Shift performance, grow sustainably Reviewed condensed group interim fi nancial statements for the six months ended 30 September 2013 1 Contents Currency of financial statements 3 Approval of the condensed group interim financial statements 4 Independent auditors’ review report on the condensed group interim financial statements to the Minister of Public Enterprises 5 Condensed group statement of financial position 6 Condensed group income statement 7 Condensed group statement of comprehensive income 8 Condensed group statement of changes in equity 8 Condensed group statement of cash flows 9 Selected notes to the condensed group interim financial statements 10 1. General information 10 2. Basis of preparation 10 3. Significant accounting policies 10 4. Income tax expense 11 5. Seasonality of interim results 11 6. Unusual changes impacting the condensed group interim financial statements 11 7. Critical accounting estimates and judgements 11 8. Issuances, repurchases and repayments of debt securities 12 9. Dividend paid 12 10. Segment information 12 11. Material events subsequent to 30 September 2013 16 12. Material changes in property, plant and equipment 16 13. Material changes in contingent liabilities 16 14. Material changes in capital commitments 16 15. Issued share capital 16 16. Fair value classification and measurement 17 17. Revenue 22 18. Net employee benefit expense 22 The reviewed condensed group interim financial statements have been prepared under the supervision of the acting chief financial officer (CFO), CM Henry CA(SA). These condensed group interim financial statements have been approved on 28 November 2013. 2 Eskom Holdings SOC Limited Reviewed condensed group interim ¿nancial statements Currency of financial statements The condensed group interim financial statements are expressed in South African rand (R). The following are approximate values of R1.00 to the selected currencies and one unit of the selected currencies to the rand: One unit of the selected currency R1.00 to the selected currencies to the rand 30 September 31 March 30 September 30 September 31 March 30 September 2013 2013 2012 2013 2013 2012 EUR 0.07 0.08 0.09 13.60 11.82 10.68 USD 0.10 0.11 0.12 10.05 9.21 8.28 GBP 0.06 0.07 0.07 16.22 13.96 13.38 CHF 0.09 0.10 0.11 11.11 9.70 8.83 JPY 10.00 10.00 9.09 0.10 0.10 0.11 Currency Abbreviation Euro EUR United States dollar USD Pound sterling (United Kingdom) GBP Swiss franc CHF Japanese yen JPY 3 Approval of the condensed group interim financial statements The condensed group interim financial statements from page 6 to page 22 for the six months ended 30 September 2013 have been prepared in accordance with the recognition and measurement requirements of International Financial Reporting Standards (IFRS), the presentation and disclosure requirements of International Accounting Standards (IAS) 34 Interim Financial Reporting, and in the manner required by the Companies Act of South Africa, 71 of 2008. In the opinion of the directors, based on the information available to date, the condensed group interim financial statements fairly present the financial position of the group at 30 September 2013 and the results of the operations and cash flow information for the six months then ended. The condensed group interim financial statements have been approved by the board of directors and signed on its behalf by: ZA Tsotsi BA Dames CM Henry Chairman Chief executive Acting chief financial officer 28 November 2013 28 November 2013 28 November 2013 4 Eskom Holdings SOC Limited Reviewed condensed group interim ¿nancial statements Independent auditors’ review report on the condensed group interim financial statements to the Minister of Public Enterprises Introduction We have reviewed the accompanying condensed group interim financial statements of Eskom Holdings SOC Limited, which comprise the condensed group statement of financial position at 30 September 2013, and the condensed group income statement and statements of comprehensive income, changes in equity and cash flows for the six months then ended and selected explanatory notes. The board of directors are responsible for the preparation and presentation of these financial statements in accordance with the recognition and measurement requirements of IFRS, the presentation and disclosure requirements of IAS 34 Interim Financial Reporting and the requirements of the Companies Act of South Africa, 71 of 2008. Our responsibility is to express a conclusion on these condensed group interim financial statements based on our review. Scope of review We conducted our review in accordance with the International Standard on Review Engagements 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity. A review of the condensed group interim financial information consists of making enquiries, primarily of persons responsible for the financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters, which might be identified in an audit. Accordingly, we do not express an audit opinion. Conclusion Based on our review, nothing has come to our attention that causes us to believe that the accompanying condensed group interim financial statements of Eskom Holdings SOC Limited for the six months ended 30 September 2013, are not prepared, in all material respects, in accordance with the recognition and measurement requirements of IFRS, the presentation and disclosure requirements of IAS 34 Interim Financial Reporting and the requirements of the Companies Act of South Africa, 71 of 2008. KPMG Inc SizweNtsalubaGobodo Inc Per HG Motau Per JE Strauss Chartered Accountant (SA) Chartered Accountant (SA) Registered auditor Registered auditor Director Director 28 November 2013 28 November 2013 85 Empire Road 20A Morris Street East Parktown Woodmead 2193 2191 5 Condensed group statement of financial position at 30 September 2013 Reviewed Audited Reviewed 30 September 31 March 30 September 2013 2013 2012 Rm Rm Rm Assets Non-current assets 402 416 378 775 358 920 Property, plant and equipment and intangible assets 366 366 344 271 327 400 Investment in equity-accounted investees 322 296 283 Future fuel supplies 7 741 8 121 6 631 Investment in securities 8 339 8 574 10 316 Loans receivable 8 716 8 425 8 187 Derivatives held for risk management 7 672 5 420 2 615 Other assets 3 260 3 668 3 488 Current assets 79 241 53 241 73 154 Inventories 14 584 12 251 10 855 Investment in securities 4 659 8 776 8 609 Loans receivable 75 114 107 Derivatives held for risk management 3 709 1 906 539 Trade and other receivables 17 477 14 925 19 072 Other assets 8 544 4 649 6 572 Cash and cash equivalents 30 193 10 620 27 400 Non-current assets held-for-sale 8 8 14 Total assets 481 665 432 024 432 088 Equity Capital and reserves attributable to owner of the company 123 446 109 139 115 666 Liabilities Non-current liabilities 294 950 264 446 262 680 Debt securities 124 879 106 526 97 854 Borrowings 95 582 84 250 100 706 Embedded derivatives 8 211 10 095 3 609 Derivatives held for risk management 13 840 1 500 Deferred tax 21 354 15 806 18 758 Deferred income 11 989 10 907 10 138 Employee benefit obligations 11 099 10 282 9 180 Provisions 17 334 20 087 15 847 Other liabilities 4 489 5 653 5 088 Current liabilities 63 269 58 439 53 742 Debt securities 2 604 2 517 7 937 Borrowings 13 715 9 663 6 863 Embedded derivatives 1 402 1 386 1 232 Derivatives held for risk management 621 572 2 763 Employee benefit obligations 3 169 3 629 3 780 Provisions 6 779 6 648 2 162 Trade and other payables 26 354 28 999 23 115 Taxation – 9 13 Other liabilities 8 625 5 016 5 877 Total liabilities 358 219 322 885 316 422 Total equity and liabilities 481 665 432 024 432 088 6 Eskom Holdings SOC Limited Reviewed condensed group interim ¿nancial statements Condensed group income statement for the six months ended 30 September 2013 Reviewed Reviewed Audited six months six months year ended ended ended 30 September 30 September 31 March 2013 2012 2013 Note Rm Rm Rm Revenue 17 77 815 73 368 128 869 Primary energy1 (31 266) (24 973) (60 748) Net employee benefit expense 18 (12 989) (11 628) (23 599) Depreciation and amortisation expense (5 920) (4 722) (9 968) Net impairment loss (682) (486) (1 011) Other operating expenses (9 111) (10 045) (23 123) Operating profit before net fair value gain/(loss) and net finance (cost)/income 17 847 21 514 10 420 Other income 197 516 1 155 Net fair value loss on financial instruments, excluding embedded derivatives (998) (1 292) (1 655) Net fair value gain/(loss) on embedded derivatives 1 868 698 (5 942) Operating profit before net finance (cost)/income 18 914 21 436 3 978 Net finance (cost)/income (1 853) (3 785) 3 027 Share of profit of equity-accounted investees, net of tax 26 22 35 Pro¿t before tax 17 087 17 673 7 040 Income tax (4 846) (5 044) (1 857) Pro¿t for the period 12 241 12 629 5 183 Attributable to: Owner of the company 12 241 12 629 5 183 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. 7 Condensed group statement of comprehensive income for the six months ended 30 September 2013 Reviewed Reviewed Audited six months six months year ended ended ended 30 September 30 September 31 March 2013 2012 2013 Rm Rm Rm Pro¿t for the period 12 241 12 629 5 183 Other comprehensive income/(loss) 2 066 (66) 853 Items that may be reclassified subsequently to profit or loss 1 795 7 1 418 Available-for-sale financial assets – net change in fair value (154) 213 43 Cash flow hedges 2 669 (149) 1 992 Foreign currency translation differences on foreign operations (15) (39) (49) Income tax thereon (705) (18) (568) Items that may not be reclassified subsequently to profit or loss 271 (73) (565) Remeasurement of post-retirement medical aid benefits 376 (101) (772) Income tax thereon (105) 28 207 Total comprehensive income for the period 14 307 12 563 6 036 Attributable to: Owner of the company 14 307 12 563 6 036 Condensed group statement of changes in equity for the six months ended 30 September 2013 Reviewed Reviewed Audited six months six months year ended ended ended 30 September 30 September 31 March 2013 2012 2013 Rm Rm Rm Balance at beginning of the period 109 139 103 103 103 103 Total comprehensive income for the period 14 307 12 563 6 036 Balance at end of the period 123 446 115 666 109 139 Comprising Equity reserve 30 520 30 520 30 520 Share capital1 – – – Cash Àow hedge reserve 5 922 1 605 2 959 Available-for-sale reserve 210 443 321 Unrealised fair value reserve (7 369) (281) (3 648) Insurance reserve – 90 – Foreign currency translation reserve 2 27 17 Accumulated pro¿t 94 161 83 262 78 970 Total equity 123 446 115 666 109 139 1. Nominal amount. 8 Eskom Holdings SOC Limited Reviewed condensed group interim ¿nancial statements Condensed group statement of cash flows for the six months ended 30 September 2013 Reviewed Reviewed Audited six months six months year ended ended ended 30 September 30 September 31 March 2013 2012 2013 Rm Rm Rm Cash Àows from operating activities Profit before tax 17 087 17 673 7 040 Adjustment for non-cash items 8 876 12 300 22 620 Changes in working capital (12 256) (10 092) (828) Cash generated from operations 13 707 19 881 28 832 Net cash flows (used in)/from financial trading assets (3 317) (854) 1 701 Net cash flows from/(used in) financial trading liabilities 4 853 (173) (2 317) Net cash flows from/(used in) current derivatives held for risk management 4 469 (586) (331) Income taxes paid (87) (86) (216) Net cash from operating activities 19 625 18 182 27 669 Cash Àows used in investing activities Proceeds from disposal of property, plant and equipment 51 45 36 Acquisitions of property, plant and equipment and intangible assets (21 639) (25 244) (55 381) Expenditure on future fuel supplies (1 444) (926) (2 533) Increase in non-current loans receivable (291) (752) (990) Other cash flows from investing activities (1 197) 148 460 Net cash used in investing activities (24 520) (26 729) (58 408) Cash Àows from ¿nancing activities Debt raised 29 475 17 804 31 120 Debt repaid (4 819) (2 021) (7 149) Decrease in investment in securities 4 050 3 756 5 047 Decrease in finance lease liabilities (14) (5) (31) Interest received 1 257 1 470 2 765 Interest paid (5 481) (4 632) (9 968) Net cash from financing activities 24 468 16 372 21 784 Net increase/(decrease) in cash and cash equivalents 19 573 7 825 (8 955) Cash and cash equivalents at beginning of the period 10 620 19 450 19 450 Cash and cash equivalents at beginning of the period attributable to non-current assets held-for-sale – 125 125 Cash and cash equivalents at end of the period 30 193 27 400 10 620 9 Selected notes to the condensed group interim financial statements for the six months ended 30 September 2013 1. General information Eskom Holdings SOC Limited, a public company and holding company of the group, is incorporated and domiciled in the Republic of South Africa. Eskom is a vertically integrated operation that generates, transmits and distributes electricity to industrial, mining, commercial, agricultural, municipalities, and residential customers and to international customers in southern Africa. 2. Basis of preparation The reviewed condensed group interim financial statements of Eskom as at and for the six months ended 30 September 2013 comprise the company and its subsidiaries (together referred to as the group) and the group’s interest in associates and joint arrangements. The reviewed condensed interim group financial statements do not include all of the information required for full financial statements and should be read in conjunction with the Eskom Holdings SOC Limited 31 March 2013 annual financial statements. The annual financial statements of the group as at and for the year ended 31 March 2013 are available for inspection at the company’s registered office and on the Eskom website at www.eskom.co.za. The condensed group interim financial statements are prepared in accordance with the recognition and measurement requirements of International Financial Reporting Standards (IFRS), the presentation and disclosure requirements of IAS 34 Interim Financial Reporting, and in the manner required by the Companies Act of South Africa, 71 of 2008. The financial statements have been prepared on the going-concern basis. The condensed group interim financial statements are prepared on the historical cost basis except for the following items which are measured at fair value: • embedded derivatives • financial instruments classified as held-for-trading • financial instruments classified as available-for-sale • post-retirement employment medical benefits 3. Significant accounting policies The accounting policies applied by the group in these condensed group interim financial statements are consistent with those applied by the group in the audited financial statements as at and for the year ended 31 March 2013, except for the following new or revised statements and interpretations implemented during the six months ended 30 September 2013. The nature and effect of the changes are as follows: IFRS 10 Consolidated Financial Statements The group has changed its accounting policy for determining whether it has control over and consequently whether it consolidates its investees. IFRS 10 introduces a new control model that is applicable to all investees, by focusing on whether the group has power over an investee, exposure or rights to variable returns from its involvement with the investee and ability to use its power to affect those returns. The group reassessed the control conclusion for its investees at 1 April 2013. As a consequence, the group has changed its control conclusion in respect of its investment in South Dunes Coal Terminal (SDCT) SOC Limited, which was previously accounted for as a subsidiary to now be accounted for as a joint arrangement. The effect of this change is regarded to be immaterial. IFRS 11 Joint Arrangements The group has changed its accounting policy for its interests in joint arrangements. Under IFRS 11, the group classified its interests in joint arrangements as either joint operations or joint ventures depending on the group’s rights to the assets and obligations for the liabilities of the arrangements. When making this assessment, the group considers the structure of the arrangements, the legal form of any separate arrangement, the contractual terms of the arrangements and other facts and circumstances. Previously the structure of the arrangement was the sole focus of the classification. The group has re-evaluated its involvement in its joint arrangements. There was no change in the accounting of its joint arrangements, except for SDCT SOC Limited that has now been accounted for as a joint operation. 10 Eskom Holdings SOC Limited Reviewed condensed group interim ¿nancial statements IFRS 13 Fair Value Measurement IFRS 13 establishes a single framework for measuring fair value and making disclosures about fair value measurements, when such measurements are required or permitted by other IFRS. In particular, it unifies the definition of fair value as the price at which an orderly transaction to sell an asset or to transfer a liability would take place between market participants at the measurement date. It also replaces and expands the disclosure requirements regarding fair value measurements in other IFRS, including IFRS 7 Financial Instruments: Disclosures. Some of these disclosures are specifically required in interim financial statements. The group has therefore included additional disclosures in this regard (see note 16). In accordance with the transitional provisions of IFRS 13, the group has applied the new fair value measurement guidance prospectively. IAS 1 Presentation of Financial Statements The group has modified the presentation of items of other comprehensive income in its condensed statement of other comprehensive income, to present separately items that would be reclassified to profit or loss in the future from those that would never be reclassified. Comparative information has been re-presented accordingly. The adoption of the amendment to IAS 1 has no impact on the recognised assets, liabilities or total comprehensive income of the group. IAS 19 Employee Benefits The revised IAS 19 had no impact on the accounting policy with respect to the basis for determining the income or expense related to the defined benefit plan as there are no plan assets. IAS 34 Interim Financial Reporting The amendment to IAS 34 clarifies that the group needs to disclose both total assets and liabilities for a particular reportable segment. This was already disclosed previously in the financial statements of the group. There is therefore no impact as a result of the amendment. 4. Income tax expense Income tax expense for the interim period is recognised based on management’s best estimate of the weighted average annual income tax rate expected for the full financial year, which is applied to the pre-tax income of the interim period. 5. Seasonality of interim results The sale of electricity is subject to seasonal fluctuations where revenue is normally higher for the first six months of the financial year (winter months), as compared to the summer months, both in terms of tariff energy charges and peak demand. 6. Unusual changes impacting the condensed group interim financial statements There have not been any unusual changes impacting the condensed statement of financial position, income statement, statement of comprehensive income, statement of changes in equity and statement of cash flows during the six months ended 30 September 2013. 7. Critical accounting estimates and judgements Estimates and judgements are evaluated continually and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The significant estimates and judgements made by management in applying the accounting policies and the key sources of estimating uncertainty were substantially the same as those applied to the financial statements as at and for the year ended 31 March 2013. The forward electricity price used to value the embedded derivatives and the government loan at 30 September 2013 is based on the Multi Year Price Determination three (MYPD 3) tariff increase of 8% for the period 2013/14 to 2017/18, whereafter a forecasted return on the regulatory asset base is used until maturity. Another key estimate in the valuation of embedded derivatives includes the forecast of United States (US) production price index (PPI), which is based on an internal model that simulates US PPI using other observable market prices such as South African consumer price index and ZAR/USD forward exchange rates. The inclusion of counterparty credit risk in the valuation of certain derivatives (ie cross currency and interest rate swaps) in terms of IFRS 13 resulted in a fair value loss of R932 million included within net fair value loss on financial instruments, excluding embedded derivatives. 11 Selected notes to the condensed group interim financial statements continued for the six months ended 30 September 2013 8. Issuances, repurchases and repayments of debt securities The nature of the group’s issuances, repurchases and repayments of debt securities are consistent with those reported previously. The details of the debt raised and repaid by the group are disclosed in the statement of cash flows. 9. Dividend paid No dividend was paid to the shareholder during the six months ended 30 September 2013 (March 2013: nil; September 2012: nil). 10. Segment information Management has determined the reportable segments, as described below, based on the reports regularly provided, reviewed and used by the executive management committee (Exco) to make strategic decisions and assess performance of the segments. Exco assesses the performance of the operating segments based on a measure of profit or loss consistent with that of the financial statements. The amounts provided to Exco with respect to total assets and liabilities are measured in terms of IFRS. These assets and liabilities are allocated based on the operation of the segment and the physical location of the assets. The following summary describes the operations in each of the group’s reportable segments: Generation Consists of the generation and primary energy functions. These functions procure primary energy and generate electricity for sale. Transmission Consists of the transmission grids, systems operations and the South African Energy unit (international buyer). These functions operate and maintain the transmission network for transmitting electricity and also sell bulk electricity to international customers. Distribution Distribution consists of nine provincial operating units. These units provide, operate and maintain the distribution network for distributing. Group customer services Group customer services consists of the customer service and integrated demand management functions and sells electricity to local key large, redistributors, large and small customers. Group capital Group capital is responsible for the planning, development and monitoring of all capital projects and the execution of capacity expansion projects. All other segments Relates to operating segments which are below the quantitative thresholds for determining a reportable segment in terms of IFRS 8 Operating Segments. These include the group’s subsidiaries. Corporate and other Relates to all service and strategic functions which do not qualify as a reportable segment in terms of IFRS 8 Operating Segments. 12 Eskom Holdings SOC Limited Reviewed condensed group interim ¿nancial statements The segment information provided to Exco for the reportable segments is as follows: Genera- Trans- Distri- Group Group All other Corporate Inter- Group tion mission bution customer capital segments and other segment services transactions Rm Rm Rm Rm Rm Rm Rm Rm Rm 30 September 2013 (reviewed) External revenue – 3 451 261 73 354 – 749 – – 77 815 Inter-segment revenue/ recoveries 51 296 4 754 13 230 (69 276) – 4 275 – (4 279) – Total revenue 51 296 8 205 13 491 4 078 – 5 024 – (4 279) 77 815 Primary energy (27 922) (3 168) – (43) (133) – – – (31 266) Net employee benefit expense (3 282) (749) (3 362) (704) (414) (1 625) (2 853) – (12 989) Depreciation and amortisation expense (3 116) (603) (1 399) (5) (38) (138) (663) 42 (5 920) Net impairment (loss)/reversal (10) (14) (1) (670) – 13 – – (682) Other operating expenses (8 356) (1 344) (4 256) (1 334) 117 (2 873) 3 139 5 796 (9 111) Operating profit/ (loss) before net fair value (loss)/ gain and net finance (cost)/ income 8 610 2 327 4 473 1 322 (468) 401 (377) 1 559 17 847 Other income 237 146 142 245 47 248 245 (1 113) 197 Net fair value (loss)/gain on financial instruments, excluding embedded derivatives (132) (107) 62 26 (948) 46 55 – (998) Net fair value gain on embedded derivatives – – – 1 868 – – – – 1 868 Operating profit/ (loss) before net finance income/ (cost) 8 715 2 366 4 677 3 461 (1 369) 695 (77) 446 18 914 Net finance (cost)/income (1 293) (371) (272) 107 (22) (65) 63 – (1 853) Share of profit of equity- accounted investees – – – – – 8 18 – 26 Profit/(loss) before tax 7 422 1 995 4 405 3 568 (1 391) 638 4 446 17 087 Income tax – – – – – (146) (4 577) (123) (4 846) Pro¿t/(loss) for the period 7 422 1 995 4 405 3 568 (1 391) 492 (4 573) 323 12 241 Other information Total segment assets 106 909 30 334 60 429 15 015 191 341 23 083 73 821 (19 267) 481 665 Total segment liabilities 30 167 1 965 22 361 17 226 13 119 15 554 274 060 (16 233) 358 219 Capital expenditure (including borrowing costs capitalised) 4 167 1 515 5 237 – 18 098 163 1 492 (1 253) 29 419 13 Selected notes to the condensed group interim financial statements continued for the six months ended 30 September 2013 10. Segment information (continued) Genera- Trans- Distri- Group Group All other Corporate Inter- Group tion mission bution customer capital segments and other segment services transactions Rm Rm Rm Rm Rm Rm Rm Rm Rm 30 September 2012 (reviewed) External revenue – 3 359 219 68 519 – 1 271 – – 73 368 Inter-segment revenue/ recoveries 45 955 3 663 13 246 (62 816) – 3 342 – (3 390) – Total revenue 45 955 7 022 13 465 5 703 – 4 613 – (3 390) 73 368 Primary energy (22 347) (2 363) – (147) (116) – – – (24 973) Net employee benefit expense (3 225) (678) (3 025) (700) (355) (864) (2 781) – (11 628) Depreciation and amortisation expense (2 548) (450) (1 152) (6) (32) (134) (431) 31 (4 722) Net impairment loss (2) – – (450) – (34) – – (486) Other operating expenses (7 106) (1 023) (3 542) (2 296) 30 (3 260) 2 675 4 477 (10 045) Operating profit/ (loss) before net fair value (loss)/ gain and net finance income/ (cost) 10 727 2 508 5 746 2 104 (473) 321 (537) 1 118 21 514 Other income 212 211 157 130 23 165 244 (626) 516 Net fair value gain/(loss) on financial instrument, excluding embedded derivatives (36) 56 20 (75) (761) 4 (490) (10) (1 292) Net fair value on embedded derivatives – – – 698 – – – – 698 Operating profit/ (loss) before net finance income/ (cost) 10 903 2 775 5 923 2 857 (1 211) 490 (783) 482 21 436 Net finance income/(cost) (2 998) (567) (233) 137 (3) (56) (65) – (3 785) Share of profit of equity- accounted investees – – – – – 5 17 – 22 Profit/(loss) before tax 7 905 2 208 5 690 2 994 (1 214) 439 (831) 482 17 673 Income tax – – – – – (97) (4 790) (157) (5 044) Pro¿t/(loss) for the period 7 905 2 208 5 690 2 994 (1 214) 342 (5 621) 325 12 629 Other information Total segment assets 93 205 24 688 52 952 14 437 174 948 21 824 64 829 (14 795) 432 088 Total segment liabilities 24 878 2 357 18 825 12 076 9 879 15 163 246 176 (12 932) 316 422 Capital expenditure (including borrowing costs capitalised) 4 112 1 204 4 373 5 29 256 264 544 (92) 39 666 14 Eskom Holdings SOC Limited Reviewed condensed group interim ¿nancial statements Genera- Trans- Distri- Group Group All other Corporate Inter- Group tion mission bution customer capital segments and other segment services transactions Rm Rm Rm Rm Rm Rm Rm Rm Rm 31 March 2013 (audited) External revenue – 5 999 570 120 773 – 1 527 – – 128 869 Inter-segment revenue/ recoveries 86 395 4 739 18 703 (109 855) – 8 089 – (8 071) – Total revenue 86 395 10 738 19 273 10 918 – 9 616 – (8 071) 128 869 Primary energy (52 353) (5 011) – (3 105) (279) – – – (60 748) Net employee benefit expense (6 302) (1 379) (6 119) (1 344) (699) (2 823) (4 933) – (23 599) Depreciation and amortisation expense (5 210) (954) (2 662) (12) (68) (244) (882) 64 (9 968) Net impairment (loss)/reversal (3) – 2 (1 020) 1 11 (2) – (1 011) Other operating expenses (16 045) (2 317) (7 480) (4 784) 204 (5 827) 5 516 7 610 (23 123) Operating profit/ (loss) before net fair value (loss)/ gain and net finance income/ (cost) 6 482 1 077 3 014 653 (841) 733 (301) (397) 10 420 Other income 387 686 326 185 73 390 618 (1 510) 1 155 Net fair value gain/(loss) on financial instrument, excluding embedded derivatives (8) (4) 48 (2) (1 535) 22 (176) – (1 655) Net fair value on embedded derivatives – – – (5 942) – – – – (5 942) Operating profit/ (loss) before net finance income/ (cost) 6 861 1 759 3 388 (5 106) (2 303) 1 145 141 (1 907) 3 978 Net finance income/(cost) 3 153 569 (464) (46) (30) (123) (32) – 3 027 Share of profit of equity- accounted investees – – – – – 9 26 – 35 Profit/(loss) before tax 10 014 2 328 2 924 (5 152) (2 333) 1 031 135 (1 907) 7 040 Income tax – – – – – (274) (2 117) 534 (1 857) Pro¿t/(loss) for the period 10 014 2 328 2 924 (5 152) (2 333) 757 (1 982) (1 373) 5 183 Other information Total segment assets 106 798 29 190 56 560 10 261 173 884 22 106 50 622 (17 397) 432 024 Total segment liabilities 34 247 2 569 21 328 18 373 13 010 15 055 232 148 (13 845) 322 885 Capital expenditure (including borrowing costs capitalised) 15 290 6 271 9 271 18 28 157 396 2 255 (612) 61 046 15 Selected notes to the condensed group interim financial statements continued for the six months ended 30 September 2013 10. Segment information (continued) Inter-segment purchases and revenue of electricity are allocated between the Generation, Transmission, Distribution and Group customer services segments based on cost recovery plus a uniform return on assets. Revenue Non-current assets Reviewed Reviewed Audited Reviewed Reviewed Audited 30 September 30 September 31 March 30 September 30 September 31 March 2013 2012 2013 2013 2012 2013 Rm Rm Rm Rm Rm Rm Geographical information South Africa 74 646 69 870 122 690 376 663 336 752 355 228 Foreign countries 3 169 3 498 6 179 121 71 106 77 815 73 368 128 869 376 784 336 823 355 334 The group’s reportable segments operate mainly in South Africa, which is Eskom’s country of domicile. Revenue is allocated based on the country in which the customer is located after eliminating intersegment transactions. There is no significant revenue derived from a single external customer by any of the reportable segments. Non-current assets disclosed for geographical information comprise non-current assets other than deferred tax assets and financial instruments. 11. Material events subsequent to 30 September 2013 Eskom negotiated an amendment to its loan agreement with the International Bank for Reconstruction and Development (World Bank) effective 1 November 2013 that converted a portion of the loan from United States dollar to rand denominated currency. Eskom considers the change in currency to be a substantial modification to the original terms of the loan and will therefore account for the modification as an extinguishment of the original loan and the creation of a new loan in accordance with IAS 39. The estimated financial effect of the extinguishment has not yet been finalised. 12. Material changes in property, plant and equipment Property, plant and equipment increased by R22 223 million for the group during the six months ended 30 September 2013 as compared to those disclosed in the financial statements as at and for the year ended 31 March 2013. This expenditure relates mainly to the cost incurred on the capital expansion programme. 13. Material changes in contingent liabilities There were no material changes in contingent liabilities during the six months ended 30 September 2013 from those reported in the financial statements for the year ended 31 March 2013. 14. Material changes in capital commitments There were no material changes in the contracted capital commitments during the six months ended 30 September 2013 from those reported in the financial statements for the year ended 31 March 2013. Eskom is currently in the process of assessing and reprioritising its capital expenditure programme in response to the MYPD 3 tariff determination by the National Energy Regulator of South Africa (NERSA). 15. Issued share capital There was no change in the issued share capital during the six months ended 30 September 2013. 16 Eskom Holdings SOC Limited Reviewed condensed group interim ¿nancial statements 16. Fair value classification and measurement 16.1 Accounting classification and fair values The classification of each class of financial assets and liabilities, and their fair values are: Held-for- Loans and Available- Liabilities at Other Total Fair value trading receivables for-sale amortised assets and carrying cost liabilities amount Rm Rm Rm Rm Rm Rm Rm 30 September 2013 (reviewed) Financial assets measured at fair value Investment in securities – – 12 998 – – 12 998 12 998 Government bonds – – 9 941 – – 9 941 9 941 Negotiable certificates of deposits – – 3 057 – – 3 057 3 057 Derivatives held for risk management 2 700 – – – 8 681 11 381 11 381 Foreign exchange derivatives 2 645 – – – 8 570 11 215 11 215 Interest rate derivatives – – – – 111 111 111 Credit derivatives 27 – – – – 27 27 Commodity derivatives 28 – – – – 28 28 Financial trading assets 5 703 – – – – 5 703 5 703 Repurchase agreements 4 383 – – – – 4 383 4 383 Listed shares 938 – – – – 938 938 Government bonds 282 – – – – 282 282 Other money market securities 100 – – – – 100 100 Financial assets not measured at fair value Loans receivable1 – 8 791 – – – 8 791 7 252 Residential mortgage backed securities – 8 362 – – – 8 362 7 045 Other – 429 – – – 429 207 Cash and cash equivalents – 30 193 – – – 30 193 30 193 Bank balances – 8 754 – – – 8 754 8 754 Unsettled deals – 1 051 – – – 1 051 1 051 Fixed deposits – 20 388 – – – 20 388 20 388 Trade and other receivables – 17 802 – – – 17 802 17 802 Finance lease receivables – – – – 547 547 547 Total ¿nancial assets 8 403 56 786 12 998 – 9 228 87 415 85 876 1. The fair value of loans receivable is based on what a market participant would be willing to pay to acquire the loans. This participant would not have the ability to garnish salaries, thus increasing the probability of default resulting in a lower fair value than Eskom’s carrying value. 17 Selected notes to the condensed group interim financial statements continued for the six months ended 30 September 2013 16. Fair value classification and measurement (continued) 16.1 Accounting classification and fair values (continued) Held-for- Loans and Available- Liabilities at Other Total Fair value trading receivables for-sale amortised assets and carrying cost liabilities amount Rm Rm Rm Rm Rm Rm Rm Financial liabilities measured at fair value Financial trading liabilities 5 839 – – – – 5 839 5 839 Short-sold government bonds 969 – – – – 969 969 Commercial paper issued 163 – – – – 163 163 Repurchase agreement 4 707 – – – – 4 707 4 707 Embedded derivatives – – – – 9 613 9 613 9 613 Derivatives held for risk management 447 – – – 187 634 634 Foreign exchange derivatives 447 – – – 178 625 625 Interest rate derivatives – – – – 9 9 9 Financial liabilities not measured at fair value Debt securities – – – 127 483 – 127 483 133 381 Eskom bonds – – – 94 853 – 94 853 98 338 Promissory notes – – – 10 – 10 10 Commercial paper – – – 1 673 – 1 673 1 673 Eurorand zero coupon bonds – – – 3 276 – 3 276 3 522 Foreign bonds – – – 27 671 – 27 671 29 838 Borrowings – – – 85 941 23 356 109 297 92 998 Development financing institutions – – – 43 491 – 43 491 36 581 Export credit facilities – – – 29 521 – 29 521 30 485 Floating rate notes – – – 2 014 – 2 014 1 698 Commercial paper – – – 10 716 – 10 716 10 877 Subordinated loan from shareholder – – – – 23 356 23 356 13 158 Rand loans – – – 199 – 199 199 Finance lease liabilities – – – – 506 506 506 Trade and other payables – – – 26 661 – 26 661 26 661 Total ¿nancial liabilities 6 286 – – 240 085 33 662 280 033 269 632 Net ¿nancial assets/ (liabilities) 2 117 56 786 12 998 (240 085) (24 434) (192 618) (183 756) 18 Eskom Holdings SOC Limited Reviewed condensed group interim ¿nancial statements 16.2 Fair value hierarchy The table below analyses fair value measurements for financial instruments categorised into the fair value hierarchy based on the inputs used. The different levels are defined as follows: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the group can access at the measurement date. Level 2: Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly. Level 3: Unobservable inputs for the asset or liability. Level 1 Level 2 Level 3 Total Rm Rm Rm Rm 30 September 2013 (reviewed) Financial assets measured at fair value Investment in securities 9 941 3 057 – 12 998 Government bonds 9 941 – – 9 941 Negotiable certificates of deposits – 3 057 – 3 057 Derivatives held for risk management – 11 381 – 11 381 Foreign exchange derivatives – 11 215 – 11 215 Interest rate derivatives – 111 – 111 Credit derivatives – 27 – 27 Commodity derivatives – 28 – 28 Financial trading assets 1 220 4 483 – 5 703 Repurchase agreements – 4 383 – 4 383 Listed shares 938 – – 938 Government bonds 282 – – 282 Other money market securities – 100 – 100 11 161 18 921 – 30 082 Financial liabilities measured at fair value Financial trading liabilities 969 4 870 – 5 839 Short-sold government bonds 969 – – 969 Commercial paper issued – 163 – 163 Repurchase agreements – 4 707 – 4 707 Embedded derivatives – – 9 613 9 613 Derivatives held for risk management – 634 – 634 Foreign exchange derivatives – 625 – 625 Interest rate derivatives – 9 – 9 969 5 504 9 613 16 086 19 Selected notes to the condensed group interim financial statements continued for the six months ended 30 September 2013 16. Fair value classification and measurement (continued) 16.2 Fair value hierarchy (continued) Transfers The group recognises transfers between levels of the fair value hierarchy at the end of the reporting period during which the transfer has occurred. There were no transfers between level 1, 2 or 3 of the fair value hierarchy during the six months ended 30 September 2013. Eskom’s policy for determining when transfers between levels in the hierarchy have occurred includes monitoring of the following factors: • Changes in market and trading activity (eg significant increases/decreases in activity) • Changes in inputs used in valuation techniques (eg inputs becoming/ceasing to be observable in the market) Group’s valuation processes The group has established a controlled framework with respect to the measurement of fair values. The framework includes a valuation team that reports to the CFO, and has overall responsibility for all significant fair value measurements, including level 3 fair values. The valuation team regularly reviews significant unobservable inputs and valuation adjustments. If third party information, such as broker quotes or pricing services, is used to measure fair value, then the valuation team assesses and documents the evidence obtained from the third parties to support their conclusion that such valuations meet the requirements of IFRS, including the level in the fair value hierarchy that the resulting fair value estimate should be classified to. Level 2 fair values The group determines level 2 fair values for debt securities using a discounted cash flow technique, which uses contractual cash flows and a market-related discount rate. Level 2 fair values for simple over-the-counter derivative financial instruments are based on broker quotes. These quotes are tested for reasonableness by discounting expected future cash flows using a market interest rate for a similar instrument at the measurement date. Fair values reflect the credit risk of the instruments and include adjustments for the credit risk of the group entity and counterparty when appropriate. The fair values are obtained from listed bond yields or with regards to unlisted instruments using a discounted cash flows model. The future cash flows are discounted using a zero curve constructed from money market and swap rates. Level 3 fair values: embedded derivatives Embedded derivatives that are not separated are effectively accounted for as part of the hybrid instrument. Non-option based derivatives are separated on terms that result in a fair value at the date of inception of zero. Option-based derivatives are separated on the terms stated in the contracts and will not necessarily have a fair value equal to zero at the initial recognition of the embedded derivative resulting in day-one gains. These day-one gains or losses are spread equally over the period of the agreement. The fair value will depend on the strike price at inception. The valuation at initial recognition is adjusted for cash flows since inception. The value of the embedded derivatives, which includes a foreign currency element is first determined by calculating the future cash flows and then discounting the cash flows converted at the relevant interest rate curve and only then is the net present value of the cash flows converted at the rand/foreign currency spot rate to the reporting currency. The fair value of the embedded derivative is adjusted, where applicable, to take into account the inherent uncertainty relating to the future cash flows of embedded derivatives such as liquidity, model risk and other economic factors. The more important assumptions, which include the following, are obtained either with reference to the contractual provisions of the relevant contracts or from independent market sources where appropriate: • Spot and forward commodity prices • Spot and forward foreign currency exchange rates • Spot and forward interest rates • Forecasted sales volumes • Spot and forward consumer and foreign production prices indices • Liquidity, model risk and other economic factors 20 Eskom Holdings SOC Limited Reviewed condensed group interim ¿nancial statements Movement analysis The movement in the fair value measurements in level 3 of the fair value hierarchy is as follows: Reviewed six months ended 30 September 2013 Rm Carrying value at beginning of the period 11 481 Net fair value gain on embedded derivatives (1 868) Carrying value at end of the period 9 613 Valuation assumptions The forward electricity price curve used to value embedded derivatives at 30 September 2013 is based on the current MYPD 3 approved tariff increase of 8% for 2013/14 to 2017/18, whereafter a forecasted return on the regulatory assets base is used until maturity. The contracted electricity price used to value embedded derivatives is based on a combination of the factors in the table below over the contracted period. Forecast sales volumes are based on the most likely future sales volumes, which have been back-tested against historic volumes. The fair value of embedded derivatives takes into account the inherent uncertainty relating to the future cash flows of embedded derivatives such as liquidity, model risk, period and other economic factors. The following valuation assumptions for the future electricity price curve discussed above for the valuation of embedded derivatives were used and are regarded as the best estimates by management: Period ended 30 September (reviewed) Input Unit 2013 2014 2015 2016 2017 2018 Aluminium USD per ton 1 794 1 881 1 994 2 094 2 181 2 256 Volatility Year-on-year (ratio) 0.25 0.25 0.25 0.25 0.25 0.25 Rand interest rate Continuous actual/365 days (%) 4.97 5.47 5.89 6.22 6.66 7.00 Dollar interest rate Annual actual/360 days (%) 0.23 0.42 0.60 0.54 0.87 1.27 United States PPI Year-on-year (%) 0.79 2.28 2.74 1.99 2.14 2.36 Rand/USD USD per rand 0.10 0.10 0.09 0.09 0.08 0.08 Sensitivity analysis The approximate change in the value of embedded derivatives if one of the inputs is changed is disclosed below. The only significant unobservable input is the US PPI. The analysis assumes that all other variables remain constant and the possible impact on profit or loss is: Reviewed 30 September 2013 1% increase 1% decrease Rm Rm Electricity tariffs (782) 757 United States PPI 233 (227) 21 Selected notes to the condensed group interim financial statements continued for the six months ended 30 September 2013 16. Fair value classification and measurement (continued) 16.3 Day-one gain/loss Derivatives held for risk management Day-one gains and losses are deferred in the statement of financial position (derivatives held for risk management) and then amortised over the term of the hedging instrument in profit or loss. Day-one gains and losses on hedging instruments are predominantly a function of the inclusion of credit, liquidity and basis risk in the terms of the trading instrument. These risks are not included in the determination of a hypothetical derivative used to measure fair value movements in a hedged item and are therefore excluded from any hedge accounting relationships. The effective portion of the changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income within cash flow hedges. The gain or loss relating to the ineffective portion and the forward points portion which is not designated (as part of the hedge) is recognised immediately in profit or loss within net fair value gain/loss on financial instruments, excluding embedded derivatives. Movement analysis Where applicable, the group recognises a day-one gain or loss on initial recognition of financial instruments accounted for as cash flow hedges. The amounts relating to the day-one loss from the cross currency swaps and interest rate swaps accounted for by the group in derivatives held for risk management, are outlined below: Reviewed six months ended 30 September 2013 Rm Balance at beginning of period 252 Day-one loss recognised during period (49) Amortised to profit or loss (15) Balance at end of period 188 The day-one gain or loss balance at the end of the period is included within the following categories: Reviewed six months ended 30 September 2013 Rm Debt securities issued 138 Borrowings 50 188 Reviewed Reviewed Audited six months six months year ended ended ended 30 September 30 September 31 March 2013 2012 2013 Rm Rm Rm 17. Revenue Electricity revenue 76 294 71 878 126 663 Other revenue, excluding electricity revenue 1 521 1 490 2 206 77 815 73 368 128 869 18. Net employee benefit expense Gross employee benefit expense 15 605 13 972 28 661 Employee benefit expense capitalised to property, plant and equipment (2 616) (2 344) (5 062) 12 989 11 628 23 599 22 Eskom Holdings SOC Limited Reviewed condensed group interim ¿nancial statements www.eskom.co.za