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CONFIDENTIAL
Eskom
Eskom Performance for the year-ended 31 March 2017
Update on addressing the audit findings
Update on risks and mitigation plans
Discussion document | xx September 2017
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Eskom delegation is as follows:
• Mr Zethembe Khoza - Interim chairman of Eskom
• Mr Johnny Dladla - Interim Group Chief Executive
• Mr Calib Cassim – Acting Group Chief Financial Officer
• Mr Sean Maritz – Group Executive Information Technology
• Ms Suzanne Daniels - Group Executive Legal
• Mr Molefi Nkhabu - Head of Assurance & Forensic
• Mr Freddy Ndou - Divisional Executive office of the GCE
• Mr Chose Choeu - Divisional Executive Corporate Affairs
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Key highlights and issues
New Build program on track
Surplus operational capacity available
Generation plant performance significantly
improved
Improved financial performance with healthy
liquidity position
Qualified audit opinion, Governance,
Contract management issues
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Eskom financial, operational and socio-economic
performance has improved in 2017 financial year
Financial performance
• EBITDA of R38 billion,
representing an increase of
14.4%
• Revenue increased by 7.9%
to R177 billion
• Own generation cost
decreased by 8.5% to
R60 billion, with total primary
energy costs down by 2.3%
• Cash generated from
operating activities
increased by 23.1% to R46
billion
• Cost savings of R20 billion
achieved against a target of
R17 billion
• 53% of funding for 2018
financial year has been
secured
Operational performance
• Generation plant performance
improved significantly from 71.1%
to 77.3%
• Medupi Unit 5 (794MW)
achieved commercial operation on
3 April 2017
• Following units were synchronised
to the grid:
– Medupi Unit 4 on 31 May
2017,Kusile Unit 1 on 26
December 2016; achieved full
load on March 2017
• All Ingula Units in commercial
operation, adding
1 332MW installed capacity
• 585.4km (2016: 345.8km) lines
constructed and
2 300MVA (2016: 2 435MVA)
transformers commissioned
• 765kV network to Western Cape
completed
Socio-economic performance
• 207 189 (2016: 158 016)
households were electrified
• Procurement from B-BBEE
compliant suppliers was 98%
(2016: 82%)
• Spend with black owned
suppliers increased from 34%
to 41%
• Local content contracted
from the new build programme
was 86%
• Procurement from black
women-owned suppliers was
15%, exceeding the target of
12%
• Employment of female
employees in senior
management positions
increased from 28%
to 37%
SOURCE: Eskom Integrated results
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Eskom financial performance is gradually improving with
most key indicators been positive being positive
Financial performance
Profitability
Key financial ratios
Solvency
Revenue R177bn
7.9%
EBITDA R38bn
14.4%
Own primary energy cost reduced by
R5.6bn
Cash from operations
R46bn 23%
10%
15%
20%
25%
10
20
30
40
2013 2014 2015 2016 2017
EBITDA EBITDA margin, %
55%
60%
65%
70%
75%
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2013 2014 2015 2016 2017
Debt Equity Gearing
Gross debt/EBITDA
ratio 10.8 (2016: 11)
Cash interest cover ratio 1.82
(2016: 1.83)
FFO as % of gross debt* 5.2% (2016: 5%)
Debt service cover ratio 1.37
(2016: 1.14)
SOURCE: Eskom Integrated results
Electricity sales are declining especially the large power users customers
Overall electricity sale volumes
• International sales
volume growth of
12.1% due Eskom
having surplus capacity
• Increase in commercial
1.9%
• Decline in industrial
3.7%, and agriculture
5.7%
• Overall electricity sales
volumes declined by
0.2%, with local sales
declining by 1%
Electricity sale overview
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SOURCE: Eskom Integrated results
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Primary energy costs decreased by 2.3% decrease from
2016
Debt per province (Soweto shown seperately) 2017 Primary energy cost analysis Year on year analysis
2016 Primary energy cost analysis
73%
3%
24%
% of cost
92%
3%
5%
% of production
92%
4%
4%
% of production
78%
4%
18% % of cost
Eskom generationInternational purchasesIndependent power producers
• Own generation costs decreased by 8.5% from
R66 billion to R60 billion
SOURCE: Eskom Integrated results
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IPP production volumes increased by 44% and cost
increased by 37%
Debt per province (Soweto shown seperately) Electricity cost, R/MWh Production volumes, GWh
Production mix,% • Average year-on-year
decrease in unit cost of 6%, from R2 230/MWh in 2016 to R2 090/MWh
-
1 000
2 000
3 000
4 000
CSP Hydro Solar PV Wind Total Re-IPP
Actual March 2016 Actual March 2017
CSP Hydro Solar PV Wind
40%
7%
52%
1%
-
1 000
2 000
3 000
4 000
5 000
6 000
7 000
8 000
CSP Hydro Solar
PV
Wind Total
Re-IPP
Actual March 2016
SOURCE: Eskom Integrated results
Overdue debt is ~R17bn and the main contributors is municipalities and Soweto
Electricity debtors age analysis, R million Total Within
due date Overdue %
Overdue
Large power users, excluding municipalities
(including interest) 7 616 7 001 614 8
Large power users, municipalities (including interest) 15 258 5 852 9 406 62
Small power users (including interest) 2 481 1 521 960 39
Soweto (excluding interest) 5 314 55 5 259 99
Other customers (including interest) 1 704 994 710 42
Total at 31 March 2017 32 374 15 424 16 950
• Arrear debt by municipalities, including interest, increased from R6 billion to R9.4 billion
• Payment arrangements (PA) were signed with 60 municipalities, with 20 fully honouring
the PA and 11 partially
• During the year 15 494 split meters were installed in Soweto and Kagiso with 13 255
converted to prepaid
• 14 105 smart meters were installed in Midrand and Sandton; will be converted to prepaid meters
2017 2016
Average debtors days (all categories) 57.31 50.05
% increase 14.5%
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SOURCE: Eskom Integrated results
2017 2018
R billion Committed Target Committed
Domestic bond private placement 10.2 – –
Signed DFIs 30.0 27.4 27.4
Signed ECAs 5.2 2.2 2.2
Swap restructuring 3.3 2.5 2.5
Subtotal funding secured 48.7 32.1 32.1
New DFIs – 12.1 –
Domestic bonds 1.7 8.0 –
Commercial paper 7.0 7.5 –
New ECAs – 5.0 –
International bonds – 7.0 –
Funding secured 57.4 71.7 32.1
% secured 45%
Available facilities 6.3 6.3 6.3
Total available funding 63.7 78.0 38.4
% available 53%
53% of funding for 2018 financial year has been secured
ccc+ b3 B-
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SOURCE: Eskom Integrated results
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Generation plant performance has significantly
improved as a result there is surplus capacity
Debt per province (Soweto shown seperately)
• EAF improved to 77.3% from 71.1% the previous year,
exceeding target of 72%
• Unplanned breakdowns reduced from 14.9% in 2016 to 9.9% in 2017
• Both Koeberg units set performance records
• Reduced reliance on OCGTs, with total of R340 million spent on OCGTs compared to R8.7 billion in
2016
• A total of 13.2Mt coal transported by rail, in line with previous year
• Since inception, a total of 5
027MW of IPPs connected to the grid, with
3 110MW of renewables
Annual plant availability (EAF) Generation performance
highlights
60%
65%
70%
75%
80%
85%
90%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Annual PCLF and UCLF,%
0%
10%
20%
30%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
PCLF UCLF
SOURCE: Eskom Integrated results
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Transmission and distribution reliability performance is
within the acceptable limits
Debt per province (Soweto shown seperately)
• Transmission
performance for system minutes lost <1 of 3.8
(2016: 2.41), against
target of 3.8
• No major incidents occurred during the
year
• Distribution network
performance (SAIFI and
SAIDI) remain within
acceptable limits
• SAIFI achieved 18.9
events per year (2016: 20.5) against a target
of 20
• SAIDI achieved 38.9
hours (2016: 38.6)
against a target of 39
System minutes lost for events < 1 minute Transmission & Distribution performance highlights
SAIFI/SAIDI performance
0
1
2
3
4
5
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
0
20
40
60
80
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
SAIFI SAIDI
SOURCE: Eskom Integrated results
Addressing the audit
findings
SizweNtsalubaGobodo (SNG) audits Eskom on behalf of the Auditor General
FIVE YEAR AUDIT OUTCOME
AFS Audit Opinion (FY2017 – per Note 52 of the AFS)
Conclusion on the audit of pre-determined
objectives
Conclusion on the audit of compliance
with laws and regulations
FY17 FY16 FY15 FY14 FY13 Legend
Qualified
Unqualifie
d Material findings No material
findings
AUDIT OUTCOME FOR SECTION 4(3) NOT
AUDITED BY AGSA
Financial Statements
Pre-determined objectives
Compliance with laws and regulations
FY17 FY16
IRREGULAR AND FRUITLESS & WASTEFUL EXPENDITURE R’m
Outcome of the 2016/17 audit
• Financial audit:
• No significant financial audit issues
• Restatement of prior year error – self build
assets in Distribution (resolved)
• Sustainability and Audit of Predetermined
Objectives (AoPO) – 3 KPIs proved difficult to audit
• Procurement – localization KPI
• Road to rail – alternative procedure not
functional Learner intake numbers –
specifically the validation of numbers
• Qualified the completeness of PFMA note
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The recovery plan will consist of a 3-tier process
• Focus areas
• Documentation management
• Contract management
• Consequence management
• This will be dealt with the in the following manner
• Verification of all the findings
• Corrective measure to ensure findings are
closed
• Internal assurance throughout the process
• External assurance prior to the year-end audit
• Continuous monitoring by management of the
improvement plans
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The focus is placed on specific leadership initiatives to aid in addressing audit findings
Leadership
commitment
Consequence
management
Treasury and
Department of
Public Enterprise
alignment
Audit and Risk
IGCE and the Acting CFO will drive leadership compliance
with PFMA through initiatives that instill discipline, ethical
behavior and professionalism
Eskom will continue to implement consequence
management and remedial measures for contraventions in
line with current policies
Awareness training will be rolled out with the Procurement
Tender Committees Reporting to Treasury and Department of Public Enterprises
will be improved to ensure alignment on PPPFA
The Eskom Board Audit and Risk Committee will continue to
provide oversight to the process to deliver an unqualified
audit opinion.
Assessment of major risks
and treatment plans
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Various risks have been identified with proposed treatment plans (1 of 6)
Identified Strategic Risk
Finance
1. Reducing electricity
demand leading to
reducing revenue
• DTI SA Inc. competitiveness as key focus for advocacy to rejuvenate
economic growth
• Improved Marketing strategy, also rebuild trust in Eskom brand
• Marketing strategy to target retention of customers, also partnering with
municipalities
• Use data analytics to assess information from smart meters for effective tariff
design
• Offer pricing incentives to stimulate market demand
2. Declining levels of long-
term profitability
Proposed risk treatments
• Implementation of “Design to cost” strategy
– Sales growth strategy to grow local and cross border sale
– Driving PED coal cost reduction
– Drive further savings through EBITDA Top up savings
– Funding strategy with longer term in mind
• Diversification of funding instruments
• Manage costs to enable a more affordable and sustainable tariff path
• Revenue diversification – through the Growth office, develop for non-
regulated income opportunities
• R&D for solutions to encourage customers to sell back to the grid
3. Failure to implement
climate change
adaptation measures
• Improvement of hardware and software capability for climate modelling and
an integrated system for use across Eskom
• Set resilience risk appetite for investment based on a scenario approach,
amongst others
• Continued investment in climate change science research
• One source of information on cost reporting to reflect type and cost of
incidents
• Continued integration of climate change impact business intelligence for
maintenance, long term planning and overall system resilience
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Finance
1. The ability to sustain
technical performance
• Operational efficiencies are being identified through the Advanced Analytics
program that will be evaluated and implemented which will contribute to
sustaining and improving technical performance
2. Intolerable levels of theft
& vandalism to network
equipment
• Group Security detection, prevention and response initiatives
• Technical solutions and monitoring implemented
3. Exceedance of emission
limits leading to legal
censure and/or load
losses/station shut downs”
• Retrofit projects
• Procurement underway for lead implementation phase of air quality offsets
programme
• Challenges with respect to modelling have impacted on SO2 postponement
application submission timeframes but the project is now progressing
4. Increasing Soweto debt • Conversion of all customers to pre-paid metering
• Debt management
• Installation of split meters with the option of pre paid enabling (Soweto)
5. Increase in late or non-
payment of Municipal
electricity accounts
• Conforming to legal (PFMA, MFMA, PAJA) and regulatory requirements
• Continuous monitoring and reporting on default / debt status of all Munics
• Disciplined application of Eskom revenue management policies and
procedures 6. Financial sustainability of
Eskom has been
compromised due to
revenue shortfall between
MYPD3 application &
NERSA’s tariff
determination
• Address credit rating as a standing item in Treasury Committee agenda
• CFO to lead engagements with Nersa
• Costs will be managed to design to cost strategy (DTC2)
• Enhance the oversight processes as it relates to cash lab projections
• Monthly reporting and analysing of actual spend vs. budget by cost centre
• Quarterly projections are performed bottom up
Identified Business Risks Proposed risk treatments
Various risks have been identified with proposed treatment plans (2 of 6)
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7. Eskom may have
insufficient funds
depending on cost
escalations, tariff
decisions &
implementation of the
funding plan
• Frequency of receiving updated funded projects costs to completion model
• Highlight to IFC impact of projects overruns and projects prioritizations
• Increased frequency of ALCO meetings
• Board and Eskom Governance Framework
• Cash lab Forum
• Loan administration responsibility
8. Inadequate capacity,
productivity and/or
competency amongst
contractors to support
Eskom’s new build
programme priorities
• Supplier Development & Localisation
• Capital Contract Management
• Group Project Sourcing
• Project oversight & productivity
9. Eskom confidential data
falling in the wrong hands
• Encryption of all laptops and desktops
• Implement a DLP prevention technology solution with defined business rules
• Data Leakage Prevention strategy and position paper for data loss prevention
• Information security program
10.Eskom's network
infrastructure & business
systems may be attacked
due to non-restriction of
unknown or unmanaged
devices connecting to it
• Prioritise the Network Access Project
• Logical access control
• Physical access control
• Security Controls
Proposed risk treatments
Various risks have been identified with proposed treatment plans (3 of 6)
Identified Business Risks
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Finance
11.Eskom's coal costs will
rise above inflation and
above the NERSA allowed
cost
• Eskom to re-structure existing long term coal supply agreements
• Fuel Sourcing team will to conclude contracts within given targets
• Negotiation teams to aim to negotiate within MYPD3 parameters
• Negotiation teams to target the Eskom inflation basket
12.Possible non-
achievement of SD&L
targets as per shareholder
compact
• Actively Report SD&L Performance
• Compacting of Procurement Managers
• Implement Work Stoppage
• Reports on Non-compliant Suppliers
13.Increased need for new
external revenue and the
possible misaligned
business model and
delegation of authority
• Driving first right of refusal through stakeholder engagement
• Explore alternative source to generate revenue using a competitive pricing
model
• Optimise business model to capture external markets and ensure
competitiveness
14.Inadequate improvement
in Health and Safety
performance
• Leadership training and development on Safety compliance
• Roll out of initiatives to create safety awareness
• SHEQ audits
15.Strained relations with
employees and
organized labour on
expectations from a
number of employee
benefit initiatives still
underway
• IR training be provided to bargaining units
• Strengthen Labour Relations processes & policies
• Timeous consultation with Labour to ensure buy in
Proposed risk treatments
Various risks have been identified with proposed treatment plans (4 of 6)
Identified Business Risks
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Finance
16.Potential harm to
members of the public
due to exposure to
Eskom's operations,
products and/or assets
• Implementation of the public safety plan
• Public incident data review, implementation of recommendations
• Continual investment to create public awareness
17.Eskom’s inability to
safeguard the integration
of climate change best
practices
• Establish an integrated Climate Change and Sustainable Development
Framework
• Partner with the business for effective mitigation and adaptation
• Implementation of Adaptation to the climate change strategy
• Implementation of the developed green finance strategy
18.Environmental
performance
compromising Eskom's
license to operate and
reputation
• Although the controls in place to address this risk are deemed as fully effective
in terms of their intended purpose (design) - they will not eliminate the risk in
the entirety but will help treat it with the support of the treatment tasks in place
as well as the responsibilities at site level e.g.
• Additional Minimum Emissions Standards postponement application
• Emission reduction cost and water ZLED projects inclusion in the MYPD4
• Engagement on explicit environmental compliance cost in NERSA application
• external markets and ensure competitiveness
19.Eskom Contractor safety
compromised
• Integration of Eskom and statutory OHS requirements into the Eskom PLCM
Model
• Provide and facilitate coaching and mentoring of OHS professionals
• Audits and Inspections
• Integration of OHS into Eskom Commercial process
• Training and awareness
Proposed risk treatments
Various risks have been identified with proposed treatment plans (5 of 6)
Identified Business Risks
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Various risks have been identified with proposed treatment plans (6 of 6)
Finance
20.Exposure of employees to
Health and safety risks
while working in the
continent
• Conduct Medical surveillance for all employees
• Development of Safety plans
• Ensure easy access to international medical services and medical insurance
• Formation of alliances with medical support providers
• Staff security plans for each site to be developed
21.Exceedance of SO2 and
NOx emission limit
• Air quality offsets pilot project
• Application for postponement of MES in 2019
• Completion of high frequency transformer pilot projects at various stations
• ERA approval for Medupi FGD retrofit project
• Retrofit programme
22.Fiscal crises (country
level) and loss of (or
exhausted) guarantees
• Develop project security plans per project
• Ensure medical aid has support or evacuation policy for countries considered
• Establish the requirements for Law of contracts and arbitration in countries
• Insurance to be considered in high risks projects
• Payment advances to be paid by client prior to commencement of work
• Training and awareness in ethics
23.Negative issues impact
Eskom
• Develop a campaigned to re- position Eskom and enhance the Brand
• Embed Reputation Management in all other divisional Plans
• Engage key stakeholder to improve perception
• Push Eskom positive stories
Identified business risk Proposed risk treatments
25 CONFIDENTIAL