 22 501 27 900 Floating rate notes – – – 3 826 – 3 826 4 112 Subordinated loan from shareholder 2 – – – 22 349 – 22 349 22 349 Embedded derivatives 25 – – – – 11 480 11 480 11 480 Derivatives held for risk management 14 485 – – – 927 1 412 1 412 Foreign exchange derivatives 481 – – – 355 836 836 Interest rate swap – – – – 572 572 572 Commodity derivatives 4 – – – – 4 4 Finance lease liabilities1 29 – – – – 826 826 826 Trade and other payables1 30 – – – 31 224 – 31 224 31 224 Loans from subsidiaries1 – – – 2 003 – 2 003 2 003 Financial trading liabilities 19 1 355 – – – – 1 355 1 355 Short-sold government bonds 204 – – – – 204 204 Commercial paper issued 388 – – – – 388 388 Repurchase agreements 763 – – – – 763 763 1 840 – – 234 115 13 233 249 188 268 167 1. The fair values of these financial instruments approximate their carrying amounts. The effect of discounting is not expected to be material. 2. For further information on the subordinated loan from shareholder. Refer to note 24. 2014 Annual Financial Statements 55 Notes to the financial statements (continued) for the year ended 31 March 2014 4. Financial risk management (continued) 4.5 Accounting classifications and fair values (continued) Fair value hierarchy The table on page 57 analyses fair value measurements which are categorised into the different levels in the fair value hierarchy based on the inputs to the valuation techniques used. Other than the application of IFRS 13 Fair value measurement there has been no change in the valuation technique applied. The hierarchy levels are defined as follows: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (ie as prices) or indirectly (ie derived from prices). Level 3: Inputs for the financial asset or financial liability that are not based on observable market data (unobservable inputs). The group recognises transfers between levels of the fair value hierarchy at the end of the reporting period during which the transfer has occurred. Eskom’s policy for determining when transfers between levels in the hierarchy have occurred includes monitoring of the following factors: • Changes in market and trading activity (eg significant increases/decreases in activity) • Changes in inputs used in valuation techniques (eg inputs becoming/ceasing to be observable in the market) There were no transfers between level 1, 2 or 3 of the fair value hierarchy during the year. The valuation techniques used are as follows: Level 1: Quoted prices (unadjusted) in active markets The fair value of financial instruments traded in active markets is based on quoted market prices at the reporting date. A market is regarded as active when it is a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. The quoted market price used for financial assets held by the group is the current bid price. For financial liabilities included in level 1 the current ask price is used. Instruments included in level 1 comprise primary listed investments classified as trading securities or available for sale. Level 2: Inputs other than quoted prices included within level 1 that are observable Level 2 fair values for debt securities are determined using a discounted cash flow technique, which uses expected cash flows and a market-related discount rate. Level 2 fair values for simple over-the-counter derivative financial instruments are based on broker quotes. These quotes are tested for reasonableness by discounting expected future cash flows using a market interest rate for a similar instrument at the measurement date. Fair values reflect the credit risk of the instruments and include adjustments for the credit risk of the group entity and counterparty when appropriate. The fair values are obtained from listed bond yields or using a discounted cash flows model for unlisted instruments. The future cash flows are discounted using a zero curve, which is adjusted to reflect the credit value adjustment (CVA) and debit value adjustment (DVA) that are constructed from money market and swap rates. Level 3: Inputs not based on observable market data (unobservable inputs) Level 3 items are fair valued using unobservable inputs (embedded derivatives for measurement and disclosure and government loan for disclosure). For background information on the valuation techniques and assumptions refer to note 3(a) and 3(e). 56 Eskom Holdings SOC Limited Group Company Fair value Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total 2014 Note Rm Rm Rm Rm Rm Rm Rm Rm Assets measured at fair value Investment in securities 12 8 160 2 747 – 10 907 8 160 – – 8 160 Government bonds 8 160 – – 8 160 8 160 – – 8 160 Negotiable certificates of deposit – 2 747 – 2 747 – – – – Derivatives held for risk management 14 – 12 173 – 12 173 – 12 173 – 12 173 Foreign exchange derivatives 1 – 12 118 – 12 118 – 12 118 – 12 118 Commodity derivatives – 51 – 51 – 51 – 51 Credit default swap – 4 – 4 – 4 – 4 Financial trading assets 19 1 580 2 685 – 4 265 541 2 685 – 3 226 Negotiable certificates of deposit – 334 – 334 – 334 – 334 Repurchase agreements – 2 325 – 2 325 – 2 325 – 2 325 Listed shares 1 039 – – 1 039 – – – – Government bonds 541 – – 541 541 – – 541 Other money market securities – 26 – 26 – 26 – 26 Assets not measured at fair value Loans receivable2 – 7 408 – 7 408 – – – – Secured by mortgages – 7 139 – 7 139 – – – – Other – 269 – 269 – – – – Finance lease receivables 15 – 538 – 538 – 538 – 538 Trade and other receivables 17 – 16 581 – 16 581 – 16 898 – 16 898 Loans to subsidiaries – – – – – 6 665 – 6 665 Cash and cash equivalents 20 – 19 676 – 19 676 – 19 044 – 19 044 Bank balances – 10 757 – 10 757 – 10 194 – 10 194 Unsettled deals – 1 489 – 1 489 – 1 489 – 1 489 Fixed deposits – 7 361 – 7 361 – 7 361 – 7 361 Other – 69 – 69 – – – – 9 740 61 808 – 71 548 8 701 58 003 – 66 704 Liabilities measured at fair value Embedded derivatives 25 – – 9 332 9 332 – – 9 331 9 331 Derivatives held for risk management 14 – 1 507 – 1 507 – 1 507 – 1 507 Foreign exchange derivatives1 – 1 504 – 1 504 – 1 504 – 1 504 Credit default swap – 3 – 3 – 3 – 3 Financial trading liabilities 19 752 4 906 – 5 658 752 4 906 – 5 658 Short-sold government bonds 752 – – 752 752 – – 752 Commercial paper issued – 762 – 762 – 762 – 762 Repurchase agreements – 4 144 – 4 144 – 4 144 – 4 144 Liabilities not measured at fair value Debt securities and borrowings2 24 102 274 124 342 14 030 240 646 102 274 122 338 14 030 238 642 Eskom bonds 102 274 – – 102 274 102 274 – – 102 274 Promissory notes – 45 – 45 – 45 – 45 Commercial paper – 14 629 – 14 629 – 12 956 – 12 956 Eurorand zero coupon bonds – 3 711 – 3 711 – 3 711 – 3 711 Foreign bonds – 30 965 – 30 965 – 30 965 – 30 965 Developing financing institutions – 41 910 – 41 910 – 41 910 – 41 910 Export credit facilities – 32 751 – 32 751 – 32 751 – 32 751 Subordinated loan from shareholder – – 14 030 14 030 – – 14 030 14 030 Other loans – 331 – 331 – – – – Finance lease liabilities 29 – 500 – 500 – 769 – 769 Trade and other payables 30 – 29 266 – 29 266 – 30 922 – 30 922 Loans from subsidiaries – – – – – 2 453 – 2 453 103 026 160 521 23 362 286 909 103 026 162 895 23 361 289 282 1. The credit risk associated with these instruments are considered to be material. The requirements of IFRS 13 Fair value measurement have been prospectively applied. 2. The prospective implementation of IFRS 13 Fair value measurement, requiring adjustment for DVA (Eskom’s own credit risk) and CVA (counterparty credit risk), impacted the fair value of these instruments. 2014 Annual Financial Statements 57 Notes to the financial statements (continued) for the year ended 31 March 2014 4. Financial risk management (continued) 4.5 Accounting classifications and fair values (continued) Group Company Fair value Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total 2013 Note Rm Rm Rm Rm Rm Rm Rm Rm Assets measured at fair value Investment in securities 12 10 193 7 157 – 17 350 10 193 4 717 – 14 910 Government bonds 10 193 – – 10 193 10 193 – – 10 193 Negotiable certificates of deposit – 2 532 – 2 532 – 93 – 93 Fixed deposits – 4 625 – 4 625 – 4 624 – 4 624 Derivatives held for risk management 14 – 7 326 – 7 326 – 7 326 – 7 326 Foreign exchange derivatives – 7 323 – 7 323 – 7 323 – 7 323 Commodity derivatives – 3 – 3 – 3 – 3 Financial trading assets 19 1 614 1 121 – 2 735 921 1 121 – 2 042 Negotiable certificates of deposit – 193 – 193 – 193 – 193 Repurchase agreements – 778 – 778 – 778 – 778 Listed shares 693 – – 693 – – – – Government bonds 921 – – 921 921 – – 921 Fixed deposits – 126 – 126 – 126 – 126 Other money market securities – 24 – 24 – 24 – 24 Assets not measured at fair value Loans receivable – 8 539 – 8 539 – – – – Secured by mortgages – 7 911 – 7 911 – – – – Other – 628 – 628 – – – – Finance lease receivables 15 – 555 – 555 – 555 – 555 Trade and other receivables 17 – 14 956 – 14 956 – 14 732 – 14 732 Loans to subsidiaries – – – – – 6 223 – 6 223 Cash and cash equivalents 20 – 10 620 – 10 620 – 9 830 – 9 830 Bank balances – 10 457 – 10 457 – 9 667 – 9 667 Fixed deposits – 163 – 163 – 163 – 163 11 807 50 274 – 62 081 11 114 44 504 – 55 618 Liabilities measured at fair value Embedded derivatives 25 – – 11 481 11 481 – – 11 480 11 480 Derivatives held for risk management 14 – 1 412 – 1 412 – 1 412 – 1 412 Foreign exchange derivatives – 836 – 836 – 836 – 836 Interest rate swap – 572 – 572 – 572 – 572 Commodity derivatives – 4 – 4 – 4 – 4 Financial trading liabilities 19 204 1 151 – 1 355 204 1 151 – 1 355 Short-sold government bonds 204 – – 204 204 – – 204 Commercial paper issued – 388 – 388 – 388 – 388 Repurchase agreements – 763 – 763 – 763 – 763 Liabilities not measured at fair value Debt securities and borrowings 24 95 835 103 751 22 349 221 935 95 835 101 683 22 349 219 867 Eskom bonds 95 835 – – 95 835 95 835 – – 95 835 Promissory notes – 115 – 115 – 115 – 115 Commercial paper – 8 422 – 8 422 – 6 751 – 6 751 Eurorand zero coupon bonds – 4 906 – 4 906 – 4 906 – 4 906 Foreign bonds – 17 645 – 17 645 – 17 645 – 17 645 Developing financing institutions – 40 254 – 40 254 – 40 254 – 40 254 Export credit facilities – 27 900 – 27 900 – 27 900 – 27 900 Floating rate notes – 4 112 – 4 112 – 4 112 – 4 112 Subordinated loan from shareholder – – 22 349 22 349 – – 22 349 22 349 Other loans – 397 – 397 – – – – Finance lease liabilities 29 – 511 – 511 – 826 – 826 Trade and other payables 30 – 31 597 – 31 597 – 31 224 – 31 224 Loans from subsidiaries – – – – – 2 003 – 2 003 96 039 138 422 33 830 268 291 96 039 138 299 33 829 268 167 58 Eskom Holdings SOC Limited A reconciliation has been performed for fair value measurements in level 3 of the fair value hierarchy as follows: Group Company 2014 2013 2014 2013 Rm Rm Rm Rm Embedded derivatives Carrying value beginning of year 11 481 5 539 11 480 5 538 Net fair value (gain)/loss on embedded derivatives (2 149) 5 942 (2 149) 5 942 Carrying value at end of year 9 332 11 481 9 331 11 480 Refer to note 3(a) and 4.2 for more information on sensitivities and assumptions. 5. Segment information Management has determined the reportable segments, as described below, based on the reports regularly provided, reviewed and used by the Exco to make strategic decisions and assess performance of the 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. The operations in each of the group’s reportable segments are as follows: Generation Consists of the generation and primary energy functions. These functions procure primary energy and generate electricity for sale. Transmission Consists of the transmission grids, systems operations and the South African Energy unit (international buyer). These functions operate and maintain the transmission network for transmitting electricity and also sell bulk electricity to international customers. Distribution Distribution consists of nine provincial operating units. These units provide, operate and maintain the distribution network for distributing. Group customer services Group customer services consists of the customer service and integrated demand management functions and sells electricity to local key large, redistributors, large and small customers. Group capital Group capital is responsible for the planning, development and monitoring of all capital projects and the execution of capacity expansion projects. All other segments Relates to operating segments which are below the quantitative thresholds for determining a reportable segment in terms of IFRS 8 Operating segments. These include the group’s subsidiaries. Corporate and other Relates to all service and strategic functions which do not qualify as a reportable segment in terms of IFRS 8 Operating segments. 2014 Annual Financial Statements 59 Notes to the financial statements (continued) for the year ended 31 March 2014 5. Segment information (continued) The segment information provided to Exco for the reportable segments is as follows: Generation Transmission Distribution Group Group All other Corporate Inter- Group customer capital segments and other segment services transactions 2014 Rm Rm Rm Rm Rm Rm Rm Rm Rm Continuing operations External revenue – 6 446 817 131 007 – 1 236 – – 139 506 Inter-segment revenue/ recoveries 97 303 6 932 20 623 (124 816) – 9 184 – (9 226) – Total revenue 97 303 13 378 21 440 6 191 – 10 420 – (9 226) 139 506 Primary energy (62 716) (6 577) – (350) (169) – – – (69 812) Net employee benefit expense (6 597) (1 480) (6 818) (1 407) (784) (3 271) (5 300) 35 (25 622) Depreciation and amortisation expense (6 436) (1 205) (2 809) (9) (70) (260) (1 402) 254 (11 937) Net impairment loss (12) (18) (7) (1 482) (2) (7) (29) – (1 557) Other operating expenses (16 694) (2 498) (8 726) (2 689) 31 (7 578) 6 195 12 782 (19 177) Operating profit/(loss) before net fair value gain/(loss) and net finance (cost)/income 4 848 1 600 3 080 254 (994) (696) (536) 3 845 11 401 Other income 504 354 317 154 96 401 490 (1 354) 962 Net fair value gain/(loss) on financial instruments, excluding embedded derivatives 691 – 206 46 (1 885) 126 190 6 (620) Net fair value gain on embedded derivatives – – – 2 149 – – – – 2 149 Operating profit/(loss) before net finance (cost)/income 6 043 1 954 3 603 2 603 (2 783) (169) 144 2 497 13 892 Net finance (cost)/income (3 715) (744) (526) 268 (6) (155) 106 – (4 772) Finance income 15 54 48 439 – 353 2 067 (501) 2 475 Finance cost (3 730) (798) (574) (171) (6) (508) (1 961) 501 (7 247) Share of profit of equity- accounted investees – – – – – 16 27 – 43 Profit/(loss) before tax 2 328 1 210 3 077 2 871 (2 789) (308) 277 2 497 9 163 Income tax – – – – – 87 (1 521) (703) (2 137) Profit/(loss) for the year from continuing operations 2 328 1 210 3 077 2 871 (2 789) (221) (1 244) 1 794 7 026 Discontinued operations Profit for the year from discontinued operations – – – – – 63 – – 63 Profit/(loss) for the year 2 328 1 210 3 077 2 871 (2 789) (158) (1 244) 1 794 7 089 Other information Segment assets 116 066 34 784 65 070 13 658 210 439 26 009 62 249 (23 747) 504 528 Investment in equity- accounted investees – – – – – 51 95 172 318 Non-current assets held-for-sale – – – – – 147 – – 147 Total assets 116 066 34 784 65 070 13 658 210 439 26 207 62 344 (23 575) 504 993 Total liabilities 37 297 2 292 23 081 17 598 15 863 19 365 291 555 (21 842) 385 209 Capital expenditure (including borrowing costs capitalised) 14 634 6 440 11 596 – 37 186 455 3 310 (905) 72 716 60 Eskom Holdings SOC Limited Generation Transmission Distribution Group Group All other Corporate Inter- Group customer capital segments and other segment services transactions 2013 Rm Rm Rm Rm Rm Rm Rm Rm Rm Continuing operations External revenue – 5 999 570 120 773 – 1 433 – – 128 775 Inter-segment revenue/ recoveries 86 395 4 739 18 703 (109 855) – 8 089 – (8 071) – Total revenue 86 395 10 738 19 273 10 918 – 9 522 – (8 071) 128 775 Primary energy (52 353) (5 011) – (3 105) (279) – – – (60 748) Net employee benefit expense (6 302) (1 379) (6 119) (1 344) (699) (2 788) (4 933) – (23 564) Depreciation and amortisation expense (5 210) (954) (2 662) (12) (68) (236) (882) 64 (9 960) Net impairment (loss)/ reversal (3) – 2 (1 020) 1 (17) (2) – (1 039) Other operating expenses (16 045) (2 317) (7 480) (4 761) 204 (5 766) 5 516 7 610 (23 039) Operating profit/(loss) before net fair value (loss)/gain and net finance income/(cost) 6 482 1 077 3 014 676 (841) 715 (301) (397) 10 425 Other income 387 686 326 162 73 384 618 (1 510) 1 126 Net fair value (loss)/gain on financial instrument, excluding embedded derivatives (8) (4) 48 (2) (1 535) 22 (176) – (1 655) Net fair value loss on embedded derivatives – – – (5 942) – – – – (5 942) Operating profit/(loss) before net finance income/(cost) 6 861 1 759 3 388 (5 106) (2 303) 1 121 141 (1 907) 3 954 Net finance income/(cost) 3 153 569 (464) (46) (30) (147) (32) – 3 003 Finance income 20 29 50 76 21 340 2 709 (449) 2 796 Finance cost 3 133 540 (514) (122) (51) (487) (2 741) 449 207 Share of profit of equity- accounted investees – – – – – 9 26 – 35 Profit/(loss) before tax 10 014 2 328 2 924 (5 152) (2 333) 983 135 (1 907) 6 992 Income tax – – – – – (273) (2 117) 534 (1 856) Profit/(loss) for the year from continuing operations 10 014 2 328 2 924 (5 152) (2 333) 710 (1 982) (1 373) 5 136 Discontinued operations Profit for the year from discontinued operations – – – – – 47 – – 47 Profit/(loss) for the year 10 014 2 328 2 924 (5 152) (2 333) 757 (1 982) (1 373) 5 183 Other information Segment assets 106 798 29 190 56 560 10 261 173 884 22 063 50 527 (17 563) 431 720 Investment in equity- accounted investees – – – – – 35 95 166 296 Non-current assets held-for-sale – – – – – 8 – – 8 Total assets 106 798 29 190 56 560 10 261 173 884 22 106 50 622 (17 397) 432 024 Total segment liabilities 34 247 2 569 21 328 18 373 13 010 15 055 232 148 (13 845) 322 885 Capital expenditure (including borrowing costs capitalised) 15 290 6 271 9 271 18 28 157 396 2 255 (612) 61 046 2014 Annual Financial Statements 61 Notes to the financial statements (continued) for the year ended 31 March 2014 5. Segment information (continued) Inter-segment purchases and revenue of electricity are allocated between the Generation, Transmission, Distribution and Group customer services segments based on cost recovery plus a uniform return on assets. Group Revenue Non-current assets 2014 2013 2014 2013 Geographical information Rm Rm Rm Rm South Africa 133 495 122 596 416 013 355 228 Foreign countries 6 011 6 179 114 106 139 506 128 775 416 127 355 334 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-segment transactions. There is no significant revenue derived from a single external customer by any of the reportable segments. Non-current assets disclosed for geographical information comprise non-current assets other than deferred tax assets and financial instruments. 2014 2013 Cost Accumulated Carrying Cost Accumulated Carrying depreciation value depreciation value and and impairment impairment losses losses Rm Rm Rm Rm Rm Rm 6. Property, plant and equipment Group Owned assets Land 1 698 – 1 698 1 587 – 1 587 Buildings and facilities 5 645 (1 376) 4 269 4 942 (1 245) 3 697 Plant – Generation 133 722 (47 627) 86 095 124 784 (45 580) 79 204 – Transmission 34 404 (9 420) 24 984 29 032 (8 467) 20 565 – Distribution 78 270 (29 183) 49 087 70 080 (26 347) 43 733 Regular distribution 56 775 (19 133) 37 642 50 935 (16 996) 33 939 Electrification 21 495 (10 050) 11 445 19 145 (9 351) 9 794 – Test, telecommunication and other plant 2 141 (1 112) 1 029 1 818 (1 066) 752 Equipment and vehicles 12 524 (7 162) 5 362 11 327 (6 320) 5 007 Total in commission 268 404 (95 880) 172 524 243 570 (89 025) 154 545 Works under construction 228 692 (40) 228 652 186 675 (1) 186 674 497 096 (95 920) 401 176 430 245 (89 026) 341 219 Leased assets Mining assets1 573 (376) 197 573 (363) 210 497 669 (96 296) 401 373 430 818 (89 389) 341 429 1. Mining assets include various long-term coal contracts whereby Eskom purchases all of the coal from specified mines. Eskom pays a fixed standing charge to cover the capital cost. 62 Eskom Holdings SOC Limited 2014 2013 Cost Accumulated Carrying Cost Accumulated Carrying depreciation value depreciation value and and impairment impairment losses losses Rm Rm Rm Rm Rm Rm Company Owned assets Land 1 669 – 1 669 1 559 – 1 559 Buildings and facilities 5 481 (1 295) 4 186 4 787 (1 173) 3 614 Plant – Generation 134 714 (47 921) 86 793 125 166 (45 776) 79 390 – Transmission 34 459 (9 440) 25 019 29 044 (8 469) 20 575 – Distribution 78 447 (29 327) 49 120 70 147 (26 356) 43 791 Regular distribution 56 941 (19 145) 37 796 50 999 (17 005) 33 994 Electrification 21 506 (10 182) 11 324 19 148 (9 351) 9 797 – Test, telecommunication and other plant 425 (382) 43 427 (377) 50 Equipment and vehicles 10 472 (6 057) 4 415 9 060 (5 201) 3 859 Total in commission 265 667 (94 422) 171 245 240 190 (87 352) 152 838 Works under construction 230 481 (40) 230 441 188 374 (1) 188 373 496 148 (94 462) 401 686 428 564 (87 353) 341 211 Leased assets 1 033 (512) 521 1 032 (471) 561 Mining assets1 573 (376) 197 573 (363) 210 Plant 54 (34) 20 54 (31) 23 Equipment and vehicles 406 (102) 304 405 (77) 328 497 181 (94 974) 402 207 429 596 (87 824) 341 772 Owned assets Leased assets Land Buildings Plant Equipment Works Mining Plant Equipment Total Reconciliation of and and under assets and movements facilities vehicles construction vehicles 2014 Rm Rm Rm Rm Rm Rm Rm Rm Rm Group Carrying value at beginning of the year 1 587 3 697 144 254 5 007 186 674 210 – – 341 429 Additions2 112 128 2 130 1 581 67 742 – – – 71 693 Transfers3 – 586 25 035 103 (25 724) – – – – Transfers to non-current assets held-for-sale – – – (30) – – – – (30) Change in discount rate of decommissioning provision and cost estimate – – 181 – – – – – 181 Disposals (1) (5) (161) (40) – – – – (207) Impairment losses – – – (5) (41) – – – (46) Reversal of impairment losses – – – – 1 – – – 1 Depreciation – (137) (10 244) (1 254) – (13) – – (11 648) Carrying value at end of the year 1 698 4 269 161 195 5 362 228 652 197 – – 401 373 Company Carrying value at beginning of the year 1 559 3 614 143 806 3 859 188 373 210 23 328 341 772 Additions2 111 127 2 733 1 614 67 628 – – 1 72 214 Transfers3 – 578 24 842 101 (25 521) – – – – Change in discount rate of decommissioning provision and cost estimate – – 181 – – – – – 181 Disposals (1) (5) (155) (38) – – – – (199) Impairment losses – – – – (40) – – – (40) Reversal of impairment losses – – – – 1 – – – 1 Depreciation – (128) (10 432) (1 121) – (13) (3) (25) (11 722) Carrying value at end of the year 1 669 4 186 160 975 4 415 230 441 197 20 304 402 207 1. Mining assets include various long-term coal contracts whereby Eskom purchases all of the coal from specified mines. Eskom pays a fixed standing charge to cover the capital cost. 2. Included in additions are borrowing costs capitalised of R13 290 million (2013: R3 678 million) for the group and company. 3. Amounts are transferred from work under construction to the relevant asset class when the asset is available for use. 2014 Annual Financial Statements 63 Notes to the financial statements (continued) for the year ended 31 March 2014 6. Property, plant and equipment (continued) Group Company 2014 2013 2014 2013 Note Rm Rm Rm Rm Borrowing costs on general borrowings are capitalised at an average rate of 9.57% (2013: 9.85%). 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 excluding the government loan for the year was 7.75% (2013: 7.85%). The amounts capitalised during the year were: 41 13 290 3 678 13 290 3 678 Details of land and buildings are available for examination at the registered offices of the respective businesses. Leased assets include arrangements that contain finance leases in terms of IFRIC4 Determining whether an arrangement contains a lease. None of the assets are encumbered or held as security. The total depreciation charge for property, plant and equipment is disclosed in profit or loss in the following categories: 11 648 9 816 11 722 9 697 Depreciation and amortisation expense 35 11 635 9 803 11 709 9 684 Primary energy 13 13 13 13 2014 2013 Cost Accumulated Carrying Cost Accumulated Carrying amortisation value amortisation value and impairment and impairment losses losses Rm Rm Rm Rm Rm Rm 7. Intangible assets Group Rights 1 720 (221) 1 499 1 504 (221) 1 283 Computer software1 5 395 (3 992) 1 403 4 750 (3 267) 1 483 Concession assets 176 (62) 114 113 (37) 76 7 291 (4 275) 3 016 6 367 (3 525) 2 842 Company Rights 1 718 (220) 1 498 1 502 (220) 1 282 Computer software1 5 030 (3 718) 1 312 4 404 (3 057) 1 347 6 748 (3 938) 2 810 5 906 (3 277) 2 629 Rights Computer Concession Total Reconciliation of movements software assets 2014 Rm Rm Rm Rm Group Carrying value at beginning of the year 1 283 1 483 76 2 842 Additions and transfers 216 756 51 1 023 Amortisation – (836) (13) (849) Carrying value at end of the year 1 499 1 403 114 3 016 Company Carrying value at beginning of the year 1 282 1 347 – 2 629 Additions and transfers 216 737 – 953 Amortisation – (772) – (772) Carrying value at end of the year 1 498 1 312 – 2 810 Amortisation of intangible assets of R849 million (2013: R619 million) for the group and R772 million (2013: R565 million) for the company is included within depreciation and amortisation expense in profit or loss. Refer to note 35. Servitude rights have been assessed for impairment as they have an indefinite useful life. The recoverable amount of the rights is based on the fair value less costs of disposal which have been derived from the most recent comparable market transactions (level 2 fair value hierarchy). There have been no impairments for the year ended 31 March 2014 (2013:nil). 1. Software licences have been included as part of computer software. 64 Eskom Holdings SOC Limited Group Company 2014 2013 2014 2013 Rm Rm Rm Rm 8. Investment in equity-accounted investees Investment in associates The carrying value of investment in associates is nil (2013:nil). The group has an investment in Uitenhage Electricity Supply Company (Pty) Limited which ceased trading in 2008 and is in the process of being wound up and Western Power Corridor Company (Pty) Limited is dormant. Investment in joint ventures Balance at beginning of the year 296 261 95 95 Share of profit after tax 43 35 – – Dividends received (21) – – – Balance at end of the year 318 296 95 95 The group’s investments in the joint ventures are not considered to be individually material. The group’s share of the results of its significant joint ventures, all of which are unlisted, is: Name Main business Country of incorporation Interest Profit for the held year after tax % Rm Group 2014 Directly held Mozambique Transmission Company SARL1 Electricity transmission Mozambique 33 27 (Motraco) Indirectly held Trans Africa Projects (Pty) Limited1 Engineering services South Africa 50 16 43 2013 Directly held Mozambique Transmission Company SARL1 Electricity transmission Mozambique 33 26 (Motraco) Indirectly held Trans Africa Projects (Pty) Limited1 Engineering services South Africa 50 9 35 SDR/United Engineers Joint Venture is dormant. The share capital of the group’s investment in joint ventures comprise ordinary shares. The joint ventures are structured as separate vehicles and the group has a residual interest in the net assets. The relevant activities are jointly controlled in accordance with the agreements under which the entities are established. The joint arrangements have therefore been classified as joint ventures. 1. Year end is 31 December. 2014 Annual Financial Statements 65 Notes to the financial statements (continued) for the year ended 31 March 2014 Company 2014 2013 Rm Rm 9. Investment in subsidiaries Shares at cost 384 384 Indebtedness 1 953 1 953 2 337 2 337 The details of subsidiaries for 2014 and 2013 are as follows: Name Main business Country of Issued/stated Interest Investment Indebtedness incorporation share capital held at cost R % Rm Rm Directly held Escap SOC Limited Insurance South Africa 379 500 000 100 380 – Eskom Development Corporate social investment South Africa – 100 – – Foundation NPC Eskom Enterprises Non-regulated electricity supply South Africa 99 000 100 –1 1 9532 SOC Limited industry activities in South Africa and electricity supply and related services outside South Africa Eskom Finance Finance (employee housing loans) South Africa 4 000 100 –1 – Company SOC Limited Natal Navigation Property holding South Africa 771 425 100 – – Collieries and Estate Company SOC Limited PN Energy Services Not trading South Africa 1 500 000 100 4 – SOC Limited3 384 1 953 Indirectly held Eskom Energie Electricity supply Mali 1 000 100 Manantali s.a4,5,6 Eskom Uganda Operations management Uganda 100 100 Limited4,5 Golang Coal SOC Coal exports South Africa 1 000 67 Limited Nqaba Finance 1 (RF) Residential backed mortgage South Africa 100 100 Limited7 securities Pebble Bed Modular Not trading – care and South Africa 100 100 Reactor SOC Limited maintenance Roshcon SOC Limited8 Construction and abnormal South Africa 1 100 load transportation Rosherville Properties Properties South Africa 1 100 SOC Limited Rotek Industries SOC Maintenance and services South Africa 4 000 100 Limited South Dunes Coal Coal exports South Africa 4 000 50 Terminal SOC Limited5 The following subsidiaries are dormant: • Eskom Enterprises Global West Africa • Nempskom Communications Limited (process of liquidation) • Technology Services International SOC Limited (process of being deregistered) There has not been any change in the control assessment and all the previous subsidiaries continue to be accounted for as subsidiaries. The group does not have any subsidiaries with a material non-controlling interest. There is only one significant restriction relating to the cash held in Pebble Bed Modular Reactor SOC Limited (PBMR). Refer to note 20 for details regarding this restriction. 1. Nominal. 2. The equity loan of Eskom Enterprises is interest free. 3. PN Energy Services SOC Limited did not trade during the 2011 to 2014 financial years. 4. Issued/stated capital in foreign currency. 5. Year end is 31 December. 6. Classified as non-current assets held-for-sale in 2014. Applicable comparative figures have been restated for 2013. Refer to note 21. 7. Nqaba is a securitisation vehicle. 8. The subsidiaries of Roshcon SOC Limited have not been disclosed. They are all dormant and in the process of being wound up. 66 Eskom Holdings SOC Limited Group and company 2014 2013 Coal Nuclear Total Total Rm Rm Rm Rm 10. Future fuel supplies Balance at beginning of the year 7 098 1 023 8 121 5 452 Net additions 1 419 1 256 2 675 2 507 Change in discount rate of decommissioning provision and cost estimate (213) – (213) 487 Transfer from equity – (300) (300) – Transfer to inventories (541) (998) (1 539) (325) 7 763 981 8 744 8 121 Group Company 2014 2013 2014 2013 Note Rm Rm Rm Rm 11. Deferred tax Deferred tax assets Balance at beginning of the year 25 43 – – Transfer from profit or loss 42 314 (18) – – 339 25 – – Comprising 339 25 – – Property, plant and equipment 15 18 – – Provisions (16) 7 – – Tax losses 340 – – – Deferred tax liabilities Balance at beginning of the year 15 806 13 807 15 920 13 449 Transfer from profit or loss 42 2 258 1 638 1 520 2 117 Transfer from statement of comprehensive income 42 1 397 361 1 402 354 19 461 15 806 18 842 15 920 Comprising 19 461 15 806 18 842 15 920 Property, plant and equipment 37 789 32 433 36 947 32 434 Inventories 1 717 1 567 1 717 1 567 Provisions (11 159) (9 708) (10 937) (9 594) Tax losses (3 936) (2 222) (3 933) (2 218) Embedded derivative liabilities (2 613) (3 214) (2 613) (3 214) Available-for-sale financial assets 18 124 20 125 Cash flow hedges 2 450 1 198 2 450 1 198 Payments received in advance (4 838) (4 172) (4 835) (4 172) Other 33 (200) 26 (206) Unused tax losses available for offset against future taxable income 15 413 8 188 14 046 7 921 Unused tax losses of a subsidiary amounting to R142 million (2013: R253 million) have not been recognised as it is uncertain whether future taxable profits will be available against which the unused tax losses can be used. 2014 Annual Financial Statements 67 Notes to the financial statements (continued) for the year ended 31 March 2014 Group Company 2014 2013 2014 2013 Rm Rm Rm Rm 12. Investment in securities Available-for-sale 10 907 17 350 8 160 14 910 Government bonds 8 160 10 193 8 160 10 193 Negotiable certificates of deposit 2 747 2 532 – 93 Fixed deposits – 4 625 – 4 624 Maturity analysis 10 907 17 350 8 160 14 910 Non-current 4 841 8 574 4 841 8 574 Current 6 066 8 776 3 319 6 336 No impairment loss was recognised on investment in securities. 13. Loans receivable Loans and receivables 8 983 8 539 – – Secured by mortgages 8 546 7 911 – – Other 437 628 – – Maturity analysis 8 983 8 539 – – Non-current 8 654 8 425 – – Current 329 114 – – Group and company 2014 2013 Assets Liabilities Notional Assets Liabilities Notional amount amount Rm Rm Rm Rm Rm Rm 14. Derivatives held for risk management Derivatives held for economic hedging 2 344 840 50 959 1 020 485 40 664 Foreign exchange derivatives 2 289 837 48 324 1 017 481 40 379 Foreign exchange contracts 1 950 833 45 355 1 017 240 37 589 Cross-currency swap 339 4 2 969 – 241 2 790 Commodity derivatives 51 – 855 3 4 285 Credit default swap 4 3 1 780 – – – Derivatives held for cash flow hedging 9 829 667 60 969 6 306 927 38 425 Foreign exchange derivatives 9 829 667 60 969 6 306 355 34 625 Foreign exchange contracts 685 165 15 904 862 136 15 709 Cross-currency swap 9 144 502 45 065 5 444 219 18 916 Interest rate swap – – – – 572 3 800 Total derivatives held for risk management 12 173 1 507 7 326 1 412 Maturity analysis 12 173 1 507 7 326 1 412 Derivatives held for economic hedging 2 344 840 1 020 485 Non-current 339 3 – 215 Current 2 005 837 1 020 270 Derivatives held for cash flow hedging 9 829 667 6 306 927 Non-current 9 022 307 5 420 625 Current 807 360 886 302 68 Eskom Holdings SOC Limited The hedging practices and accounting treatment are disclosed in note 2.11.3 in the accounting policies. The group uses forward exchange contracts, cross-currency swaps and interest rate swaps for cash flow hedging. • 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 swaps: used to hedge the currency and interest rate risk arising from the foreign fixed rate bonds and foreign fixed or floating borrowings (denominated in US dollar, 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 a R254 million gain (2013: R109 million gain) was recognised in profit or loss as ineffectiveness arising from cash flow hedges (refer to note 39). 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. Credit default swap The group has entered into a credit default swap transaction that could result in the payment by one party to the other party on the occurrence of a credit event or an event of default by Eskom (includes bankruptcy, failure to pay, obligation acceleration, repudiation or moratorium or restructuring of any obligation on Eskom bonds). Cash flow hedges Contractual cash flows are a function of forward exchange rates and forward interest rates and is a point in time calculation that is impacted by market conditions at that time. This may result in future contractual cash outflows or inflows even though the fair value of the derivative may be reflected as an asset or liability. The periods in which the cash flows of derivatives designated as cash flow hedges are expected to occur are: Group and company Carrying Undiscounted 0-3 months 4-12 months 1-5 years More than amount cash flows 5 years Rm Rm Rm Rm Rm Rm 2014 Forward exchange contracts Assets 685 741 378 363 – – Liabilities (165) (149) (27) (122) – – Cross-currency swaps Assets 9 144 19 753 (15) (9) (1 466) 21 243 Liabilities (502) 719 (69) (1 707) (2 653) 5 148 9 162 21 064 267 (1 475) (4 119) 26 391 2013 Forward exchange contracts Assets 862 627 242 385 – – Liabilities (136) (231) (44) (187) – – Interest rate swaps Liabilities (572) (756) (37) (97) (409) (213) Cross-currency swaps Assets 5 444 11 295 (38) (715) (1 717) 13 765 Liabilities (219) (80) (46) (42) (105) 113 5 379 10 855 77 (656) (2 231) 13 665 Gains or losses recognised in the hedging reserve in equity are first recognised in the initial cost carrying amount of the asset or liability when the forecast transaction results in the recognition of a non-financial asset or non-financial liability. Therefore, gains and losses recognised in the hedging reserve in equity will affect profit or loss in the periods during which the relevant non-financial assets are depreciated or finance cost is recognised for the relevant financial liability. 2014 Annual Financial Statements 69 Notes to the financial statements (continued) for the year ended 31 March 2014 14. Derivatives held for risk management (continued) Cash flow hedges (continued) The periods in which the cash flows associated with derivatives are expected to impact profit or loss are: Group and company Carrying Undiscounted 0-3 4-12 1-5 More than amount cash flows months months years 5 years Rm Rm Rm Rm Rm Rm 2014 Forward exchange contracts Assets 685 741 378 363 – – Liabilities (165) (2 967) (27) (122) (130) (2 688) Cross-currency swaps Assets 9 144 19 753 (15) (9) (1 466) 21 243 Liabilities (502) 719 (69) (1 707) (2 653) 5 148 9 162 18 246 267 (1 475) (4 249) 23 703 2013 Forward exchange contracts Assets 862 627 242 385 – – Liabilities (136) 1 357 (44) (187) 67 1 521 Interest rate swaps Liabilities (572) (756) (37) (97) (409) (213) Cross-currency swaps Assets 5 444 11 295 (38) (715) (1 717) 13 765 Liabilities (219) (80) (46) (42) (105) 113 5 379 12 443 77 (656) (2 164) 15 186 Day-one gain/loss The group recognises a day-one gain/loss on initial recognition of cross-currency, credit default and interest rate swaps held as hedging instruments where applicable. Group and company 2014 2013 Rm Rm Loss at beginning of the year 252 325 Day-one (gain)/loss recognised (329) 13 Amortised to profit or loss (91) (86) (Gain)/loss at end of the year (168) 252 The day-one (gain)/loss is included within debt securities and borrowings in the statement of financial position. 15. Finance lease receivables Gross receivables 1 165 1 252 Unearned finance income (627) (697) Present value of minimum lease payments 538 555 Maturity analysis of gross receivables from finance leases Due within one year 86 87 Due between one and five years 342 342 Due after five years 737 823 1 165 1 252 Future finance charges (627) (697) 538 555 Maturity analysis of net receivables from finance leases Non-current 520 538 Due between one and five years 99 87 Due after five years 421 451 Current Due within one year 18 17 538 555 Average implicit rate (%) 13 13 Finance lease receivables mainly comprise premium power supply equipment contracts. Refer to note 4.1.1 (d). 70 Eskom Holdings SOC Limited 2014 2013 Payments Environmental Total Total made in rehabilitation advance trust fund Rm Rm Rm Rm 16. Payments made in advance Group Balance at beginning of the year 4 299 180 4 479 3 591 Transfer to profit or loss (658) – (658) (269) Transfer to the statement of financial position (1 847) – (1 847) (1 735) Payments made during the year 3 325 141 3 466 2 892 5 119 321 5 440 4 479 Maturity analysis 5 119 321 5 440 4 479 Non-current 2 355 321 2 676 2 646 Current 2 764 – 2 764 1 833 Company Balance at beginning of the year 4 189 180 4 369 3 543 Transfer to profit or loss (652) – (652) (268) Transfer to the statement of financial position (1 847) – (1 847) (1 735) Payments made during the year 3 259 141 3 400 2 829 4 949 321 5 270 4 369 Maturity analysis 4 949 321 5 270 4 369 Non-current 2 188 321 2 509 2 520 Current 2 761 – 2 761 1 849 Payments made in advance Payments made in advance comprises of payments made to suppliers and to issuers of loan facilities. Payments made to suppliers are made 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 in advance. Payments made to loan facility issuers are for commitment and issuing fees. These amounts are transferred to the loan balances when the loan is accessed. Environmental rehabilitation trust fund Payments made in advance also include 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. The fund is controlled by third parties to be solely utilised for the said environmental rehabilitation. Group Company 2014 2013 2014 2013 Note Rm Rm Rm Rm 17. Trade and other receivables Financial instruments 16 581 14 956 16 898 14 732 Trade receivables 20 662 17 104 20 269 16 692 Other receivables 1 644 2 130 2 339 2 285 Allowance for impairment of trade and other receivables 4.1.2(g) (5 725) (4 278) (5 710) (4 245) Non-financial instruments VAT receivable 24 428 – 390 16 605 15 384 16 898 15 122 Maturity analysis 16 605 15 384 16 898 15 122 Non-current 27 459 16 8 Current 16 578 14 925 16 882 15 114 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 R52 million (2013: R38 million) for the group and R49 million (2013: R36 million) for the company. 2014 Annual Financial Statements 71 Notes to the financial statements (continued) for the year ended 31 March 2014 Group Company 2014 2013 2014 2013 Rm Rm Rm Rm 18. Inventories Coal and liquid fuel 5 276 5 330 5 276 5 330 Nuclear fuel 1 456 856 1 456 856 Maintenance spares and consumables 5 690 6 065 5 403 5 794 12 422 12 251 12 135 11 980 The group and company reversed R1 million (2013: R1 million) of a previous inventory write down. The amount reversed has been included in net impairment loss in profit or loss. Refer to note 36. 19. Financial trading assets and liabilities Financial trading assets Repurchase agreements 2 325 778 2 325 778 Negotiable certificates of deposit 334 193 334 193 Listed shares 1 039 693 – – Government bonds 541 921 541 921 Fixed deposits – 126 – 126 Other money market securities 26 24 26 24 4 265 2 735 3 226 2 042 Financial trading liabilities Short-sold government bonds 752 204 752 204 Commercial paper issued 762 388 762 388 Repurchase agreements 4 144 763 4 144 763 5 658 1 355 5 658 1 355 Encumbered assets Eskom has concluded sale and repurchase transactions of commercial paper, comprising Eskom bonds and government bonds, with approved counterparties. The group enters into transactions whereby it transfers assets recognised on its statement of financial position, but retains either all or substantially all of the risks and rewards of the transferred assets or a portion of them. If all or substantially all risks and rewards are retained, then the transferred assets are not derecognised. Transfers of assets with retention of all or substantially all risks and rewards include, for example, securities lending and repurchase transactions. At year end Eskom has sold and is committed to repurchase commercial paper after year end with a fair value of R4 144 million (2013: R1 215 million). Of this amount, R4 091 million (2013: R1 191 million) relates to government securities and R53 million (2013: R24 million) to Eskom bonds. Collateral held Eskom has concluded the purchase of commercial paper (Eskom and government bonds) 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 on the statement of financial position as a result of the commitment to resell. This has also resulted in the recognition of a receivable with a fair value of R2 325 million (2013: R1 230 million) recorded in financial trading assets and cash and cash equivalents (depending on original maturity) at year end. Of this amount, R1 714 million (2013: R443 million) relates to government securities and R611 million (2013: R787 million) to Eskom bonds. The total receivable is secured by commercial paper of an equivalent fair value. Group Company 2014 2013 2014 2013 Rm Rm Rm Rm 20. Cash and cash equivalents Bank balances1 10 757 10 457 10 194 9 667 Unsettled deals 1 489 – 1 489 – Fixed deposits 7 361 163 7 361 163 Other 69 – – – 19 676 10 620 19 044 9 830 1. Includes an amount of R54 million (2013: R54 million) in PBMR that is subject to a restriction that prohibits the transfer of the cash within the group or to the shareholder. 72 Eskom Holdings SOC Limited 21. 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. Indirectly held subsidiary – Eskom Energie Manantali s.a (EEM) During the prior year an interim operating and maintenance contract between EEM and Société de Gestion de l’Energie de Manantali (SOGEM) was approved until 30 June 2013 and the process to finalise an additional 10-year contract was in progress. The authorities of the countries involved decided in January 2014 that there would be one more attempt by EEM and SOGEM to reach agreement on the 10-year operating and maintenance contract through mediation, and if this process was not successful by 30 April 2014 EEM will exit from the arrangement. Although significant progress was made, agreement on this contract could not be reached by the cut off date. Based on the above, it is management’s determination that the assets and liabilities of EEM constitute non-current assets and liabilities held-for-sale in terms of IFRS 5 Non-curent assets held-for-sale and discountinued operations. Details regarding EEM can be found under service concession arrangements. Refer to note 22. A consolidated analysis of the assets and liabilities held-for-sale are disclosed as follows: Group 2014 2013 EEM Aviation Total Total assets Rm Rm Rm Rm Income statements Revenue 117 – 117 93 Net employee benefit expense (61) – (61) (35) Net impairment reversal – – – 28 Depreciation and amortisation expense (9) – (9) (8) Other operating expenses (40) – (40) (56) Operating profit before finance income 7 – 7 22 Other income 29 – 29 6 Operating profit before finance income 36 – 36 28 Finance income 28 – 28 24 Profit before tax 64 – 64 52 Income tax (1) – (1) (5) Profit for the year from discontinued operations 63 – 63 47 Statements of cash flows Net cash (used in)/from operating activities (23) – (23) 48 Net cash from investing activities – 7 7 46 (23) 7 (16) 94 Statements of financial position Assets Non-current assets Property, plant and equipment 29 1 30 8 Current assets 117 – 117 – Inventories 7 – 7 – Trade and other receivables 9 – 9 – Cash and cash equivalents 101 – 101 – 146 1 147 8 Liabilities Current liabilities 113 – 113 – Provisions 10 – 10 – Trade and other payables 101 – 101 – Taxation 2 – 2 – 113 – 113 – 2014 Annual Financial Statements 73 Notes to the financial statements (continued) for the year ended 31 March 2014 22. 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 EEM entered into an operation and maintenance agreement with SOGEM in 2001 to operate and maintain a 200 MW 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 was originally 15 years (ending December 2017). EEM is responsible for the day-to-day maintenance, repairs and replacement of the energy assets. During the prior year an interim operating and maintenance contract between EEM and SOGEM was approved until 30 June 2013 and the process to finalise an additional 10-year contract was in progress. The authorities of the countries involved decided in January 2014 that there would be one more attempt by EEM and SOGEM to reach agreement on the 10-year operating and maintenance contract through mediation, and if this process was not successful by 30 April 2014 EEM will exit from the arrangement. Although significant progress was made, agreement on this contract could not be reached by the cut off date. Based on the above, it is management’s determination that the assets of EEM constitute non-current assets held-for-sale in terms of IFRS 5. The operations have been classified as discontinued operations, and the comparatives in the income statement and statement of cash flows have been restated in terms of IFRS 5. Refer to note 21. 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. Eskom Uganda EEM 2014 2013 2014 2013 Rm Rm Rm Rm Income statements Revenue 124 100 117 93 Profit before tax 29 12 64 52 Income tax (10) (4) (1) (5) Profit for the year 19 8 63 47 Statements of financial position Assets Property, plant and equipment – – 29 30 Intangible assets 114 76 – – Inventories 25 18 7 7 Payments made in advance 16 – – – Trade and other receivables 28 27 9 4 Cash and cash equivalents 19 19 101 125 202 140 146 166 Liabilities Debt securities and borrowings 35 18 – – Provisions 9 8 10 10 Trade and other payables 15 15 101 119 Other liabilities 5 9 2 – 64 50 113 129 The underlying assets are included in the respective asset categories in the statement of financial position. Balances relating to EEM are included in non-current assets and liabilities held-for-sale for the 2014 financial year. 74 Eskom Holdings SOC Limited Group Company 2014 2013 2014 2013 R R R R 23. 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 (DPE), as the sole shareholder. Group Company 2014 2013 2014 2013 Rm Rm Rm Rm 24. Debt securities and borrowings Eskom bonds 102 080 88 063 102 080 88 063 Promissory notes 35 83 35 83 Commercial paper 14 635 8 422 12 962 6 751 Eurorand zero coupon bonds 3 484 3 080 3 484 3 080 Foreign bonds 29 100 16 146 29 100 16 146 Development financing institutions 49 256 38 089 49 256 38 089 Export credit facilities 31 506 22 501 31 506 22 501 Floating rate notes – 3 826 – 3 826 Subordinated loan from shareholder 24 393 22 349 24 393 22 349 Other loans 331 397 – – 254 820 202 956 252 816 200 888 Maturity analysis 254 820 202 956 252 816 200 888 Non-current 234 562 190 776 233 042 189 406 Current 20 258 12 180 19 774 11 482 Group Company Security Maturity Currency number Interest rate Nominal date Carrying value Carrying value 2014 2013 2014 2013 2014 2013 2014 2013 % % m m Rm Rm Rm Rm Eskom bonds 101 350 86 944 102 080 88 063 102 080 88 063 ZAR EL15 1 2.87 2.87 5 000 5 000 Jun 15 6 380 6 060 6 380 6 060 ZAR ES151 7.79 7.77 4 684 4 705 Aug 15 4 713 4 734 4 713 4 734 ZAR ES181 9.18 9.18 9 405 9 580 Apr 18 9 818 10 007 9 818 10 007 ZAR E1702 10.07 10.06 11 300 11 513 Aug 203 13 401 13 714 13 401 13 714 ZAR ES231 9.41 9.27 11 435 11 743 Jan 23 12 044 12 419 12 044 12 419 ZAR ES261 9.03 9.06 17 665 16 337 Apr 26 16 842 15 490 16 842 15 490 ZAR EL281 2.24 2.24 3 000 3 000 May 28 3 480 3 310 3 480 3 310 ZAR EL291 1.73 1.76 3 000 1 751 Nov 29 3 330 1 837 3 330 1 837 ZAR EL301 2.38 – 2 455 – Jul 30 2 500 – 2 500 – ZAR ES331 8.84 8.83 25 279 23 315 Sep 33 22 253 20 492 22 253 20 492 ZAR ES421 9.96 – 8 127 – Apr 42 7 319 – 7 319 – Promissory notes2 110 170 35 83 35 83 ZAR PN06 – 16.13 – 60 Feb 14 – 53 – 53 ZAR PN07 15.34 15.34 20 20 Aug 20 8 7 8 7 ZAR PN08 15.08 15.08 20 20 Aug 21 7 6 7 6 ZAR PN09 14.80 14.80 35 35 Aug 22 11 9 11 9 ZAR PN10 14.61 14.61 35 35 Aug 23 9 8 9 8 Balance carried forward to next page 102 115 88 146 102 115 88 146 1. Government guaranteed. 2. Secured by Eskom’s assets (section 7 of Eskom Conversion Act). 3. Latest in a range of maturity dates is indicated for these instruments. 2014 Annual Financial Statements 75 Notes to the financial statements (continued) for the year ended 31 March 2014 24. Debt securities and borrowings (continued) Group Company Security Maturity Currency number Interest rate Nominal date Carrying value Carrying value 2014 2013 2014 2013 2014 2013 2014 2013 % % m m Rm Rm Rm Rm Balance carried forward from previous page 102 115 88 146 102 115 88 146 Commercial paper 14 899 8 604 14 635 8 422 12 962 6 751 ZAR n/a – 6.11 – 597 May 13 – 601 – – ZAR n/a 5.70 5.29 13 239 6 944 Mar 153 12 962 6 751 12 962 6 751 ZAR n/a 6.82 6.22 382 382 May 14 384 384 – – ZAR n/a 6.66 6.04 316 316 May 15 319 318 – – ZAR n/a 6.86 6.52 429 229 May 16 432 231 – – ZAR n/a 6.84 – 397 – May 18 400 – – – ZAR n/a 10.58 10.59 131 131 May 20 133 132 – – ZAR n/a 8.93 8.33 5 5 May 20 5 5 – – Eurorand zero coupon bonds2 17 500 17 500 3 484 3 080 3 484 3 080 ZAR n/a 13.93 13.93 2 000 2 000 Dec 18 1 076 944 1 076 944 ZAR n/a 13.33 13.33 8 000 8 000 Aug 27 1 497 1 321 1 497 1 321 ZAR n/a 11.89 11.89 7 500 7 500 Dec 32 911 815 911 815 Foreign bonds 2 750 1 750 29 100 16 146 29 100 16 146 USD n/a 5.75 5.75 1 750 1 750 Jan 21 18 536 16 146 18 536 16 146 USD n/a 6.75 – 1 000 – Aug 23 10 564 – 10 564 – Development financing institutions3 30 783 22 478 49 256 38 089 49 256 38 089 ZAR n/a 9.67 9.52 9 000 7 000 Mar 29 9 200 7 173 9 200 7 173 USD n/a 1.46 1.62 291 291 Aug 28 3 077 2 679 3 077 2 679 ZAR n/a 7.03 6.43 1 933 2 000 Aug 28 1 949 2 021 1 949 2 021 EUR n/a1 0.67 0.76 499 326 Aug 29 7 278 3 856 7 278 3 856 ZAR n/a1 5.81 5.22 10 314 9 932 Aug 29 10 408 10 016 10 408 10 016 ZAR n/a 8.78 6.50 248 30 Jun 31 249 31 249 31 ZAR n/a 6.13 5.53 1 661 1 755 Mar 32 1 666 1 760 1 666 1 760 USD n/a1 0.62 0.81 875 1 144 May 38 9 245 10 553 9 245 10 553 ZAR n/a1 9.04 – 5 961 – May 38 6 177 – 6 177 – USD n/a1 0.25 – 1 – May 51 7 – 7 – Export credit facilities3 20 240 19 058 31 506 22 501 31 506 22 501 JPY n/a 1.65 1.45 16 349 15 751 May 22 1 666 1 538 1 666 1 538 EUR n/a 1.02 0.99 113 107 Feb 24 1 627 1 246 1 627 1 246 EUR n/a 1.30 1.26 17 19 Jul 24 242 214 242 214 EUR n/a 5.07 5.14 909 869 Jan 27 12 685 9 687 12 685 9 687 EUR n/a 2.82 2.80 756 753 Jul 27 10 454 8 356 10 454 8 356 ZAR n/a 7.73 7.22 1 795 1 559 Jul 27 1 689 1 460 1 689 1 460 USD n/a 2.32 – 301 – Mar 31 3 143 – 3 143 – Floating rate notes1 – 3 800 – 3 826 – 3 826 ZAR n/a – 5.76 – 1 800 Aug 26 – 1 812 – 1 812 ZAR n/a – 5.93 – 2 000 Aug 33 – 2 014 – 2 014 Subordinated loan from shareholder 60 000 60 000 24 393 22 349 24 393 22 349 ZAR n/a 7.52 7.52 5 000 5 000 Dec 38 2 364 2 198 2 364 2 198 ZAR n/a 8.95 8.95 5 000 5 000 Mar 39 2 106 1 933 2 106 1 933 ZAR n/a 9.43 9.43 7 500 7 500 Jun 39 2 938 2 685 2 938 2 685 ZAR n/a 9.15 9.15 7 500 7 500 Sep 39 3 041 2 785 3 041 2 785 ZAR n/a 9.57 9.57 7 500 7 500 Dec 39 2 904 2 650 2 904 2 650 ZAR n/a 9.52 9.52 7 500 7 500 Mar 40 2 949 2 692 2 949 2 692 ZAR n/a 9.54 9.54 5 000 5 000 Jun 40 1 986 1 813 1 986 1 813 ZAR n/a 8.58 8.58 5 000 5 000 Sep 40 2 159 1 988 2 159 1 988 ZAR n/a 9.03 9.03 5 000 5 000 Dec 40 2 048 1 878 2 048 1 878 ZAR n/a 9.81 9.81 5 000 5 000 Mar 41 1 898 1 727 1 898 1 727 Other loans 354 396 331 397 – – ZAR n/a 7.13 7.73 246 298 Jul 16 223 299 – – ZAR n/a – – 108 98 – 108 98 – – 254 820 202 956 252 816 200 888 1. Government guaranteed. 2. Secured by Eskom’s assets (section 7 of Eskom Conversion Act). 3. Latest in a range of maturity dates is indicated for these instruments. 76 Eskom Holdings SOC Limited Subordinated loan from shareholder The subordinated loan from the shareholder of R60 billion has been fully drawn down in 2011. 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 to note 2.15). For details of the valuation of the subordinated loan from shareholder. Refer to note 3(e). Group Company 2014 2013 2014 2013 Rm Rm Rm Rm 25. Embedded derivatives Embedded derivative liabilities Commodity and/or foreign currency 8 757 10 286 8 757 10 286 Foreign currency or interest rate 1 1 – – United States PPI and foreign currency 574 1 194 574 1 194 9 332 11 481 9 331 11 480 Maturity analysis 9 332 11 481 9 331 11 480 Non-current 7 871 10 095 7 870 10 095 Current 1 461 1 386 1 461 1 385 Included in the non-current balances above are the following amounts with maturities of greater than five years: Commodity and/or foreign currency 1 764 3 352 1 764 3 352 PPI and foreign currency 437 919 437 919 2 201 4 271 2 201 4 271 Refer to note 3(a) and 4.2 for information about sensitivities and assumptions relating to embedded derivatives. Group and company 2014 2013 Government Capital Total Total grant contributions received from customers Rm Rm Rm Rm 26. Deferred income Balance at beginning of the year 8 823 2 746 11 569 10 269 Additions and transfers 2 179 234 2 413 1 895 Income recognised (547) (143) (690) (595) 10 455 2 837 13 292 11 569 Maturity analysis 10 455 2 837 13 292 11 569 Non-current 9 825 2 693 12 518 10 907 Current 630 144 774 662 Group and company 2014 2013 Note Rm Rm The total income for the group and company of R690 million (2013: R595 million) is disclosed in profit or loss in the following categories: Depreciation and amortisation expense 35 (547) (462) Other revenue (143) (133) (690) (595) Government grant The government’s transitional electrification programmes are managed by Eskom on behalf of the Department of Energy (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 were paid in advance by electricity customers. 2014 Annual Financial Statements 77 Notes to the financial statements (continued) for the year ended 31 March 2014 2014 2013 Post- Leave Annual and Other Total Total employment performance medical bonus benefits Rm Rm Rm Rm Rm Rm 27. Employee benefit obligations Group Balance at beginning of the year 9 993 1 719 1 587 612 13 911 11 614 Total amount charged to profit or loss and other comprehensive income 524 625 2 397 38 3 584 5 197 Amounts used (283) (522) (2 206) (1) (3 012) (2 900) 10 234 1 822 1 778 649 14 483 13 911 Maturity analysis 10 234 1 822 1 778 649 14 483 13 911 Non-current 9 922 – – – 9 922 10 282 Current 312 1 822 1 778 649 4 561 3 629 Company Balance at beginning of the year 9 788 1 599 1 469 605 13 461 11 225 Total amount charged to profit or loss and other comprehensive income 469 609 2 188 36 3 302 5 041 Amounts used (276) (495) (2 062) – (2 833) (2 805) 9 981 1 713 1 595 641 13 930 13 461 Maturity analysis 9 981 1 713 1 595 641 13 930 13 461 Non-current 9 674 – – – 9 674 10 053 Current 307 1 713 1 595 641 4 256 3 408 Group Company 2014 2013 2014 2013 Note Rm Rm Rm Rm The total charge in profit or loss and other comprehensive income is disclosed in the following categories: Post-employment medical benefits 27.1 524 1 933 469 1 904 Leave 27.2 625 597 609 569 Annual and performance bonus 27.3 2 397 2 061 2 188 1 963 Pension benefits 27.4 1 888 2 308 1 768 2 207 5 434 6 899 5 034 6 643 27.1 Post-employment medical benefits The group has anticipated expenditure in terms of continued contributions to medical aid subscriptions in respect of qualifying employees who retire. The amounts recognised in profit or loss are: 1 406 1 161 1 381 1 139 Current service cost 34 537 414 531 409 Finance cost 41 869 747 850 730 The amounts recognised in other comprehensive income are: Remeasurements of post-employment medical benefits (actuarial (gain)/loss) (882) 772 (912) 765 Demographic assumptions 18 – – – Financial assumptions (831) 983 (845) 974 Experience adjustments (69) (211) (67) (209) 524 1 933 469 1 904 Measurement of post-employment medial benefits and key actuarial assumptions The estimated present value of the anticipated expenditure for both in-service and retired members was calculated by independent actuaries. The group expects to pay R312 million and the company expects to pay R307 million in contributions to this plan in the 2015 financial year. 78 Eskom Holdings SOC Limited Expected maturity analysis of undiscounted post-employment medical benefits: 1 year 1-2 years 2-5 years After 5 years Total 2014 Rm Rm Rm Rm Rm Group Post-employment medical benefits 312 346 1 346 123 920 125 924 Company Post-employment medical benefits 307 338 1 314 121 740 123 699 Risks The post-employment obligation is administered by funds that are legally separated from the group. The boards of the funds are required by law to act in the best interest of the plan participants and are responsible for setting certain policies including investment, contribution and indexation of the funds. These funds expose the group to a number of risks, the most significant of which are: • changes in bonds yields: a decrease in corporate bond yields will increase plan liabilities • inflation risk: the post-employment obligations are linked to inflation, and higher inflation will lead to higher liabilities (although, in most cases, caps on the level of inflationary increases are in place to protect the plan against extreme inflation) • life expectancy: the majority of the plans’ obligations are to provide benefits for the life of the member, so increases in life expectancy will result in an increase in the plans’ liabilities The expected current service cost for the 2015 financial year is estimated at R471 million for the group and R465 million for the company. Refer to note 3(b) for the sensitivity analysis and principal actuarial assumptions used. Group Company 2014 2013 2014 2013 Note Rm Rm Rm Rm 27.2 Leave The group recognises a liability for occasional and service leave (refer to note 3(c)). The total charge is disclosed in profit or loss in the net employee benefit expense 34 625 597 609 569 27.3 Annual and performance bonus 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 thirteenth cheque. The performance bonus is based on the performance of the company and employees. The total charge is disclosed in profit or loss in the net employee benefit expense 34 2 397 2 061 2 188 1 963 27.4 Pension benefits The total contribution is disclosed in profit or loss in the net employee benefit expense 34 1 888 2 308 1 768 2 207 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 (EPPF) 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 EPPF is registered in terms of the Pensions Funds Act. 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 valued actuarially on the IAS 19 Employee benefits basis on 31 March 2014 (previous valuation at 31 March 2013). The actuarial present value of retirement benefits at 31 March 2014 was R80 837 million (2013: R82 504 million), while the fair value of the fund’s assets was R106 042 million (2013: R90 571 million). Valuation assumptions The principal actuarial assumptions used were: Long-term investment return before tax (%) 9.70 8.80 9.70 8.80 Future general salary increases (%) 7.90 7.50 7.90 7.50 Future pension increases (inflation) (%) 6.40 6.00 6.40 6.00 In-service mortality for group and company are the adjusted PA(90) tables rated down by two years. Pensioner mortality for group and company are the adjusted PA(90) tables rated down by two years. 2014 Annual Financial Statements 79 Notes to the financial statements (continued) for the year ended 31 March 2014 2014 2013 Power Power Mine-related Other 4 Total Total station-related station-related closure, environmental environmental pollution restoration restoration control and – nuclear – other rehabilitation3 plant1 generating plant 2 Note Rm Rm Rm Rm Rm Rm 28. Provisions Group Balance at beginning of the year 7 177 6 762 4 309 8 487 26 735 16 818 Provision raised for the year 1 588 (418) (224) 6 126 7 072 7 467 Raised to the income statement 831 146 121 1 271 2 369 4 056 Capitalised to property, plant and equipment 745 (564) – 4 855 5 036 2 814 Capitalised to inventory 12 – (132) – (120) 110 Capitalised to future fuel – – (213) – (213) 487 Finance cost 566 598 281 11 1 456 2 569 Unwinding of discount 41 828 705 341 11 1 885 1 509 Change in discount rate applied to provision 41 (262) (107) (60) – (429) 1 060 Transfer from non-current assets held-for-sale – – – (10) (10) 201 Amounts used – – – (4 495) (4 495) (320) 9 331 6 942 4 366 10 119 30 758 26 735 Maturity analysis 9 331 6 942 4 366 10 119 30 758 26 735 Non-current 9 331 6 942 4 366 518 21 157 20 087 Current – – – 9 601 9 601 6 648 Company Balance at beginning of the year 7 177 6 762 4 309 7 752 26 000 16 339 Provision raised for the year 1 588 (418) (224) 6 096 7 042 7 301 Raised to the income statement 831 146 121 1 241 2 339 3 890 Capitalised to property, plant and equipment 745 (564) – 4 855 5 036 2 814 Capitalised to inventory 12 – (132) – (120) 110 Capitalised to future fuel – – (213) – (213) 487 Finance cost 566 598 281 7 1 452 2 566 Unwinding of discount 41 828 705 341 7 1 881 1 506 Change in discount rate applied to provision 41 (262) (107) (60) – (429) 1 060 – – – (4 299) (4 299) (206) Amounts used 9 331 6 942 4 366 9 556 30 195 26 000 Maturity analysis 9 331 6 942 4 366 9 556 30 195 26 000 Non-current 9 331 6 942 4 366 454 21 093 20 022 Current – – – 9 102 9 102 5 978 1. Provision is made for the estimated decommissioning cost of nuclear plant and for the management of nuclear fuel assemblies and radioactive waste. Refer to note 3(d). 2. Provision is made for the estimated decommissioning cost of all other generating plant. Refer to note 3(d). 3. 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 to note 3(d). 4. Includes provision made for contractual obligations to maintain and restore the infrastructure under service concession arrangements, onerous contracts, compensation claims and guarantees. 80 Eskom Holdings SOC Limited Group Company 2014 2013 2014 2013 Rm Rm Rm Rm 29. Finance lease liabilities Gross liabilities 1 367 1 466 1 698 1 882 Future finance charges (867) (955) (929) (1 056) Present value 500 511 769 826 Maturity analysis of gross liability Due within one year 98 95 173 175 Due between one and five years 396 436 642 711 Due after five years 873 935 883 996 1 367 1 466 1 698 1 882 Future finance charges (867) (955) (929) (1 056) 500 511 769 826 Maturity analysis of net liability Non-current 488 501 705 770 Due between one and five years 72 79 280 291 Due after five years 416 422 425 479 Current Due within one year 12 10 64 56 500 511 769 826 Average implicit rate (%) 18 18 18 18 30. Trade and other payables Financial instruments 29 266 31 597 30 922 31 224 Trade and other payables 20 824 21 436 21 924 20 545 Accruals 6 133 8 251 6 689 8 769 Deposits 2 309 1 910 2 309 1 910 Non-financial instruments VAT payable 302 – 213 – 29 568 31 597 31 135 31 224 Maturity analysis 29 568 31 597 31 135 31 224 Non-current 1 037 2 598 1 073 1 326 Current 28 531 28 999 30 062 29 898 Non-current trade and other payables consists mainly of retention payables. 31. Payments received in advance Upfront capital contributions 3 880 3 871 3 880 3 871 Grant funding 1 531 1 149 1 531 1 149 Other 305 523 292 511 5 716 5 543 5 703 5 531 Maturity analysis 5 716 5 543 5 703 5 531 Non-current 3 589 2 554 3 589 2 554 Current 2 127 2 989 2 114 2 977 32. Revenue Electricity revenue 136 869 126 663 136 869 126 663 Other revenue 2 637 2 112 1 444 699 139 506 128 775 138 313 127 362 2014 Annual Financial Statements 81 Notes to the financial statements (continued) for the year ended 31 March 2014 Group Company 2014 2013 2014 2013 Note Rm Rm Rm Rm 33. Primary energy Own generation costs 54 186 44 380 54 186 44 380 Environmental levy 8 530 7 971 8 530 7 971 International electricity purchases 3 311 2 070 3 311 2 070 Independent power producers 3 266 2 956 3 266 2 956 Other 519 3 371 519 3 371 69 812 60 748 69 812 60 748 Own generating costs relates to the cost of coal, uranium, water and liquid fuels that are used in the generation of electricity. Eskom use a combination of short-, medium- and long-term agreements with suppliers for coal purchases and long-term agreements with the DWA to reimburse the department for the cost incurred in supplying water to Eskom. 34. Net employee benefit expense Salaries 17 372 15 974 16 390 15 001 Overtime 1 616 1 440 1 417 1 252 Post-employment medical benefits 27.1 537 414 531 409 Leave 27.2 625 597 609 569 Annual and performance bonus 27.3 2 397 2 061 2 188 1 963 Pension benefits 27.4 1 888 2 308 1 768 2 207 Direct costs of employment 24 435 22 794 22 903 21 401 Direct training and development 326 391 300 377 Temporary and contract staff costs 5 565 4 459 3 906 3 127 Other staff costs 998 982 960 925 Employee benefit expense capitalised to property, plant and equipment (5 702) (5 062) (5 685) (5 054) 25 622 23 564 22 384 20 776 35. Depreciation and amortisation expense Depreciation of property, plant and equipment 6 11 635 9 803 11 709 9 684 Amortisation of intangible assets 7 849 619 772 565 Deferred income recognised (government grant on electrification) 26 (547) (462) (547) (462) 11 937 9 960 11 934 9 787 36. Net impairment loss Impairment 1 574 1 056 1 565 1 038 Property, plant and equipment 6 46 6 40 3 Inventories 11 3 10 3 Loans receivable 15 9 – – Trade and other receivables (net of reversals) 4.1.2(g) 1 502 1 038 1 515 1 032 Reversal (2) (6) (2) (6) Property, plant and equipment 6 (1) (5) (1) (5) Inventories 18 (1) (1) (1) (1) Bad debts recovered (15) (11) (14) (11) 1 557 1 039 1 549 1 021 82 Eskom Holdings SOC Limited Group Company 2014 2013 2014 2013 Note Rm Rm Rm Rm 37. Other operating expenses Managerial, technical and other fees 2 906 3 589 2 826 3 548 Direct research and development 35 17 35 17 Operating lease expense 1 272 841 587 346 Auditors’ remuneration1 126 96 105 83 Net loss on disposal of property, plant and equipment 179 124 176 133 Government grant (43) 44 (43) 44 Income (312) (23) (312) (23) Expenses incurred 269 67 269 67 Repairs and maintenance, transport and other expenses 14 702 18 328 20 654 20 751 19 177 23 039 24 340 24 922 38. Other income Insurance proceeds – – 384 449 Management fee income – – 751 734 Operating lease income 331 260 175 171 Dividend income 27 34 21 16 Sale of scrap 199 252 199 255 Other income 405 580 343 627 962 1 126 1 873 2 252 39. Net fair value loss on financial instruments, excluding embedded derivatives Gain on financial trading assets held-for-trading (234) (154) (109) (147) Loss on financial trading assets held-for-trading 59 236 59 236 Loss on financial trading liabilities held-for-trading 36 78 36 78 Net gain on derivatives held for risk management 2 (10 602) (7 091) (10 602) (7 091) Net gain on other financial assets held-for-trading (9) (4) (10) (1) Net loss on financial liabilities measured at amortised cost 11 624 8 699 11 633 8 700 Ineffective portion of changes in fair value of cash flow hedges (254) (109) (254) (109) 620 1 655 753 1 666 40. Finance income Loans and receivables 1 417 1 566 1 729 1 861 Available-for-sale financial assets 988 1 158 823 971 Finance lease receivables 70 72 70 72 2 475 2 796 2 622 2 904 1. There were no non-audit services rendered by the group’s statutory auditors. 2. Includes forward exchange contract premium of R2 909 million (2013: R2 530 million) for the company. 2014 Annual Financial Statements 83 Notes to the financial statements (continued) for the year ended 31 March 2014 Group Company 2014 2013 2014 2013 Note Rm Rm Rm Rm 41. Finance cost Debt securities and borrowings 16 448 (1 771) 16 438 (1 812) Interest expense 14 404 11 794 14 394 11 753 Subordinated loan from shareholder 2 044 3 730 2 044 3 730 Remeasurement of subordinated loan from shareholder1 – (17 295) – (17 295) Derivatives held for risk management – interest rate and cross-currency swaps 1 523 1 687 1 523 1 687 Borrowing costs capitalised to property, plant and equipment 6 (13 290) (3 678) (13 290) (3 678) Unwinding of discount 2 906 2 404 2 883 2 384 Post-employment medical benefits 27 869 747 850 730 Provisions 28 1 885 1 509 1 881 1 506 Trade and other payables 116 148 116 148 Other 36 – 36 – Change in discount rate of provisions 28 (429) 1 060 (429) 1 060 Finance lease liabilities 89 91 116 125 7 247 (207) 7 241 (234) 42. Income tax Current tax 193 200 – – Deferred tax 11 1 944 1 656 1 520 2 117 Reversal of temporary differences 3 999 3 566 3 235 4 027 Tax losses (2 055) (1 910) (1 715) (1 910) 2 137 1 856 1 520 2 117 2014 2013 Before tax Tax After tax Before tax Tax After tax Rm Rm Rm Rm Rm Rm Income tax recognised in other comprehensive income Group Available-for-sale financial assets Net change in fair value (377) 106 (271) 43 (12) 31 Cash flow hedges 4 471 (1 252) 3 219 1 992 (556) 1 436 Effective portion of changes in fair value 5 697 (1 595) 4 102 2 791 (780) 2 011 Net amount transferred to initial carrying amount of hedged items (1 226) 343 (883) (799) 224 (575) Foreign currency translation differences (23) – (23) (49) – (49) Remeasurement of post-employment medical benefits 882 (251) 631 (772) 207 (565) 4 953 (1 397) 3 556 1 214 (361) 853 Company Available-for-sale financial assets Net change in fair value (376) 105 (271) 43 (12) 31 Cash flow hedges 4 471 (1 252) 3 219 1 992 (556) 1 436 Effective portion of changes in fair value 5 697 (1 595) 4 102 2 791 (780) 2 011 Net amount transferred to initial carrying amount of hedged items (1 226) 343 (883) (799) 224 (575) Remeasurement of post-employment medical benefits 912 (255) 657 (765) 214 (551) 5 007 (1 402) 3 605 1 270 (354) 916 1. There was no remeasurement of the subordinated loan from shareholder in 2014 as there was no change in estimated future cash flows. 84 Eskom Holdings SOC Limited Group Company 2014 2013 2014 2013 % % % % Reconciliation of the effective tax rate Taxation as a percentage of profit before tax 23.34 26.54 21.89 26.83 Taxation effect of: Non-taxable income 4.80 3.17 6.27 2.64 Expenses not deductible for tax purposes (0.14) (1.71) (0.16) (1.47) Standard tax rate 28.00 28.00 28.00 28.00 Group Company 2014 2013 2014 2013 Rm Rm Rm Rm 43. Cash generated from operations Profit before tax 9 163 6 992 6 944 7 890 Adjustments for: 21 925 22 620 21 602 22 150 Depreciation and amortisation expense 11 937 9 960 11 934 9 787 Depreciation expense – primary energy 13 13 13 13 Net impairment loss (excluding bad debts recovered) 1 572 1 050 1 563 1 032 Net fair value (gain)/loss on financial instruments including embedded derivatives (1 529) 7 597 (1 396) 7 608 Net loss on disposal of property, plant and equipment 179 124 176 133 Dividend income (27) (34) (21) (16) Increase in provisions 5 930 7 734 5 667 7 436 Decrease in deferred income (143) (133) (143) (133) Payments made in advance recognised in profit or loss 658 269 652 268 Payments received in advance recognised in profit or loss (1 478) (843) (1 463) (824) Other non-cash items (6) (16) 1 (16) Finance income (2 475) (2 796) (2 622) (2 904) Finance cost 7 247 (207) 7 241 (234) Share of profit of equity-accounted investees after tax (43) (35) – – Non-current assets held-for-sale 90 (63) – – 31 088 29 612 28 546 30 040 Changes in working capital: (10 455) (828) (9 396) (1 193) Increase in payments made in advance (3 466) (2 892) (3 400) (2 829) Decrease/(increase) in inventories 550 (2 260) 568 (2 125) Increase in trade and other receivables (3 103) (1 387) (3 250) (2 808) Increase in loans receivable (230) (44) – – (Decrease)/increase in trade and other payables (764) 5 182 (231) 5 807 Expenditure incurred on provisions (7 507) (3 220) (7 132) (3 011) Increase in payments received in advance 4 065 3 793 4 049 3 773 20 633 28 784 19 150 28 847 2014 Annual Financial Statements 85 Notes to the financial statements (continued) for the year ended 31 March 2014 Group Company 2014 2013 2014 2013 Rm Rm Rm Rm 44. Guarantees and contingent liabilities Eskom issues guarantees for strategic and business purposes to facilitate other business transactions. 44.1 Financial guarantees (a) Long-term debt raised by Motraco 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 2014 the outstanding amount was USD16 million (2013: USD18 million), which translates into R165 million (2013: R167 million). The loans of USD16 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 0.20% (2013: 0.20%), the financial liability in respect of these guarantees is calculated as Rnil (2013: Rnil). 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 165 167 165 167 (b) EFC loans to group employees EFC has granted loans (secured by mortgage bonds on the properties) to employees of the group. Eskom has 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 2014 the guaranteed amounts were R1 119 million (2013: R1 041 million). 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 3% of the loan book) is calculated at 27% (2013: 27%), while the secured portion of the loan book (97% of the loan book) is calculated at 0.01% (2013: 0.01%). Applying the combined default probability, the financial liability in respect of this guarantee is calculated at R1 million (2013: R1 million). This amount has been included as a provision in Eskom in the current year, and is included in other provisions. Refer to note 28. Changes in variables will not have a significant impact on profit or loss. The unprovided portion, disclosed as a contingent liability, amounted to – – 1 118 1 040 Summary of financial guarantees Unprovided portion 165 167 1 283 1 207 Amounts provided in other provisions – – 1 1 165 167 1 284 1 208 86 Eskom Holdings SOC Limited Group Company 2014 2013 2014 2013 Rm Rm Rm Rm 44.2 Other guarantees (a) Guarantees to South African Revenue Services (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). 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 (b) Eskom Pension and Provident Fund Eskom has indemnified the EPPF against any loss resulting from negligence, dishonesty or fraud by the fund’s officers or trustees. 44.3 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 50 58 50 58 45. Commitments 45.1 Capital expenditure Estimated capital expenditure 175 255 206 741 171 089 200 788 Contracted 59 718 70 344 59 579 70 295 Approved, not yet contracted for 115 537 136 397 111 510 130 493 The expenditure is expected to be incurred as follows: 175 255 206 741 171 089 200 788 Due within one year 60 855 66 157 58 967 64 959 Due between one and five years 112 161 111 648 109 883 106 893 Due after five years 2 239 28 936 2 239 28 936 This expenditure will be financed through debt and internally generated funds. The capital programme will be reviewed and reprioritised by management in line with the funds available. 45.2 Operating leases As lessee The future minimum lease payments payable under non-cancellable operating leases are: 312 162 308 158 Due within one year 119 94 116 91 Due between one and five years 193 68 192 67 As lessor The future minimum lease payments receivable under non-cancellable operating leases are: 355 435 355 435 Due within one year 47 64 47 64 Due between one and five years 308 371 308 371 2014 Annual Financial Statements 87 Notes to the financial statements (continued) for the year ended 31 March 2014 46. Related-party transactions The group is wholly owned by its shareholder, the government, represented by the DPE. Eskom (and its subsidiaries) are classified as Schedule 2 public entities in terms of the PFMA. Eskom’s government related parties include national departments (including the shareholder), constitutional institutions, public entities (schedule 1, 2 and 3) and local government (including municipalities). Eskom’s transactions with local government (with the exception of municipalities) are not individually significant when compared to the total value of the transactions between Eskom and other government related parties and are therefore not disclosed separately. These include, among others, transactions as a result of services provided to government hospitals and libraries. Related parties also comprise subsidiaries of Eskom, associates and joint ventures of the group and post-employment benefit plans for the benefit of employees. It also includes 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 is provided by National Treasury on its website www.treasury.gov.za. It also provides the names of subsidiaries of public entities. Key management personnel for Eskom include the group’s board of directors and the Exco. Disclosure of related-party transactions with key management personnel is included in note 49. The following transactions were carried out with related parties: Group Company 2014 2013 2014 2013 Note Rm Rm Rm Rm Transactions Sales of goods and services1 72 639 67 984 73 950 69 468 National departments 608 669 599 668 Local government 64 644 60 956 64 644 60 956 Public entities 4 689 3 907 4 623 3 836 Eskom subsidiaries – – 1 386 1 559 Joint venture in which Eskom is a partner 2 698 2 452 2 698 2 449 Government grant funding received for electrification National departments 2 887 2 363 2 887 2 363 Purchases of goods and services2 12 874 8 336 21 833 15 590 National departments 1 263 950 1 262 950 Local government 1 138 882 1 130 882 Public entities 8 252 4 036 8 173 4 031 Eskom subsidiaries – – 9 167 7 360 Joint venture in which Eskom is a partner 333 160 333 160 Other related parties 34 1 888 2 308 1 768 2 207 Finance income 1 371 1 458 1 724 1 784 National departments 773 740 773 740 Local government 303 179 303 179 Public entities 295 539 295 539 Eskom subsidiaries – – 353 326 Finance cost 6 047 6 947 6 168 7 036 National departments 2 046 3 731 2 046 3 731 Public entities 3 923 3 183 3 923 3 183 Eskom subsidiaries – – 121 89 Other related parties 78 33 78 33 Lease income 75 61 78 71 Public entities 75 61 75 61 Eskom subsidiaries – – 3 10 Lease expenses Eskom subsidiaries – – – 1 Finance lease finance cost Eskom subsidiaries – – 26 34 Environmental levy Public entities 33 8 530 7 971 8 530 7 971 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 prices. 88 Eskom Holdings SOC Limited Group Company 2014 2013 2014 2013 Note Rm Rm Rm Rm Outstanding balances (due by related parties) Receivables and amounts owed by related parties 8 447 6 987 9 569 8 066 National departments 21 54 19 54 Local government 6 927 5 142 6 927 5 142 Public entities 1 181 1 568 1 132 1 529 Eskom subsidiaries – – 1 173 1 118 Joint venture in which Eskom is a partner 318 223 318 223 Payments made in advance 30 21 35 105 Public entities 30 21 30 21 Eskom subsidiaries – – 5 84 Loan to Eskom subsidiaries1 – – 6 665 6 223 Indirect transactions – assets at nominal value National departments 8 094 10 091 8 094 10 091 Total due by related parties 16 571 17 099 24 363 24 485 Cash and cash equivalents 7 835 5 944 7 835 5 944 Public entities Outstanding balances (due to related parties) Payables2 and amounts owed to related parties 62 603 62 193 65 807 65 339 National departments 60 113 60 071 60 112 60 071 Subordinated loan from shareholder 24 60 000 60 000 60 000 60 000 Other 113 71 112 71 Local government 80 279 79 279 Public entities 1 955 1 640 1 866 1 639 Eskom subsidiaries – – 3 295 3 147 Joint venture in which Eskom is a partner 44 10 44 10 Other related parties 411 193 411 193 Payments received in advance National departments 1 531 1 478 1 531 1 478 Loan from subsidiaries1 – – 2 453 2 003 Debt securities and borrowings3 61 867 47 763 61 867 47 763 Public entities 60 686 46 811 60 686 46 811 Other related parties 1 181 952 1 181 952 Indirect transactions – liabilities at nominal value 805 188 805 188 National departments 126 806 111 622 132 463 116 771 Total due to related parties Guarantees Guarantees received 350 077 350 095 350 077 350 095 National departments 350 000 350 000 350 000 350 000 Committed 153 611 153 611 153 611 153 611 Uncommitted 196 389 196 389 196 389 196 389 Local government 43 42 43 42 Public entities4 34 53 34 53 Guarantees issued 348 350 1 466 1 390 National departments 44.2 183 183 183 183 Eskom subsidiaries 44.1 – – 1 118 1 040 Joint venture in which Eskom is a partner 44.1 165 167 165 167 Commitments Eskom does not have any commitments with its related parties. 1. The loans to and from subsidiaries is payable on demand. The effective interest rate on the loans to subsidiaries is 5.91% (2013: 5.29%). 2. Purchase transactions with related parties are at an arm’s length basis with payment terms of 30 days from invoice date. 3. Bonds are bearer instruments and it is therefore unknown if the initial counterparty still holds the bonds. 4. The guarantees from state-owned entities are for future or unpaid electricity consumption accounts. 2014 Annual Financial Statements 89 Notes to the financial statements (continued) for the year ended 31 March 2014 47. Events after the reporting date There were no significant events after the reporting date. 48. Restatement of comparatives The following restatements and reclassifications which had an impact on the financial statements, were made: Eskom Energie Manantali s.a (EEM) During the prior year an interim operating and maintenance contract between EEM and SOGEM was approved until 30 June 2013 and the process to finalise an additional 10-year contract was in progress. The authorities of the countries involved decided in January 2014 that there would be one more attempt by EEM and SOGEM to reach agreement on the 10-year operating and maintenance contract through mediation, and if this process was not successful by 30 April 2014 EEM will exit from the arrangement. Although significant progress was made, agreement on this contract could not be reached by the cut off date. Based on the above, it is management’s determination that the assets of EEM constitute non-current assets held-for-sale in terms of IFRS 5. The operations have been classified as discontinued operations, and the comparatives in the income statement and statement of cash flows have been restated in terms of IFRS 5. Reclassification of comparative figures Certain comparative figures have been reclassified in order to improve disclosure. These include the government grant received for electrification which was reclassified from other income into other operating expenses and in the cash flow statement the foreign currency translation reserve is now shown separately apart from cash flows from operating, investing and financing activities. The impact of the restatements is as follows: Group Company Previously Adjustments Restated Previously Adjustments Restated reported reported Rm Rm Rm Rm Rm Rm Income statements for the year ended 31 March 2013 Continuing operations Revenue 128 869 (94) 128 775 127 362 – 127 362 Primary energy (60 748) – (60 748) (60 748) – (60 748) Net employee benefit expense (23 599) 35 (23 564) (20 776) – (20 776) Depreciation and amortisation expense (9 968) 8 (9 960) (9 787) – (9 787) Net impairment loss (1 011) (28) (1 039) (1 021) – (1 021) Other operating expenses (23 123) 84 (23 039) (24 945) 23 (24 922) Operating profit before net fair value loss and net finance income 10 420 5 10 425 10 085 23 10 108 Other income 1 155 (29) 1 126 2 275 (23) 2 252 Net fair value loss on financial instruments excluding embedded derivatives (1 655) – (1 655) (1 666) – (1 666) Net fair value loss on embedded derivatives (5 942) – (5 942) (5 942) – (5 942) Operating profit before net finance income 3 978 (24) 3 954 4 752 – 4 752 Net finance income 3 027 (24) 3 003 3 138 – 3 138 Finance income 2 820 (24) 2 796 2 904 – 2 904 Finance cost 207 – 207 234 – 234 Share of profit of equity-accounted investees after tax 35 – 35 – – – Profit before tax 7 040 (48) 6 992 7 890 – 7 890 Income tax (1 857) 1 (1 856) (2 117) – (2 117) Profit for the year from continuing operations 5 183 (47) 5 136 5 773 – 5 773 Discontinued operations Profit for the year from discontinued operations – 47 47 – – – Profit for the year 5 183 – 5 183 5 773 – 5 773 90 Eskom Holdings SOC Limited Group Company Previously Adjustments Restated Previously Adjustments Restated reported reported Rm Rm Rm Rm Rm Rm Cash flow statements for the year ended 31 March 2013 Cash flows from operating activities Cash generated from operations 28 832 (48) 28 784 28 847 – 28 847 Non-current assets held-for-sale – 48 48 – – – Other net cash flows from operating activities (1 163) – (1 163) (905) – (905) Net cash from operating activities 27 669 – 27 669 27 942 – 27 942 Cash flows from investing activities Acquisitions of property, plant and equipment (53 494) 49 (53 445) (53 742) – (53 742) Other net cash flows from investing activities (4 914) – (4 914) (4 365) – (4 365) Net cash used in investing activities (58 408) 49 (58 359) (58 107) – (58 107) Cash flows from financing activities Net cash from financing activities 21 784 – 21 784 21 600 – 21 600 Net increase/(decrease) in cash and cash equivalents (8 955) 49 (8 906) (8 565) – (8 565) Cash and cash equivalents at beginning of the year 19 450 – 19 450 18 395 – 18 395 Foreign currency translation – (49) (49) – – – Cash and cash equivalents at beginning of the year attributable to non-current assets held-for-sale 125 – 125 – – – Cash and cash equivalents at end of the year 10 620 – 10 620 9 830 – 9 830 49. 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 Eskom 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. Eskom aims to remunerate in line with the median of the market to recruit and retain the best management team to lead the business. The executive remuneration strategy is constantly reviewed to stay aligned with the DPE remuneration guidelines and abreast with best practices. People and governance committee The people and governance committee assists the board to apply policy relating to the remuneration of directors and executives as set by Eskom’s shareholder. The policy also covers the nomination of executives for senior positions and conditions of service. 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 people and governance committee regarding non-executive directors remuneration 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 members The committee makes recommendations to the board concerning the remuneration of the chief executive, and approves the remuneration of the other Exco members (group executives). 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 people and governance 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 chief executive, finance director and group executives have permanent employment contracts based on Eskom’s standard conditions of service. Six month’s notice is required. 1. Includes remuneration of the chief executive, finance director and Exco members (group executives who are senior executives but not directors of Eskom). 2014 Annual Financial Statements 91 Notes to the financial statements (continued) for the year ended 31 March 2014 49. Directors’ remuneration (continued) 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 (these are linked to the shareholder compact) as set by the chief executive in performance contracts with each Exco member. The people and governance 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 scheme has been approved by the shareholder 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 2010, 2011, 2012 and 2013. 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 corporate 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 aligned with the shareholder compact and corporate plan 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 incidence rate is greater than 0.45 • if the sustainability committee gives an unfavourable safety report • if Eskom’s audited financial statements show a financial loss • if the auditors qualify Eskom’s financial statements • if a significant PFMA contravention occurs • if enhancement of Eskom’s reputation is not achieved The vesting period for award performance shares is three years from the date of grant. At the end of that period, the people and governance 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). Share awards – vested Award performance shares awarded on 1 April 2011 vested on 31 March 2014 with an expected vesting rate over the three-year period of 53.48% due to the achievement of non-financial performance conditions. The cash value of the vested shares is payable in June 2014 at R1.19 per share based on the money market rate. Shares awarded on 1 April 2010 were redeemed during the year. 92 Eskom Holdings SOC Limited Shares vested on 31 March 2014 (with comparative status at 31 March 2013) are: Award Award Award Award Award Award performance performance performance performance performance performance shares vested on shares vested on shares payable shares vested on shares vested on shares payable at 31 March 2014 31 March 2014 at R1.19 per share 31 March 2013 31 March 2013 at R1.20 per share at a rate of 53.48% a rate of 48.23% Name Number Number R’000 Number Number R’000 BA Dames 8 972 308 4 486 154 5 201 3 330 786 1 606 405 1 928 TBL Molefe 1 734 385 927 549 1 104 877 739 423 334 508 PS O’Flaherty – – – 2 772 000 1 260 833 1 513 BE Bulunga 1 871 100 1 000 664 1 191 1 247 400 601 609 722 T Govender 2 072 022 1 108 117 1 319 1 801 367 868 781 1 043 EL Johnson 2 662 934 1 424 137 1 695 2 064 290 995 586 1 195 SJ Lennon 1 999 876 1 069 534 1 273 1 333 251 643 014 772 DL Marokane 2 519 731 1 347 552 1 604 2 150 400 1 037 116 1 245 A Noah 2 057 980 1 100 608 1 310 1 595 333 769 413 923 MM Ntsokolo 2 358 838 1 261 507 1 501 1 572 559 758 429 910 The current estimated vesting values of the award performance shares are R1.20 per share for the 1 April 2012 awards (vesting 31 March 2015) and R1.21 for the April 2013 awards (vesting 31 March 2016). 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 vesting percentage of 50% for the 1 April 2012 and 50% for the 1 April 2013 awards, are estimates. Shares awarded on 1 April 2013: Shares awarded on 1 April 2012: Outstanding Award Award Outstanding Award Award award performance performance award performance performance performance shares vesting shares payable performance shares vesting shares payable shares vesting on 31 March 2016 in June 2016 at shares vesting on 31 March 2015 in June 2015 at on 31 March 2016 at a rate of 50% R1.21 per share on 31 March 2015 at a rate of 50% R1.20 per share Name Number Number R’000 Number Number R’000 TBL Molefe 1 829 776 914 888 1 107 1 829 776 914 888 1 098 T Govender 2 185 983 1 092 992 1 323 2 185 983 1 092 992 1 312 EL Johnson 2 809 394 1 404 697 1 700 2 809 394 1 404 697 1 686 SJ Lennon 2 109 869 1 054 935 1 276 2 109 869 1 054 935 1 266 DL Marokane 2 658 316 1 329 158 1 608 2 658 316 1 329 158 1 595 A Noah 2 171 168 1 085 584 1 314 2 171 168 1 085 584 1 303 MM Ntsokolo 2 488 574 1 244 287 1 506 2 488 574 1 244 287 1 493 The details of the schemes are: Long-term incentive plan Long-term incentive plan Date of grant 1 April 2013 1 April 2012 Number of shares awarded 16 253 080 26 428 075 Contractual life 3 years 3 years Vesting conditions Variable vesting depending Variable vesting depending on the achievement of on the achievement of performance conditions performance conditions Method of settlement Cash Cash Expected attrition of employee (%) – – Expected outcome of performance conditions (%) 50% 50% Long-term incentive Long-term incentive plan 2014 plan 2013 Number Number Reconciliation of performance share movements Outstanding at beginning of the year 70 478 960 32 875 919 Granted during the year 16 253 080 51 733 835 Forfeited during the year (9 231 581) – Settled during the year (18 745 125) (14 130 794) Outstanding at end of the year 58 755 334 70 478 960 Carrying amount of liability (R’000) 26 419 24 212 Intrinsic value of liabilities relating to vested rights (R’000) 26 419 24 212 2014 Annual Financial Statements 93 Notes to the financial statements (continued) for the year ended 31 March 2014 49. Directors’ remuneration (continued) Details of emoluments paid The following schedule sets out the emoluments due to the directors of Eskom for the current year: 2014 2013 Directors Salaries1 Short-term Long-term Other Termination Total Total fees bonus bonus payments 4 payments payment 2 payment3 Name R’000 R’000 R’000 R’000 R’000 R’000 R’000 R’000 Non-executive directors 6 440 – – – 637 – 7 077 6 400 ZA Tsotsi 1 152 – – – 637 – 1 789 1 374 BL Fanaroff 487 – – – – – 487 446 RMQ Gungubele 437 – – – – – 437 416 N Lesela 437 – – – – – 437 416 B Luthuli 551 – – – – – 551 517 C Mabude 468 – – – – – 468 459 Y Masithela 468 – – – – – 468 446 MC Matjila5 493 – – – – – 493 470 B Mehlomakulu 493 – – – – – 493 470 ME Mkwanazi 493 – – – – – 493 470 SPQ Sedibe 493 – – – – – 493 470 DEL Zondo 468 – – – – – 468 446 Executive directors – 11 641 – 3 949 563 8 275 24 428 17 341 BA Dames 6 – 7 931 – 1 928 501 5 007 15 367 8 464 TBL Molefe7 – 2 622 – 508 40 – 3 170 2 904 PS O’Flaherty8 – 1 088 – 1 513 22 3 268 5 891 5 973 Exco members (group executives) – 21 071 – 6 810 764 – 28 645 33 743 BE Bulunga 9 – 2 537 – 722 35 – 3 294 3 179 T Govender – 2 809 – 1 043 300 – 4 152 4 485 EL Johnson – 3 610 – 1 195 21 – 4 826 5 972 SJ Lennon – 2 711 – 772 191 – 3 674 5 430 DL Marokane – 3 416 – 1 245 76 – 4 737 4 555 A Noah – 2 790 – 923 63 – 3 776 4 659 MM Ntsokolo – 3 198 – 910 78 – 4 186 5 463 Total directors and group executives 6 440 32 712 – 10 759 1 964 8 275 60 150 57 484 1. Includes medical aid and pension fund contributions. 2. Short-term incentive bonus awarded for the 2014 financial year. 3. Long-term incentive bonus scheme – Grant 6, which vested on 31 March 2013 was paid in June 2013. 4. Fees related to security services and operating vehicle expenditure. 5. Appointed interim chief executive on 1 April 2014. 6. Resigned 31 March 2014. Included in salaries is an amount of R1.9 million relating to back-pay increases from 2010. 7. Appointed finance director on 14 January 2014. Previously group executive: Group Customer Services. 8. Resigned 10 July 2013. 9. Retired 31 January 2014. 94 Eskom Holdings SOC Limited 2014 2013 Housing loans to Exco members at 31 March R’000 R’000 T Govender 2 906 4 397 DL Marokane 4 563 4 646 7 469 9 043 The interest rate on the loan from EFC at 31 March 2014 was 7.25% (2013: 6.75%). The loans are repayable over a maximum period of 30 years1. 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 SOC Limited2 DL Marokane – – MM Ntsokolo3 – – PS O’Flaherty4 – – Escap SOC Limited5 PS O’Flaherty6 – 34 TBL Molefe7 12 – EL Johnson – – Eskom Finance Company SOC Limited5 BE Bulunga8 – 30 PS O’Flaherty8 5 10 TBL Molefe7 5 – 50. New standards and interpretations 50.1 Standards, interpretations and amendments to published standards that are not yet effective The following new standards, interpretations and amendments to existing standards have been published that are applicable for future accounting periods but have not been adopted early by the group: Amendments to IAS 32 Financial instruments: presentation (effective 1 January 2014) The amendments to IAS 32 were issued to address inconsistencies in current practice when applying the offsetting criteria in IAS 32 Financial instruments: presentation. The amendments clarify the meaning of currently has a legally enforceable right of set-off, and that certain gross settlement systems may be considered equivalent to net settlement. The group is currently in the process of evaluating the detailed requirements of this amendment to assess the possible impact on the group’s financial statements. IFRS 7 Financial instruments: disclosure (effective 1 January 2014) The amendments to IFRS 7 require additional disclosure on transfer transactions of financial assets, including the possible effects of any residual risks that the transferring entity retains, if a disproportionate amount of transfer transactions are undertaken around the end of a reporting period. The amendments also requires additional disclosure on offsetting financial assets and financial liabilities. These amendments are not expected to have a significant impact on the group’s financial statements. IFRS 9 Financial instruments (effective date unknown) IFRS 9 (2009) introduces new requirements for the classification and measurement of financial assets. Under IFRS 9 (2009), financial assets are classified and measured based on the business model in which they are held and the characteristics of their contractual cash flows. IFRS 9 (2010) introduces additions relating to financial liabilities. The International Accounting Standards Board currently has an active project to make limited amendments to the classification and measurement requirements of IFRS 9 and add new requirements to address the impairment of financial assets and hedge accounting. The group is continuously assessing the possible impact. The group is currently in the process of evaluating the detailed requirements of this new standard to assess the possible impact on the group’s financial statements. Amendments to IAS 36 Impairment of assets (effective 1 January 2014) The amendment on recoverable amount disclosures addresses the disclosure of information about the recoverable amount of impaired assets if that amount is based on fair value less costs of disposal. The amendment removed certain disclosures of the recoverable amount of CGUs which have been included in IAS 36 by the issue of IFRS 13. The group is busy assessing the impact. Amendments to IAS 39 Financial instruments: recognition and measurement (effective 1 January 2014) This amendment provides relief from discontinuing hedge accounting when novation (novation of derivatives) of a hedging instrument to a central counterparty meets specified criteria. The group is busy assessing the impact. 1. On resignation the terms and conditions of the loan are renegotiated. 2. Paid by Eskom. 3. Appointed in August 2013. 4. Resigned in March 2013. 5. Fees paid to Eskom. 6. Resigned in April 2013. 7. Appointed in March 2014. 8. Resigned in January 2014. 2014 Annual Financial Statements 95 Notes to the financial statements (continued) for the year ended 31 March 2014 50. New standards and interpretations (continued) 50.1 Standards, interpretations and amendments to published standards that are not yet effective (continued) IFRIC 21 – Levies (effective 1 January 2014) This is an interpretation of IAS 37 Provisions, contingent liabilities and contingent assets. IAS 37 sets out criteria for the recognition of a liability, one of which is the requirement for the entity to have a present obligation as a result of a past event (known as an obligating event). The interpretation clarifies that the obligating event that gives rise to a liability to pay a levy is the activity described in the relevant legislation that triggers the payment of the levy. Sets out the accounting for an obligation to pay a levy that is not income tax. The group assessed the impact and no change in the current accounting treatment is expected. 50.2 Standards, interpretations and amendments to published standards that are effective and applicable to the group The group has adopted the following new standards, interpretation and amendments to existing standards for the first time for the financial year ended 31 March 2014. The nature and effect of the changes are as follows: Amendments to IFRS 7 Financial instruments: disclosures, on asset and liability offsetting (effective 1 January 2013) This amendment includes new disclosures to facilitate comparison between those entities that prepare IFRS financial statements to those that prepare financial statements in accordance with United States Generally Accepted Accounting Principles. The effect of this change is regarded to be immaterial. IFRS 10 Consolidated financial statements (effective 1 January 2013) IFRS 10 introduces a new control model that is applicable to all investees, by focusing on whether the group has power over an investee, exposure or rights to variable returns from its involvement with the investee and ability to use its power to affect those returns. The group has changed its accounting policy for determining whether it has control over and consequently whether it consolidates its investees. The group reassessed the control conclusion for its investees at 1 April 2013. The effect of this change is regarded to be immaterial. IFRS 11 Joint arrangements (effective 1 January 2013) Previously, the structure of the arrangement was the sole focus of the classification. In terms of IFRS 11, the group classified its interests in joint arrangements as either joint operations or joint ventures depending on the group’s rights to the assets and obligations for the liabilities of the arrangements. When making this assessment, the group considers the structure of the arrangements, the legal form of any separate arrangement, the contractual terms of the arrangements and other facts and circumstances. The group has re-evaluated its involvement in its joint arrangements. There was no change in the accounting of its joint arrangements. IFRS 12 Disclosures of interests in other entities (effective 1 January 2013) IFRS 12 is a new and comprehensive standard on disclosure requirements for all forms of interests in other entities. The group has increased the level of disclosure provided for its interests in subsidiaries, joint arrangements, associates and structured entities in line with the requirements of the new standard. Refer to note 8 and 9. IFRS 13 Fair value measurement (effective 1 January 2013) IFRS 13 establishes a single framework for measuring fair value and making disclosures about fair value measurements, and when such measurements are required or permitted by other IFRS. In particular, it unifies the definition of fair value as the price at which an orderly transaction to sell an asset or to transfer a liability would take place between market participants at the measurement date. It also replaces and expands the disclosure requirements regarding fair value measurements in other IFRSs, including IFRS 7 Financial instruments: disclosures. The group included additional disclosures in this regard. Refer to note 4.5. In accordance with the transitional provisions of IFRS 13, the group has applied the new fair value measurement guidance prospectively. Amendments to IAS 1 Presentation of financial statements (effective 1 July 2012) The group has modified the presentation of items of other comprehensive income in its condensed statement of other comprehensive income, to present separately items that would be reclassified to profit or loss in the future from those that would never be reclassified. Comparative information has been re-presented accordingly. The adoption of the amendment to IAS 1 had no impact on the recognised assets, liabilities or total comprehensive income of the group. Amendments to IAS 1 Presentation of financial statements (effective 1 January 2013) The amendment to IAS 1 gives clarity on when a third statement of financial position is required. This is only required if a retrospective change in accounting policy, a retrospective correction of an error or a reclassification has a material effect on information in the statement of financial position. The effect of the change is regarded as being immaterial. IAS 19 Employee benefits (effective 1 January 2013) (revised) The revised IAS 19 had no impact on the accounting policy with respect to the basis for determining the income or expense related to a defined benefit plan as there are no plan assets. There was also no impact as a result of the changes to the definitions of short-term and other long-term benefits or the changes in relation to the timing of recognition of termination benefits. 96 Eskom Holdings SOC Limited Amendment to IAS 16 Property, plant and equipment (effective 1 January 2013) The amendment to IAS 16 clarifies that stand-by equipment is classified as property, plant and equipment if it meets the definition of property, plant and equipment, otherwise it may be seen as inventory. The amendment to IAS 16 did not have a significant impact on the group’s financial statements. IAS 27 Separate financial statements (effective 1 January 2013) (revised) The revised IAS 27 carries forward the existing accounting and disclosure requirements for separate financial statements, with minor clarifications. The adoption of the revised IAS 27 had no impact on the separate financial statements of the company. IAS 28 Investments in associates and joint ventures (effective 1 January 2013) The revised IAS 28 carries forward the existing accounting and disclosure requirements with limited amendments. The adoption of the revised IAS 28 had no significant impact on the group’s financial statements. Amendment to IAS 32 Financial instruments: presentation (effective 1 January 2013) The amendment to IAS 32 removes the concept of net of tax in the distribution to equity holders. The tax effect will be treated in terms of IAS 12. The adoption of the amendment had no impact on the group’s financial statements. 51. Information required by the Public Finance Management Act Losses through criminal conduct and irregular or fruitless and wasteful expenditure In terms of the significance and materiality framework as approved by 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 R25 million must be reported. Irregular or fruitless and wasteful expenditure Total irregular expenditure incurred was nil (2013: R20 million) (excluding non-compliance with the PPPFA discussed below) comprising six incidents. For these incidents disciplinary action has been taken. PN Energy Services SOC Limited (PNES) PNES is a wholly owned subsidiary of Eskom. The operations of the company were closed down in 2010, and it did not operate in the 2011 to 2014 financial years. The board of PNES investigated potential irregular and fruitless and wasteful expenditure suffered by the company during the 2009 and 2010 financial years. Eskom is taking further action against all the parties involved into the alleged breach of fiduciary duties and conflict of interests. Preferential Procurement Policy Framework Act (PPPFA) Eskom’s exemption from the PPPFA expired on 7 December 2012. Eskom paid R22 million (2013: R447 million) for the year ending 31 March 2014 on contracts that were entered into between 8 December 2012 to 31 March 2013 that were not recalled or corrected. The amount paid during the current year is below the significance and materiality framework threshold as approved by the shareholder. Eskom will continue to meet its obligations under these contracts until expiry of the contract. All these transactions have taken place in the normal course of business and have been subject to Eskom’s approved procurement policy. Incidents of fruitless and wasteful expenditure below the materiality threshold There were no material incidents of fruitless and wasteful expenditure suffered by the group during the reporting period. The aggregate of other fruitless and wasteful expenditure which individually (or collectively where items are closely related) were below the materiality threshold was R47 million (2013: R38 million) comprising 354 (2013: 254) incidents of which 7 (2013: 5) incidents account for R35 million (2013: R24 million). In all instances management has instituted preventive and corrective measures as considered appropriate, including disciplinary action. Criminal conduct Conductor theft Losses due to conductor theft (including theft of copper cable, transformers and tower-related structures) totalled R68 million (2013: R51 million), and involved 7 166 (2013: 5 187) incidents. Actions to combat these losses are managed by the Eskom Network Equipment Crime Committee in collaboration with affected state-owned companies and the South African Police Services. The combined effort resulted in 316 (2013: 321) arrests. Stolen material worth R7 million (2013: R5 million) was recovered. Fraud During the reporting period no significant incidents of fraud occurred. Eskom concluded 4 (2013: 3) investigations into fraud involving an amount of R7 million (2013: R1 million). The existing internal control measures in the affected areas as well as similar areas have been reviewed and enhanced to prevent a possible reoccurrence. Disciplinary, criminal as well as civil proceedings have been instituted against those involved. 2014 Annual Financial Statements 97 Notes to the financial statements (continued) for the year ended 31 March 2014 52. Pro forma revaluation of property, plant and equipment (unaudited) The group currently accounts for its property, plant and equipment using the cost model under IAS 16 Property, plant and equipment. The cost model requires that property, plant and equipment should be measured at cost (including borrowing cost capitalised in respect of qualifying assets), less accumulated depreciation and impairment. However, the cost model does not reflect the true economic value of the group’s property, plant and equipment and the basis on which our tariff is calculated by NERSA. Therefore, a summary has been provided below reflecting what the impact on the financial statements would be if the group’s property, plant and equipment was measured using the depreciated replacement cost (DRC) model. Borrowing costs were not included in the carrying amount of property, plant and equipment when determining the increase or decrease in the revaluation surplus and have therefore been expensed. The fair values determined using the DRC model were reviewed for possible impairment loss in order to determine whether or not the net future cash inflows related to the use of property, plant and equipment are less than the calculated fair value of property, plant and equipment. The fair values disclosed below are net of the adjustment made for the tariff shortfall in the first few years of R190 billion (2013: R238 billion). This shortfall is expected to be eliminated once the electricity tariff determined in terms of the regulatory methodology, which is based on the depreciated replacement values, is fully phased in by NERSA. 2014 2013 Historical Adjustments After Historical Adjustments After cost revaluation cost revaluation Rm Rm Rm Rm Rm Rm Summarised group statements of financial position at 31 March 2014 Assets Property, plant and equipment 401 373 164 836 566 209 341 429 165 073 506 502 Deferred tax assets 339 32 231 32 570 25 24 597 24 622 Other assets 103 281 – 103 281 90 570 – 90 570 504 993 197 067 702 060 432 024 189 670 621 694 Equity and liabilities Total equity 119 784 118 682 238 466 109 139 118 852 227 991 Deferred tax liabilities 19 461 78 385 97 846 15 806 70 818 86 624 Other liabilities 365 748 – 365 748 307 079 – 307 079 504 993 197 067 702 060 432 024 189 670 621 694 Summarised group income statements for the year ended 31 March 2014 Operating profit before depreciation and amortisation expense, net impairment loss and other operating expenses 46 563 – 46 563 37 992 – 37 992 Depreciation and amortisation expense (11 937) (13 887) (25 824) (9 960) (15 534) (25 494) Net impairment loss (1 557) 45 (1 512) (1 039) (28) (1 067) Other operating expenses (19 177) (85) (19 262) (23 039) (77) (23 116) Operating profit/(loss) before net finance (cost)/income 13 892 (13 927) (35) 3 954 (15 639) (11 685) Net finance (cost)/income (4 772) (13 290) (18 062) 3 003 (3 678) (675) Share of profit of equity accounted investees, net of tax 43 – 43 35 – 35 Profit/(loss) before tax 9 163 (27 217) (18 054) 6 992 (19 317) (12 325) Income tax (2 137) 7 621 5 484 (1 856) 5 409 3 553 Profit/(loss) for the year from continuing operations 7 026 (19 596) (12 570) 5 136 (13 908) (8 772) Profit for the year from discontinued operations 63 – 63 47 – 47 Profit/(loss) for the year 7 089 (19 596) (12 507) 5 183 (13 908) (8 725) 98 Eskom Holdings SOC Limited Appendix – Abbreviations and acronyms Accounting, audit and other financial terms CGU Cash Generating Unit CVA Credit Value Adjustment DRC Depreciated Replacement Cost DVA Debit Value Adjustment EBITDA Earnings Before Interest, Tax, Depreciation and Amortisation FFO Free Funds From Operations IAS International Accounting Standard/(s) IFRIC International Financial Reporting Interpretations Committee IFRS International Financial Reporting Standard/(s) LIFO Last-In-First-Out PA Pensioners Amounts PPI Producer Price Index R Rand Rm Rand Millions VAT Value Added Tax Currencies AUD Australian Dollar CAD Canadian Dollar CHF Swiss Franc EUR Euro GBP Pound Sterling (United Kingdom) JPY Japanese Yen NOK Norwegian Krone SEK Swedish Krona USD United States Dollar Entities company Eskom Holdings SOC Limited EEM Eskom Energie Manantali s.a EFC Eskom Finance Company SOC Limited EPPF Eskom Pension and Provided Fund Escap Escap SOC Limited Eskom Eskom Holdings SOC Limited Eskom Enterprises Eskom Enterprises SOC Limited Eskom Uganda Eskom Uganda Limited group Eskom Holdings SOC Limited and its subsidiaries Motraco Mozambique Transmission Company SARL Nqaba Nqaba Finance 1 (RF) Limited PBMR Pebble Bed Modular Reactor SOC Limited PNES PN Energy Services SOC Limited Roshcon Roshcon SOC Limited SOGEM Société de Gestion de l’Energie de Manantali UEGCL Uganda Electricity Generation Company Limited UETCL Uganda Electricity Transmission Company Limited 2014 Annual Financial Statements 99 Appendix – Abbreviations and acronyms (continued) Legislation PAA Public Audit Act PFMA Public Finance Management Act PPPFA Preferential Procurement Policy Framework Act Measures GWh Gigawatt Hour kg Kilogram km Kilometre L Litre Mt Million tons MVA Mega volt ampere MW Megawatt MWh Megawatt Hour Other Alco Asset and Liability Committee B-BBEE Broad-Based Black Economic Empowerment BPP Business Productivity Programme CSI Corporate Social Investment DoE Department of Energy DPE Department of Public Enterprises DWA Department of Water Affairs EAF Energy Availability Factor Exco Executive Management Committee IDM Integrated Demand Management ISO International Standards Organisation JSE Johannesburg Stock Exchange KPI Key Performance Indicator LTIR Lost-Time Incidence Rate MYPD Multi-Year Price Determination NERSA National Energy Regulator of South Africa RCA Regulatory Clearing Account SAIDI System Average Interruption Duration Index SARB South African Reserve Bank SARS South African Revenue Services TASK Tuned Assessment of Skills and Knowledge UCLF Unplanned Capability Loss Factor 100 Eskom Holdings SOC Limited 952