Integrated Report 2014 20 Shift performance, Integrated Report grow sustainably 2014 2014 Integrated Report 1 Late President Mandela visited Eskom in the late nineties to celebrate Eskom’s honouring of African struggle heroes In 1994, Eskom and the government were faced with the enormous task of extending electricity access to all South Africans in order to improve their quality of life. At the same time, there was the need to expand the country’s Twenty years of powering a democratic South Africa generating capacity to support economic growth. This diagram shows Eskom’s journey since the start of 1994 to where it is today 1994 2000 2002 2005 2007 2009 2013 2014 • Eskom operates and • RDP for the period • Successful participation • Eskom spends • Construction at Medupi • Final five units at • Final unit of Camden • Eskom operates and maintains 37 636MW 1994 to 2000: in the world summit on R10.3 billion on black and work at Kusile Ankerlig and two units power station maintains 41 995MW of generating capacity, – 2 391 684 sustainable development economic empowerment power stations begin at Gourikwa completed completed (1 571MW of generating capacity, 238 964km of power electrification held in South Africa • Eskom has electrified a • Eskom completes (1 040MW of open-cycle total capacity of the 359 337km of power lines and 167 413MVA connections are made total of 3 210 557 homes the first four units at gas turbines) station) lines and 232 179MVA of substation capacity – Real price of electricity since 1994 Ankerlig power station • Eskom signs IPP of substation capacity • Eskom employs reduces by 14.1% • Eskom tasked to build and first three units at contracts in terms of • Eskom employs 46 919 40 128 people – Eskom achieves racial 70% of new generation Gourikwa power station the Department of people and achieves • Eskom has 872 509 equity in management, capacity, with the – liquid-fuel powered Energy’s first round racial equity in middle customers professional and remaining 30% to be (1 044MW of open- of the renewable IPP management and • Eskom commits to supervisory staff at 2003 built by independent cycle gas turbines) 2011 programme professionals at 70.6% the Reconstruction 50.7% power producers • Rail coal terminals • Eskom has 5 232 915 and Development – 2 631 Eskom trainees • Eskom commissions the operating at Camden customers • Eskom kept the lights Klipheuwel wind farm Programme (RDP) and bursars complete demonstration facility 2008 on when South Africa and Tukuku power • Eskom group spends • Since the beginning training hosted a successful stations reduce the R119.4 billion with of 1991 Eskom has – Illiteracy in Eskom • Decision is made to • Eskom implements size of the road B-BBEE compliant 2010 FIFA World CupTM electrified a total of reduces from 45% to commence the return to rotational load shedding transport fleet, suppliers • Eskom issues a US 384 911 homes less than 10% as a service of the mothballed between October 2007 contributing to a 31% • Over 4.5 million homes dollar bond which raised • Eskom forms the result of adult basic Camden, Grootvlei and 2006 and February 2008 USD1.75 billion year-on-year decrease electrified since 1991 Eskom Development education training Komati power stations • Recovered coal supplies in public road fatalities • Eskom committed • Klipheuwel wind farm • Operation Khanyisa Foundation NPC • The South African and reliability of supply launched to combat involving coal trucks R132.9 million on demonstration facility corporate social efficient lighting initiative by April 2008 electricity theft • MYPD 3 determination (3MW) placed into investment projects is established to • 5 368 learners in the of 8% commercial operation promote energy pipeline of whom efficiency 85% are studying in technical fields 2 Eskom Holdings SOC Limited 2014 Integrated Report 3 Navigation icons Contents Becoming a high- 01 About this report 7 06 Leading and partnering performance organisation Eskom’s approach to integrating to keep the lights on 103 reporting 7 Keeping the lights on 106 Letter from the chairperson 10 Delivering capacity expansion 115 Chief executive’s report 14 Leading and partnering to Shareholder’s compact 26 07 Reducing Eskom’s keep the lights on environmental footprint and 02 About the Eskom group 31 pursuing low-carbon growth  127 Eskom’s business model 31 Reducing particulate and gaseous Reducing Eskom’s Eskom’s legal and operating structure 42 emissions 128 environmental footprint Purpose, values and strategic objectives 44 Reducing water consumption 129 and pursuing low- carbon growth Future focus for Eskom 48 Reducing Eskom’s carbon footprint 130 03 Eskom’s approach to 08 Securing Eskom’s future integrated reporting 51 resource requirements 135 Securing Defining material items in partnership future resource with stakeholders 51 09 Implementing coal haulage requirements and the road-to-rail Risks relating to material items 57 migration plan 141 04 Leadership and corporate 10 Pursuing private-sector Implementing coal governance 65 participation 143 haulage and the Shareholder and board of directors 65 road-to-rail migration Corporate governance framework 68 11 Transformation 147 plan Leadership’s key focus areas 71 Directors’ and group executives’ 12 Ensuring Eskom’s financial remuneration 81 sustainability 153 Pursuing private- 05 Becoming a high-performance 13 Summarised group sector participation organisation 83 financial results 163 Safety 85 Improving operations 89 14 Appendices 169 Being customer-centric 94 Transformation (including Building strong skills 100 the business productivity Investing in appropriate technologies 101 programme) Ensuring Eskom’s financial sustainability The navigation icons above are used throughout the report to link stakeholder concerns, material items, performance and key performance indicators to strategic objectives Top: New poles are planted for new connections in the Cosmos area in Johannesburg Throughout this integrated report, performance against target is indicated as follows: Bottom: Eskom employees do maintenance on a high-voltage powerline Actual performance met or better than the target Actual performance almost met the target Actual performance did not achieve the target 4 Eskom Holdings SOC Limited 2014 Integrated Report 5 Online content The table below sets out the reports that are available online: Top: Rotek, a subsidiary of Eskom Enterprises, performs some of the maintenance on power station components Report Purpose and basis of preparation Online reference Bottom: The air-cooled condenser duct takes steam from the turbine to the air-cooled condenser plant Annual financial The group and company financial statements of Eskom at Kusile power station statements for the year Holdings SOC Limited in accordance with International ended 31 March 2014 Financial Reporting Standards and the requirements of the Public Finance Management Act of South Africa as well as the Companies Act of South Africa www.eskom.co.za/IR2014/01.html The Eskom The supplementary and divisional report supports and supplementary and expands on the information in the integrated report. divisional report It offers a detailed report about the performance of Eskom’s operating divisions, key strategic and support functions, and affiliated entities for the 2013/14 year www.eskom.co.za/IR2014/02.html The King Report on As required by King III, Eskom has identified and Corporate Governance disclosed the King III principles that do not apply, (King III) checklist together with an explanation, and areas where further improvement is necessary www.eskom.co.za/IR2014/03.html The Eskom Foundation The Eskom Development Foundation NPC report (“Foundation”) is responsible for the coordination and execution of Eskom’s corporate social investment (CSI) strategy in support of Eskom’s business imperatives. This reports details the operations and achievements of the Foundation for the 2013/14 year www.eskom.co.za/IR2014/04.html The Eskom Factor The Eskom Factor is a collective term to explain report Eskom’s footprint in South Africa, which has been quantified through a comprehensive assessment of the company’s economic, social and environmental impact on the country, both positive and negative, within the financial year April 2010 to March 2011 www.eskom.co.za/IR2014/05.html The Eskom interim The September 2013 interim integrated report sets out integrated report for a contextual review of Eskom’s overall performance for the six months ending the period 1 April to 30 September 2013 and should 30 September 2013 be read in conjunction with the integrated report for the year ended 31 March 2013 www.eskom.co.za/IR2014/06.html 6 Eskom Holdings SOC Limited 2014 Integrated Report 7 01 About this report This integrated report aligns with best practices in integrated reporting. It includes the principles of integrated reporting contained in the international integrated reporting framework, published by the International Integrated Reporting Council (IIRC) in December 2013, and takes into account other guidelines published in this regard Eskom’s approach to integrated reporting Integrated reporting brings greater cohesion and efficiency to the reporting process. It encourages integrated thinking to break down internal silos and reduce duplication in content, so improving the quality of information available to key stakeholders. An integrated report focuses on value creation over the short, medium and long term. It uses the “six capitals” in the framework as a guide to ensure that a company considers all resources and how they interact with each other. The integrated report should indicate how the company’s value creation process is impacted by the company’s internal and external environment. This report focuses on qualitative and quantitative items that are material to Eskom’s operations and strategic objectives. The question of what is “material” has been determined by the board and executive management through extensive consultation within Eskom as well as with Eskom’s stakeholders, while taking into consideration Eskom’s strategic objectives, risk assessments and the way in which its value chain operates (refer to page 51 for more information regarding the determination of material items). Eskom’s integrated report steering committee guides the company in compiling this report and ensures alignment with other reporting processes. The finance director chairs this committee and reports on the process to the executive management committee. The integrated reporting pilot programme Eskom has been a member of the IIRC’s pilot programme since its inception. More than 100 companies from around the globe have joined the programme’s business network since it was launched in October 2011. These companies interact with the council and each other through regional and sector meetings, through web-based seminars, conferences and through a dedicated pilot programme community website. This wide-ranging interaction provides the opportunity to discuss and challenge technical material, test its application and share knowledge and experiences. Eskom’s 2012/13 integrated report was well received and was followed by an interim integrated report in December 2013. Reviews of these reports identified a number of ways to improve the Majuba power station report, which have been considered in compiling the 2013/14 report. near Volksrust in KwaZulu-Natal Board responsibility and approval statement The board, assisted by its respective committees, is ultimately responsible for overseeing the integrity and completeness of the integrated report. The board have applied their collective mind 8 Eskom Holdings SOC Limited 2014 Integrated Report 9 About this report (continued) to the preparation and presentation of the integrated report and have concluded that it is presented Structure of the report in accordance with the international integrated reporting framework version 1.0 (IIRC framework). This report includes information on Eskom’s business model, its approach to leadership and governance and its operational performance during the year under review. It is structured On 29 May 2014, the board approved the 2014 integrated report taking into consideration as follows: the completeness of the material items it deals with and the reliability of data and information • Letter from the chairperson discusses key reflections and provides insight into the presented, in line with the combined assurance process followed. shareholder’s vision for the utility Sustainability • The chief executive’s report provides an executive summary, highlighting key areas in Global Compact LEAD operational performance, Eskom’s progress in achieving its long-term strategic objectives and Eskom was one of the first signatories to the United Nations Global Compact (UNGC) in 1999 the main areas that will need to be addressed during the year ahead and is committed to its principles. Eskom reports on its progress in complying with the UNGC • The shareholder’s compact details Eskom’s performance against key performance indicators principles on an annual basis. Eskom is also a UNGC LEAD company, recognised for leadership as set by its shareholder, the government of South Africa, represented by the Minister of Public in the sustainability field. Enterprises • About the Eskom group outlines Eskom’s business model, highlighting the internal and Global Reporting Initiative (GRI) external factors that affect its operations. It details the company’s corporate structure and its Eskom continues to use the GRI G3 guidelines, supported by Eskom internally developed purpose, values and strategic objectives and outlines Eskom’s strategic priorities for the year to guidelines, as a basis for reporting its sustainability information. Eskom is currently assessing the come and beyond efficacy of transitioning from G3 to G4 as well as the application of the IIRC framework. • Defining material items in partnership with stakeholders explains Eskom’s methodology in Sustainability audit, combined assurance and King III identifying the material items that have a bearing on performance and the risks relating to these Selected sustainability KPIs were subject to external assurance. These are marked with an “RA” material items. It also provides a reference for where these items are discussed in greater detail in appendix A and B on pages 170 to 177. The assurance opinion is on page 180. in the report • Leadership and corporate governance provides insight into Eskom’s corporate governance Eskom follows a combined assurance approach (refer page 75 for detail). Eskom’s reports are framework. It also sets out leadership’s key focus areas for the year under review and details also prepared with due consideration to King III. Refer to www.eskom.co.za/IR2014/03.html for the link between performance and remuneration more information on King III. • Performance on strategic objectives details Eskom’s performance on key performance Reporting boundary indicators relevant to its eight strategic objectives. It includes performance targets and actual This integrated report reviews Eskom’s performance for the year from 1 April 2013 to measurements for key indicators relevant to each objective, as well as commentary on 31 March 2014. performance. Operating highlights, challenges and future focus areas are also summarised • Summarised group financial results are a summarised version of the full annual financial This report holistically examines Eskom’s performance in relation to its strategic objectives statements (refer pages 83 to 161), taking into account the environment in which the company operates, its long‑term goals, the risks that might prevent it from achieving those goals and the measures put • Appendices consist of: in place to mitigate these risks (refer Eskom’s business model on page 31 for more detail on the – A table containing the key performance indicators discussed in this report company’s operations). – A table containing other performance indicators – An overview of awards Eskom received in 2013/14 Unless otherwise stated, the information in this report refers to the Eskom group, comprising the Eskom business and its major subsidiaries (Eskom Enterprises SOC Limited, Escap SOC Limited, – Sustainability assurance statements reflecting Eskom’s sustainability responsibilities, and Eskom Finance Company SOC Limited and the Eskom Development Foundation NPC). (Refer approval and assurance statements from Eskom and the external assurance provider page 42 for more detail.) – A list of abbreviations and acronyms, and a glossary – Eskom’s contact details 10 Eskom Holdings SOC Limited 2014 Integrated Report 11 Letter from the chairperson The electricity tariff approved by the National Energy Regulator of South Africa in 2013 resulted in lower revenue than Eskom has applied for which has serious consequences for our business In the two decades since South and future sustainability. We have launched the business productivity programme which aims to Africa achieved its freedom, our reduce cost, increase productivity and enhance efficiencies, but the revenue shortfall cannot be addressed through cost savings and efficiencies alone. We continue to engage our stakeholders country has made enormous in this regard, but cost-reflective tariffs remain a requirement. progress. Eskom has played a It remains critical for us to balance the short-term priority of security of supply with long-term central role in this transformation. operational and financial sustainability and this entails difficult trade-offs to be made, amongst Between 1994 and 2014, our others: • Given the tight reserve margin, we have operated the more expensive diesel-fuelled open-cycle generating fleet capacity has gas turbine (OCGT) stations far above previous load factors to ensure a continuous supply of been expanded from 37 636MW electricity. In light of our revenue outlook, this situation is not sustainable • Eskom’s Generation sustainability strategy will improve plant health and reliability in the long to 41 995MW, and our power lines term, but the need for maintenance should be balanced with the current power system and have increased from 238 964km financial constraints • Ensuring that the older coal-fired stations meet the strict atmospheric emission standards is a to 359 337km. Over the same challenge. Should our older plant persistently exceed the legal limits for atmospheric emissions, period, the proportion of households with access to electricity the board may have to consider using the plant at reduced capacity, which would place even greater pressure on security of supply and possibly have a negative financial impact has risen from 44% to 85%1. Since the inception of the capacity expansion programme in 2005, a total of 8 930 individuals have These are difficult trade-offs that not only Eskom, but the country, should consider. participated in skills development and a significant number of jobs Integrated decision-making at a policy level is needed to ensure that the country looks beyond the end of the current capacity expansion programme. This involves planning for new power stations have been created through these mega projects in a timely manner, including the diversification of energy sources, building and strengthening the distribution and transmission networks, addressing environmental concerns, securing an adequate, affordable supply of primary energy as well as moving towards cost-reflective tariffs. There is a need for energy security in South Africa to support the country’s much anticipated economic growth in the future. Eskom is committed to its purpose to provide sustainable electricity Clarity on new power stations beyond Kusile is required for all participants in the electricity sector. solutions to grow the economy and improve the quality of life of all South Africans. In the years Nearly two-thirds of Eskom’s power stations are beyond the midpoint of their expected lifespans. ahead, the current capacity expansion programme will, once completed, result in a more secure While we have not yet been allocated any new base-load capacity after Kusile, we are exploring national power supply that can meet the country’s needs. diversification of our energy sources to complement our generating fleet in future, thus ensuring security of supply to the country. This includes the development of a gas strategy, which entails South Africa is now experiencing the consequences of deferring planning and investment the conversion to combined-cycle gas turbines in the short term and upstream gas activities in decisions in years gone by. In order to keep the lights on, Eskom has had to run its generating the long term. These decisions are not Eskom’s and we are confident that, working with the plant at significantly higher load factors, which continues to have a negative impact on the overall shareholder, these questions will be addressed comprehensively during the period ahead. plant performance and the health of the plant. Even as new capacity enables Eskom to bridge the gap, careful management of existing resources is required to ensure that we do not push our On behalf of the shareholder and the board, I would like to thank Mr Brian Dames, Eskom’s former ageing plant beyond sustainable limits. chief executive, who stepped down at the end of the reporting period. Brian spent 27 years with Eskom and brought both skill and dedication to his position. The position of chief executive has Over the past year, Eskom has worked extremely hard to keep the lights on and, apart from been filled by Eskom board member, Mr Collin Matjila, on an interim basis until a permanent 14 hours in March 2014, we have done so successfully. We recognise that load shedding has replacement is identified. serious economic and social impacts and are working tirelessly to avoid this, keeping in mind that our mandate is to ensure the integrity of South Africa’s power system. All of our resources We welcome Ms Tsholofelo Molefe, formerly the group executive: Group Customer Services, as – human, technical and financial – are geared towards ensuring that electricity generation, our new finance director. transmission and distribution remain secure and sustainable over the long term. Eskom resorts to load shedding only when not doing so could lead to a longer, more damaging shutdown of the entire system. 1. Based on the StatsSA 2012 General Household survey, revised in October 2013. 12 Eskom Holdings SOC Limited 2014 Integrated Report 13 Letter from the chairperson (continued) The board thanks the executive management committee for their vigilance and determination in confronting the challenges facing Eskom. We have a highly competent management team in place. We recognise, however, that the vacancies at senior level needs to be addressed. This will be one of the first priorities of the incoming chief executive, who may also want to shape the management structure. A note of appreciation is owed to our former shareholder representative, the Honourable Minister Malusi Gigaba and the Department of Public Enterprises, who have supported and guided Eskom on the path to sustainable growth. Eskom’s board and management have been fortunate to have an active and accessible shareholder representative who enabled us to understand government’s thinking on key issues. The overall strategic direction of Eskom is aligned to the Department of Public Enterprises’ vision statement “To drive investment, productivity and transformation in its portfolio of state-owned companies, their customers and suppliers so as to unlock growth, drive industrialisation, create jobs and develop skills.” This report covers a period when a democratic South Africa bid farewell to its founding president, Nelson Mandela, who was an inspiration to all of humanity. As he once said, “After climbing a great hill, one only finds that there are many more hills to climb.” This is precisely the situation facing Eskom. We are dedicated to fulfilling our mandate, but the board will not allow Eskom to commit itself beyond its means. It is critical for Eskom to ensure a balance between security of supply, financial and operational sustainability and environmental compliance and to responsibly manage the trade-offs that are required. Drawing inspiration from former President Mandela, we will successfully confront the challenges we face in the years ahead. Zola Tsotsi Chairperson A team from the Cullinan technical service centre fix a technical fault on a distribution line 14 Eskom Holdings SOC Limited 2014 Integrated Report 15 Chief executive’s report Becoming a high-performance organisation Safety Eskom’s going-concern status Safety is at the centre of our zero harm policy. Overall safety performance has been improving will continue to be a key focus for over the past three years but there are still concerns related to contractors. We are working with the coming year as the revenue contractors to ensure that all safety requirements are met. Non-compliance is not tolerated. shortfall created by the MYPD 3 At the Ingula pumped-storage construction site, a single accident claimed the lives of six contractors in October 2013. In the wake of this tragic incident, we have continued to reinforce all decision cannot be solved through safety practices on site and continue to implement improvement actions. cost savings and efficiencies Our thoughts and prayers go to all the families, friends and colleagues of the employees and alone – cost-reflective tariffs contractors who passed away in the line of duty this past year: remain a requirement. Eskom has Eskom employees Contractor employees to balance short-term priorities Llwellyn Fredericks Maurice Antonio with long-term sustainability Mthunzi Majeke Federico Caasi Jr requirements Mulimisi Piet Mamburu Dennis Casale Saul Legstom Micambeni Bongani Tom Dhlamini Nigel Roger Roelfse Majara Lesaoana Over the next several years, South Africa’s electricity shortage will be alleviated as new power stations begin feeding power into the grid, providing improved security of supply to businesses Lucas Masilela and households. We still have some way to go before this vision becomes a reality. This integrated Mcatsane Thokozane Mbebe report reflects the complex challenges we face in re-orienting our business while ensuring a stable Malan Mjoli supply of electricity. Selby Velaphi Mkhwanazi Eskom is doing what needs to be done. We have outlined a four-year strategy premised on our eight strategic objectives to build a sustainable future, based on the following seven sustainability Benzile Mlotshwa elements: Daniel Mthiyane • Sustainable asset creation Sinethemba Ndzoyiya • Financial sustainability • Operational sustainability Thembalakhe Ntsethe • Building a sustainable skills base Khaya Eric Nukani • Environmental sustainability Tsepho Justice Rakcotsoka • Transformation and social sustainability • Building a solid reputation Arno Reynders During 2014/15, our primary focus will be on the first three elements – asset creation, financial and Abias Tobe operational sustainability – where the material challenges to the business are most immediate. Mojalefa Tshwaela Safety will remain an overarching priority. The power system will remain constrained until units from the capacity expansion programme Technical performance come online. During this time, all South Africans have a role to play in using energy efficiently and In line with the Generation sustainability strategy, Eskom is implementing appropriate levels reducing demand on the system, particularly during peak hours. of planned maintenance based on what is necessary to ensure long-term plant health while remaining cognisant of current system constraints, compliance, safety and statutory requirements This report reviews our performance in terms of the eight strategic objectives. It shows where as well as the financial constraints. we have made progress, where we are lagging behind and what we are doing to ensure that our business continues to support economic and social development in South Africa and the region. 16 Eskom Holdings SOC Limited 2014 Integrated Report 17 Chief executive’s report (continued) The performance of the generating plant is under serious pressure, especially as Eskom tries Leading and partnering to keep the lights on to focus on driving sustainability through the execution of normal planned maintenance, while Keeping the lights on catering for short duration corrective maintenance opportunities. This is shown by the unplanned We are committed to keeping the lights on, but we cannot afford to do so at all cost. We need capability loss factor (UCLF) percentage for the year ended March 2014 which deteriorated from to operate within our financial means and in a way that does not compromise the sustainability 12.12% to 12.61%. The higher UCLF percentage is an indication of the deteriorating plant health of the national electricity grid, the natural environment, the safety of our people and surrounding of an ageing power station fleet. The deterioration in UCLF and higher planned maintenance communities. resulted in decreased plant availability of 75.13% for the year to March 2014 compared to 77.65% the previous year. A range of short-term interventions are in place to assist us in meeting the demand for electricity, especially during peak hours, while new power stations are under construction. These include the During the past year the two indicators of Transmission’s technical performance, namely the mass rollout programmes, which distribute energy-saving light bulbs to residential customers, and number of system minutes lost and major incidents, improved compared to the previous year, due the 49M campaign to encourage energy-efficient behaviours to achieve an overall target of 10% to the sustained reduction in line faults and plant failures, as well as effective risk management. energy demand reduction. Eskom has also continued the implementation of its demand response programme to sign up customers to reduce demand for compensation should the power system The two indicators of Distribution’s technical performance, namely system average interruption require it. frequency index and the system average interruption duration index, improved significantly during the year. The improvement is due to the increase in the number of customer network The MYPD 3 tariff determination sharply curtailed funding for integrated demand management centres, maximising live-line work, reduction of outages due to technology solutions and improved (IDM) and made no award for the demand market participation programme beyond year two of the maintenance. MYPD 3 period, and therefore Eskom has to focus on accessing alternative funding for Eskom’s IDM programme and also recovering it through the regulatory clearing account adjustment. The Being customer-centric peak demand electricity reduction of 410MW achieved through IDM initiatives exceeded the Eskom’s has 5 232 915 customers as at 31 March 2014. A range of statistical perception and target of 379MW. Eskom continues to improve the internal energy efficiency of its facilities (power interaction-based customer surveys are used to measure customer satisfaction with Eskom’s stations and office buildings) and realised annualised energy savings of 19GWh from new IDM service. Most of these surveys have indicated an improvement in customer satisfaction in this projects for the year ended 31 March 2014, exceeding the target of 15GWh. year compared to the previous year. Despite the number of system emergencies, the proactive manner in which Eskom informs its customers of the system status, via twice daily reports, as well Over the past year Eskom has worked hard to keep the lights on and, apart from 14 hours in as the KeyAlert SMS messaging system, has made a difference. March 2014, we have done so successfully. When the power emergency was declared on 6 March 2014, Eskom followed approved load shedding procedures. This occurrence – the Customers responded admirably when Eskom declared power system emergencies during the combined result of a low reserve margin and loss of load at two power stations, due in part year and reduced demand by 600MW in November 2013, by 340MW in February 2014 and by to coal-quality issues – lasted for 14 hours. It differed vastly from 2008, when South Africa 1 160MW in March 2014. experienced prolonged periods of load shedding. It was unavoidable and we apologise for any Building strong skills inconvenience caused. Eskom is a complex business that requires a diverse skills set that must be maintained and Decreasing the maintenance backlog developed. These are skills that we cannot do without and training remains a priority as we build While no load shedding is forecast in the near future it remains a possibility as the power system for the future. will remain constrained until units from the capacity expansion programme come online. The As at 31 March 2014, we had 5 160 technical learners in the pipeline (engineers, technicians and status of the system is also affected by changes in atmospheric emission licence conditions. artisans) as well as 4 325 learners being trained to contribute to the socio-economic development Much hinges on the balancing of the demand and supply side options in the interim without of the country’s youth. compromising the sustainability of the existing Eskom generation fleet further while the capacity expansion programme is being completed. Our ability to supply continuous power to the grid thus The construction of new power stations is South Africa’s largest capital investment project. depends on both the adherence to required maintenance programmes to improve the performance The capacity expansion programme employs over 40 0001 people, 8 930 of whom have benefited of the current fleet and our ability to access and lever demand side management options. directly from skills training. The Generation sustainability strategy to improve performance over a period of five years to The Medupi experience has also underlined the need for Eskom to increase its project-management 2017/18, involves having the generating fleet operate at 80% availability, with 10% of the fleet’s capacity. To this end, Eskom’s project management training centre of excellence and the Eskom capacity scheduled for maintenance and a 10% allowance for emergency outages. This has power plant engineering institute have made progress by collaborating with various universities, enabled us to do more planned maintenance in 2013/14 than in the previous year. In 2013/14 such as the smart grid centre development at the University of KwaZulu-Natal. maintenance was focused on design-based maintenance, 8% of total 10% planned maintenance, 1. The 25 181 jobs created mentioned elsewhere in the integrated report (pages 148, 150 and 172) refers to contractors that have been on site for a minimum of three months. 18 Eskom Holdings SOC Limited 2014 Integrated Report 19 Chief executive’s report (continued) while the remainder was used for short-term emergent risks. Some outages were deferred due to supply-demand constraints, delaying improvements in plant performance. To ensure that the most crucial maintenance is done, our technical governance committee prioritised the outages that had to be completed during the year and these were carried out. We are taking several steps to reinforce operational stability over the short to medium term. The Eskom board has approved some flexibility to the execution of planned maintenance during periods of a tight power system to ease pressure on the reserve margin. We are also working with some large industrial customers to strengthen power-reduction agreements. For the future, we are exploring the conversion of open-cycle gas turbines to run on either natural gas or diesel to reduce cost. Delivering capacity expansion Eskom spent R59.8 billion on capital expenditure in 2013/14, R2.5 billion less than budgeted. The build programme is a priority for both the board and management: • We completed the return-to-service programme during the reporting period. All three stations (Camden, Grootvlei and Komati) are fully operational. The last unit of this project – Komati power station’s Unit 3 – was commissioned in September 2013, bringing the total amount of generating capacity for return-to-service units added to the grid since 2005 to 3 741MW • The refurbishment projects, despite the ongoing challenge of outage constraints, have made good progress. All the Kriel units have now been refurbished, with the final unit (Unit 5) synchronised to the grid on 15 March 2014. Furthermore, three of the six Matla units have been refurbished, with the third unit (Unit 5) synchronised to the grid on 25 March 2014. Delays were experienced at Duvha due to outage movements, hence the refurbishment programme will only start during 2014/15. The development of the Generation outage management plan takes into account the outage schedules required for the refurbishment projects • We remain on track for synchronisation of Medupi Unit 6 during the second half of 2014. Commissioning of the first unit has started, and we are working with contractors to ensure that they adhere to agreed schedules and processes. Key challenges include finding solutions for the control and instrumentation systems. Eskom will submit its claims to contractors to recover costs and compensate for delays incurred in accordance with the relevant works contracts • The Kusile power station Unit 1 is scheduled for synchronisation by the end of 2015. The key challenge is finding a solution for control systems to avoid repeating delays experienced at Medupi. There was an increase in productivity at Kusile over the past year. Four medium-term contracts have been signed for coal supply to Kusile power station during the commissioning phase. The conclusion of long-term coal and limestone supply agreements for Kusile is yet to be finalised • Work continues at the Ingula power station, but the tragic incident that cost the lives of six contractors has affected the schedule. We have taken a range of steps to investigate the incident and prevent similar incidents. Work to install turbines and generators will begin soon. As a result of the accident, the synchronisation of Unit 3, that was initially scheduled for the second half of 2014, is now targeted for the second half of 2015 A total of 811km of transmission power lines and 3 790MVA of transmission substation capacity were also commissioned during the course of the year. Construction on the 100MW Sere wind The turbine hall under construction at Medupi farm is progressing well, with 69% of the tower foundations and 17% of the turbines completed. power station 20 Eskom Holdings SOC Limited 2014 Integrated Report 21 Chief executive’s report (continued) When the build programme is completed in 2019/20, Eskom will have increased its capacity by Securing Eskom’s future resource requirements 17 384MW1. Some of our generating plant will reach the end of their life cycles over the next Eskom’s thermal power stations require primary energy (fuel in the form of coal, diesel and five to 10 years and, as the economy grows, so too will the demand for electricity. While the uranium) as well as water to function. These need to be secured well in advance, in the correct government’s Integrated Resource Plan (IRP 2010) indicates that new base load capacity is volumes, at the appropriate quality levels, and at the best possible price if we are to generate required beyond the Medupi and Kusile power stations, no new base-load capacity has been sufficient electricity in a sustainable, cost-effective way. allocated to Eskom yet. Eskom is working with the shareholder to ensure that planning for future capacity is undertaken in a timely manner. Overall coal stock days were at 44 days on 31 March 2014, exceeding the target of 42 days. Reducing Eskom’s environmental footprint and pursuing low-carbon growth Procuring sufficient coal of the appropriate quality remains a challenge. The calorific value Environmental compliance remains a priority in our operations. During the reporting period we of coal at Arnot, Matla and Tutuka power stations remains lower than required by the power spent R3 billion on improving the generating fleet’s environmental performance. During the station design, causing load losses. The high ash content continues to impact ash handling plant year the water usage improved relative to the previous year while the particulate-emissions reliability and boiler performance. In addition, stone-contaminated coal affected performance at performance remained the same. We also met the internal targets for both indicators. these stations. Technologies to screen coal for stones and metal have been installed at Tutuka and Arnot power stations to assist in mitigating this risk. Despite these measures, there is the risk that our older coal-fired stations will not be able to consistently meet the limits set by new atmospheric emission licences, which came into effect Coal supply was also a factor in the rotational load shedding implemented on 6 March 2014. in April 2014 and the minimum emission standards which come into effect in 2015. Should this Prolonged rainy weather had left coal stocks and open-pit coal mines wet. Fine coal, when wet, risk materialise, the resulting legal consequence, penalties and significant financial impact may congeals and sticks to conveyor belts, restricting the amount of coal that can be delivered to the make it unsustainable to continue running these ageing stations at full capacity, which would boilers resulting in the affected power stations generating less electricity. have implications in terms of our ability to meet demand and do maintenance on the rest of the Several projects are underway to ensure that our new coal-fired power stations have sufficient fleet. We are committed to environmental sustainability but believe that a balanced approach is water resources when they begin operating. The first phase of the Mokolo Crocodile water necessary to ensure environmental sustainability whilst supporting economic growth and access augmentation project reached the 10.3km mark during the year, increasing the water supply to to affordable electricity. the area by 37% and transporting enough water to supply four of the six Medupi units. Eskom is engaging with local authorities to align the new atmospheric emission licences with the Looking beyond short-term supply issues, we have two strategic concerns. First, for at least the capability of installed technology and considering the current operating conditions. To address the next two decades, Eskom needs to be able to obtain coal of an acceptable quality, at an affordable risk related to complying with the minimum emission standards we have applied for a five-year price, from South Africa’s coal reserves. Second is the need to take advantage of the resources extension on the new licence terms for some of our generating plant. This will give us the time in the southern African region. We continue to interact with government, as well as our suppliers, to retrofit emissions-filtering technologies to the plant to ensure that we will be able to reliably in an effort to ensure that our resource needs can be met over the long term. abide by the new licence terms. We remain committed to working with the authorities to limit the negative effects on public health and so maximise our positive impact on society. A strategy has been developed to take full advantage of the benefits of gas. In the short term Eskom is undertaking a conversion of existing open-cycle gas turbine (OCGT) installations which In the case of the Kriel power station, Eskom’s request to increase the particulate-emissions limit will allow the OCGTs to switch from expensive diesel to more affordable gas. It is desirable for and to allow a grace period for when emissions exceed the limit of the new licence, has been Eskom to participate in upstream gas activities to expedite the production of unconventional denied. Every effort will be made to comply with the conditions of the licence. The new limit does gas such as coal-bed methane and shale gas, which could enable cost-competitive base-load not allow the station to continuously operate at its full rated power and will require load losses. capacity. Longer term initiatives also include acquiring gas from Mozambique through existing and We also invest in renewable energy indirectly by purchasing electricity from independent power planned infrastructure and possibly the building of closed-cycle gas turbines. producers (IPPs) that use wind, solar power, biomass, landfill gas and small hydro technologies Eskom supported the government of South Africa in concluding an inter-governmental agreement to generate power. between South Africa and the Democratic Republic of the Congo (DRC) on the proposed Grand Critical for Eskom at this point is ensuring a balance between security of supply, financial Inga hydro-electric project on the Congo River. sustainability and environmental compliance and to responsibly manage the trade-offs that are Implementing coal haulage and the road-to-rail migration plan required. We transported 11.6Mt of coal by rail during 2013/14, reaching our target of 11.5Mt and improving our performance by 15% relative to the previous year. Railway lines are being built to supply the new coal-fired power stations. The route for the Majuba heavy-haul railway line is being cleared 1. Capacity increased from 17 100MW reported in 2012/13. The concentrated solar power plant (100MW), project Illanga (the 150MW and construction is underway. When the 68km rail is completed in 2017, this dedicated line will photovoltaic renewables project to supplement auxiliary power usage by power stations), in addition to 34MW enhancements to transport 14Mt of coal a year from Ermelo to Majuba power station. The railway line for coal existing plant capacity, are now included as there is more certainty regarding these projects. transportation to Kusile also saw some progress when protracted negotiations were concluded for the purchase of a servitude on a farm in the path of the line. 22 Eskom Holdings SOC Limited 2014 Integrated Report 23 Chief executive’s report (continued) Pursuing private-sector participation Eskom welcomes government’s recent announcements regarding additional generation capacity through renewables, co-generation and coal technologies. These will augment the national electricity supply and reduce pressure on the grid when they come into operation. Eskom has successfully connected 21 renewable energy independent power projects (RE‑IPP) (representing a total capacity of 1 076MW) to the grid. Of these projects a total of 467.3MW is currently available to the system. Total energy procured from IPPs for the year amounted to 3 671GWh at a cost of R3 266 million (averaging 88c/kWh) which is R721 million higher than the NERSA decision for 2013/14. As the IPP programme expands, we look forward to growing participation by private-sector players, as well as greater certainty regarding Eskom’s role in acquiring and building new generation capacity. Transformation Maximising Eskom’s socio-economic transformation Transformation is both a business and social imperative. We continued contributing to South The Soshanguve manufacturing technology demonstration centre is a business incubator funded by the Africa’s economic transformation in line with available resources and all performance targets for Eskom Development Foundation broad-based black economic empowerment (B-BBEE) attributable expenditure was exceeded for the year ended 31 March 2014. The local sourcing in the capacity expansion programme for the Ensuring Eskom’s financial sustainability year was 54.6%. In February 2013, the National Electricity Regulator of South Africa (NERSA) awarded us an The expiry of Eskom’s exemption from the Preferential Procurement Policy Framework Act annual tariff increase of 8% over the period from 2013/14 to 2017/18, substantially lower than (PPPFA) has required that a number of commodity strategies and targets be amended. We will our request for 16% per annum. While we will be able to complete the current capacity expansion continue to seek innovative ways to further advance the supplier development and localisation programme using existing resources, the tariff level awarded means that we will not achieve cost- mandate in collaboration with other state-owned companies, and within the ambit of applicable reflective tariffs by 2017/18. We will not be able to expand the investment asset base beyond procurement regulations. current commitments, and it will be a challenge for us to meet all regulatory requirements. The Eskom Development Foundation NPC oversees our corporate social investment projects. The environment that Eskom currently operates in poses a number of challenges: A total of 357 443 people benefited from its R132.9 million investment in projects focusing on • The revenue shortfall of R225 billion created by the MYPD 3 determination requires significant health, education, the environment, and small and medium-sized business development during adjustments in the business the year. • Lower than projected local electricity sales are exacerbating the projected revenue shortfall • We used the open-cycle gas turbine stations more since the tools we used to reduce demand We brought electricity to 201 788 households during the year as part of Eskom and the Department in the past – particularly, power buybacks and the short-term power-purchase programme – are of Energy’s electrification programme, as well as to 112 schools. The Department of Energy has no longer available. We will not be able to continue this practice over the longer term as we made additional funding available to extend the electricity network to rural and far-flung areas cannot afford this nor maintain our liquidity buffer which will help accelerate progress towards universal electrification by 2025. • Payments to IPPs, which are regulated in terms of their power purchase agreements, have Internal transformation increased, and the costs are currently higher than anticipated by NERSA. The regulatory Our employment equity indicators for black and female employees in senior management, methodology allows the recovery of prudently incurred IPP costs as a pass through with a middle management and professional positions all showed an improvement compared to the timing delay in the reimbursement previous year. • There is increased pressure on the credit rating associated with the country’s credit profile and Eskom’s financial profile We extended our employment equity plan, which was signed in 2010 and expired in March 2013, • Our credit ratings underpin our ability to borrow sufficient volumes at affordable levels. Eskom’s by a year to allow time to analyse our internal transformation progress and develop a long-term foreign-currency ratings are on the low end of investment grade (Baa3 from Moody’s) and employment equity plan. The revised plan will be submitted to the shareholder in 2014/15. second-lowest (BBB from Standard & Poor’s) investment grades. Both ratings have a “negative” outlook. In December 2013, Fitch affirmed Eskom’s long-term local currency issuer default Eskom has a highly competent management team in place. We recognise, however, that the rating of BBB+. Eskom is at risk of a further downgrade if South Africa’s sovereign rating, vacancies at senior level needs to be addressed. This will be one of the first priorities for the presently on “negative” outlook, deteriorates, or if our standalone financial profile weakens incoming chief executive, who may also want to shape the management structure. materially 24 Eskom Holdings SOC Limited 2014 Integrated Report 25 Chief executive’s report (continued) In combination, these factors are putting a great deal of pressure on our financial sustainability. nearly three decades. The executive committee also bid farewell to Mr Bhabhalazi Bulunga, group Accordingly, we are discussing possible funding options with the shareholder. In addition, we have executive: Human Resources and Mr Kannan Lakmeeharan (divisional executive for the Office of applied to NERSA for the regulatory clearing account (RCA) adjustment. The RCA is necessitated the Chief Executive) and group executive: Technology and Commercial (acting) during the year. by the fact that the revenue and expenditure approved for Eskom is largely based on forecasts. The MYPD rules require that from time to time a reconciliation of these variances be done in A sincere word of thanks to Ms Caroline Henry, who acted as chief financial officer after the order to quantify over/under collection of revenue and over/under-expenditure on Eskom’s part. resignation of the former finance director, Mr Paul O’Flaherty, to whom we bid farewell in NERSA allows only expenditure that has passed the efficiency test. Should the results of the July 2013. Caroline drew on her extensive experience as the Eskom Treasurer to ensure a assessment indicate that Eskom has to re-imburse the customers, then the price of electricity seamless transition. would have to decrease proportionally to the RCA balance. Similarly, if the customers have to Congratulations to Ms Tsholofelo Molefe, who has been appointed as our new finance director. re-imburse Eskom, the price would have to increase. Depending on the quantum of the RCA I know she will apply herself to her new role with the same dedication and acuity that helped balance, it is either carried over to the following financial year, or a tariff adjustment is effected transform Group Customer Services into the efficient, effective division it is today. in the following financial year or the MYPD is re-opened and the full stakeholder consultation process is undertaken before any tariff adjustment is allowed. Above all, I thank our 46 919 employees, whose talent, skill and commitment will make all the difference as we build the bridge to a sustainable future. We have a clear strategy in place – now While we pursue these discussions, we will continue to strengthen internal efficiencies, defer we must execute. spend where possible and reduce costs through our business productivity programme. However, cost-reflective tariffs remain a necessity for operational and financial sustainability. We have identified and largely secured funding for the current capacity expansion programme and have sufficient liquidity to meet our immediate liability requirements. We are confident that we will be able to secure the remaining funding for the current capacity expansion programme. However, this will have to be balanced against the negative outlook from the rating agencies and Collin Matjila the possibility of a downgrade due to the deterioration in the credit metrics. Interim chief executive Eskom achieved a group net profit of R7.1 billion for 2013/14 (2012/13: R5.2 billion) which was significantly affected by the profit on the embedded derivatives of R2.1 billion (2012/13: loss of R5.9 billion). The profit should be viewed in context of Eskom’s holistic financial position. The group is highly leveraged with a debt-to-equity ratio of 2.06 at 31 March 2014 (2013: 1.84). Eskom’s gross debt as at 31 March 2014 is R255 billion (2013: R203 billion) and will continue to increase as we execute our funding plan. Both the free funds from operations as a percentage of gross debt and gross debt as a percentage of earnings before interest, taxation, depreciation and amortisation ratios are significantly below investment-grade targets. Conclusion Eskom remains committed to its aspiration of sustainable development as demonstrated in our continued support, as an active signatory, for the United Nations Global Compact. Eskom is a UNGC LEAD company which means that we are seen as a leader in the sustainability field. As part of this commitment Eskom successfully piloted a UNGC LEAD board programme which is focused on driving the sustainability agenda through the boards of companies. Eskom continues to confront a challenging set of financial and operational circumstances. In this context we remember the words of late former president Nelson Mandela: “It always seems impossible until it’s done.” All of our efforts are aimed at ensuring an uninterrupted supply of electricity to the nation without compromising the financial well-being of the company. Working with the shareholder – who has been very supportive – and with cooperation of all South Africans Two of the 46 wind turbines to be erected in using electricity efficiently, we will successfully meet these challenges. at the Sere wind farm I would like to acknowledge the contributions of Mr Brian Dames, who served as our chief on the West Coast executive until the close of 2013/14. We thank Brian for his contributions to this organisation over 26 Eskom Holdings SOC Limited 2014 Integrated Report 27 Shareholder’s compact Key performance Performance Target Target Actual Actual Actual Page The South African government, represented by the Minister of areas Deliver capital indicator Generation capacity Unit MW 2013/14 achieved? 100 2013/14 120 2012/13 261 2011/12 535 ref 117 Public Enterprises, is Eskom’s sole shareholder expansion installed and commissioned Transmission lines Km 770.0 810.9 787.1 631.0 installed Each year, in consultation with the shareholder, Eskom agrees on its performance objectives, 117, Transmission MVA 3 790 3 790 3 580 2 525 measures and indicators, as well as its annual targets, in line with the Public Finance Management capacity installed and 123 Act (1999). commissioned Generation new build Days 30.00 48.90 43.48 n/a 117 The table below sets out Eskom's performance for the year to 31 March 2014 in terms of the capacity milestones deviation shareholder’s compact. All key performance indicators (KPIs) on the compact refer to the Eskom (Medupi, Kusile and company only. Commentary on performance is contained in the “Performance on strategic Ingula) objectives” section of this report. Reduce Relative particulate kg/MWh 0.36 0.35 0.35 0.31 128 environmental emissions footprint in existing Water usage per kWh L/kWhSO Key performance indicators of the shareholder’s compact fleet 1.39 1.35 1.42 1.34 128, sent out6 129 Key performance Performance Target Target Actual Actual Actual Page Implementing Coal road-to-rail Mt 11.48 11.58 10.12 8.50 141 areas indicator Unit 2013/14 achieved? 2013/14 2012/13 2011/12 ref coal haulage and migration Focus on safety Employee lost-time Index 0.36 0.31 0.401 0.41 85 the road-to-rail incidence rate (LTIR) migration plan Keep the lights on Maintenance Number 0 0 − n/a 106, backlog reduction 114 Ensure financial Cost of electricity R/MWh 453.40 541.92 496.24 374.19 153 based on Eskom sustainability7 (excluding technical governance depreciation) committee approval Interest cover Ratio 1.18 0.65 0.27 3.27 IDM demand savings MW 379 410 595 365 106, 111 Debt:equity (including Ratio 2.17 2.21 1.96 1.69 long-term provisions) 155 Internal energy GWh 15.0 19.4 28.9 45.0 106, efficiency Free funds from % 9.11 9.21 8.55 15.06 113 operations (FFO) as Put customer at Customer service Index 88.7 86.6 86.8 85.6 96 % of total debt the centre index Build strong skills Training spend as % % 5.00 7.87 − − Improve Normal UCLF2 % 10.00 12.61 12.12 7.97 (total pipeline or of gross employee operations new enrolments) benefit costs8 Less: Constrained % − − 1.63 3.41 − 89, Engineers Number 2 007 1 962 2 144 2 273 UCLF3 91 100 Underlying UCLF 4 % − − 10.98 8.71 − Technicians Number 780 815 835 844 EAF % 80.0 75.13 77.65 81.99 Artisans Number 2 619 2 383 2 847 2 598 Total system minutes Minutes 3.40 3.05 3.52 4.73 lost for events <1 Youth programme9 Number 5 000 4 325 5 701 5 159 89, minute 93 SAIDI5 Hours 45.0 37.0 41.9 45.8 28 Eskom Holdings SOC Limited 2014 Integrated Report 29 Shareholder’s compact (continued) Key performance Performance Target Target Actual Actual Actual Page areas indicator Unit 2013/14 achieved? 2013/14 2012/13 2011/12 ref Maximise Local sourcing in % 52.0 54.6 80.2 77.2 socio-economic procurement contribution Procurement from % 75.0 93.9 86.3 73.2 B-BBEE compliant 148 companies Procurement from % 1.0 1.0 1.0 − black youth-owned companies Employment equity – % 3.00 2.99 2.59 2.49 disability Racial equity in senior % 61.0 59.5 58.3 53.9 management, % of black employees Gender equity in % 30.0 28.9 28.2 24.3 senior management, % of female employees 151 Racial equity in % 71.0 71.2 69.6 65.7 professionals and middle management, % of black employees Gender equity in % 36.0 35.8 34.6 32.4 professionals and middle management, % of female employees 1. One noise-induced hearing loss late report by Generation and one LTI 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 – This is UCLF that was a result of emissions and short-term related UCLF due to system constraints to meet the “Keeping the lights on” objective. This is apportioned between PCLF and OCLF. 4. Underlying UCLF – This 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. 7. The original year to 31 March 2014 budget which was included for 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) 463.25 R/MWh • Interest cover (excluding remeasurement of the shareholder loan) 0.98 • Debt/equity 2.19 • FFO as a % of gross debt 10.51% 8. This is a new measure, effective from 1 April 2013. 9. Includes learners trained by Eskom, as well as learners trained by Eskom’s suppliers. Artisan training is provided at the Eskom Academy of Learning in Johannesburg 30 Eskom Holdings SOC Limited 2014 Integrated Report 31 02 About the Eskom group Eskom is South Africa’s primary electricity supplier and is wholly owned by the South African government. In total, it generates and distributes about 95% of electricity used in South Africa and about 40% of electricity used on the continent Nature of the business and client base Eskom generates, transmits and distributes electricity to industrial, mining, commercial, agricultural and residential customers in South Africa, and to municipalities, who in turn redistributes electricity to businesses and households within their areas. It also purchases electricity from independent power producers (IPPs) in terms of various agreement schemes as well as electricity generating facilities beyond the country’s borders. Eskom operates 27 power stations with a total nominal capacity of 41 995MW, comprising 35 726MW of coal-fired stations, 1 860MW of nuclear, 2 409MW of gas-fired, 2 000MW hydro- and pumped-storage stations as well as the 3MW wind farm at Klipheuwel. The company also maintains more than 359 337km of power lines and substations with a cumulative capacity of 232 179MVA. Eskom is building new power stations and major power lines to meet South Africa’s energy demand. This capacity expansion programme will be completed in 2019/20. To ensure that Eskom is able to meet demand and create the space for crucial infrastructure maintenance while new generating capacity is being built, it runs a range of demand-management and energy- efficiency programmes. Eskom sold 217 903GWh of electricity to about 800 municipalities in bulk, 3 000 industrial customers, 1 000 mining customers, 50 000 commercial customers and 84 000 agricultural customers in 2013/14. It also supplied electricity to more than 5.1 million residential customers. The figure for residential users includes prepaid customers. Eskom’s business model The International Integrated Reporting Council’s framework describes a company’s business model as “its system of transforming inputs, through its business activities, into outputs and outcomes with the aim to fulfilling the organisation’s strategic purposes and create value over the short, medium and long term”. This system is affected by internal and external factors, which together make up the company’s operating environment. Eskom was voted as the “Most desired company to work for” by the Sunday Times newspaper. Awards were also received in the categories “Community Upliftment” (second place), and “Top company that does the most to look after the environment and natural resources” (second place) 32 Eskom Holdings SOC Limited 2014 Integrated Report 33 About the Eskom Group (continued) Electricity supply industry (ESI) in South Africa Eskom uses integrated demand-management programmes to reduce energy demand while it The ESI consists of generation, transmission and distribution as well as the importing and builds additional generating, transmitting and distributing capacity. exporting of electricity. Eskom sells electricity to a variety of customers, including to redistributors (municipalities). Redistributors distribute power to end-users directly, under licence. Eskom is also tasked with supporting the government’s developmental objectives, as outlined in the New Growth Path, the National Development Plan and other development documents. Eskom is a key player in the industry in the generation space, particularly with most of the base- load and peaking capacity being operated by Eskom. Eskom’s annual corporate plan gives effect to Eskom’s medium-term strategic objectives and the annual shareholder’s compact sets out annual key performance indicators in support of Eskom’s Independent power producers (IPPs) have been invited to participate through a renewable energy mandate and strategic objectives. This plan and compact are sent to the Minister of Public programme run by the Department of Energy (DoE). Potential players were shortlisted and Enterprises for approval before the start of each financial year. successful bidders have been contracted to supply energy into the national grid owned by Eskom. All grid planning is done by Eskom, lines are constructed under specific licensing criteria and The economic, social and environmental climate conform to a national grid code which is overseen and regulated by NERSA. The electricity that Eskom produces is a major driver of the economy and about 3% of the country’s gross domestic product can be attributed to Eskom. Regulation of electricity market: The electricity business is regulated by NERSA in terms of the National Energy Regulatory Act. NERSA issues licences, regulates all tariff increases, provides The pace at which the economy grows is linked to the pace at which the country’s energy needs national grid codes, etc. grow, and therefore the pace at which Eskom needs to expand to meet demand. Infrastructure capital investment has historically not kept up with economic growth, resulting in a constrained Integrated Resource Plan 2010 (IRP 2010): The IRP 2010 sets out South Africa’s long-term electricity-supply situation in the short term. energy needs and discusses the generating capacity, technologies, timing and costs associated with meeting that need. Elements of the social landscape affecting operations include an increase in labour action against Eskom’s customers, which ultimately reduces their electricity usage, and against its contractors National Nuclear Regulator (NNR): The NNR ensures that individuals, society and the and suppliers, which has the potential to further delay the capacity expansion programme and environment are adequately protected against radiological hazards associated with the use of raises concerns about contractor and employee safety. nuclear technology, and in Eskom’s case, regulates its Koeberg nuclear power station. The current economic climate also has the potential to increase customer non-payment, electricity Independent system market operator bill (ISMO): This is a proposal to restructure the existing and equipment theft, and illegal connections, all of which have a technical and financial impact on market structure (one dominant player within a regulated market which manages the overall value Eskom’s ability to ensure security of supply. chain of electricity generation, transmission and the bulk sale of electric power). A proposed independent system operator with or without transmission assets being incorporated into the Just as electricity generation inevitably affects the environment, the environment also has an effect structure was considered in terms of legislation. Eskom has in its comments to the parliamentary on Eskom. Eskom’s operating licence depends on various legislative requirements, including sub-committee indicated that it was important not to embark on any restructuring while the power keeping its water usage and atmospheric emissions within legislative requirements. system was constrained and recommended a phased approach towards the creation of an ISMO. The Integrated Resource Plan for Electricity 2010-2030 Southern African Power Pool (SAPP): Eskom imports electricity from Namibia, Lesotho, and The IRP 2010 sets out South Africa’s long-term energy needs and discusses the generating Mozambique and sells electricity to Lesotho, Namibia, Botswana, Zimbabwe, Mozambique, capacity, technologies, timing and costs associated with meeting that need. In November 2013, Swaziland and Zambia on either firm or unfirm contracts. the Department of Energy (DoE) issued a draft update of the IRP for public comment. This reflects the effect of slowing economic growth on projected electricity demand as well as changes in the External factors that influence Eskom committed build programme. Public comment on the update has been gathered. The DoE is now Eskom is affected by four key external factors, which form the framework within which the consulting with other government departments and is expected to issue the approved updated company operates. These factors are the shareholder mandate; the economic, social and plan in the second half of 2014. environmental climate; the Integrated Resource Plan for Electricity 2010-2030 (IRP 2010); and relevant legislation, regulations and policies (other than the IRP 2010). The government is in the process of allocating generating capacity to power producers, based on the IRP 2010 requirements. The number of MWs required and technology allocated to Eskom Shareholder mandate will substantially influence its expansion plans after the completion of Kusile, especially if that Eskom’s mandate, as outlined by the government, is to sustainably provide electricity to grow allocation includes nuclear power. No South African cabinet decision has yet been made regarding the economy and improve the quality of life of people in South Africa and the region. In practice, new nuclear power stations. The government’s nuclear energy working groups and sub-working this requires keeping the lights on under conditions of tight supply – requiring a concerted groups are developing strategies for the envisaged new nuclear build programme, including the effort to balance competing priorities in an appropriate manner – the need to do maintenance, supply of nuclear fuel. Eskom is participating in the sub-working groups. manage the financial constraints, and ensure sustainability in the longer term. Eskom cannot do this on its own and relies on partnerships with all stakeholders and various demand-side management interventions. 34 Eskom Holdings SOC Limited 2014 Integrated Report 35 About the Eskom Group (continued) Legislation, regulation and policies Eskom is subject to numerous laws and regulations regarding its operations, including conditions relating to tariffs, expansion activities, environmental compliance and regulatory and licence conditions. Eskom has to operate within the terms of the various regulations and water usage and atmospheric emissions licences that govern its operations. Current licensing conditions place stringent limits on plant emissions to reduce the country’s current and future environmental footprint. Important legislation that influences Eskom’s governance include the Companies Act (2008), the Public Finance Management Act (1999), the Preferential Procurement Policy Framework Act (2000), the Promotion of Access to Information Act and the Promotion of Administrative Justice Act (2000). King III, the Protocol on Corporate Governance in the Public Sector, and various international guidelines guide Eskom regarding best practice in governance and reporting. Eskom has applied most of the King III principles although, since it is a state-owned company, some of them do not apply. In some instances, Eskom has adopted alternative practices to those recommended by King III. Where a principle has not been applied, an explanation is provided. For more information on King III practices refer to www.eskom.co.za/IR2014/03.html Eskom periodically has to apply to NERSA for the revenue it requires to sustainably operate its business. The application for revenue is in the form of a multi-year price determination (MYPD) and currently the third pricing application, MYPD 3, is in effect and covers the five-year period 2013/14 to 2017/18. Eskom’s internal operating environment The four internal cornerstones of Eskom’s business are: leadership and governance; the Eskom values; policies, procedures and systems; and technology. Leadership and governance Eskom’s board is responsible for governing the company. The executive management committee and a broader management committee, which includes line and functional leaders, implement the decisions made at governance level on a day-to-day basis. There is a clear distinction of roles and responsibilities between the board, the executive management committee (Exco) and the management committee (Manco). The Exco provides overall guidance while Manco focuses on monitoring performance and operations at a more detailed level. Eskom’s leadership and governance is underpinned by Eskom’s values. Eskom’s values Eskom works within a culture that strives to embody the following values: • Zero harm: Eskom strives to ensure that zero harm befalls its employees, contractors, the public and the natural environment • Integrity: Eskom strives to achieve honesty of purpose, conduct and actions, and respect for Live-line maintenance on the high-voltage lines people reduces the need to shut • Innovation: Eskom strives to encourage value-adding creativity and to be results orientated. lines down for maintenance It aims to lead through excellence in innovation • Sinobuntu: Eskom is caring • Customer satisfaction: Eskom is committed to meeting or even exceeding the needs of the recipients of its products and services • Excellence: Eskom aims to be recognised for its exceptional standards, performance and professionalism 36 Eskom Holdings SOC Limited 2014 Integrated Report 37 About the Eskom Group (continued) Eskom’s value chain Eskom is committed to providing and maintaining a safe, healthy working environment for all employees and contractors and has made safety a key focus area within the company. Core operations As stated in the “Nature of the business and client base”, on page 31 of this report, Eskom’s core operations are the generation, transmission and distribution of electricity. The primary energy resources (coal, liquid fuel and uranium), water and limestone that Eskom’s power stations need to operate, must be sufficient, delivered on time and at optimal cost, and be of the required quality. Coal is procured in term of cost-plus contracts, fixed-cost contracts, medium- and short-term contracts. Cost-plus contracts are long-term agreements whereby a mine’s coal reserves are dedicated to Eskom and bought at a cost that covers the mine’s full capital investment plus a return on investment. Fixed-cost contracts are with mines that produce both export-quality coal for sale on international markets and Eskom-quality coal, which is sold to the company at a fixed price, subject to annual inflationary adjustments. Kusile will be the first Eskom power station to use limestone when it comes into operation. Generating electricity requires a significant amount of water and also results in atmospheric emissions, ash and nuclear waste. Eskom aims to minimise its impact on the environment by reducing atmospheric emissions and fresh-water usage by transitioning to a cleaner energy mix, considering different technologies and The Apollo HVDC converter station in Johannesburg converts the direct current power into alternating continuing with research and development to develop improved energy technologies. current power from Mozambique and then feeds it into the South African national grid Eskom’s primary partners are the people and companies it sells electricity to, both locally and Policies, procedures and systems beyond its borders. The quality of these relationships is very important to the company and is Systems play an important role in Eskom, affecting every aspect of operations from safety to constantly being monitored and enhanced. Eskom’s customers are important partners in assisting the experience of its customers to the efficiency of its power stations. Standardised processes, the company to ensure security of supply by reducing their electricity demand. This is done policies and procedures have been developed for all aspects of the business and are regularly through demand-management and energy-efficiency strategies such as the televised Power updated to ensure good governance and implement efficiency improvements. Alerts, the integrated demand-management campaign and the 49M energy-efficiency campaign. Eskom has key performance indicators to measure business performance. These measures are Strong partnerships with government, suppliers and contractors are vital to Eskom meeting documented and approved in terms of the enterprise performance management process. current and future electricity needs. This group includes various government departments, coal Eskom achieved ISO 9001 certification on 31 March 2013. During the surveillance audits, the mines and water authorities, IPPs, fellow members of the Southern African Power Pool, original certification bodies (e.g. SABS) did not identify any significant findings or risks that could lead to equipment manufacturers and contractors working on the capacity expansion programme. Eskom losing its ISO 9001 certificate. Work is underway with the SABS to identify specialist ISO Eskom has also established partnerships with other state-owned entities such as Transnet and standards which need to be implemented in specific divisions or business units in Eskom. Broadband Infraco to capitalise on any complementary strengths that may exist between itself and these organisations and enhance the economic contribution of state-owned entities. Technology Eskom’s regional development strategy involved creating the Southern African Energy unit, Technology is a key enabler for Eskom and includes telecommunications, information technology, through which it imported electricity in the past year from Namibia, Lesotho, and Mozambique. research and innovation. Eskom is constantly scanning the technology environment for new ways As a member of the Southern African Power Pool, Eskom also sells electricity to Lesotho, Namibia, to improve its operations. Botswana, Zimbabwe, Mozambique, Swaziland and Zambia on firm or unfirm contracts. Eskom runs focused research programmes to improve its processes and technologies as well as reduce its impact on the environment. If research indicates that a technology is promising, Capacity expansion programme Eskom invests in a pilot project to investigate the feasibility of larger-scale rollout. These Eskom is in the process of a capacity expansion programme to expand its generation and technologies include new methods for generating electricity (such as the concentrated solar transmission capacity. This programme will increase Eskom’s generating capacity by 17 384MW. power plant in Upington) and smart grid technology. This includes building two coal-fired and one pumped-storage power stations, one wind farm as well as a concentrated solar thermal station. It also involves strengthening and substantially extending the transmission grid. 38 Eskom Holdings SOC Limited Economic and 2014 Integrated social Report 39 climate 2014 Integrated Report 40 Technology Transmission energy losses 2.34% About the Eskom Group (continued) International sales 12 378GWh Liquid fuel ZIISCE: Zero harm, Integrity, Innovation, Sinobuntu, Customer satisfaction, Excellence Finance 1 148.5ML Eskom’s funding model consists of equity, revenue and debt funding, with strong support from the government. Eskom’s revenue requirement and resultant tariff is determined by its regulator, NERSA, through multi-year-price-determinations. Eskom’s credit rating is affected by its own Laws, regulations and policies Local sales 205 525GWh financial position as well as the sovereign credit rating. Eskom has embarked on the business Emissions productivity programme to address the revenue shortfall it is faced with by introducing cost Carbon dioxide 233.3Mt IPP purchases 3 671GWh reductions, increasing productivity as well as improving operational efficiencies. Nitrous oxide 2 969t Sulphur dioxide 1 975kt Energy Particulate emissions 78.9kt Generated 231 129GWh efficiency Workforce IDM 5.2 million customers Eskom’s operations are supported by a highly skilled workforce that executes Eskom’s core Ash Imports 9 425GWh 49M campaign operations and provides supporting business services such as human resources management, produced 35.0Mt Policies, procedures and systems information technology services, procurement, research, etc. IDM savings 410MW Distribution energy losses 7.13% Integrated Resource Plan 2010 Eskom has a rigorous transformation programme in place to ensure equity in the workplace, and has put in place skills-development programmes to train engineers, technicians and artisans to meet its need for skilled workers in future. Eskom’s employees receive training on an ongoing basis. R271 billion funding plan secured for the capacity expansion programme Procurement 11.6Mt coal transported by rail Installed this year: Eskom has a centre-led procurement and supply chain process. Eskom uses its procurement Water used Capacity 120MW 317 052ML Lines 811km partnerships to stimulate black economic empowerment, in line with its supplier localisation and Substation 3 790MVA development aspirations. Coal burnt 122.4Mt Corporate social investment and development services Gross maintenance costs of R28.6 billion across Eskom has a dedicated subsidiary, the Eskom Development Foundation NPC, to run corporate Eskom in 2013/14 social investment activities. Eskom is also leveraging the capacity expansion programme to reduce unemployment, improve the country’s skills pool, stimulate the local economy and increase economic equity by supporting B-BBEE. Eskom has been implementing the Department of Energy’s integrated national electrification programme in its licensed areas of supply since April 2001. Since it started electrifying homes in 1991, more than 4.5 million households have been electrified within Eskom’s supply areas. The following diagram outlines Eskom’s business model and how it creates value: 48 used nuclear fuel elements discharged in 2013/14 Local sourcing in procurement 54.6% 46 919 employees Training spend as % Learners R156.2 million spent on Free funds from operations R27.5 billion B-BBEE 91.8% Employees of gross employee Engineers 1 962 learners Research and development Liquid assets of R30.6 billion Black women owned (BWO) 7.5% Skills benefits: 7.87% Technicians 815 learners Integrated demand management Revenue of R139.5 billion Internal Racial equity in senior management 59.3% Experience Artisans 2 383 learners Power station technology Opex of R128.1 billion Electrification: 201 788 houses this year Youth 4 325 learners Clean coal technology Credit rating of BBB and R3.0 billion total capital investment External CSI committed: R132.9 million Leadership and governance Shareholder mandate 41 Eskom Holdings SOC Limited 42 Eskom Holdings SOC Limited 2014 Integrated Report 43 About the Eskom Group (continued) About the Eskom Group (continued) The Eskom energy wheel Eskom’s legal and operating structure Eskom’s operating structure The energy wheel shows the volume of electricity that flowed from local and international power Eskom’s legal structure Eskom’s operating structure, depicted below, comprises line functions that operate the business, stations and independent power producers (IPP) to Eskom’s distribution and export points during Eskom’s head office is in Johannesburg, while it has operations across South Africa. It maintains service functions that service the operations and strategic functions that develop the enterprise. the past two years, including the losses incurred in reaching those customers. All figures are in a small office in London, primarily for quality control of the equipment being manufactured for the GWh unless otherwise stated. capacity expansion programme. Eskom energy flows during 2013/14 and 2012/13 The Eskom group consists of the Eskom business and a number of subsidiaries, including: Office of the Chief Executive • The Eskom Enterprises SOC Limited group. Through the Rotek and Roshcon entities, Eskom Chief executive (interim) Enterprises provides life-cycle support, plant maintenance, network protection and support for Mr C Matjila the capacity expansion programme for Eskom’s line divisions. These entities support Eskom’s Assurance and Forensic Generation of electricity Available for distribution Total imports FY2014 FY2013 Variance FY2014 FY2013 Variance FY2014 FY2013 Variance strategic objective of “Becoming a high-performance organisation” as well as the “Leading (internal audit) Generation (excluding 227 508 230 845 3 337 Generation International and partnering to keep the lights on” objective. There is also a subsidiary with an interest in OCGT) (including IPPs) 234 800 236 265 1 466 purchases 9 425 7 698 (1 727) electricity operations and maintenance concessions in Uganda. Another subsidiary, Eskom Generation ocgt 3 621 1 904 (1 717) International 9 425 7 698 (1 727) Wheeling1 3 353 2 948 (405) Pumping (3 862) (4 037) (175) Energie Manantali s.a (EEM), operates an operating and maintenance concession with Société Mr T Govender Wheeling 1 3 353 2 948 (405) Total 12 778 10 645 (2 133) IPP 3 671 3 516 (154) Subtotal 247 578 246 911 (667) de Gestion de l’Energie de Manantali (SOGEM). A mediation process to reach agreement Total 230 938 232 228 1 291 Transmission on a 10‑year operating and maintenance contract was not as successful as intended, with Pumping (3 862) (4 037) (175) Line Mr MM Ntsokolo Total 243 716 242 874 (842) some major issues that could potentially expose EEM to undue risk remaining unresolved. functions Exit options are thus being pursued. As a result, EEM has been classified as a discontinued Distribution operation in Eskom’s March 2014 financial statements Ms A Noah Total exports • Eskom Finance Company SOC Limited was established in 1990 primarily to enable Eskom’s FY2014 FY2013 Variance employees to have access to home loan finance whilst optimising home ownership costs to Group Customer Services both Eskom and its employees. Eskom is in the process of finding an appropriate disposal Acting Ms EL Johnson International sales 12 378 13 791 1 413 solution for this subsidiary on request of the shareholder, however, as it currently does not meet Wheeling1 3 353 2 948 (405) South African the requirements as stated in the International Financial Reporting Standards (IFRS), it has not Total 15 731 16 739 1 008 Human Resources power pool been classified as a discontinued operation in Eskom’s financial statements Acting Mr MM Ntsokolo • Escap SOC Limited, Eskom’s wholly owned insurance captive company, manages and External sales insures the business risk of Eskom and its subsidiaries, excluding nuclear and aviation liabilities Technology and Commercial Service Acting Mr K Lahmeeharan (up to 30 April 2014) FY2014 FY2013 Variance • The Eskom Development Foundation NPC is a wholly owned non-profit company that Local 205 525 202 770 (2 755) manages Eskom’s corporate social investment in support of Eskom’s “Transformation” objective functions Group Capital International 12 378 13 791 1 413 Total 217 903 216 561 (1 342) Acting Mr DL Marokane Technical and other losses Finance Internal use Demand FY2014 FY2013 Variance Ms TBL Molefe FY2014 FY2013 Variance FY2014 FY2013 Variance Generated (129) (243) (114) Distribution 15 824 15 464 (360) Sales 217 903 216 561 (1 342) Transmission 5 664 6 757 1 093 Internal use 465 461 (4) Losses 21 488 22 221 733 Total 21 488 22 221 733 Total 336 218 (118) Internal 465 461 (4) Generated (129) (243) (114) Technical and other losses – % Enterprise Development Wheeling1 3 353 2 948 (405) FY2014 FY2013 Variance Strategic Ms EL Johnson Other 636 926 290 Distribution 7.1% 7.1% – functions Total 243 716 242 874 (842) Transmission 2.3% 2.8% 0.5% Sustainability Dr SJ Lennon 1. Wheeling is the buying and selling of electricity between Eskom and foreign parties without the power entering into South Africa. 44 Eskom Holdings SOC Limited 2014 Integrated Report 45 About the Eskom Group (continued) Purpose, values and strategic objectives Purpose The purpose of Eskom’s annual corporate plan is to outline the strategic and operational direction The purpose of Eskom is to provide sustainable electricity solutions to assist the economy to grow of Eskom and to capture the necessary financial, operational and resource plans to support and to improve the quality of life of people in South Africa and in the region. this direction. As such, the corporate plan becomes an engagement document for discussion with Eskom’s stakeholders. The latest plan covers the four-year period from 1 April 2014 to Strategic objectives 31 March 2018 and the focus is on Eskom’s response plan to its changing environment. Eskom has aligned itself around eight strategic objectives. These objectives give Eskom direction to deliver on its purpose, vision and values. They are confirmed on an annual basis as part of the A secondary purpose of the corporate plan is to comply with the requirements of section 52 corporate plan process. of the Public Finance Management Act (PFMA) as well as section 29 of the National Treasury regulations, and to support internal Eskom policies. The consolidated corporate plan with all its Becoming a high-performance organisation annexures is submitted to the Department of Public Enterprises (DPE) and National Treasury Eskom continues its transformation into a high-performance utility focused on quality customer annually in February. service; safer, effective and efficient plant operation through prudent plant maintenance; optimising key talent; and ensuring resilience measures are in place for major disruptive events. The targets reflected in the integrated report for 2013/14 are those that were approved in the The business productivity programme is identifying and eliminating inefficiencies in the business five‑year corporate plan that covered 2013/14 to 2017/18. The 2017/18 targets are those that are to enable Eskom to better manage its costs and revenue. reflected in the current four-year corporate plan that was submitted to DPE and National Treasury on 28 February 2014. Eskom’s purpose, values and strategic objectives have been consistent in Leading and partnering to keep the lights on both the 2013/14 and 2014/15 corporate plans. Eskom is committed to keeping the lights on whilst at the same time maintaining a sound basis for sustainable operations. This will be done by taking a leading role and actively partnering with all Eskom’s purpose, values and strategic objectives key stakeholders, including the people of South Africa, in a comprehensive supply-and-demand management strategy. Reducing Eskom’s environmental footprint and pursuing low-carbon growth Our purpose Eskom is committed to reducing its environmental and carbon footprint and helping South Africa To provide sustainable electricity solutions to grow the economy and improve the achieve its environmental targets by transitioning to a cleaner energy mix and reducing emissions quality of life of people in South Africa and the region Accomplish and water use and ensuring full compliance with environmental legislation. In addition, Eskom has Eskom’s to adapt to a changing environment as a result of the negative impacts of climate change placing purpose pressure on its resources and infrastructure. Securing future resource requirements Eskom must partner with suppliers and regulators to ensure that it has the resources including Leading and Reducing Securing Implementing Pursuing land, coal, liquid fuel, uranium and water it needs for its existing and new generating assets partnering Eskom’s future coal haulage private-sector Execute to operate. to keep the environmental resource and the road- participation strategic lights on footprint and requirements to-rail pillars Implementing coal haulage and the road-to-rail migration plan pursuing migration plan low-carbon Eskom will continue to reduce the number of coal trucks on the road and contribute to the security growth of coal supply by migrating coal transport from road to rail. The aim is to reduce the cost of transporting coal and improve the safety record of coal hauliers. Pursuing private-sector participation Transformation Ensuring Eskom’s Becoming a high- Eskom acts as a catalyst for private-sector participation in South Africa to ensure security of (including the financial sustainability performance Get supply for South Africa. business productivity organisation foundation programme) right, build capacity Transformation (including the business productivity programme) Eskom has initiated a transformation programme to address national and internal transformation ZIISCE: Zero harm, Integrity, Innovation, Sinobuntu, Customer satisfaction, Excellence challenges by leveraging the capacity expansion programme and Eskom’s organisational spend to reduce unemployment, improve the country’s skills pool and increase economic and workplace Foundation: Long-term nation-building – Electricity for all – Triple bottom line equity. This transformation programme is informed by the government’s developmental goals. Eskom is addressing the overall challenges it faces through the business productivity programme, which aims to ensure a sustainable business despite the financial constraints faced. 46 Eskom Holdings SOC Limited 2014 Integrated Report 47 About the Eskom Group (continued) Ensuring Eskom’s financial sustainability Six capitals Eskom remains focused on re-engineering the business to achieve sustainability and cost- Manufac- Social and efficiency by striking a balance between reducing costs where appropriate and the three sources Financial tured Intellec- Human relation- Natural of funding: equity, debt and revenue. This will inevitably involve increasing electricity prices to capital capital tual capital capital ship capital capital obtain cost-reflective tariffs in the future and to retain a supportive credit rating that retains access Becoming a high-performance to funding as well as reduces the cost thereof. organisation Leading and partnering to keep Link between Eskom strategic objectives and the “six capitals” the lights on The capitals, as defined in the integrated reporting framework are “stocks of value” that are Reducing Eskom’s increased, decreased or transformed through the activities and outputs of a business. environmental footprint and Strategic objectives pursuing low-carbon growth For the purpose of the integrated reporting framework, the six capitals are categorised and described as follows: Securing future resource requirements • Financial capital – The pool of funds that is available to an organisation for use in the production of goods or the provision of services Implementing coal haulage and • Manufactured capital – Manufactured physical objects (as distinct from natural physical the road-to-rail migration plan objects) that are available to an organisation for use in the production of goods or the provision Pursuing private-sector of services. Manufactured capital is often created by other organisations, but includes assets participation manufactured by the reporting organisation for sale or when they are retained for its own use Transformation (including • Intellectual capital – Organisational, knowledge-based intangibles the business productivity programme) • Human capital – People’s competencies, capabilities and experience, and their motivations to innovate Ensuring financial sustainability • Social and relationship capital – The institutions and the relationships within and between communities, groups of stakeholders and other networks, and the ability to share information to enhance individual and collective well-being • Natural capital – All renewable and non-renewable environmental resources and processes that provide goods or services that support the past, current or future prosperity of an Trade-offs organisation An excess or shortage of any of the resources required for Eskom’s core operations or supporting services can affect all the others. Eskom is constantly monitoring and managing The table below gives an indication of how the six capitals are impacted by Eskom’s strategic the costs and benefits of key trade-offs between its required resources to ensure that objectives. It is evident from this that Eskom’s strategic objectives are integrated and consider all its operations are efficient and sustainable. The following are examples of the trade-offs aspects of its business and the value that it creates over time. Eskom currently faces: • Diesel to run the open-cycle gas turbines ensures security of supply in the short term, but negatively affects Eskom’s financial sustainability in the longer term • Eskom’s Generation sustainability strategy is crucial to improve plant health and reliability in the long term, thereby improving security of supply. In the shorter term, planned maintenance has to be balanced with the constrained power system and financial constraints. By contrast, not performing sufficient maintenance negatively affects plant reliability, which likewise increases the risk of load shedding • Requesting customers to reduce their electricity demand assists Eskom to meet demand, but has negative consequences for Eskom’s revenue due to reduced sales • Coal is a relatively inexpensive fuel to source financially, but has a high environmental cost, and contributes to an increasingly vulnerable supply chain, e.g. reliance on road transport and mining challenges coupled with extreme weather events 48 Eskom Holdings SOC Limited 2014 Integrated Report 49 About the Eskom Group (continued) Future focus for Eskom Seven areas of sustainability The current environment that Eskom operates in poses a number of short-term challenges: • The power system will remain constrained until units from the capacity expansion programme come online, but the level of power that can be generated can be influenced by changes in atmospheric emission licence conditions om reputatio • The MYPD 3 determination has resulted in a revenue shortfall of R225 billion, which is Esk n exacerbated by lower local sales volumes, increasing pressure on Eskom’s credit rating n and soci tio • High open-cycle gas turbine usage (as a result of power system constraints) is increasing rma al s s fo us operational expenditure and has a negative impact on Eskom’s financial sustainability an ta Tr in a • The utility business model is changing around the world. Eskom needs to refine its business bi Op er lit model to ensure its agility and long-term sustainability n tio at y ea io cr The Eskom environment is dynamic, posing challenges, threats and opportunities. To guide na et l su Ass Eskom in achieving the strategic objectives and deliver on its mandate, Eskom has developed Environmen Eskom stainabili a response plan to ensure sustainability along seven distinct dimensions. In pursuing these base mandate dimensions, safety will continue to be the foundation for all Eskom’s operations and is key to Eskom’s performance. The principles of the response plan are as follows: ls skil Fin ty • Capital investment will prioritise capacity expansion projects, generation sustainability, nc tal a ial ble sust ability su environmental compliance, transmission strengthening and compliance, customer connections, ain st na asset maintenance, asset replacement and refurbishment and the connection of independent ai ab ai n ili st power producers, based on the available capital budget over the five-year MYPD 3 period ty su ng • Eskom will pursue the Generation sustainability strategy which focuses on plant, people and ldi Bui processes • Alternative funding options, including government support will be pursued • The regulatory clearing account adjustment (RCA) will be pursued • Focus on skills building, transformation and environmental sustainability will continue • Eskom’s business model must be adapted and re-engineered Eskom’s overall strategic direction is aligned to the DPE vision statement “To drive investment, productivity and transformation in its portfolio of state-owned companies, their customers and suppliers so as to unlock growth, drive industrialisation, create jobs and develop skills.” Focus for 2014/15 During 2014/15, Eskom will focus on three core areas in support of its strategic objectives: • Sustainable asset creation through the capacity expansion programme, with particular focus on synchronisation of Medupi Unit 6 • Ensuring financial sustainability by implementing the business productivity programme which also includes applying to NERSA in terms of the RCA • Operational sustainability by continuing the Generation sustainability strategy and enhancing performance levels in the Transmission, Distribution and Group Customer Services divisions 50 Eskom Holdings SOC Limited 2014 Integrated Report 51 03 Eskom’s approach to integrated reporting More than 120 stakeholder engagements were arranged in the year to 31 March 2014 at a national level. This excludes the many engagements at an operational and provincial level. Engagements focused on sharing key information, improving existing and new relationships and creating partnerships to ensure support in addressing Eskom’s challenges Defining material items in partnership with stakeholders The relationships with stakeholders are managed in Eskom in terms of a governance process which is aligned to King III. This includes a stakeholder relations policy, process control manual, assessment of stakeholder relations and annual reporting of the material issues to the executive management committee, the social, ethics and sustainability committee and to the board. New developments for 2014 will include a stakeholder management data tool and the bi-annual submission of an integrated stakeholder relations issues and engagement report to the executive management committee and board. This integrated report focuses on qualitative and quantitative items that are material to Eskom’s operations and strategic objectives. The question of what is “material” has been determined by the board and executive management through extensive consultation within Eskom as well as with Eskom’s stakeholders, while taking into consideration Eskom’s strategic objectives, risk assessments and the way in which its value chain operates. Material items are those that are both of high concern to stakeholders and have a significant impact on the business. Eskom analysed the following to determine its material items: • Both formal and informal stakeholder feedback, including media coverage • Parliamentary questions received and the questions and feedback from government portfolio committee engagements • Reports submitted to the board and shareholder for discussion or approval • Eskom’s shareholder’s compact, corporate plan, its long-term strategic objectives and key focus areas for 2013/14 • Eskom’s key risks, as identified by its integrated risk management process • Policies and initiatives relevant to Eskom’s business • Policy, legislation and regulation changes The complete list of material items was analysed in terms of Eskom’s strategic objectives and was tabled at Eskom’s integrated report steering committee for consideration of the accuracy and completeness of the list. As part of Eskom’s governance process, the following committees also reviewed the material items that were included in this integrated report for accuracy and completeness: Many stakeholder groups • Executive management committee such as the World Bank • Social, ethics and sustainability committee visit the Medupi power • Audit and risk committee station project • Board 52 Eskom Holdings SOC Limited 2014 Integrated Report 53 Eskom’s approach to integrated reporting (continued) Stakeholder engagement There are various avenues of communication through which stakeholders can approach Eskom with their concerns and expectations. The company takes care to ensure that all stakeholder Eskom operates within a complex stakeholder landscape involving multiple stakeholders with multiple engagements are carefully planned in terms of the scope of the engagement, the intended objectives, who are engaged through multiple engagement agents and touch points. The stakeholders outcomes of the interaction and the engagement approach. engaged during the year include: Special publications and newspapers Task teams and Social media public hearings Industry Employees Regulators Government Parliament Key customers Association of Employees, National Energy Public Enterprises, Public Enterprises, Top key customers, Municipal Electricity Executive forum, Regulator (NERSA) Water and Minerals and Energy, industrial, mining Undertakings, industry Exco, board National Nuclear Environmental Affairs, Water and Environmental Monthly, quarterly, Strategic commercial, experts Regulator (NNR) National Treasury, DTI, Affairs, Trade Industry, municipalities, and bi-annual partnerships Trade and industry, NCOP, Select Committee agricultural, meetings Reports GCIS, Public works, on Finance, Select residential DST, Cooperative Committee on Public Government, and Enterprises and Labour, Traditional Affairs Provincial and Local Senior management (COGTA), SA Local Government, Standing Open dialogues Government Committees Oversight visits Association and ICT Site visits Engagement Conferences platforms One-on-one CE and Chairman’s Suppliers Organised International Media Business Civil society roadshows Capacity expansion labour relations South African, Financial Institutions, NGOs and CBOs contractors, NUM, NUMSA, Multilateral Institution African and Investors – Local SANGOC, WWF Sponsorships Fuel suppliers, Solidariteit, (World Bank, Africa Bank international and International, Consumers Forum Study group Original equipment Cosatu and IMF) Cooperation BUSA, SACCI, Executive forums meetings manufacturers agreements, Chamber of Committee MoU international Commerce and corporations/members Industry SA, both meetings (WEF, CIGRE) national and foreign regional Steering committee Stakeholder representations forums inclusive of management Policies representatives 54 Eskom Holdings SOC Limited 2014 Integrated Report 55 Eskom’s approach to integrated reporting (continued) Eskom’s interaction with stakeholders Stakeholder materiality matrix This integrated report addresses only those items that: Stakeholders Method of interaction • Have such relevance that they could substantively influence stakeholders’ decisions Government, parliament, national One-on-one meetings; Presentations to parliamentary portfolio committees; • Pose a significant risk or opportunity to business operations in the short, medium and long term departments and regulators Committee meetings; Eskom website; Reports; Annual general meeting; • May affect the achievement of strategic objectives and sustainability of value created through Industry associations and task teams; Site visits and public hearings; Monthly, Eskom’s activities quarterly and bi-annual meetings; Community and executive forums Lenders, investors and customers Roadshows; Meetings; Results presentations; Webcasts; Site visits; Eskom Eskom’s integrated report steering committee prioritised the issues that were identified through website; Teleconferences; Social media; Formal presentation website; Company the stakeholder engagement process, to form a stakeholder materiality matrix as outlined in the announcements; Reports and quarterly forums table that follows on page 56. While Eskom considers all the items raised by stakeholders, these are not all necessarily addressed in this report. Suppliers and contractors Roadshows; One-on-one meetings; Preferential procurement programmes; Open days; Contracts and service agreements; Workshops; Presentations; Training; Project steering committees Stakeholder material items have not been grouped together in general categories. By grouping them together the significance of some material items would have been lost for some specific Eskom management, employees Provincial employee engagements; Collective bargaining practices; Pre- and stakeholders. Stakeholder concerns that are ranked as having a “high” or “medium” impact on and organised labour post- interim and annual results; Regular meetings; Eskom website; Social Eskom (the last two columns) are regarded as having the potential to significantly affect the media; Development programmes; Special publications and newspapers; Open dialogues, conferences and forums; Partnerships company’s achievement of its strategic objectives. As such, they have been included in this integrated report under the “Performance on strategic objectives” section. Business groups, civil society and Roadshows; Results presentations; Reports; Community forums; Stakeholder non-governmental organisations forums; Peer educators; Industry partnership; Wellness campaigns, HIV The material items have been numbered to allow for cross-referencing with the key focus areas and Aids awareness; Skills development programmes; Advertising in local and associated risks table on pages 58 to 62. The numbering does not indicate the level of newspapers; Sponsorships; NGO Forum importance of an item. Industry experts, analysts, Industry associations and task teams; Forums and committees; Emails and academics and media Eskom website; Interviews; Roadshows; Results presentations; Quarterly briefings; Company reports; Articles The improvement in the 12-month moving average top customer KeyCare service measure for the year is attributable to Eskom meeting regularly with its top customers to share critical information on the system status and the capacity expansion programme. This was done with regular feedback from the chief executive to the key customers, quarterly liaison meetings at plant level and customer forums. The regional key account managers and their teams also regularly visit the general managers of customers and municipal managers to share important information and to enquire about service-related issues requiring attention. During the year, 56 general managers, 133 engineers and 138 accounting staff from the top customers were interviewed. Despite the number of system emergencies, the proactive manner in which Eskom informs its customers of the system status, via twice daily reports, as well as the KeyAlert SMS messaging system, has made a difference by assisting Eskom’s top customers to plan their operational activities. 56 Eskom Holdings SOC Limited 2014 Integrated Report 57 Eskom’s approach to integrated reporting (continued) Stakeholder materiality matrix Risks relating to material items The Eskom board, through the audit and risk committee, manages Eskom’s risk and resilience in Impact on Eskom Low High order to provide greater security for its employees, customers and other stakeholders. Two risk profiles are considered in Eskom, namely enterprise risk and business risk profiles. 11. Environmental 3. Impact of 1. Technical performance of generation, distribution High concerns regarding international sales and transmission plant, including maintenance An enterprise risk profile gives Exco and the board a robust and holistic top-down view of key the use of nuclear on security of supply 4. Overreliance on open-cycle gas turbines, risks facing the organisation. This makes it possible to manage those risks strategically and to power including the 10. Concerns regarding including the availability and cost of liquid fuel management of water scarcity 5. Security of supply, including load shedding and increase the likelihood that Eskom’s objectives will be achieved. Enterprise risk is defined as one nuclear waste 23. Impact of carbon tax quality of coal feed into power stations or a combination of the following: 17. Social responsibility 24. Directors’ 6. Delayed completion of capacity expansion • Risks emanating from external factors and/or enterprise events that are strategic challenges contribution remuneration and projects including costs, contractor capacity which may affect Eskom’s ability to achieve its objectives e.g. climate change leadership transition and performance, job creation, localisation and 22. Tender opportunities 27. Protecting the poor labour unrest • Risks associated with Eskom’s ability to develop and execute strategy, achieve strategic for suppliers from high tariffs and 9. Impact of particulate emission licences on the objectives, and build and protect value 41. Eskom annual and interim results providing free basic security of supply • Business risks that occur across multiple divisions that, when integrated and aggregated, are electricity 12. Adequate coal stock at power stations material and impact Eskom’s objectives 42. Performance against 31. Availability 25. Impact of outstanding electricity debtors on the shareholder of alternative Eskom’s liquidity position • The aggregated risks may not be recognised as material in any one division but are occurring compact investment options 26. Negotiated pricing agreements across multiple Eskom divisions and when integrated, become significant to investors 28. Impact of high tariffs on businesses and • A single business risk, may be material enough to impact on the Eskom’s objectives as a whole 35. Employee salary and customers and as such maybe reported as a corporate risk benefits 29. Revenue shortfall following NERSA’s MYPD 3 40. Customer determination and the impact of this on financial The business risk profile gives Exco and the board a robust and holistic bottom-up view of key dissatisfaction with and operational sustainability quality of service 39. Energy losses due to theft of equipment, illegal risks facing the divisions, and a view of the level of effectiveness in the management of those delivery connections, meter tampering and illegal risks. vending of pre-paid electricity Stakeholder concerns Risks inherent to Eskom’s operations are considered as: 21. Fraud and 15. Creation of an 2. Implement energy-efficiency programmes and • Risks that will have a significant consequence should they materialise, but that may not be governance issues Independent System incentives consistently listed on the risk register because of the perceived adequacy of the controls or due 34. Availability of Market Operator 7. Reduce carbon footprint by procuring renewable to their perceived low likelihood jobs and training 18. Transform energy • Risks which by their nature fall into the realm of business continuity management – i.e. related opportunities employment equity 8. Environmental contraventions and water 19. Electrification licences to the continuity of critical products and services in the event of a disruption to processes 37. Electric vehicle research connection 13. Availability of coal and water of acceptable providing these (the focus here is not on the cause of the disruption but on the time-critical challenges (including quality at a fair price impact on the process if buildings, equipment, system, technologies, human resources, or network upgrading, 14. Safety of the workplace, the public and the suppliers, are affected) timeliness, costs) transport of coal on the roads 20. Increase localisation 16. Private-sector participation through Department • Risks that fall into the category of disaster risks – i.e. with potentially significant impact on the and procurement of Energy renewable energy programme and country if Eskom products and services are disrupted (if business continuity is not adequate), from black, black other IPPs and if Eskom does not have the capability to respond women and black 30. Uncertainty regarding the regulatory regime youth-owned including the tariff review In line with Eskom’s integrated risk management methodology, inherent risks are continuously businesses 32. Savings through the business productivity 33. Shortage of programme reviewed with a particular focus on the effectiveness of controls. technicians, artisans 38. Lack of improvement in safety performance and engineers 44. Strategic partnerships, relationships and Eskom is required to comply with the relevant provisions in the Disaster Management Act No 57 36. Improve research communication with stakeholders of 2002 (and the associated National Disaster Management Framework) and Eskom is currently and innovation 45. Awaited IRP 2010 allocations after Kusile, focusing on improving the processes around this requirement. especially nuclear and coal power stations The following table details the key focus areas and associated risks and provides a link to the 43. Business continuity material items identified in the stakeholder materiality matrix (refer to page 56). It also refers to and disaster management, the section in this report where the items are discussed in more detail. Labour issues have been including the strategy identified as a new item on this table since the integrated report for the year ended 31 March 2013. Low for insurance 58 Eskom Holdings SOC Limited 2014 Integrated Report 59 Eskom’s approach to integrated reporting (continued) In reviewing the table below, the reader should be aware that the identification of risks is based on Key performance Page an approach that attempts to identify what could go wrong to disrupt the achievement of current Key focus areas and associated risks indicators Strategic response and controls reference objectives, and whether there is adequate mitigation in place to address such an eventuality. • Training • Skills development initiatives 100 It does not intend to set out as a matter of fact any particular concern or deficiency. It should be IV Build strong skills expenditure as (training, skills transfer, seen as a process to consider different scenarios and the contingency plans in place should such a percentage of engagement with educational Related material items: 6, 33, 34, 42, 44 a scenario materialise. gross employee institutions) There is a concern that there may be benefits • Back2Basics initiative to 74 Stakeholder materiality matrix linked to key focus areas and associated risks inadequate skills in certain areas of the • Total number of standardise operations business to support Eskom’s technology- learners in the • Localisation of skills through the 150 intensive operations following streams: capacity expansion programme Key performance Page – Engineering • Eskom provides training through 100 Key focus areas and associated risks indicators Strategic response and controls reference – Technician the Academy of Learning and – Artisan learner programmes • Number of • Eskom’s “zero harm” initiative 85 I Focus on safety – Youth • Eskom’s learner programmes, 100 fatalities focuses on the following elements: programme focused on technical learners • LTIR – Leadership Related material items: 14, 38, 44 – Contractor safety • Integrated • Protection systems and operating There is an ongoing concern that the – Supervisory capacity V Security of supply demand standards inherently significant health and safety – Training and facilities management and • Black-start readiness risks associated with an electricity – Human behaviour Related material items: 2, 3, 4, 5, 6, 8, 9, energy efficiency • Disaster risk planning through 57 business might materialise • Eskom’s life-saving rules 88 12, 13, 39, 42, 43, 44, 45 • Maintenance national disaster management • Integrated crime-prevention plan 75 If there is slow progress on Eskom’s backlog reduction structures • Motor vehicle interventions to maintenance programme, it may delay based on • Security of supply recovery project/ 104 improve vehicle safety improvements in plant performance. Eskom’s technical system emergency preparedness • Contractor coal trucks are not 147 Coupled with partial load losses due governance and emergency response allowed to be on the roads to poor coal quality, this might result in committee command centre between 18:00 on Fridays and prolonged energy constraints, loss of approval • Capacity expansion and IPP 115 – 124, 06:00 on Sundays confidence in Eskom and an increased programmes 143 – 145 risk of load shedding, which would have • NERSA approved NRS 048-9 load 104 • UCLF • Generation sustainability strategy 90, 114 II Improve operations severe implications for the country and curtailing protocols • EAF • Distribution sustainability strategy 93 Eskom. Potential shortage of liquid fuels • Power Alert, Power Bulletin and 54, 105, 109, • System minutes focusing on prioritised interventions Related material items: 1, 4, 8, 13, 36, may impact security of supply. Refer to quarterly state of the system media 113, 191 lost (for events towards refurbishments, reliability 39, 42, 43 “delivering capacity expansion” focus releases <1) improvements and maintenance area below • Stakeholder engagement 51 – 56 If a significant incident relating to Eskom’s • Number of major • Transmission network 93, 123 assets and technologies occur, it might • Crisis communication centre incidents strengthening projects result in impairment of operations, established • SAIFI • Leadership interventions 71 prosecutions, financial loss and • Refer to “improve operations” focus • SAIDI • Operation Khanyisa 99 reputational damage. Theft of electricity area in this table on page 58 • Technologies to help reduce tower 98 and equipment resulting in financial loss component theft • Generation • An integrated mega project risk 115 – 124 are also potential risks, including the • Business continuity, including the 73 VI Delivering capacity capacity, management framework has been impact thereof on technical performance. appropriate insurance portfolio expansion transmission lines implemented to align the objectives The risk of loss of supply to customers • Asset management 49 and transmission of all relevant stakeholders, identify due to network unavailability and/or • Process control manuals 74 Related material items: 6, 42, 44 capacity installed and integrate risks and issues equipment failure as a result of ageing If there are further delays in delivery, and/ • Generation across projects, and implement plant may lead to an interruption(s) of or if the cost of the capacity expansion expansion more effective treatment plans supply to customers projects escalates, it could lead to a loss capacity • Appropriate insurance portfolio of stakeholder confidence, which would milestones • Board build programme review 70 • Customer service • A centre of excellence has been 94 – 97 III Being customer-centric affect future build projects. Possible late (Medupi, Kusile committee index established with structured delivery would also place pressure on and Ingula) • Eskom KeyCare operating units to improve Related material items: 19, 27, 28, 40, 44 the power system and the Generation index operations and to manage sustainability strategy There is a concern that Eskom’s reputational risk reputation may be negatively affected • Customer service improvement by poor service delivery and insufficient plan understanding of what is important to customers 60 Eskom Holdings SOC Limited 2014 Integrated Report 61 Eskom’s approach to integrated reporting (continued) Key performance Page Key performance Page Key focus areas and associated risks indicators Strategic response and controls reference Key focus areas and associated risks indicators Strategic response and controls reference • No specific key • Strike prevention mechanisms • No specific key • Eskom contributed to the 32 VII Labour XI Independent System performance • Engagement with government 52 – 54 performance preparation of a due diligence Market Operator indicators intelligence agencies and indicators report that was tabled with the Related material items: 6, 38, 44 environmental scanning Department of Energy Related material item: 15 Possible labour unrest among contractors, • Monitoring the labour environment • Eskom has suggested a phased service providers and suppliers could • Develop, review and implement 76, 151 The creation of the Independent System approach further delay major projects, cause strategy on employee engagement Market Operator may affect Eskom and significant disruptions in electricity • Security drive to protect 75, 85 – 88 its stakeholders should it be implemented supply, decrease productivity and pose employees, contractors and within a constrained capacity environment a risk to the safety of Eskom employees, infrastructure contractors and members of the public • See the treatment and controls • Percentage of • Eskom promotes jobs and local- 148 – 150 XII Maximise socio-economic local content content procurement in all new under the “focus on safety” focus contribution and area in this table on page 58 in all new build commercial contracts procurement equity contracts • Eskom’s procurement policies • Specific water • Emission treatment plans are 128 – 129, Related material items: 17, 19, 20, 21, 22, • Percentage of advance B-BBEE and black- VIII Reduce environmental usage in place. However, they cannot 132 27, 42, 44 expenditure women-owned and black youth- footprint in existing fleet • Relative always be executed due to the attributable owned businesses particulate outages required to do upgrades Failing to meet targets for corporate to B-BBEE • Eskom provides training through Related material items: 2, 7, 8, 9, 10, 11, social investment, universal electrification companies, black- the Academy of Learning and emissions being postponed 23, 36, 37, 42 and local procurement – especially women-owned learner programmes • Environmental • Ongoing reviews to ensure that 129 – 130, Should Eskom fail to embed climate legal water-use licences and permit 137 – 138 procurement from businesses that are and black youth- • The universal electrification change and sustainable development contraventions requirements are met owned by black people, black women or owned companies programme is ongoing in its operations, its access to natural in terms of the • Kusile and Medupi power 138 black youth – would mean that Eskom • Corporate social • Corporate social investment resources and licence to operate may operational health stations will be fitted with flue gas has effectively not fulfilled its mandate investments activities are ongoing be jeopardised to the point that it will dashboard desulphurisation technology, which to contribute to the government’s • Electrification • Eskom’s socio-economic be unable to reliably supply electricity. will reduce sulphur oxides, nitrogen developmental plans connections development strategy Eskom’s emissions performance could oxides and particulate emissions also deteriorate, possibly resulting in • Renewable-energy projects are 132 – 133 • Employment • Eskom has implemented an 150 – 151 XIII Employment equity equity indicators employment equity plan supported costly legal contraventions, increased underway public health risks due to growing • Eskom supports introducing 143 – 145 by a long-term, target-setting Related material items: 18, 42 emissions, reputational damage and renewable energy IPPs to the strategy to drive the transformation jeopardised security of supply should Failing to meet equity targets for disability, agenda electricity industry generating plant have to be wholly or race and gender in middle and upper • Internal and external energy- 111 – 114 partially shut down managerial and professional positions efficiency programmes would affect Eskom’s reputation and • Eskom’s climate change strategy 130 – 132 labour relations, and could jeopardise the • Amount of • The road-to-rail migration 141 developmental aspect of its mandate IX Implementing coal haulage coal haulage strategy is being implemented in and the road-to-rail transferred from partnership with Transnet Freight migration plan road to rail Rail Related material items: 14, 42, 44 Failing to successfully implement the road-to-rail migration strategy would cost Eskom lost opportunities in terms of cost (road repairs and logistics costs would not be lowered) and reputation. Safety benefits would also not materialise • Installed IPP • Eskom continues to sign power 143 – 145 X IPP-contracted energy capacity purchase agreements with IPPs Related material items: 5, 16, 44 • GWh purchased • Eskom is implementing a contract from IPPs management strategy for IPPs If IPPs are only able to intermittently deliver electricity, Eskom’s demand-and- supply planning may be affected, so affecting security of supply 62 Eskom Holdings SOC Limited 2014 Integrated Report 63 Eskom’s approach to integrated reporting (continued) Key performance Page Key focus areas and associated risks indicators Strategic response and controls reference • Financial and • Eskom continues to monitor its 153 – 161 Ensure Eskom’s financial XIV liquidity ratios funding and liquidity position sustainability • The MYPD 3 response, which 73 includes the business productivity Related material items: 4, 13, 16, 23, 24, programme, forms the core of 25, 26, 29, 30, 31, 32, 35, 41, 42, 45 the treatment plan. Executive The revenue shortfall between Eskom’s management committee “sponsors” MYPD 3 application and NERSA’s tariff have been assigned to the determinations may compromise business programme’s seven streams to operations and delivery on the current drive value creation and ensure corporate mandate. Should poor decisions that cash is delivered to the be made regarding liquidity and portfolio business, and the board closely management, it will lead to insufficient monitors the progress funds to meet financial obligations • There is ongoing engagement with 48 – 49 Further sovereign rating downgrades, NERSA regarding the regulatory combined with uncertainty around rules and RCA Eskom’s financial sustainability or ability • A joint board/Exco task team has 72 to meet loan obligations on time as been established to find a solution perceived by the rating agencies, may to Eskom’s financial sustainability result in a lower credit rating for Eskom. in the long term This would negatively affect its funding • Refer to note 4 in the 2014 annual and hedging options, and increase financial statements for more borrowing costs information regarding Eskom’s financial risk management (www.eskom.co.za/IR2014/01.html). The heat map that follows indicates the relative likelihood and impact of selected risks noted in the materiality matrix. For a risk to be classified as a priority one risk, both the likelihood and impact should be high. Roman numerals are used to facilitate the linkage to the material items table above. Heat map of risks linked to material items High XIV V VI II I XI VIII VII X Impact III IX XII IV XIII Rotek and Roshcon logistics services transports about 18 000 tons of abnormal loads for Eskom per year, such as this vale for the Ingula pumped-storage scheme Low Low Likelihood High 64 Eskom Holdings SOC Limited 2014 Integrated Report 65 04 Leadership and corporate governance Eskom needs strong leadership, governance structures and processes to effectively manage its operations and achieve its core mandate of ensuring that South Africa’s energy needs are met Shareholder and board of directors Eskom is a state-owned company answering to the Minister of Public Enterprises. Its strategic direction is guided by a unitary board (that is, a single board with both executive and non‑executive directors). The non-executive directors, including the chairman of the board, and the chief executive are appointed by the shareholder. The finance director is appointed by the board after approval of the candidate by the shareholder. The chairperson and chief executive is not the same person. Eskom’s board is responsible for the strategic direction of the company and monitoring the company’s progress against the business strategy. The board also drives Eskom’s goal to be a good corporate citizen and is assisted by Eskom’s committees and subsidiaries in this regard. Board members have a diverse profile that includes the sciences, engineering, law, finance, auditing, enterprise risk management, business and accounting skills and expertise. The majority of the board is made up of independent non-executive directors. The first three-year term of office for non-executive directors expires in July 2014 and will be reviewed at the annual general meeting (AGM). Retiring directors are eligible for reappointment and the appointment of non-executive directors is reviewed annually at the AGM. Eskom has a transformation programme in place and has put in place skills-development programmes to train engineers, technicians and artisans 66 Eskom Holdings SOC Limited 2014 Integrated Report 67 Leadership and corporate governance (continued) Membership of Please see www.eskom.co.za/IR2014/07.html for board the board members’ qualifications, significant directorships and at 31 March 2014 appointment dates Mr Collin Matjila (52) Mr Brian Dames (48) Ms Tsholofelo Molefe (45) Independent non-executive director Chief executive Finance director Appointed as interim chief executive on Resigned 31 March 2014 Appointed 14 January 2014 1 April 2014 Mr Zola Tsotsi (67) Independent non-executive director Chairperson of the board Dr Bernie Fanaroff (66) Ms Queendy Gungubele (55) Ms Neo Lesela (44) Ms Bajabulile Luthuli (41) Ms Chwayita Mabude (44) Independent non-executive director Independent non-executive director Independent non-executive director Independent non-executive director Independent non-executive director Ms Yasmin Masithela (40) Dr Boni Mehlomakulu (41) Mr Mafika Mkwanazi (60) Mr Phenyane Sedibe (44) Ms Lily Zondo (45) Independent non-executive director Independent non-executive director Independent non-executive director Independent non-executive director Independent non-executive director Directors’ ages are as at 31 March 2014 68 Eskom Holdings SOC Limited 2014 Integrated Report 69 Leadership and corporate governance (continued) Changes in board composition and company secretary • Relevant policies and procedures of the shareholder and Eskom Mr Brian Dames resigned as chief executive, effective 31 March 2014. Mr Collin Matjila, • Delegation of authority framework which delegates power and authority from the board to an independent non-executive director, was appointed interim chief executive effective on committees and employees. The revised delegation of authority framework was approved and 1 April 2014 while the recruitment process for a new chief executive is underway. is being implemented Mr Paul O’Flaherty resigned as finance director effective 10 July 2013. Ms Caroline Henry One of the essential components of the governance framework is the emphasis on the clarity (senior general manager: Treasury) was, in the interim, appointed as acting chief financial officer. of roles between the board, shareholder and management, and this is addressed through the On 14 January 2014, Ms Tsholofelo Molefe, formerly the group executive: Group Customer strategic intent statement and shareholder’s compact. Services, was appointed as the finance director. A subsidiary governance framework is in place to ensure that Eskom’s subsidiaries align with the Ms Bongiwe Mbomvu resigned as company secretary, effective 31 August 2013. Ms Annamarie group’s sustainability goals. van der Merwe was appointed as interim company secretary with effect from 1 September 2013. Responsible and ethical leadership Board assessments Eskom’s leadership focuses on effective ethical leadership and corporate citizenship. As can also An independent evaluation of the performance and effectiveness of the board, individual directors be seen from what is set out earlier regarding the performance of Eskom and its key priorities, the and the company secretary is being undertaken with regard to 2013/14, in line with Eskom board and executive management have recognised the need to integrate strategy, governance practice. The board will consider the improvement opportunities identified in the evaluation report and sustainability. and develop a programme to implement the recommendations, including the enhancement of the director training programme to focus on industry-specific topics, as was the case the previous year The Eskom board ensures that the group’s ethics-management programme is effectively with regards to the 2012/13 evaluation. implemented. Eskom manages fraud and corruption by: • Fostering ethical standards Director induction and orientation • Raising awareness regarding ethics through training, reporting and providing advice through A comprehensive programme is in place to train and orientate new directors and external an ethics help desk committee members on a continual basis. • Encouraging whistle-blowing through mechanisms such as a fraud and corruption hotline on 0800 112 722 Corporate governance framework • Conducting forensic investigations The governance framework that regulates the relationship between the shareholder, the company and the board includes the following: A detailed forensic report is tabled with the audit and risk committee on a quarterly basis. This • A memorandum of incorporation, which sets out certain powers of the shareholder and the report contains information on: board. Eskom’s revised memorandum of incorporation (MoI) is being finalised. The board and • New forensic incidents reported, including those reported through the hotline the shareholder are in consultation on various provisions of the MoI • Progress on investigations relating to incidents of corruption, fraud, irregularities and sexual • A strategic intent statement, which sets out the agreed mandate and strategy for Eskom harassment • The corporate plan, which forms the basis of Eskom’s operations and outlines the company’s • Losses and recoveries recorded by Assurance and Forensics purpose, values and strategic objectives • Disciplinary action taken (11 employees were dismissed during the year as a result of the • A shareholder’s compact, which sets out annual key performance indicators and targets in outcome of forensic investigations) support of the strategic intent statement. To the extent necessary, the shareholder’s compact • Trends and observations stemming from investigations seeks to clarify the objectives of Eskom in the context of the strategic intent statement • Preventative action taken (for example, fraud awareness training to enhance vigilance among • Codes of good governance such as King III and the Protocol on Corporate Governance in employees was attended by 1 933 employees during the year) the Public Sector. Eskom has endeavoured to apply all the King III principles and practices. Eskom is a signatory to the United Nations Global Compact LEAD initiative, which includes an However, as a state-owned company, a few of these cannot be applied and Eskom has, in anti-corruption clause, as well as the World Economic Forum’s Partnership Against Corruption some instances, adopted alternative practices to those recommended by King III. A report initiative. on Eskom’s King III exceptions and alternative practices can be found at www.eskom.co.za/ IR2014/03.html Committees • Relevant legislation, including the Companies Act, the Public Finance Management Act The board’s effectiveness is improved by the use of board sub-committees, to which it delegates (PFMA), National Treasury regulations, the Eskom Conversion Act (2001), and regulations of authority without diluting its own accountability. Board committees consist of a majority of NERSA and the National Nuclear Regulator (also refer to page 34) independent non-executive directors who exercise their authority in accordance with approved • Materiality framework which sets out the requirements regarding matters needing approval in terms of reference, which are reviewed on an annual basis. These terms of reference define terms of the PFMA each committee’s composition, role, responsibilities and authority, and are aligned with regulatory 70 Eskom Holdings SOC Limited 2014 Integrated Report 71 Leadership and corporate governance (continued) requirements and best-governance practices. The board provides the strategic direction, while the Changes in executive management committee in 2013/14 chief executive, who is assisted by the executive management committee, is accountable to the Refer to changes in board composition on page 68 for changes regarding the chief executive and board for implementing the strategy. the finance director. The diagram below sets out Eskom’s key governance structures: Mr Paul O’Flaherty, who was also the group executive: Group Capital, resigned with effect from 10 July 2013 and Mr Dan Marokane (group executive: Technology and Commercial) was appointed to act as group executive: Group Capital. Mr Kannan Lakmeeharan (divisional executive for Office of the Chief Executive) was appointed to Eskom board act as group executive: Technology and Commercial. Mr Lakmeeharan resigned with effect from 30 April 2014 and Mr Matshela Koko was appointed to act as group executive: Technology and Commercial until the permanent appointment has been concluded. Chief executive Ms Erica Johnson, group executive for Enterprise Development has been acting as group executive: Group Customer Services from 20 January 2014 after Ms Tsholofelo Molefe vacated the position. Social, Build Executive Audit and risk Investment Tender ethics and People and programme Mr Bhabhalazi Bulunga, group executive: Human Resources went on early retirement on management and finance governance 31 January 2014. Mr Mongezi Ntsokolo, group executive: Transmission, was appointed acting committee committee sustainability review committee committee committee committee committee group executive: Human Resources from 1 February 2014. Filling of the executive vacancies will be one of the first priorities for the incoming chief executive. The board held 11 meetings during the year. The board committees held the following number Leadership’s key focus areas of meetings: The board and executive management have been instrumental in guiding Eskom with regard to • Audit and risk committee 9 the key priorities and risks in the business – they have been appropriately involved in the material • Investment and finance committee 12 issues affecting the business. • Tender committee 12 Some of the key items that were tabled at board and executive management level during 2013/14 • Social, ethics and sustainability committee 5 are listed below and all these items are addressed in this integrated report: • People and governance committee 6 • Strategy, including the corporate plan for 2014/15 to 2017/18 • Build programme review committee 10 • General performance and risks, including safety, board and sub-committee evaluations, key Please see www.eskom.co.za/IR2014/08.html for more information on the committees and their business risks, and shareholder reporting activities throughout the year. For the report of the audit and risk committee, please refer to page 3 • Generation sustainability, including maintenance issues of the annual financial statements, which can be found at www.eskom.co.za/IR2014/01.html • Security of supply, including IPPs, energy efficiency, electricity and equipment theft, and stakeholder engagement Executive management committee • Progress on the capacity expansion programme The executive management committee is established by the chief executive and assists the chief • Financial sustainability, including the business productivity programme, municipal debt, executive to guide the overall direction of the business and exercise executive control in managing budgets, Eskom’s borrowing programme and statutory reporting day-to-day operations. The executive management committee held 17 meetings during 2013/14. • Security of coal and water supply, including coal haulage Refer to page 43 for Eskom’s operational structure as well as the related executive management • Eskom’s environmental footprint, including emissions and environmental licences committee member responsible for each function. • Transformation, including employment equity, job creation, the electrification programme and B-BBEE Other than the chief executive and finance director, who are executive directors, Eskom’s group executives are appointed by the board. Group executives are full-time employees subject to Eskom’s conditions of service. Please see www.eskom.co.za/IR2014/09.html for executive management committee members’ qualifications, significant directorships and appointment dates. 72 Eskom Holdings SOC Limited 2014 Integrated Report 73 Leadership and corporate governance (continued) Ensure security of supply and Eskom’s financial sustainability Balancing security of supply and Eskom’s financial sustainability were two of the most material items the board had to deal with this year. Some of the key decisions the board has taken during Cost savings through the business productivity programme Eskom implemented the business productivity programme (BPP) which focuses on the the year in this regard are listed below: reduction of the cost base, increased productivity and revisions of the Eskom business • The going-concern status of the company will not be compromised while Eskom continues to model and strategy in order to close the revenue shortfall that was created by the MYPD 3 ensure security of supply determination. Cash savings of between R50 billion and R60 billion are targeted over the • The funding for the use of open-cycle gas turbines (OCGTs) in 2013/14 was increased period of MYPD 3. from R3.6 billion to R11.3 billion to ensure security of supply, but this funding needs to be found elsewhere within the approved budgets, until it is recovered as a part of the regulatory To date, 86 savings opportunities (value packages) totalling R72.9 billion have been mechanism identified and approved and covers the following functional areas: • Appropriate levels of planned maintenance based on what is necessary to ensure long-term • Primary energy plant health will be executed while at the same time taking into account the current system • Employee costs constraints, compliance, safety and statutory requirements, and the financial constraints • Repairs and maintenance • Eskom will explore alternative funding options, including government support • External spend • Eskom will pursue all the regulatory options, including the liquidation of the RCA balance and, • Finance if necessary, a potential re-opening of the MYPD 3 revenue determination will be considered • Revenue management • The capital portfolio will be managed within the available funds and should additional funding not be secured for additional capital requirements, the current capital portfolio will be reviewed Cost-saving projects focus on: to reprioritise projects to ensure environmental and regulatory compliance • Improving the efficiency and effectiveness of the capacity expansion programme • The board build programme review committee was established in April 2013 to enhance • Reducing external expenditure through, amongst others, efficient procurement governance and monitoring and provide an additional oversight role for the capacity expansion practices, negotiating for better prices, revising technical standards and reviewing the programme necessity of some activities • The residential customer revenue-management strategy, which includes the Soweto revenue • Reducing revenue losses, improving debt management and finding additional revenue management strategy to address debtor payment levels, received PFMA approval from the sources DPE and will be implemented in the new financial year • Optimising maintenance costs and processes • Various cost saving initiatives relating to the business productivity programme have been • Reducing direct and indirect employee benefit costs approved by the board investment and finance committee • Optimising funding options and the balance sheet • The board has taken active steps to address the sustainability challenges in an integrated • Optimising and reducing the cost of primary energy manner, including the establishment of a special board/Exco task team Risk reviews are performed prior to the implementation of value packages. A number of controls are in place to manage the risk of non-realisation of BPP targets. These mostly relate to the current governance processes such as business planning, budgeting and periodic financial monitoring. However, more specific measures will be implemented as part of the BPP programme. This will provide a much more granular view, monitoring value packages from inception through savings realisation, following a “stage gate” methodology. This is a proven, standard methodology applied in cost-saving exercises. A comprehensive project management approach and methodology is in the process of being implemented. 74 Eskom Holdings SOC Limited 2014 Integrated Report 75 Leadership and corporate governance (continued) Internal controls including security and combined assurance Combined assurance Internal controls Combined assurance assists management in identifying duplication of assurance work, any The board, through the audit and risk committee, ensures that internal controls are potential assurance shortfall, and improvement plans for those areas identified. It also helps focus effective and adequately reported on for auditing and regulatory purposes. In line with assurance providers to better achieve consensus on the key risks the company faces and reduce King III, Eskom applies a combined assurance model to ensure coordinated assurance activities. the risk of failing to identify significant risks. This model gives the audit and risk committee an overview of significant risks, as well as the The combined assurance model provides three lines of defence against risk: effectiveness of critical controls to mitigate these risks. The principles for the combined assurance • Line 1: Line management and managerial controls. Line management is responsible for model are embedded in the combined assurance framework. Eskom’s internal audit function is managing risk and performance managed by the Assurance and Forensics department which reports directly to the audit and risk • Line 2: Functional areas like risk management, compliance (including ISO 9001 and 14001 committee. compliance), safety, health, environment, quality and the associated frameworks, policies, Eskom has for the past few years been running the “Back2Basics” programme to standardise, reporting and oversight, support management in executing its duties and provides a layer of simplify and optimise its internal processes and improve the overall control environment. This control over risk management is managed by a cross-functional committee called the CARAT committee. Process control • Line 3: Independent, objective internal and external assurance providers. The third line of manuals, each containing a “risk and controls” matrix, have been prepared for all key processes. defence is independent of management and provides independent, objective assurance These manuals cover both financial and operational processes, including the processes to be A combined assurance forum has been established to implement and embed the combined followed to determine the key performance indicators for technical matters and operations. The assurance framework principles. The forum consists of the three lines of defence, with the process control manuals are updated regularly. objective of: • Ensuring coordinated and relevant assurance activities focusing on key risks • Improving collaboration between different assurance providers The CARAT committee is a sub-committee of the executive management committee and • Improving reporting to the board and committees, including minimising repetition of reports performs the following in terms of its mandate: being reviewed by different committees • It ensures that processes are driven with functional accountability with respect to the • Reducing assurance fatigue and minimising disruptions to the business principles of completeness, accuracy, relevance, accessibility and timeliness • Providing the audit and risk committee with a better basis for exercising its oversight function • Reviews all change requests affecting processes, systems or data • Ensures the adherence to and compliance with business processes defined in each The Assurance and Forensics department is responsible for driving combined assurance within support function process control manual Eskom. External auditors independently audit the financial statements and selected sustainability • Identifies the need for business process optimisation projects information. • Enforces standardisation across the business Security risk management • Defines and monitors KPIs to drive performance improvement across the business The board is responsible for ensuring that an integrated crime-prevention plan is in place to minimise Eskom’s exposure to crime, particularly fraud. Eskom develops strategies to protect assets, interests, information, people and processes, and gives assurance that the required measures are implemented. The Audit and Forensic department’s risk-based plan for technical and financial reviews of internal control systems is approved by the audit and risk committee on an annual basis. Eskom keeps Security projects for the year included purchasing new data-leakage prevention software, firewalls, a database of all internal and external audit findings (financial and technical). The database is laptop encryption and a security operations centre. Public Finance Management Act approval has monitored on a monthly basis by management and Assurance and Forensics, and progress on been obtained for the transmission national security refurbishment project. This project includes resolving audit findings is reported to the audit and risk committee on a quarterly basis. Eskom various initiatives to improve and upgrade the security systems at various critical and high-risk also provides the Auditor-General of South Africa with a quarterly assessment on the control Transmission sites, in order to mitigate risks to the integrity of assets and continuity of supply. environment. The project is underway and will receive continued focus until completion. 76 Eskom Holdings SOC Limited 2014 Integrated Report 77 Leadership and corporate governance (continued) Remuneration and employee relations Eskom’s approach to remuneration and benefits is designed to attract and retain skilled, high- performing employees. To achieve this, Eskom pursues the following remuneration principles: • Business requirements determine market positioning • Provide market-related remuneration structures, benefits and conditions of service • Maintain external competitiveness to attract and retain key skills • Ensure internal equity through defensible differentials in pay and benefits • Remunerate employees in accordance with their job grade, and at least at the minimum of the applicable salary scale • Follow a lead-lag market approach. The Eskom salary/guaranteed packages will typically be leading the market just after the annual increases have been implemented and lagging the market two to three months before the next increases are due Eskom is committed to resolving unjustifiable race- and gender-based income differentials by reinforcing its remuneration management principles. This involved ensuring that all qualifying employees are moved to the 50th percentile for their job description. An income differential exercise was implemented in November 2013 and the resulting salary adjustments were made. Eskom’s employee engagement model aims to encourage employee participation and involve employees and executives in conversations around strategy, performance and people. Eskom has developed more productive, sustainable relationships with organised labour and continues to do so through a partnering model to guide these interactions. The company has also embarked on a process to further strengthen the relationships with the trade unions, using the services of an external facilitator. Eskom’s remuneration structures fall into four categories as set out below. Bargaining unit Bargaining-unit employees (all those below middle management) receive a basic salary plus benefits. Major benefits include membership of the pension and provident fund, a medical aid, housing allowance and an annual bonus (thirteenth cheque). Basic salaries and conditions of service are reviewed annually through a collective bargaining process. Bargaining-unit employees also participate in an annual short-term incentive scheme. Eskom and its recognised trade unions approved the Council for Conciliation, Mediation and Arbitration (CCMA) for wage-negotiation arbitration towards the end of 2013. In January 2014, the CCMA awarded Eskom’s trade unions a 5.6% annual wage increase (6.3% total costs including benefits) for one year, backdated to 1 July 2013. This was largely in line with Eskom’s final offer. Even though electricity has been declared an essential service, which prohibits Eskom employees from engaging in industrial action, employees at some sites embarked on various forms of unprotected industrial action during the year. High-voltage line construction calls for very stringent safety measures 78 Eskom Holdings SOC Limited 2014 Integrated Report 79 Leadership and corporate governance (continued) Managerial level The remuneration of executive management committee (Exco) members consists of the following: Managerial-level employees are remunerated on a cost-to-company/package basis. The package • A total guaranteed amount, consisting of a fixed cash portion and compulsory benefits. This is includes pensionable earnings, compulsory benefits and a residual cash component. Managerial reviewed annually employees also participate in an annual short-term incentive scheme, consisting of rewards for • Short-term incentives, consisting of rewards for achieving objectives set by the chief executive achieving objectives set by the chief executive and approved by a board committee. and approved by a board committee (refer to the key performance indicators on page 80) • Long-term incentives, consisting of rewards for achieving objectives set by the shareholder (refer page 80) Short-term incentive scheme for bargaining unit and managerial level In terms of their performance contracts, only 20% of executives’ performance rating is based Eskom has a short-term incentive scheme in place that aims to align individual performance on individual performance; the remaining 80% is based on Eskom’s collective performance. with organisational strategic objectives by setting targets for key performance indicators Cognisance must be taken of the responsibilities and risks that directors and executives carry, that contribute to these objectives. given their broad accountability. The key performance indicators are linked to Eskom’s strategic objectives and cascade Incentives for executives down from the organisational level to the individual level. Employees are contracted to Eskom has a formal remuneration plan that links management remuneration to the performance achieve targets for selected key performance indicators and are rewarded for meeting or of the organisation and individual contribution. exceeding these targets. All permanent employees take part in the scheme. The value of the bonus itself depends on the organisation’s overall performance. Shareholder Group and divisional The performance areas of Eskom are weighted: safety (15%), technical and customer Corporate plan Exco compacts compact compacts service (45%), energy demand and cash savings (20%) and achievement of new build milestones (20%). The executive management committee can reduce the incentive payable to the All key performance areas and key performance indicators in the shareholder’s compact are bargaining unit and managerial level when the minimum requirements of the scheme are included in the Exco compacts. The compact is in essence a performance agreement. not adhered to, for example fatalities, by a maximum of 30%. • Compacts of Exco members are focused on the implementation of the corporate plan and are as such linked to the Eskom strategic objectives • The people and governance committee reviews the key performance areas and key performance indicators of the Exco members’ compacts annually to ensure alignment with the shareholder’s Non-executive directors compact and the corporate plan Non-executive directors’ fees are paid as a fixed monthly fee, decided in accordance with the • Individual performance is reviewed annually and is based on a performance contract (compact) shareholder’s approval. Non-executive directors are reimbursed for company-related expenses. between the group executive and chief executive • Compacts for all other executives are aligned with the Exco compacts Executive remuneration • Targets include both company and division specific priorities (key performance areas and key The chief executive, finance director and group executives have permanent employment contracts performance indicators) which link directly to the shareholder compact and corporate plan based on Eskom’s standard conditions of service. Exco compacts rely on three elements to determine bonuses for executives: Executive remuneration is based on the organisation’s performance, as assessed through • Gatekeepers need to be reached to qualify for bonus: If gatekeepers are not reached, then performance on key indicators, and the individual’s contribution to that performance. It consists there will be no bonus at all of a basic salary augmented by short- and long-term incentives. The balance between fixed and • Qualifiers determine the performance score of between 60% and 120%, depending on variable remuneration (short- and long-term incentives) is reviewed annually. achievement International and local benchmarks are considered in determining remuneration. The remuneration • Modifiers reduce performance score if not reached and can decrease the performance score strategy is aligned with shareholder guidelines. by up to 25%, depending on how many modifiers are not reached The board approves the remuneration of the finance director and group executives. The chief executive’s remuneration is approved by the shareholder. Factors taken into account include the executive’s level of skill and experience, his/her contribution to organisational performance, and the group’s business results. 80 Eskom Holdings SOC Limited 2014 Integrated Report 81 Leadership and corporate governance (continued) Long-term incentives Disclosure of the remuneration of the three highest paid individuals in Eskom, as required by the A number of performance shares (award performance shares) were awarded to the Exco King III code, is included in the table below. members on 1 April 2010, 2011, 2012 and 2013. The board has set performance conditions in line with the Eskom shareholder’s compact over a three-year performance period. Performance The following table sets out the directors’ and group executives’ remuneration for the year ended covers financial and non-financial targets. Awards only vest if, and to the extent that, these targets 31 March 2014. Refer to note 49 in the financial statements (www.eskom.co.za/IR2014/01.html) are met. The vesting percentage can be reduced by the people and governance committee if for detailed remuneration information. gatekeepers are not met. Directors’ and group executives’ remuneration Long-term incentive vesting percentages – 2014: 53.48%, 2013: 48.23%. 2013/14 2012/13 The vesting rates take into account the penalty of 0% for 2014 and 15% for 2013 on the vested Name R 000 R 000 amount. Non-executive directors 7 077 6 400 Zola Tsotsi (chairman) 1 789 1 374 Short-term incentives Short-term incentives, consisting of rewards for achieving set objectives over a 12-month period, Other non-executives 5 288 5 026 are division/company specific. Executive directors 24 428 17 341 The table below contains the executive compact areas for the year ended 31 March 2014. Brian Dames 15 367 8 464 Tsholofelo Molefe1 3 170 2 904 The consolidated key performance indicator table (which includes the key performance indicators in the shareholder’s compact) shows the link (colour coded as indicated below) between the key Paul O’Flaherty (former finance director) 5 891 5 973 indicators in appendix A (refer to pages 170 to 175) and the executive compact key performance Other executive management committee members 28 645 33 743 areas. Bhabhalazi Bulunga (group executive: Human Resources) 3 294 3 179 Thava Govender (group executive: Generation) 4 152 4 485 Executive compact key performance areas Erica Johnson (group executive: Enterprise Development) 4 826 5 972 1. Operate safely Steve Lennon (group executive: Sustainability) 3 674 5 430 2. Keep the lights on Dan Marokane (group executive: Technology and Commercial) 4 737 4 555 3. Deliver on the capacity expansion programme Ayanda Noah (group executive: Distribution) 3 776 4 659 Mongezi Ntsokolo (group executive: Transmission) 4 186 5 463 4. Protect the environment Total remuneration 60 150 57 484 5. Socio-economic contribution and build skills 1. Appointed as finance director on 14 January 2014. Before that date, remuneration relates to the position as group executive: Group Customer 6. Transformation Services. The prior year figure was reclassified for comparative purposes. 7. Improve performance 8. Chief executive discretion The weight allocated to each person for each of the compact areas will depend on the responsibilities of that specific individual. 82 Eskom Holdings SOC Limited 2014 Integrated Report 83 05 Becoming a high-performance organisation Eskom has continued its focus on enhancing and improving its performance to ensure a major performance transformation into a utility focused on enhancing the quality of customer service, safer, more effective and efficient plant operation through prudent plant maintenance, optimising key talent and ensuring resilience measures are in place for major disruptive events. The business productivity programme will identify and eliminate inefficiencies in the business to enable Eskom to manage its costs and revenue Eskom focuses on the following to become a high-performance organisation: • Safety • Improving operations • Being customer-centric • Building strong skills • Investing in appropriate technologies Operating highlights • The lost-time incidence rate, including occupational diseases, has shown a significant improvement compared to the previous year and is within target • Koeberg Unit 2 achieved a record run of 484 days when it was shut down for a scheduled refuelling outage – this marks a continuous run from one refuelling outage to another • Both Distribution and Transmissions’ key technical indicators have shown good improvement compared to the previous year • A number of information technology projects and improvements were successfully completed during the year, including improvements in the online vending system that successfully went live on 22 July 2013 Operating challenges • The number of fatalities is still high and there is an increased exposure of employees and contractors to crime-related assault incidents • Eskom declared four power system emergencies on 19 November 2013, on 20 and 21 February 2014 as well as on 6 March 2014. Rotational load shedding was implemented for 14 hours on 6 March 2014 (refer to page 104 under “Keeping the lights on”) • Unit 3 at Duvha power station (575 MW) was taken out of service on 30 March 2014 due to an over-pressurisation incident – it will remain out of service for a prolonged period. The incident is under investigation Special climbing apparatus is used to scale the wooden distribution poles 84 Eskom Holdings SOC Limited 2014 Integrated Report 85 Becoming a high-performance organisation (continued) • Eskom’s unplanned capability loss factor (UCLF), a measure of generating plant health, and Safety the energy availability factor (EAF), which measures plant availability, deteriorated compared Eskom’s safety principle is that no operating condition or urgency of service justifies exposing to the previous year and Eskom failed to meet its target anyone to injury or safety or environmental risks arising out of Eskom’s business. This principle • Equipment theft, vandalism and energy theft (illegal connections) as well as the related impact applies to all levels of the company, the public and the environment. Eskom’s safety performance on plant performance and the cost of supplying electricity remains a challenge is assessed in terms of the number of fatalities among employees and contractors for the year, • Debt collection, especially from municipalities, is a challenge with arrear debt increasing and its lost-time incidence rate. The lost-time incidence rate is a proportional representation of the significantly compared to the previous year. More than one percent of the 2013/14 electricity occurrence of lost-time injuries over 12 months per 200 000 working hours. revenue is provided for as arrear debt Safety performance indicators Future focus areas • Continuing to reinforce safety practices to achieve zero harm for Eskom’s employees and Target Target Actual Actual Actual Target Indicator and unit 2017/18 2013/14 2013/14 2012/13 2011/12 achieved? contractors, including more extensive and frequent public road safety campaigns and related initiatives Lost-time incidence rate • Achieving a predictable and sustainable generation performance within the Generation (employees only), index 0.24 0.36 0.31 0.401 0.41 sustainability strategy over five years Fatalities (employees and • Network strengthening to achieve grid code N–1 compliance, as well as the integration of new contractors), number 0 0 23 19 24 generation sources • Continued focus on distribution sustainability through prioritised interventions towards Fatalities (public), number 0 0 33 29 34 refurbishment, reliability improvements and addressing maintenance backlogs 1. Two late classifications of LTIR incidents resulted in the LTIR for 2012/13 changing from 0.39 to 0.40. • Implementing processes in terms of the revenue management strategy to enhance energy protection and energy loss programmes, and improve debt collection Eskom’s internal safety measures are having a positive effect, with its lost-time incidence rate • Exploring alternative funding mechanisms for the existing learner pipeline and collaboration decreasing to 0.31 in 2013/14, from 0.40 in 2012/13. The company’s fatality count, however, with other institutions remains high at five fatalities. Regrettably, there were 18 contractor fatalities, six of whom died in an accident at the Ingula pumped-storage scheme in October 2013. Seven contractor employees were also seriously injured. Eskom is concluding an internal investigation into the incident. All work on the inclined high-pressure shaft has been stopped in terms of the Mine Health and Safety Act (1996) pending review by the mine health and safety inspectorate. The statutory processes and reviews regarding this accident are still in progress. Refer to page 121 for more information. Contractor management is one of Eskom’s occupational hygiene and safety strategic elements. Given the strategic importance of contractors across Eskom, substantial efforts are required to introduce safe systems of work across the entire organisation to ensure continual safety performance improvement in Eskom’s drive for zero harm. A contractor safety performance analysis was conducted between April 2012 and December 2013. Historical workplace health and safety key performance indicators, covering contractor fatalities and lost-time incidents, were used as lag indicators to identify problem areas. The analysis highlighted motor vehicle accidents, falls from elevation, and “struck-by” incidents as the most common causes of incidents. The next step is to ensure that the contractor management strategy is aligned to address the areas identified. Moving coal transport from road trucks to rail has been a key focus area in terms of road safety and cost considerations 86 Eskom Holdings SOC Limited 2014 Integrated Report 87 Becoming a high-performance organisation (continued) Summary of main causes of fatalities for 2013/14 Altogether 33 members of the public died in incidents linked to Eskom’s activities. Of these, 11 deaths were the result of motor-vehicle accidents, while the remaining fatalities were related to Cause of death Employees Contractors Public electrical contacts, including those as a result of criminal activities. Vehicle accident, number 3 4 11 Eskom’s “zero harm” drive continues. Safety initiatives to mitigate the risks faced by employees, Electrical contact, number 1 1 18 contractors and members of the public include: Other causes (such as being struck by an object, 1 13 4 • Conducting safety audits of principal contractors every month as opposed to every six months caught between objects, falls), number • Devising contractor-management plans with safety performance targets Total fatalities, number 5 18 33 • Improving procedures for reporting safety incidents and identifying root causes • Detailing specifications for personal protective equipment • Using simulators to train truck drivers in defensive and all-terrain driving Employee and contractor fatalities • Running campaigns to improve driver safety awareness Eskom continues to implement its industry-supported safety drive by restricting the transport of Causes of employees and contractor Causes of employees and contractor coal by road between Friday night and Sunday morning, as most coal transport-related road fatalities during 2013/14 fatalities during 2012/13 fatalities occurred between these times. Compared to previous periods, a decline was seen in the number of fatalities occurring over this period, with the majority of incidents caused by the public 1 1 1 and not truck driver behaviour. 1 1 3 4 Nuclear safety 2 2 The social, ethics and sustainability committee is responsible for scrutinising safety at Eskom’s nuclear facility to ensure that it exceeds all regulatory and internal requirements and aligns with 1 international best practice. The committee also makes recommendations on policies, strategies and guidelines relating to nuclear issues. A nuclear safety review board, consisting of experienced international nuclear power experts was 2 established in 2014 to provide an additional and independent expert view of the management and performance of the Koeberg nuclear power station. The chairperson of this review board provides 7 a report on a six-monthly basis to the board social, ethics and sustainability committee. 5 All aspects of electricity production at the Koeberg nuclear power station are the responsibility of 7 the Generation group executive. The nuclear safety assurance function is a separate department 4 in the Generation division, with its own technical experts reporting directly to the Generation group executive. In line with global best practice, Eskom has a three-tier system of nuclear safety Assault Gunshot Assault Gunshot governance. The next international peer review will be in July 2014. Electrical contact Vehicle accidents Electrical contact Vehicle accidents Struck by an object Falls Struck by an object Falls Caught between or Contact with heat Caught between or under objects under objects 88 Eskom Holdings SOC Limited 2014 Integrated Report 89 Becoming a high-performance organisation (continued) Improving operations The technical operations of Eskom’s Generation, Distribution and Transmission line divisions are assessed in terms of the following: Life-saving Rules Generation • Unplanned capability loss factor (UCLF) measures the lost energy due to unplanned energy ZeroHarm (Cardinal Rules) losses resulting from equipment failures and other plant conditions We make it happen! • Planned capability loss factor (PCLF) measures energy loss during the period because of planned shutdowns • Energy availability factor (EAF) measures plant availability including planned and unplanned unavailability and energy losses not under plant management control Transmission 1. Open, isolate, test, earth, • Total system minutes lost for events <1 minute measures the cumulative number of bond and/or insulate before touch minutes the system was compromised to the point that electricity could not be relayed, due No person may work on any electrical network unless trained and to transmission system failures or constraints. This metric only considers events lasting less authorised to do so. Furthermore all hazards and risks must be than a system minute. One system minute is equivalent to the loss of the entire system for one identified and the apparatus must also be proven safe to work on minute at the annual peak • The number of major incidents refers to events with a duration of longer than one system minute 2. Hook up at heights Distribution Where there is potential for a fall, a risk assessment • System average interruption frequency index (SAIFI) is a reliability of supply index and must be conducted and suitable control measures measures how often on average (frequency) the customer connected would experience a must be implemented sustained interruption per annum (number of times per annum) • System average interruption duration index (SAIDI) is an availability of supply index and measures the average duration (hours) of a sustained interruption the customer would 3. Buckle up experience per annum (number of hours per annum) No person may drive any vehicle on Eskom business unless Key indicators of Eskom’s technical operations performance he or she and all passengers are wearing seat belts Target Target Actual Actual Actual Target Indicator and unit 2017/18 2013/14 2013/14 2012/13 2011/12 achieved? Normal UCLF, % 10.00 10.00 12.61 12.12 7.97 4. Be sober Less: Constrained UCLF, %1 – – 1.63 3.41 – – No person is allowed to work whilst under the influence of drugs Underlying UCLF, %2 – – 10.98 8.71 – – and/or alcohol PCLF, % 10.00 10.00 10.50 9.10 9.07 EAF, % 80.00 80.00 75.13 77.65 81.99 5. Permit to work Total system minutes lost for events <1 minute, minutes 3.80 3.40 3.05 3.52 4.73 No person is allowed to work without the required Permit to Work (PTW) Major incidents, number 1 2 0 3 1 SAIFI, events per year 17 20 20.2 22.2 23.7 Zero fatalities • Zero injuries • Zero environmental incidents • Zero tolerance SAIDI, hours per year 39 45 37.0 41.9 45.8 Issued by Group Sustainability January 2013 1. Constrained UCLF – This is UCLF that was a result of emissions and short-term related UCLF due to system constraints to meet the “Keeping the lights on” objective. This is apportioned between PCLF and OCLF. 2. Underlying UCLF – This is the UCLF that is the difference between normal and constrained UCLF and that is still within Generation control. CE 5655 Life-Saving A3 Poster (FINAL) indd 1 2013/01/22 5:06 PM 90 Eskom Holdings SOC Limited 2014 Integrated Report 91 Becoming a high-performance organisation (continued) The power station enhancement project quick win actions have almost been completed. Medium- and long-term actions are outage dependent and are thus impacted by the deferment of outages. While this project operated as a standalone project in 2012/13, it is now incorporated within the Generation sustainability strategy. More planned maintenance is now scheduled in the winter months. The power plant availability (EAF) of 75.1% for the year to 31 March 2014 (2012/13: 77.7%), against a target of 80%, reflects the increase in both unplanned unavailability, as well as the increased planned maintenance. Eskom aspires to reach the 80% EAF target over a period of five years as it increases its efforts and focus in driving sustainability of generation assets. Although the system was tight, Eskom still managed to schedule and complete nine maintenance outages – a good achievement to meet winter demand and do more maintenance than before. Refer to page 114, which deals with maintenance in further detail. Plant performance The utilisation of available plant capacity (EUF) was significantly higher than the target and higher A Koeberg worker wears protective clothing that is required for the nuclear sections of the power plant than the previous four years due to the increased loading of available plant to match the demand. The overall fleet EUF was at 83.55% (2012/13: 81.87%). The utilisation of the coal-fired units for Generation the year to 31 March 2014 was 92.73%, nuclear achieved 99.52% and peaking (including the Eskom aims to optimally operate and maintain its electricity generating assets for the duration of OCGT stations) achieved 20.72%. their economic life. Eskom’s operating strategy for generation constantly considers the following Eskom did not meet its EAF target, mostly due to an increase in unplanned plant unavailability factors in balancing national demand and supply: and energy losses due to incorrect quality coal being delivered, mainly at Tutuka and Arnot power • Electricity demand fluctuates. Eskom aims to ensure that there is enough supply to meet stations. demand. An undersupply of electricity would have negative economic consequences for the country and the company The unplanned capability loss factor (UCLF) for the year to March 2014 is slightly higher than • Plant health is deteriorating, resulting in reduced plant availability and reliability. Eskom previous years, indicative of ageing generating plant, the related deteriorating plant health and needs to do more plant maintenance, but the constrained system does not allow for sufficient the high utilisation of the plant. The UCLF for 2013/14 was 12.61% compared to 12.12% in 2012/13 planned outages to do so and also affects plans to reduce Eskom’s environmental footprint and 7.97% in 2011/12. The impact on UCLF was 1.63% due to decisions by management • System reserve requirements. Over and above meeting the expected demand for electricity, regarding emission control and short-term outages not undertaken in order to ensure security Eskom needs to have generation capacity in reserve to cater for an unforeseen increase in of supply. demand, or unplanned plant breakdowns where additional plant capacity will need to kick in to The partial load losses continue to contribute significantly to the system total unplanned losses, replace the generation capacity lost and continue to increase. The UCLF due to these losses was 5.24%, contributing 42% to the • Poor-quality coal results in inefficient energy production, places strain on generating plant and system UCLF. The main reasons for the load losses were problems at the draught plant, coal negatively affects Eskom’s environmental footprint. Although measures are in place to ensure mills, turbines, gas cleaning and feed-water systems. that suppliers provide Eskom with coal of suitable quality and sufficient quantity, some stations continue to receive poor-quality coal Boiler tube failures are typically the result of welding repair damage, corrosion, fly ash erosion, • Potential delays in commissioning new capacity means that the power system remains too etc. In the year, 210 UCLF boiler tube failures were recorded, with a UCLF of 2.18%, contributing constrained to do planned maintenance to existing plant, resulting in plant health deteriorating 17% to the system UCLF. This is higher in both number and UCLF contribution compared to the even further previous year when a total of 191 failures and UCLF contribution of 1.95% were recorded. As a result of previous years’ deferment of maintenance that was required to keep the lights on The energy efficiency improvement programme aims to improve the heat rate of the units at and the fact that nearly two-thirds of Eskom’s power stations are beyond the mid-point in their Eskom’s 13 coal-fired stations. Heat rate measures the conversion rate of heat from the energy expected lifespan, the technical performance of the power stations has been declining over the source (coal) to electricity generated. Improvements would indicate an improvement in plant past few years. The Generation sustainability strategy has been implemented which aspires to performance and will help reduce Eskom’s environmental footprint, including its carbon emissions. Eskom’s power station fleet having on average an energy availability factor of 80%, with 10% set aside for planned maintenance outages and 10% for unplanned outages. 92 Eskom Holdings SOC Limited 2014 Integrated Report 93 Becoming a high-performance organisation (continued) Average Eskom coal power station heat rate Transmission Transmission provides an integrative function for the operation and risk management of the 2013/14 2012/13 2011/12 interconnected power system. This includes balancing supply and demand in real time, trading Average coal power station heat rate, MJ/kWh 11.49 11.25 11.46 energy internationally, buying energy from independent power producers (IPPs), and operating the transmission grid. The heat rate improvements in 2012/13 have not been sustained, with a 2.1% deterioration in Good transmission technical performance was achieved with zero major incidents, system 2013/14 compared to 2012/13. This deterioration is attributed to the deferment of outages that minutes <1 performance at 3.05 compared to a target of 3.40, and a line fault performance of has impacted the execution of technical plan projects, as well as coal qualities at certain power 1.73 compared to a target of 2.45 faults/100km. Performance vulnerabilities remain due to the stations. ageing assets and unfirm networks. Firmness relates to the degree of redundancy (N–1) as defined in the grid code. Koeberg performance Koeberg Unit 1 was returned to service on 22 April 2013, following the shutdown that occurred on Benchmarking 20 February 2013 to repair an electrical switchboard fault. Transmission took part in a benchmarking exercise with 27 other international transmission companies in 2012/13. The study focused on maintenance and plant performance and identified On 24 March 2014, Koeberg Unit 2 was shut down for scheduled outage number 20, having been best international practices for the transmission industry. These studies have been used to identify online for a record 484 days since 25 November 2012, when it was returned to operation after opportunities for the development of continual improvement objectives and strategies. The results the previous outage. This is the first time in Koeberg’s history that one of the units completed an of the 2012/13 study indicate that Eskom’s Transmission substation and line asset performance uninterrupted run from one refuelling outage to the next. is marginally below average whilst a significant improvement has been achieved with line asset Benchmarking performance over the previous two years. For benchmarking information relating to Eskom’s coal-fired stations, energy availability and the Criminal incidents nuclear power station please refer to www.eskom.co.za/IR2014/10.html A sustained reduction in security incidents has meant that no major losses were incurred during the year to 31 March 2014. Nonetheless, theft remains a risk for Eskom as experienced earlier in the financial year, when the theft of copper at a substation resulted in a minor interruption to a rural supply point. Distribution Eskom’s distribution network relays electricity from the transmission network to customers, including municipalities that manage their own distribution networks. There was a significant improvement in the SAIDI performance, achieving an average of 37.0 hours in 2013/14 compared to 41.9 in 2012/13. There was also an improvement in the SAIFI performance, achieving an average of 20.2 events in 2013/14 compared to 22.2 events in 2012/13. These improvements are due to: • The establishment of additional customer network centres to increase the operational footprint and enable a quicker response to network interruptions • Reduced network downtime by maximising live-line work for planned maintenance • The implementation of a revised network reliability planning standard to improve the reliability of the network, in line with the regulatory requirements of the Distribution grid code • Increased network visibility, to enable remote monitoring and switching of network equipment to reduce the outage time • Improving reliability centered maintenance to reduce the risk of equipment failure • Focused management attention that ensures disciplined execution of all initiatives Koeberg Unit 2 completed an uninterrupted run from one scheduled refuelling outage to the next 94 Eskom Holdings SOC Limited 2014 Integrated Report 95 Becoming a high-performance organisation (continued) Benchmarking Distribution is currently preparing for a new benchmarking cycle, comparing technical and operational performance with international utilities. For previous year’s benchmarking information relating to Eskom’s distribution network please refer to www.eskom.co.za/IR2014/11.html Direct electricity sales for 2013/14 by Direct electricity sales for 2012/13 by customer type customer type 5.7% 6.4% 1.4% 1.4% 2.4% 2.4% 41.9% 42.2% 14.1% 14.6% 25.0% 23.8% 5.1% 4.8% 4.4% 4.4% Actual (GWh) Actual (GWh) Municipality 91 262 Residential 11 017 Municipality 91 386 Residential 10 390 Commercial 9 605 Industrial 54 658 Commercial 9 519 Industrial 51 675 Mining 30 667 Agriculture 5 191 Mining 31 611 Agriculture 5 193 Rail 3 125 International 12 378 Rail 2 996 International 13 791 Total 217 903 Total 216 561 Being customer-centric Eskom aims to ensure that its customers are consistently satisfied with the level of service they receive. Customer-centricity extends to the company’s revenue-collection practices. Billing should be accurate and prompt, and payment should be collected in a timely fashion. Eskom assesses its customer-centricity in terms of: • Eskom’s customer-service index, which combines six external and internal customer-service assessments to determine an overall score for service to residential, small- and medium-sized customers Eskom technical services centres • Eskom’s KeyCare rating, which measures the satisfaction of Eskom’s large industrial send out special trucks to do customers maintenance on the lower voltage • The average number of debtor days, which measures the average age of outstanding distribution lines customer debt These indicators help Eskom identify aspects of service that need to be improved. 96 Eskom Holdings SOC Limited 2014 Integrated Report 97 Becoming a high-performance organisation (continued) Key performance indicators for customer-centricity The residential revenue management strategy, which includes Soweto, is critical to enhance energy protection and energy loss programmes, and improve debt collection for Soweto, large Target Target Actual Actual Actual Target Indicator and unit 2017/18 2013/14 2013/14 2012/13 2011/12 achieved? and small power users. The strategy entails: • The installation of split metering with protective enclosures and converting customers to Customer service index, % 89.7 88.7 86.6 86.8 85.6 pre‑paid meters with new supply group codes to eliminate illegal pre-paid vending • There is now a focused credit management process for all businesses, which, together with Eskom KeyCare, % 102.0 102.0 108.7 105.8 105.9 disconnections, should assist in recovering outstanding debt Arrear debt as percentage of revenue, % – 0.50 1.10 0.82 0.53 Implementation of the strategy is planned for early in the new financial year, as the PFMA approval was received late in the financial year. Average debtor days for municipalities, average days1,2 – 22.0 32.7 22.4 n/a For more information regarding Eskom’s financial risk management, including credit risk, refer to Average debtor days for large power note 4 in the 2014 annual financial statements (www.eskom.co.za/IR2014/01.html). users (<100GWh a year), average days2 – 16.0 16.9 18.3 n/a Average debtor days for small power Large power users’ arrear debt users (excluding Soweto debt), There has been a slight increase in the number of key industrial customers not honouring their average days – 42.0 50.2 48.2 42.9 payments on time, due to cash flow problems caused by the economic climate. All non-payments Average debtor days for large power are handled according to Eskom’s credit-management policy, with the disconnection process top customers (excluding disputes), being initiated where necessary. average days – 14.0 14.5 12.3 14.4 1. The earlier key performance indicator for large power users (including municipalities) was replaced by two key performance indicators: average Municipal arrear debt debtor days for municipalities and the average debtor days for other large power users (<100 GWh per year). Historically, payments by municipalities are strongly correlated to them receiving the equitable 2. These key performance indicators only came into effect on 31 March 2013. Data is not available for 2011/12. The calculation for debtor days share from National Treasury (payments in December, March, June and September). Previously excludes international customers and major disputed accounts that are involved in litigation or arbitration. this funding was sufficient to settle outstanding electricity debt, but this is no longer the case with municipalities facing increased electricity prices and reduced funding. Customer satisfaction metrics Key industrial customers regard Eskom’s customer service highly, reporting 110.84% satisfaction Disconnection of supply is the last resort for Eskom. In line with the Promotion of Administrative against a target of 102% on the KeyCare metric despite being asked to contribute significantly to Justice Act (2000), the company sent disconnection notices to some of the defaulting municipalities keep the lights on. This is largely due to Eskom’s proactive and regular interaction with this group during the year. No disconnections have yet been effected, as all the municipalities that received to keep them informed on the status of the power system and the capacity expansion programme disconnection notices responded appropriately, with the exception of one municipality. This matter via a number of forums as well as regular visits to customer management. is the subject of litigation. Eskom narrowly missed reaching its customer service index target, reporting an overall rating of The total municipal arrear debt as at 31 March 2014 is R2.6 billion (2013: R1.2 billion) and 86.6% (2013/14: 86.8%). The main reasons cited by customers for dissatisfaction in this customer numerous meetings were held with the DPE and National Treasury to discuss sustainable ways grouping were tariff increases, the threat of load shedding, metering accuracy, the speed of to address municipal debt and implement longer-term interventions to deal with this challenge. installing new connections, the quality of supply, outage management and slow response for quotations and connections on small projects. Soweto arrear debt Soweto’s arrear debt continues to increase. Eskom supplies electricity to about 180 000 households Managing electricity debtors in Soweto and average payment for the year is 16% (2012/13: 16%). The total Soweto debt, as at Eskom makes every effort to ensure that customers pay their accounts. It constantly monitors 31 March 2014, stood at R3.6 billion (31 March 2013: R3.2 billion), excluding interest charged on payments and is willing to enter into reasonable payment agreements that take into account overdue amounts. During the year, 4 838 defaulting customers were disconnected, which is not defaulting customers’ circumstances. enough to curb the debt. The implementation of the residential revenue management strategy, which includes Soweto revenue management, will assist to improve future revenue streams. Electricity debtors (before impairment provision) increased from R16.7 billion at 31 March 2013 to R20.2 billion at 31 March 2014. The allowance for impairment for trade and other receivables increased by R1.4 billion, from R4.3 billion in 2012/13 to R5.7 billion in 2013/14. 98 Eskom Holdings SOC Limited 2014 Integrated Report 99 Becoming a high-performance organisation (continued) Energy losses and theft The courts are taking this crime seriously and significant sentences are being handed out to Energy losses are a challenge for utilities throughout the world. There are two broad categories perpetrators. For example, a collective sentence of 123 years was handed out in the North West of energy loss: and Free State provinces to eight convicted members of a crime syndicate. • Technical energy losses are a natural result of electrical energy being transferred from one point to another with some of the energy being dissipated as heat Operation Khanyisa • Non-technical energy losses are typically caused by theft (illegal connections, meter Operation Khanyisa was launched in October 2010 and aims to raise awareness of, and educate tampering and illegal vending of pre-paid electricity) or errors in data/billing the nation about, the impact and consequences of electricity theft. Social mobilisation across all sectors and compliance interventions aim to instil a culture of legal, safe and efficient energy use. For internal evaluation purposes the technical losses accounted for between 60% and 75% of the To address the problem of electricity theft in municipalities, Operation Khanyisa has also partnered total energy losses in the Distribution networks. The actual percentage in Distribution is influenced with the South African Local Government Association (SALGA) and different municipalities. by factors such as network design, network topology, load distribution on the network and network operations. For the Transmission networks, technical losses account for all of the energy losses. Target Actual Actual Actual Total energy losses (%) (12-month moving average) 2013/14 2013/14 2012/13 2011/12 Total distribution losses, % 6.54 7.13 7.12 6.32 Total transmission losses, % 3.40 2.34 2.80 3.08 Total Eskom losses, % 9.28 8.88 9.08 8.65 Eskom reduced its total energy losses to 8.88% during the year, from 9.08% in 2012/13 (target: <9.28%). While transmission losses are lower than target, distribution recorded higher than target losses. Interventions to manage the losses include, amongst others, continuing with the energy and revenue losses programme reduction activities and the Operation Khanyisa social marketing campaign. Equipment theft Eskom is plagued by network equipment theft (generally referred to as conductor or copper theft). Eskom’s Operation Khanyisa campaign addresses electricity theft and non-payment This includes the theft of overhead lines, underground cables, airdac and bundle conductors, earthing equipment, transformers, pylon support lattices and so forth. Some of the key successes include: • More than 8 000 tip-offs have been received via Crime Line (SMS: 32211) and Eskom’s toll-free The increase in the value of material stolen remains a serious concern. This is an indication of reporting line (0800 11 27 22) an organised (syndicate driven) criminal activity in the conductor theft environment, which is also • In the 2013/14 financial year, 18 suspects appeared before various courts in South Africa on experienced by other state-owned enterprises. charges related to electricity theft. Since the launch of Operation Khanyisa more than 60 court cases have been heard and over 112 arrests made for crimes relating to electricity theft The fight against network equipment theft is being addressed by means of intelligence driven • Eskom teams have conducted more than two million audits of electricity meters and installations investigations by the Hawks (a division of the South African Police Services). It also encompasses and removed over 80 000 illegal connections aggressive policing of the scrap metal markets for stolen goods. Operation Khanyisa received a number of awards, both at home and abroad for its efforts in The joint industry working group (formed by Eskom, Transnet, Telkom, the South African Police combating electricity theft. Services, the National Prosecuting Authority, Business Against Crime and the South African Chamber of Commerce and Industry) continues to contribute positively in the fight against this crime. 100 Eskom Holdings SOC Limited 2014 Integrated Report 101 Becoming a high-performance organisation (continued) Building strong skills Investing in appropriate technologies Eskom constantly needs to source, develop and retain technically skilled workers at all levels of Eskom invested R156.2 million into researching and developing technologies that could reduce its the company to ensure the sustainability of its business. carbon footprint and improve technical and safety performance. This is 20% lower than research investment in the previous year (R195.3 million). Key performance indicators for skills development The research and development department has made good progress on its portfolio for the year, Target Target Actual Actual Actual Target especially on 18 high priority projects. Key amongst these is the online boiler monitor, Waterberg Indicator and unit 2017/18 2013/14 2013/14 2012/13 2011/12 achieved? coal evaluation and high frequency electrostatic precipitator projects which are all on track. The Training spend as % of focus on high impact, high value project identification and delivery will continue. This requires gross employee benefit increased effort on project management systems and practices and alignment with the real needs costs, %1 5.00 5.00 7.87 n/a n/a of the business. For further details on Eskom’s research activities, refer to www.eskom.co.za/ Total engineering learners IR2014/12.html in the system, number 391 2 007 1 962 2 144 2 273 Total technician learners in Eskom achieved ISO 9001 certification (quality management systems) and is in the process of the system, number 652 780 815 835 844 obtaining certification for safety, health and environmental management for its various divisions and units. It is also working with the South African Bureau of Standards to identify additional Total artisan learners in the system, number 1 434 2 619 2 383 2 847 2 598 specialist ISO standards that need to be implemented for its various divisions. Youth programme, number – 5 000 4 325 5 701 5 159 1. Training spend is a new measure effective from 1 April 2013, thus comparative information prior to this date is not available. Eskom reviewed the learner numbers and decided to realign the learner pipeline from 14.5% of staff complement to a more sustainable level of 6% phased in over the next five years. The engineering and artisans target was not achieved as a result of this decision. The underperformance of the country’s youth (SYDI) programme is due to a lack of funding. A learner hub was established to ensure centralised learner management, and manage the further development, placement or exit of learners. Eskom has also partnered with higher learning and basic education institutions to promote access to quality education, particularly in the fields of maths and science, as part of its external development programme. Another example is Eskom’s Academy of Learning (EAL) artisan operating and maintenance centre of excellence which chairs the initiative that champions the building of additional infrastructure and developing a curriculum at the further education and training college in Lephalale, and provides support through leadership and technical guidance. The first skills programme, accommodating 40 demobilised workers, started on 21 October 2013 and was completed on 13 December 2013. Successful candidates earned national credits. EAL’s mandate is to close Eskom’s competency gap by addressing, coordinating and integrating all learning needs of employees, as well as enhancing performance throughout Eskom, by focusing on business needs, and catering for all facets of the learning value chain and learning operations. As an example, the EAL welding school of excellence is accredited by the International Institute of Welding. A total of 150 welding apprentices are in the learner pipeline and the first group of 50 will qualify in 2014. This initiative will help with the national shortage of welding skills. The early success of this initiative is evident, with positive feedback from potential employers and continuous improvement of learner capabilities. The underground coal gasification project next to the Majuba power station has been a highlight in Eskom’s research portfolio 102 Eskom Holdings SOC Limited 2014 Integrated Report 103 06 Leading and partnering to keep the lights on Eskom remains committed to keeping the lights on whilst at the same time maintaining a sound basis for sustainable operations and financial sustainability. Eskom is achieving this by taking a leading role and actively partnering with all key stakeholders in a comprehensive supply-and-demand management strategy. At the same time, Eskom is working hard to deliver on capacity expansion projects that will increase its generating capacity Operating highlights • Demand-savings initiatives achieved a total of 410MW, exceeding the target of 379MW • The residential mass roll-out programme has been a key contributor to the demand savings. Phase 2 of the programme has been completed and 87MW of these savings have been verified in 2013/14 • Annualised energy savings of 19GWh were achieved from new integrated demand management (IDM) projects for the year ended 31 March 2014 relating to internal energy efficiency of Eskom’s facilities, exceeding the target of 15GWh • The pilot underground coal gasification plant has been built at Majuba. Testing is ready to commence, pending environmental and water permissions from the relevant state departments • 120MW of generation capacity has been commissioned, 811km of transmission power lines built and 3 790MVA of transmission substation capacity commissioned during the year • The return-to-service programme has now been completed with the successful commissioning of the final unit at Komati power station at the end of September 2013. In total, all 23 units of the three mothballed power stations have been returned to service (3 741MW) at a cost of R26 billion • Despite the outage constraints, some of the refurbishment projects have progressed well, i.e. all Kriel units have now been refurbished; the last unit (Unit 5) synchronised on load on 15 March 2014. Three of the six Matla units have been refurbished, with the third unit (Unit 5) synchronised on load on 25 March 2014 • In June 2013, a partnership agreement was signed between Eskom, contractors and labour to bring about stability at the Medupi and Kusile construction sites. Since the conclusion of the agreement, the sites have experienced less work stoppages and no violence • Eskom has taken the initiative in facilitating the establishment of the Medupi leadership initiative to address the consequence of demobilisation of workers Operating challenges • As a result of contractor’s performance regarding the continued failure of the control and instrumentation systems factory acceptance tests on the boiler-protection system at the Medupi power station, Eskom has stepped in and placed a contract with an alternative contractor for the engineering and manufacturing of the boiler-protection systems, which form a small part of the overall scope of the control and instrumentation systems works contract. The current contractor of the control and instrumentation system for Medupi remains bound to fulfil its obligations in Solar photovoltaic panels terms of such contract have been installed at Lethabo power station near Vereeniging 104 Eskom Holdings SOC Limited 2014 Integrated Report 105 Leading and partnering to keep the lights on (continued) • Acquisition of servitudes over state-owned and tribal land is a lengthy process because in many • Procurement and due diligence processes regarding the conversion of the OCGT plant from cases the land has not been surveyed. This causes significant delays to the construction and diesel to gas expansion of the transmission network • The milestones leading up to the commercial operation of Medupi Unit 6 are all expected to be • As a result of a constrained power system, the difficulty in obtaining outages for Transmission completed in the second half of 2014 projects and Generation coal projects (including refurbishments), continues to pose a challenge • Lifting of the work stoppage instruction in terms of section 54 notice of the Mines Health and to the execution of projects Safety Act at Ingula to allow for work to continue in the inclined high-pressure shafts • For the Generation coal projects and Transmission projects, managing the requirements Future focus areas regarding the integration of the project outage schedules • Continued focus on accessing alternative funding for Eskom’s IDM programme and developing low cost energy-saving programmes in view of financial constraints • Servitude acquisitions remain a critical priority and engagement continues with government departments to assist in dealing with the challenges experienced with regard to expropriation applications Power system emergencies and rotational load shedding 5 000MW, thus enabling the stable operation of the system. By mid-day the load reduction For many hours of the day, the reserve margin is more than adequate. However, during peak was reduced to stage two and at 22:00 the system emergency was cancelled and all load hours or when abnormal events occur, demand at times exceeds supply. When this occurs, was restored. Eskom implements demand and supply-side management strategies, including the demand Stages one, two and three indicate the degree of severity of the supply shortfall, and thus response programme where selected large customers reduce their demand on request from the frequency and duration of the required rotational load shedding, with three being the Eskom. As a last resort, Eskom will introduce rotational load shedding to protect the integrity most severe. of the power system. Failure to do so could lead to a full national power blackout with severe consequences for the country. Clear protocols are in place in the event that there is no option The curtailment of production at the four units was mainly due to the handling difficulties but to resort to load shedding. regarding wet coal as a result of continuous rain over a number of days leading up to this date. After the load shedding in 2008 following heavy rains, Eskom is mixing coarse coal The emergency response command centre was activated on a total of 36 occasions in the with the finer coal to prevent the wet coal from coagulating on the conveyors. However, the year to 31 March 2014. The majority of the activations were proactive interventions (in alert length of this period of wet weather meant that many of the coarse stock piles were depleted. mode) to manage emerging threats. However, emergencies had to be declared on four occasions during the year. This was the only incident of rotational load shedding during the year. • Emergencies declared on 19 November 2013, 20 and 21 February 2014 and 6 March 2014 • Communication to all customers Power system emergencies were declared when there was insufficient capacity to meet In an effort to reduce electricity demand, an integrated communication and stakeholder the demand. Instructions were given to large customers to reduce demand in accordance “Keeping the lights on” programme encourages all South Africans to “beat the peak” in with the protocols for stage one load reduction. Control centres were instructed to be ready winter and to “live lightly” in summer. The Power Alert and Power Bulletins on TV and for load shedding. For the first three emergencies rotational shedding was not required as radio have proved effective in encouraging customers to reduce their power usage the response from customers was adequate to stabilise the power system. However on when the power system is constrained, having achieved a cumulative average saving of 6 March load shedding was instituted. approximately 350MW. In addition, bi-weekly status updates are issued to the media and Customers responded admirably when Eskom declared these emergencies and reduced quarterly power system media briefings are held, along with regular national, regional, and demand by 600MW in November 2013, by 340MW in February 2014 and by 1 160MW in local stakeholder engagements to provide open and transparent information on the state March 2014. of the power system. • Rotational load shedding on 6 March 2014 • International customers The already constrained system was exacerbated by a rapid change in the early hours of Cross-border international customers are also subjected to load reduction and load 6 March 2014, as production at four units at power stations was severely curtailed, with shedding protocols. Customers with discretionary agreements are declined in advance of a load losses of 3 226MW by 08:00. tight supply situation. Customers with non-firm agreements follow the same load reduction and load shedding as large customers in South Africa. Industrial end-use customers are An emergency was declared at 06:00 and load curtailment commenced. By 08:00 it was interrupted in line with their agreements. Those with firm supply agreements continue to necessary to commence with rotational load shedding, which continued for 14 hours. The receive supply, but are urged to cut back consumption. load shedding reached stage three in the morning, reducing demand by approximately 106 Eskom Holdings SOC Limited 2014 Integrated Report 107 Leading and partnering to keep the lights on (continued) Keeping the lights on “Keeping the lights on” refers to Eskom’s ability to ensure that sufficient generating units are on Average monthly % actual reserves including OCGTs line, and, during periods of generation constraints, to balance the power supply and demand by (Excess capacity compared against actual demand) using demand-savings initiatives to reduce energy usage. “Keeping the lights on” is about asking 50 all customers to use electricity more sparingly, especially during peak hours, when demand at times exceeds supply, or when abnormal events occur that impact on the available supply. Previously, Eskom had no choice but to defer power station maintenance in order to keep the 40 lights on, which was not a sustainable approach. At the end of 2012, Eskom’s board approved the Generation sustainability strategy. The plan spans five years, with 2013/14 being the first full year that the plan has been in place. The “keeping the lights on” strategy now also includes managing 30 the demand such that the Generation sustainability strategy can be achieved, while avoiding rotational load shedding, as well as tracking the status of reduction in the maintenance backlog. Eskom’s “keeping the lights on” performance is also assessed in terms of verified energy savings 20 and reductions in the maintenance backlog. Key performance indicators for keeping the lights on 10 Target Target Actual Actual Actual Target Indicator and unit 2017/18 2013/14 2013/14 2012/13 2011/12 achieved? Evening peak demand 0 savings, MW 174 379 410 595 365 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jan 2013 Jan 2014 Apr 2009 Oct 2009 Apr 2010 Oct 2010 Apr 2011 Oct 2011 Apr 2012 Oct 2012 Apr 2013 Oct 2013 Jul 2009 Jul 2010 Jul 2011 Jul 2012 Jul 2013 Internal energy efficiency, annualised GWh1 0 15 19 29 45 Maintenance backlog reduction based on Monthly average at 06:00 Monthly average at 15:00 Monthly average at peak Monthly average at 22:00 the Eskom technical governance committee approval, number 0 0 0 n/a n/a Eskom has managed to meet the daily peak demand with the support of customers with interruptible load agreements (the Bayside, Hillside and Mozal aluminium smelters), demand- 1. The figures reported for each year are for projects verified in the relevant financial year. market participation (DMP) customer support, emergency DMP, demand-side management (DSM), tariffs (more expensive tariffs during peak periods encourage customers to reduce Managing supply-and-demand constraints demand during peak periods), municipality assistance, independent power producers (IPPs) as During 2013/14 Eskom performed more planned maintenance than normal as a result of well as utilising the open-cycle gas turbines (OCGTs). The 2012/13 power buyback programme implementing the Generation sustainability strategy – refer to page 114, which deals with impacted the GWh sold in April and May 2013, however, the cost of this programme was provided maintenance in further detail. While implementing this strategy is critical to ensure the long-term for in the 2012/13 financial year. sustainability of the generating assets, it has inevitably created more pressure on the already tight supply/demand balance. Refer to page 143 for details on electricity purchases from IPPs and pages 111 to 114 for details on demand-side levers, which have contributed to the security of electricity supply. Although there was sufficient capacity to meet the demand during the day in winter, on a number of evenings the power system was tight with all available generation in service and contracted A lower than normal reduction in sales volumes to key customers in the winter periods to offset the demand reduction used to reduce load. The average available operating reserves over the growth in sales to the remainder of the customer base did not manifest itself as strongly this year, peak period in June 2013 were under 3% as depicted on the graph. For Eskom’s rotational load resulting in additional demands on the OCGT fleet. Electricity demand during the peak periods shedding event that occurred on 6 March 2014, refer to page 104. of 17:00 to 21:00 was still significant, hence the requirement for OCGT generation during peak periods. As generation units are taken off-load for maintenance, it also necessitated the increased usage of these expensive diesel burning OCGT stations. OCGTs were used in winter as well as summer to ensure security of supply. 108 Eskom Holdings SOC Limited 2014 Integrated Report 109 Leading and partnering to keep the lights on (continued) The total production by OCGTs reached 3 621GWh against a budget of 1 284GWh in 2013/14 (2012/13: 1 905GWh). The actual load factor on the plant for the year to 31 March 2014 was September – March: spring/summer April – August: autumn/winter 17.16%, against a budgeted factor of 6.08% (2012/13: 9.03%). The total board approved spend on diesel for the OCGTs for 2013/14 was R11.3 billion, of which R10.6 billion was spent in the “Live lightly” “Beat the peak” year to 31 March 2014 (2012/13: R5.0 billion). The MYPD 3 decision for OCGT purchases was • Table Mountain profile • Peak profile R2.5 billion for 2013/14, which was R8.1 billion less than the actual spend. • Constrained all day including from • Constrained from 17:00 – 21:00 17:00 – 21:00 • Electrical heating, geysers and pool Summer and winter have very different load profiles as depicted below. Unlike winter, where • Air-conditioning, geysers and pool pumps pumps primarily impact demand the demand increases during the evening peak, the demand profile during summer is much primarily impact demand • Residential customers can make flatter (“Table Mountain” profile as depicted in the figure below) with an increased demand profile • Commercial, agricultural and residential the biggest difference as demand throughout the day, primarily due to air-conditioning and geysers. The outlook for the coming year customers can make the biggest increases in the evenings is predicted to be very tight due to the maintenance required by the generating fleet, resulting in difference Eskom on occasion being up to 1 000MW short to meet the evening peak over the winter period. The summer period shortage may not be as high but will be for longer periods as can be seen from the profile below. Summer and winter load profiles 36 000 34 000 Winter peak profile Between 5pm and 9pm, Geyser 32 000 and Pool pump are not welcome. 30 000 Please switch them off. 28 000 26 000 Summer flat (“Table Mountain”) profile 24 000 22 000 20 000 Between 5pm and 9pm electricity usage peaks when people return home after work. They start cooking, watching TV and bathing. All of 00:00 02:00 04:00 06:00 08:00 10:00 12:00 14:00 16:00 18:00 20:00 22:00 this leads to a large demand on our limited power supply. A geyser can consume up to 39% of household power, whereas a pool pump can use up to 11%. Please help us reduce the pressure on the national grid by switching off your geyser and pool pump during peak periods. For more information please visit www.eskom.co.za/idm Typical winter day Typical summer day 534_ESKD_5-9 Activate_Kid.indd 1 2012/03/12 2:16 PM 110 Eskom Holdings SOC Limited 2014 Integrated Report 111 Leading and partnering to keep the lights on (continued) Cross-border purchases and sales of electricity supplying 100MW on a firm basis (which is withdrawn if South Africa is exposed to rotational Eskom is a member of the Southern African Power Pool (SAPP) that provides the opportunity load shedding) and additional capacity subject to availability. for the various utilities in the region to ensure integrated planning and smooth and safe operation of the interconnected transmission system. The various members of the SAPP For 2013/14, 15% of the international sales have occurred during peak periods, 38% during support each other during emergencies and wheel (transport) electricity on behalf of each standard hours and 47% during off-peak hours. other across their grids. It also provides access to a day-ahead market where surplus energy Cross-border purchases and sales of electricity can be traded with those who are experiencing a deficit. Actual Actual Actual Eskom has bilateral electricity trading agreements with most SAPP members and continues to 2013/14 2012/13 2011/12 export and import electricity. Eskom is aware of its responsibility to South Africa regarding the Sales, GWh 12 378 13 791 13 108 exporting of electricity when the domestic supply-demand balance is constrained. To reduce the impact of exports, Eskom has ensured that the contracts with SAPP trading partners are Purchases, GWh 9 425 7 698 9 939 sufficiently flexible to allow for the following controls: Net sales, GWh 2 953 6 093 3 169 • During emergency situations in South Africa, non-firm agreements (Botswana and Namibia) and industrial customers across the border (Mozal and Skorpion Zinc) are interrupted in line with the terms of their agreements The energy exports continue to exceed the planned level due to delays in the commissioning • The remaining firm supply agreements (Swaziland and Lesotho) continue to be supplied in of new generation assets in neighbouring countries and due to a drier than normal season full, but they are urged to reduce consumption. During load shedding in South Africa they affecting the availability of hydro generation in neighbouring countries. Despite this, the are required to undertake proportional load shedding exports are still 1 321GWh less than in 2012/13. Botswana failed to bring its new Morupule B coal-fired power station into commercial The performance of Hidroelectrica de Cahora Bassa S.A. energy imports remains a risk due operation, resulting in a significant supply deficit in that country. Eskom agreed to continue to challenges regarding the reliability of the high-voltage direct current transmission lines. Integrated demand management and energy efficiency Eskom employed various demand-management strategies to ensure security of supply, while creating space to maintain and refurbish its power stations during the year. Demand-side management Demand-side management (DSM) encourages customers to limit their electricity usage. Demand-side management initiatives support national security of supply and minimise the negative economic consequences of a power shortage for the country. During 2013/14, Eskom spent R1.36 billion on DSM whereas the MYPD 3 decision for the 2013/14 financial year was R1.46 billion. The 49M initiative that aims to inspire and rally all South Africans behind a common goal – saving electricity – now has 135 corporate partners who have pledged their support 112 Eskom Holdings SOC Limited 2014 Integrated Report 113 Leading and partnering to keep the lights on (continued) Verified accumulated demand savings against the cumulative target per year (MW) 4 000 3 500 3 000 Peak demand savings (MW) 2 500 2 000 1 500 1 000 500 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Financial years Eskom contributes to the government’s solar water heating initiative, which aims to install one million solar water heaters Verified demand savings (MW) Eskom target Demand-side management and energy efficiency Energy-efficiency measures Demand-side management is divided into two broad programmes: Eskom’s Power Alert and “5pm to 9pm” campaigns continue to reduce power demand during • The demand-response programme consists of a range of sub-programmes which offers the evening peak. The average weekday evening peak impact for the period under review for commercial and industrial customers financial incentives to reduce their electricity requirements all colours (green, orange and red) is 224MW. The average impact for the red flightings in the as and when needed. Before being placed on hold, the requirements for taking up demand evening peak on the worst constrained day is 294MW. The impact shows the positive response response programme products (standard product and standard offering) were amended to by customers to these signals. allow smaller companies to participate in the programme. Eskom spent R350 million (2012/13: Eskom’s 49M campaign, a long-term behavioural-change initiative that encourages energy- R3.1 billion) on demand market participation, the reduction from previous year mainly as efficiency practices, particularly for residential users, has the ultimate goal of reducing energy a result of a significant decrease in the power buyback programme. consumption by 10%. This includes targeted seasonal campaigns such as the “beat the peak” • The residential mass roll-out programme aims to reduce residential electricity usage by campaign and the “live lightly” campaign. To date, 133 partners have joined the campaign and encouraging households to use energy-efficient technologies. The programme is a significant have committed to promote energy efficiency in their organisation. lever to reduce demand during periods of system constraint, but it will require funding from government as it has not been accommodated in the MYPD3 determination. It includes the Internal energy-efficiency initiatives following sub-programmes: Eskom continues to improve the internal energy efficiency of its facilities (power plant and buildings) - The compact fluorescent lamps (CFL) programme – phase 2 of the CFL roll-out has been by undertaking energy audits and implementing efficiency programmes that focus on lighting, completed, with 1.2 million bulbs installed, realising verified savings of 65MW in 2013/14. heating, ventilation and air-conditioning. Annualised energy savings of 19GWh were achieved from The CFL roll-out phase 3 began in February 2014 new IDM projects for the year ended 31 March 2014, exceeding the target of 15GWh. - The solar water-heater programme – Eskom contributes to the government’s solar water heating initiative, which aims to install one million solar water heaters. Over the year ended 31 March 2014, a total of 47 020 solar water heaters were installed, bringing the total for the rebate programme and residential contracts to 381 052 since its inception in 2009 114 Eskom Holdings SOC Limited 2014 Integrated Report 115 Leading and partnering to keep the lights on (continued) The piloted power management software has been rolled out to Eskom’s Windows 7 users and Actual Actual Actual includes the roll-out of the enhanced power management rules for both desktops and laptops. 2013/14 2012/13 2011/12 This has already resulted in energy savings. Generation operating maintenance costs, R million1 7 763 5 954 4 936 Decreasing the maintenance backlog 1. This is after the capitalisation of costs, which are included in capital expenditure. The gross maintenance for Generation, before capitalisation Between 2008 and 2012, Eskom had no option but to defer certain planned maintenance on its is R14.3 billion (2012/13: R10.6 billion) generating fleet to ensure security of supply. This backlog, coupled with the burning of below- standard coal and the high utilisation of the plant, resulted in wear and tear on plant and impact the health of the ageing fleet. Monthly planned maintenance (PCLF) (%) In 2013/14, Eskom started rolling out the Generation sustainability strategy that involved increasing 15 the fleet’s planned capability loss factor (PCLF) – that is, planned down time for maintenance and refurbishment – to 10% of overall energy availability to create a gap for maintenance. Historically more maintenance is scheduled for the summer months, when the electricity demand is lower, 12 but more maintenance was scheduled in the winter months than ever before in order to reduce the backlog. See the graph on the next page which demonstrates the increase in planned maintenance over the previous three years. 9 Eskom, through its technical governance committee, prioritised nine maintenance items for the PCLF year, with a target of zero items outstanding by 31 March 2014. This target was achieved by December 2013. 6 Maintenance plan for a coal-fired power station Coal-fired generating units need to be regularly taken out of service to conduct routine 3 repairs and inspections. While these units are down, the rest of the generating fleet needs to compensate for the commensurate decrease in generating capacity. 0 Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Activity Cycle time (years) Duration (days) Major general overhaul 6-12 40-60 2013/14 2012/13 2011/12 Interim repairs 2-3 14-35 Mini general overhaul 6 28 Delivering capacity expansion Eskom’s performance in terms of delivering capacity expansion is assessed in terms of: Boiler inspection 1-1.5 7-14 • Generation capacity installed and commissioned which measures the generating capacity Statutory inspection and test 6 35 added in MW Main steam pipe work ad hoc 120 • Power lines built which measures the transmission power lines built in kilometres • Substation capacity installed and commissioned which measures substation transformer capacity added in MVA • Generation capacity milestones which measures the variance of achieving the milestones The year-on-year maintenance cost has grown incrementally, as shown in the following table, as in days a result of extensive planned and unplanned maintenance. The UCLF of 12.61% and the PCLF of • Capital expenditure (excluding interest during construction) which measures the amount 10.50% are indicative of the level of maintenance that was executed. spent on capital projects 116 Eskom Holdings SOC Limited 2014 Integrated Report 117 Leading and partnering to keep the lights on (continued) Project management Realising it did not have adequate engineering and project management capacity to undertake the mega projects, Eskom decided to outsource the work to execution partners that were to provide world class project management, engineering services and management of contractors. Processes were implemented for claims and variations management. Contingency status reports capture and track the contract controls. An overarching oversight claims and variations committee performs regular analysis of the overall control and interested parties are informed of lessons learnt. Eskom has undergone a process to revise its contractor management strategy to control cost and improve contractor management. In cases where the performance was not satisfactory the following was done: • The performance bonds for some of the contractors were called • Counter claims against the contractors are being finalised • Eskom has requested that sub-contractors are replaced and that contractors’ management teams be changed • Eskom assumed some of the management roles and increased oversight Since 2005, Eskom has been expanding its generation and transmission capacity to meet the country’s growing demand for energy. Eskom’s nominal generating capacity in 2005 was 36 208MW. The programme will increase this by 17 384GW by 2019/20. The key generation Eskom has commissioned a total of 27 565MVA substation capacity since 2005 expansion projects are the 4 764MW Medupi and 4 800MW Kusile coal-fired stations, and the Ingula pumped-storage scheme in the Drakensberg, which will deliver 1 332MW of hydro- electricity during peak demand periods. Transmission line length and substation capacity will also Technical performance for the year to 31 March 2014 increase substantially. Target Target Actual Actual Actual Target The capacity expansion programme has cost R213.2 billion (excluding capitalised borrowing Indicator and unit 2017/18 2013/14 2013/14 2012/13 2011/12 achieved costs) to date. Generation capacity installed and commissioned, MW 6 214 100 120 261 535 Between 2005 and 31 March 2014, the programme has increased Eskom’s generating capacity by 6 137MW, its transmission lines by 5 497km and its transmission substation capacity by Power lines built, km 1 539 770 810.9 787 631 27 565MVA. Substation capacity installed and commissioned, MVA 5 755 3 790 3 790 3 580 2 525 Generation capacity milestones, days 30.0 30.0 48.9 43.5 – Project schedules continue to be under strain, while certain recovery plans are being implemented in order to mitigate the effects of the challenges. 118 Eskom Holdings SOC Limited 2014 Integrated Report 119 Leading and partnering to keep the lights on (continued) Medupi power station • The cumulative cost incurred on Medupi as at 31 March 2014 is R77.0 billion against a total budget of R105.0 billion (excluding capitalised borrowing costs) • The project schedule recovery processes are already showing good results. Project cost, time and commercial reviews are aligned with the integrated schedule and preliminary milestones are in place to achieve the planned synchronisation dates, as well as the revision of their estimated cost at completion • The critical path to first synchronisation remains through the delivery, installation and testing of the boiler-protection system as part of the control and instrumentation works. The boiler- protection system factory acceptance test is planned for the first quarter of the new financial year • There are technical issues surrounding welding on the Unit 6 boiler and recovery strategies have been put in place to implement solutions to the post-weld heat treatment. The weld procedure qualification record re-qualification exercise is substantially complete with all welds procedures verified and accepted by Eskom engineering and the approved inspection authority. Remedial work is in progress at the boiler and for welds identified as being defective. Boiler re‑heater work is complete and has been signed off by Eskom • The control and instrumentation contractor has progressed well in some areas while they still remain late in other areas. Site access is also a major contributing factor to current delays. The factory acceptance test in this regard was conducted and passed. There are still outstanding distributed control system related defects that will be dealt with via site acceptance testing • The control and instrumentation solution and mitigation strategy is in place: - Units 5 and 6: The alternative system solution is on track for completion by September 2014 (first fires) - Eskom has decided to step-in under sub-clause 17.7 (employer’s step-in rights and additional remedies) of the Medupi control and instrumentation system works contract, and has placed a contract with an alternative contractor for engineering and manufacturing of the boiler- protection system for Units 6 and 5, up to factory acceptance test stage. This contractor is currently busy with the pre-factory acceptance tests on the boiler-protection system - Units 1 to 4: Initiated commercial process for a closed enquiry to selected group of suppliers for initially an early work order and then a complete work enquiry for the full solution • All 64 air-cooled condenser fans have been commissioned and are undergoing optimisation • The coal-conveyor system is ready to take coal from the mine • A review of the current R105 billion budget is underway and entails the following: - An independent review of the deep dives of the control/cost logs of each contract package and owner development costs in order to quantify the cost impact - The refinement of the integrated project schedule for Units 5 to 1. The organisational structure has been reworked, with some reorganisation done for Units 5 to 1. A new unit based organisation is in place, which includes package-based commercial management • The first synchronisation of Medupi Unit 6 is expected to be in the second half of 2014 • The Medupi partnership agreement between Eskom, principal contractors and organised labour has been signed, with 69 site-specific issues that were agreed. Four are still outstanding and these are scheduled to be finalised in the second quarter of 2014 • Eskom has taken the initiative in facilitating the establishment of the Medupi leadership initiative Construction of the to address the consequence of demobilisation of workers and the impacts on the community Medupi power station and the local economy of Lephalale. More than 250 opportunities were identified, six were project in Lephalale is prioritised and funding of over R76 million was committed by the collaborating partners to kick- gaining momentum start the initiative 120 Eskom Holdings SOC Limited 2014 Integrated Report 121 Leading and partnering to keep the lights on (continued) The machine hall at the Ingula pumped-storage scheme project is the largest cavern in mud rock in the world Ingula pumped-storage power station • The cumulative cost incurred on Ingula as at 31 March 2014 is R19.4 billion against a total budget of R25.9 billion (excluding capitalised borrowing costs) • Safety continues to remain a key focus at Ingula, especially following the accident in the inclined high-pressure shaft 3 – 4 on 31 October 2013 - The Mine Health and Safety Inspectorate of the Department of Mineral Resources issued a The Kusile power station project will on completion be the fourth largest coal plant in the world work stoppage instruction in terms of section 54 of the Mines Health and Safety Act (MHSA) in the inclined high-pressure shafts as a result of the incident. It remains in effect in that no Kusile power station work is allowed to commence and continue in the inclined high-pressure shafts. The safe work • The cumulative cost incurred on Kusile as at 31 March 2014 is R66.6 billion against a total procedures, risk assessments and documentation approval relating to the above accident are budget of R118.5 billion (excluding capitalised borrowing costs) being finalised. The MHSA section 54 work stoppage instruction has not been completely • The Kusile power station project has also been impacted by overall poor contractor performance lifted, but has been conditionally lifted to allow for cleaning of the inclined high-pressure shafts • The Unit 1 boiler continues to impact several of the top 10 critical paths for Unit 1 synchronisation. - It is estimated that work will restart during June 2014. This has set back the completion Specifically, access has been delayed to other contractors for the installation of the Unit 1 schedule at Ingula auxiliary transformers, the transverse ash conveyor foundations, the fabric filter electrical • Although no construction work is allowed to commence and continue in the inclined high- building, and the compressed air building pressure shafts, work on other parts of the site continues. Construction work in the inclined • The Unit 1 target date for first synchronisation is October 2015. However, the latest forecast high-pressure shafts can only commence once the revised work method has been approved indicates January 2016 for first synchronisation. This date is driven by the release of the area by the Mine Health and Safety Inspectorate of the Department of Mineral and Resources. The by the boiler contractor and the start of construction by its sub-contractors appointed for the aforesaid documentation was submitted to them for approval at the end of April 2014. The full compressor building. Compressed air is required for Unit 1 commissioning impact of the accident on the schedule at Ingula is currently being assessed by the project team • The Kusile team continues to work with the boiler contractor in these areas and with follow-on • As a result the projected forecast dates (after the accident) for the first unit (Unit 3) contractors to develop mitigation strategies for the work synchronisation is the second half of 2015. The accident will also impact the remaining units’ synchronisation dates 122 Eskom Holdings SOC Limited 2014 Integrated Report 123 Leading and partnering to keep the lights on (continued) Power lines and substation capacity commissioned Eskom commissioned 811km of power lines and 3 790MVA of substation capacity in 2013/14, Knowledge management across the capacity expansion programme bringing the total power lines commissioned since 2005 to 5 497km and the total substation • Implementation of project management tools across the capacity expansion capacity to 27 565MVA. programme, aligned to international benchmarks • Establishment of communities of practice to address welding quality control beyond the traditional quality assurance Eskom’s transmission projects as at 31 March 2014 • Proactive and timely identification and involvement of alternative service providers for critical control and instrumentation activities, whilst strictly monitoring markers of success for incumbents • Revising the contractor execution and supervision approach to improve productivity • Tripartite partnership agreement with organised labour, contractors and Eskom to create a climate of harmony across the capacity expansion programme and thereby reduce disruption due to industrial action • Consistent commercial approach to contractors across the capacity expansion programme • Safety forums and interventions to drive continuous improvement in safety performance Existing Interconnection substation Nuclear power station Not yet complete Town Future gas station Possible future grid system Future renewables Gas power station Future hydroelectric power station Renewables Future substation Future thermal power station Thermal power station Hydroelectric power station Future interconnection substation The 94km high-voltage line from the Ingula pumped-storage scheme to the Venus substation has been completed 124 Eskom Holdings SOC Limited 2014 Integrated Report 125 Leading and partnering to keep the lights on (continued) Transmission expansion projects experienced similar obstacles to those faced by generation projects, with additional challenges posed by the need to secure servitudes on state or tribal land that first needed to be surveyed and access to servitudes over privately owned land. The difficulty in integrating project outage schedules with the existing outage schedule poses a further challenge, although it is taken into account in the development of the Generation outage management plan. Capital expenditure Eskom spent R59.8 billion on capital expenditure in 2013/14, R2.5 billion less than the budget of R62.3 billion, excluding capitalised borrowing costs, mainly due to construction delays in the capacity expansion programme. Capital expenditure (excluding capitalised borrowing costs) per division (R million)1 Actual Actual Actual Division 2013/14 2012/13 2011/12 Group Capital 33 475 37 690 39 730 Generation 10 326 8 512 6 590 Transmission 1 516 893 1 554 Distribution 10 265 8 317 7 941 Subtotal 55 582 55 412 55 815 Future fuel 2 675 2 634 1 992 Eskom Enterprises 453 376 473 Other areas including service and strategic functions (including inter-group eliminations) 1 093 1 711 535 Total Eskom group funded capital expenditure 59 803 60 133 58 815 1. Capital expenditure includes additions to property, plant and equipment, intangible assets and future fuel, and excludes construction stock and capitalised borrowing costs. Eskom’s coal-fired power stations generate around 35Mt of ash which requires various handling Construction at the Medupi power station as seen from the clean water dam methods 126 Eskom Holdings SOC Limited 2014 Integrated Report 127 07 Reducing Eskom’s environmental footprint and pursuing low-carbon growth Environmental performance and reducing Eskom’s environmental and carbon footprint remain key focus areas for Eskom and every effort is made to reduce the impact of existing plant through improved management, and where required, plant modifications. New plant and infrastructure is designed to be more efficient and ensure that negative impacts on the natural environment and human health are minimised Eskom continues to reduce its carbon footprint by exploring and implementing renewable technologies and purchasing energy from renewable energy IPPs. Eskom believes a balanced approach is necessary to ensure environmental sustainability whilst supporting economic growth and access to affordable electricity. Operating highlights • Water-usage and environmental-emissions targets were met, with substantial improvement in the water-usage performance compared to the previous year • Additional maintenance improved emissions performance at several power stations • Eskom’s Sere wind farm project has shown progress with the installation of 10 of 46 wind turbines by 31 March 2014 • Eskom secured co-financing loan agreements for the proposed concentrated solar thermal station near Upington Operating challenges • Eskom’s request for a variation of the particulate emission conditions in Kriel power station’s atmospheric emission licence was denied and the licence will not allow the continuous operation of the station at full rated power • New atmospheric emission licences were received for all power stations with the exception of Matimba and Lethabo power stations. Outstanding licences are expected to be received early in the new financial year • Water quality from some catchments is deteriorating, and having a negative impact on some power stations due to limited capacity to treat the pollution in the water Future focus areas • Eskom will continue to implement the compliance programme to achieve full compliance to environmental requirements, specifically: atmospheric emission licences, waste management permits, water use licences, environmental authorisations and biodiversity related permits • The minimum emission standards are effective from 2015. Eskom is unable to meet the emissions standards at all sites within the required timelines, and has submitted an application for a five-year postponement for some power stations in terms of section 6 of the Listed Activities and Associated Minimum Emission Standards • Continue to work towards Blue drop (water treatment) and Green drop (sewerage works) Temperatures often reach certification by March 2016 subzero levels at the Ingula • Completion and commissioning of Sere wind farm project in the 2014/15 financial year pumped storage scheme construction site 128 Eskom Holdings SOC Limited 2014 Integrated Report 129 Reducing Eskom’s environmental footprint and pursuing low-carbon growth (continued) • The implementation of a carbon tax, and the resultant possible increase in tariffs remains Eskom remains committed to reducing emissions to minimise the effect of its operations in a challenge in terms of the economic impact thereof. National Treasury’s announcement on the terms of health and the environment, and to comply with regulated emission standards. Eskom deferment of the implementation to January 2016, however, provides further opportunities for has completed maintenance at several stations to improve emissions performance. Given the Eskom to engage with National Treasury constrained power system situation, there may not be enough planned outages for Eskom to rollout similar maintenance across the entire fleet before new national emissions standards come into Reducing Eskom’s environmental footprint effect in 2015. Eskom’s overall environmental performance is assessed in terms of relative particulate emissions, specific water consumptions (water usage for all commissioned power stations) and the number The programme to retrofit fabric filter plant on at least five power stations in the existing fleet of environmental legal contraventions. Relative emissions entail the measurement of emissions continues, with the possible completion of the first unit at Grootvlei power station expected in 2016. intensity, which is the amount of emissions per unit of output. Eskom has received new atmospheric emission licences for most of its power stations. In the case of Kriel power station, Eskom’s request to increase the particulate emissions limit and to allow Key performance areas for reducing Eskom’s environmental footprint a grace period for when emissions exceed the limit of the new licence, has been denied. Every Target Target Actual Actual Actual Target effort will be made to comply with the conditions of the licence. The new limit does not allow the Indicator and unit 2017/18 2013/14 2013/14 2012/13 2011/12 achieved? station to continuously operate at its full rated power and will require load losses during off-peak Relative particulate emissions, time. This will increase cost if other levers, such as OCGTs, have to be used to supplement this kg/MWh sent out 0.29 0.36 0.35 0.35 0.31 reduction in load. Specific water consumption, L/kWh sent out1 1.21 1.39 1.35 1.42 1.34 Environmental legal contraventions Compliance with National Emission Standards in terms of the operational health Eskom has embarked on an extensive retrofit programme to reduce emissions at the dashboard2 0 0 2 23 5 highest emitting power stations. The execution of this programme will require long 1. The volume of water consumed per unit of generated power from commissioned power stations. outages and a significant amount of capital (currently R72 billion in nominal terms), and 2. Under certain conditions, contraventions of environmental legislation are classified in terms of the Eskom operational health dashboard index. will achieve 57% compliance with the National Emission Standards by 2026. Despite this, These include instances where censure was received from authorities, non-reporting to authorities as may be legally required, non-reporting in Eskom, a repeat legal contravention, or when the contravention was not addressed adequately. Eskom is unable to comply fully with the new National Emission Standards, which come 3. Increased from previously reported figure (1) due to an additional legal contravention that was identified during the year for activities associated into effect in 2015 and 2020, for several reasons. with the underground coal gasification (UCG) project, in October 2012. • Implementation of certain of the required technologies requires additional water which is not presently available Provisions for environmental measures (R million) • Implementation of the required technologies requires plant outages of 120-150 days Actual Actual Actual per unit and there is insufficient spare capacity to enable the required outages to be 2013/14 2012/13 2011/12 taken across the fleet before 2015 or in some cases 2020 without impacting on the ability to meet national electricity demand Power station-related environmental restoration – nuclear plant 9 331 7 177 5 428 • The long planning horizons required for these capital projects means that it is simply Power station-related environmental restoration – other power plant 6 942 6 762 4 731 not possible to execute most of the retrofits in time Mine-related closure, pollution control and rehabilitation 4 366 4 309 2 476 Given this situation, in February 2014 Eskom submitted an application for a five-year Refer to note 28 of the 2014 annual financial statements at www.eskom.co.za/IR2014/01.html postponement of compliance to the standards in cases where compliance within the legislated timeframe is not possible. A response is expected from the authorities within six to nine months. Reducing particulate and gaseous emissions Particulate emission performance was marginally better than the target and remained consistent with 2012/13, indicating that maintenance measures and technological advances are starting to yield environmental benefits. Reducing water consumption Eskom has formed water management task teams to reduce freshwater consumption and legal Power stations with fabric filter plant continue to sustain low emission levels. However, challenges contraventions relating to water use. are experienced with emissions at many of the stations with electrostatic precipitators. This is due to a range of factors, including capacity constraints and the limited space available for Eskom met its target for specific water usage, reporting 1.35L/kWh sent out against a target of maintenance. At some stations a decline in the coal quality and the high load factors together 1.39L/kWh sent out. The improvement on the previous year’s performance of 1.42L/kWh sent out result in overburdened dust handling plant. can be attributed mainly to an increase in the proportion of energy generated by the dry-cooled stations during the year. Increased opportunities for maintenance, implementation of initiatives 130 Eskom Holdings SOC Limited 2014 Integrated Report 131 Reducing Eskom’s environmental footprint and pursuing low-carbon growth (continued) identified by the water management task teams, good rains and the increased recovery of water compared to previous year also contributed to the improvement. Eskom tracks the number of mines that supply coal to Eskom on a monthly basis, together with their water use licence status. At the end of the 2013/2014 financial year, 36 of the 46 mines supplying Eskom with coal had approved water use licences, and 10 have applied for licences and are awaiting approval from the Department of Water Affairs (DWA). This is a significant improvement compared to the previous year. Eskom continues to engage with the DWA to clear the remaining backlog of water use licences, and proactively monitors the compliance of all of Eskom’s coal suppliers to the National Water Act. Reducing environmental legal contraventions Two environmental legal contraventions in terms of the operational health dashboard have been identified in the year, matching the 2012/13 figure. The first contravention is associated with the failure of Hendrina power station to effectively and timeously manage water-related legal contraventions that took place between October 2012 and October 2013. This is being addressed by the power station. The other contravention was due to Eskom constructing the Ruigtevallei- Dreunberg 132kV line on an incorrect servitude option that was not approved in the environmental authorisation. The number of legal environmental contraventions decreased from the previous year (32 contraventions against 481 in 2012/13). A total of 13 were linked to water usage (leaks and spills, sewage spills and ash-line leaks) and 10 to power stations exceeding particulate emissions limits. The remaining contraventions related to clearing vegetation without a licence, installing distribution lines without environmental authorisation and oil spills. Eskom has initiated training and awareness initiatives to ensure that employees and contractors are made aware of environmental risks. Eskom aims to obtain ISO 14001 (environmental management) certification for all its power stations. Programmes are being implemented to achieve full compliance with atmospheric emission licences, waste-management permits, water-use licences, environmental authorisations and biodiversity-related permits. Reducing Eskom’s carbon footprint Climate change strategy Eskom aims to foster a company culture that considers sustainable development in all activities. The company’s adaptation to climate change strategy is based on six pillars: • Diversification of the generation mix to lower carbon-emitting technologies • Energy-efficiency measures to reduce demand, greenhouse gases and other emissions • Adaptation to the negative impacts of climate change • Innovation through research, demonstration and development • Investment through carbon market mechanisms The proposed 100MW concentrated • Progress through advocacy, partnerships and collaboration solar thermal power project near Upington will save about 450 000 tons of carbon dioxide emissions 1. The 2012/13 number of 47 was restated due to an additional legal contravention that was identified during the year for activities associated with the development of facilities at Kusile which occurred in March 2013. when it is commissioned 132 Eskom Holdings SOC Limited 2014 Integrated Report 133 Reducing Eskom’s environmental footprint and pursuing low-carbon growth (continued) Eskom’s adaptation strategy is in the process of being implemented throughout the business. The strategy, which details how Eskom will respond to and prepare for the impacts of climate change, is industry leading. Eskom has been invited to international meetings to present this strategy and has participated in discussions to prepare business views on the issue. Eskom’s executive management committee approved a socio-economic development policy and strategy which supports Eskom’s drive for sustainable socio-economic growth through the provision of electricity. Eskom continued working with the government on developing carbon budgets, adaptation and mitigation plans for climate change, protocols for measuring and evaluating carbon emissions, and procedures for reporting on greenhouse gases. It actively supported the government delegation to the COP 19 conference and is developing a strategy for COP 21. Eskom also continued its work with the following environmental business movements: • The World Business Council for Sustainable Development, which develops medium-term business solutions to ensure a sustainable planet by 2050 • The Global Sustainable Electricity Partnership, through which Eskom hosted two workshops on financing electrification with the Southern African Power Pool Investing in renewable energy Eskom remains committed to reducing its carbon footprint and helping the country transition to a cleaner energy mix by pursuing low-carbon sources of generation capacity. It also aims to facilitate the development of renewable energy production into a robust subsector of the emerging power industry through its support for the government’s RE-IPP programme. South Africa is rich in natural resources, including wind, sun and ocean energies, that could, if efficiently harnessed, help meet the country’s electricity needs while reducing its absolute and relative carbon emissions. Seven of the 46 turbines that will be erected at the Sere wind farm to generate around 100MW of wind power Eskom’s two key renewable energy projects, namely the Sere wind farm and the concentrated solar thermal power station near Upington, are progressing. • Construction of Sere is well underway – the first wind turbine was erected on 2 December 2013. Renewable energy from independent power producers By the end of the year, 10 of the 46 planned turbines had been installed, and foundations for Eskom facilitates investment into renewable energy generation by purchasing power from IPPs a further 22 turbines had been laid. The 100MW wind farm will be fully commissioned in the that use wind, solar power, biomass, landfill gas and small hydro technologies to generate 2014/15 financial year, saving approximately 230 000 tons of carbon emissions per year electricity, in accordance with the Department of Energy’s renewable energy IPP (RE-IPP) • The concentrated solar thermal power station has received exemption from PPPFA procurement programme. Eskom is responsible for ensuring that these IPPs are connected to the conditions and co-financing loans have been signed. Six suppliers have applied to prequalify national grid and that it purchases a target amount of electricity from them. Please see pages 143 for the project, due to be commissioned in 2017. The Upington plant will save an estimated to 145 for more detail. 450 000 tons of carbon dioxide emissions when it is commissioned Photovoltaic solar-panel arrays are being installed at Eskom office buildings and power stations to offset internal electricity usage. The photovoltaic project (project Illanga) is expected to add 150MW by 2017/18. 134 Eskom Holdings SOC Limited 2014 Integrated Report 135 08 Securing Eskom’s future resource requirements Eskom has to secure land, water, limestone, as well as its primary energy sources (coal, liquid fuels, gas and uranium) for its existing and new generating assets to operate. Primary energy needs to be of the required quality, and delivered on time and at an optimal cost. These resources must at all times be managed in a way that minimises the impact on the environment and ensures the safety of Eskom’s employees, contractors and the public Securing coal is a growing challenge as Eskom’s coal-fired power stations require a continuous supply of acceptable quality coal at fair prices. Eskom has to compete with international buyers for South Africa’s coal reserves, which has a negative effect on the coal price. More detailed specifications for the acceptable quality of coal delivered to Eskom also influence supply. Eskom secures these resources through national collaboration and effective engagement with relevant stakeholders. The following indicators are used: • Average coal stock days • Coal delivery (see “Implementing coal haulage and the road-to-rail migration plan” on page 141) • Coal quality, which is measured indirectly via a power plant’s UCLF and EAF measurements (see “Becoming a high-performance organisation” on page 91) • Specific water consumption (see “Reducing Eskom’s environmental footprint” on page 137) • Primary energy costs, including future fuel • Volume of coal burnt Operating highlights • Significant progress made in the execution of the coal supply strategy • Four medium-term contracts have been signed for coal supply to Kusile power station during the commissioning phase • Fund advisors have been appointed to create a mine development fund to advance black- owned emerging miners’ coal and limestone mining projects • The Komati water scheme augmentation project was commissioned and declared operational on 5 June 2013 • The Mokolo Crocodile water augmentation project phase 1 debottlenecking delivered water to Medupi for construction activities and for the commissioning of the first few units Operating challenges • Even though overall coal quality was on target, negative impacts were experienced at Arnot, Matla and Tutuka power stations due to foreign material, mill constraints and stone contamination, resulting in poor quality coal • Production performance at some of the cost-plus mines continues to be a challenge • The Duvha coal conveyor was damaged by fire in December 2013, impacting coal stock days and coal cost negatively Eskom burns around 122Mt of coal per year 136 Eskom Holdings SOC Limited 2014 Integrated Report 137 Securing Eskom’s future resource requirements (continued) • During the last quarter of the year there was an increase in the number of community protests Although overall coal standards improved in 2013/14, stone-contaminated coal and mill constraints around coal trucks, and this impacted the coal supply to critical stations resulting in poor-quality coal still affected performance at Arnot, Matla and Tutuka power stations. • The prolonged rainy weather in the last quarter of the year caused coal and live coal stock piles Technologies to screen coal for stones and metal have been installed at the Tutuka stockyard, to become wet. Additional coarse coal had to be procured where low stockpiles or wet coal Arnot power station and the Arnot colliery. These measures assist in detecting impurities in coal issues had impacted electricity production so that these can be removed or the coal sorted for quality before being fired, thus preventing coal-related plant damage. Future focus areas • Improving the performance of the existing cost-plus mines as well as improving coal quality for Coal supply strategy implementation plan certain power stations Eskom started to implement a set of actions to give effect to the coal supply strategy. Some of the • Continuing with the roll-out of the coal supply strategy implementation plan actions include the following: • Conclusion of long-term coal and limestone supply agreements for Kusile power station • Eskom is continuing to work closely with Transnet Freight Rail and the Department of Water • Developing and implementing a water quality strategy to protect water resources and reduce Affairs (DWA) to develop funding models for the rail and water infrastructure required to access the impact of deteriorating water quality on power stations the Waterberg coalfield • Continuing to implement measures to improve coal quality for Arnot and Tutuka power stations • Transnet Freight Rail delivered all the required coal from Exxaro in the Waterberg region to Majuba power station for the full scale combustion test. The test was successfully completed at Securing Eskom’s coal requirements Majuba power station on 21 February 2014, and the final report is anticipated to be completed Reliably procuring sufficient coal of the appropriate quality remains a challenge. Even though within the 2014/15 financial year Eskom’s power stations are designed to use poor quality coal, in recent years some mines • The creation of a mine development fund to advance black-owned emerging miners’ coal and delivered fuel that did not meet Eskom’s coal quality standards, resulting in increased emissions, limestone mining projects coal ash and wear on the plant. Eskom has contracted 80% of the coal it requires over the next five years. Primary energy balances – coal and liquid fuel (R million) Eskom made presentations before parliament’s minerals portfolio committee to debate the draft Actual Actual Actual Mineral and Petroleum Resource Development Amendment bill, which aims to promote national Indicator and unit 2013/14 2012/13 2011/12 energy security, including the possibility of declaring coal a strategic resource. Despite claims Coal and liquid fuel inventory balance 5 276 5 330 3 798 that the country has ample coal both for export and to supply Eskom, the company believes that given the importance of the resource to the country, state intervention is required to ensure that Future fuel balance (coal portion) 7 763 7 098 5 020 South Africa has enough coal to meet its growing energy needs. Parliament approved the bill on For further detail on primary energy costs for the year, refer to page 157. 27 March 2014. Securing Eskom’s water requirements Key performance indicators for securing Eskom’s coal requirements Eskom has continued to work closely with the Department of Water Affairs to address the backlog Target Actual Actual Actual Target of water-use licences for its power stations, capacity expansion programme and coal suppliers. Indicator and unit 2013/14 2013/14 2012/13 2011/12 achieved? Water performance is assessed in terms of water usage, measured in megalitres (ML), litres per Coal burnt, Mt – 122.42 122.95 125.21 – kilowatt-hour sent out (L/kWhSO) and water costs. Coal purchased, Mt – 121.98 126.44 124.27 – Key performance indicators for securing Eskom’s water requirements Coal stock days, days 42 44 46 39 Target Actual Actual Actual Target Indicator and unit 2013/14 2013/14 2012/13 2011/12 achieved? Overall coal stock days exceeded the target of 42 days largely due to overproduction of coal at the Water usage, ML – 317 052 334 275 319 772 – mines attached to Lethabo, Matla and Kendal power stations. Since these are all cost-plus mines, Water usage, L/kWhSO1 1.39 1.35 1.42 1.34 there is no financial benefit in reducing their production. Production performance at the Arnot and New Denmark cost-plus mines continues to be a challenge. Water costs, R million 2 082 1 451 1 379 165 In December 2013, a fire on the conveyor belt transporting coal to Duvha power station resulted 1. The volume of water consumed per unit of generated power from commissioned power stations. in coal being transported by road, coal stock days at the station decreasing to 19 days (minimum stock level: 23 days). The recovery of the one conveyor stream was completed at the end of March 2014 and the second stream is due for completion by the end of May 2014. 138 Eskom Holdings SOC Limited 2014 Integrated Report 139 Securing Eskom’s future resource requirements (continued) The Mokolo Crocodile water augmentation project phase 1 debottlenecking was completed and resulted in an increase in the water infrastructure capacity. The three months labour strike and heavy rains have delayed the full water delivery date to October 2014. Phase 2 of this water supply agreement negotiations with DWA are progressing well to ensure water security to the Lephalale area in the Limpopo province. The projected water delivery date has moved from December 2018 to December 2019. This is not expected to impact the retrofit of flue gas desulphurisation capability at Medupi power station, as the first two units can be retrofitted from the water available from the existing water resource. Water resources are at healthy levels due to above average rainfalls, however, water-treatment works at some power stations are struggling to handle the levels of pollution at stations where the quality of water from catchments is deteriorating. The Kilbarchan Colliery, a closed colliery owned by a subsidiary of Eskom, is decanting mine- affected water. To ensure that the colliery complies with the Mine Health and Safety Act (1996), Eskom has appointed service providers to develop a closure plan and remediation solutions in line with the required water-use and environmental authorisations. Securing Eskom’s nuclear fuel requirements The current uranium and enriched uranium contracts are sufficient for Koeberg until 2017, while the current fuel-fabrication contracts are sufficient to cover Koeberg’s demand until 2015/16. Normal commercial processes will be followed to enter into appropriate contracts for the supply of nuclear fuel when the above contracts come to an end. The contracting and pricing strategy will depend on the market and policies applicable at that time. Primary energy balances Actual Actual Actual R million 2013/14 2012/13 2011/12 Nuclear fuel (inventory balance) 1 456 856 1 217 Future fuel balance (nuclear portion) 981 1 023 432 The Komati water scheme augmentation project is dedicated to supply water to two of Eskom’s power stations – Matla and Duvha in Mpumalanga 140 Eskom Holdings SOC Limited 2014 Integrated Report 141 09 Implementing coal haulage and the road-to-rail migration plan Eskom has been progressively migrating coal transport from road to rail over the past four years. Rail transport is safer, more environmentally friendly, less damaging to roads and more cost-effective than road transport by truck. The project is being implemented in partnership with Transnet Freight Rail The Majuba heavy-haul line is the road-to-rail strategy’s flagship project. When completed, this dedicated line will be able to transport 14 million tons (Mt) of coal from Ermelo to Majuba power station each year. The site for the railroad is being established and construction on surrounding structures (cattle creeps, culverts, agricultural underpass and bridges) has begun. The project is scheduled for completion in 2017. Operating highlights • The volume of coal transported by rail increased by 15% compared to the previous year Future focus areas • Continue work on the Majuba line project • Expedite the integrated logistics strategy implementation plan which includes the formation and roll-out of the implementation of the road change-over strategy • Fast track the formation of the implementation vehicle that will house skilled resources who can facilitate and assist transporters and truck drivers with other opportunities as the road-to-rail migration programme continues Migrating coal transport from road-to-rail Eskom transported 11.6Mt of coal by rail, meeting the 2013/14 target of 11.5Mt. This target was lower than the previous year’s 12.2Mt target to account for lower electricity demand. Key performance indicator for migrating coal transport from road-to-rail Target Target Actual Actual Actual Target Indicator and unit 2017/18 2013/14 2013/14 2012/13 2011/12 achieved? Coal haulage (road-to-rail), Mt 20.7 11.5 11.6 10.1 8.5 Coal deliveries by rail remain a challenge due to the operational performance constraints experienced by both Eskom and Transnet Freight Rail. Operational inefficiencies were experienced across all Eskom rail services. In June 2013, the rail deliveries were affected by a series of derailments on the Transnet Freight Rail Natcor rail line. The construction of a dedicated railway comes as result of Eskom’s initiative to change transportation of coal to a number of power stations, from road trucks to rail transportation 142 Eskom Holdings SOC Limited 2014 Integrated Report 143 10 Pursuing private-sector participation Eskom remains committed to developing the electricity supply industry by facilitating the integration of independent power producers (IPPs) into the national grid and buying electricity from IPPs for national distribution. IPPs play an important role in ensuring security of supply at a time when Eskom’s generating capacity is closely matched by electricity demand Eskom interfaces with IPPs through two organisational units. Firstly Eskom’s grid access unit manages the end-to-end network service relationship with generators and IPPs connecting to Eskom’s grid. Its other key role is to facilitate grid access by ensuring the process is efficient and all commercial options for IPPs are available in a transparent and non-discriminatory manner. Secondly, the buyer is housed in the energy planning and market development unit, which enters into power purchase agreements with IPPs. This unit also assists the Department of Energy (DoE) with the country’s integrated resource plan. Operating highlights • The first project under the RE-IPP was connected to the grid on 27 September 2013 and the first IPP was commissioned on 15 November 2013 • Eskom has successfully facilitated the connection of 21 renewable energy independent power producer (RE-IPP) projects with a capacity of 1 076MW to the grid. Of these a total of 467.3MW is currently available to the system • The DoE approved an additional 1 457MW pursuant to the third bid submission. No contracts have yet been signed for this capacity • A further 1 005MW of capacity was signed under the DoE Peaker programme Future focus areas • Assisting the DoE with applications for the fourth round of the RE-IPP programme • Securing funding, land and environmental permissions for the transmission strengthening project in preparation for more IPPs being added to the grid Key performance indicators for IPP capacity Target Actual Actual Actual Target Indicator and unit 2013/14 2013/14 2012/13 2011/12 achieved IPP purchases, GWh 4 152 3 671 3 516 4 107 Installing and purchasing IPP capacity Eskom has a range of short-, medium- and long-term contracts with IPPs. Short- and medium‑term energy purchases from IPPs are primarily intended to help widen the supply-and demand margin so that Eskom can perform maintenance (refer to “Keeping the lights on” on pages 106 to 109). A multi-storey video wall – located in the control room at Eskom’s national control Long‑term IPP purchases focus on renewable and gas-based energies to reduce South Africa’s centre in Johannesburg carbon footprint and diversify the energy mix while strengthening the country’s energy industry. 144 Eskom Holdings SOC Limited 2014 Integrated Report 145 Pursuing private-sector participation (continued) Long term • The DoE peaker programme is a long-term Department of Energy (DoE) initiative that involves purchasing power from the independently-owned Avon and Dedisa power plant (OCGTs), which are under construction. Eskom signed power purchase agreements with the service provider that owns both stations during the year. Dedisa is expected to be commissioned in 2015, and Avon is scheduled for 2016 • The renewable energy independent power producer procurement (RE-IPP) programme is a long-term DoE initiative that was launched on 3 August 2011 and commits Eskom to signing power purchase agreements for renewable energy from IPPs Total energy procured from all IPPs for the year amounted to 3 671GWh at a cost of R3 266 million (average cost of 88c/kWh), which is R721 million higher than the NERSA decision for 2013/14. The following table provides a comparison of the amount of energy purchased in 2013/14 and the cost per type of IPP contract. Actual energy procured through IPP programmes in 2013/14 Actual energy purchased Actual cost Actual cost IPP purchases (GWh) (Rm) (c/kWh) MTPPP 1 478 1 217.5 82 STPPP 931 815.6 88 WEPS 139 72.3 52 Municipal base loads 873 771.9 88 RE-IPP 250 350.5 140 Adjustment – 38.3 – Eskom operates around 359 337km of power lines across South Africa Totals/averages 3 671 3 266.1 88 Short/medium term • The medium-term power purchase programme (MTPPP) involves Eskom purchasing base- load capacity from private generators. The programme was initiated in 2008 In April 2014, the Department of Energy announced that: • The wholesale electricity pricing system programme (WEPS) involves Eskom entering into • A fourth round of bidding for the renewable energy IPP programme would close in annual contracts to purchase electricity at wholesale prices from co-generators outside of the August 2014 ambit of the MTPPP and short-term contracts • The number and capacity of renewable energy IPPs to be contracted through the third • The short-term power purchase programme (STPPP), which involves Eskom contracting round of the programme might be extended private generating capacity on a short-term basis • The process to procure 800MW of co-generation power and 2 500MW of coal • Municipal base-load contracts with City Power and the City of Tshwane. Eskom contracted generation power from IPPs was underway 585MW of generating capacity from Kelvin, Rooiwal and Pretoria West power stations. • The revised solar water heater programme model would start using locally produced Electricity was purchased at rates comparable to the MTPPP. NERSA did not approve any heaters in the 2014/15 financial year further costs for purchases from municipal generators during MYPD 3, so these contracts were not extended after they expired at the end of December 2013 146 Eskom Holdings SOC Limited 2014 Integrated Report 147 11 Transformation Eskom’s supplier localisation drive is complemented by its corporate social investment (CSI) programme, which aims to improve society at large through targeted direct investments into community education, health and developmental projects Rolling out government’s universal electrification programme within Eskom’s areas of operation has been the company’s most direct, widespread contribution to social improvement. The capacity expansion programme, as one of the main drivers of industrialisation in the country, has contributed substantially to the shareholder’s vision of transforming society by creating jobs and developing skills. Eskom also has an internal transformation policy to ensure workplace equity. Operating highlights • Eskom achieved 201 788 electrification connections during 2013/14 (including DoE funded connections), the highest since 2002. The increased connections are in response to increased DoE funding in terms of its universal access programme • Eskom awarded R3.1 billion in contracts to local suppliers on the capacity expansion programme • All targets for B-BBEE attributable expenditure measures were exceeded Operating challenges • Construction delays resulted in the CSI target for the number of rural development projects completed not being met. The remaining project is due for completion in the first few months of 2014/15 • The expiry of Eskom’s exemption from the Preferential Procurement Policy Framework Act (PPPFA) required that a number of commodity strategies and targets be reviewed and amended • Employee numbers have been capped, resulting in the reduction of opportunities to improve on employment equity Future focus areas • Continuing with the CSI impact study which is currently underway to determine the impact of CSI programmes implemented over the past three years • Finding innovative funding solutions for CSI spend • Continuing the electrification connections on the accelerated DoE universal access programme • Finding innovative ways to further advance skills development, job creation, localisation and enterprise development in collaboration with other state-owned companies, and within the ambit of applicable procurement regulations • Finalisation of Eskom’s revised employment equity plan Eskom achieved 201 788 electrification connections during 2013/14, the highest achieved since 2002 148 Eskom Holdings SOC Limited 2014 Integrated Report 149 Transformation (continued) Maximising Eskom’s socio-economic contribution Rural development projects FET colleges Eskom’s socio-economic contribution is measured in terms of the key performance areas shown in the table that follows. Sthandimfundo High School Cape Town Tiyane Magoro Pre-school Boland Key performance indicators of Eskom’s socio-economic contribution for the group1 Mqhokweni Primary School Vhembe Target Target Actual Actual Actual Target Nzimakwe cooperative Sekhukhune Indicator and unit 2017/18 2013/14 2013/14 2012/13 2011/12 achieved? Phumalanga Primary School Umgungundlovu Corporate social investments committed, R million – 133.0 132.9 194.3 87.9 Mnambithi Job creation, number 2 000 24 965 25 181 35 759 28 616 More information on Eskom’s corporate social investment initiatives can be found at Total number of electrification www.eskom.co.za/IR2014/04.html connections, number2 300 013 184 975 201 788 139 881 154 250 Procurement from B-BBEE compliant Electrification suppliers, % 75.0 75.0 91.8 82.1 73.2 The Government of South Africa, through the Department of Energy (DoE), continues to fund the electrification of previously disadvantaged and farm worker households in its licensed areas of Local sourcing in procurement, % 3 52.0 52.0 54.6 80.2 77.2 supply. While the DoE funds the new connections and infrastructure development, Eskom carries Procurement from black-owned the ongoing operating costs for these connections, and receives the revenue for electricity sold. suppliers, % 20.0 10.0 35.3 22.1 14.6 The National Census of 2011/12 identified 3.4 million South Africans who are without electricity. Procurement from black women-owned The majority of these people live in the Limpopo, Eastern Cape and KwaZulu-Natal provinces. suppliers, % 9.0 5.0 7.5 5.1 3.3 In order to achieve the United Nation’s millennium development goal of universal access to Procurement from black youth-owned electricity by 2030, the DoE has accelerated the universal access programme. suppliers, % 5.0 1.0 1.0 1.0 – The DoE’s integrated national electrification programme that commenced in 2013/14, increased 1. Group numbers are shown, except where those numbers are not available, in which case company numbers are presented. 2. The reporting boundary for the number of connections was changed in March 2014 to exclude farm worker and municipality funded its funding by 17%. At the same time, Eskom is pursuing construction efficiency opportunities connections. The target has been revised to exclude 551 farmer connections. The comparatives have been restated (876 and in order to unlock savings to fund 50 000 extra connections per annum. The electrification 963 farmer, and 3 801 and zero municipality-funded connections deducted for March 2013 and March 2012 respectively). A total of 992 farm worker, and 2 879 municipality funded connections were installed for the current year. programme is now being implemented in more remote areas where the construction of network 3. Local sourcing of procurement for capacity expansion projects only. infrastructure is more expensive due to the distances involved and, in some cases, the difficult terrain encountered. Corporate social investment Eskom has in 2013/14, for the first time since year 2002, achieved electrification of more than The Eskom Development Foundation NPC (the Foundation) continues to implement Eskom’s 200 000 household connections in a year. Electrification performed on behalf of, and funded corporate social investment mandate to promote transformation and social sustainability. The by, municipalities has been excluded from the numbers reported above. Eskom has connected Foundation focuses on initiatives to develop small- and medium-sized enterprises, education, 2 879 municipal households in 2013/14 (2012/13: 3 801). The electrification of farm dwellers is health, food security, community development, energy and the environment. Year-to-date, the also excluded from these numbers. Foundation has approved the commitment of R132.9 million for corporate social investment (CSI), impacting 357 443 beneficiaries. An amount of R115.4 million was spent during the year. Electrification of grid schools and clinics School electrification is funded by the Department of Basic Education. A total of 112 schools CSI highlights for the year include: received electricity for the first time for a total capital outlay of R51 million. No clinics were • The graduation of 214 learners who successfully completed the contractor academy programme identified for electrification during the year. • Launch of the telematics programme with the St Johns School in the Eastern Cape. The telematics technology enables students to benefit directly from the subject presenter based in Cape Town through satellite connection. A total of 4 973 learners will benefit from this initiative Actual Actual Actual and it encourages a culture of teaching and learning through technology Indicator and unit 2013/14 2012/13 2011/12 • The successful completion of six further education and training (FET) college projects, and five Capital investment, R million 51 36 2 rural development projects as listed as follows Total connections, number 112 142 19 150 Eskom Holdings SOC Limited 2014 Integrated Report 151 Transformation (continued) Localisation, job creation and skills development through the capacity expansion Key performance indicators for internal transformation1 programme Target Target Actual Actual Actual Targets Contracts with key suppliers generally include targets for skills development and job creation. Employment equity – Group 2017/18 2013/14 2013/14 2012/13 2011/12 achieved? Some suppliers are failing to meet these targets on time and are being monitored more closely to ensure compliance. People with disability, % 2.50 3.00 2.77 2.43 2.36 Since the inception of the capacity expansion programme, a total of 8 930 individuals have been Racial equity in senior management, trained for skills development against a target of 9 377. A total of 2 476 learners are currently % of black employees 74.0 61.0 59.3 58.4 53.9 being trained in various institutions throughout the country. Racial equity in professionals and middle management, % of black As at 31 March 2014, there are a total of 25 181 jobs created through the mega projects in the employees 79.0 71.0 70.6 69.0 65.7 capacity expansion programme. This is less than the previous year as the completion of work in Gender equity in senior management, certain areas has resulted in the demobilisation of workers. % of female employees 38.0 30.0 28.8 28.5 24.3 A total of 547 contracts worth R5.6 billion were awarded through the capacity expansion Gender equity in professionals and programme during 2013/14. Of this, R3.1 billion (54.6% of the total contract value) was committed middle management, % of female to local content. To date, R98.7 billion (65.3% of the total contracted value of R151.2 billion) has employees 42.0 36.0 34.9 34.0 32.4 been committed to local content, of which R68.7 billion (69.5% of local committed expenditure) 1. Group numbers are shown, except where those numbers are not available, in which case company numbers are presented. has been paid out. In addition to Eskom’s local expenditure, major suppliers on the capacity expansion programme The Eskom group employs 46 919 people including fixed-term contractors. It has become committed to R1.4 billion to local development plans specific to their build contracts. These apparent that Eskom cannot grow its headcount and strategies have been put in place to manage commitments are specific to the boiler, turbine and generator packages. These values are the current headcount. The freeze on recruitment to limit employee numbers has restricted the cumulative, from inception of the capacity expansion programme in 2005, up to 31 March 2014. opportunities for transformation; however Eskom is committed to achieving the employment equity expectations and is reviewing various options. The primary focus will be on the occupational levels Eskom B-BBEE attributable expenditure performance that are under-represented. Initiatives to ensure B-BBEE compliance have brought about improvements in Eskom’s transformation performance. The Eskom group’s total measured procurement spend (including Employment equity at senior management, professional and middle management levels remains primary energy) amounted to R130 billion in 2013/14, of which R119.4 billion (91.8%) was below target, with women under-represented across all occupational levels. attributable to B-BBEE compliant suppliers, exceeding the internal target of 75%. The proportion of people with disabilities is 2.77%, slightly below the 3% target but above the Strategies are being developed to improve procurement from black-owned businesses, with government’s target of 2% for the public services. Eskom has identified that not all its facilities can a particular focus on businesses owned by black women and black youth. Total measured accommodate people with disabilities. To address this, Eskom has drafted a disability charter to procurement spend from black women- and black youth-owned both met or exceeded the target ensure that facilities become more accessible. for the year. Employee relations Improving internal transformation Eskom’s employee engagement model builds employee participation and involves employees Eskom extended its employment equity plan, which was signed in 2010 and expired in March 2013, and executives in conversations around strategy, performance and people. Eskom has also by one year to allow time to analyse the company’s internal transformation progress and develop built more productive and sustainable relationships with organised labour and continues to do a long-term employment equity plan. This was done in consultation with the Department of Labour so through a partnering model to guide these interactions. In addition, Eskom has embarked on and organised labour. a process to further strengthen the relationships with the trade unions, utilising the services of an external facilitator. After a lengthy wage dispute, Eskom and its recognised trade unions referred the wage dispute to the CCMA for resolution. A final decision, for the most part in favour of Eskom, was delivered in January 2014. The decision was only effective for the financial year 2013/14, backdated to 1 July 2013. Even though Eskom has been declared an essential service, which prohibits employees from engaging in industrial action, employees at some Eskom sites have embarked on various forms of unprotected industrial action. 152 Eskom Holdings SOC Limited 2014 Integrated Report 153 12 Ensuring Eskom’s financial sustainability Eskom’s going-concern status will continue to be a key focus for the coming year as the revenue shortfall created by the MYPD 3 decision cannot be solved by cost savings and efficiencies alone – cost-reflective tariffs remain a requirement. Eskom has to balance short-term priorities with, long-term sustainability requirements and has to ensure that it will be able to repay a significant amount of current and future borrowings Notwithstanding the significant effect that the MYPD 3 tariff increase has had on the expected revenue for the year, as well as the R225 billion revenue shortfall over the five-year MYPD 3 period, Eskom has identified and largely secured funding for the current capacity expansion programme up to the completion of the Kusile power station. Eskom has sufficient liquidity to meets its current liability requirements. Eskom remains confident that it will be able to raise the remaining funding for the current capacity expansion programme, but this must be balanced against the negative outlook from the rating agencies and the possibility of a downgrade due to the deterioration in the credit metrics. Eskom remains focused on re-engineering the business to achieve sustainability and cost efficiency by striking a balance between reducing costs where appropriate and the three sources of funding: equity, debt and revenue. The need for a supportive credit rating that reduces the cost of funding as well as retaining access to funding markets, and therefore, the need to migrate to cost-reflective tariffs in the future, will play a key role. Eskom implemented the business productivity programme (BPP) which focuses on the reduction of the cost base, increased productivity and revisions of the Eskom business model and strategy in order to close the revenue shortfall. Cash savings of between R50 billion and R60 billion are targeted over the MYPD 3 period. Please refer to page 73 for further detail on BPP. Eskom submitted a regulatory clearing account (RCA) application to NERSA for the MYPD 2 period during the last quarter of 2013 regarding the variances between costs and revenues assumed in MYPD 2 compared to the actual costs incurred and revenues received by Eskom. In terms of the regulatory rules, the regulator can increase future electricity tariffs to compensate Eskom for an under-recovery of revenue or it can reduce tariffs in the future if Eskom has over- recovered revenue. The electricity sub-committee has made a recommendation on the RCA to the NERSA board and a decision is awaited in the first quarter of the new financial year. It is anticipated that this adjustment is likely to commence no later than 1 April 2015. While the regulatory mechanism does not take into account Eskom’s capital expenditure, other than depreciation once in commercial operation and a return on assets, the revenue shortfall due to the lower tariff does have an impact on the cash available to Eskom for capital expenditure. Eskom submitted a capital programme amounting to R337 billion over the MYPD 3 period and the result of the determination implies that Eskom has to reduce its capital programme to R251 billion The coal conveyor and coal stockyard at the Medupi power station project is taking into account the cash position. There is an additional requirement for critical projects funded by the World Bank 154 Eskom Holdings SOC Limited 2014 Integrated Report 155 Ensuring Eskom’s financial sustainability (continued) that can’t be executed within the R251 billion budget. The capital expenditure portfolio will be Performance indicators for ensuring Eskom’s financial sustainability managed by Eskom within the funds available, and should additional funding not be secured for Target Target Actual Actual Actual Target the additional capital requirements, the current capital portfolio of R251 billion will be reviewed Indicator and unit 2017/18 2013/14 2013/14 2012/13 2011/12 achieved to reprioritise projects to ensure that environmental and regulatory legal requirements are met. Eskom is currently nine years into a capacity expansion programme which is funded from various Company local and international funding sources and relies on Eskom’s credit rating, which is linked to Electricity revenue per kWh, South Africa’s sovereign rating. c/kWh 89.30 62.37 62.82 58.49 50.27 Electricity operating costs per The board has emphasised that by implementing the corporate plan for 2014/15 to 2017/18 and kWh (including depreciation and all the approved initiatives to ensure the continued operation of Eskom, it is a specific prerequisite amortisation), c/kWh 73.21 52.67 59.67 54.15 41.28 that Eskom remains a going concern and financially sustainable. Interest cover, ratio 1.06 1.18 0.65 0.27 3.27 Operating highlights • Eskom successfully raised USD1 billion through an international bond issue during July 2013 Debt:equity (including long-term provisions), ratio 3.40 2.17 2.21 1.96 1.69 • The original R300 billion funding plan that covered the capacity expansion programme to the end of Kusile, from 1 April 2010 to 31 March 2017, is progressing well with 90.5% of the FFO as a percentage of gross R300 billion secured debt (target >20%), %2 11.08 9.11 9.21 8.55 15.06 • During the period, Eskom entered into a loan amendment whereby the currency of the World Group Bank loan was changed from a floating US dollar loan to a fixed-rate rand loan, the effect being that Eskom now no longer has a US dollar exposure to hedge Working capital ratio, ratio 0.79 0.65 0.71 0.68 0.76 • Eskom restructured a cross-currency swap and as a result released R2.3 billion in March 2014 Free funds from operations, (cash received), and also reduced the coupon payable over the period R million1 49 119 29 653 27 542 18 108 30 483 Operating challenges Gross debt/EBITDA • Bridging the R225 billion five-year revenue shortfall resulting from the 8% MYPD 3 tariff (target < 3), ratio2 6.80 7.95 10.96 16.20 6.46 increase which is exacerbated by the decline in local sales volumes (compared to budgeted Debt service cover sales volumes), the impact of the determination on operations and capital expenditure and the (target >2.5), ratio3 2.17 1.55 1.21 2.01 3.50 net impact on Eskom funding requirements 1. Comparative restated. • The high cost of the liquid fuel for open-cycle gas turbines to maintain security of supply 2. The target reflects investment grade aspiration. 3. The target reflects a loan covenant. • The cash flow impact of electricity theft and the increase in outstanding debt of electricity debtors like municipalities and residential customers Actual performance for the year ending 31 March 2014 has been significantly different from the Future focus areas budgeted outlook, which can be directly linked to the reduction in local sales volumes, and the In light of Eskom’s financial sustainability, it is imperative that the following are undertaken to additional OCGT expenditure necessary to ensure the security of supply. maintain a positive outlook for the organisation’s liquidity: • Disciplined execution of the BPP workstream opportunities that are identified • Continuing engagement with NERSA on regulatory clearing account recovery • Exploring other funding alternatives to unlock cash, including investigating additional equity 156 Eskom Holdings SOC Limited 2014 Integrated Report 157 Ensuring Eskom’s financial sustainability (continued) The following Eskom company financial ratios have been recalculated to reflect a scenario that Operating costs assumes that Eskom’s sales volumes were as budgeted and that the OCGT spend was only at Primary energy costs for the year amounted to R69.8 billion (2012/13: R60.7 billion). This included budgeted levels: R10.6 billion (2012/13: R5.0 billion) relating to the fuel for the open-cycle gas turbines (refer pages 106 to 108 under “Keeping the lights on”). Per unit, primary energy costs increased by 14.2% per Actual Actual unit of electricity sold, from 28.05c/kWh in 2012/13 to 32.04c/kWh in 2013/14. The 3.99c/kWh Indicator and unit March 20141 2014 adjusted Variance increase is mainly due to: • Coal usage costs increasing by 0.74c/kWh EBITDA, R million 23 497 36 228 12 732 • The cost of using open-cycle gas turbines increasing by 2.54c/kWh Electricity operating costs per kWh (including depreciation • Demand-market participation, power-buyback and co-generation costs decreased by and amortisation), c/kWh 59.67 54.11 (5.55) 1.27c/kWh – this was mainly due to power-buyback costs decreasing from R2.8 billion in Interest cover, ratio 0.65 1.36 0.71 2012/13 to R0.01 billion in 2013/14 • Other expenditure including coal handling, fuel for gas-fired start-ups, water usage, Free funds from operations (FFO), R million 25 874 38 612 12 732 environmental levies and international purchases made up the remainder of the increase Debt service cover ratio, ratio 1.16 1.94 0.77 The amount paid to the South African Revenue Service regarding the environmental levy for the FFO as percentage of gross debt, % 9.21 13.74 4.53 2013/14 financial year was R8.5 billion (2012/13: R8.0 billion). Gross debt/EBITDA, ratio 11.96 7.76 (4.20) Group employee numbers, inclusive of fixed-term contractors, reduced by 376 from 47 295 at Sales volumes, GWh 217 903 227 393 9 490 31 March 2013 to 46 919 at 31 March 2014. Group gross employee costs (before capitalisation) for the year amounted to R31.3 billion (2012/13: R28.6 billion). The increase in gross employee 1. The figures reflect company numbers which are not necessary comparable to those in the table on page 155, which shows group figures. cost is mainly as a result of the increase in contract labour cost relating to the capacity expansion programme. Financial results of operations Group arrear bad debt was 1.10% of external revenue for the year (2012/13: 0.82%). The Eskom achieved a group net profit of R7.1 billion for 2013/14 (2012/13: R5.2 billion). Operating municipality arrear debt as well as residential arrear debt in Soweto continues to grow. Refer to profit before fair value gains and losses on embedded derivatives and net finance costs was pages 96 to 97 under “Being customer-centric” for more detail on electricity debtors. R11.4 billion (2012/13: R10.4 billion). Compared to 2012/13, the 8% tariff increase resulted in a 7.4% average increase in electricity revenue per kilowatt-hour (kWh). This increase was offset by The group’s other operating expenses for the year came to R19.2 billion (2012/13: R23.0 billion). a 10.2% increase in operating costs per kWh compared to the previous year. The decline in local The main items in this category are: sales volumes has an impact on the calculation of operating costs per kWh sold (compared to • The company’s net repairs and maintenance cost1 (after capitalisation) of R12.9 billion target), as a significant portion of Eskom’s operating cost base is fixed. (2012/13: R10.6 billion). Refer to pages 114 to 115 under “Keeping the lights on” for more detail on generation’s maintenance, which is on average about 60% of the total of repairs and The effect of applying the replacement value approach to Eskom’s assets results in the group maintenance cost reporting a net loss of R12.5 billion (2012/13: R8.7 billion). This equates to a negative return • The company’s demand-side management (DSM) cost for Eskom amounted to R1.4 billion in on assets of 1.89% (calculated before applying the impairment provision). For further details on 2013/14 (2012/13: R3.0 billion). The decrease is as a result of the reduced amount allowed by the replacement value approach, refer to note 52 in the annual financial statements available at NERSA in its MYPD 3 determination. Refer to pages 111 to 113 under “Keeping the lights on” www.eskom.co.za/IR2014/01.html for more detail on IDM This section should be read in conjunction with the summarised financial statements on pages Eskom’s focus on cost efficiencies has had a positive impact on the other items included in other 164 to 166 as well as the full annual financial statements available at www.eskom.co.za/ operating costs. IR2014/01.html 1. A significant amount of repairs and maintenance cost incurred by the Eskom company relate to its subsidiaries Roshcon and Rotek and therefore the cost is eliminated against the repairs and maintenance line upon consolidation of the group results, in accordance with IFRS. Sales and revenue Group revenue for 2013/14 was R139.5 billion (2012/13: R128.8 billion) and the increase is mainly as a result of the electricity tariff increase of 8% as determined by NERSA. Electricity sales for the year amounted to 217 903GWh, representing a 0.6% increase on the previous year (2012/13: 216 561GWh). Local sales to industrial customers have increased by 5.6% year-on-year, mainly due to increased operations by certain key customers as well as less power buybacks during 2013/14. This increase is offset by a decline of 3% in the mining sector and a 9.6% decrease in international sales. Refer to pages 110 to 111 for more detail on international sales. 158 Eskom Holdings SOC Limited 2014 Integrated Report 159 Ensuring Eskom’s financial sustainability (continued) Net fair value on financial instruments and embedded derivatives Finance costs The net fair value loss on financial instruments, excluding embedded derivatives, was After capitalising borrowing costs and including the unwinding of interest on provisions, the R0.6 billion for the year (2012/13: R1.7 billion). These gains and losses consist primarily of the net finance cost for the group for 2013/14 was R4.8 billion (2012/13: R3.0 billion income). costs attributable to the rolling over of forward exchange contracts, which vary from period to Gross finance income was R2.5 billion (2012/13: R2.8 billion) while the gross finance cost period due to the timing of the placement of related procurement contracts and exchange-rate was R17.6 billion (2012/13: R1.1 billion). The borrowing costs capitalised for the year were fluctuations. R13.3 billion (2012/13: R3.7 billion), while the unwinding of interest amounted to R2.9 billion (2012/13: R2.4 billion). The net impact on the income statement of changes in the fair value of the embedded derivatives (relating to the negotiated pricing agreements) was a fair value gain of R2.1 billion for the year The gross finance cost, as well as borrowing costs capitalised for the 2012/13 year, were impacted (2012/13: R5.9 billion loss). Embedded derivative liabilities amounted to R9.3 billion (2012/13: by the remeasuring of the government loan which amounted to an income of R17.3 billion. The R11.5 billion). The loss in 2012/13 was mainly due to the decision at 31 March 2013 to account remeasurement of the government loan is based on the MYPD 3 price path and no remeasurement for the full term of the underlying negotiated pricing agreement contracts. The profit in the current was required in the current year. year is mainly as a result of the changes in the USD/ZAR exchange rate and interest rates. Eskom submitted the remaining contract to NERSA in the previous year and is awaiting its decision. Taxation The effective tax rate for the year was 23.3% for the group (2012/13: 26.4 %). Please refer to note 42 of the annual financial statements available at www.eskom.co.za/IR2014/01.html for more Euro and US dollar to rand exchange rate movements information. Liquidity and capital resources 20 Cash and cash equivalents, together with liquid investment in securities, amounted to R30.6 billion as at 31 March 2014 (31 March 2013: R28.0 billion). In terms of the latest projections, assuming no further drawdowns on borrowings, Eskom’s liquidity reserves cover its requirements for approximately 120 days. The group’s net cash inflow from operating activities for 2013/14 was R33.6 billion (2012/13: Monthly exchange rates 15 R27.7 billion). The group’s working-capital ratio was 0.71, compared to 0.68 as at 31 March 2013. Cash flows used for investing during the year stood at R57.2 billion (2012/13: R58.4 billion). The capital expenditure cash flows included in this item, excluding capitalised interest, amounted to R55.8 billion (2012/13: R57.9 billion). For details on the capital expenditures incurred for the year refer to the table on page 124. 10 The net cash inflows from financing activities for the year were R32.8 billion (2012/13: R21.8 billion). The raising of borrowings and the issuing of securities have been managed to match the capital expenditure. Gross debt increased by R51.9 billion during the year. The debt-to-equity ratio for the group (including long-term provisions) was 2.06 as at 31 March 2014 (2012/13: 1.84). The free funds 5 from operations as a percentage of gross debt was 9.73% for the group at 31 March 2014 (2012/13: 8.04%), while the gross debt as a percentage of earnings before interest, taxation, Mar 2012 Apr 2012 May 2012 Jun 2012 Jul 2012 Aug 2012 Sep 2012 Oct 2012 Nov 2012 Dec 2012 Jan 2013 Feb 2013 Mar 2013 Apr 2013 May 2013 Jun 2013 Jul 2013 Aug 2013 Sep 2013 Oct 2013 Nov 2013 Dec 2013 Jan 2014 Feb 2014 Mar 2014 Apr 2014 depreciation and amortisation was 10.96% (2012/13: 16.20%). Funding progress Euro US dollar As at 31 March 2014, R271.6 billion or 90.5% of the R300 billion borrowing programme had been secured. The R300 billion borrowing programme is based on the original funding requirements as at April 2010 and covers the period 1 April 2010 to 31 March 2017. Further funding requirements, including those resulting from the lower than expected MYPD 3 tariff determination, are not included in this borrowing programme. The tracking of execution progress of the original R300 billion plan will have to be replaced over time, with the R251 billion borrowing requirement which covers the period 1 April 2013 to 31 March 2018. Eskom’s current funding plan does not take into account allocations of capital projects in terms of the IRP 2010 post-Kusile. 160 Eskom Holdings SOC Limited 2014 Integrated Report 161 Ensuring Eskom’s financial sustainability (continued) Progress on the original R300 billion funding plan as at 31 March 2014 For the rating rationale of Standard & Poor’s and Moody’s, please refer to the interim integrated report (www.eskom.co.za/IR2014/06.html). Funding Combined Amount sources Drawdowns Drawdowns drawdowns secured/ Eskom continues to monitor the effects of its funding initiatives and operations on the ratios that April 2010 – Secured April 2010 – April 2013 – since April supported by impact on its credit rating. Eskom’s credit rating continues to reflect its highly leveraged financial Sources March 2014 to date March 2013 March 2014 2010 government profile, the execution risks associated with its capacity expansion programme and a degree of Bonds 90.0 65.4 44.8 20.6 65.4 42.6 regulatory uncertainty. Commercial Funds for the next 12 to 18 months will be sourced mainly from a combination of issuing domestic paper1 70.0 70.0 30.0 10.0 40.0 0.0 and international bonds, export credit agency-backed financing, development finance institutions ECAs2 32.9 32.9 19.4 2.3 21.7 0.0 and the domestic commercial paper market. New opportunities from alternative funding sources and products, such as Islamic (Sukuk) funding, preference shares, syndicated loans and project- World Bank 27.8 27.8 8.6 3.4 12.0 27.8 based funding are also being explored and considered to complement the current funding sources. AfDB3 20.9 20.9 13.3 2.8 16.2 20.9 Eskom’s current funding plan does not take into account allocations of capital projects in terms of DBSA4 15.0 15.0 7.0 2.0 9.0 0.0 the IRP 2010 post-Kusile. Shareholder Activities remain focused on funding the remaining balance of the committed capacity expansion loan 20.0 20.0 20.0 – 20.0 20.0 programme and the maintenance of a liquidity buffer. The additional capital requirements will only Other/new be approved if additional funding can be secured. sources 23.4 19.64 0.9 3.59 4.5 5.0 Total (R billion) 300.0 271.6 144.1 44.7 188.7 116.2 Percentages 90.5 69.5 42.8 (% of (% of (% of R300 billion) secured) secured) 1. Commercial paper is issued for up to one year and then redeemed and re-issued for the same net amount. The commercial paper is thus by definition not fully secured for the full period, however, Eskom’s long-term observations and past trends support a high level of confidence that Eskom will be able to roll over the redemptions each year. For this reason, the gross value of the commercial paper is shown under the “secured” column in the table above. 2. Export credit agencies. 3. African Development Bank. 4. Development Bank of South Africa. Summary of Eskom’s credit ratings as at 31 March 2014 Fitch Rating Standard & Poor’s Moody’s Local currency National scale Foreign currency BBB Baa3 – AAA* Local currency BBB Baa3 BBB+ F1+ Standalone b- b1 B None Outlook Negative Negative Stable Stable Action date 14 Oct 2013 19 Jul 2013 11 Jan 2013 15 Jan 2014 Affirmation date 14 Oct 2013 19 Jul 2013 12 Dec 2013 15 Jan 2014 * Adjusted from AA+ to AAA in January 2014. Hitachi, one of the main suppliers for the Medupi power station project, funded the Segwati Pre-school in Shongoane village, Lephalale 162 Eskom Holdings SOC Limited 2014 Integrated Report 163 13 Summarised group financial results The group financial results have been extracted from the Eskom consolidated financial statements for the year ended 31 March 2014 that have been prepared in accordance with International Financial Reporting Standards (IFRS) and in the manner required by the Companies Act of South Africa, 71 of 2008 The consolidated financial statements have been prepared under the supervision of the finance director, Ms Tsholofelo Molefe CA(SA). These consolidated financial statements have been reviewed by the independent auditors KPMG Inc and SizweNtsalubaGobodo Inc and were approved by the board of directors on 29 May 2014. The consolidated financial statements, with the audit opinion issued by the independent auditors, are available at www.eskom.co.za/ IR2014/01.html One of the key focus areas in terms of the power line network is to increase live work to reduce the outages experienced by customers 164 Eskom Holdings SOC Limited 2014 Integrated Report 165 Condensed group income statement Condensed group statement of financial position for the year ended 31 March 2014 at 31 March 2014 Restated 2014 2013 2014 2013 Rm Rm Rm Rm Continuing operations Assets Revenue 139 506 128 775 Non-current assets 439 869 378 775 Primary energy1 (69 812) (60 748) Property, plant and equipment and intangible assets 404 389 344 271 Net employee benefit expense (25 622) (23 564) Investment in equity-accounted investees 318 296 Depreciation and amortisation expense (11 937) (9 960) Future fuel supplies 8 744 8 121 Investment in securities 4 841 8 574 Net impairment loss (1 557) (1 039) Loans receivable 8 654 8 425 Other operating expenses (19 177) (23 039) Derivatives held for risk management 9 361 5 420 Operating profit before net fair value loss and net finance (cost)/income 11 401 10 425 Other assets 3 562 3 668 Other income 962 1 126 Current assets 64 977 53 241 Net fair value loss on financial instruments excluding embedded derivatives (620) (1 655) Inventories 12 422 12 251 Net fair value gain/(loss) on embedded derivatives 2 149 (5 942) Investment in securities 6 066 8 776 Operating profit before net finance (cost)/income 13 892 3 954 Loans receivable 329 114 Net finance (cost)/income (4 772) 3 003 Derivatives held for risk management 2 812 1 906 Finance income 2 475 2 796 Trade and other receivables 16 578 14 925 Finance cost (7 247) 207 Other assets 7 094 4 649 Share of profit of equity-accounted investees, net of tax 43 35 Cash and cash equivalents 19 676 10 620 Profit before tax 9 163 6 992 Non-current assets held-for-sale 147 8 Income tax (2 137) (1 856) Total assets 504 993 432 024 Profit for the year from continuing operations 7 026 5 136 Equity Discontinued operations Capital and reserves attributable to owner of the company 119 784 109 139 Profit for the year from discontinued operations 63 47 Liabilities Profit for the year 7 089 5 183 Non-current liabilities 310 915 264 446 Attributable to: Debt securities and borrowings 234 562 190 776 Owner of the company 7 089 5 183 Embedded derivatives 7 871 10 095 Derivatives held for risk management 310 840 Deferred tax liabilities 19 461 15 806 Deferred income 12 518 10 907 Employee benefit obligations 9 922 10 282 Provisions 21 157 20 087 Other liabilities 5 114 5 653 Current liabilities 74 181 58 439 Debt securities and borrowings 20 258 12 180 Embedded derivatives 1 461 1 386 Derivatives held for risk management 1 197 572 Provisions 9 601 6 648 Trade and other payables 28 531 28 999 Taxation 1 9 Other liabilities 13 132 8 645 Non-current liabilities held-for-sale 113 – 1. Primary energy relates primarily to the acquisition of coal, uranium, water, gas and diesel that are used in the generation of electricity together with the environmental levy. Total liabilities 385 209 322 885 Total equity and liabilities 504 993 432 024 166 Eskom Holdings SOC Limited 2014 Integrated Report 167 Condensed group statement of cash flows for the year ended 31 March 2014 Restated 2014 2013 Rm Rm Cash flows from operating activities Profit before tax 9 163 6 992 Adjustment for non-cash items 21 925 22 620 Changes in working capital (10 455) (828) Cash generated from operations 20 633 28 784 Net cash flows (used in)/from financial trading assets (1 471) 1 701 Net cash flows from/(used in) financial trading liabilities 4 383 (2 317) Net cash flows from/(used in) current derivatives held for risk management 10 278 (331) Net cash flows (used in)/from non-current assets held-for-sale (23) 48 Income taxes paid (184) (216) Net cash from operating activities 33 616 27 669 Cash flows from investing activities Proceeds from disposal of property, plant and equipment 28 36 Acquisitions of property, plant and equipment and intangibles (53 160) (55 332) Expenditure on future fuel supplies (2 675) (2 533) Increase in non-current loans receivable (229) (990) How you can help to keep the lights on this winter Other cash flows from investing activities (1 171) 460 … especially between 5pm and 9pm weekdays Net cash used in investing activities (57 207) (58 359) South Africa’s homes – from flats and clusters to stand-alone houses and residential estates – demand 17% of the electricity used in our country. Cash flows from financing activities But on weekdays, between 5pm and 9pm, this demand increases and peaks at 35%, a huge jump that puts severe strain on the power supply. Debt securities and borrowings raised 44 142 31 120 Why does this happen? Debt securities and borrowings repaid (8 014) (7 149) We arrive home from work around 5pm, Monday to Friday. Decrease in investment in securities 5 748 5 047 The first thing we do is switch on the lights, television, our electrical space heaters, followed by the oven, the microwave and the washing machine or dishwasher. We also run hot water in the kitchen and take a bath or shower – with the geyser tucked away in the ceiling working hard to heat Decrease in finance lease liabilities (11) (31) the water. Interest received 2 768 2 765 Millions of us follow this evening routine at the same time, which means South Africa’s households use more than one third of the electricity Interest paid (11 838) (9 968) consumed in the country between 5pm and 9pm, on weekdays. Net cash from financing activities 32 795 21 784 As the demand increases, Eskom does all it can including running some emergency power stations during the day, to balance supply and demand. This winter we need to continue with power station maintenance and the system will be tighter during the peak period from 5pm to 9pm. Net increase/(decrease) in cash and cash equivalents 9 204 (8 906) What can you do to help keep the lights on this winter? Cash and cash equivalents at beginning of the year 10 620 19 450 Foreign currency translation (23) (49) Three simple things: 1. Switch off your electrical element geyser between 5pm and 9pm; this appliance uses the most electricity of all in the home, and can account Cash and cash equivalents at beginning of the year attributable for up to 50% on your electricity bill to non-current assets held-for-sale (125) 125 2. Don’t switch on your space heater between 5pm and 9pm. This appliance is energy-intensive and can account for up to 16% on your monthly Cash and cash equivalents at end of the year 19 676 10 620 electricity bill, instead, dress warmly, switch on a gas heater, and use a hot water bottle and blankets to keep warm 3. Switch off your pool pump between 5pm and 9pm; this appliance uses up to11% on your electricity bill. Let’s switch off together … and keep South Africa powered up this winter Visit www.eskom.co.za/idm for detailed information on saving tips for winter and Eskom’s energy efficiency product rebates. Powering your world 1923- 2013 Eskom Holdings SOC Limited Reg No 2002/015527/06 168 Eskom Holdings SOC Limited 2014 Integrated Report 169 14 Appendices Contents Appendix A: Key performance indicators 170 Appendix B: Other performance indicators 176 Appendix C: Awards 178 Appendix D: Sustainability responsibilities, approval and assurance statements 180 Appendix E: Abbreviations, acronyms and glossary 185 Appendix F: Contact details IBC A lineman wearing a Faraday suit can work on live, high-power lines by being transported to the lines in a helicopter. Wearing the suit, they can crawl down the wires 170 Eskom Holdings SOC Limited 2014 Integrated Report 171 Appendix A: Key performance indicators The following table shows the key performance indicators of Eskom, and includes all the shareholder’s Targets Annual actuals compact indicators. Target Target Actual Actual Actual Actual Actual Five-year The key performance indicators are colour coded to indicate the link to the executive compact key Indicator and unit 2017/18 2013/14 2013/14 2012/13 2011/12 2010/11 2009/10 trend performance areas. Refer to executive remuneration on page 80. Total system minutes lost for events <1 minutes, minutesSC 3.80 3.40 3.05RA 3.52RA 4.73RA 2.63RA 4.09RA Executive compact key performance areas Major incidents, number 1 2 0RA 3RA 1RA 0RA 1RA 1. Operate safely System average interruption Five-year trend from 2009/10 to 2013/14 frequency index, events7 17.0 20.0 20.2RA 22.2RA 23.7RA 25.3RA 24.7RA 2. Keep the lights on The key performance indicator shows a System average interruption 3. Deliver on the capacity expansion programme positive trend over the five years, with the arrow duration index, hoursSC,8 39.0 45.0 37.0RA 41.9RA 45.8RA 52.6RA 54.4RA indicating the performance against target 4. Protect the environment The key performance indicator shows a Being customer-centric negative trend over the five years, with the 5. Socio-economic contribution and build skills Customer service indexSC 89.7 88.7 86.6 86.8 85.6 84.4 85.1 arrow indicating the performance against target 6. Transformation The key performance indicator has been stable over the five years Eskom KeyCare, index 102.0 102.0 108.7 105.8 105.9 101.2 98.1 7. Improve performance Arrear debts as % of revenue (group), % – 0.50 1.10 0.82 0.53 0.75 0.83 Customer service (large power Targets Annual actuals users – <100GWh per annum), average debtors’ days – 16.0 16.9 18.3 – – – Target Target Actual Actual Actual Actual Actual Five-year Indicator and unit 2017/18 2013/14 2013/14 2012/13 2011/12 2010/11 2009/10 trend Customer service (large power users – municipalities), average Becoming a high-performance organisation debtors’ days – 22.0 32.7 22.4 – – – Focus on safety Customer service (large power users – including municipalities), Employee lost-time incidence average debtors’ days – – – 18.3 21.8 18.9 18.9 rate (LTIR) , indexSC 0.24 0.36 0.31RA 0.40RA1 0.41RA 0.47RA 0.54RA Customer service (small power Fatalities (employees and users excluding Soweto debt), contractors), number 0 0 23RA 19RA 24RA 25RA 17RA average debtors’ days – 42.0 50.2 48.2 42.9 45.1 40.5 Improve operations Customer service large power top customers excluding Normal unplanned capability disputes, average debtors’ days – 14.0 14.5 12.3 14.4 15.5 15.4 loss factor, %SC,2 10.00 10.00 12.61RA 12.12RA 7.97RA 6.14RA 5.10RA Build strong skills Less: Constrained unplanned capability loss factor, %3 – – 1.63 3.41 – – – Training spend as % of gross employee benefit costs, %SC,9 5.00 5.00 7.87RA – – – – Underlying unplanned Total engineering learners in the capability loss factor, %4 – – 10.98 8.71 – – – system, numberSC 391 2 007 1 962RA 2 144RA 2 273RA 1 335 955 Normal planned capability loss Total technician learners in the factor, %5 10.00 10.00 10.50RA 9.10 9.07 7.98 9.04 system, numberSC 652 780 815RA 835RA 844RA 692 681 Underlying planned capability Total artisan learners in the loss factor, %6 – – 10.77 – – – – systemSC, number 1 434 2 619 2 383RA 2 847RA 2 598RA 2 213 2 144 Energy availability factor Strategic Youth Development (EAF), %SC 80.00 80.00 75.13RA 77.65RA 81.99RA 84.59RA 85.21 Programme, numberSC,10 – 5 000 4 325RA 5 701RA 5 159 – – 172 Eskom Holdings SOC Limited 2014 Integrated Report 173 Appendix A: Key performance indicators (continued) Targets Annual actuals Targets Annual actuals Target Target Actual Actual Actual Actual Actual Five-year Target Target Actual Actual Actual Actual Actual Five-year Indicator and unit 2017/18 2013/14 2013/14 2012/13 2011/12 2010/11 2009/10 trend Indicator and unit 2017/18 2013/14 2013/14 2012/13 2011/12 2010/11 2009/10 trend Leading and partnering to keep the lights on Employment equity – Company Keep the lights on Employment equity – disability, %SC 3.00 3.00 2.99RA 2.59RA 2.49RA 2.53 2.54 Maintenance backlog reduction based on the Eskom Technical Racial equity in senior Governance Committee management, % black approval, numberSC,11 0 0 0RA – – – – employeesSC 74.0 61.0 59.5RA 58.3RA 53.9RA 52.5 47.3 Integrated demand management Racial equity in professionals savings, MWSC,12 174.0 379.0 409.6RA 595.0RA 365.0RA – – and middle management, % Internal energy efficiency, black employeesSC 79.0 71.0 71.2RA 69.6 65.7 64.1 62.9 GWhSC,13 0.0 15.0 19.4RA 28.9RA 45.0RA 26.2RA – Gender equity in senior Deliver capital expansion management, % female employeesSC 38.0 30.0 28.9RA 28.2RA 24.3RA 23.5 21.6 Generation capacity installed and commissioned, MWSC 6 214 100 120 RA 261 RA 535 RA 315 RA 452 RA Gender equity – professionals and middle management, % Transmission lines female employeesSC 42.0 36.0 35.8RA 34.6 32.4 31.6 30.3 installed, kmSC 1539.0 770.0 810.9RA 787.1RA 631.0RA 443.0RA 600.0RA Employment equity – Group Transmission capacity installed and commissioned, MVASC 5 755 3 790 3 790RA 3 580RA 2 525RA 5 940RA 1 630RA Employment equity – disability, % 2.5 3.0 2.8RA 2.4RA 2.4RA 2.4 2.3 Generation new build capacity milestones (Medupi, Kusile and Racial equity in senior Ingula), daysSC 30.00 30.00 48.90RA 43.48 – – – management, % black employees – 61.0 59.3RA 58.4 – – – Total capital expenditure (excluding capitalised borrowing Racial equity in professionals costs), R billion 40.8 62.3 59.8RA 60.1 58.8 47.9 48.7 and middle management, % black employees – 71.0 70.6RA 69.0 – – – Reducing Eskom’s environmental footprint and pursuing low-carbon growth Reduce environmental footprint in existing fleet Gender equity in senior management, % female Relative particulate emissions, employees – 30.0 28.8RA 28.5 – – – kg/MWhSC 0.29 0.36 0.35RA 0.35RA 0.31RA 0.33RA 0.39RA Gender equity in professionals Specific water consumption, and middle management, % L/kWh sent outSC,14 1.21 1.39 1.35RA 1.42RA 1.34RA 1.35RA 1.34RA female employees – 36.0 34.9RA 34.0 – – – Environmental legal Procurement equity – Company contraventions in terms of the operational health dashboard, Local sourcing in procurement number15 0 0 2 2 5 – – (new build), %SC,17 52.0 52.0 54.6RA 80.2RA 77.2RA 79.7RA 73.9RA Transformation (including the business productivity programme) Procurement from B-BBEE compliant suppliers, %SC 75.0 75.0 93.9RA 86.3RA 73.2RA 52.3RA 28.6 Maximise socio-economic contribution Procurement from black- Corporate social investment, owned suppliers, % 20.0 10.0 32.7RA 22.1 14.6 – – R million – 133.0 132.9RA 194.3RA 87.9RA 62.3RA 58.7RA Procurement from black women- Job creation, number 2 000 24 965 25 181RA 35 759 28 616 21 477 – owned suppliers, % 9.0 5.0 7.2RA 4.7RA 3.3RA 4.3 12.1 Total number of electrification Procurement from black youth- connections, number16 300 013 184 975 201 788RA 139 881 154 250 145 360 145 284 owned suppliers, %SC 5.0 1.0 1.0RA 1.0 – – – 174 Eskom Holdings SOC Limited 2014 Integrated Report 175 Appendix A: Key performance indicators (continued) Notes: Targets Annual actuals RA Reasonable assurance provided by the independent assurance provider (refer pages 180 to 184). SC Included in the Shareholder Compact. Target Target Actual Actual Actual Actual Actual Five-year 1. Two late LTIR incidents resulted in the signed-off LTIR for 2012/13 changing from 0.39 to 0.40. Indicator and unit 2017/18 2013/14 2013/14 2012/13 2011/12 2010/11 2009/10 trend 2. Normal UCLF – measures the lost energy due to unplanned energy losses resulting from equipment failures and other plant conditions. 3. Constrained UCLF – This is UCLF that was a result of emissions and short-term related UCLF due to system constraints to meet the Procurement equity – Group “Keeping the lights on” objective. This is apportioned between PCLF and OCLF. 4. Underlying UCLF – This is the UCLF that is now the difference between normal and constrained UCLF and that is still within Procurement from B-BBEE Generation control. compliant suppliers, % 75.0 75.0 91.8RA 82.1RA – – – 5. Normal PCLF – is energy loss during the period because of planned shutdowns. 6. Underlying PCLF – The sum of the normal PCLF and the constrained PCLF (the apportionment of the constrained UCLF that is Procurement from black- assigned to PCLF). owned suppliers, % 20.0 10.0 35.3RA – – – – 7. SAIFI is a reliability of supply index – how often on average (frequency) the customer connected would experience a sustained interruption per annum (number of times per annum). Procurement from black women- 8. SAIDI is an availability of supply index – the average duration (hours) of a sustained interruption the customer would experience per owned suppliers, % 9.0 5.0 7.5RA 5.1RA – – – annum (number of hours per annum). 9. Training spend as a % of gross employee benefit costs is a new measure, effective from 1 April 2013. Procurement from black youth- 10. Includes learners trained by Eskom, as well as learners trained by Eskom’s suppliers. owned suppliers, % 5.0 1.0 1.0RA – – – – 11. Refer to pages 114 to 115 for the maintenance backlog reduction strategy, where the extent of the maintenance backlog is explained. 12. The basis of measurement changed during the 2010/11 year; prior to that verified savings of 372MWRA (2009/10) were achieved. Implementing coal haulage and the road-to-rail migration plan 13. Reporting basis changed during the 2010/11 year; hence no comparatives are available prior to 2010/11. 14. The volume of water consumed per unit of generated power from commissioned power stations. Implement coal road to rail migration plan 15. From 2012/13, environmental legal contraventions has been tracked in terms of the operational health dashboard. In defined circumstances where the management of a legal contravention indicates specific management issues/failings, it is recorded on the Coal road-to-rail migration Eskom operational health dashboard. Comparatives for this measure have been provided. 16. The reporting boundary for the number of connections was changed in March 2014 to exclude farm workers and municipality funded (additional tonnage transported connections. The target has been revised to exclude 551 farmer connections. The comparatives have been restated (876 and 963 on rail), MtSC 20.7 11.5 11.6RA 10.1RA 8.5 7.1 5.1 farmer connections, and 3 801 and zero municipality deducted for March 2013 and March 2012 respectively). A total of 992 farm worker, and 2 879 municipality funded connections were installed for the current year. Pursuing private sector participation 17. Local sourcing of procurement for capital expansion projects only. 18. The original year to 31 March 2014 budget which was included for the shareholder compact was subsequently revised and the IPP purchases, GWh – 4 152 3 671 3 516 4 107 1 833 – differences mainly result from additional operating expenditure allocated to Generation. The revised budget ratios are as follows: (i) Cost of electricity (excluding depreciation) 463.25 R/MWh Ensuring Eskom’s financial sustainability (ii) Interest cover (excluding remeasurement of the shareholder loan) 0.98 (iii) Debt/equity ratio 2.19 Ensure financial sustainability (shareholder compact ratios) – Company18 (iv) FFO as a % of gross debt 10.51% 19. Comparative restated. Cost of electricity (excluding depreciation), R/MWhSC 732.10 453.40 541.92RA 496.24RA 374.19RA 296.36RA 255.09RA Interest cover, ratioSC 1.06 1.18 0.65RA 0.27RA 3.27RA 1.40RA 0.77RA Debt:equity (including long-term provisions), ratioSC,19 3.40 2.17 2.21RA 1.96RA 1.69RA 1.66RA 1.68RA FFO as % of total debt, %SC 11.08 9.11 9.21RA 8.55 15.06 12.55 7.12 Ensure financial sustainability – Company Electricity revenue per kWh (including environmental levy), c/kWh 89.30 62.37 62.82 58.49 50.27 40.27 31.95 Electricity operating cost per kWh (including depreciation and amortisation), c/kWh 73.21 52.67 59.67 54.15 41.28 32.78 28.23 Ensure financial sustainability – Group Working capital ratio, ratio 0.79 0.65 0.71 0.68 0.76 0.85 0.89 Free funds from operations (FFO), R million19 49 119 29 653 27 542 18 108 30 483 16 953 2 356 Gross debt/EBITDA, ratio19 6.80 7.95 10.96 16.20 6.46 7.55 8.40 Debt service cover ratio, ratio 2.17 1.55 1.21 2.01 3.50 1.90 1.43 176 Eskom Holdings SOC Limited 2014 Integrated Report 177 Appendix B: Other performance indicators Actual Actual Actual Actual Actual Five-year Actual Actual Actual Actual Actual Five-year Indicator and unit 2013/14 2012/13 2011/12 2010/11 2009/10 trend Indicator and unit 2013/14 2012/13 2011/12 2010/11 2009/10 trend Technical Procurement equity – Company Unit capability factor (UCF), % 76.9RA 78.8RA 83.0RA 85.9RA 85.9 B-BBEE expenditure, R billion 125.4RA 103.4RA 72.1RA 41.9RA 20.8LA Black women-owned expenditure, OCGT load factor trend 19.3 RA 10.4 RA 3.9 1.1 0.3 R billion 9.6RA 5.7RA 3.3RA 3.5RA 2.5 National load shedding Yes RA No RA No RA No RA No RA Black-owned expenditure, R billion 43.6RA 26.5RA 14.4RA – – Energy losses (Transmission), % 2.3RA 2.8RA 3.1RA 3.3RA 3.3 Black youth-owned expenditure, R billion 1.3RA 1.2RA – – – Energy losses (Distribution), % 7.1RA 7.1RA 6.3RA 5.7RA 5.9 Procurement equity – Group Total system minutes lost, number1 3.05RA 20.80RA 6.27 2.63 5.25 B-BBEE expenditure, R billion 119.4RA 96.0RA – – 35.2 Environmental Black women-owned expenditure, R billion 9.8 RA 6.0 RA – – 3.7 Liquid fuels usage – OCGT, ML 1 148.5RA 609.7RA 225.5RA 63.6RA 16.1RA Black-owned expenditure, R billion 45.8RA – – – – Black youth-owned expenditure, Environmental legal contraventions, R billion 1.3RA – – – – number 32RA 48RA 50RA 63RA 55RA Social responsibility Particulate emissions (tonnage), kt 78.92RA 80.68RA 72.42RA 75.84RA 88.27RA Corporate social investment committed, R billion 132.9RA 194.3RA 87.9RA 62.3RA 58.7RA Carbon dioxides, Mt 233.3 RA 227.9 RA 231.9 RA 230.3 RA 224.7 RA Corporate social investment expended, R billion 115.4RA 126.5RA 40.8 – – Sulphur dioxides, kt 1 975RA 1 843RA 1 849RA 1 810RA 1 856RA Corporate social investment (number of beneficiaries), number 357 443RA 652 347RA 531 762 303 983 590 440 Nitrogen oxide, kt 954RA 965RA 977RA 977RA 959RA Employment equity Low-level radioactive waste generated, m3 180.8RA 183.1RA 184.7RA 165.3RA 137.8 Disabilities (company), number 1 283RA 1 126RA 1 022RA 1 002 1 073 Low-level radioactive waste disposed Disabilities (group), number 1 305RA 1 137RA 1 032RA 1 012 – of, m3 28.7RA 54.0RA 53.8RA 81.0RA 216.0 Economic Intermediate-level radioactive waste generated, m3 324.0RA 34.7RA 25.4RA 39.4RA 47.1 Coal stock days 44RA 46RA 39RA 41RA 37RA Intermediate-level radioactive waste Free funds from operations as % of disposed of, m3 178RA 0RA 128RA 0RA 266 total debt (group), % 9.69RA 8.04 15.2 9.5 1.9 RA Reasonable assurance provided by the independent assurance provider (refer pages 180 to 184). Ash (produced), Mt 34.97RA 35.30RA 36.21RA 36.22RA 36.01RA LA Limited assurance provided by the independent assurance provider. Ash (recylced), % 7.0RA 6.8RA 6.4RA 5.5RA 5.6 The key performance indicator shows a positive trend over the five years, with the arrow indicating the performance against target Social The key performance indicator shows a negative trend over the five years, with the arrow indicating the performance Safety against target The key performance indicator has been stable over the five years Employee work-related fatalities, number 5RA 3RA 13RA 7RA 2RA Total contractor fatalities, number 18RA 16RA 12RA 18RA 15RA Notes: 1. Total system minutes is a measure of the severity of all interruptions inclusive of major incidents. 2. Increased from the figure reported in 2013 (47) due to an additional environmental legal contravention which was not classified as at the end of the previous financial year – related to activities associated with development of facilities at Kusile which occurred in March 2013 no comparatives available as the measure was not tracked. 178 Eskom Holdings SOC Limited 2014 Integrated Report 179 Appendix C: Awards Eskom and its employees where applicable, were recipients of the following awards during the period under review: Eskom brand Our Guardians Sunday Times Eskom was voted as the “Most desired company to work for” Boss of the Year Ayanda Nakedi, Senior General Manager of the Renewables by the Sunday Times newspaper. Awards were also received business unit was awarded the 2013 Boss of the Year award in the categories “Community Upliftment” (second place), and General Counsel of At the African Legal awards, Willie du Plessis, General Manager “Top company that does the most to look after the environment the Year (Legal Specialist), was awarded the General Counsel of the and natural resources” (second place) Year award Operation Khanyisa The campaign received an Orchid from Independent Newspapers Integrated reporting for its innovative approach to public sector advertising, as well as a Loerie advertising award in the Ubuntu category Nkonki SOC Integrated In June 2013, Eskom emerged as the overall winner of the Nkonki Reporting SOC Integrated Report Awards 2013. Eskom also scooped The Star Award from Crime Line was received for the second several other awards in categories related to governance and year the application of King III 13th Annual Oliver Eskom was the recipient of two accolades at the event held on Investment Analysts Society At the 28th annual Investment Analyst’s Society awards, Eskom Empowerment awards 25 April 2014, namely the Socio-economic Development award of Southern Africa emerged as the winner for the best presentation in the market for the Eskom Development Foundation contractor academy, cap above R30 billion category and the Enterprise and Supplier Development award for Group Commercial – supplier development and localisation Association of Chartered Eskom’s integrated report was the winner in the resources Certified Accountants category Mail & Guardian newspaper Eskom was voted as the Top Engineering Company by engineering students, and the second best by MBA and Ernst & Young Excellence Eskom was adjudged an “Excellent Integrated Reporter” at Professionals in Integrated Reporting the Ernst & Young 2013 inaugural Excellence in Integrated Reporting Awards event Finweek Eskom was named the fourth most popular brand in South Africa Chartered Secretaries In November 2013, Eskom emerged as the joint winner, Our Guardians Southern Africa and JSE alongside Transnet, in the state entities category Institute of Personnel Eskom’s human resources function was announced as the Limited Annual Report Management winner in the Human Resources Team of the Year category. award The Acting chief Advisor for Strategy at the EAL won the HR Sustainability Practitioner of the year award for her outstanding contribution to the field Department of Water Affairs Eskom was named as the runner-up in the 2013 Water Conservation and Water Demand Management Sector awards SA Human Rights Eskom was awarded the Golden Key Award for best practice by (mining, industry, power) Commission a public institution Processes Stars of Africa Eskom received the Stars of Africa 2013 Gold award in the Eskom Contractor Academy: Incubation category Institute of Management Eskom’s Group IT division received the award for the SAP Consultants South Africa project implementation African Utility Week Dr Steve Lennon received a lifetime achievement award for his outstanding contribution to the utilities industry at the African SAP AG Eskom achieved its independent SAP Centre of Excellence Utility Week’s Industry awards accreditation from SAP globally, with a score of 192 out of 200, making it one of only four companies to achieve this level of Visionary CIO of the Year Eskom chief information officer (CIO), Sal Laher, was the winner accreditation of the prestigious Visionary CIO of the Year award. The award recognises an executive in all industries across South Africa who Enterprise Mobility Forum Eskom won two Mobility awards – one for best enterprise has demonstrated vision and leadership in using technology to solution for Distribution’s handheld solution for field workers and support and grow business the second for best return on investment for a mobility solution 180 Eskom Holdings SOC Limited 2014 Integrated Report 181 Appendix D: Sustainability responsibilities, approval and assurance statements Sustainability assurance statements - System average interruption frequency index (SAIFI) - System average interruption duration index (SAIDI) Sustainability key performance indicators, set out within this report, measure performance on - Management of the national supply/demand constraints issues material to stakeholders. These key performance indicators have been prepared in - OCGT load factor trend accordance with the GRI G3 guidelines, supported by Eskom’s internal reporting guidelines. - Energy losses (transmission and distribution) The King Code advocates that sustainability reporting and disclosure should be independently - Integrated demand management (megawatts) assured. KPMG Services Proprietary Limited provided reasonable assurance on selected - Internal energy efficiency (gigawatts). sustainability key indicators marked with an “RA” in appendices A and B of this report. • Environmental performance parameters The board have applied their collective mind to the preparation and presentation of the integrated - Coal road to rail migration report and have concluded that it is presented in accordance with the International Integrated - Specific water consumption Reporting Framework Version 1.0. - Liquid fuel usage (diesel and kerosene) - Particulate emissions (total tonnages) The board believes the integrated report is a fair presentation of the integrated performance of the - Relative particulate emissions group and appropriately takes into consideration the completeness of the material items it deals - Carbon dioxide emissions with and the reliability of data and information presented, in line with the combined assurance - Sulphur dioxide emissions process followed. - Nitrogen oxides emissions - Low level radioactive waste (generated and disposed) - Intermediate level radioactive waste (generated and disposed) - Ash (produced and recycled) - Environmental legal contraventions in terms of the operational health dashboard MC Matjila TBL Molefe • Social performance parameters Interim chief executive Finance director - Engineering learners - Technician learners 29 May 2014 29 May 2014 - Artisan learners - Strategic youth development programme Independent assurance report on selected sustainability information to - Broad-based black economic empowerment (B-BBEE) expenditure (company and group – the directors of Eskom Holdings SOC Limited attributable spend and percentage) - Black women-owned expenditure (company and group – attributable spend and percentage) We have undertaken a reasonable assurance engagement on selected sustainability information - Black-owned expenditure (company and group – attributable spend and percentage) as described below and presented in the 2014 integrated report (the report) of Eskom Holdings - Black youth-owned expenditure (company and group – attributable spend and percentage) SOC Limited (Eskom) for the year ended 31 March 2014. This engagement was conducted by - Corporate social investment (committed rand value, spend rand value and number of a multidisciplinary team including health, safety, environmental and assurance specialists with beneficiaries) extensive experience in sustainability reporting. - Total employee and contractor work-related fatalities Subject matter - Employee work-related fatalities We are required to provide reasonable assurance on the following key performance indicators - Contractor work-related fatalities prepared in accordance with the Global Reporting Initiative (GRI) G3 guidelines, marked with an - Employee lost-time incidence rate (LTIR) “RA” and presented in the table in Appendix A (key performance indicators) and Appendix B (other - Disabilities (company and group – number and percentage) performance indicators): - Racial equity in senior management (company and group – percentage of black employees) • Technical performance parameters: - Gender equity in senior management (company and group – percentage of female - Unplanned capability loss factor (UCLF) employees) - Unit capability factor (UCF) - Racial equity in professionals and middle management (company and group – percentage of - Energy availability factor (EAF) black employees) - Planned capability loss factor (PCLF) - Gender equity in professionals and middle management (company and group – percentage - System minutes lost (<1 minute) of female employees) - Total system minutes lost - Job creation - Major incidents - Training spend as a percentage of gross employee benefit costs 182 Eskom Holdings SOC Limited 2014 Integrated Report 183 Appendix D: Sustainability responsibilities, approval and assurance statements (continued) • Economic parameters: to Eskom’s preparation of the selected sustainability information. A reasonable assurance - Generation capacity installed and commissioned engagement also includes: - Transmission lines installed • Assessing the suitability in the circumstances of Eskom’s use of the criteria, as the basis for - Transmission capacity installed and commissioned (MVA) preparing the selected sustainability information; - Total number of electrification connections • Evaluating the appropriateness of quantification methods and reporting policies used, and the - Maintenance backlog reduction based on Eskom technical governance committee approval reasonableness of estimates made by Eskom; and - Generation new build capacity milestones • Evaluating the overall presentation of the selected sustainability information and whether - Coal purchased stock days the information presented in the report is consistent with our findings, overall knowledge and - Cost of electricity (excluding depreciation) experience of sustainability management and performance at Eskom. - Capital expenditure (excluding capitalised borrowing costs) - Debt:equity ratio (company) Our work included the following evidence-gathering procedures: - Interest cover (company) • Interviewing management and senior executives to evaluate the application of the - Free funds from operations (company and group – percentage of total debt)) GRI G3 guidelines and to obtain an understanding of the control environment relative to the - Percentage of local content in new-build contracts reported sustainability information. • Inspecting documentation to corroborate the statements of management and senior executives Directors’ responsibilities in our interviews. The directors are responsible for the selection, preparation and presentation of the sustainability • Testing the processes and systems to generate, collate, aggregate, monitor and report the information in accordance with the GRI G3 guidelines. This responsibility includes the identification selected sustainability information. of stakeholders and stakeholder requirements and material issues, for commitments with respect • Inspecting supporting documentation and performing analytical procedures. to sustainability performance, and for the design, implementation and maintenance of internal • Performing site work at the nuclear power station (Koeberg), coal power stations (Majuba, control relevant to the preparation of the report that is free from material misstatement, whether Grootvlei, Lethabo, Kriel, Matla, Hendrina and Kendal), Transmission divisions (Central and due to fraud or error. Northern), the Distribution divisions (Limpopo, Western Cape and KwaZulu-Natal), Roshcon and Rotek. Our independence and quality control We have complied with the Code of Ethics for Professional Accountants issued by the International We believe that the evidence we have obtained is sufficient and appropriate to provide a basis Ethics Standard Board for Accountants, which includes independence and other requirements for our opinion. founded on fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. Opinion In our opinion, the selected sustainability information for the year ended 31 March 2014 is In accordance with International Standard on Quality Control 1, KPMG Services Proprietary prepared, in all material respects, in accordance with the GRI G3 guidelines. Limited maintains a comprehensive system of quality control including documented policies and procedures regarding compliance with ethical requirements, professional standards and Other matters applicable legal and regulatory requirements. The report includes the provision of reasonable assurance on the following indicators. We were previously not required to provide assurance on these key performance indicators. Our responsibility • Planned capability loss factor (PCLF) Our responsibility is to express an opinion on the selected sustainability information based on • Black-owned expenditure (company and group – attributable spend and percentage) the evidence we have obtained. We have conducted our engagement in accordance with the • Black youth-owned expenditure (company and group – attributable spend and percentage) International Standard on Assurance Engagements (ISAE 3000), Assurance Engagements Other • Racial equity in senior management (group – percentage of black employees) than Audits or Reviews of Historical Financial Information, issued by the International Auditing and • Gender equity in senior management (group – percentage of female employees) Assurance Standards Board. That standard requires that we plan and perform our engagement • Racial equity in professional and middle management (company and group – percentage of to obtain reasonable assurance about whether the selected sustainability information is free from black employees material misstatement. • Gender equity in professional and middle management (company and group – percentage of female employees) A reasonable assurance engagement in accordance with ISAE 3000 involves performing • Job creation procedures to obtain evidence about the quantification of the selected sustainability information • Training spend as a percentage of gross employee benefits and related disclosures. The nature, timing and extent of procedures selected depend on the • Total number of electrification connections practitioner’s judgement, including the assessment of the risks of material misstatement, whether • Maintenance backlog reduction based on Eskom technical governance committee approval due to fraud or error. In making those risk assessments we considered internal control relevant • Generation new build capacity milestone 184 Eskom Holdings SOC Limited 2014 Integrated Report 185 Appendix D: Sustainability responsibilities, approval and Appendix E: Abbreviations, acronyms and glossary assurance statements (continued) • Capital expenditure (excluding capitalised borrowing costs) Abbreviations and acronyms • Free funds from operations (company and group – percentage) B-BBEE Broad-based black economic empowerment Our report does not extend to any disclosures or assertions relating to future performance plans and/or strategies disclosed in the report. BPP Business productivity programme DoE Department of Energy The maintenance and integrity of Eskom’s website is the responsibility of Eskom’s management. Our procedures did not involve consideration of these matters and, accordingly we accept no DPE Department of Public Enterprises responsibility for any changes to either the information in the report or our independent assurance EAF Energy availability factor (see glossary) report that may have occurred since the initial date of presentation on the Eskom website. EBITDA Earnings before interest, taxation, depreciation and amortisation Restriction of liability Our work has been undertaken to enable us to express an opinion on the selected sustainability EUF Energy unavailability factor information to the directors of Eskom in accordance with the terms of our engagement, and for no GW Gigawatt other purpose. We do not accept or assume liability to any party other than Eskom, for our work, GWh Gigawatt hour (1 000MWh) for this report, or for the opinion we have reached. IIRC International Integrated Reporting Council KPMG Services Proprietary Limited IPP Independent power producer (see glossary) IRP 2010 Integrated Resource Plan 2010 King III The third King Commission: Code of Corporate Governance kt Kiloton (1 000 tons) kV Kilovolt Per PD Naidoo HG Motau kWh Kilowatt hour (see glossary) Director Director ML Megalitre (1 million litres) Johannesburg Johannesburg mSv Millisievert 29 May 2014 29 May 2014 Mt Million tons MVA Mega volt ampere MW Megawatt (1 million watts) MWh Megawatt-hour (1 000kWh) MYPD Multi-year price determination NERSA National Energy Regulator of South Africa OCGT Open-cycle gas turbines OHSAS Occupational health and safety standards PCLF Planned capability loss factor PPPFA Preferential Procurement Policy Framework Act RCA Regulatory clearing account RTS Return-to-service power stations SAIDI System average interruption duration index SAIFI System average interruption frequency index UCLF Unplanned capability loss factor (see glossary) 186 Eskom Holdings SOC Limited 2014 Integrated Report 187 Appendix E: Abbreviations, acronyms and glossary (continued) Glossary 49M The 49M initiative aims to inspire and rally all South Africans Free funds from operations as Free funds from operations/gross debt multiplied by 100 behind a common goal – save electricity and create a better a percentage of gross debt economic, social and environmental future for all Gigawatt One thousand megawatts Back2Basics programme An efficiency programme that focuses on getting the basics Gross debt Debt securities issued, borrowings, finance lease liabilities and right by simplifying, standardising and optimising our processes, financial trading liabilities plus the after tax effect of: retirement systems and data, together with comprehensive process benefit obligations and provisions for power station-related documentation environmental restoration and mine-related closures Base-load plant Largely coal-fired and nuclear power stations, designed to Gross debt/EBITDA Gross debt/earnings before interest, taxation, depreciation and operate continuously amortisation Daily peak Maximum amount of energy demanded in one day by consumers Independent non-executive Someone who is: Decommission To remove a facility (eg reactor) from service and store it safely director – Not a full-time salaried employee of the company or its Debt: equity including long- Net financial assets and liabilities plus non-current retirement subsidiary term provisions benefit obligations and non-current provisions divided by total – Not a shareholder representative equity – Has not been employed by the company and is not a member of the immediate family of an individual who is, or has been Debt service cover ratio Cash generated from operations/(net interest paid plus debt in any of the past three financial years, employed by the repaid excluding repayments on commercial paper) company in any executive capacity Demand-side management Planning, implementing and monitoring activities to encourage – Not a professional advisor to the company consumers to use electricity more efficiently, including both the – Not a significant supplier or customer timing and level of demand International financial Global accounting standards issued by the International Electricity revenue per kWh Electricity revenue including environmental levy/kWh sales total reporting standards Accounting Standards Board that require transparent and Electricity operating costs Electricity related costs: (Primary energy costs, net transfer comparable information per kWh pricing, employee benefit cost, depreciation and amortisation plus Independent power producer Any entity, other than Eskom, that owns or operates, in whole or impairment loss and other operating expenses)/external sales (IPP) in part, one or more independent power-generation facilities in kWh Interest cover Operating profit before net finance cost/(net finance cost but Embedded derivative Financial instrument that causes cash flows that would otherwise before unwinding of discount on provisions, change in discount be required by modifying a contract according to a specified rate and borrowing cost capitalised) variable such as currency Kilowatt-hour (kWh) Basic unit of electric energy equal to one kilowatt of power Energy availability factor Measure of power-station availability, taking account of energy supplied to or taken from an electric circuit steadily for one hour (EAF) losses not under the control of plant management and internal (one kilowatt-hour is 1 000 watt hours) non-engineering constraints Load Amount of electric power delivered or required at any specific Energy efficiency Programmes to reduce energy used by specific end-use devices point on a system and systems, typically without affecting services provided Load management Activities to influence the level and shape of demand for Forced outage Shutdown of a generating unit, transmission line or other facility electricity so that demand conforms to the present supply for emergency reasons or a condition in which generating situation, long-term objectives and constraints equipment is unavailable for load due to unanticipated breakdown Load shedding Scheduled and controlled power cuts that rotate available Free basic electricity Amount of electricity deemed sufficient to provide basic electricity capacity between all customers when demand is greater than services to a poor household (50kWh/month) supply to avoid blackouts Free funds from operations Cash generated from operations adjusted for working capital (excluding provisions) and net interest paid/received and non- current assets held for risk management 188 Eskom Holdings SOC Limited 2014 Integrated Report 189 Appendix E: Abbreviations, acronyms and glossary (continued) Lost-time injury (LTI) A work injury, including any occupational disease/illness or Unit capability factor (UCF) Measure of power station availability indicating how well plant is fatality, which arises out of and in the course of employment operated and maintained and which renders the injured employee or contractor unable to Unplanned capability loss All occasions when a power station unit has to be taken out of perform his/her regular/normal work on one or more full calendar factor (UCLF) service. Energy losses due to outages are considered unplanned days or shifts other than the day or shift on which the injury if they are not scheduled at least four weeks in advance occurred Used nuclear fuel Nuclear fuel irradiated in, and permanently removed, from a Lost-time incidence rate Proportional representation of the occurrence of lost-time injuries nuclear reactor. Used nuclear fuel is stored on-site in used fuel (LTIR) over 12 months per 200 000 working hours pools or storage casks Maximum demand Highest demand of load within a specified period Working capital ratio (Total current assets less financial instruments with group Megawatt One million watts companies less investments in securities less embedded Megawatt-hour (MWh) One thousand kilowatt-hours or 1 million watt-hours derivative assets less derivatives held for risk management less financial trading assets less cash and cash equivalents)/(Total Open-cycle gas turbines Liquid fuel turbine power stations that form part of peak-load plant current liabilities less financial instruments with group companies (OCGT) and run on kerosene and diesel. Designed to operate in periods less debt securities issued less borrowings less embedded of peak demand derivative liabilities less derivatives held for risk management less Outage Period in which a generating unit, transmission line, or other financial trading liabilities) facility is out of service Watt The watt is the International System of Units’ (SI) standard unit of Off-peak Period of relatively low system demand power. It specifies the rate at which electrical energy is dissipated Peak demand Maximum power used in a given period, traditionally between – energy per unit time 07:00-10:00 and 18:00-21:00 Peaking capacity Generating equipment normally operated only during hours of highest daily, weekly or seasonal loads Peak-load plant Gas turbines, hydroelectric or a pumped-storage scheme used during peak-load periods Primary energy Energy in natural resources (eg coal, liquid fuels, sunlight, wind, uranium) Pumped-storage scheme A lower and an upper reservoir with a power station/pumping plant between the two. During off-peak periods the reversible pump/turbines use electricity to pump water from the lower to the upper reservoir. During peak demand, water runs back into the lower reservoir through the turbines, generating electricity Reserve margin Difference between net system capability and the system’s maximum load requirements (peak load or peak demand) Return on average equity Profit/loss for the year after tax/average total equity Return on average total Profit/loss for the year after tax/average total assets assets System minutes Global benchmark for measuring the severity of interruptions to customers. One system minute is equivalent to the loss of the entire system for one minute at annual peak. A major incident is an interruption with a severity ≥1 system minute Technical losses Naturally occurring losses that depend on the power systems used 190 Eskom Holdings SOC Limited Appendix F: Contact details 4 ACTIONS IN 4 HOURS Telephone numbers Websites and email addresses Switch off between 5pm and 9pm Eskom head office +27 11 800 8111 Eskom website www.eskom.co.za contact@eskom.co.za Eskom Strategic Marketing +27 11 800 2323 Eskom integrated report www.eskom.co.za/IR2014 Eskom media desk +27 11 800 3304 Eskom media desk mediadesk@eskom.co.za +27 11 800 3343 +27 11 800 3378 +27 82 805 7278 Eskom Development +27 11 800 6128 Eskom Development www.eskom.co.za/csi Foundation Foundation csi@eskom.co.za Investor relations +27 11 800 2775 Investor relations lerato.mashinini@eskom.co.za Switch off Switch off Switch off Switch off Ethics office advisory +27 11 800 3700 Ethics office advisory ethics@eskom.co.za geysers pool pumps electrical heating all non-essential lighting service +27 11 800 4816 service +27 11 800 3187 Confidential reporting line 0800 11 27 22 Eskom environmental envhelp@eskom.co.za National Sharecall number 08600 ESKOM Promotion of Access to PAIA@eskom.co.za In winter consumers tend to use more electricity due to heating and this creates (08600 37566) Information Act a higher demand. Physical address Postal address There is sufficient capacity to meet the demand most of the day in winter. The concern is during the evening peak between 5pm and 9pm. If that can be reduced Eskom, Megawatt Park, 2 Maxwell Drive, Eskom, PO Box 1091, Johannesburg, 2000 by as much as 2000MW, the supply will be adequate. Sunninghill, Sandton, 2157 Eskom remain determined to avoid load-shedding and is asking all South Africans to Company secretary Company registration number pull together over the next several months. Eskom Holdings Secretariat Eskom Holdings SOC Limited 2002/015527/06 Households can help reduce the load and Beat The Peak by following these Annamarie van der Merwe four easy steps, especially during weekdays: (Interim company secretary) • Switch off geysers and pool pumps PO Box 1091 • Switch off non-essential lights Johannesburg • Find alternatives to electric heaters • Respond to the Power Alert and the Power Bulletin messages 2000 on both radio and TV Eskom is confident that together we can keep the lights on throughout winter if we all do our bit to “Beat The Peak”. Let’s Beat The Peak together. Eskom Holdings SOC Limited Reg No 2002/015527/06 952