Eskom status, corporate plan and 2017/18 Annual Report

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Public Enterprises

21 November 2018
Chairperson: Ms L Mnganga-Gcabashe (ANC)
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Meeting Summary

VIDEO: Eskom appears before the Public Enterprises Committee

Annual Reports 2017/18

The power utility Eskom stated that it has made substantial progress towards ensuring that disciplinary proceedings are taken against its officials who are implicated in wrongdoing. Since April 2018, a total 822 cases were completed from 1 049.

Eskom however foresees dismal financial conditions in the coming years, projecting that the debt burden will rise from R400 billion to R550 billion in the near future. It is presently unable to service its debt and this is forcing it to borrow even further. Despite these shortcomings, the power utility does not see any load shedding in the foreseeable future which will be welcome news to South Africans.

Members were worried that the coal contracts still remains a source of concern and asked how a manipulated coal contract regime could be rectified. Others praised the present Eskom board and its executives for rising from the abyss after the systematic misuse and abuse of its resources.

Meeting report

Eskom status, corporate plan and 2017/18 Annual Report
Mr Phakamani Hadebe, Group Chief Executive of Eskom, and Mr Jan Oberholzer, Eskom Chief Operating Officer, presented. Eskom has experienced difficult years following leadership and governance instability. A new board and leadership team was appointed to clean up, stabilise and set Eskom up for future growth. Despite experiencing a difficult year, there was improved liquidity, continued improvement in operational performance and advancement in governance and control systems. A strategic review is underway and Phase 1 will deliver a strategy blueprint, including a short-term turnaround. This was taken to Board on 12 November 2018 and it will culminate in a corporate plan that will be finalised in February 2019 in line with PFMA requirements. There will be continued pressure, as we transition towards financial and operational sustainability, requiring resolute, tough and decisive leadership.

Key priorities to position Eskom for growth:
• Clean up and re-position Eskom as the most trusted state-owned entity. Instill transparent and effective governance. Initiative to address qualified audit and identify more irregular expenses;
• Stabilise and improve financial health. 21% increase in EBITDA from R37.5 billion in FY2017 to R45.4 billion in FY2018;
• Regulatory Clearing Account (RCA) determination of R32.7 billion. Improved liquidity by raising R57 billion since January 2018. Capex and opex reduction to achieve financial viability;
• Efficient optimisation: Prepare for growth / new initiatives to increase EBITDA. Target 500MW additional demand;
• Reduce arrear debt. Manage risk of increasing coal costs and optimise staff productivity levels;
• Future Eskom to grow the business: Become an innovative and data-driven utility. Grow new markets and products while retaining and growing existing clients. Achieve long-term sustainability and developmental mandate and a sustainable business model for Eskom.

Significant progress has been made towards becoming a trusted state owned company:
• 11 implicated senior executives exited. Finalisation of outstanding senior executive disciplinary hearings being accelerated
• 11 criminal cases opened, 5 of which involve 9 senior executives
• 1 049 disciplinary cases since April 2018 of which 822 have been finalised resulting in 97 employee exits
• 239 whistleblower cases investigated, 122 have been concluded. Disciplinary process is underway for 67 confirmed cases
• Lifestyle audits of senior management in progress. There is effective declaration of interests.
• Investigated all irregular supplier contracts. So far 5 no longer doing business with Eskom (amount spent with these companies in past 3 years was R2.3 billion). Recovered R1 billion from McKinsey plus interest
• Cooperating with 8 regulatory bodies conducting major investigations.

Ms D Rantho (ANC) noted the overhead presentation contains slides that the Members do not have. The reason that led the Committee to institute an inquiry is due to having wrong information. She cautioned Eskom executives that all the slides presented must be made available to the Committee otherwise it amounts to some sort of violation of the law.

The Chairperson said she was reliably informed that there are about three slides are missing from the version sent to Members. She asked for a short break so the slides could be made available to Members.

Committee members elected to continue with proceedings.

Mr Hadebe highlighted that it was not the formal presentation but rather the COO merely emphasizing the challenges Eskom is facing about coal. He wanted to explain why Eskom is the situation it now finds itself. The problem of coal shortages started in November 2017 with less than a 40 day coal supply. This was because Tegeta had overstated its coal stock. Tegeta could not supply the contracted 400 000 tonnes so that decreased the stockpile. Eskom management had then engaged with National Treasury requesting urgent coal procurement. Treasury took a long time and was asking questions and the stock continued to decrease in December.

On 21 January, the new board was appointed. With the new board in place, Treasury approved coal procurement in February but with three conditions: Eskom was asked to go back to those awarded the contract; if they are unable to get the coal, Eskom must revert to those shortlisted; if they too are unable to, then the market must be opened up.

Since Eskom’s relationship with its suppliers was broken down, it had to go to the market and a Request for Proposal (RFP) to get coal takes almost a year. That was what transpired. What happened in February exasperated the matter. Firstly, when Tegeta could not supply 400 000 tonnes, it affected three power stations. Other problems before Treasury approval were that Tegeta had gone into a business rescue and this took out about 8 million tonnes of coal that have been budgeted for by Eskom. Secondly, some mines could not meet their targets because Eskom has not invested according to the agreements. Thirdly the new suppliers could not meet their targets. This led to the downward spiral. As it stands now, Treasury has approved 29 contracts that could give Eskom 15.8m tonnes that could also cover 28.2 stock days by the end of the financial year. Eskom has gone back to the Treasury to request an additional 4m tonnes, to which they have acceded. A contract of 1.1m has already being secured from the additional 4m tonnes requested. If the coal from all 29 contracts is received, including the 4m tonnes, it will surely improve stock by year’s end from the 28 days in the original plan to 36.3 days. Eskom projects that by mid 2020, it will have coverage for 56 days. This explains the coal problem as enumerated by the COO.

Ms N Mazzone (DA) commended the Eskom board for their honesty that was absent from the board in the past. It is clear to the Committee and country that what is being experienced is the woeful effect of state capture and what it did to Eskom as a company. Eskom board membership is not a job for the faint-hearted at this time. The board is honest and this should continue. The coal contracts are a source of concern and how can a manipulated system be rectified? It is now obvious that one aspect of state capture was a manipulation of contracts so that certain companies and shelf companies got the coal contracts, often with inflated prices. Are these being rectified or is Eskom still being held to ransom? If so, could the board tell the Committee who is doing so? This Committee can do something about it just as they have shown that it could unshackle Eskom from being held to ransom. Are coal prices being artificially inflated given that Eskom is in a state of emergency? The press is reporting that coal prices are inflated; is this happening?

Eskom has a five-day coal supply to certain of its power stations so that qualifies as an emergency and akin to your child being held by terrorists who are threatening to kill the child if you do not give in to their demands. If this is happening then the board must take the Committee into confidence. It was reported yesterday that Eskom is going into load shedding schedule eight; what is schedule eight? How many plants will be shut for routine maintenance? The country is aware that load shedding will return but the more information citizens have, the more they can prepare. The National Energy Regulator (NERSA) keeps Eskom in line, by regulating what it allows Eskom to charge consumers. Did the CEO state that in order for Eskom to recoup what it requires, it will need a 90% increase in electricity tariffs? This is not possible and the way this is going, will Eskom ever be a profitable enterprise? Could it serve Eskom better to be only a generator of power that supplies energy to another independently controlled entity? The middle management at Eskom was said to be around 70 people years back, but it was revealed at the state capture inquiry that this was increased to 700 hence the bid to retrench staff. Is it true that Eskom is spending an average of R1 billion a month on diesel? Is this amount correct or inflated?

Dr Z Luyenge (ANC) praised Eskom for rising from the abyss after the misuse and abuse of its resources. There is now the possibility of recouping the money that was deliberately stolen from Eskom. If 11 senior executives have exited and are now criminally charged and 822 of the 1068 disciplinary cases instituted since April have been finalised, credit has to be given to the new people now in charge of Eskom. The ground covered puts into question the prophets of doom who are still saying that the present Eskom is a collapsed entity. Eskom was meant to collapse but it is thanks to the present Minister working tooth and nail to fix it. There would not have been electricity in this country now, considering the resources looted. Thanks to the Chairperson and this Committee, they are part of the process to rectify Eskom. We all have the responsibility to support the current Eskom executives and board to enable them succeed. He asked how much government departments owe Eskom of the total debt owed to it. Why does Eskom not utilise the prepaid system so that the supply of electricity via the municipalities is eliminated as some municipalities have no mechanism for collecting their own revenue. Why not sell electricity directly to the consumers?

Mr S Swart (ACDP) thanked the new board and executives for the job they are doing in trying to clean up the legacy of many years of corruption. This Committee is aware of this legacy and will help to stabilise Eskom. It is pleasing to know that the McKenzie amount has been repaid after it committed to this before this Committee. Eskom indicated R1 billion has been paid but other reports stated R900m plus R300m outstanding interest. What is the correct figure? The Committee looks forward to the outcome of the court case for the recovery of R600m from Trillian. This is a start because the new Eskom directors are aware of the Companies Act under which they can be held personally liable and declared delinquent directors for breach of their fiduciary duty. Board members must not be allowed to move around companies to effect looting and plundering. This Committee appreciates the work done by the new Eskom. Recovering looted money mostly sitting in Dubai should be a top priority.

Mr G Gardee (EFF) asked why Eskom made no mention of Independent Power Producers (IPP) in the presentation. Is it deliberate or an omission? What is the unit cost to Eskom of power purchased from IPPs to the public? Has the board ever vetted IPP service providers to unravel the extent of their close links to Politically Exposed Persons (PEP)? Are there plans afoot towards the privatisation of any Eskom unit?

Mr E Marais (DA) asked for the top ten Eskom municipal debtors and the amount owed by them. Does Eskom have a plan B to keep the Christmas lights on? Will the Koeberg Unit 2 come back on line on 17 December as scheduled? Eskom should endeavour to communicate to the public on any planned load shedding because it helps consumers to plan. The students given bursaries by Eskom, finished as engineers in 2017, and were compelled to work in service for 24 months. It is said that they enlarged middle management at Eskom. We are told they have to leave at the end of January after working for one year due to lack of funds. These people are our future. Is there no way to retain them by cutting down in other areas? The board must give clarity about the pay back of pension money by Mr Brian Molefe. The court had ruled that he had to pay back the excess.

Mr R Tseli (ANC) was proud of the intervention by the Committee that helped to save Eskom from total collapse. He mentioned activities orchestrated by former Eskom CFO, Mr Anoj Singh. He never touched his salary and other payments, and the amount discovered in his salary bank account was R19m at the time of the investigation. How was he servicing his personal accounts for four years if there was no debit order or cash withdrawals from his bank account? Was this report shared with Eskom and, if yes, what is happening with the investigation? How is Eskom dealing with the municipal debt report? The increase in irregular expenditure from R3 billion in 2016/17 to R19.6 billion is very worrying. What led to this increase? Could the salaries of the COO and the CEO be shared with the Committee?

Mr F Shivambu (EFF) said the biggest concern is the possibility of Eskom being privatised. The Committee wants clear communication from Eskom executives that no attempt will be made to do so. How much does Eskom spend on power purchases from IPPs and how much do they make out of it? The IMF said last week that Eskom is a danger to the SA economy because of the way it is managed. The Eskom spokesperson last week said that Eskom purchases power from the IPPs for R2.20 and sells it to consumers for 86 cents. This is dangerous because it will collapse the entity.

Ms Rantho welcomed the honest presentation. She said the impression was that the IPPs will help to generate more power when the grid is constrained, what then is the contribution of the IPPs now that Eskom is facing coal challenges? She decried the recycling of discredited board members from one government entity to another. What does Eskom do about dismissed board and staff members? Are they blacklisted so they do not pop up in another SOE? In the report about cases under review in January, why are the cases still at the same level as today?

Mr N Kwankwa (UDM) asked if some of the IPPs do achieve their socio-economic objectives entered into with the Economic Development Department. Are there consequences when they fail to adhere to these? What has happened to the politicians that aided and abetted the looting at Eskom? Municipal debt is not under control and if prepaid meters have to be introduced all round, there must first be consultation especially in Soweto. How does Eskom deal holistically with municipalities that have limited resources to pay the debt owed to it?

The Chairperson took comfort that the new Eskom is honest and this should be the norm going forward. An update is needed on the conversion of Open Cycle Gas Turbine (OCGT) to dual fuel facilities as indicated in the 2017 Annual Report. The R18 billion debt to Eskom by municipalities is worrying. What is Eskom’s debt collection ratio in Soweto and other areas? What is Eskom’s strategy about the recent adverse court judgements in recovering its debt?

Mr N Singh (IFP) asked about government guarantees for Eskom’s loans and access to funding. What about the Capex and Opex reduction to R10 billion and how this will compromise service delivery? He asked about government departments' debt to Eskom. Which companies are getting the transport contracts?

Mr Calib Cassim, Eskom Acting CFO, replied that Eskom has agreed to review the coal contracts signed a few years ago not only from a legal perspective but also from a pricing perspective. It is starting there before moving beyond that. This review is linked to the irregular expenditure and some of the big capital projects will be looked into as well. The IPP is not in the presentation because this was a summary and Eskom will take note of that in future, although it is detailed in the Integrated Annual Report. The average was 222 cents per kilowatt and for the previous year it was 188 cents per kilowatt. The spend in the past financial year was R19.3 billion. Eskom asked for total amount of revenue to cover the cost and recover its costs from this methodology. If there is any over or under expenditure, that is dealt with through the Regulatory Clearing Account mechanism.

Mr Hadebe replied about the coal price, saying Members should remember that they are competing with the global price. During the past three years, the coal price has increased immensely up to even $103 per tonne at a time but it is now at $99 per tonne. Eskom is now trying to mend some relationships because the former Eskom executives ruined them. Interactions with coal companies are taking place and they are apologising where Eskom went wrong. The price too is coming down a bit although some companies are insisting that they are interested only in exporting their coal and should Eskom so wish, it should buy at $99 per tonne. Through engagements, Eskom is bringing the price down though not at an ideal level it would have wanted. Some of the previous contracts are questionable and, if unearthed, Eskom takes action. On the 90% increase in price for Eskom to break even, in terms of the regulatory mechanism and formula, NERSA must allow for an efficient operating cost and fair return on asset base so the 90% demonstrates Eskom’s application and costs of capital. If the full outcomes were adjusted, it would mean 90% in one year. That is why the board has made application to phase in an application for 15% over the next three years knowing it is not practical to do 90% immediately. As for Eskom becoming a liquid entity, it is facing serious challenges. Its debt increased from R50 billion to R400 billion within eight years and is projected to be R550 billion in three years. Government is being approached so that a solution could be found. A new way of doing things is urgently needed to fix Eskom otherwise in three years’ time the situation will be dire. The company is going through section 189 of the Labour Relations Act. The mandate has been given to the board to deal with the middle management issue.

Eskom does not know what government departments owe municipalities for electricity, except in Soweto and other areas that are direct clients of Eskom. The company is contracted to the municipalities only and it will be better for the Committee to invite the municipalities and departments to hear from them directly. The plan of using prepaid cards is in the offing and being discussed with the inter ministerial team. In some areas, the communities are not happy about it and are destroying some of the installed prepayment facilities.

As for holding directors responsible, Eskom is doing that through instituting court cases and not merely allowing them to resign. There is now a partnership with SIU, SAPS and HAWKS to accomplish this further and results will be coming soon. On the Minister and his family’s involvement with the IPP, there is no information at our disposal that substantiates that assertion. The Department of Energy perhaps will be better placed to dig further. The top ten municipalities owing Eskom making up 72% of its municipal debt are mainly from three provinces. They are: Maluti-A-Phofung Local R3.2bn, Emalahleni Local R2bn; Matjhabeng R1.7bn; Ngwathe Local R1bn; Emfuleni R900m; Govan Mbeki R809m; Lekwa Local R630m; Thaba Chweu Local R488m; Ditsobotia Local R350m; Modimolle-Mookgophong Local R315m; Naledi Local R268m.

Brian Molefe’s pension payment is managed by the Eskom Pension and Provident Fund. The Fund indicated that they are awaiting the records from the courts to make the decision to proceed.

Mr Jan Oberholzer, Eskom Chief Operating Officer, replied that level one load shedding is 1000 megawatts, level 2 is 2000 megawatts, and so it goes to level 8 at 8000 megawatts. Eskom communicated last week to consumers that this is the way the levels work. The message came through of the possibility of a level 8 load shedding which is not the case. The load shedding last Sunday was because the system was under duress and needs a lot of care. On Sunday, Eskom had sufficient capacity with the diesel to avoid load shedding but due to the situation during the week when a lot of water was used, that reduced the dam levels at around 10am. There were also diesel challenges and the decision was made not to start the week with no water and very little diesel but rather to start the week with full dam levels and a lot of diesel. As a result, load shedding level one was requested. No load shedding is expected for the whole week. There is no question of level eight load shedding. SA has too many problem power stations including the new Medupi and Kusile recently commissioned. There are plans afoot to deal with it but it will take time. It foresees spending another R750 million to R1 billion on diesel by the end of the year. The energy availability factor is down to 75.2% and is going down further. A turning point is expected around March.

Eskom Annual Financial Statements
Mr Cassim gave an overview of Eskom’s financial performance:
▪ EBITDA of R45.4 billion (2017: R37.5 billion)
▪ Net loss after tax of R2.3 billion (2017: R0.9 billion profit)
▪ Net cash from operations of R37.6 billion (2017: R45.8 billion)
▪ Liquid assets of R22.3 billion (2017: R32.5 billion)
▪ 22% of funding requirement for 2018/19 secured to date
▪ Eskom had a modified audit opinion

The external auditors raised an emphasis of matter on Eskom’s status as a going concern in their review for the six months ended 30 September 2017. The steps taken by the shareholder and the Board boosted investor confidence, and the liquidity position improved since January 2018. Eskom continues to face significant financial and liquidity challenges in the short to medium term, mainly due to the high debt burden, low sales growth and increased finance costs. NERSA has approved the liquidation of MYPD 3 RCAs for year 2 - 4. The balance of R32.69 billion will be recoverable from the standard tariff customers, local special pricing agreements (SPAs) and international customers over a four-year period. The auditors raised uncertainty that may cast significant doubt on the group’s ability to continue as a going concern

A summary of financial performance was given:
▪ Liquidity position improved since January 2018
▪ Improved investor sentiment
▪ EBITDA and EBITDA margin % increased
▪ However, reported a net loss due to increased depreciation and finance costs
▪ Reduced cash from operations
▪ Most financial ratios deteriorated and are expected to deteriorate further, before stabilising and improving
▪ Additional work is required to ensure continued and enhanced PFMA reporting
▪ Financial performance needs to improve to ensure financial sustainability.

Dr Luyenge asked if Eskom still has the same asset management policy and register and what is the value of assets such as machines even those claimed to be too old for use? What are Eskom plans to ensure it has quality assets to produce quality electricity? Does Eskom have a retention strategy?

Ms Mazzone said the consensus is that Eskom is a captured company but nothing is being done to the bad guys such as Brian Molefe. Criminal charges were laid against him for PFMA breaches as was done with the previous board, Matshela Koko for the R1 billion tender awarded to his daughter, Anoj Singh for various issues such as the Tegeta deal, links to state capture and McKinsey and Trillian and many others. What is Eskom doing about all the malfeasance being uncovered? Is anyone held responsible for aiding and abetting them? Are criminal charges laid against them? Who has been charged now? Is Eskom going to ask for permission to appear before the Zondo Commission to tell them about the malpractices discovered? These people looted billions of SA tax money and they must pay for it. The Committee thanks you for your presentation and for being honest, and knows that you were not part of the board that did these terrible things. To fix Eskom is almost an impossible mammoth task but how do we move forward in holding the old guard to account? That the Molefe pension payout matter is still ongoing is mind-boggling.

Mr Shivambu recalled that in 2017 Eskom reported that it was suffering from a wide margin of excess capacity and as a result is forced to trim down on its power generation but it remains contractually bound to purchase excess capacity from IPPs even though it does not need it. Is the continual purchase of power from IPPs sustainable? How much is the power purchased from IPPs sold to the public? How much debt does Eskom owe and how much of it is state guaranteed? How much does Eskom owe to the PIC?

Mr Singh asked what impact the possible reduction of staff would have on the cash flow of the organisation. What is the return on investment on Eskom’s investments outside South Africa? Is it better than what is made in SA? On debt servicing, what is Eskom’s view on medium to long-term strategy on reducing the debt?

The Chairperson asked how Eskom plans to militate against the R19.6 billion irregular expenditure recurring in the future. How is Eskom going to service the R28 billion municipal debt? If municipalities call for a debt write off due to their low revenue base, will this not affect Eskom’s payment of its own debt?

Mr Cassim replied that the average selling price of the power purchased from the IPPs was 85 cents per kilowatt-hour and 89 cents on average since March. The IPP contracts are twenty years. The PIC debt is R100 billion out of the current Eskom total debt of R400 billion. As for state guarantees, R250 billion of those debts are guaranteed by the state.

Mr Oberholzer replied that the IPPs are still needed because of the lack of capacity facing Eskom. With the nine point recovery plan, if Eskom is successful then the amount of diesel burnt will reduce. If load shedding is eliminated, the savings to the country will be immense. Eskom has an asset register and is always improving and updating that register. It is true that some of the assets are very old that are accounted for according to historical value and will not reflect on the market value of its assets. On social investments, in 2018 Eskom invested R192m in its development foundation and other linked activities. The director and executive salaries are noted in the financial statements.

Mr Hadebe summed up by saying that the cases reported to the police are not only the 11 that were indicated. Collaboration is ongoing with the various agencies such as the SIU and Hawks and the number of cases is much bigger. All identified irregular expenditure is being followed through. The Zondo Commission is working with Eskom as we speak. On staff reduction, if the Eskom staff was reduced by a third, Eskom will save R22 billion over a five-year period. Eskom is making a return to the continent and it is helping Eskom but there are countries that are struggling to pay such as Zimbabwe. To reduce debt, Eskom is talking to government to look at this matter holistically and a solution will be found.

The Chairperson thanked Eskom for assuaging their concerns and going the extra mile to provide clarity. This Committee will have a joint meeting with the Portfolio Committee on Police to expedite the cases opened by the Hawks. As we are not talking about small change, it might require a longer time for the cases to be investigated and disposed of.

The meeting was adjourned.


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