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Annual Financial Statements
ESKOM HOLDINGS SOC LTD
22 August 2014
MEDIA STATEMENT
Media Releases
In its annual results released on Friday, 11 July 2014, Eskom reported a net profit of R7.1 billion for
the year ended 31 March 2014 (which was significantly affected by the profit on the embedded
derivatives of R2.1 billion), up from R5.2 billion in the previous year, but significantly less than the
R12.2 billion reported for the six months ended 30 September 2013. The surplus will be reinvested in
the company in full to support its capacity expansion programme and to service debt.
As explained at the time of announcing its half-year results, Eskom’s revenues and profits are higher
in winter due to greater sales volumes, seasonal tariff adjustments and lower maintenance costs.
Revenue for the year ended 31 March 2014 increased to R139.5 billion from R128.8 billion in the
previous year, reflecting the impact of the 8% tariff increase and the flat demand for electricity (0.6%
growth compared to the previous year).
The increase in revenue was offset by escalating primary energy costs, especially on open-cycle gas
turbines (OCGTs), and an increase in maintenance costs.
This translated into revenue per kilowatt hour of 62.8c (2013: 58.5c), while costs per kWh in Eskom’s
electricity business were 59.7c (2013: 54.2c). Primary energy costs have increased significantly by
14.2% to 32.0c/kWh. Given the tight reserve margin, the more expensive OCGT stations were
operated far above previous load factors to ensure continuity of supply.
Eskom’s R300 billion funding plan is progressing well, with 90.5% of funding secured. However, the
plan from 1 April 2010 to 31 March 2017 was based on the assumption of a 16% third multi-year
price determination (MYPD 3) tariff increase and will need to be extended to support the capital
expansion programme to 31 March 2018.
“The revenue shortfall created by the MYPD 3 determination requires significant shifts in the
business. A number of options are being pursued together with government, including the
regulatory clearing account (RCA) adjustment and other funding alternatives,” says finance director
Ms Tsholofelo Molefe.
Eskom is awaiting a determination from the National Energy Regulator of South Africa (NERSA) on
its submission for the evaluation and approval of the RCA balance for its previous multi-year price
determination (MYPD 2) control period. The RCA submission was made during the last quarter of
2013 in line with NERSA rules.
The RCA mechanism allows Eskom to adjust for variances between costs and revenues assumed in
MYPD 2 compared to the actual costs incurred and revenue received by Eskom, to ensure that both
Eskom and the customer are treated fairly. The resulting under- or over-recovery is then recovered
through the electricity tariff in the following or subsequent years. Customers could experience an
increase or decrease in the price of electricity as a result thereof.
Standard & Poor’s recently downgraded Eskom’s credit rating and placed it on CreditWatch with
potential negative implications, while Fitch Ratings revised Eskom’s outlook to “negative”. Credit
ratings remain at the lowest end of investment grade. Eskom is at risk of a further downgrade in the
next 90 days if the Eskom standalone financial profile weakens materially. Eskom is currently
engaging Government to address the company’s capital structure.
“Eskom’s financial sustainability is under pressure but we have investigated alternative funding,
including possible equity and quasi-equity, in response. We have applied to NERSA for the RCA
adjustment, and we have launched a business productivity programme to reduce cost, increase
productivity and enhance efficiencies,” Ms Molefe said. “Eskom remains integral to the South
African economy and it continues to rely on a stable financial profile and Government support to
execute its capacity expansion programme,” she added.
“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 through cost savings and efficiencies
alone – cost-reflective tariffs remain a key imperative. Eskom has to balance short-term priorities
with long-term sustainability requirements,” Eskom’s interim chief executive Mr Collin Matjila said.
The return-to-service programme has been concluded with the successful commissioning of the
final unit at Komati power station. A total of 3 741MW has been returned to service.
The delivery of Medupi Unit 6 (794MW) remains a key focus area and the synchronisation (first
power to the grid) date is scheduled for the second half of 2014, with commercial operation (full
load) following approximately six months thereafter. Kusile power station’s Unit 6 (800MW) is due
to be synchronised in the second half of 2015; similarly the first unit of the Ingula pumped-storage
scheme (333MW) in KwaZulu-Natal is due for synchronisation in the second half of 2015.
A number of key milestones have been achieved at Medupi, including the successful hydrostatic
pressure tests conducted in April and May 2014 on the reheater and superheater circuits of the Unit
6 boiler. The welding challenges which resulted in extensive delays to Unit 6 are effectively resolved.
The boiler is now mechanically complete and ready to continue with acid cleaning. The successful
completion of both the control and instrumentation factory acceptance tests of the balance of plant
and the boiler-protection system in April and May 2014 respectively also released a significant part
of the plant to progress with critical commissioning activities. The achievement of these critical
milestones ensure that Eskom remains on track for the targeted first synchronisation of Unit 6 by the
second half of 2014 as previously reported.
The construction of the Sere wind farm has gained momentum and the installation of 10 of a total of
46 wind turbines was completed at 31 March 2014, and a further 22 tower foundations were laid.
This 100MW renewable project is expected to be completed and commissioned in the 2014/15
financial year.
Total energy procured from Independent Power Producers (IPPs) for the year is 3 671GWh at a cost
of R3 266 million, at an average cost of 88c/kWh. In addition, the first project under the renewable
energy independent power producers (RE-IPP) programme was commissioned on 15 November
2013. Eskom has successfully facilitated the connection of 21 RE-IPP projects (1 076MW) to the grid,
of which 467.3MW is currently available to the system. The Department of Energy (DoE) approved
an additional 1 457MW pursuant to the third bid submission, but no contracts have yet been signed.
Contracts were however signed for 1 005MW under the DoE Peaker programme.
Eskom declared four power system emergencies during the year. On 6 March 2014, after having
declared an emergency, Eskom had no choice but to implement load shedding for the first time since
2008.
“This was a painful yet necessary decision to protect the power system from a total blackout. A total
blackout would have significant consequences for the South African economy,” Mr Matjila said.
“All our resources – human, technical and financial – are geared towards ensuring that electricity
generation, 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,” Eskom’s Chairman Mr Zola Tsotsi said.
The system continues to remain tight and vulnerable throughout winter, until a substantial part of
the capacity expansion programme delivers new capacity. It remains important for all customers to
maintain or achieve 10% electricity savings.
Eskom’s integrated demand management (IDM) initiatives achieved total evening peak demand
savings of 410MW against a target of 379MW (2013: 595MW). Eskom continues to improve the
internal energy efficiency of its facilities. Annualised energy savings of 19GWh were achieved from
new IDM projects for the year ended 31 March 2014, exceeding the target of 15GWh.
Safety is at the centre of our zero harm policy. Overall, safety performance has been improving over
the past three years but there are still concerns relating to contractors. We are working with
contractors to ensure that all safety requirements are met. Non-compliance is not tolerated.
There have been a number of safety-related incidents during the 2013/14 financial year. On 31
October 2013, an accident at the Ingula power station construction site resulted in the tragic loss of
six lives, while a further seven sustained injuries. Work on the inclined high-pressure shaft has
resumed after it was halted in terms of the Mines Health and Safety Act (1996), pending a review by
the Mine Health and Safety Inspectorate.
“We remember with sadness each and every life that is lost linked to the provision of our services.
Safety continues to remain a strategic focus for Eskom. The Department of Mineral Resources’
investigation into the cause of the accident is underway and Eskom’s investigation will be done in
line with the prevalent guidelines. Eskom will consider the outcome of the investigations carefully
and implement the necessary actions,” Mr Tsotsi said.
There was an over-pressurisation incident in the boiler of Unit 3 of the Duvha power station on 30
March 2014, taking the 575MW unit out of service. One person was treated for dust inhalation but
no other injuries were reported. The incident is still under investigation
Eskom believes in a balanced approach to ensure environmental sustainability whilst supporting
economic growth and access to affordable electricity. New atmospheric emission standards come
into effect in 2015. Eskom has received new atmospheric emission licences for most of its power
stations, except Kriel, where Eskom’s request to increase the particulate-emissions limit and allow a
grace period for when emissions exceed the limit of the new license, has been denied. The new limit
does not allow the station to continuously operate at its full rated power and will require load
losses.
Eskom has embarked on an extensive retrofit programme to reduce emissions at the highest
emitting power stations, but the execution of this programme will require long outages and a
significant amount of capital (currently R72 billion in nominal terms). Despite the retrofit programme
and Eskom’s best efforts, there remains a risk that Eskom may not be able to fully comply with the
new national emission standards, which come into effect in 2015 and 2020, for several reasons:
· Certain of the required technologies requires additional water which is not yet available
· Implementation of the required technologies requires plant outages of 120 to 150 days per
unit; there is insufficient spare capacity to enable the required outages to be taken without
impacting on the ability to meet national electricity demand.
Based on the above, Eskom expects to achieve 57% compliance with the national emission
standards by 2026. Given this situation, Eskom submitted an application in February 2014 for a five-
year postponement from compliance to the standards for cases where compliance within the
legislated timeframe is not possible. A response from the authorities is expected within six to nine
months.
Despite the overall coal quality being on target, coal-related load losses were experienced at the
Arnot, Matla and Tutuka power stations. Production performance of some cost-plus mines continues
to be a challenge. Although four medium-term contracts were signed for coal supply to the Kusile
power station during the commissioning phase, the conclusion of long-term coal and limestone
supply agreements remains a focus area.
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. A highlight this year is an increase of 15% against the previous
year of coal transportation by rail.
As at 31 March 2014, the capacity expansion programme employed 25 181 people on new build
project sites, down from 35 759 at the previous year-end, due to the demobilisation of staff as work
packages are completed. Since the inception of the capital expansion programme in 2005, a total of
8 930 (2013: 6 851) contractor employees have been trained in various trades.
Highlights of the financial year included the electrification of 201 788 households (2012/13: 139
881), our best performance in 12 years. Since inception of the electrification programme in 1991,
more than 4.5 million homes have been electrified. Eskom has also committed R132.9 million to
corporate social initiatives during the year to March 2014.
Total measured procurement spend by the company for the year was R133.5 billion, of which
R125.4 billion or 93.9% was attributable to B-BBEE suppliers, exceeding the target of 75%. During the
year, local sourcing in the capacity expansion programme represented 54.6% local content (2012/13:
80.2%).
“In the two decades since South Africa achieved its freedom, our country has made enormous
progress. Eskom has played a central role in this transformation. Between 1994 and 2014, our
generating fleet capacity has been expanded from 37 636MW to 41 995MW, and our power lines
have increased from 238 964km to 359 337km. Over the same period, the proportion of households
with access to electricity has risen from 44% to 85%.,” Mr Tsotsi said.
“We have to meet the challenges of energy security on a sustainable basis. In this regard, we have
formulated a comprehensive plan based on financial sustainability, accelerating generation
performance and completing the current new build programme. We are also pursuing other supply-
side levers including gas as a significant component of our energy mix.” Mr Matjila concluded.
The Minister of Public Enterprises, Ms Lynne Brown said that there is a need for energy security in
South Africa to support the country’s anticipated economic growth in the future.
“Eskom is committed to its purpose to provide sustainable electricity solutions to grow the economy
and improve the quality of life of all South Africans. In the years ahead, the current capacity
expansion programme will, once completed, result in a more secure national power supply that can
meet the country’s needs,” she said.
Full report can be viewed on Eskom website:
http://integratedreport.eskom.co.za/financials/fin-approval.php
ENDS
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