Denel and Eskom on their Annual reports for 2012/13

Meeting report

Briefing by Denel
Denel started the briefing with a short video presentation.
 
Mr Zoli Kunene, Chairman of the Board, Denel, said the outlook was positive for Denel, with the cash flow situation improving and Denel looking to reduce its debt. Denel was self-funded but the increasing orders would necessitate a balance sheet that would support bigger job orders, of between R3bn to R6bn. The expanding footprint of Denel had seen growth in sales to countries in the Middle East and Latin America, and it had an order book of R22bn. Denel did not have enough product to supply the market, and might need to make acquisitions. Denel was on a sustainable growth path.

Mr Riaz Saloojee, Chief Executive Officer, said Denel was a global player and its key drivers were growing revenue through good customer relations, increased productivity and increased profitability. It needed to keep up with new technology and so needed to invest in research and development. Denel had been 'fat', and cuts had been made. It had reduced net borrowings and refinanced risk.  Transformation was at 79%, which was beyond the 70% target it had set itself.

Ms Marina Uys, Chief Financial Officer (CFO), Denel, said that revenue had increased by 10% and export revenue by 34%. Net profit was R71m and debt ratios had improved, although the company was still impacted by the interest on its high debt levels. It had received clean internal and external audit findings.

Ms Natasha Davies, Human Resources Executive, Denel, said the entity had spent R56m on school outreach projects. It had provided 80 engineering bursaries and had offered four internships to engineering graduates.

Mr Saloojee said in the repositioning of Denel, it needed to communicate its new role.

Discussion
Mr A Mokoena (ANC) said the bunker at the Overberg site needed to be fenced off.   Denel should link up with the Overberg municipality to assist with the socio- economic development of the area.

Ms N Michael (DA) said that Denel should communicate its anti-mining activities and products, as well as its support of SANPARKS with its rhino search using Unmanned Aerial Vehicles (UAVs), as it was not well known. She asked whether the repayment of interest on loans which matured in 2017, was catered for in a worst case scenario. What had been done to look after the 400 people who had been laid off following the cancellation of aircraft contracts?  What plans did it have to prevent industrial action at its facilities?

Mr C Gololo (ANC) asked whether Denel could manufacture complete aircraft if government gave increased research and development funds. How many UAV vehicles had been deployed in Kruger National Park?

Dr G Koornhof (ANC) asked whether Denel was capable of fulfilling its sovereign capabilities. Why were domestic orders stagnant compared to foreign sales. He questioned the attendance record of some directors of the board. He said the interest on borrowings was a sword hanging over the company. What was the future for the Philippi site?

Ms C Pilane-Majake (ANC) asked how many jobs were being created.

Ms Davies replied that they were involved in training in rural areas, and co-exhibited with state-owned companies at expos and air shows.

She said the 400 people who had been laid off, had access to the Denel social plan. Denel had tried to redeploy them and failing that, had offered counselling and assistance in finding other jobs.

Mr Saloojee said that the Overberg facility was 100% compliant with occupational, health and safety regulations. There was interaction with the mayor, and Denel was involved in activities with the municipality.

Mr Kunene said that the board had directed the CEO to assist in the area.

Mr Saloojee said the Pretoria Metal Processings (PMP) site manufactured small arms munitions. Safety was high on its priority list because of urban encroachment in the area, and there was no real threat to the community.

Denel was repositioning itself and had embarked on a communications exercise on why Denel was good for South Africa.

There was now a good dynamic interaction with workers compared to previous times, when strike action had occurred.

Denel could build a complete aircraft if research and development funds were made available, but that would have to be a strategic decision by government.

Denel’s assistance to SANPARKS with UAVs at the Kruger National park was complete, as the costs involved were very high. It was looking at other solutions which involved the SANDF.

There were on-going discussions with the Department on Denel’s budget challenges.

Mr Kunene said Denel was a listable company, with its debt as a percentage of turnover and profit being miniscule. Denel was in a position to raise capital in the market to get rid of its debt, but it was a state-owned company.

Ms Uys said Denel had restructured its debt, which had been short term, into a mixture of short term and other debt. She was comfortable it would oversubscribe a bond issue, and was comfortable with the five year plan and the good prospects of the company.

Mr Kunene said one member of the board would be stepping down, but that board attendance stood at around 90%.

Mr Saloojee said the Philippi site was in the last phase of rehabilitation, and they were in discussions with the Department of Public works over its final state.

He added that Denel was planning to increase the number of jobs it offered.

Briefing by Eskom
Ingula Accident
Mr Brian Dames, Chief Executive, Eskom, said that the accident at Ingula was tragic. The families were being cared for and a memorial service would be a held on the coming Thursday. Three gantries had been operational at the top of an inclined tunnel shaft in which thirteen people had been working. The top gantry had come loose and took the other two gantries with it as it plummeted down the shaft. Six people had died and seven people needed medical treatment. Webber Wentzel and the Department of Mineral Resources (DMR) were assisting in the investigations. The bodies of the dead were being repatriated. All work at Eskom sites had been stopped to check on safety requirements of the sites and work would restart once management was satisfied that the sites were safe.

Ms Michaels asked what the investigation time frame was.

Mr Dames said the DMR had specific timelines regarding mining, which were being used. It had started the local inspection and had 30 days to complete it, although it could ask for an extension.


Integrated Annual Report
Turning to the integrated annual report, he said safety was the primary focus of the company, but this was not shared by all its contractors.  Eskom employed 40 000 workers and supported approximately 46 000 more.   There had been no load shedding since April 2008, despite a tight power supply situation. The business had had to be re-engineered to work within the revenue allowed for by the NERSA price increase. It had expanded the power supply by 261MW of additional capacity.  787km of high voltage transmission lines had been installed and 3 580 MVA of transformer capacity refurbished. It had experienced a decline in demand for electricity. The surplus was not covering the interest on the debt, so it was important to look at how Eskom was funded. It had raised 83% of a targeted R300bn.  Eskom was highly leveraged, therefore the tariff increases were important. Most electricity was sold to municipalities.  Eskom would maintain its manpower levels and not increase them.  A challenge was securing coal supplies for the future.

Ms Caroline Henry, Acting Chief Financial Officer, Eskom, said Eskom was essentially a construction and electricity supply company currently, and these two elements were reflected in the income statement.  Some of the financial instruments had been renegotiated, and there had been a reduction in the net financial income on a government loan, because of the NERSA decision not to permit the full increase requested.  The impact of the subordination of loans had shielded even unguaranteed loans, and had assisted with its credit rating. Revenue per kWh was 58.5c, while costs per kWh were 54.2c.  Earnings before interest, depreciation, tax and amortisation (EBIDTA) was R14bn, and bad debt was at 0.8%.  Sales had been impacted by the mining strikes, and electricity usage was at its lowest since 2006.  50% of operational expenditure was on primary energy, the cost of which had increased by 36% – and the cost of coal alone by 25%. There was no change in Eskom’s hedging policy. Half of its debt was older than ten years. It was concerned that its credit rating would be impacted by the electricity pricing policy of NERSA.

Mr Dan Marokane, Group Executive for Construction, Eskom, said three power stations had been returned to service. It had not achieved its transmission line construction targets because of servitude issues.

Mr Dames said 86% of contracts went to local companies. Transformation equity at the senior management level stood at 58%, and at middle management level stood at 70%.  Capital expenditure amounted to R60bn.  The number of coal stock days had increased. It had reduced fatalities by banning night travel by coal trucks and continuing the migration from road to rail. The distribution and maintenance of equipment was still a challenge, given the tight generating capacity. Municipal debt was also a challenge, as was copper theft. In the next ten to twenty years, power stations would be decommissioned and new power stations would be needed. Other challenges included the power supply from Cahora Bassa.  47 contracts had been issued to Independent Power Producers.  Eskom could not continue receiving 15% increases from NERSA when it needed 24% to be sustainable, so alternative funding was being looked at.  Eskom had performed soundly in a tough year. 

Discussion
Mr Mokoena asked whether consultations could not be organised with stakeholders and relevant people, like Mr Amos Masondo and Mr David Thibedi, regarding a loan taken out to electrify Soweto.  If one had problems with Cahora Bassa on electricity supply, then how did this impact on hydroelectric schemes envisaged in the DRC. How sustainable was the 58c selling price for electricity, given that the buying price from Independent Power Producers was 84c.

Ms Michael asked why the construction of transmission line targets had not been met. Was it because of environmental impact assessments, or securing access to land?  What was the risk in deferring maintenance?  She was shocked at the speed at which a wildcat strike had occurred at Medupi and Kusile while on an oversight visit. How could Eskom ensure that it would not happen again?

Ms G Borman (ANC) asked if safety formed part of the contract of contractors.

Mr E Marais (DA) asked if there was a new time frame for the commissioning of Medupi.

Mr Gololo asked if Eskom had a solution or plan for copper theft.  He said 1.5m electricity consumers would soon be relieved of their debt, and asked how that would affect Eskom’s balance sheet.

Dr Koornhof said the 30 year average life of SA’s power stations was a challenge, as was the fact that primary energy input costs had increased by 36%. What should be asked of the shareholder, so that Eskom could do its job?

The Chairperson asked how much of the copper theft involved Eskom workers.

Mr Dames said it would take on the Soweto debt, and that it was fully provided for in the balance sheet.

He said the lesson learnt from the Cahora Bassa scheme was that to ensure the country’s own energy security; it had to control how the power got to South Africa.

The sustainability of Independent Power Producers (IPPs) would be impacted greatly if the price of electricity went up. The IPP contracts were for 25 years, and were subsidised. There was a need to learn from other countries' experiences, and to ensure that localisation of manufacture took place.

Environmental issues in building the transmission lines to the Cape and getting access to land in the Tulbagh area were challenges, as the Cape needed four lines to supply it with electricity. The Department of Public Enterprises (DPE) had assisted with regard to servitudes and physical access to land.

Eskom had increased its maintenance spend, and there was a 10% maintenance target across the vehicle fleet.

Eskom’s legal contraventions revolved around power station emissions, and the quality of coal and water released from its plant sites.

Medupi and Kusile had experienced no work stoppages since the incidents mentioned, and action had been taken. Eskom had brought the people back to the table to deal with the confusion over issues which had resulted in the wildcat strikes, as well as sorting out other issues. The police had provided support in the form of a permanent presence at the sites.

Eskom had taken action against contractors regarding contractor safety issues, and had strengthened its contractual terms.

The increase in coal costs in the long term would have a big impact. The increases in the tariffs it had received permission for, did not take into account expansion beyond the Kusile power station. This was an issue which needed to be addressed.

The timeframe for the commissioning of Medupi had not changed. It had appointed extra contractors to work with Alstom.

Eskom had seen a reduction in the value of copper theft, as well as the number of incidents reported.

Possible debt relief had been provided for, even for municipalities.

Maintenance was done mainly in winter.

Mr Simphiwe Makhathini, Deputy Director General: Energy and Broadband, Department of Energy, said the Department of Mineral Resources (DMR) was working with them to ensure an adequate supply of quality coal at good prices.

Mr Marokane said the labour agreements were under implementation, with Kusile being more advanced than Medupi. The company had been firm regarding the strike action, and the ‘no work, no pay’ principle had been enforced.

Mr Dames said Eskom had a comprehensive fraud prevention program to prevent copper theft by its employees, and had made 'whistle-blower' lines available.      

It was EIA matters and geography which had hampered the attainment of transmission line targets.  Eskom was engaging with the Department of Public Works and the Department of Energy to get approvals.

The meeting was adjourned.