Eskom - PMG

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

2

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

3

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

3

4

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

5

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)


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

6


7

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


8

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


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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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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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


12

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


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


21

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



Identified Business Risks

22

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




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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




24


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

Eskom - PMG

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