Eskom Annual and Audit Report 2010/11

Meeting report

Consideration of the Report and Financial Statements of Eskom Holdings Limited for 2010-11, including the Report of the Independent Auditors on the Financial Statements and Performance information for 2010-11
Mr Brian Dames, Chief Executive; Eskom made the presentation, which covered the Overview, Eskom’s triple bottom line, results of operations, financial position, cash flows including funding, operating highlights and challenges and outlook.
The Committee was informed that there had been no load shedding since April 2008, despite an extremely tightly balanced energy system and Eskom had also initiated the 49M campaign to educate South Africans about the importance of saving electricity and to help create a culture of energy efficiency. In addition Eskom had also posted a second consecutive year of strong financial performances, with a surplus of R8.4 billion, compared to R3,6 billion the previous year.  These financial surpluses would be reinvested in the business, helping to fund the capacity expansion programme.  With government’s guarantees and explicit support, Eskom had put a funding plan in place for the next seven years from 1 April 2010. Tariffs were also moving towards cost-reflective levels.

Mr Dames informed the Committee that this was the first year in the electricity market for independent power producers, and a milestone had been reached of 4 million households electrified since the inception of the electrification programme.  Another highlight was the R41.9 billion spent on Broad-based Black Economic Empowerment (BBBEE).
Eskom had 41 778 employees as at 31 March 2011 and served 2 857 industrial, 1 110 mining, 49 090 commercial, 84 393 agricultural and more than 4.5 million residential customers. There were total electricity sales of 224 446GWh and gross electricity revenues of R90.38bn for the year ended 31 March 2011 (R69.83bn for the year ended 31 March 2010) and Eskom was committed to build 17.1GW new generation capacity by 31 March 2018. This included 5.2GW already commissioned as at 31 March 2011. In terms of safety, there had been six employee, 18 contractor and 43 public fatalities. The safety of the people remained fundamental to Eskom’s business.

In terms of Eskom’s triple bottom line, financial highlights and income statement for the year, there was revenue of R 91.4 billion as of 31 March 2011, compared to R 71.1 billion for 31 March 2010, and R 54.1 billion for 31 March 2009. Debt securities issued/borrowings were at R 160.3 billion as of 31 March 2011 compared to R 105.9 billion for 31 March 2010 and R 74.1 billion for 31 March 2009.  Most of the performance targets for the shareholders’ compact had been achieved, save for generation capacity and transmission lines under provision of electricity (refer to presentation for targets achieved).  The target relating to transmission lines had not been achieved because of challenges in securing land to erect these lines.

The Committee was informed that the financial position of Eskom was very strong. The income statement for the year ended 31 March 2011 pointed to electricity sales of 224 446 GWh, an increase of 2.7% when compared to the 218 591 GWh reported in the 2010 financial year and group revenue of R91.4 billion (31 March 2010: R71.1 billion), an increase of 28.6%. The revenue growth was driven primarily by the 24.8% tariff increase granted by NERSA effective from 1 April 2010. Electricity sales were subject to seasonal fluctuations and were higher in the first two quarters of Eskom’s reporting cycle and large power user prices were higher in winter compared to summer prices.  Eskom had also held a moratorium on dividend payments since 2008 due to its capacity expansion programme.  The financial position was such that total equity and liabilities were at R 328.1 billion as of 31 March 2011 compared to R 246.1 billion for 31 March 2010 and R 199.3 billion for 31 March 2009.
The Eskom capacity expansion programme included:
•           Return-to-service (RTS):  Komati (1 000 MW), Camden (1 520 MW) and Grootvlei (1 200 MW).   
•           New coal: Medupi (4 764 MW) and Kusile (4 800 MW).
•           Peaking & renewables: Ankerlig (1 338.3MW), Gourikwa (746 MW), Ingula (1 352 MW) and Sere (100 MW).
•           Mpumalanga refurbishment: Arnot capacity increase (300 MW), Matla refurbishment, Kriel refurbishment and Duvha refurbishment.
•           Transmission: 765kV projects, Central projects, Northern projects and Cape projects.
Eskom’s cash flows, including funding, had moved from a funding gap to a funding plan of R300 billion until 2017. The sources of funds were bonds, commercial paper, Export Credit Agency, World Bank loan, AFDB loan, Development Bank of South Africa (DBSA) loan, shareholder loan and other sources.

Mr Dames covered operating highlights and challenges. Under Generation Business, the highlight was that there had been no load shedding in the past financial year. Challenges included the return to service of Duvha Unit 4 turbine and generator which had been extensively damaged in February 2011 and the estimated recovery period was greater than 12 months. Another challenge was a constrained power system, as Eskom had to balance the need for planned maintenance on ageing plant with the demands of a growing economy. In addition, particulate emissions performance was unfavourable and required focussed attention.
Coal-related energy losses had also increased substantially since 2008, contributing to the reduction in the availability of some coal-fired plants to meet demand. The improved performance of Koeberg nuclear power station had been curtailed by two significant forced outages immediately following a refuelling outage.
Under Primary Energy, some highlights were that for the year ended 31 March 2011, coal costs had been maintained below budget, and dam levels had been higher than expected, resulting in lower pumping costs. Challenges included delays in spending on the road repair programme, the poor performance of some mines resulting in the purchasing of more coal from the short/medium-term market at higher coal and transport costs, and reducing defunct mine liability. Other challenges included road fatalities among both the public and coal transporters, despite a number of safety initiatives, and supply risk exposure to disruptions in mining operations due to legal non-compliance.  

Customer Network Business highlights included successful partnership with local authorities to ensure incident-free electricity supply for the 2010 FIFA Soccer World Cup, the launch of Operation Khanyisa as part of the Energy Losses Management Programme, and the number of school connections (special projects) was higher than target.  Challenges included high levels of theft of equipment and electricity, which was affecting plant performance and increasing cost.  Other challenges were that sales growth had been lower than budget projections, and though municipal debt payments had improved, R123 million was overdue as at 31 March 2011.  Non-payment by large and residential customers, including a large customer liquidation case; and some contractual payment disputes experiencing lengthy resolution delays, were other challenges.  Employee security was becoming a concern and collisions and electrocutions of birds on distribution power lines were also challenges.  Not meeting the target of 158 430 overall electrification connections in 2010/11 (149 914 made) presented another challenge.

Mr Dames concluded the presentation by informing the Committee on the outlook for the future. Eskom had implemented its plans, on the supply and demand sides, to address the challenges and manage a tight system, and also kept the lights on during winter. Demand saving was important, to create space for maintenance and summer would continue to be tight. If all South Africans, individuals, companies and government saved 10% of their energy use of 2010, we would have enough to ensure a secure power system and grow the economy. The saving of 10% was equal to 3 700 Mega Watts and also equal to one new power station and approximately 23 million tonnes less carbon dioxide.  
Eskom resolved to keep the lights on but could not do it alone as partnerships with stakeholders were needed. Eskom fully supported government's priorities of improving education and health care, creating decent work, fighting crime and corruption and rural development and land reform.  Eskom had launched the 49M campaign aimed at creating a culture of energy efficiency in South Africa.  Eskom’s appeal was for everyone to embrace energy saving as a national culture, joining the global journey towards a sustainable future.

Discussion
Mr M Sibande (ANC; Mpumalanga) asked the percentage by which the salaries of Eskom employees had been increased, compared to those of executive directors.

Mr Dames replied that the increases in management salaries was 6.9 %, while for financial year the staff increases were higher than 7%.

Mr Sibande asked what the reasons where for the sharp increase in staff employment figures.

Mr Dames replied that the increase in staff to 42 000 currently was because Eskom was growing.   Eskom was building 17 000 kilo watt capacity and was also adding 155 000 new connections every year. The growth of staff was from the perspective that Eskom was growing.

Mr Sibande stated that top management at Eskom was still dominated by white males.

Mr Dames replied on the EXCO, which was a team of nine, there were only two white male executives. There was a lot of work that needed to be done in terms of transformation. The employment equity plan was focusing on all the levels.

Mr Sibande asked whether Eskom could provide a breakdown per province of the R41,1 billion spent on BBBEE.  It was alleged that only people in the cities were benefiting.

Mr Dames replied that Eskom would provide to the Committee with a breakdown of the support for BBBEE per province.

Mr Sibande asked for the details of the irregular and fraudulent activities reported by the Auditor General (AG).  When would investigations be completed?

Mr Dames replied that Eskom was not audited by the AG but by KPMG.  Eskom had a requirement under the Public Financial Management Act (PFMA) to deal with irregular expenditure. In the current financial year, R58 million had been highlighted as irregular expenditure which had occurred in a business established in the Western Cape. The issue had gone to court and was in the process of being finalised.

Mr Sibande asked if South Africa was still supplying the Southern African Development Community (SADC) with electricity. If so, why was this not reported on?

Mr Dames replied that Eskom supplied SADC and this was reported under international sales in the presentation. This electricity was sold to Mozambique, Botswana, Namibia, Lesotho and Swaziland. This was important as Eskom could not be an island, though these sales were a small percentage of total sales.

Mr Sibande asked if South Africa was still using Cahora Bassa Dam to supply electricity.

Mr Dames replied that Cahora Bassa was still an important part of Eskom’s supply. Eskom imported 1500 Mega Watts of electricity from Cahora Bassa in Mozambique and there was a long-term contract around this.

Mr Q De Beer (COPE; Western Cape asked what had been done about the President’s request to Eskom to look at alternatives to the proposed tariff increment of 35%. The price increase was concerning.

Mr Dames replied that Eskom had responded to the President’s request within the four weeks that they had been given. There had been a public announcement made. For the last financial year 2011/12, as of 1 April, the tariffs had not increased as determined, but only by 16%. This had been implemented.

Mr De Beer stated that local authorities were complaining in places where Eskom was supplying free 50 Kilo watt electricity.

Mr Dames replied that government provided free basic electricity and municipalities had to identify the people who qualified.  Eskom configured the people that had to receive it and the municipalities needed to ensure that people received it, and 99.9 % of everyone who had been identified had been configured on Eskom’s system.

Mr De Beer asked if there were plans to reduce fatalities. Were there awareness programmes? One life was too much. How could the Committee assist in awareness?

Mr Louis Maleka, General Manager; Eskom, replied that fatalities were a big concern and there was a big awareness programme, Operation Khanyisa, within the communities. The deeper issues around illegal connections and fatalities required a joint effort. Eskom had programmes but needed community involvement and leadership in the communities. Children were usually the victims, so Eskom was exploring through its legal team the possibility of charging people with culpable homicide. Some of the illegal connections though were related to people genuinely wanting electricity but were in the areas unproclaimed by municipalities. These people tapped into the networks that were close by.  The National Housing Department should look into this.

Mr De Beer asked if there was skills transfer within Eskom as an organisation.

Mr Dames replied that skills transfer was not as effective as it should be. A large part of Eskom’s staff was young and the other half had an average age of 50.  Eskom had asked its Human Resources to look at its skills transfer programmes.

Mr De Beer stated that Eskom negotiated with only one customer out of the three on special tariffs.  How far was Eskom in negotiating with the rest?

Mr Dames replied that Eskom had 138 large customers of which only three had special pricing agreements. These were the Billiton smelter in Mozambique, Hillside and Bayside and Anglo smelter in Namibia. Eskom had renegotiated the Billiton and Anglo agreements and what was left was Hillside and Bayside. .

Mr De Beer stated that the Minister had given an assurance that there would be no power cuts, but that this would be dependent on demand and supply. Was Eskom able to supply according to demand, as was done in 2010.

Mr Dames replied that the supply of electricity went up in winter.  Eskom had made a clear plea to its customers regarding the use of electricity during winter. It would be finishing all its maintenance before winter. Eskom’s resolve was that the lights should stay on.

Mr Z Mlenzana (COPE; Eastern Cape) asked if there was capacity to service the community that had been moved from Kwa-Zulu Natal to Eastern Cape in the current financial year.

Mr Maleka replied that some of the traditionally Magemage customers had been moved to the Eastern Cape.  Provision had been made for these areas. The Elliot area and other areas were all covered. There was a management structure and Technical Support Areas and Customer Service Areas.  In terms of management and operators, it was well resourced.  People were not being moved around -- it was just a boundary change.

Mr Mlenzana asked about the future cost implications of the reduced tariffs approved by National Energy Regulator South Africa (NERSA).

Mr Dames replied that Eskom was very comfortable with its financial position and tariffs. When the President had made the call, Eskom had gone back and re-looked at its position as a company, and the shareholder had also been able to give up some of its returns. Price increases would be looked at over longer periods and not shorter ones.

Mr Mlenzana pointed out that with regard to the shareholder compact, Eskom had not managed to meet its target on generation capacity. How had this under-achievement affected EXCO bonuses?

Mr Dames replied that making sure that the lights stayed on meant no load shedding and making sure that efficiencies were there.  Eskom had achieved this. The share holder compact had played a role, and Eskom had achieved and exceeded all the targets set by the shareholder. The generation of capacity referred to in the presentation was installation of new mega watts into the system. This talked to the completion of programmes like Medupi (4 764 MW) and Kusile (4 800 MW).

Mr H Groenewald (DA; North West) asked what the percentage increase in tariffs was over the three years.  What would happen after that period? What would happen to the profits, as Eskom had indicated it was in a strong financial position.

Mr Dames replied that Eskom was busy with preparation in terms of future increases. All profits generated were invested back into the company.

Mr Groenewald stated that there were a lot of energy losses in the communities. What measures had Eskom put in place to fight fraud?

Mr Maleka replied that Eskom had established a multi-disciplinary committee with the South African Police Service as well as the South African National Defence Force to deal with some of the issues.  There were also programmes like Operation Khanyisa.  More work needed to be done and the key also lay in electrification.

Mr Groenewald asked what type of coal Eskom would use in Medupi. South Africa was exporting high quality coal and using low quality coal.

Mr Dan Marokane, Divisional Executive; Eskom, replied that both stations Medupi (4 764 MW) and Kusile (4 800 MW)) had encompassed the latest technological advances to allow exploitation of lower quality coal resources and also to burn in a way that reduced carbon emissions.  Eskom had aired its voice on the issue of exporting high quality coal and the supply of low quality coal domestically. There was a need to have a balanced approach from a country perspective on the need to earn foreign revenue and being efficient. Eskom had put controls on the type of coal it bought, and acquired only pre-certified coal.

Mr Groenewald asked what Eskom was doing about municipal debt, as municipalities were also in debt.

Mr Dames replied that Eskom had a strong engagement with the municipalities, as well as the premiers of the provinces. Very good support had been received. The municipalities were getting their equitable share from government and from this perspective, Eskom’s debt was being addressed.

Mr Groenewald asked what Eskom was doing about skills, as these were needed at Medupi and elsewhere.

Mr Dames replied that Eskom had established a Power Engineering Institute and other initiatives to address the provision of critical skills.

Mr Groenewald asked what the future of nuclear power was in South Africa. Was it being put aside?

Mr Dames replied that the future of nuclear was captured in Government’s Integrated Resource Plan. In the next few months government would make the necessary announcements.

The Chairperson asked if Eskom was also encouraging industry and government departments to save electricity. A drive-by showed that most of these places left their lights on.

Mr Dames replied that that the point was valid. The Minister of Public Enterprises had now brought government together with Public Works to look at energy efficiency in government departments. Eskom had a strong programme with large industry on this issue.

The Chairperson stated that Eskom employees in the provinces should communicate all the problems being faced in the communities to management. The information that Eskom had provided on the provinces should be beefed up to include challenges.

Mr Dames replied that Eskom had strengthened its structures in the provinces.  Eskom had appointed senior managers in each province and had now engaged with mayors and premiers to show the electrification footprint in the communities.  Eskom did not decide where to electrify, but this responsibility was assigned to government.  Eskom would provide the details per province of the electrification plan going forward.

Consideration of Minutes
The Committee adopted its minutes of 25 April and 2 May 2012 without amendments.

The meeting was adjourned.