Eskom Annual Report and Financial Results 2009/10

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Public Enterprises

06 September 2010
Chairperson: Ms M Mentor (ANC)
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Meeting Summary

Eskom presented an overview of the Annual Report and financial statements for 2009/10. In contrast to the previous year, Eskom was on the path to total recovery. A net profit of R3,6 billion had been posted, in contrast to the loss of R9,7 billion posted in 2008/09. However, Eskom cautioned that it was still faced with substantial challenges. In the last year there had been no load-shedding and the power supply had been delivered throughout the World Cup. There was also a positive reserve margin, and significant funding had been secured to finance the capacity expansion programme at Medupi and Kusile, and for renewable energy development. Strong government support had been given for the build programme. The 2009/10 annual financial statements were explained in detail, and it was stressed that both the interim 31% tariff increase in 2009 and renegotiation on the Mozal Special Pricing Agreement had contributed to the turnaround in revenue. However, there were still concerns over the cost of financing, since the total interest bill was over R10 billion. Cash flow was still problematic. Bad debt was being controlled, at less than 1%, but was still a concern. There had been increased sales, reflecting improved economic growth. Operating costs had risen, but were within manageable limits. Eskom had  committed itself to a R2 billion saving by increasing efficiencies internally.

The embedded derivatives and Special Pricing Agreements, particularly for BHP Billiton, were explained in some detail, and compared to megaflex terms, and Members asked questions of clarity about the aluminium smelters, and why it was not possible to put up smelters in the Eastern Cape. It was noted that Eskom was paying deferred tax from previous years. Eskom was careful not to fall into a situation where it had to borrow to pay interest. Cash from operating activities remained stable from previous years. It hoped to maintain 43 average stock days. Its spending was below budget, deliberately, and contracts were signed on a “limited notice to proceed” basis, depending on cash flows. The presenters explained that most of the long term assets had lives of 40 to 60 years, and its long term debt was in line with this, with some debts maturing only in 2040 and 2041, while the World Bank loan had a 28-year life span. 

South Africa must create 50GW of new electricity capacity by 2028, which required a faster build rate. Eskom was committed until 2017 with Medupi and Kusile but projects beyond that should be done in a project-funded manner, where all debt was cleared up front. Eskom had to maintain its investment grading and credit rating to enable it to go into the international market and raise funds. Eskom had suggested some hybrid solutions which entailed recapitalising Eskom, getting additional guarantees from government and raising international debt.

Members asked that the costing for Medupi and Kusile, and the funding models, must be presented at the next meeting, and questioned reports that Kusile might not proceed. They also questioned whether the reports that Koeberg was to be decommissioned were true, and was assured that they were not. Several Members expressed their concern about the quality and cost of the coal that Eskom was using, and also asked about its transport, recommending that rail should be used, as well as the costs of road maintenance. Members asked about electrification in the rural areas. Members asked about the drop in the non-Eskom learners and what arrangements it had with the Further Education and Training Colleges. They noted the bonuses given to top management and asked what specifically was being done to discuss these matters with the unions to avert possible future strikes, as well as what had been done about the discontent around the food parcels given to workers on site. Members asked about alternative sources that Eskom might be considering, were quite concerned about the losses due to illegal connections and questioned specifically whether these were not regarded as criminal offences. They noted the need to strengthen transmission lines, asked Eskom to provide a map of the proposed transmission lines where access was a problem, and asked about Independent Power Producers and their state of readiness. Members questioned the prices paid by BHP Billiton at Hillside and Bayside, and asked about Mozal and selling of electricity to other countries, and whether they represented any of the bad debt. The World Bank loans and possibility of extra funds were also raised.  

Eskom gave a very brief presentation on its Operating Highlights and Challenges. Members noted that South Africa had coal reserves until 2050, and that nuclear options would take years to implement, asked how Eskom as a strategic water user was addressing any deficiencies it had identified in this field, and asked for clarity on the wasteful expenditure due to late payments to SARS. They questioned the causes of fatalities, again raised the problem of illegal connections, and asked about suppliers’ compliance with black economic empowerment prescripts. A question was asked, but not answered, about the spending on World Cup tickets. Members commented that it was necessary to benchmark Eskom against other international players, commented that the South African system of multiple role players provided a healthy system of checks and balances, and noted that all stakeholders must work together to avoid any damage to Eskom’s credit rating.

Meeting report

Eskom Annual Report and financial performance 2009/10
Mr Mpho Makwana, Chairperson, Eskom Board, presented a document containing an overview and financial performance of Eskom for 2009/10,  entitled 'On the path to recovery'. He asked that Members should raise questions of clarity, if they wished, as the presentation proceeded. He said that, in contrast to the preceding year's annual results, in which huge losses were posted and when the year had been marred by load shedding, the present outlook was more positive and Eskom was on the path to total recovery. He noted that the report was compiled in line with the Global Reporting Initiative (GRI) Index on Sustainability Reporting. He said more detail was available in the Annual report and outlined how the presentation conformed to the GRI Index in its format.

The most significant aspect of the turnaround was a return to profitability. A net profit of R3,6 billion had been posted, in contrast to the loss of R9,7 billion posted in 2008/09. He said although Eskom had turned a sharp corner, it was still not “out of the woods” and there were substantial challenges in the future. There had been no load shedding since the end of April 2008. Eskom had kept its promise and had delivered the power supply for a successful World Cup.

Other positive indicators were the positive reserve margin, and that significant funding had been secured to finance the capacity expansion programme at Medupi and Kusile, and for renewable energy development. There was a new leadership thrust and the board, management, shareholders and new Chief Executive Officer were aligned around the turnaround plan. There was strong government support, especially in the respect of the build programme. This was reflected in the R60 billion subordinated shareholder loan and the R176 billion South African Government guarantee

Mr Paul Flaherty, Finance Director, Eskom, presented the 2009/2010 Annual Results. He began by setting out the key financial performance indicators. The turnaround in Eskom's financial performance was highlighted by revenue and embedded derivatives. The interim 31% tariff increase in 2009 from the National Energy Regulator of South Africa (NERSA) was reflected in the change in revenue, from R54,177 billion in 2009 to R71,209 billion in 2010. In the case of embedded derivatives, the renegotiation on Mozal, one of Eskom’s four Special Pricing Agreements (SPAs), had made it possible to turn around the loss of the previous year, to making a profit in the current year. The operating loss reported last year had been turned around to a profit of R7,089 billion.

Mr Flaherty said that there was still an issue of concern around Eskom's finance costs. The total interest bill was over R10 billion. Eskom capitalised most of the interest into the power stations it was building at Medupi, Kusile and others, and was effectively still in a loss situation. This was reflected in the cash flow statements and key performance ratios. Mr Flaherty explained that if the  total operating profit was divided by the total interest bill, the latter was not covered. Therefore, for every R1 of interest charges, it only received a current contribution of 57 cents. The revenue per kilowatt hour (kWh) was 31,9 cents on average, compared to 24,7 cents in the previous year. The operating costs were 28,2 cents per kWh, compared to 25,9 cents per kWH in the previous financial year. Electricity was thus sold below the operating cost in the previous year. This negative trend had been turned around, as indicated in the 2010 Annual Report.

The Chairperson interjected to ask what had prompted the return to profitability.

Mr Flaherty expanded that NERSA's approval of the 31% tariff increase had been instrumental in returning the sale of electricity to profitability. This tariff had been effective until 31 March 2010. In the current financial year NERSA had granted Eskom a 25% increase in the electricity price, in line with the migration to a more cost-reflective tariff.

Eskom’s bad debt was being controlled at less than 1%, but was an area of concern, especially in the light of electricity tariff increases, as it would impede Eskom's financial recovery. He summarised again that the net increase of R16 billion in revenue was due to the electricity tariff increases, selling electricity above operating cost, and the renegotiation of the Mozal contract.

In terms of Gigawatt-hours(GWh) sold, there had been an increase of 1,7% in 2010 and this indicated improved economic growth and an indicator that the country was coming out of the recession. From 1 April to 30 June 2010, there was a growth of 4% in electricity sales, in comparison to the first quarter of 2009. The growth of the economy made the Build Programme more pressing from Eskom's perspective.

He reported that the operating costs for primary energy (the cost of coal and nuclear fuel) had risen by 16,9%. The introduction of the environmental levy in the previous financial year, of 2 cents per kWh, resulted in an increase of 14% in primary energy costs in the current year, but the actual cost had risen by 2.9%, which he described as good performance.

Eskom's 'coal stock' days had exceeded the average of 42 days coal stocks on hand.

Mr Flaherty said that for cash operating costs, the total employee costs rose by 15%. Across the board increases accounted for 12%, and the balance of 3% reflected an increase in the number of employees. Eskom had committed itself to a R2 billion savings in operational cash costs by increasing efficiencies internally.

Mr Flaherty then elaborated on the issue of Eskom's embedded derivatives and the SPAs. Until 2008, Eskom had four negotiated pricing contracts, three with BHP Billiton and one with Skorpion in Namibia. In terms of those contracts, which were signed many years ago, the price that these customers paid for electricity was based on the commodities they were smelting, so that if the aluminium price went up, the electricity tariffs also went up. Until 2008, Eskom was making money on those contracts, as those particular smelters were paying electricity tariffs higher than Eskom's standard industrial tariffs (megaflex). In 2009, however, many of the commodity prices collapsed as a result of the global economic meltdown, particularly aluminium. Eskom had to  compare the future aluminium price, and what would be obtained from those contracts for their remaining life, to the megaflex tariffs. Eskom was not able to sell the electricity at megaflex, and that accounted for the large loss in the 2009 financial year. The problem was compounded by the continuing decline in aluminium prices, despite Eskom’s three year 25% increase. Had Eskom not negotiated itself out of Mozal in this year, there would have been another significant loss on the income statement ending 31 March 2010.

Members of the Committee asked about the virtual loss alluded to by the Chairperson in his opening address.

Mr Flaherty explained how this was reflected in the income statement. The calculation of an embedded derivative related to a measurement of opportunity profit / loss on revenue, and was not compared to the cost of production. He stated that Eskom was in negotiations with BHP Billiton in respect of the contracts of Bayside and Hillside, which hopefully would be concluded in the present financial year.

Mr P Van Dalen (DA) wanted to know whether contracts were renegotiated were on Megaflex terms. 

Mr Flaherty stated this was not the case, as BHP Billiton had a signed commercial agreement with Eskom. Eskom believed that there should no longer be any embedded derivatives, and that there should be a rand-based tariff for a rand-based cost. Secondly, it was important that the selling price of electricity had to be higher than its production cost.

A Member asked about negotiations with BHP Billiton.

Mr Flaherty stated that it was a company-to-company negotiation with BHP Billiton. The latter would maintain that it should be paying a price that would still keep its smelters in operation. Mr Flaherty indicated that if Eskom was negotiating anywhere near megaflex, it would be a good negotiation. It would not negotiate for anything below cost.

Mr Flaherty then spoke to the net finance costs. The interest bill was high, as it was capitalised. Eskom was not paying tax in cash currently, but was paying deferred tax from prior years. Liquidity and capital resources were the major challenges facing Eskom. Shareholders’ equity, or net accounting worth at the end of the financial year was R70,222 billion. Its debt, both long and short term, was about R110 billion. It was committed to a Build Programme, which would incur another R400 billion of debt, while it still did not have a tariff that gave enough surplus or shareholders’ equity. This meant that it faced significant liabilities with only a small equity. Mr Flaherty emphasised that it was not possible to run a commercial operation if the interest bill could not be paid, or if Eskom had to keep borrowing to pay interest. Eskom would not allow itself to fall into a situation where it was not a going concern.

The cash generated from operating activities was the same as in previous years. Although Eskom was showing profitability, this was not cash profit, because of the virtual concepts that had been explained earlier. Eskom's cash flows had not improved in the past year, and it had to invest R48 billion to keep the bill programme going, which it then had to balance by taking out net borrowings of R34 billion. It had managed by generating as much cash as possible from operations, and paying what it could afford towards the bill programme. Mr Flaherty reiterated that Eskom would not commit itself to payments and contracts that it could not afford, because this would run it into liquidation. In terms of its working capital, Eskom’s average stock days in March 2010 were 37 days, but this had risen, by August 2010, to 43 days, which it hoped to maintain.

In terms of capital expenditure, although Eskom was continuing to spend, it was well below the budget as reflected in the Build Programme. This was because of the cash situation. He reiterated that Eskom wanted to stay within its means. It had committed R125,5 billion to Medupi, but had spent only R32,08 billion. At Kusile, although R126.8 billion was budgeted, only R14,7 billion had been spent. Eskom was often asked about the escalation in the costs. If interest was taken out of the equation, the actual contracted costs of Medupi were just under R100 billion, and for Kusile were about R105 to R110 billion. 80% of the contracts were signed for Kusile, but on a  “limited notice to proceed” basis, because cash flows to proceed faster were not available. Once the cash flows improved, Kusile could be accelerated, and the final costs could be calculated.

In terms of cash generated by operations, the amount of R11,646 billion barely covered the interest bill. In terms of its debt maturity, Eskom had long term assets with lives of 40 to 60 years. In order to maximise the cash flows of those assets, it had taken out long term debt to match, and had stretched repayment out as long as possible. Debts would mature in 2040 and 2041 while the World Bank Loan had a 28 year life. The present management was fully aware that it would not be in place in 30 years time, and had to ensure that it would leave behind something sustainable.
 
The context of the funding gap was that South Africa needed to create 50GW of new electricity capacity by 2028. This required a faster build rate than ever before. With Medupi and Kusile, Eskom was committed till 2017, but there were no commitments beyond that. The funding gap over seven years was R190 billion. Included in that was R144 billion for projects beyond Kusile. All projects beyond Kusile should be done in a project-funded manner, where all debt was cleared up front. If the R144 billion was taken out, it meant that Eskom had a shortfall. Management had looked at utilities throughout the world, and had concluded that Eskom had to maintain its investment grading because that would enable it to go into the international market and raise funds. Eskom's goal was thus to maintain its credit rating, based on its benchmarking of itself against other utilities in the world. In America and Europe, the power producers, when embarking on build programmes and had maintained their credit grade rating. Eskom's credit rating was currently below those set by the rating agencies. In conjunction with the Department of Public Enterprises (DPE) and National Treasury, Eskom had come up with hybrid solutions which entailed recapitalising Eskom, getting additional guarantees from government and raising international debt. The combination of those strategies was to complete Kusile as a priority.

Discussion
The Chairperson reminded Members that Eskom would be returning to the Committee in the next quarter, specifically to speak about its funding model. She asked Eskom to present the costing for Kusile and Medupi at that meeting as well.

The Chairperson noted that questions around coal and coal technologies were of concern to her, as the mining houses had indicated that superior coal was being exported and that inferior quality was used by Eskom.

Mr C Gololo (ANC) commended Eskom on the report and its application of the GRI Index, as well as the fact that it had received the award for Employer of Choice by engineering students. He also congratulated Eskom on keeping the lights on during the World Cup, and for its rating by FIFA of nine out of ten. He noted the statistics on the electrification of homes since 2008 and wanted to know if progress had been made on electrification in the rural areas.

Ms G Borman (ANC) commended Eskom on the positive turnaround. She wanted to know why there had been such a significant drop in the non-Eskom learners as reflected in the statistics. Referring to the World Bank Loan and the public interest it generated, she wanted to know how the Medupi project would assist in job creation. She noted the bonuses and perks received by top management, despite all its economic challenges, in contrast with the threat of strikes and anger on the ground surrounding the huge wage gap, and wanted to know what Eskom was doing to reduce this gap and to address the anger of workers.

Mr M Sonto (ANC) noted Eskom's commitment to sticking to its objectives indicated in the Path to Recovery. Eskom had also warned about the serious challenges it would be facing. He wanted to know what might cause it to regress. He inferred that Eskom was making money for the State and noted that Eskom had received more from the State than in the previous year. He wanted to know whether it was true that Eskom was more than R90 billion in debt.

Mr S Van Dyk (DA) said it was believed that the new coal power stations, Medupi and Kusile would come to the rescue of the country. In a government document earlier this year, the public had been informed that the building of Kusile, which commenced in 2007, would be completed in eight years time, which now left four years for the completion of the project. However, in August 2010, the Department of Energy had said this and other projects might be scrapped. He queried the apparent lack of communication between Eskom, the Department of Energy and the Department of Public Enterprises. Taking into account that energy needs would increase by 3% per annum, which implied that the country would have to double its electricity supply in the next 20 years, he enquired what the result would be if Kusile were to be halted, what alternatives there were, or if the public must simply prepare for blackouts.

Mr Van Dyk noted that on 1 July 2010, the Minister of Public Enterprises responded to a written question in Parliament, indicating that an amount of  R625 million had been lost by Eskom, due to illegal electricity connections. He wanted to know what measures Eskom had in place to ensure that these illegal connections and the loss of electricity could be limited to the minimum. It had been said in the past that local authorities did not want to go into illegal settlements because of risks and safety reasons. He questioned whether Eskom went into informal settlements. He stated that at Medupi it was common knowledge that there were numerous delays in the building programme due to problems with labour and unions. Workers on site had received three food parcels per day, and that there had been an agreement with Eskom that after one year they would receive hot meals instead of food parcels. Mr Van Dyk produced photographs, noting that the workers had not been happy with the food parcels and simply threw them away, which was wasteful and fruitless expenditure. He did not see a record of that in the Annual Report .

The chairperson queried exactly what the food parcels were, and whether they included cooked food.

Mr Van Dyk responded that they comprised cold food, and although there was an agreement that it would be changed to hot food that had not happened.

The Chairperson said normally food parcels referred to groceries, but this appeared to be more of a lunch-box, with sandwiches and other snacks.

Mr Van Dyk said thousands of workers received free food, accommodation and transport at Medupi, and he wanted to know whether the problem had been solved and what was being done to ensure that there were no more delays caused by dissatisfied workers preventing the completion of the project.

Mr G Koornhof (ANC) congratulated Eskom on delivering on its promises during the World Cup, and on the comprehensive Annual Report which had addressed most of the issues in an open and transparent way. He commented on the R10 billion interest rate bill and the fact that the net operating profit was not covering it. He said that Eskom's resolve not to borrow to cover the debt reflected sound financial management. He said that Eskom's commitment to maintaining its credit rating was the most significant statement in the presentation. He cautioned that all stakeholders, Parliament and Eskom had to work together, as it was easy to damage the credit rating, which would then have dire consequences for the country. In terms of operational issues, he queried the amount of R950 million reflected for road repairs in the financial statements, and asked why this had risen so steeply from R161 million in the previous year. He also queried the quality of the coal used by Eskom, and said that Majuba and Matla accounted for 78% of system losses. He asked the reasons for the poor coal quality and asked what steps were being taken to correct that.

Mr L Greyling (ID) noted that recently he had become acquainted with China’s electricity generation practices. He raised the need to strengthen transmission lines, as problems were under reported. He commented on the erection of transmission lines and access to land, and asked what Eskom's plans were on this issue. With regard to the special contracts, he said his understanding was that these were all regulated by NERSA and that there were about 110 different tariff structures. He wondered why it was not possible to go to the contractors and state that anyone using electricity would have to conform to the regulated tariffs, instead of allowing the special arrangements allowed to continue. The perception created was that some companies were receiving a better deal than others, and that must be avoided. He asked about progress on the concentrated solar power plant and wind power. He also queried if funds would be received from the World Bank, or whether funding must be leveraged elsewhere.

Mr A Makoena (ANC) congratulated Eskom on its achievements and said he appreciated its sense of accountability. He noted that Koeberg had not featured in the report, and said that he had learned that it would be decommissioned, and that there were issues related to the water levels. He wanted to know more about the Independent Power Producers (IPPs) and their state of readiness. He suggested that before next year's wage negotiations, Eskom should acquaint the unions about the reality of its financial status, and the virtual accounting practises reflected in its financial statements, as this might moderate the workers’ demands and hopefully avoid a strike.

Mr Van Dalen referred to the SPAs and said he had a Cabinet-approved document before him, from which he proceeded to read.

The Chairperson enquired what the name and status of the document was.

Mr M Nonkonyana (ANC), on a point of order, stated that if the document was not the one under discussion, it was irrelevant at this stage. If Mr Van Dalen wished to discuss that document, it should be done at an appropriate time.

The Chairperson requested that Mr Van Dalen not produce documents at the meeting that had not been tabled, but should rather address himself to the subject of the agenda.

Mr Van Dalen said he wanted to know why it was that whenever the SPAs were raised in Parliament, Members were informed it was confidential. He was trying to make the point that Members should be given the information when they requested it.

Mr Van Dalen asked what price BHP Billiton was paying for electricity at Hillside and Bayside. In answer to a question in Parliament, the Minister had said that Mozal had been paying 12,2 cents, but that had now changed, to the better, as the financial statements from Eskom showed.

Mr Van Dalen also raised a question about illegal connections, enquiring whether the legislation had changed so that the theft of electricity was not a crime, and asking what Eskom was doing about this. He raised the issue of downtime, and also mentioned reports on the poor quality of coal. His understanding was that coal of a lower grade suited the functionality of Eskom's power stations.

The Chairperson responded that the Eskom legislation could only be changed by Parliament.

Mr Van Dalen stated that this assertion had been made in the report, and he said that further details related it to the debt of Soweto.

The Chairperson stated that she was not allowing Eskom to answer that question. It remained Parliament's prerogative to change any Act.

Mr K Dikobo (AZAPO) added his congratulations to Eskom for a good report. He referred to the statistics on non-Eskom learners raised by Ms Borman earlier. He had attended a summit on Further Education and Training (FET) Colleges recently and he was disappointed that Eskom, as one of the biggest parastatals who needed the skills base trained by FET Colleges, had not been there. He wanted to know what relationship there was between FET colleges and Eskom. One of the complaints from this sector was that FET learners could not get placed for experiential training. Eskom had imported artisans from Asia. He questioned when Eskom would grow its own scarce and critical skills base.

Mr Dikobo also wanted to know who the bad debtors were. He referred to the provision of power to Botswana, Swaziland and Zimbabwe, and asked whether they were part of the bad debtors. His last question was about the reported profit that Eskom had reported on and whether it was the result of prudence, or a “rip off”, as alleged by people on the ground who were unhappy about the increases in tariffs allowed by NERSA.

Mr M Nhanha (COPE) congratulated Mr Brian Dames on his appointment as Chief Executive Officer. He asked whether Eskom could disclose the conditions laid down by the World Bank for the loan, saying that there was some belief that South Africa had signed away some of its freedom. He also asked about the contracts involving BP Billiton. He voiced his concern about Eskom selling electricity to a multi-national operating outside the country, when the building of a smelter in the Eastern Cape had not got off the ground. He wanted to know how old the contracts were, what their lifespan was, if Eskom was going to do away with the contracts, and, if so, whether the energy could be redirected to a smelter in the Eastern Cape.

Mr Gololo also followed up on the question on road repairs raised by Mr Koornhof, asking about the damage caused by trucks, especially in Mpumalanga, and whether Eskom had any programme in place to reduce the damage.

The Chairperson commended Eskom on a well presented report and congratulated Mr Dames, who was attending the Committee meeting for the first time in his new capacity. She also expressed her appreciation of the good working relationship she had with Eskom. She added to the concerns raised on the non-Eskom learners and said the country was grappling with serious problems of youth unemployment. She was also concerned that Eskom had not mentioned plans to assist industries to manufacture the essential components that they were currently sourcing internationally. She was also concerned about the bank loans, and stated that it was imperative that the funding model was finalised, and that all concerned must work hard to prevent having to take out a second loan from the World Bank. She was concerned about the figures given for the funding gap, as it did not accord with the projected economic growth of the country from other sources, and she felt that further research should be done in that area. She too was concerned about the poor quality of coal and said that the moving of transport of coal from roads to rail should be investigated.

Mr Flaherty responded to the financial questions. He noted that many questions were asked around the SPAs. There were legal contracts in place with the smelters. Eskom wished to abide by those contracts, but was concerned with trying to get a better deal out of them. These contracts had been in place for many years, dating back to times when South Africa had surplus electricity supplies, and had wanted to grow industry, so those contracts made sense in that context at that time. In 2009, circumstances changed, and the contracts then had adverse effects on Eskom. Eskom would have liked to resile from them, but had no legal basis to do so, and it was problematic to involve NERSA and the government. He noted that the price was confidential; both Eskom and BHP Billiton had to have their confidentiality protected. Billiton had other competitors in the field of aluminium, and had shareholders to whom it was accountable. He could confirm that the remaining R4,5 billion loss on Eskom's balance sheet as on 31 March 2010 did basically reflect the future losses from Bayside and Hillside, in terms of the megaflex price.

With regard to the World Bank Loan, Mr Flaherty clarified that the loan was a direct investment loan, and not a developmental loan of the type that the World Bank sometimes entered into with developing countries and which had onerous conditions. This particular loan was repayable over 28 years. For the first seven years there was a deferral on capital repayments, so payment was made on the interest only. The interest rate on the loan was linked to international interest rates, which, as at the previous week, were 9,7%, in line with what Eskom was currently paying for loans. The debt service cover ratio was expected to be two and half times, but Eskom was way off on this, and had projected three to four years to reach this. Eskom would have to supply a plan of how it intended to reach this, if this was not accomplished within the timeframe. The World Bank had made some significant waivers on Medupi, in that the Bank was funding specific contracts, which Eskom had already signed. The World Bank had put in guidelines but these were in line with the Public Finance Management Act (PFMA), with some additional fraud and corruption clauses attached.

Mr Flaherty said the bad debt did not relate to electricity sold to other regions, but emanated from some of the municipalities such as Soweto, and gold mines such as Aurora and Grootvlei. Bad debt remained under 1% of Eskom's revenue. Referring to the comments on “prudence” and “rip-off tariffs”, he reminded Members that there was no surplus money to pay the interest on loans, and so without those higher tariffs, Eskom could not pay its interest.

Mr Flaherty noted the question of a smelter for the Eastern Cape, and said that the SPAs had been entered into many years ago. The major one had been Mozal, but Mozal received power from Cabora Bassa, and it provided Mozambican power to Mozambican industries. Bayside and Hillside represented South African power supplied to South African industries. He suggested that it would not be profitable to build an aluminium smelter in the Eastern Cape at this stage

Mr Van Dalen queried why Mozal had such an effect on the balance sheet if it was a Mozambican concern, and if Eskom had just been feeding power through to Mozal.

Mr Flaherty responded that Eskom had bought the electricity from Cabora Bassa in rands, and sold it to Mozal at a lower cost than normal. However, the problem had been the decrease in the aluminium price, which had caused the embedded loss.

Mr Flaherty noted the questions about government providing more to Eskom in the 2009/2010 financial year. He reiterated the points he had made in regard to the balance sheet. At the end of the financial year Eskom had R110 billion debt, not R94 billion. The government had funded Eskom with R60 billion, according to its funding commitment to Eskom.

The Chairperson asked whether Eskom was in credit or debit.

Mr Flaherty said that as at 31 March 2010 Eskom had been in debit, but with the additional 25% increase in the electricity tariff in the current financial year, it aimed to at least cover the interest bill. From the second and third year of the annual 25% electricity tariff increases which had been approved by NERSA, additional surpluses would be generated, to fund the building of power stations and service Eskom’s debt. It hoped to start moving out of the red in the current and following financial years, owing to the tariff increases.

Mr Brian Dames, Chief Executive Officer, Eskom, said that all the questions had been noted and Eskom would report back on the outstanding matters.

Mr Dames then answered the questions on the rural areas, saying that this was a concern for Eskom and it would be looking at ways to accelerate the electrification, especially in schools and clinics. He noted that electrification was the responsibility of the Department of Energy, and Eskom was just the agent, who was directed by local, provincial and national government as to where it must electrify. The electrification of homes referred mostly to urban areas. He stressed that South Africa would not achieve universal access without increased funding from government. Eskom saw itself playing a role in driving the process. He said there were innovative ways to address the electrification needs of the rural areas, which could be looked at.

Mr Greyling stated that a joint meeting with the Portfolio Committee on Energy should be set up around the issue of rural electrification.

The Chairperson agreed.

In regard to the questions on non-Eskom learners, Mr Dames said Eskom acknowledged that it had not met the target, but pointed out that Eskom’s figures did not include all its bursary-holders. There were more than 4 500 learners who were being trained. He welcomed the comments on the FET Colleges and said that Eskom would work more closely with them in the future, especially around experiential learning.

Commenting on the questions about the path to recovery and what would impact on that, he raised the concern of what would be happening after 2017, and the necessity for progress on renewable energy. The critical issue was the challenge posed by funding, which Mr Flaherty had illustrated. At present, South Africa had no other viable alternative to Kusile to deal with its energy needs, and therefore it was imperative to find a funding solution to complete the Kusile project.

Mr Dames noted that the question of illegal connections remained a big challenge for Eskom and the country. New technologies had to be looked at, and it was essential to work with communities.

Mr Dames then discussed the labour issues at Medupi and Kusile. He noted that there was an agreement with organised labour, which regulated payment and hours and other issues, and there had been a massive reduction in labour unrest. He said the problem around food had been an isolated incident, and had been remedied. It was important to Eskom that its employees were treated fairly and that everyone was receiving the same food, and there was capacity to ensure delivery in this respect.

In answer to the questions related to road repairs and the massive increase reflected in the financial statement, he said there was a move to a shadow toll.  Road repairs were essential to ensure security of supply to power stations. The road repairs in Mpumalanga, which were of critical necessity due to the bad state of roads there, were in excess of R10 billion. The expectation was that the South African National Road Agency Limited (SANRAL) would take over the repairs of roads, as Eskom was not a road building company.

Mr Dames noted the comments about removal of trucks from the road, and said that Eskom was working with the Department of Transport, and was migrating from road to rail transport where possible. A railway line was being built to Camden. This was an issue that must be dealt with in long term planning. South Africa had to decide whether its future power source would be nuclear or coal.

Mr Dames said that Eskom would revert to the Committee with the answers to the questions about the quality of coal. The major problems were at Maduba and Matla. Daily losses caused by problems with coal amounted to 1000 megawatts. He said Eskom might have to renegotiate with the mining companies, or invest in plants that could clean up the coal.

Mr Dames noted comments about the lessons learned from China. The transmission lines were crucial and Eskom had an extensive programme dealing with this. The biggest problem was getting access to land and getting servitudes, and this put the power supply at risk. A line was being built from Gauteng to the Western Cape, to Medupi and to Kwazulu Natal. The Eastern Cape had been dealt with extensively in the past years.

The Chairperson asked that Eskom should provide a map of the proposed transmission lines where access was a problem, so that the Committee could address this in a future meeting.

Mr Dames agreed to do so, and noted that there were particular problems in the Western Cape.

Mr Dames noted that there was progress in terms of the solar plant and wind power, and Eskom was working with the World Bank to secure the technology needed.

Mr Dames said that it was not correct that Koeberg was to be decommissioned, and said that there was an investigation into how to extend its life. Eskom was proud of Koeberg, and it was performing better than the nuclear plant in France. He mentioned factors such as climate change, water scarcity and baseload capacity that made nuclear power the best option for the country in future. It was urgent for South Africa to deal with this. Renewables and Independent Power Producers had a role to play.

Mr Van Dyk returned to the issue of coal quality and stated that representatives of mining companies and Eskom had visited Parliament earlier on in the year, and had stated there was no problem with the quality of the coal. He maintained that South Africa had quality coal reserves, that Eskom was paying for a low quality product, and the problem had to be solved.

The Chairperson reminded Members that they would be dealing with the issue at the next meeting with Eskom.

Mr Dames admitted that there was a problem with the quality of the coal, the volume of the coal and the transport of coal, and these led to higher electricity costs. These problems also meant that Eskom's carbon footprint was higher. South Africa had quality coal reserves, but there were problems in getting to them, and in price. Eskom had met with the Department of Mineral Resources and this remained a problem that had to be addressed urgently.

Mr Dames said that Eskom had already begun to engage with the unions about Eskom’s funding problems and remuneration structures and salary negotiations.

The Chairperson raised the issue of the second loan from the World Bank.

Mr Flaherty responded that the World Bank had a Clean Technology Fund, and if South Africa wanted to invest in clean technology, then it could approach the World Bank. No negotiations had been entered into.

Mr Dames said that the long term perspective also had to be taken with capacity building, in terms of the production for components for power stations. Eskom had built capacity in significant respects and this could be increased with economic growth.

Mr Makwana commented on issues raised in the presentation. He said that, in regard to the non-Eskom learners, the statistics had been misleading. Eskom had taken more than 5 000 students aboard on learnerships. He stated that in the Corporate Services Division of the Annual Report, there was mention of the FET Colleges. Rural electrification was being dealt with, and Eskom was involved with many developmental initiatives in the rural areas. He suggested that a presentation be made to the Committee on those issues, so that Members gained a broader perspective. He referred to the Independent Auditors' Report in the Annual Report, noting that the Auditors had expressed satisfaction with Eskom’s financial statements. He noted the statement to the effect that Eskom was facing cumulative cash shortfalls of R115 billion by 2013, and R190 billion by 2017. Cash shortfalls should not be misconstrued as debt, and the statement was a projection of what would be the case if nothing was done.

The Chairperson thanked Mr Makwana for clarifying that issue.

Ms Borman said her question about what was being done about closing the wage gap had not been answered, nor was there an indication of what was being done to appease the public’s anger.

The Chairperson noted that the Minister of Public Enterprises was undertaking a review of remuneration, which would have bearing on this issue, and this matter could be addressed after that process.

Mr Sonto commented that energy theft would definitely impact negatively on Eskom, and he wanted to know what partnerships Eskom was entering into with the community to prevent the problem. He was concerned about the transmission lines and land issue, and recalled an incident where game farmers had refused to grant access servitudes over their land. He said the Committee should be pro-active in resolving these issues.

Mr Dames noted that access to land and transmission lines was still a problem. The transmission networks would not be completed in time, and it was costing a lot more money as contractors had to come back and redo work.

Operating highlights and challenges
Mr Dames directed Members’ attention to the Operating Highlights and Challenges section of the presentation, but did not present on it in any depth, at the request of the Chairperson, due to time constraints. (See attached document for details).

Discussion
The Chairperson commented that at Copenhagen, it had been indicated that South Africa had coal reserves until 2050. She stated that the nuclear option was one that would take many years to implement, and the onus still lay with Eskom for planning beyond 2017.

Mr Koornhof noted that water was a scarce commodity in South Africa and asked how Eskom, as a strategic water user, was addressing the deficiencies that it had identified.

Mr Koornhof wanted clarity on the instances of wasteful expenditure which were reported to be due to a late payment to South African Revenue Services (SARS) and asked if disciplinary action was taken against those responsible.

Mr Flaherty answered the question on the wasteful expenditure and said it was unacceptable. VAT had not been paid, and the amount reflected was the interest on the VAT that should have been paid. Eskom had negotiated itself out of paying penalties. He said that archaic systems and practices had to be done away, and the personnel had to be trained in best practices.

Mr Dikoba referred to the graph on Safety Performance and the causes of fatalities. He noted that the second largest percentage was classified as 'other' and said that he needed more details on this vague statement.

Mr Dames said that the fatalities were reflected in detail in the annual report. Incidents included were armed robbery and falling objects.

Mr Van Dalen said he wanted a simple answer to the question whether illegal connections were treated as criminal offences.

Mr Koornhof noted that conductor theft had risen from R30 000 million to R46 000 million, and noted that incidents had increased and the recovery rate was not good.

Mr Dames responded that Eskom was working on building partnerships with communities, also in conjunction with local and provincial government, to redefine the communication strategies around energy theft. He confirmed that conductor theft had increased and he had met with the government agencies, such as the Hawks, and they would be partnering with Eskom. There was a dedicated team at Eskom dealing with the issue and on-site security was being increased and there was a move away from outsourcing to using Eskom security personnel on key installations.

Mr Dames stated that work was being done to classify electrical theft as a criminal offence.

Mr Makwana responded more fully on illegal connections in his concluding remarks and stated that in November 2009, recommendations had been made to the appropriate Ministry on proposed changes to the Electricity Act, and it was now up to the law-making process to accelerate that and make the appropriate amendments. Internally, Eskom had launched operation Khanyisa, to address the matter of illegal connections, and to change behaviour.

Mr Van Dalen asked whether coal mines had to ensure that suppliers were compliant with Broad Based Black Economic Empowerment (BBEEE) requirements. He also noted that there were local suppliers for components that were also manufactured in foreign countries, but the locally-manufactured prices were three times more than international suppliers. He asked how Eskom handled this.

Mr Dames stated that the media reports around Eskom's procurement practices were incorrect. The mine in question was operated by BHP Billiton and Anglo, who applied their own procurement practices. Eskom could provide guidelines that would benefit South Africans. If there were any concerns, companies could take them up with Eskom.

Mr Gololo wanted to know to what the increase in reserve margins should be attributed.

Ms Borman asked how the R12 million spent on World Cup tickets had benefited Eskom from a business point of view.

The Chairperson said she noted from media reports that Independent Power Producers were using a lot of water, and had prospecting rights to do that in the Northern Cape, which was one of the driest regions in a dry country. She asked what Eskom could tell the Committee about this issue. She said that she had heard that solar energy was expensive to implement and that the power yielded was not that cost effective, and called for clarity.
 
Mr Dames confirmed that Eskom was a major water user but said it was saving water by capturing water on site, such as rain water. It was also doing significant work with the mines, and the issue of mine water had to be addressed. This could be cleaned up and used in the power generators. Work was being done in dry cooling, at Medupi and Kusile, and would be done in all future projects.

Mr Dames stated that the improvement in the reserve margin had nothing to do with the IMF. The reserve margin went up to 16%, but this was essentially driven by the global financial crisis and was a result of a lower demand and additional capacity, as had been explained by Mr Flaherty.

Mr Koornhof, in regard to the Regulatory Framework, and the oversight authority of the shareholders and the Minister, enquired what views Management held on the relationship, and whether it was working or not, saying that this would assist the Committee in its oversight role.

The Chairperson also commented on the regulatory framework, saying that when the Portfolio Committee did international oversight missions, it should benchmark Eskom against similar utilities and their reporting lines. The South African system of multiple role players provided a healthy system of checks and balances.

Conclusions
Mr Makwana concluded the presentation by reiterating that Eskom was undergoing a major overhaul. It was working with government in the Inter-ministerial Committee for Energy, on securing energy supply. The Integrated Resource Plan 2 (IRP2) would spell out in clear detail the energy mix that the country would implement in the next 20 years. Eskom was committed to increasing the reserve margin. He explained that the reserve margin was not a financial margin but a technical margin, and that it was the balance between what South Africa had, as installed capacity, against what would be supplied and what would remain. If the balance was high, it would be possible to mitigate against any crisis because there was a margin with which to operate.

Mr Makwana said that in the current financial year, it was crucial to look at the demand and supply. Significant capacity constraints would be experienced from the latter part of 2010 to 2013 and power conservation was imperative. Eskom had initiatives around a wonderful energy saving tool, but he could not yet go into detail on this, because it still needed to be launched in the market, and Eskom did not want to lose its competitive edge before its launch.

He reiterated Management's commitment to an annual saving of R2 billion. He said Eskom was also committed to causing zero harm to the environment and communities, to reducing carbon emissions and to adopting measures to mitigate against climate change.

His final message was that when any persons or municipalities did not pay their electricity bill, they would be switched off. Eskom was battling to access money and it was vital to engender a culture of payment, in order to recover its costs.

The meeting was adjourned.

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