ANNUAL FINANCIAL STATEMENTS 2020 www.eskom.co.za ANNUAL FINANCIAL STATEMENTS 31 March 2020 RESTORING TRUST ESKOM HOLDINGS SOC LTD | iii CONTENTS Directors’ report 2 19 Payments made in advance 81 Nature of the business 2 20 Trade and other receivables 82 Overview of the year 2 21 Inventories 83 Operational performance 3 22 Cash and cash equivalents 83 Financial performance 5 23 Assets and liabilities held-for-sale 83 Governance and compliance 9 24 Service concession arrangements 84 Human resources 11 25 Share capital 85 Shareholder compact performance 13 26 Debt securities and borrowings 85 Reportable irregularities 15 27 Embedded derivatives 88 Events after the reporting date 15 28 Payments received in advance and contract liabilities and 88 deferred income Approval 15 29 Employee benefit obligations 89 Report of the audit and risk committee 16 30 Provisions 92 Statement by company secretary 18 31 Lease liabilities 93 Independent auditor’s report to Parliament and 19 the shareholder – Minister of Public Enterprises on 32 Trade and other payables 93 Eskom Holdings SOC Ltd and its subsidiaries 33 Revenue 94 Statements of financial position 26 34 Other income 94 Income statements 27 35 Primary energy 94 Statements of comprehensive income 27 36 Employee benefit expense 95 Statements of changes in equity 28 37 Impairment of assets 95 Statements of cash flows 29 38 Other expenses 95 Notes to the financial statements: 30 39 Depreciation and amortisation expense 95 1 General information 30 40 Net fair value and foreign exchange loss on financial 96 2 Summary of significant accounting policies 30 instruments 3 COVID-19 considerations 41 41 Finance income 96 4 Capital management and going concern 42 42 Finance cost 96 5 Critical accounting estimates and assumptions 45 43 Income tax 97 6 Financial risk management 48 44 Cash generated from operations 98 7 Accounting classification and fair value 65 45 Net debt reconciliation 99 8 Segment information 69 46 Guarantees and contingent liabilities 100 9 Property, plant and equipment 72 47 Commitments 101 10 Intangible assets 74 48 Related-party transactions and balances 102 11 Future fuel supplies 75 49 Events after the reporting date 104 12 Investment in equity-accounted investees 75 50 Restatement of comparatives 104 13 Investment in subsidiaries 76 51 Directors’ remuneration 106 14 Deferred tax 76 52 New standards and interpretations 108 15 Investments and financial trading instruments 77 53 Information required by the Public Finance 111 Management Act 16 Loans receivable 77 54 Reportable irregularities 120 17 Derivatives held for risk management 78 Appendix – Abbreviations, acronyms and definitions 123 18 Finance lease receivables 81 Contact details ibc The annual financial statements were prepared under the supervision of the chief financial officer (CFO), C Cassim CA(SA). The financial statements have been audited in compliance with section 30 of the Companies Act and approved by the board of directors (board) on 28 October 2020. The audited financial statements of the group and Eskom as at and for the year ended 31 March 2020 are available for inspection at the company’s registered office and were published on 30 October 2020. The full suite of the group's externally published reports, including the financial statements and integrated report, are available at www.eskom.co.za. ESKOM HOLDINGS SOC LTD | 1 DIRECTORS’ REPORT for the year ended 31 March 2020 The directors are pleased to present their report for the year ended 31 March 2020. Overall there was a slight improvement in the financial performance from the previous year with earnings before interest, tax, depreciation and amortisation (EBITDA) increasing by R5.6 billion in 2020, primarily as a result of an increase in revenue and the results of cost- Nature of the business curtailment efforts. These improvements were largely offset by an increase in primary energy expenditure. Eskom Holdings SOC Ltd (Eskom) is South Africa’s primary electricity supplier that generates, transmits and distributes electricity to local industrial, mining, commercial, agricultural, residential and redistributor (metropolitan and other municipalities) customers as well as to During the year, savings of R16.3 billion were achieved against a target of R6.2 billion. The main savings were in primary energy costs as well utilities and end-customers in the Southern African Development Community (SADC). Eskom also purchases electricity from independent as additional international sales and recovery of lost revenue. Employee benefit costs further contributed to the savings due to underspend power producers (IPPs) as well as utilities and private suppliers in the SADC region. on contract labour and normal salary costs due to a lower headcount. Eskom is a state-owned enterprise, with the minister of the Department of Public Enterprises (DPE) as the shareholder representative. The The board concluded, based on the understanding by the shareholder of Eskom’s situation and the undertaking of additional support, that state is the only shareholder in Eskom. Eskom is a going concern. The details considered by the board when assessing Eskom’s ability to continue as a going concern are included in note 4.2 in the annual financial statements. It is important that strategies materialise as envisaged subsequent to the going concern Eskom’s head office is in Johannesburg. The nature of the business of the significant operating subsidiaries is set out in note 13 in the annual assessment period for Eskom to be sustainable into the future. financial statements. The business objective of these subsidiaries is mainly for the sole benefit of Eskom. Mr JA Mabuza was appointed as the interim chairman and acting group chief executive (GCE) from 1 August 2019. Mr Mabuza resigned on Overview of the year 10 January 2020 and the shareholder appointed Prof MW Makgoba as the Interim Chairman with effect from 13 January 2020. Mr A de Ruyter, A high-level summary of the pertinent issues that characterised the year under review is presented below. Additional information, where who has extensive experience in creating and managing high-performing businesses, was appointed as GCE on 6 January 2020. relevant, is contained in relevant sections of the directors’ report, annual financial statements and integrated report. Progress was made on addressing the audit qualification relating to the completeness of irregular and fruitless and wasteful expenditure. The performance for the year was marked by the following key factors that had a negative impact on the business: Enhancements to improve the Public Finance Management Act (PFMA) reporting process were implemented. There is unfortunately still work • system constraints that lead to loadshedding to be done to ensure an unmodified audit opinion as it is a lengthy process to address issues and embed improvements. • COVID-19 and the downgrade by credit rating agencies Irregular expenditure of R11.2 billion was reported in the current year for the group as Eskom continues with its governance clean up. Transgressions • liquidity constraints and increasing debt levels can only be closed once condoned and therefore irregular expenditure will continue to be incurred on open contracts until the related transgressions • flat sales and an increase in overdue debt have been condoned. Fruitless and wasteful expenditure of R2.3 billion and losses due to criminal conduct of R2.2 billion were reported during the Loadshedding was required on 46 days during the year with unprecedented stage 6 implemented on 9 December 2019. Loadshedding is year for the group. mostly required when diesel fuel levels at Open Cycle Gas Turbines (OCGT) stations or water levels at pumped storage stations are low, coupled with particularly high levels of unplanned breakdowns of the coal generating plant. Loadshedding has a negative impact on the Operational performance economy, with the World Bank naming Eskom as the biggest risk to the South African economy. Security of supply remains a key concern, with focus on improving the generation plant health and reducing loadshedding while containing costs. The President of South Africa declared a National State of Disaster and implemented a nationwide lockdown on 27 March 2020 to reduce Loadshedding was required on four days in October 2019, two days in November, nine days in December, seven days in January 2020, 17 days the spread of COVID-19, which was declared by the World Health Organisation as a global pandemic on 11 March 2020. The government in February and seven days in March. Eskom reached an all-time low on 9 December 2019 when it had to implement stage 6 loadshedding implemented a risk-adjusted strategy for economic activity which constitutes a five-level approach to the nationwide lockdown, with level 5 because of severe supply constraints as nine generating units were not available and there was a risk of losing additional units at Medupi, Kriel being the highest level. The country gradually moved down to the current level 1 on 21 September 2020. and Kendal power stations due to low coal bunker levels as a result of persistent heavy rainfall. Wet coal, flooded power stations, flooded mines and compromised emissions performance contributed to the largest unplanned capability loss factor (UCLF) figures ever observed by Eskom. The impact of the lockdown on Eskom’s operations was not that severe as the generation and provision of electricity was declared an essential service. It resulted in a significant reduction in electricity demand during the initial lockdown period. The extended lockdown is The lockdown resulted in a significant reduction in demand which led to excess capacity and allowed for more short-term maintenance during expected to threaten future sales volumes and the ability of customers to pay, as well as increasing the cost of production. levels 5 and 4 of the lockdown to address partial load losses. No long duration outages were embarked on during this period to limit the risk of COVID-19 to employees and contractors. The downgrade of the sovereign credit rating by Moody’s has placed the country at sub-investment grade level across all three internationally recognised credit rating agencies. With Eskom being intrinsically linked to the sovereign, the downgrade will result in an increase in the Eskom commenced with the implementation of its long-term coal strategy to address challenges relating to the cost of coal and security of marginal rate of borrowing for Eskom. Nevertheless, it is expected that the impact on Eskom’s issued current debt will be minimal as all supply. Eskom is pursuing the extension of cost-plus supply contracts to match the remaining life of the related power stations as well as transactions are hedged. utilising dedicated coal reserves to supply other power stations. Liquidity remains one of the biggest short-term challenges hampering Eskom’s ability to achieve financial and operational stability and Although the ageing generation fleet is susceptible to unpredictable breakdowns due to legacy issues, apathetic behaviour by some management posing a risk to going concern. Access to cost-effective funding remains restricted, while inadequate price increases granted by the National has exacerbated the situation. Eskom has suspended some power station managers for this reason, pending disciplinary inquiries. There have Energy Regulator of South Africa (NERSA) as well as escalating municipal arrear debt further contribute to liquidity constraints. Eskom has been engagements with other power station managers to ensure that the previous culture of weak consequence management will no longer restricted its cash requirements to improve liquidity through targeted savings on operating and capital expenditure. However, cost savings be tolerated. alone will not be sufficient to resolve liquidity constraints and the electricity price must migrate to cost reflectivity. Despite the focus on the challenges in generation, there are also risks in the transmission and distribution environments. A transmission A focus area for liquidity is to improve the revenue outlook through migrating to cost-reflective tariffs and growing sales. Revenue is sustainability improvement plan was approved which focuses on the replacement of assets in poor condition, system expansion for growth determined through the Multi-Year Price Determination (MYPD) methodology regulatory process with NERSA. The tariffs awarded by and reliability, security upgrades and improvement actions for leading risk indicators. A distribution network development plan was developed NERSA for 2020 to 2022 resulted in a substantial revenue shortfall. Eskom is following due process to seek rectification with regard to the based on needs identified and includes strengthening and refurbishment projects that will support future growth. unsustainable tariff determination awarded, but this is a drawn-out process with no guaranteed relief. Generation recovery plan Revenue increased by 10.9% to R199.5 billion in the current year despite a decrease of 1.3% in sales volume. The growth in revenue is driven The generation recovery plan aims to allow for fast-tracked improvement in generation performance. Progress has been made in some by the annual increase in the average electricity price. The allowed tariff increase for 2020 equates to 13.87%, including the liquidation of a areas of the plan, but the generation system is expected to remain vulnerable for the next 18 to 24 months, with an increased likelihood of portion of the MYPD 3 regulatory clearing account (RCA) balance. loadshedding. The progress on the implementation of the plan includes: Access to funding in domestic and foreign markets has been restricted due to decreased investor confidence caused by poor financial • Fix new plant performance, saturated borrowing capacity and the sovereign’s credit rating downgrade. The borrowing programme for 2021 to 2025 The new plant has not achieved the desired levels of performance and reliability due to plant design deficiencies combined with operational envisages Eskom raising debt of R121.9 billion. and maintenance inefficiencies. Responsible contractors are being held liable within the provisions of the contracts where relevant. Government continues to support Eskom to operate as a going concern and improve liquidity through a government commitment of An integrated technical solution for the boiler at Medupi unit 3 was implemented and tested during the general inspection outage which R112 billion over the next three years. Eskom’s liquidity remains constrained, even after taking the government support into account, due started in January 2020. The agreed solutions included modifications to the reheater spray flow, pulse jet fabric filter, gas air heater, milling to poor long-term financial sustainability arising from an inadequate tariff path. Although the equity support addresses Eskom’s liquidity plant, duct and reheater erosion protection together with boiler optimisation and performance testing. The Kusile power station boiler requirements, it does not adequately support its long-term financial sustainability. Eskom is in the process of exploring different options to plant modifications will be executed during the guarantee inspection on unit 3, planned for January 2021. The dual-load rejection defect at find an appropriate solution to address this challenge. Ingula power station was corrected successfully and the units have been rerated to the full design capability of 331MW. The targets in the shareholder compact were achieved for the majority of financial ratios, with better performance of key ratios than • Fix load losses and reduce power station trips the prior year. High levels of debt continue to lead to greater debt servicing requirements. Most notably, cash interest cover and debt The generation fleet unit trips have increased in comparison to the previous year. The trip reduction strategies in 2020 focused primarily on service cover ratios remained steady at 0.94 (2019: 0.94) and 0.52 (2019: 0.47) respectively when compared to the previous year. While the Duvha, Kriel, Majuba and Tutuka power stations. Medupi, Kusile, Arnot and Matla power stations are receiving attention in 2021 and have shown performance of these measures was higher than target, they remain below acceptable norms, indicating that cash generated from operating an improvement during the first quarter of the new financial year. Full load losses increased mainly due to outage slips and significant incidents. activities is insufficient to cover the cost of servicing debt, thereby prompting the need for government support. • Fix units on long-term forced outages Progress was made during the year with the successful return to service of Duvha unit 1, Lethabo unit 5 and Hendrina unit 6 which were on long-term forced outages. Kendal unit 5 is expected to return to service in April 2021. 2 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 3 DIRECTORS’ REPORT (continued) for the year ended 31 March 2020 Operational performance (continued) Plant failures impacted system reliability and system minutes lost <1 minute performance deteriorated to 4.36 minutes compared to 3.16 minutes Generation recovery plan (continued) in 2019. The performance of the transmission network is impacted by ageing assets and financial constraints which limit Eskom’s ability to • Fix partial losses and boiler tube leaks maintain and refurbish assets. Incidents of tower member and substation theft continue to pose risks for asset failures and network availability. Performance on partial load losses has deteriorated from the previous year. While identified partial losses have been reduced some of The duration and frequency of interruptions on the distribution network improved compared to the prior year due to the network these gains were not always sustainable. Steam and water chemistry control on stations remain a long-term sustainability issue which impacts partial load losses. Plans have been put in place to address the most common contributors to partial load losses. Outage readiness performance turnaround plan, which focused on improving elements that contribute significantly to the unplanned system average remains a concern and partial load loss gains from units post outage are being monitored. The lockdown as a result of the COVID-19 interruption duration index. The total technical and non-technical distribution line losses increased to 8.79% (2019: 8.47%) largely due to pandemic, allowed for opportunity to clear some of the partial load losses. declining sales and escalating electricity theft, with an estimated cost of R2.0 billion (2019: R1.7 billion). Load reduction during peak times has been implemented in areas with a high prevalence of illegal connections to protect Eskom’s infrastructure against damage due to overloading. There were 170 (2019: 154) boiler tube failures during the year, contributing 2.06% (2019: 1.77%) to UCLF. The results of the latest annual boiler tube leak failure compliance review indicate that there has not been an improvement in compliance, which is evident in the poor Eskom recorded no employee fatalities for the first time in 15 years (2019: three). Despite commitment to safety and focus on Zero Harm boiler tube failure performance. Greater emphasis is being placed on improving compliance to achieve sustainable future performance. there were nine (2019: four) contractor and 17 (2019: 22) public fatalities. A further concern is an increase in physical threat to employees and contractors working in public areas due to community unrest. • Fix outage duration and slips The effective execution of an outage is measured based on the reliability of the unit after it has returned to service. The post-outage Capacity expansion programme UCLF deteriorated in 2020 and Eskom is reviewing outage planning and execution measures in order to improve outage readiness and The capacity expansion programme started in 2005 to build new power stations and reinstate mothballed power stations to increase installed unit performance after the outage. generation capacity by 17 384MW, as well as increase high-voltage transmission power lines by 9 756km and transmission substation capacity by 42 470MVA. The inception to March 2020 installed generation capacity increased by 12 338MW, transmission lines by 7 976km and • Fix human capital All power station general manager and middle manager positions have been filled. Approval was granted to fill 1 872 vacant positions substation capacity by 37 690MVA. The programme is expected to be completed by 2024, with an expected cost of R558.1 billion excluding including 205 plant operators. Progress was made in the recruitment process and Eskom is currently addressing other critical vacancies borrowing costs. through a work skills plan and pipelining. Medupi units 3 and 2 were commissioned during the year, adding installed capacity of 1 588MW to the national grid. Kusile units 2 and 3 were • Prepare for increased OCGT usage not commissioned during the year as originally expected due to the defects correction process. The Medupi and Kusile power stations are A five-year diesel purchasing agreement was approved, thereby securing diesel supply. Diesel tank levels are maintained well above target. expected to be completed by 2021 and 2024 respectively. • Fix coal stockpiles Construction of transmission lines is behind schedule due to various challenges such as site instability, poor contractor performance, Coal stock days significantly improved during the year with 14 of the 15 coal power stations at the expected level and all power stations met the construction problems and contractual issues. During the year, 127.9km of high-voltage transmission lines and 250MVA of substation capacity grid code requirement. Coal stock levels at the end of the year were at 50 days (2019: 36 days), excluding Medupi and Kusile power stations. were installed and commissioned. • Fix environmental issues Progress was made on the electrification programme during the year with 163 613 (2019: 191 585) households connected. With coal stock restored to acceptable levels, the focus has shifted from preparing for rain to fix environmental issues and particularly power station emission levels. Emissions control projects consist of refurbishment of existing plant and retrofitting new technologies to Refer to page 84 of the integrated report for more information. reduce particulate matter emissions as well as sulphur and nitrogen oxides. The progress in these areas has been disappointing mainly due to financial constraints. Financial performance Turnaround plan At year end, 11 coal-fired units were operating in non-compliance with average monthly emissions limits. All eight units at Camden power station The progress against the four pillars of the 2019 turnaround plan includes: were temporarily shut down to mitigate and manage a potential safety and environmental risk resulting from ash dam capacity constraints. • Financial support from the Government of South Africa (government) The generation environmental compliance steering committee was established in June 2020 to address continuous exceedances of National Treasury provided R49 billion in equity support to Eskom in 2020. The funds may only be used to settle debt and interest atmospheric emissions and poor water usage in the coal-fired fleet. payments in terms of the equity conditions attached to the support. The liquidity reserves improved to R23 billion in 2020 as a result of the support combined with payments of R5.3 billion that were delayed from 31 March 2020 to 1 April 2020 due to information technology Technical performance (IT) technical issues. The energy availability factor of the generating plant decreased from 70.0% in 2019 to 66.6% in the current year because of increased unplanned maintenance of coal-fired plant compared to the prior year. The energy utilisation factor (EUF) increased to 79.0% compared to Government has committed R112 billion support over the next three years with R56 billion for 2021, R33 billion for 2022 and R23 billion 77.8% in the prior year indicating that power stations are operating at unsustainably high levels which will impact the future reliability of units for 2023. due to the stress placed on them. The high EUF was largely due to coal stations running at an average EUF of 93.3% for the year, which is well above the international standard of approximately 75% over the long term. • Cost curtailment During the year, savings of R16.3 billion were achieved against a target of R6.2 billion, mainly as a result of coal inventory optimisation, The graph below reflects the decline in the energy availability factor and coal EUF over the last few years as well as the interrelationship of reduced sundry expenses, revenue recovery initiatives and increased revenue from international customers. unplanned, planned and other capability loss factor with the energy availability factor and coal EUF. Employee benefit expense was a large component of EBITDA. Given the socio-economic conditions of the country, the shareholder indicated % % its lack of support for an aggressive headcount reduction. A voluntary separation package was offered to non-core and not-critical employees 40 100 as well as all employees aged between 60 and 62 to reduce manpower costs. As a result, 163 employees exited the organisation in March 2020, 21 in April 2020 and one in June 2020 at a total cost of R286 million, with a payback period of just over one year. 80 Cumulative cash savings targeted over the next three years amounts to R55.8 billion, comprising operating expenditure of R32.3 billion, 30 capital expenditure of R12.4 billion and working capital of R11.1 billion. • Tariff increases through NERSA 60 Eskom needed tariff increases of 17.1%, 15.4% and 15.5% for 2020 to 2022, but NERSA only granted increases of 9.4%, 8.1% and 5.2% respectively, thereby resulting in revenue shortfalls. Eskom is seeking rectification regarding the unsustainable tariff determination awarded. 20 The status of the court proceedings that Eskom has lodged against NERSA are as follows: 40 – Revenue decision for 2020 to 2022 (MYPD 4): The court ruled that the revenue decision for the MYPD 4 determination made by NERSA where the equity injection was incorrectly deducted is reviewed and set aside. It requires Eskom to recover the R69 billion in 10 a phased manner over a three-year period, starting in the 2022 financial year. NERSA has applied for leave to appeal the phasing of the 20 recovery. The appeal was granted on 6 October 2020. – Revenue decision for 2019: The court determined that the revenue decision was procedurally unfair, irrational, unreasonable and unlawful. Eskom submitted a supplementary application to NERSA to recover costs had a lawful decision been made. NERSA decided 0 0 to undertake a public consultation process and it is envisaged that a final outcome will be determined by NERSA on 26 February 2021. 2016 2017 2018 2019 2020 Unplanned capability loss factor (%) – left axis Planned capability loss factor (%) – left axis Other capability loss factor (%) – left axis Coal energy utilisation factor (%) – right axis Energy availability factor (%) – right axis 4 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 5 DIRECTORS’ REPORT (continued) for the year ended 31 March 2020 Financial performance (continued) Performance Turnaround plan (continued) Eskom’s financial health has been deteriorating over the past few years and is not at an acceptable level. The financial performance for the • Tariff increases through NERSA (continued) year improved slightly with most of the financial ratios better than in 2019, but still far below acceptable norms. – RCA decision for 2015 to 2017 (MYPD 3): The judgement sets aside the RCA decisions and accepts that Eskom put forward a case for The net loss after tax for 2020 was R20.5 billion, reflecting a slight improvement of R0.4 billion from the previous year. relief in areas where NERSA did not implement its methodology and past precedent. NERSA is required to urgently reconsider its RCA balance decision. NERSA decided to undertake a public consultation process and it is envisaged that a final outcome will be determined The graph below reflects a steady growth in the EBITDA and EBITDA margin with a dip in 2019 as well as a decline in the net profit and loss by NERSA on 26 February 2021. after tax. – RCA decision for 2018: Eskom submitted its founding affidavit on the review to NERSA on 9 April 2020. NERSA indicated that it would Rbn % oppose this review application. 50 30 Furthermore, NERSA made a determination of R13.3 billion in May 2020 on the RCA balance for the 2019 financial year in response to 25 40 Eskom’s application of R27.3 billion which resulted in a shortfall of R14 billion. There is evidence of continued incorrect application of the MYPD methodology. It is crucial that NERSA provide cost-reflective tariffs for the long-term sustainability of Eskom. 20 30 • Functional separation of Eskom into individual entities 15 The president announced in February 2019 that the unbundling of Eskom is a priority activity towards electricity market structure reform 20 in South Africa. DPE released the “Roadmap for Eskom in a reformed electricity supply industry” in October 2019 and envisaged three 10 subsidiaries under Eskom Holdings SOC Ltd, namely generation, transmission and distribution. 10 Prior to legal unbundling, a number of matters need to be clarified to manage the risk associated with the process and ensure that the new 5 entities would be sustainable. Among these are finalising the revenue models and debt allocation, engagement with lenders to ensure that 0 0 the process does not trigger debt covenants, labour consultations as well as regulatory and legislative changes. -10 Eskom has embarked on a process to separate the three line businesses (namely generation, transmission and distribution) into standalone -5 businesses under Eskom Holdings through divisionalisation as a first step to unbundling as it is the least risky approach. -20 -10 All three businesses will be divisionalised simultaneously to ensure that the divisions will be able to operate as standalone businesses and to further mitigate the risks to debt and lender security and the asset base. -30 -15 2016 2017 2018 2019 2020 Progress on the functional separation of Eskom is discussed below: EBITDA (Rbn) EBITDA margin (%) Net profit and loss after tax (Rbn) Aspect Comment Programme management Eskom set up a turnaround management office to drive the implementation of Eskom’s turnaround Revenue increased by R19.6 billion to R199.5 billion in the current year mainly due to the tariff allowed by NERSA, which was offset by the plan and appointed Mr V Tuku on 1 July 2020 to lead the team. Each division has established a sales volume decline of 1.3% to 205 635GWh in the current year despite efforts to grow sales volumes. The decline in sales volume was mainly project management office and divisional governance frameworks to execute the objectives within due to lower local sales to the mining and industrial sectors as a result of the downscaling of operations and depressed commodity prices, their divisions which was marginally offset by higher international sales. Revenue was also negatively impacted by revenue not recognised of R10.2 billion as the collectability criteria was not met, with R4.1 billion of revenue recognised from customers on the cash basis. Supply constraints also Process Divisional boards with associated managing directors, comprising Eskom employees, have been had a negative effect on demand and sales volumes. Eskom’s average electricity price amounted to 101.86c/kWh, compared to 90.01c/kWh set up in generation, transmission and distribution. Eskom’s GCE, CFO, chief operating officer for the prior year. and group executive (GE): human resources are members of these boards, which are chaired by the GCE. The divisional boards are mandated to operate the divisions as independent entities Eskom is working with government to address deteriorating sales volumes by identifying possible solutions to make the electricity supply while aligning to the group strategy. The divisional boards hold the divisional management industry more reliable, sustainable and competitive, including incentive pricing to optimise electricity sales to energy-intensive customers accountable on strategy implementation, business performance and functional compliance. The and stimulate local sales. divisional boards are operational whilst the delegation of authority for these boards and their subcommittees is being finalised Primary energy costs increased by R12.6 billion to R112.1 billion in the current year. Coal usage costs were the main contributing factor with an increase of R7.9 billion mainly due to coal price escalations. IPP costs increased by R3.1 billion, international purchases by R1.0 billion and The internal energy trading process was reinstated to enable transfer pricing together with OCGTs by R0.6 billion largely due to increased production from these sources to avoid or minimise the impact of loadshedding. corporate cost allocations to divisions. Internal power purchase and energy supply agreements were signed between transmission, the various power stations, distribution and the southern African Employee benefit expenses decreased by R0.2 billion to R33.0 billion in the current year, which is mainly attributable to a reduction in energy division headcount from 46 665 in 2019 to 44 772 in 2020. The headcount reduced as a result of natural attrition and the moratorium on external appointments (except for core, critical and scarce positions as approved by the board). The impact of the voluntary separation packages will People Corporate staff in IT, security, human resources, finance and procurement who previously serviced only be reflected in 2021 as the employees left at the end of the financial year. The prior year expenses were restated by R0.1 billion as the operating divisions centrally now report directly to the relevant division. Revised structures to post-employment medical aid obligation is now accrued for from the early retirement age of 55. accommodate the movement of staff and the relevant delegation of authority were approved IT systems and finance An analysis has been done of the IT systems that are impacted to inform the detailed implementation Other operating expenditure increased by R0.5 billion mainly due to a net write off of R3.5 billion as well as related borrowing costs plan and a roadmap is being prepared of R0.5 billion as a result of potential overpayments to contractors involved in the construction of the Kusile power station as well as a reduction in the decommissioning provisions of R4.6 billion as the long-term discount rate increased. A finance journey map has been developed which will be refined over time. The tax provisions applicable to the unbundling transaction may result in adverse tax implications. Eskom plans to In the prior year, accelerated depreciation for four units at Komati power station occurred and units at the Hendrina and Komati power submit a request to National Treasury for a tax provision that addresses the unbundling of Eskom stations were placed in cold reserve. These are the main reasons for the decrease in depreciation and amortisation expense of R1.9 billion in 2020. Business and operating models Work has commenced on updating the business and operating models. The business models for divisionalisation are at an advanced stage. The Executive committee (Exco) will be engaged on these Net finance cost increased by R3.5 billion in the current year which represents an 12.7% increase, as a result of the increase in debt securities models which will guide the operating models and borrowings and the impact of a higher weighted average cost of debt. The functional leader model has been adopted as the operating model. The role of the corporate The financial health ratios relating to the statement of financial position improved slightly, with the net debt-to-equity ratio at 2.2 in the centre will be that of a functional leader, by giving direction and setting policies. Corporate or current year compared to 2.9 in the prior year. The net debt decreased by R15.6 billion during the year to R415.2 billion and equity increased strategic servicing functions will be provided to leverage economies of scale and skills. This will by R35.9 billion to R185.9 billion, mainly resulting from equity support of R49 billion received from government which was offset by the net entrench a values-driven organisation aiming for a high-performance culture and excellent loss for the year. governance 6 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 7 DIRECTORS’ REPORT (continued) for the year ended 31 March 2020 Financial performance (continued) The graph below reflects the increase in the overdue municipal debt per province and the breakdown between the net impairment and Performance (continued) interest and revenue not recognised since 2016. The graph below reflects the movement in net debt as well as the slight improvement in the debt-to-equity ratio and the decline in the net Rbn debt service cover ratio over the last few years. 30 Rbn Ratio 500 4 25 400 20 3 15 300 2 10 200 5 1 100 0 2016 2017 2018 2019 2020 0 0 Interest and revenue not recognised (Rbn) Net impairment (Rbn) 2016 2017 2018 2019 2020 Free State (Rbn) Mpumalanga (Rbn) Gauteng (Rbn) Other (Rbn) Net debt (Rbn) Net debt-to-equity (Ratio) Net debt service cover (Ratio) The board has noted that Eskom cannot continue to fund the Pebble Bed Modular Reactor SOC Ltd (PBMR) in its current state of care and maintenance and resolved to dispose of PBMR and its subsidiaries to avoid any further expenses. Negotiations are in progress to explore the The net cash from operations of R36.2 billion (2019: R32.7 billion) during the year was not sufficient to service debt and fund general capital option of transferring the PBMR to the South African Nuclear Energy Corporation SOC Limited. expenditure. Capital expenditure and the shortfall on debt service commitments are funded by debt raised and government support. The investment activities decreased by R9.2 billion to R27.0 billion in 2020 as the capital expansion programme is nearing completion. Funding The graph below shows the movement in cash from operations and the decrease in cash interest cover and net debt service cover over the Eskom raised R50.9 billion against a target of R46.2 billion in 2020. New funding of R35.9 billion was secured through cash drawdowns and a last few years. R15 billion credit facility agreement was extended with a consortium of banks. The sustainability of Eskom’s liquidity position and medium- term ability to raise funds remains at risk. Rbn Ratio 50 2.0 The debt repayment profile, based on existing debt, is pressured over the short and long term with debt repayments of R197 billion and interest payments of approximately R145 billion over the next five years and maturities extending to 2052. These redemptions and interest payments can only be met with government support combined with cost-reflective tariffs. 40 1.5 Eskom uses a government guarantee of R350 billion to secure funding. The committed and drawn down funding against the guarantee for 2020 was R324 billion, with R26 billion available for further use. 30 The new five-year borrowing programme for 2021 to 2025 envisaged that Eskom would raise R121.9 billion, which represents a decrease of R85.5 billion compared to the previous five-year borrowing programme. This demonstrates Eskom’s intention to limit further growth in 1.0 debt securities and borrowings as well as related debt servicing costs. The funding plan for 2021 is R30.8 billion of which R19.6 billion was committed at 30 September 2020. 20 The successful execution of this plan is contingent on fair regulatory tariffs, improved investor confidence, additional government support and the ability to improve the balance sheet by effectively reducing current debt levels. South Africa’s credit rating downgrade, the lack of 0.5 diversification of funding sources and increased financing costs due to the current financial environment are constraints that pose a threat 10 to the effective execution of the programme. Refer to page 59 of the integrated report for more information. 0 0.0 2016 2017 2018 2019 2020 Governance and compliance The board remains committed to rooting out financial mismanagement, malfeasance and maladministration, the elimination of which is critical to Cash from operations (Rbn) Cash interest cover (Ratio) restore transparent and effective governance. Governance breaches arose from years of exposure to fraud, corruption, unethical business practices, Net debt service cover (Ratio) conflict of interest in procurement, non-compliance with policies and procedures and irregular expenditure. In order to restore Eskom’s reputation and improve financial and operational sustainability, various actions have been taken to address corporate governance related breaches, including: The total gross overdue debt increased by R7.8 billion to R43.5 billion of which municipalities represents 64% and Soweto 29%. The total gross municipal overdue debt was R28.0 billion in 2020 of which the Free State owed 41%, Mpumalanga 29% and Gauteng 9%. • Lifestyle audits The first phase of the lifestyle audits, which was performed on executive and senior management, has been completed and 34 high-risk A new municipal debt management strategy was approved, which comprises three key objectives, namely to reduce and/or eliminate overdue cases have been handed over to the Special Investigating Unit (SIU) for further investigation. The second phase targets lower occupational debt, stop defaulting where it occurs and prevent defaulting by paying customers. A total of 48 active payment agreements were in place with levels through lifestyle reviews. A detailed independent lifestyle audit will be conducted where the results of the preliminary lifestyle defaulting municipalities at year end with only 20 agreements being honoured. There are 29 legal cases against defaulting municipalities and review indicate potential red flags. Approximately 3 800 employees have been identified for an in-depth review. Eskom has been interdicted from interrupting supply to 16 of the top 20 defaulting municipalities. Eskom started issuing summons for debt owed and is pursuing the attachment of municipal assets. Eskom tries to set a tone of no tolerance, however external interventions hamper • Delegation of authority framework progress. The delegation of authority framework was reviewed during the year to enhance accountability and ensure that risks, associated with governance and transactional oversight, are managed effectively. The total gross overdue debt for Soweto decreased by R0.6 billion to R12.7 billion. The payment level has improved to 20.5% from 12.5% in 2019 largely due to the conversion of conventional meter customers to prepaid meters resulting in fewer billed customers. 8 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 9 DIRECTORS’ REPORT (continued) for the year ended 31 March 2020 Governance and compliance (continued) • proactive reviews of newly established contracts, modifications and deviations. In instances where potential irregular expenditure is • Ethics, fraud and consequence management identified, an investigation is conducted and the necessary condonation process implemented, if required. Disciplinary action is taken An anti-fraud and corruption integration committee was established to monitor the progress on governance clean-up and related matters. against employees implicated in wrongdoing and civil action and recovery measures are pursued where applicable A fraud awareness e-learning programme was launched to enhance prevention of fraud and corruption across the organisation. An anti- Training on the revised PFMA reporting procedures and guidelines was rolled out in conjunction with these initiatives, with the aim of fraud and corruption awareness programme was also part of supplier forums conducted during the year as suppliers are key stakeholders eliminating any ambiguities that may arise from different interpretations of governance frameworks. in the fight against fraud and corruption. Irregular transactions are considered by internal delegated approval authorities and submitted to National Treasury for condonation. • Investigations and disciplinary action involving employees National Treasury is yet to approve the majority of the condonation requests submitted. Unfortunately, expenditure on affected contracts A total of 118 new cases were reported through whistle-blowing channels during the year. Eskom concluded 202 investigations relating will only cease to be irregular once condoned or upon expiry of the contract. Resources were made available to National Treasury to fast- to whistle-blowing cases during the year of which 54 were fraud, 49 corruption and 99 related to irregularities. Disciplinary action was track condonations. recommended for 41% of cases and 256 cases are still active at year end. During the disciplinary processes, 60 employees resigned and 18 employees were dismissed due to fraud and corruption. Fruitless and wasteful expenditure and criminal conduct The trend from the investigations concluded during the year indicated failure to declare and manage conflicts of interest, failure to obtain Fruitless and wasteful expenditure of R2.3 billion (2019: R0.6 billion) was reported during the year. Eskom implemented procedures, effective permission to perform private work and payment for goods not delivered. from 1 November 2019, to ensure compliance with the framework issued by National Treasury on fruitless and wasteful expenditure. A schedule with details of each incident, including corrective and preventive measures instituted, has been submitted to National Treasury. General procurement irregularities include incorrect procurement processes followed, issuing of purchase orders and billing for resources. The failures occurred mainly because of management and operational override of internal controls. Disciplinary action was taken, where Losses due to criminal conduct of R2.2 billion (2019: 2.0 billion) were reported during the year of which R2.0 billion (2019: R1.7 billion) appropriate, and internal control measures were reviewed and enhanced. related to non-technical energy losses including energy theft. It remains a challenge to address losses due to criminal conduct and Eskom continues to co-operate with all regulatory bodies and law enforcement agencies in dealing with matters of a criminal nature. • Investigations into suppliers A supplier review committee was re-established during the year. The committee is responsible for instituting disciplinary action against Board and executive committee changes suppliers, including the suspension and termination of contracts where non-compliance with Eskom’s procurement and supply chain The board shall, in terms of the memorandum of incorporation, consist of a minimum of three and maximum of 15 directors, with the management procedures has been identified. At 30 September 2020, 57 recommendations of supplier sanctions were considered by the majority being non-executive directors. There is a need for the appointment of more suitably qualified directors, especially taking into committee based on findings from forensic investigations. account the challenges that the organisation is facing. The finalisation of investigations into former executives suspected of misconduct remains a priority. Two former senior employees were The following changes to the non-executive directors occurred during the year and subsequent to year end: arrested on corruption-related charges in December 2019. Eskom and the SIU issued summons in August 2020 to recover money from three Non-executive directors Comment former board members and four former executives relating to a prepayment to a former supplier, Tegeta Exploration and Resources (Pty) Ltd. JA Mabuza Appointed as interim chairman and acting GCE on 1 August 2019 Eskom submitted a claim of R5 billion against the Optimum Coal Mine (Pty) Ltd business rescue practitioners for pre- and post-business Resigned on 10 January 2020 rescue penalties. This has subsequently been reduced to R1.3 billion after an arbitration ruling. MW Makgoba Appointed as interim chairman on 13 January 2020 Eskom and the SIU are investigating potential overpayments to a number of contractors involved in the construction of the Kusile power RSN Dabengwa Resigned on 23 July 2020 station. At this stage, Eskom identified the possibility of overpayments of approximately R4 billion. Based on the progress of the investigations SN Mabaso-Koyana Resigned on 31 January 2020 into these matters, R3.5 billion of expenditure previously capitalised to the cost of plant was written off as well as related borrowing cost of R0.5 billion. The necessary recovery processes are being instituted upon conclusion of the investigations and quantification of the The following changes to the Exco occurred during the year and subsequent to year end: overpayments in line with the normal processes followed for variation orders and compensation events. Executive committee members Comment Eskom continues to support government and law enforcement agencies with investigations into violations of law and recovery of monies lost using criminal and civil processes. Criminal convictions and the recovery of financial losses are dependent on the successful prosecution by AM de Ruyter Appointed as GCE on 6 January 2020 law enforcement agencies and the justice system which is a lengthy process. F Burn Appointed as general manager: information technology on 15 May 2020 PS Hadebe Resigned on 31 July 2019 The Standing Committee on Public Accounts (SCOPA) conducted an oversight visit at Kusile and Medupi power stations during the year. ND Harris Appointed as acting general manager: information technology on 19  May 2019 and acted until SCOPA then presented 23 recommendations to parliament to address its findings and concerns, ranging from progress on the overdue new 14 May 2020 build programme to addressing Eskom’s governance challenges. These recommendations are consistent with the board’s plan to root out V Tuku Appointed as GE: transformation management office on 1 July 2020 corruption and Eskom is in the process of addressing the recommendations. SJ Mthembu Resigned on 31 December 2019 Despite the continued focus on the governance clean-up and some success in this area, there is still a long way to go. A key concern is to N Zibi Resigned on 17 May 2019 ensure that changes implemented are sustainable and lead to a reduction in transgressions. Refer to page 11 of the integrated report for more information. The board remains committed to the implementation of King IV TM, together with an overall improvement in governance and ethics, to align the organisation with its stated values. The board concedes that certain of the King IV TM principles need to be effectively implemented once Human resources the governance improvement has been completed. A people plan was developed and approved by the board in June 2019 in response to the electricity market structure reform in South Africa. The plan outlines the human resources journey over the next three years with the primary focus being to drive a culture of performance PFMA compliance and accountability, build critical capabilities across the organisation, increase employee morale and productivity as well as manage employee Irregular expenditure benefit costs. New instances of irregularities have been detected as Eskom continues with its governance clean up exercise, which are then investigated and appropriately addressed. Approximately 42% of the irregular expenditure of R11.2 billion reported in 2020 related to new transgressions The board is mindful of the prevailing low staff morale as a result of Eskom’s poor reputation, lack of incentive bonuses and continued due to the contravention of various national legislative requirements. uncertainty around the impact of the restructuring. Initiatives are in place to rebuild employee morale and give employees an opportunity to provide feedback to leadership. A loss control department is being established in compliance with new National Treasury instructions. The department will be responsible for conducting assessments and investigations into all occurrences of irregular as well as fruitless and wasteful expenditure. It will also Workforce optimisation oversee consequence management including disciplinary actions, condonations and recovery of losses. Workforce planning is a business-driven process with the aim to match the workforce to business requirements and ensuring that the organisation is the right size to improve efficiencies, performance and productivity. The supply chain recovery programme focused on the implementation of corrective action to mitigate the occurrence of irregular expenditure so that adequate systems and processes are in place to monitor and report all information required in terms of the PFMA. Numerous The headcount reduced by 1 893 to 44 772 in the current year due to natural attrition as well as adherence to the moratorium on external initiatives were implemented during the year, including: appointments, with the exception of the appointment of core and critical employees as approved by the board. Eskom prioritises retention • enhancement of internal processes and controls to eliminate circumventing of procurement processes. Checklists have been embedded of critical workforce segments when reducing headcount. into systems to ensure that the applicable controls and workflows are complied with before conclusion of a transaction in line with legislative and compliance requirements • analysis of purchase orders and monitoring of procurement plans to determine trends indicating possible abuse of low-value procurement mechanisms. Where anomalies are identified, business is required to take the necessary action to prevent a recurrence • implementation of a price check tool and e-auction system to ensure that transactions are based on market-related prices and that potential service providers are able to compete fairly 10 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 11 DIRECTORS’ REPORT (continued) for the year ended 31 March 2020 Human resources (continued) Shareholder compact performance Workforce optimisation (continued) The table below sets out Eskom’s performance measured against the shareholder compact that was reviewed by the external auditors. The The graph below reflects the decrease in the employee numbers since 2016. external audit opinion relating to this review is detailed on page 22. All the key performance indicators (KPIs) in the compact refer to the Eskom company, with the exception of the lost-time injury rate and the finance measures which reflects the group. The 2020 targets were revised, Number where applicable, in accordance with the shareholder compact addendum signed by the Minister of Public Enterprises on 1 April 2019. 50 000 Actual performance against the year-end target is indicated as follows: Actual performance for the year met or exceeded the target 45 000 Actual performance for the year did not meet the target Key performance indicator Ref Unit Target Actual Actual 2020 2020 2019 40 000 Focus on safety Lost time injury rate (employee)1 index 0.34 0.30 0.31 Improve plant operations 35 000 Energy availability factor (a) % 71.50 66.64 69.95 Planned capability loss factor (b) % 9.50 8.92 10.18 Unplanned partial load losses (c) average MW 3 500 4 651 3 443 30 000 Unplanned automatic grid seperations trips (d) number of trips 560 594 517 Post philosophy outage unplanned capability loss factor (e) % 17.00 29.91 17.05 System minutes lost (f) minutes 3.53 4.36 3.16 0 2016 2017 2018 2019 2020 Transmission technical energy losses savings MWh 8 422 32 890 n/a Permanent employees Fixed-term contractors Payment levels excluding Soweto interest (g) % 96.70 96.24 95.79 Distribution total energy losses (h) % 8.00 8.79 8.47 Natural attrition, overtime management and enhanced productivity levels are key levers to achieve a reduction in employee benefit costs. Total electrification connections (i) number 177 000 163 6132 191 585 Initiatives to manage manpower cost drivers and employee productivity levels are ongoing in addition to the progress made to reduce the System average interruption duration index hours 38.00 36.90 38.00 headcount through natural attrition. Primary energy optimisation Building critical capabilities Migration of coal delivery from road to rail (j) Mt 10.60 7.50 8.20 A key human resource challenge is to ensure that the workforce is adequately skilled given the moratorium on external recruitment in Coal purchase rand/ton % increase 20.00 16.30 14.06 response to financial challenges. Focus is placed on recruitment of critical and core staff in support of the generation recovery plan. Reduce environmental footprint in existing fleet Internal talent boards are used to identify high-performing individuals and staff developmental needs, perform succession planning for the Relative particulate emissions (k) kg/MWh sent out 0.33 0.47 0.47 critical workforce and actively manage talent pools in line with the workforce plan and transformation objectives. This seeks to reduce the Specific water usage (l) ℓ/kWh sent out 1.35 1.42 1.41 need for external recruitment. Deliver capital expansion Eskom remained committed to skills development despite the current financial constraints. The training spend of R1.1 billion (2019: R1.2 billion) Generation capacity installed and commissioned in 2020 is 3.67% (2019: 3.85%) of gross manpower costs. The learner pipeline was 1 517 with the majority of learners being developed within (commercial operation) MW 1 588 1 588 – the distribution and generation divisions. Only learner plant operators were appointed permanently as they form part of the generation core Transmission lines installed (m) km 155.00 127.90 378.70 and critical skill requirement. The further study programme enables building of skills in future sourcing pools and expanding leadership skills. A total of 182 (2019: 854) employees were enrolled in the current year with various academic institutions to obtain qualifications directly Transmission transformer capacity installed and commissioned MVA 250 250 540 related to their line of work. Ensure financial sustainability3 EBITDA R million 34 386 36 998 31 417 Aligning transformation targets Employment equity remains one of the key initiatives through which meaningful transformation can be realised. Eskom continues to make Cash interest cover ratio 0.65 0.94 0.94 progress in ensuring equitable representation of the workforce at all levels which reflects the demographics of the country. Debt service cover ratio 0.29 0.52 0.47 Disposal of the EFC (n) R million 6 104 – n/a All equity targets improved from the prior year, even though gender and racial equity at middle management levels as well as racial equity at Savings from turnaround initiatives R million 6 213 16 287 n/a senior management levels were not achieved due to financial constraints and the moratorium on external recruitment. The disability equity target was not achieved. Opportunities that arise at senior management and middle management levels will continue to be targeted and Socio-economic impact: human capital reserved for women and persons with disabilities. Progress has been made in ensuring that the buildings and facilities cater for the needs of Learner intake: artisans (o) number 92 91 – employees with disabilities Learner intake: engineers number 16 16 10 Staff management during the national lockdown Learner intake: technicians number 11 11 3 A change management and engagement plan was developed as part of Eskom’s COVID-19 response strategy to ensure that employees, Learner intake: sector-specific number – – 8 contractors, communities, organised labour and other key stakeholders are timeously informed and engaged, while building resilience and Training spend as % of gross manpower costs (p) % 3.75 3.67 3.85 driving behaviour modification to address the challenges as a result of the pandemic. A COVID-19 hotline was established for employees to Industrialisation and localisation voice any questions, concerns or suggestions about COVID-19 or inform Eskom of any potential COVID-19 exposure. Preferential procurement (q) % of TMPS 75.00 61.57 54.41 A national register of critical staff who may be required to commute or live on site was compiled. Approximately 10 554 essential staff were Local content contracted (Eskom-wide) % 80.00 92.84 91.51 identified and issued with permits to commute during the lockdown; 15 213 critical staff were required to remain at home on standby; and Competitive supplier development programme (r) % of total capital 30.00 0.03 n/a 19 162 employees were required to work from home or remain at home if work cannot be done remotely. Overall, the aim was to have procurement spend minimal employees and contractors on site. B-BBEE score number 8 7 – Eskom recorded 1 982 positive cases at 14 October 2020, consisting of 1 677 employees and 305 contractors, with 1 808 recoveries. Sadly, Enterprise and supplier development (s) R million 5.00 4.59 n/a 27 employees and two contractors have succumbed to the disease. % of NERSA-allocated Research and development spend 80.00 84.94 80.31 Refer to page 116 of the integrated report for more information. 1. Includes occupational disease. 2. Includes 45 292 rollover connections. 3. Prior year information has been restated. Refer to note 50 in the annual financial statements. 12 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 13 DIRECTORS’ REPORT (continued) for the year ended 31 March 2020 Shareholder compact performance (continued) The reasons for the targets that were not achieved are discussed below: Ref Key performance indicator Target Actual Reason Ref Key performance indicator Target Actual Reason 2020 2020 2020 2020 Improve plant operations Deliver capital expansion (a) Energy availability factor 71.50 66.64 Low availability of generating units resulted in an increase in (m) Transmission lines installed 155.00 127.90 Site instability, poor contractor performance and construction and unplanned maintenance due to high levels of both full and partial contractual issues had a negative impact on the transmission lines unplanned load losses which caused a low energy availability factor installed (b) Planned capability loss factor 9.50 8.92 Planned maintenance was negatively impacted by an increase in Ensure financial sustainability unplanned maintenance undertaken during the year in order to maintain critical plant systems and address unplanned load losses (n) Disposal of the EFC 6 104 – Delays in updated approval processes resulted in the revision of the disposal date to 2021. A request for proposal was released to (c) Unplanned partial load losses 3 500 4 651 Factors that lead to unplanned partial load losses included steam and interested parties in February 2020 water chemistry control issues, poor maintenance practices, lack of outage readiness and plant not being maintained due to spares and Socio-economic impact: human capital refurbishment contracts that were not in place and other (o) Learner intake: artisans 92 91 The full complement of learners was recruited by February 2020, but procurement delays one learner artisan subsequently resigned (d) Unplanned automatic grid 560 594 Trip performance was impacted by numerous factors including critical (p) Training spend as % of gross 3.75 3.67 Expenditure was curtailed on external training due to financial separations trips vacancies, unavailability of maintenance spares, lack of suitable manpower costs constraints. Employees were developed through on-the-job, internal training for technical staff, backlog of capability testing after major learning and development opportunities as well as further study planned outages and execution of planned outage scope programmes (e) Post philosophy outage 17.00 29.91 The main contributors to the post-outage unplanned losses that Industrialisation and localisation unplanned capability loss factor occurred within 60 days after a unit returned from an outage for interim repairs and mini and general overhauls were boiler, turbine, (q) Preferential procurement 75.00 61.57 The procurement target was negatively impacted by increased electrical and draught plant related losses spending with non-compliant suppliers due to expired B-BBEE certificates. The calculation of total measurable procurement spend (f) System minutes lost 3.53 4.36 Performance has been negatively impacted by incidents at both new (TMPS) also includes spending on IPP contracts that are not B-BBEE and older assets that were considered to be in good condition. compliant and which Eskom has no control over as these contracts Ongoing theft of tower members and substation equipment continued were concluded in terms of RE-IPP programme by the DMRE. The to be a risk for asset failures and network availability. Other risks that overall performance would have improved to approximately 73% of impact performance include ageing assets, poor outage management TMPS had IPP expenditure been excluded and associated network vulnerabilities (r) Competitive supplier 30.00 0.03 Performance in the competitive supplier development programme (g) Payment levels excluding 96.70 96.24 The top 20 defaulting municipalities had a negative impact on payment development programme (CSDP) was negatively affected by the measurement criteria Soweto interest levels with a 42% payment level on billed revenue for the year finalisation delays, with the criteria only approved in November 2019. (h) Distribution total energy 8.00 8.79 The non-technical component of losses increased due to ghost The CSDP performance will remain a challenge going forward as it is losses vending, meter tampering and illegal connections across all sectors. largely dependent on contracted expenditure on major capital The technical component of losses was due to the ageing distribution projects, which have existing contracts in place and are close to networks which are often constrained and overloaded. The increase completion. Eskom’s annual project plan cannot accommodate in low-voltage sales, through electrification projects, also degraded investing 30% of capital procurement expenditure on CSDP and network performance financial constraints further limit opportunities (i) Total electrification 177 000 163 613 Key challenges that negatively impacted on connection delivery (s) Enterprise and supplier 5.00 4.59 The success of enterprise and supplier development initiatives was connections include delays in procurement and material deliveries, design issues development negatively impacted by funding constraints and delays in finalising the and other external factors, such as business forum engagements, measurement criteria community unrest and reduced funding from the Department of Mineral Resources and Energy (DMRE) Reportable irregularities Limited progress has been made in clearing the reportable irregularities reported by the external auditors in the prior year, as most items will Primary energy optimisation remain open until all related aspects are concluded, such as the finalisation of court cases or conclusion of investigations by external parties. (j) Migration of coal delivery from 10.60 7.50 Less coal was transported by rail mainly due to suspended rail Detailed progress on reportable irregularities can be found in note 54 of the annual financial statements. road to rail operations at Majuba power station due to a fire in December 2019, which caused damage to the conveyor and silo infrastructure Events after the reporting date Events after the reporting date are discussed in note 49 of the annual financial statements. Reduce environmental footprint in existing fleet (k) Relative particulate emissions 0.33 0.47 Poor performance of relative particulate emissions was largely Approval The group annual financial statements for the year ended 31 March 2020 were prepared under the supervision of the CFO, C Cassim CA(SA), attributable to high emissions at Kendal power station due to and approved by the board and signed on its behalf by: damaged electrostatic precipitators and four other power stations that experienced periods of poor performance during the year (l) Specific water usage 1.35 1.42 Water consumption was negatively impacted by inadequate water management practices and operational inefficiencies at power stations resulting from water leaks, overflowing tanks, low load MW Makgoba AM de Ruyter C Cassim factors, unit trips and boiler filling Interim chairman Group chief executive Chief financial officer 28 October 2020 28 October 2020 28 October 2020 14 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 15 REPORT OF THE AUDIT AND RISK COMMITTEE Mandate and terms of reference Significant matter Committee review and conclusion The audit and risk committee (the committee) presents its report in terms of the requirements of the PFMA, the Companies Act (section 94(7)(f)) and in accordance with the King IV TM Report on Corporate Governance for South Africa for the financial year ended 31 March 2020. Governance The current leadership’s priority remains turning Eskom around. Progress has been made towards restoring (continued) Eskom’s ethical culture and governance practices. The committee continued its focus on monitoring the status The role of the committee is defined in its mandate. It covers, among others, its statutory duties and assistance to the board with the and action taken on addressing key matters arising from investigations, reportable irregularities and past oversight of financial and non-financial reporting and disclosure, internal control systems, risk management, internal and external audit corporate governance breaches, including: functions and combined assurance, including technology and information governance. The committee also performs the functions required • implementing reviews of conflicts of interest and the second phase of lifestyle audits, targeting all employees by the Companies Act on behalf of the wholly-owned subsidiaries of the group, with the exception of Escap SOC Ltd (Escap). Information below senior management level, based on risk analysis about the mandate, membership composition and attendance of meetings of the committee is set out in the 2020 integrated report under • enhancing commercial governance processes to ensure robust scrutiny and strengthening the delegation of the governance, leadership and ethics as well as supplementary information sections. authority framework The committee has adopted appropriate formal terms of reference as its audit and risk committee charter, has regulated its affairs in • strengthening ethics and fraud frameworks and enhancing the focus on consequence management compliance with this charter and has discharged all its responsibilities contained therein. • instituting disciplinary charges against employees and suppliers, and taking legal action, where appropriate • investigating and terminating supplier contracts implicated in irregularities, fraud and corruption The group is applying a combined assurance model to ensure coordinated assurance activities. The committee oversees the assurance activities and the establishment of effective systems of internal control to provide reasonable assurance that the group’s financial and non- Information required The committee continued to place significant focus on addressing the shortcomings in the completeness of by the PFMA and the information required by the PFMA. The supply chain recovery programme was concluded in July 2019, leading to financial objectives are achieved and that the preparation of the group’s suite of externally published reports (as detailed in the integrated impact thereof on improvement in the identification, reporting and addressing of PFMA matters, even though there are still report) is in accordance with the frameworks and standards set out within those reports. the audit opinion challenges that need to be addressed. The emphasis has now shifted to maintenance and monitoring of PFMA Execution of functions reporting. Refer to the directors’ report for further information on addressing the PFMA reporting challenges Oversight of financial and non-financial reporting and disclosure Recovery of overdue The committee considered the actions taken by Eskom to address municipal, Soweto and international arrear In the conduct of its duties the committee has, inter alia: trade receivables debt, including continued plans to roll out split metering on a prepaid basis, impose payment agreements, enforce • considered whether the annual financial statements met the fair presentation requirements of the PFMA, Companies Act and International (arrear debt) Eskom’s rights to restrict, interrupt and terminate supply, issue summonses and pursue the attachment of assets Financial Reporting Standards (IFRS) • considered the appropriateness of key judgements, estimates and the accounting treatment applied to significant transactions in the annual The board approved the write-back of non-compliant in duplum interest and prescribed debt relating to Soweto financial statements receivables. A new municipal debt management strategy was approved to reduce and/or eliminate overdue debt, • sought the input and views of the external auditors and encouraged rigorous challenging of control, accounting and disclosure matters stop defaulting where it occurs, and prevent future defaulting by paying customers • considered matters relating to cost savings, budgeting and forecasting, future funding and taxation The committee, however, recognises that the challenges regarding the recovery of outstanding receivables cannot • overseen the risk management function including the process of identifying significant risks and opportunities and the resulting mitigation be solved by Eskom alone. The continued support and cooperation from government and other stakeholders are strategies crucial to address the root causes of the problem. It is critical that these challenges are addressed through the The following significant matters were considered: Eskom political task team and its multidisciplinary revenue committee, which are focusing on the implementation of the recommendations of the former inter-ministerial task team Significant matter Committee review and conclusion Valuation of The committee assessed the appropriateness of the cash generating units (CGU) for the group. The committee Impact of the The committee reflected on the impact of the COVID-19 pandemic and resultant lockdown on reporting. The property, plant and also considered that impairment indicators such as damaged plant and the impact of lower than expected COVID-19 outbreak committee considered management’s assessment of the impact of the outbreak and the various financial reporting equipment and electricity tariffs on future cash flows have been appropriately taken into account in the impairment assessment. on financial reporting considerations that were taken into account, including the impact on the going-concern and the impairment assessment for The committee interrogated the underlying assumptions and estimates used in the calculation of the recoverable assessments of non-financial and financial assets as discussed in note 3 possible impairment amount of the CGUs and confirm that there is no impairment required on property, plant and equipment Going-concern The committee continued to monitor the group’s liquidity and solvency closely because of the financial position The committee considered the possible accounting impact of alleged overpayments to suppliers that are currently assessment and related challenges and concluded that it was not trading recklessly at any time during the year. The committee being investigated as well as the re-assessment of costs eligible for capitalisation and are satisfied that the relevant acknowledged that Eskom cannot solve its problems alone, but needs support from the shareholder. The accounting adjustments have been made. The committee acknowledge that Eskom is continuing with the committee recognised the continued support from government investigating processes and will consider the impact on the financial statements if similar overpayments are identified and confirmed in the future The committee considered the key aspects taken into account in the going-concern assessment as discussed in note 4.2 as well as scenarios that might impact the going-concern assessment. The committee critically assessed Valuation and The committee considered the briefings on the decommissioning and rehabilitation provisions, including the the liquidity of Eskom using the latest cash flow forecasts, including servicing of debt in the next 12 months and adequacy of governance framework applied, the movement in provisions over time and the key assumptions and discount rates stress-tested the forecasts using lower electricity prices, changes to capital activities and reducing costs. The long-term used. Detailed annual reviews are done by external experts on a rotation basis to re-assess the relevant committee considered Eskom’s financial ratios that reflect an overall negative trend. The committee concluded, decommissioning decommissioning and rehabilitation liabilities against the latest international practices and benchmarks as well as after examining the forecast and stress-tested scenarios and considering Eskom’s ability to raise funding in the provisions compliance to legislation. The committee interrogated the underlying assumptions used in determining the current market conditions, that the going-concern basis of accounting was appropriate only with support from decommissioning provisions to assess the adequacy thereof government. The committee recommended the adoption of the going-concern basis of preparation by the group Valuation and The committee considered the briefings and reports on the employee benefit obligations, including the key to the board based on the critical factors as disclosed in note 4.2 adequacy of assumptions and discount rates used in the annual actuarial valuations. The committee interrogated the accounting Governance The committee acknowledged that improvement is required in respect of compliance with applicable laws and employee benefit interpretations and considered expert advice in this regard including from legal counsel. The committee is satisfied regulations. Roles, responsibilities and authority of external governance role players also need to be clarified obligations with the accounting treatment of the post-employment medical benefits that resulted in the prior year adjustment Steps are being taken to sufficiently strengthen Eskom’s leadership. Permanent appointments were made in certain The Eskom Pension and Provident Fund (EPPF) has always been accounted for as a defined contribution plan in key executive positions, including the group chief executive and the group company secretary. The board terms of IAS 19. There were no perceived changes necessitating a review of this classification. The committee requested the shareholder to fill the board vacancies to ensure that all committees are adequately capacitated considered the position paper prepared by management as well as the independent legal opinions and advice to fulfil their mandates. This is particularly relevant for the audit and risk committee where the current obtained and is satisfied with the accounting treatment of the EPPF and the relevant disclosure in the annual membership of only three members is not adequate for the size and risks associated with Eskom as well as the financial statements in notes 2.17, 5.7 and 29.4 planned separation of the committee into separate audit and risk committees Internal control over The committee monitored the effectiveness of the control environment through feedback on the results of the financial reporting, combined assurance activities from management, assurance and forensics (internal audit) and the external including information auditors. The committee scrutinised the significant risk areas and their associated remediation plans and mitigating technology general controls implemented, including those relating to segregation of duties, access management, security of controls confidential data, cyber risk, information technology infrastructure, application issues and third-party supplier management. The committee focused on specific control issues, in particular, the controls relating to PFMA reporting and investigations into fraudulent activities. The committee concluded that the internal control environment is satisfactory, even though improvement is necessary in certain areas including PFMA reporting and contract management The matters listed above are considered to be key focus areas for the committee in the next financial year and will be monitored and reported on in future. 16 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 17 REPORT OF THE AUDIT AND RISK COMMITTEE (continued) INDEPENDENT AUDITOR’S REPORT TO PARLIAMENT AND THE SHAREHOLDER – MINISTER OF PUBLIC ENTERPRISES ON ESKOM HOLDINGS SOC LTD AND Execution of functions (continued) ITS SUBSIDIARIES Internal control, management of risks and compliance with legal and regulatory requirements The committee considered the following: Report on the audit of the consolidated and separate financial statements • effectiveness of internal control systems and governance processes Qualified opinion • legal matters that could have a material impact on the group We have audited the consolidated and separate financial statements of Eskom Holdings SOC Ltd and its subsidiaries (the group) set out on • effectiveness of the system and process of risk management including the following specific risks: pages 26 to 122, which comprise the consolidated and separate statement of financial position as at 31 March 2020 and consolidated and – financial reporting separate statement of profit or loss and other comprehensive income, statement of changes in equity and statement of cash flows for the year – internal financial controls – fraud risks relating to financial reporting then ended, as well as the notes to the consolidated and separate financial statements, including a summary of significant accounting policies. – information technology risks relating to financial reporting and internal control In our opinion, except for the possible effects of the matters described in the basis for qualified opinion section of this auditor’s report, the – the effectiveness of the entity’s compliance with legal and regulatory requirements consolidated and separate financial statements present fairly, in all material respects, the consolidated and separate financial position of the group as at 31 March 2020, and the group’s financial performance and cash flows for the year then ended in accordance with International Internal and external audit The committee considered the following: Financial Reporting Standard (IFRS) and the requirements of the Companies Act of South Africa (Companies Act) and the Public Finance Management Act of South Africa (PFMA). • audit charter, annual audit plan, independence, effectiveness, coordination with external auditors and performance of the assurance and forensic department Basis for qualified opinion • appointment of the external auditors in terms of the Companies Act, Johannesburg Stock Exchange (JSE) listings’ requirements and all Irregular expenditure other applicable legal and regulatory requirements The irregular expenditure includes amounts emanating from the modifications to contracts which were not conducted as required in terms • the quality of the external audit as well as the independence and objectivity of the external auditors including the tenure of the audit firm of the PFMA. In addition, irregular expenditure was not fully recorded in the notes to the financial statements. We were unable to determine and the rotation of the engagement partner the full extent of the understatement of the irregular expenditure disclosed in terms of section 55(2)(b)(i) of the PFMA stated at R33 055 • external audit plan, audit budget, actual fee and terms of engagement of the external auditors including adherence to the policy of not allowing the external auditors to provide any non-audit services million (2019: R22 111 million) and R23 429 million (2019: R14 688 million) in the consolidated and separate financial statements respectively, • accounting, sustainability and auditing concerns identified as a result of the internal and external audits, including reportable irregularities as it was impractical to do so. Context for the opinion Opinion We conducted our audit in accordance with the International Standards on Auditing (ISAs). Our responsibilities under those standards The committee is of the opinion, based on the information and explanations provided by management and the assurance and forensic are further described in the auditor’s responsibilities for the audit of the consolidated and separate financial statements section of this department during the year and at year end and discussions with the independent external auditors, that: auditor’s report. • the expertise, resources and experience of the finance function under the leadership of the chief financial officer are adequate • the system and process of risk management is adequate even though the effectiveness thereof needs to be improved We are independent of the group in accordance with sections 290 and 291 of the Independent Regulatory Board for Auditors’ Code of • the compliance framework is adequate and there is continued focus on the application thereof, especially in terms of PFMA requirements professional conduct for Registered Auditors (revised January 2018), parts 1 and 3 of the Independent Regulatory Board for Auditors’ Code and contract management of Professional Conduct for Registered Auditors (revised November 2018) (together the IRBA Codes) and other independence requirements • the internal accounting controls are adequate to ensure that the financial records may be relied upon for preparing the financial statements applicable to performing audits of financial statements in South Africa. We have fulfilled our other ethical responsibilities, as applicable in and accountability for assets and liabilities is maintained accordance with the IRBA Codes and in accordance with other ethical requirements applicable to performing audits in South Africa. The • the internal audit charter approved by the committee was adhered to IRBA Codes are consistent with the corresponding sections of the International Ethics Standards Board for Accountants’ Code of Ethics • the expertise, resources and experience of the assurance and forensic department are adequate for Professional Accountants and the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional • the assurance and forensic department, under the leadership of a general manager, is operating effectively Accountants (including International Independence Standards) respectively. • the combined assurance model is adequate • the information contained in the integrated report is reliable and does not contradict the information in the annual financial statements We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified opinion. • Eskom and the group have access to adequate resources, facilities and support from government to be able to continue their operations for the foreseeable future, supporting the going-concern assumption Material uncertainty relating to going concern • it is satisfied with the audit quality of the external audit as well as the independence and objectivity of the external auditors having considered We draw attention to the matter below. Our opinion is not modified in respect of this matter. the matters set out in section 94(8) of the Companies Act. SizweNtsalubaGobodo Grant Thornton has been appointed as external auditors since 2015. The lead engagement partner for 2020 is N Ngobese after the previous partner was rotated after a five-year engagement period. We draw attention to note 4.2 in the consolidated and separate financial statements, which indicates that for the year ended 31 March 2020 the group incurred a loss of R20 502 million (2019: R20 930 million). The group’s current liabilities exceed its current assets by R16 515 million The committee is satisfied, notwithstanding the aspects considered in relation to the annual financial statements including the PFMA reporting (2019: R45 174 million). As stated in note 4.2, the current and prior year losses, deterioration of most of the group’s financial indicators, the challenges, that nothing significant has come to the attention of the committee to indicate any material breakdown in the functioning of the impact of reduced generation performance along with other matters as set forth in note 4.2, indicate that a material uncertainty exists that controls, procedures and systems during the year under review and that the controls are still appropriate to ensure compliance with the may cast significant doubt on the group’s ability to continue as a going concern. requirements of the Companies Act, the PFMA and IFRS. Emphasis of matter Recommendation of the annual financial statements We draw attention to the matters below. Our opinion is not modified in respect of these matters. The committee has evaluated the annual financial statements of Eskom and the group for the year ended 31 March 2020 and, based on the information provided to it, considers that they comply, in all material respects, with the requirements of the Companies Act, the PFMA and IFRS. Restatement of corresponding figures The committee concurs that the adoption of the going-concern premise in the preparation of the annual financial statements is appropriate. As disclosed in note 50 to the consolidated and separate financial statements, the corresponding figures for the prior periods have been restated to correct prior period errors on accounting for post-employment medical benefits, impairment of trade receivables and The committee has therefore, at its meeting held on 28 October 2020, recommended the adoption of the financial statements by the board. capitalisation of costs incurred during construction of plant for the group in prior periods at, and for the year ended, 31 March 2020. Material losses – electricity As disclosed in note 53.3(b) to the consolidated and separate financial statements, estimated non-technical revenue losses of R1 977 million PE Molokwane (2019: R1 741 million) were incurred mainly due to meter tampering and bypasses, illegal connections to the electricity network and illegal Chairman vending of electricity. 28 October 2020 STATEMENT BY COMPANY SECRETARY In terms of section 88(2)(e) of the Companies Act of South Africa, I certify that the company has filed with the Companies and Intellectual Property Commission all such returns and notices in terms of this Act, and all such returns appear to be true, correct and up to date. M Manjingolo Company secretary 28 October 2020 18 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 19 INDEPENDENT AUDITOR’S REPORT TO PARLIAMENT AND THE SHAREHOLDER – MINISTER OF PUBLIC ENTERPRISES ON ESKOM HOLDINGS SOC LTD AND ITS SUBSIDIARIES (continued) Report on the audit of the consolidated and separate financial statements (continued) Key audit matters Key audit matters are those matters which, in our professional judgement, were of most significance in our audit of the consolidated and separate financial statements of the current period. These matters were addressed in the context of our audit of the consolidated and separate financial statements as a whole and in forming our opinion, and we do not provide a separate opinion or conclusion on these matters. Key audit matter How the matter was addressed in the audit Key audit matter How the matter was addressed in the audit Impairment assessment – property, plant and equipment Loan covenants compliance As disclosed in note 2.6 and note 37.2 of the notes to the Our audit work included the following: As disclosed in note 26 of the notes to the consolidated and Our audit work included the following: consolidated and separate financial statements, the group’s • assessed the assumptions and judgement in determining the cash separate financial statements, the group is highly leveraged • inspected the terms of agreements for loans and borrowings including property, plant and equipment (PPE) has been tested for generating unit (CGU) with total debt securities and borrowings of R483 682 million covenant ratios and event of default definitions impairment in terms of IAS 36 Impairment of assets. • obtained the discounted cash flow models underlying the recoverable at 31 March 2020 and has to comply with certain financial • analysed the terms of waivers provided by lenders to the extent applicable amount of the CGUs as prepared by directors and and non-financial covenants. • reviewed the directors’ calculations of covenant ratios The directors assessed the recoverable amount of the CGU through determination of the value in use amount which was • tested the accuracy of the models and inputs used including the weighted In accordance with the terms of agreements for loans and • recalculated the covenant calculations and reconciled input data used compared to the carrying amount average cost of capital expected inflation rates and growth rates borrowings, the group should maintain and comply with in the calculations with data in the consolidated and separate financial • challenged the assumptions used by the directors for the discounted certain financial and non-financial covenants. Analysing statements prepared in accordance with IFRS The directors performed an assessment of the impairment cash flows compliance with covenants is one of the matters of most • compared the maturity classification of loans and borrowings as current of the PPE by conducting a major defect analysis exercise at • engaged a valuation professional, independent engineering, transaction significance in our audit because it may have a significant or non-current liabilities with the results of analysis of compliance with Medupi, Kusile and Ingula power stations to ascertain the advisors to assist us with our assessment of the reasonability of the impact on the going concern assumption used in the covenants on relevant loans and borrowings extent of damage and repairs that would need to be carried models preparation of the consolidated and separate financial out and the plant’s expected performance. • assessed the reasonableness of the future projected cash flows used in statements and on the maturity classification of liabilities in Based on the results of our work performed, we are satisfied that the entity the models the consolidated and separate statement of financial position. has complied with its covenants. The purpose of the exercise was to determine the financial and technical accounting implications and treatment of the Therefore, compliance with financial and non-financial Based on the results of the work performed, we accepted the directors’ covenants is considered a key audit matter. impairments/scrapping relating to the aforementioned power valuation techniques. stations placed into commercial operation by the entity. Post-employment benefit plan Due to the complexity of the estimation techniques used in As disclosed in the notes 2.17 and note 29.4 of the notes to Our audit work included the following: quantifying these defects as well as the degree of subjectivity the consolidated and separate financial statements, the post- • obtained the EPPF rules of the fund and assessed the accounting involved in the process, impairment was considered to be a employment benefit plan managed by the Eskom Pension and treatment of the fund in terms of IAS 19 key audit matter. Provident Fund (EPPF) has been accounted for as a defined • we considered the following: contribution fund. – the defined benefit formula Valuation of complex financial instruments The EPPF is registered as a defined benefit fund, however the – the nature of the scheme and the participating employers The valuation of complex financial instruments requires Our audit work included the following: – the requirements of the rules relating to funding of the shortfall when significant judgement by the directors in the application of rule that relates to the funding of deficit refers to the • engaged our expert regarding the valuation of the complex financial amendment of the rules so that the benefits may be reduced is arises valuation methodologies as well as the determination of key instruments or the contributions increased at the occurrence of that • obtained a legal opinion on whether or not Eskom is liable to make good assumptions relating to inputs other than unadjusted quoted • tested the design, implementation and operating effectiveness of the event at a future date. This created the uncertainty of a shortfall or have any entitlement towards a surplus in the fund prices in active markets that Eskom Treasury can access at relevant financial reporting controls relating to valuations existence of the liability for Eskom to fund the deficit. • reviewed the financial statements of the EPPF to confirm that the the measurement date. • evaluated the technical and practical appropriateness and accuracy of members are paid out in terms of the benefit formula as per the rules The financial instruments impacted by these judgemental valuation methodologies (including key assumptions made and modelling The directors performed an assessment of the accounting • reperformed the actuarial calculations using our actuarial specialists assumptions include: approaches adopted) applied by the directors with reference to market treatment for EPPF and based on the critical judgement and • assessed that there was no uncertainty on the existence of the liability practice, practical constraints on the ability to apply the methodologies estimates determined that the EPPF should continue to be Complex derivative financial instruments (primarily those that arose through the members rendering of services entitles the to the instruments being valued and for consistency with prior periods accounted for as a defined contribution plan. The accounting which are longer dated and valued with reference to members to the benefits as defined in the rules • recalculated the fair values selected financial instruments policy was revised and additional disclosures included in the unobservable inputs). • assessed that there was no measurement uncertainty as to the • assessed the appropriateness and sensitivity of unobservable market notes to the consolidated and separate financial statements. measurement of the net asset or net liability. The actuarial valuation was As the impact of these valuation methodologies and inputs rates, projected cash flows and valuation adjustments with reference to The accounting for the EPPF was considered a key matter performed using a projected unit credit method and disclosed. significantly affects the measurement of the financial the best available independent information due to critical judgement and estimates made by the • assessed that the outcome uncertainty existed as the rules provided that instrument and financial risks in the financial statements, the directors. the contributions may be increased with consent of the employer when valuation of the complex financial instruments was Based on the results of work performed, we are satisfied that the the shortfall arises considered a key audit matter. assumptions used in valuing these instruments are reasonable and appropriate. Costs incurred during construction of assets – property, plant and equipment Based on the results of our work performed, we concluded that: As disclosed in note 9 of the notes to the consolidated and Our audit work included the following: • EPPF met the criteria for defined benefit fund in terms of IAS 19 and separate financial statements, the group’s PPE includes assets should have been classified and accounted for as such • obtained an understanding of the accounting policy applied by the under construction. The assets under construction are • we assessed the impact of the classification as defined contribution fund directors in the capitalisation of compensation events accounted for in accordance with IAS 16. in the financial statements and concluded that due to the fund being in • challenged the directors’ rationale for the capitalisation of the surplus position there was no liability or asset to recognise in the current There is significant judgment applied by the directors in compensation events claims considered to be directly attributable to the or prior year deciding which compensation events claims should be development of the PPE • sufficient disclosure was provided in the financial statements in capitalised in terms of IAS 16. • assessed the experience and capabilities of the engineers who assess the accordance with the Conceptual Framework when dealing with contractors’ compensation events The significant consideration on the nature as well as the existence uncertainty of assets or liabilities as the directors had made • reviewed the reports of the directors’ experts on compensation quantum of the capitalised costs makes the valuation of judgements that there is uncertainty on existence of the obligation to events claims property, plant and equipment a key audit matter. fund the shortfall. • assessed the journals processed by the directors as prompted by the exceptions noted Based on the results of our work performed, we are satisfied that the audit procedures performed mitigated the risk of material misstatements on the capitalisation of the compensation events claims. 20 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 21 INDEPENDENT AUDITOR’S REPORT TO PARLIAMENT AND THE SHAREHOLDER – MINISTER OF PUBLIC ENTERPRISES ON ESKOM HOLDINGS SOC LTD AND ITS SUBSIDIARIES (continued) Responsibilities of the accounting authority for the consolidated and separate financial statements Our procedures address the usefulness and reliability of the reported performance information, which must be based on the approved The board of directors, which constitutes the accounting authority, are responsible for the preparation and fair presentation of the performance planning documents of the group. We have not evaluated the completeness and appropriateness of the performance indicators consolidated and separate financial statements in accordance with IFRS and the requirements of the Companies Act and PFMA, and for included in the planning documents. Our procedures do not examine whether the actions taken by the group enabled service delivery. Our such internal control as the accounting authority determines are necessary to enable the preparation of consolidated and separate financial procedures also do not extend to any disclosures or assertions relating to planned performance strategies and information in respect of statements that are free from material misstatement, whether due to fraud or error. future periods that may be included as part of the reported performance information. Accordingly, our findings do not extend to these matters. We evaluated the usefulness and reliability of the reported performance information in accordance with the criteria developed In preparing the consolidated and separate financial statements, the accounting authority is responsible for assessing the group’s ability to from the performance management and reporting framework, as defined in the general notice, for the following selected key performance continue as a going concern, disclosing, as applicable, matters related to going concern and using the going-concern basis of accounting unless the area presented in the shareholder compact performance section of the directors’ report of the group for the year ended 31 March 2020: appropriate governance structure either intends to liquidate the company or to cease operations, or have no realistic alternative but to do so. • improve plant operations (page 13). Auditor’s responsibilities for the audit of the consolidated and separate financial statements We performed procedures to determine whether the reported performance information was consistent with the approved performance Our objectives are to obtain reasonable assurance about whether the consolidated and separate financial statements as a whole are free planning documents. We performed further procedures to determine whether the indicators and related targets were measurable and from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance relevant, and assessed the reliability of the reported performance information to determine whether it was valid, accurate and complete. is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could We did not identify any material findings on the usefulness and reliability of the reported performance information for this key performance reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. area, Improve plant operations. As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional scepticism throughout the audit Other matters of the consolidated and separate financial statements, and the procedures performed on reported performance information for selected key We draw attention to the following matter below with regards to the shareholder compact performance section in the directors’ report: performance areas and on the group’s compliance with respect to the selected subject matters. Achievement of planned targets In addition to our responsibility for the audit of the consolidated and separate financial statements as described in this auditor’s report, Refer to the shareholder compact performance section of the directors’ report on pages 13 to 15 for information on the achievement of we also: planned targets for the year. • identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The Report on the audit of compliance with legislation risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, Introduction and scope forgery, intentional omissions, misrepresentations, or the override of internal control In accordance with the PAA and the general notice issued in terms thereof, we have a responsibility to report material findings on the public • obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the entities’ compliance with specific matters in key legislation. We performed procedures to identify findings but not to gather evidence to circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control express assurance. • evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors The material findings on compliance with specific matters in key legislations are as follows: • conclude on the appropriateness of the directors’ use of the going concern basis of accounting and based on the audit evidence obtained, Annual financial statements whether a material uncertainty exists related to events or conditions that may cast significant doubt on the company’s ability to continue The financial statements submitted for auditing were not prepared in accordance with the prescribed financial reporting framework and/or as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the supported by full and proper records, as required by section 55 (1)(a) and (b) of the PFMA. Material misstatements of non-current assets, related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on current assets, liabilities and expenditure identified by the auditors in the submitted financial statements were corrected and the supporting the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the group to cease to records were provided subsequently. continue as a going concern • evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial Expenditure management statements represent the underlying transactions and events in a manner that achieves fair presentation Effective and appropriate steps were not taken to prevent irregular expenditure, as required by section 51(1)(b)(ii) of the PFMA. As reported • obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group to in the basis for the qualified opinion the full extent of the irregular expenditure could not be quantified. Most of the irregular expenditure express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the disclosed in the financial statements was caused by modifications to contracts. group audit. We remain solely responsible for our audit opinion Effective steps were not taken to prevent fruitless and wasteful expenditure amounting to R2 868 million, as disclosed in note 53.2 to the We communicate with the accounting authority regarding, among other matters, the planned scope and timing of the audit and significant annual financial statements, as required by section 51(1)(b)(ii) of the PFMA. Most of the fruitless and wasteful expenditure was caused by the audit findings, including any significant deficiencies in internal control that we identify during our audit. poor facilitation of project management. Fruitless and wasteful expenditure amounting to R840 million was incurred on the construction of residential flats to accommodate artisans for the Kusile project as the building cannot be utilised for the intended purpose and R1 247 million We also provide the accounting authority with a statement that we have complied with relevant ethical requirements regarding independence, was incurred due to shortcomings in project management. and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. Procurement and contract management From the matters communicated with those charged with governance, we determine those matters that were of most significance in the Sufficient appropriate audit evidence could not be obtained that all awards to suppliers on established panels were in accordance with legislative audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in requirements, as proper record keeping of such awards was not maintained. Similar limitations were also reported in the prior year. our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we Some of the goods, works or services were not procured through a procurement process which is fair, equitable, transparent and competitive, determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be as required by section 51(1)(a)(iii) of the PFMA. Similar non-compliance was also reported in the prior year. expected to outweigh the public interest benefits of such communication. Some of the contracts and quotations were awarded to bidders based on preference points that were not allocated and calculated in Report on other legal and regulatory requirements accordance with the requirements of the Preferential Procurement Policy Framework Act and its regulations. Similar non-compliance was In accordance with our responsibilities in terms of sections 44(2) and 44(3) of the Auditing Profession Act, we report that we have identified also reported in the prior year. reportable irregularities in terms of the Auditing Profession Act. We have reported such matters to the Independent Regulatory Board for Auditors. The matter pertaining to the reportable irregularities have been described in note 54.1 to the consolidated and separate financial Some of the tenders which failed to achieve the minimum qualifying score for functionality criteria were not disqualified as unacceptable in statements. accordance with Preferential Procurement Regulations 5(6). Some of the tenders which achieved the minimum qualifying score for functionality criteria were not evaluated further in accordance with Report on the audit of the annual performance report Preferential Procurement Regulations 5(7). Introduction and scope In accordance with the Public Audit Act of South Africa (PAA) and the general notice issued in terms thereof, we have a responsibility to Sufficient appropriate audit evidence could not be obtained that construction contracts were awarded to contractors that were registered report on the usefulness and reliability of the reported performance information against predetermined objectives for selected objectives with the Construction Industry Development Board (CIDB) and qualified for the contract in accordance with section 18(1) of the CIDB Act, presented in the shareholder compact performance section of the directors’ report. We performed procedures to identify material findings CIDB regulations 17 and 25(7A). Similar non-compliance was also reported in the prior year. but not to gather evidence to express assurance. Sufficient appropriate audit evidence could not be obtained that some of the bid documentation for procurement of commodities designated for local content and production, stipulated the minimum threshold for local production and content, as required by the 2017 Preferential Procurement Regulation 8(2). 22 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 23 INDEPENDENT AUDITOR’S REPORT TO PARLIAMENT AND THE SHAREHOLDER – MINISTER OF PUBLIC ENTERPRISES ON ESKOM HOLDINGS SOC LTD AND ITS SUBSIDIARIES (continued) Sufficient appropriate audit evidence could not be obtained that some of the commodities designated for local content and production, Other reports were procured from suppliers who submitted a declaration on local production and content as required by the 2017 Preferential We draw attention to the following engagements conducted by various parties which had, or could have, an impact on the matters reported Procurement Regulation. in the group’s financial statements, reported performance information, compliance with applicable legislation and other related matters. These reports did not form part of our opinion on the consolidated and separate financial statements or our findings on non-compliance Sufficient appropriate audit evidence could not be obtained that commodities designated for local content and production, were procured with legislation. from suppliers who met the prescribed minimum threshold for local production and content, as required by the 2017 Preferential Procurement Regulation 8(5). Matters under investigation Sufficient appropriate audit evidence could not be obtained that members of the accounting authority whose close family members, partners or During the financial year under review the regulatory authorities and the accounting authority conducted investigations into alleged associates had a private or business interest in contracts awarded by the entity disclosed such interest, as required by PFMA section 50(3)(a). irregularities, fraud and corruption within the procurement environment and other areas of the entity. As at the reporting date, some of these investigations were still ongoing and we could not determine the extent of the impact of the outcomes of these investigations to the Sufficient appropriate audit evidence could not be obtained that persons in service of the entity who had a private or business interest in consolidated and separate financial statements. As disclosed in note 54.2 to the financial statements, various matters are reported to be contracts awarded by the entity had not participated in the process relating to that contract as required by PFMA section 50(3)(b). under investigation. Consequence management Agreed-upon procedures engagements We were unable to obtain sufficient appropriate audit evidence that disciplinary steps were taken against officials who had incurred irregular Agreed-upon procedure engagements were performed on the following: expenditure as required by section 51(1)(e)(iii) of the PFMA. This was due to investigations not being initiated and failure to maintain proper • National Treasury consolidation template that covered the period from 1 April 2019 to 31 March 2020. and complete records as evidence to support that investigations were initiated. • Eskom’s generation, transmission and distribution activities regulatory financial report. This agreed-upon procedure is performed on behalf of NERSA. Disciplinary steps were not taken against the officials who had incurred and/or permitted fruitless and wasteful expenditure, as required by section 51(1)(e)(iii) of the PFMA. Auditor tenure We were unable to obtain sufficient appropriate audit evidence that allegations of financial misconduct committed by members of the In terms of the IRBA rule published in Government Gazette Number 39475 dated 4 December 2015, I report that SizweNtsalubaGobodo accounting authority and officials were investigated as required by treasury regulation 33.1.3 and 33.1.1 respectively. This was due to a failure Grant Thornton has been the auditor of Eskom Holdings SOC Ltd for six years. to maintain proper and complete records as evidence to support the investigations into allegations of financial misconduct committed by members of the accounting authority and officials. We were unable to obtain sufficient appropriate audit evidence that allegations of theft/fraud/extortion/forgery/uttering a forged document which exceeded R100 000 were reported to the South African Police Service, as required by section 34(1) of the Prevention and Combatting of Corrupt Activities Act. Similar limitation was also reported in the prior year. Nkanyiso Ngobese Governance and oversight SizweNtsalubaGobodo Grant Thornton The company secretary did not ensure that the minutes of all shareholders meetings, board meetings and the meetings of any committees of Director the directors, or of the company’s audit committee, were properly recorded, as required by section 88(2)(d) of the Companies Act. Similar Registered auditor non-compliance was also reported in the prior years. 30 October 2020 Other information 20 Morris East Street, Woodmead, 2191 The group’s accounting authority is responsible for the other information. The other information comprises the information included in the directors’ report, the audit and risk committee’s report and certificate by the company secretary as required by the Companies Act. The other information does not include the consolidated and separate financial statements, our auditor’s report thereon and those selected key performance areas presented in the shareholder compact performance section of the directors’ report that have been specifically reported on in the auditor’s report. Our opinion on the consolidated and separate financial statements and findings on the compliance with legislation do not cover the other information and we do not express an audit opinion or any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Internal control deficiencies We considered internal control relevant to our audit of the consolidated and separate financial statements, reported performance information and compliance with applicable legislation; however, our objective was not to express any form of assurance on it. The matters reported below are limited to the significant internal control deficiencies that resulted in the basis for the qualified opinion and the findings on compliance with legislation included in this report. The accounting authorities initiatives implemented during the year to provide effective leadership based on a culture of honesty, ethical business practices and good governance, protecting and enhancing the interests of the entity are in progress and have not, in all circumstances, resulted in the intended outcomes. The accounting authority did not exercise adequate oversight responsibility regarding compliance with applicable legislation and related internal controls that resulted in the lack of proper procurement and contract management processes as well as effective consequence management practices. Action plans developed to address internal control deficiencies were not, in all instances, adequate. Management did not implement proper record keeping in a timely manner to ensure that complete, relevant and accurate information is accessible and available to support financial reporting. The accounting authority did not fill the vacancy of a chairperson of the audit and risk committee, who resigned during the year, with a member that has the requisite financial skills, as there was no member appointed to the accounting authority by the executive authority, who possesses the requisite skills. 24 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 25 STATEMENTS OF FINANCIAL POSITION INCOME STATEMENTS at 31 March 2020 for the year ended 31 March 2020 Group Company Group Company Restated1 Restated1 Restated1 Restated1 Restated1 Restated1 2020 2019 2018 2020 2019 2018 2020 2019 2020 2019 Note Rm Rm Rm Rm Rm Rm Note Rm Rm Rm Rm Assets Revenue 33 199 468 179 892 199 468 179 892 Non-current 697 893 683 956 656 852 698 596 684 381 657 225 Other income 34 1 238 2 150 1 819 3 073 Primary energy 35 (112 119) (99 488) (112 119) (99 488) Property, plant and equipment 9 653 359 650 440 629 433 654 395 651 036 629 944 Employee benefit expense 36 (32 976) (33 183) (27 590) (27 532) Intangible assets 10 3 830 3 925 3 945 3 558 3 706 3 803 Impairment of financial assets 37 936 107 929 89 Future fuel supplies 11 4 295 6 471 7 157 4 295 6 471 7 157 Impairment of other assets 37 (875) 153 (875) 153 Investment in equity-accounted investees 12 397 373 372 95 95 95 Other expenses 38 (18 674) (18 214) (26 251) (27 019) Investment in subsidiaries 13 – – – 384 384 384 Deferred tax 14 115 17 23 – – – Profit before depreciation and amortisation expense and net fair Loans receivable 16 27 40 63 – – – value and foreign exchange loss (EBITDA) 36 998 31 417 35 381 29 168 Derivatives held for risk management 17 33 918 20 582 13 705 33 918 20 582 13 705 Depreciation and amortisation expense 39 (27 779) (29 738) (27 693) (29 644) Finance lease receivables 18 338 374 408 338 374 408 Net fair value and foreign exchange loss on financial instruments 40 (4 592) (3 409) (4 227) (3 368) Payments made in advance 19 1 614 1 734 1 746 1 613 1 733 1 729 Profit/(loss) before net finance cost 4 627 (1 730) 3 461 (3 844) Current 116 404 62 877 71 177 110 947 59 592 69 585 Net finance cost (31 252) (27 732) (32 541) (28 888) Inventories 21 33 573 26 482 24 348 33 330 26 251 24 122 Finance income 41 2 610 2 722 1 468 1 679 Taxation 140 102 149 – – – Finance cost 42 (33 862) (30 454) (34 009) (30 567) Loans receivable 16 27 26 18 5 937 6 071 6 201 Share of profit of equity-accounted investees after tax 12 63 35 – – Derivatives held for risk management 17 23 718 2 080 1 873 23 718 2 080 1 875 Finance lease receivables 18 34 31 29 34 31 29 Loss before tax (26 562) (29 427) (29 080) (32 732) Payments made in advance 19 1 398 1 541 1 418 1 395 1 460 1 328 Income tax 43 6 060 8 497 6 740 9 341 Trade and other receivables 20 22 391 20 859 19 179 24 067 22 020 20 483 Loss for the year 2 (20 502) (20 930) (22 340) (23 391) Insurance investments 15 11 981 9 563 8 172 – – – Financial trading assets 15 152 162 168 152 162 168 Cash and cash equivalents 22 22 990 2 031 15 823 22 314 1 517 15 379 Assets held-for-sale 23 8 642 8 871 8 926 – – 40 Total assets 822 939 755 704 736 955 809 543 743 973 726 850 Equity Capital and reserves 185 863 149 978 167 237 169 421 135 399 155 003 Liabilities STATEMENTS OF COMPREHENSIVE INCOME Non-current 502 684 495 996 475 291 501 364 495 046 474 699 for the year ended 31 March 2020 Debt securities and borrowings 26 408 151 387 208 348 112 408 107 387 161 348 060 Group Company Embedded derivatives 27 5 1 365 3 434 5 1 365 3 434 Restated1 Restated1 Derivatives held for risk management 17 1 802 5 643 16 570 1 802 5 643 16 570 2020 2019 2020 2019 Deferred tax 14 3 678 7 138 14 641 2 724 6 601 14 471 Note Rm Rm Rm Rm Employee benefit obligations 29 13 530 15 560 15 868 13 232 15 224 15 509 Loss for the year2 (20 502) (20 930) (22 340) (23 391) Provisions 30 41 300 45 588 44 370 41 278 45 558 44 359 Other comprehensive income 7 387 3 869 7 362 3 787 Lease liabilities 31 8 875 9 130 9 533 8 873 9 130 9 533 Trade and other payables 32 411 1 031 1 201 411 1 031 1 201 Items that may be reclassified subsequently to profit or loss 4 836 2 433 4 858 2 383 Payments received in advance 28 2 355 2 038 1 766 2 355 2 038 1 766 Cash flow hedges Contract liabilities and deferred income 28 22 577 21 295 19 796 22 577 21 295 19 796 Changes in fair value 17 7 557 2 964 7 557 2 964 Current 132 919 108 051 92 745 138 758 113 528 97 148 Net amount transferred to profit or loss (444) 626 (444) 626 Debt securities and borrowings 26 75 531 53 402 40 572 80 107 57 886 44 525 Amortisation of effective portion of terminated cash flow hedges 40 (325) (324) (325) (324) Embedded derivatives 27 1 131 2 069 1 857 1 131 2 069 1 857 Ineffective portion of cash flow hedges 40 (119) 950 (119) 950 Derivatives held for risk management 17 1 139 1 397 4 896 1 143 1 397 4 896 Net amount transferred to initial carrying amount of hedged items (366) (281) (366) (281) Employee benefit obligations 29 3 293 3 244 3 244 3 018 2 976 2 992 Foreign currency translation differences on foreign operations (22) 50 – – Provisions 30 5 991 5 662 5 309 5 933 5 556 5 194 Income tax thereon 43 (1 889) (926) (1 889) (926) Lease liabilities 31 475 332 286 474 332 286 Trade and other payables 32 40 175 36 849 32 116 41 761 38 208 32 944 Items that may not be reclassified subsequently to profit or loss 2 551 1 436 2 504 1 404 Payments received in advance 28 3 430 3 359 3 003 3 437 3 367 2 996 Re-measurement of post-employment medical benefits 29 3 546 1 992 3 478 1 949 Contract liabilities and deferred income 28 1 540 1 499 1 209 1 540 1 499 1 209 Income tax thereon 43 (995) (556) (974) (545) Taxation – – 4 – – – Financial trading liabilities 15 214 238 249 214 238 249 Total comprehensive loss for the year2 (13 115) (17 061) (14 978) (19 604) Liabilities held-for-sale 23 1 473 1 679 1 682 – – – Total liabilities 637 076 605 726 569 718 640 122 608 574 571 847 Total equity and liabilities 822 939 755 704 736 955 809 543 743 973 726 850 1. Refer to note 50. 2. A nominal amount is attributable to the non-controlling interest in the group. The remainder is attributable to the owner of the company. 26 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 27 STATEMENTS OF CHANGES IN EQUITY STATEMENTS OF CASH FLOWS for the year ended 31 March 2020 for the year ended 31 March 2020 Share Cash flow Available- Unrealised Foreign Accumulated Total Group Company capital hedge for-sale fair value currency profit equity 2020 2019 2020 2019 reserve reserve reserve translation Note Rm Rm Rm Rm reserve Cash flows from operating activities Rm Rm Rm Rm Rm Rm Rm Cash generated from operations 44 36 338 33 257 34 474 32 323 Group Net cash used in derivatives held for risk management (81) (172) (78) (174) Balance at 31 March 2018 83 000 (416) 6 (10 313) (31) 94 991 167 237 Finance income received 377 245 377 245 Finance cost paid (60) (277) (59) (276) Previously reported 83 000 (416) 6 (10 313) (31) 98 090 170 336 Income taxes paid (367) (313) – – Prior year restatements, net of tax1 – – – – – (3 099) (3 099) Net cash from operating activities 36 207 32 740 34 714 32 118 Adoption of IFRS 9 and 15 – – (6) – – (192) (198) Cash flows used in investing activities Restated loss for the year1 – – – – – (20 930) (20 930) Disposals of property, plant and equipment 508 566 498 566 Restated other comprehensive income, net Acquisitions of property, plant and equipment (24 009) (34 087) (24 479) (34 474) of tax1 – 2 383 – – 50 1 436 3 869 Acquisitions of intangible assets (260) (443) (153) (343) Transfer between reserves – – – (3 328) – 3 328 – Acquisitions of future fuel supplies (1 261) (548) (1 261) (548) Balance at 31 March 2019 83 000 1 967 – (13 641) 19 78 633 149 978 Disposals of insurance investments 9 188 10 669 – – Loss for the year – – – – – (20 502) (20 502) Acquisitions of insurance investments (11 930) (12 025) – – Other comprehensive income, net of tax – 4 858 – – (22) 2 551 7 387 Payments made in advance (2) (9) (2) (9) Share capital issued 49 000 – – – – – 49 000 Cash used in provisions (846) (1 707) (846) (1 707) Net cash used in derivatives held for risk management (120) (166) (120) (166) Transfer between reserves – – – (3 971) – 3 971 – Net cash from loans receivable 12 25 150 96 Balance at 31 March 2020 132 000 6 825 – (17 612) (3) 64 653 185 863 Cash from finance lease receivables 54 29 54 29 Dividends received 66 49 46 35 Company Dividends received – investment in equity-accounted investees 12 39 34 – – Balance at 31 March 2018 83 000 (416) – (10 313) – 82 732 155 003 Finance income received 1 550 1 411 511 506 Previously reported 83 000 (416) – (10 313) – 85 804 158 075 Net cash used in investing activities (27 011) (36 202) (25 602) (36 015) Prior year restatements, net of tax1 – – – – – (3 072) (3 072) Cash flows from/(used in) financing activities Restated loss for the year1 – – – – – (23 391) (23 391) Debt securities and borrowings raised 45 32 036 58 914 32 124 59 364 Restated other comprehensive income, net Payments made in advance 45 (642) (1 179) (642) (1 179) of tax1 – 2 383 – – – 1 404 3 787 Debt securities and borrowings repaid 45 (31 511) (34 455) (31 599) (34 332) Transfer between reserves – – – (3 328) – 3 328 – Share capital issued 25 49 000 – 49 000 – Net cash from derivatives held for risk management 45 1 843 1 219 1 843 1 219 Balance at 31 March 2019 83 000 1 967 – (13 641) – 64 073 135 399 Cash used in lease liabilities 45 (423) (357) (422) (357) Loss for the year – – – – – (22 340) (22 340) Net cash from financial trading assets 45 9 10 9 10 Other comprehensive income, net of tax – 4 858 – – – 2 504 7 362 Net cash used in financial trading liabilities 45 (33) (29) (33) (29) Share capital issued 49 000 – – – – – 49 000 Finance income received 597 858 558 820 Transfer between reserves – – – (3 971) – 3 971 – Finance cost paid (39 111) (35 845) (39 205) (36 035) Balance at 31 March 2020 132 000 6 825 – (17 612) – 48 208 169 421 Taxes paid (84) (69) (84) (69) Net cash from/(used in) financing activities 11 681 (10 933) 11 549 (10 588) Share capital Net increase/(decrease) in cash and cash equivalents 20 877 (14 395) 20 661 (14 485) Refer to note 25 for details regarding share capital. Cash and cash equivalents at beginning of the year 2 031 15 823 1 517 15 379 Foreign currency translation (22) 50 – – Cash flow hedge reserve Effect of movements in exchange rates on cash held 136 620 136 620 The cash flow hedge reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments Assets and liabilities held-for-sale (32) (67) – 3 (forward exchange contracts and cross-currency swaps) related to hedged transactions that have not yet occurred. The cross-currency swap hedges foreign exchange rate and interest rate risk of the future interest payments and the principal repayment on bonds and loans Cash and cash equivalents at end of the year 22 22 990 2 031 22 314 1 517 (denominated in US dollar, euro and yen). The reserve includes an unamortised gain of R406 million (2019: R731 million) relating to the effective portion of terminated hedges that is amortised to the income statement over the remaining life of the underlying hedged item. Cash flow allocation Unrealised fair value reserve Cash flows that form part of the changes in the line items of the statement of financial position are classified into operating, investing and The cumulative net change in the fair value of financial instruments that have not been designated as cash flow hedging instruments is financing activities in a manner that is most appropriate to the group. As a result, the cash flows associated with some line items in the recognised in profit or loss. The unrealised portion of the net change in fair value is not distributable and has been reallocated from a statement of financial position may be split into multiple cash flow activities in the statement of cash flows. These line items are: distributable reserve (accumulated profit) to a non-distributable reserve. Derivatives held for risk management Foreign currency translation reserve Derivatives held for risk management are classified as operating, investing or financing activities based on the allocation of the cash flows of The foreign currency translation reserve comprises exchange differences resulting from the translation of the results and financial position the underlying hedged item. Refer to note 17. of foreign operations. Payments made in advance Accumulated profit Payments made in advance that relate to the raising of debt securities and borrowings are classified as financing activities. Payments related to Accumulated profit is the amount of cumulative profit retained in the business after tax. No dividend has been proposed in the current or the acquisition of property, plant and equipment and intangible assets are allocated to investing activities. All other payments made in advance prior year. There are no restrictions on the distribution of dividends. are deemed operational in nature and are therefore included within operating activities. Refer to note 19. Non-controlling interest Provisions The non-controlling interest in the group is a nominal amount. Cash flows related to provisions for environmental restoration and mine-related closure, pollution control and rehabilitation, where the cost of property, plant and equipment as well as future fuel supplies includes environmental rehabilitation costs, are classified as investing activities. All other provisions are operational in nature and are classified as operating activities. Refer to note 30. Finance income and costs 1. Refer to note 50. Finance income and costs are allocated in line with the allocation of the related balances on which the income or cost arose. 28 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 29 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 1. General information Foreign operations Eskom Holdings SOC Ltd (Eskom), a state-owned company and holding company of the group, is incorporated and domiciled in The assets and liabilities of foreign operations (including fair value adjustments arising on acquisition) are translated to rand at the the Republic of South Africa. Eskom is a vertically integrated operation that generates, transmits and distributes electricity to local prevailing exchange rates at the reporting date. The income and expenses of foreign operations are translated to rands at the average industrial, mining, commercial, agricultural, redistributors (metropolitan and other municipalities) and residential customers, and to exchange rate. Foreign currency differences arising as a result of these transactions are recognised in other comprehensive income international customers in southern Africa. Eskom also purchases electricity from IPPs and international suppliers in southern Africa. within the foreign currency translation reserve. These represent the significant activities of the group. The business focus of the subsidiaries is primarily to support the electricity business. The nature of the businesses of the significant operating subsidiaries is set out in note 13. 2.4 Property, plant and equipment Property, plant and equipment is stated at cost less accumulated depreciation and impairment losses. Cost includes environmental rehabilitation costs, borrowing costs and transfers from equity of any gains or losses on qualifying cash flow hedges of foreign 2. Summary of significant accounting policies currency transactions. Work under construction includes the cost of materials and direct labour and any other directly attributable The principal accounting policies applied in the preparation of these separate and consolidated financial statements are set out below. costs incurred in bringing an item of property, plant and equipment to its present location and condition. Significant parts of an item of property, plant and equipment that have different useful lives are accounted for as separate items (major components). Spare parts 2.1 Basis of preparation and measurement classified as strategic and critical spares are recognised as property, plant and equipment and are only capable of operating in the Statement of compliance manner intended by management when they are installed. Items of property, plant and equipment transferred from customers are The consolidated financial statements of Eskom at and for the year ended 31 March 2020 comprise the company, its subsidiaries, initially recognised at fair value in accordance with International Accounting Standard (IAS) 16 Property, plant and equipment and any joint ventures, associates and structured entities (together the group). The separate and consolidated financial statements have been related revenue is recognised in accordance with IFRS 15 Revenue from contracts with customers, within revenue. prepared in accordance with IFRS and in the manner required by the PFMA and the Companies Act. The financial statements have been prepared on the going-concern basis and were approved for issue by the board on 26 October 2020. Subsequent costs are capitalised only when it is probable that future economic benefits associated with the item will flow to the group and the cost of the item can be measured reliably. When part of an asset is being replaced, the carrying amount of the replaced part Basis of measurement is derecognised. Repairs and maintenance are charged to profit or loss during the financial period incurred. The separate and consolidated financial statements are prepared on the historical-cost basis except for the following items which are measured at fair value: Owned land and spare parts are not depreciated. Depreciation on other owned assets is calculated using the straight-line method to • derivatives held for risk management allocate cost over the estimated useful lives (limited to residual values). Right-of-use assets are depreciated on a straight-line basis • embedded derivatives over the shorter of the lease term and the estimated useful life of the assets. The useful lives of owned and right-of-use assets are • certain investments and financial trading assets and liabilities as follows: Functional and presentation currency Owned Right-of-use The consolidated financial statements are presented in South African Rand (rounded to the nearest million unless otherwise stated), Years Years which is the company’s functional currency and the presentation currency of the group. Buildings and facilities 10 to 40 2 to 5 Changes in accounting policies and comparability Plant The group has consistently applied the accounting policies to all periods presented in these consolidated financial statements • Generating 2 to 80 2 to 15 except for new or revised statements and interpretations implemented during the year. The nature and effect of new standards and • Transmitting 5 to 40 n/a interpretations are discussed in note 52.2. • Distributing 5 to 35 n/a • Other 3 to 40 40 2.2 Consolidation Equipment and vehicles 2 to 15 2 to 5 Subsidiaries Subsidiaries are consolidated from the date on which control is transferred to the group until the date that control ceases. Investments The depreciation method, residual values and useful lives of assets are reviewed, and adjusted if appropriate, at each reporting date. in subsidiaries are accounted for at cost less impairment losses in the separate financial statements of the company. When the group The estimation of the useful lives of property, plant and equipment is based on historical performance as well as expectations about ceases to have control of an entity, it derecognises the assets and liabilities of the subsidiary and any components of equity. Any future use and therefore requires a degree of judgement. resulting gain or loss is recognised in profit or loss. Gains or losses on the disposal or writeoff of an item of property, plant and equipment are recognised in profit or loss within other The accounting policies of the subsidiaries have been adjusted, where necessary, to ensure consistency with the policies adopted by income or other expenses. Projects in works under construction that have been discontinued are written off and included in other the group. expenses. Investment in equity-accounted investees Investments in equity-accounted investees (associates and joint ventures) are accounted for at cost less impairment losses in the 2.5 Intangible assets separate financial statements of the company and on the equity method of accounting in the financial statements of the group. The Research and development group’s share of post-acquisition profits or losses of these investments is recognised in profit or loss within share of profit of equity- Research expenditure is recognised as an expense as incurred. accounted investees, and its share of post-acquisition movements in other comprehensive income is recognised directly in other Development expenditure (relating to the design and testing of new or improved products) is capitalised only if the expenditure can comprehensive income. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable and the Accounting policies of associates and joint ventures have been adjusted where necessary to ensure consistency with the policies adopted by group intends to and has sufficient resources to complete development and to use or sell the asset. Otherwise, it is recognised in the group. If the financial statements of the associate or joint venture were prepared as of a different date to that of the group (maximum profit or loss within other expenses. Subsequent to initial recognition, development expenditure is measured at cost less accumulated of three months difference), adjustments were made to the group financial statements for significant transactions and events that occurred amortisation and any accumulated impairment losses. between the date of the financial statements of the associate or joint venture and the date of the financial statements of the group. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period. Development costs previously capitalised that have been discontinued are written off and included in other expenses. 2.3 Foreign currency translation Transactions and balances Capitalised development costs are amortised from the point at which the asset is ready for use on a straight-line basis over its useful Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the life. Subsequent to initial recognition, the capitalised development costs are measured at cost less accumulated amortisation and transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year impairment losses. end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss, except when recognised in other comprehensive income for qualifying cash flow hedges. Rights Rights consist mainly of servitudes and rights of way under power lines. A servitude right is granted to Eskom for an indefinite period Changes in the fair value of monetary securities denominated in foreign currency classified as fair value through other comprehensive (useful life) and is therefore not amortised. income are analysed between translation differences resulting from changes in the amortised cost of the security, and other changes in the carrying amount of the security. Translation differences relating to changes in the amortised cost are recognised in profit or Computer software loss and other changes in the carrying amount are recognised within fair value through other comprehensive income. Computer software and licences acquired have a finite useful life and are measured at cost less accumulated amortisation and any accumulated impairment losses. If software is integral to the functionality of related equipment, it is capitalised as part of the Non-monetary items are measured at historical cost. equipment. Costs associated with maintaining computer software programs are recognised as an expense as incurred. Foreign loans are initially recognised at the exchange rate prevailing at transaction date and are translated at spot rate at every reporting date. Foreign exchange gains and losses that relate to financial assets and liabilities at amortised cost are presented in profit Amortisation is calculated using the straight-line method to allocate costs over their estimated useful lives of between 3 to 10 years. or loss within net fair value and foreign exchange gain/loss on financial instruments. Amortisation methods and useful lives of assets are reviewed at each reporting date and adjusted if appropriate. 30 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 31 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 2. Summary of significant accounting policies (continued) Lessor accounting 2.5 Intangible assets (continued) Finance leases – where the group is the lessor Concession assets Finance lease receivables mainly comprise premium power supply equipment contracts. Concession assets consist of the right to charge for the usage of the infrastructure under service concession arrangements. The capital The present value of the lease payments is recognised as a receivable when property, plant and equipment are leased out under a expenditure incurred in respect of the service concession arrangements (fair value at initial recognition), including borrowing costs on finance lease. The difference between the gross receivable and the present value of the receivable is disclosed as unearned finance qualifying capital expenditures, is capitalised (refer to note 2.7) and amortised over the estimated useful life of the concession asset, income within finance lease receivables. Lease income is recognised over the term of the lease using the net investment method, which which is the concession period during which it is available for use (refer to note 24). Subsequent to initial recognition, the concession reflects a constant periodic rate of return. Finance lease receivables are assessed for impairment and derecognised in accordance with assets are measured at cost less accumulated amortisation and impairment losses. the requirements for financial assets. 2.6 Impairment of non-financial assets Operating leases The carrying amounts of non-financial assets within the scope of IAS 36 Impairment of assets are assessed at each reporting date to Leases where substantially all of the risks and rewards of ownership are not transferred are classified as operating leases. Payments determine whether there is any indication of impairment. These assets are reviewed for impairment whenever events or changes in received under operating leases are recognised in profit or loss within other income on a straight-line basis over the period of the lease. circumstances indicate that the carrying amount may not be recoverable or if there are indicators of impairment. Assets that have an indefinite useful life (rights) are tested annually for impairment. 2.9 Payments made in advance Assets are grouped at the lowest levels for which there are separately identifiable cash flows, the cash generating unit (CGU), that Securing debt raised are largely independent of cash inflows when assessing for impairment. Eskom is regarded as a CGU as it is a vertically integrated Payments are made in advance to lenders for the commitment and issuing fees incurred in raising debt. regulated business with no largely independent cash flows. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. Value in use is based on the estimated future cash flows, discounted to their present value using a pre-tax Environmental rehabilitation trust fund discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. An Contributions were made by Eskom to environmental rehabilitation trust funds that were established to fund the financial obligation impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. Non-financial in respect of the rehabilitation of certain coal mines from which Eskom sources its coal for the generation of electricity. The trust assets that were subject to impairment are reviewed for possible reversal of the impairment at each reporting date. Impairment losses funds are controlled by third parties and will be solely used for the environmental rehabilitation of the relevant coal mines. The or reversals are recognised in profit or loss within impairment of other assets. contributions made to the trust funds were recognised separately from the environmental rehabilitation provision in accordance with the requirements of IFRIC 5 Rights to interests arising from decommissioning, restoration and environmental rehabilitation funds. 2.7 Capitalisation of borrowing costs Borrowing costs attributable to the construction of qualifying assets are capitalised as part of the cost of these assets over the period Other of construction, until the asset is substantially ready for its intended use. All other borrowing costs are expensed in the period in Other payments made in advance comprise mainly of payments made to suppliers to reserve manufacturing capacity for the future which they occur. construction of assets. These amounts will be used as partial settlement towards the future amounts payable to the suppliers. There is no contractual right to receive a refund in cash or another financial instrument from the suppliers. In the event of default or non- Borrowing costs for qualifying assets financed by specific borrowings are capitalised using the actual interest expense incurred. performance, there are performance bonds in place that can be used to recover outstanding payments in advance. Borrowing costs for qualifying assets that are not financed by specific borrowings are capitalised at the weighted average of the borrowing costs (capitalisation rate) using the borrowings applicable to the entities in the group. 2.10 Financial instruments 2.10.1 Financial assets (excluding derivatives) 2.8 Leases Classification The group assesses at contract inception whether a contract is or contains a lease if the contract conveys the right to control the use The appropriate classification of a financial asset is determined on acquisition of the financial asset and is based on: of an identified asset for a period of time in exchange for consideration. • whether the contractual terms of the financial asset gives rise to contractual cash flows that are solely payments of principal and Lessee accounting in terms of IFRS 16 interest; and The group recognises right-of-use assets relating to the right to use the underlying assets and lease liabilities for the lease payments • the objective of the business model in which the financial asset is held at a portfolio level that best reflects the way the business except for short-term leases and leases of low-value assets, where the recognition exemption is applied. is managed Right-of-use assets Financial assets are not reclassified subsequent to their initial recognition unless the group changes its business model for managing The group recognises a right-of-use asset at lease commencement (the date the underlying asset is available for use). Right-of-use financial assets, in which case all affected financial assets are reclassified on the first day of the first reporting period following the assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease change in the business model. liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred and lease The group may irrevocably designate a financial asset on initial recognition that otherwise meets the requirements to be measured payments made at or before the commencement date. Refer to note 2.4 for details regarding the depreciation of right-of-use assets at amortised cost or at fair value through other comprehensive income as at fair value through profit or loss if doing so eliminates or and to note 2.6 regarding assessment for impairment of right-of-use assets. significantly reduces an accounting mismatch that would otherwise arise. The group may also irrevocably elect on initial recognition of Lease liabilities an equity investment that is not held for trading to present subsequent changes in the investment’s fair value in other comprehensive The group recognises a lease liability at the commencement of a lease at the present value of the lease payments that have to be income. This election is made on an investment-by-investment basis. made over the lease term. The lease payments include fixed payments. There are no variable lease payments that would impact the The group did not designate any financial assets at fair value through profit or loss and has not elected to present equity investments determination of the lease payments. at fair value through other comprehensive income. The group uses the incremental borrowing rate at lease commencement to calculate the present value of lease payments if the Financial assets are classified into the following categories: interest rate implicit in the lease is not readily determinable. The incremental borrowing rate requires a degree of judgement regarding the determination of an appropriate discount rate for the lease term, and is based on borrowings of a similar term which Amortised cost takes into account current market conditions. A financial asset is measured at amortised cost if it meets both of the following conditions and is not designated as at fair value through profit or loss: After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for lease • its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal payments made. The carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term or a change amount outstanding of the in-substance fixed lease payments. • it is held within a business model whose objective is to hold assets to collect contractual cash flows Short-term leases and leases of low-value assets Fair value through other comprehensive income The group applies the short-term lease recognition exemption to leases with a term of less than 12 months. The group also applies A financial asset is measured at fair value through other comprehensive income if it meets both of the following conditions and is not the lease of low-value assets recognition exception to leases with a value of less than R75 000. Lease payments on short-term leases designated as at fair value through profit or loss: and leases of low-value assets are recognised as an expense on a straight-line basis over the lease term. • its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal Lessee accounting in terms of IAS 17 amount outstanding The group classified leases as finance or operating leases at commencement of the lease. Leases were classified as finance leases • it is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets if they transferred substantially all of the risks and rewards of ownership of the leased asset to the lessee. All other leases were classified as operating leases. Fair value through profit or loss All financial assets not classified as measured at amortised cost or fair value through other comprehensive income are measured at Finance leases were capitalised at commencement of the lease at the fair value of the leased asset or, if lower, at the present value fair value through profit or loss. of the minimum lease payments. Lease payments were apportioned between interest (finance costs) and reducing the lease payable. Operating leases payments were recognised as an expense in profit or loss on a straight-line basis over the lease term. 32 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 33 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 2. Summary of significant accounting policies (continued) Expected credit loss models and methods 2.10 Financial instruments (continued) Instrument Criteria used for assessment of expected credit loss measurement 2.10.1 Financial assets (excluding derivatives) (continued) 12-month expected credit loss Lifetime expected credit loss Measurement Stage 1 Stage 2 Stage 3 Initial recognition Low credit risk Not credit-impaired or significant Credit impaired or Financial assets are initially measured at fair value on the date of commitment to purchase (trade date). The transaction price is increase in credit risk default generally the best indicator of fair value. If a contract with a customer has a significant financing component, the related financial asset is initially measured at the transaction price excluding the time value of money. Trade and other Not applicable (simplified approach Elected to measure loss allowances at Financial asset more than receivables applied and therefore use lifetime an amount equal to the lifetime 90 days past due Where the fair value of a financial asset is different to the transaction price, a day-one gain or loss may arise. If the fair value has been expected credit loss) expected credit losses determined based on market-observable data the whole day-one gain or loss is recognised immediately in profit or loss. If the fair value has not been based on market-observable data the day-one gain or loss is deferred in the statement of financial position and Finance lease, loans Credit risk is assessed as low (where Financial asset more than 30 days Financial asset more than amortised over the term of the instrument in profit or loss. receivable and the credit risk rating assigned is past due 90 days past due financial guarantees equivalent to the globally understood Any directly attributable transaction costs are included in the initial measurement of financial assets except for financial assets at fair definition of investment grade) value through profit or loss where directly attributable transaction costs are recognised in profit or loss. Investments and Credit risk is assessed as low (where Significant increase in credit risk since There is objective After initial recognition financial trading the credit risk rating assigned is initial recognition but there is no evidence that the Amortised cost assets and cash and equivalent to the globally understood objective evidence of loss (ie the counterparty is unlikely Financial assets at amortised cost are measured at amortised cost after initial recognition using the effective interest rate method less cash equivalents definition of investment grade) counterparty is still considered likely to pay its obligations any accumulated impairment losses. Interest income, foreign exchange gains and losses and impairments are recognised in profit or loss. to pay its obligations) Loss allowances for financial assets measured at amortised cost are deducted from the gross carrying amount of the assets. Derecognition Fair value through other comprehensive income Financial assets are derecognised when the right to receive cash flows from the assets has expired or substantially all the risks and Financial assets at fair value through other comprehensive income are measured at fair value after initial recognition. Interest income rewards of ownership have transferred from the group. Realised gains or losses on derecognition are determined using the last-in-first- calculated using the effective interest method, foreign exchange gains and losses and impairments are recognised in profit or loss. out (LIFO) method. Gains and losses, including those accumulated in other comprehensive income, are recognised in profit or loss. Other net gains and losses are recognised in other comprehensive income. The gross carrying amount of a financial asset is written off when the group has no reasonable expectation of recovering a Fair value through profit or loss financial asset. Financial assets at fair value through profit or loss are measured at fair value after initial recognition. Changes in the fair value after initial recognition (including any interest or dividend income) are recognised in profit or loss. 2.10.2 Financial liabilities (excluding derivatives) Classification Impairment Financial liability balances have been classified as either amortised cost or other liabilities. Loss allowances are recognised for expected credit losses on financial assets measured at amortised cost or fair value through other comprehensive income. Loss allowances are calculated using the general or simplified approach. Measurement Initial recognition The general approach requires impairment to be measured using a 12-month or lifetime expected credit loss. The lifetime expected Financial liabilities are measured at fair value on the date of commitment (trade date). Where financial liabilities are carried at credit loss method will be used if, after initial recognition, there is a significant increase in the credit risk of a financial asset or if it amortised cost, transaction costs are included in the value of the financial liability. Where financial liabilities are carried at fair value becomes credit-impaired. The simplified approach requires impairment to be measured using a lifetime expected credit loss. The through profit or loss, transaction costs are recognised in profit or loss. Fees paid on the establishment of loan facilities are recorded simplified approach is applied to trade and other receivables. as a payment made in advance where it is probable that some or all of the facility will be drawn down. Refer to note 2.9. The fees paid are recognised as transaction costs upon drawdown and then amortised to profit or loss within finance costs from the date of first The maximum period considered when estimating expected credit losses is the maximum contractual period over which the group is drawdown to final maturity of each facility. exposed to credit risk. 12-month expected credit losses are the portion of the expected credit loss resulting from default events that are possible within 12 months after reporting date (or a shorter period if the expected life of the instrument is less than 12 months). After initial recognition Lifetime expected credit losses are the expected credit losses that result from all possible default events over the expected life of Financial liabilities at amortised cost are measured at amortised cost using the effective interest method. Financial liabilities classified the financial instrument. as at fair value through profit or loss are measured at fair value. The group did not designate any financial liabilities at fair value through profit or loss. Expected credit losses are probability-weighted estimates of credit losses. Credit losses are measured as the difference between the cash flows due in accordance with the contract and the cash flows expected to be received discounted at the effective interest rate Derecognition of the financial asset. Financial liabilities are derecognised when the obligation expires, is discharged or cancelled, or there is a substantial modification to the terms of the liability. Realised gains and losses are determined using the LIFO method. All financial assets subject to impairment are monitored to assess whether they have been subject to a significant increase in credit risk after initial recognition. There will be a significant increase in credit risk when: 2.10.3 Derivatives held for risk management • payments are more than 30 days past due, or Classification and measurement • a significant qualitative event has occurred These balances are not managed on a held-to-collect and/or for sale business model and the default classification and measurement is therefore at fair value through profit or loss unless they meet the criteria for, and have been designated as, cash flow hedges. Where it is assessed that a counterparty’s credit risk has increased significantly from its initial low risk designation, the related asset is moved from stage 1 to stage 2. Economic hedges Certain derivative instruments do not qualify for cash flow hedge accounting but are used for economic hedging. Changes in the fair An assessment is performed at each reporting date to determine whether financial assets subject to impairment are credit-impaired. value of these derivative instruments (realised and unrealised gains or losses) are recognised in profit or loss within net fair value and A financial asset is credit-impaired when there is observable evidence that one or more event has occurred that has had a detrimental foreign exchange gain/loss on financial instruments. impact on the estimated future cash flows expected to flow from the asset such as: • significant financial difficulty of the borrower, issuer or customer Cash flow hedges • a breach of contract such as a default (where the counterparty is unlikely to pay its obligations) or being more than 90 days The relationship between hedging instruments and hedged items as well as risk management objectives and the strategy for past due undertaking various hedging transactions are documented at the inception of a transaction. The group also documents its assessment, • restructuring of a loan or advance on terms that the group would not otherwise consider both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective • it is probable that the borrower or customer will enter bankruptcy or other financial reorganisation in offsetting changes in fair values or cash flows of hedged items. • the disappearance of an active market for a security because of financial difficulties It is expected that the values of the hedging instrument and hedged item will move in opposite directions as a result of the hedged Where the counterparty is assessed to be credit-impaired, the related asset is disclosed in stage 3. risks (foreign exchange and interest rate risks). The hedge ratio is based on a hedging instrument with the same notional amount in currency terms as the hedged item or portion thereof designated for hedge accounting. This results in a hedge ratio of 1:1 or 100%. 34 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 35 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 2. Summary of significant accounting policies (continued) Nuclear 2.10 Financial instruments (continued) Expenditure incurred to obtain, convert, enrich and fabricate fuel assemblies is stated at cost in future fuel supplies. The fuel 2.10.3 Derivatives held for risk management (continued) assemblies are transferred to inventory when they are received. Costs include the transfer from equity of any gains or losses on Classification and measurement (continued) qualifying cash flow hedges relating to purchases of raw materials, fabrication and enrichment. Cash flow hedges (continued) 2.12 Inventories Significant day-one gains and losses are deferred in the statement of financial position (derivatives held for risk management) and Coal, liquid fuel, maintenance spares and consumables amortised on a straight-line basis over the term of the hedging instrument to profit or loss. Unamortised day-one gains and losses Inventories are stated at the lower of cost and net realisable value. Cost is determined on the weighted average basis and includes are written off to profit or loss if the related financial instrument is derecognised (extinguished) before maturity date. Day-one gains expenditure incurred in acquiring inventories and other costs in bringing inventory to its present location and condition as well as the and losses on hedging instruments are predominantly a function of the inclusion of credit, liquidity and other risks in the terms of cost of ongoing programmes to rehabilitate the environment and other closure cost for active mines that is charged to profit or loss the trading instrument. These risks are not included in the determination of a hypothetical derivative used to measure fair value within primary energy as the coal is consumed. movements in a hedged item and are therefore excluded from any hedge accounting relationships. Nuclear fuel The effective realised and unrealised portion of changes in the fair value of derivatives that are designated and qualify as cash flow Nuclear fuel consists of enriched and fabricated fuel assemblies and fuel in reactors. Nuclear fuel is stated at the lower of cost and hedges is recognised in other comprehensive income within the cash flow hedge reserve. The gain or loss relating to the ineffective net realisable value. Cost is determined on the first-in-first-out basis and includes cost for the management of fuel assemblies that portion is recognised immediately in profit or loss within net fair value and foreign exchange gain/loss on financial instruments. are written off on a straight-line basis to profit or loss within primary energy over the estimated useful life of the fuel in the reactor. Cumulative gains or losses existing in other comprehensive income where the hedged item is a non-financial asset are included in the initial carrying amount of the asset when the forecast transaction results in the recognition of a non-financial asset. Gains and losses 2.13 Share capital recognised in the cash flow hedge reserve in other comprehensive income will affect profit or loss in the periods during which the Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares, net of any tax effects, relevant non-financial assets are expensed to profit or loss. are recognised as a deduction from equity. Cumulative gains or losses existing in other comprehensive income where the hedged item is a financial liability are taken to profit 2.14 Income tax or loss within finance cost or net fair value and foreign exchange gain/loss on financial instruments when the cash flows occur on the Income tax expense is recognised in profit or loss except to the extent that it relates to items recognised in other comprehensive hedged financial liability. income or equity, in which case it is recognised on that basis. When a hedging instrument expires, is sold or a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss 2.15 Deferred tax existing in equity at that time remains in other comprehensive income until the forecast transaction occurs. If a forecast transaction Deferred tax is recognised on temporary differences arising between the carrying amounts of assets and liabilities for financial is still expected to occur, the cumulative gains or losses in other comprehensive income are reclassified from equity to profit or loss reporting purposes and the amounts used for taxation purposes. Deferred tax is determined using tax rates (and laws) enacted or in the same periods during which the hedged forecast cash flows affect profit or loss. If a forecast transaction is no longer expected substantively enacted at the reporting date and that are expected to apply when the related deferred tax asset is realised or the to occur, the cumulative gain or loss that was reported in other comprehensive income is immediately transferred to profit or loss deferred tax liability is settled. Deferred tax assets are reviewed at each reporting date and derecognised if it is no longer probable within net fair value and foreign exchange gain/loss on financial instruments. that the related tax benefits will be realised. The measurement of deferred tax reflects the tax consequences that would follow from the manner in which the group expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities. Sources of ineffectiveness include the following: • period mismatches between the hedging instrument and hedged item Deferred tax is not recognised for: • the fair value of the hedging instrument at the hedge relationship designation date (if not zero) • temporary differences on the initial recognition of assets or liabilities in a transaction other than a business combination that at • the fair value or cash flow of the hedged item and hedging instrument are dependent on different variables the time of the transaction affects neither accounting nor taxable profit or loss • temporary differences relating to investments in subsidiaries and associates to the extent that the group is able to control the 2.10.4 Embedded derivatives timing of the reversal of the temporary differences and it is probable that they will not reverse in the foreseeable future Eskom entered into a number of agreements to supply electricity to electricity-intensive businesses where the revenue from these contracts is linked to commodity prices and foreign currency rates or foreign producer price indices that give rise to embedded derivatives. Deferred tax assets are recognised for unused tax losses, unused tax credits and deductible temporary differences to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred tax is Embedded derivatives that are not separated from the host contract are effectively accounted for as part of the hybrid instrument. also recognised in respect of temporary differences arising on the assets and provisions created in respect of decommissioning and Non-option based derivatives are separated on terms that result in a fair value of zero at the date of inception. Option-based nuclear waste management and closure, pollution control and rehabilitation. Future taxable profits are determined based on business derivatives are separated on the terms stated in the contracts and will not necessarily have a fair value equal to zero at the initial plans for legal entities in the group. recognition of the embedded derivative resulting in day-one gains or losses. These day-one gains or losses are recognised over the period of the agreement. The fair value will depend on the strike price at inception. 2.16 Payments received in advance, contract liabilities and deferred income Customer connections The determination of the host contract of an electricity contract (which includes an embedded derivative) is based on the standard Customer connections arise when customers make a contribution to Eskom to construct regular distribution and transmission assets electricity tariff specified in the contract and where no standard tariff is specified, the tariff that would best fit the profile of such a or when the constructed assets are transferred to Eskom to connect customers to the electricity network. Contributions are made customer. in advance, in terms of a financing agreement or the completed assets are transferred to Eskom. The changes in fair value of embedded derivatives are recognised in profit or loss within net fair value and foreign exchange gain/loss Customer connections received in advance are initially recognised as payments received in advance. on financial instruments. The impact of the fair value gains or losses is taken into account in the calculation of current and deferred taxation. The related customer connections that arise when customers transferred distribution and transmission assets to Eskom to connect to the electricity network are accounted for when the customer hands over the completed assets to Eskom. 2.10.5 Repurchase and resale agreements Repurchase agreements are included in financial trading liabilities or financial trading assets dependent on whether securities are Connections for electricity customers that were connected after 1 April 2018 (transition date to IFRS 15) bought or sold. Agreements to resell securities are recorded as repurchase agreements and included in financial trading assets when When the connection provides the customer with a material right, the connection is allocated to deferred income (contract liabilities) the securities are bought for market-making activities. The difference between the sale and repurchase price or purchase and resale when the customer is connected to the electricity network. The deferred income is recognised in profit or loss within revenue on a price is treated as interest accrued over the life of the repurchase or resale agreement using the effective-yield method. straight-line basis over the estimated customer relationship period as the connection provides the customer with a material right of renewal that extends the revenue recognition period beyond the initial contractual period. 2.10.6 Financial guarantees Financial guarantees are contracts that require the group to make specified payments to reimburse the holder for a loss that it incurs When the connection does not provide the electricity customer with a material right, the connection is recognised in full in profit or because a specified debtor fails to make payment when it is due in accordance with the terms of a debt instrument. loss within revenue when the customer is connected to the electricity network. Financial guarantees issued are initially measured at fair value and subsequently at the loss allowance calculated in accordance with Connections for electricity customers that were connected after 30 June 2009 but before 1 April 2018 IFRS 9 Financial instruments. Connections were recognised in profit or loss when the customer was connected to the electricity network in terms of IFRIC 18 Transfers of assets from customers. 2.11 Future fuel supplies Coal Connections for electricity customers that were connected before 30 June 2009 The right to future coal supplies from coal mines is measured at cost. Cost includes payments made to coal suppliers for mine Connections were allocated to deferred income when the customer was connected to the electricity network. The deferred income establishment and related equipment in terms of cost-plus agreements. The cost also includes the initial estimate of environmental is recognised in profit or loss within revenue on a straight-line basis over the expected useful lives of the related assets. rehabilitation of the mine as well as changes in the estimated timing or amount of outflow of resources or changes in the discount rate. The cost is amortised to coal inventory over the lesser of the life of the agreement or the underlying assets. Refer to note 2.19 for revenue recognition of connections. 36 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 37 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 2. Summary of significant accounting policies (continued) The classification as a defined contribution plan is consistent with the prior period classification. 2.16 Payments received in advance, contract liabilities and deferred income (continued) However, as the rules provide Eskom the right to consent to an increase in contributions, it created uncertainty as to the existence Grants of the obligation, ie as the fund rules provide for the future option of an increase in contributions should a deficit arise, the fund could Government grants for electrification are initially recognised in payments received in advance and allocated to deferred income be assessed as a defined benefit fund. If the fund had to be accounted for as a defined benefit fund, the relevant disclosure has been when the related asset has been connected to the electricity network. The deferred income is recognised in profit or loss within made in note 29.4. The impact on the financial statements would be immaterial as the fund is in a net asset position. depreciation and amortisation expense on a straight-line basis over the expected useful lives of the related assets. Contributions to the fund are expensed in the period in which they have been incurred. 2.17 Employee benefit obligations Post-employment medical benefits 2.18 Provisions All permanent employees qualify for post-employment medical benefits, except for new employees appointed on or after 1 June 2003 Provisions are recognised when the group has a present legal or constructive obligation as a result of a past event, when it is probable at a managerial level. The entitlement to post-employment medical benefits is conditional on the employee remaining in service up that an outflow of resources will be required to settle the obligation and when the amount can be reliably estimated. Provisions are to retirement when the employee qualifies for the full benefit. Retirement includes any early retirement from age 55 up to normal not recognised for future operating losses. retirement at age 65. The valuation of long-term provisions requires a degree of judgement regarding the future cash flows and the timing thereof. The group accounts for its post-employment medical benefits obligation as a defined benefit plan in line with IAS 19. The post- Provisions are determined by discounting the expected future cash flows using a pre-tax discount rate that reflects current market employment medical benefits plan is unfunded. The cost to the employer, in the form of employer contributions, is actuarially assessments of the time value of money and, where appropriate, the risks specific to the liability. The increase in the provision due to determined by using the projected unit credit method at reporting date. The present value of the obligation is determined by using the passage of time is recognised as finance costs. government bonds which have maturities similar to the liability. Provision is made for the estimated cost over the period until the date of early retirement at age 55 when further service by the employee will lead to no material amount of further benefits to the The initial cost of a provision is capitalised against the cost of the related asset if it meets the requirements for capitalisation. Changes employee. Actuarial gains or losses are recognised in other comprehensive income within re-measurements of post-employment in the liability for capitalised provisions are added to, or deducted from, the cost of the related asset. Any amount exceeding the cost medical benefits. Interest and other expenses related to these benefits are recognised in profit or loss. of the related asset is allocated to profit or loss. The main categories of provisions include the following: Occasional and service leave The liability for occasional and service leave is of a long-term nature in terms of IAS 19 as it is not expected to be settled wholly within Power station-related environmental restoration – nuclear plant and other generating plant 12 months after the reporting period, but there is no unconditional right to defer settlement for at least 12 months after the reporting The provision includes the estimated decommissioning cost of nuclear and other generating plant. The estimated cost of period. The full provision is therefore presented as current in the statement of financial position. decommissioning at the end of the productive life of plant is based on engineering and technical estimates and reports from An actuarial valuation is performed at the reporting date for the occasional and service leave liability. The accrued liability is independent experts. The initial cost of the provision is capitalised against property, plant and equipment. determined by valuing all future leave expected to be taken and payments expected to be made in respect of benefits up to the A provision is also raised for the management of fuel assemblies and radioactive waste, which is recognised and measured based valuation date. Allowance is made for the assumed benefit options employees will exercise, as well as salary increases and investment on the latest available cost information and spent fuel management methodologies. The costing and methodologies are revised on returns up to the date the benefit is received. All actuarial gains or losses and past service costs are recognised in profit or loss within a regular basis to ensure alignment with the requirements of the National Nuclear Regulator of South Africa. The cost for the fuel employee benefit expense. The present value of the benefit is determined by using government bonds which have maturities similar assemblies is included in the cost of inventory while the fuel is in the reactor. The cost relating to radioactive waste is charged to to the liability. profit or loss within primary energy. Annual and performance bonus Mine-related closure, pollution control and rehabilitation The annual and performance bonus is a short-term employee benefit which is expensed as the related services are provided. A liability The provision includes the estimated cost of physical, biophysical and social closure and environmental rehabilitation of the mine is recognised for the amount expected to be paid if the group has a present legal or constructive obligation to pay this amount as a where a legal or constructive obligation exists. The initial cost of the provision is capitalised against future fuel. The cost of ongoing result of past service provided by the employee and the obligation can be estimated reliably. A liability for annual bonuses is accrued closure and rehabilitation programmes for active mines is charged to inventory and subsequently to profit or loss within primary on a proportionate basis as services are rendered. A liability for performance bonus is raised on the estimated amount payable in energy as the coal is consumed, while the cost relating to defunct mines is charged directly to profit or loss. terms of the incentive scheme, which is based on the business and employees’ performance in the applicable year. Coal-related obligations Pension benefits A provision is raised for coal-related obligations which arise out of contractual obligations as a result of delays in commissioning of Details of the pension benefits the related power stations, which is recognised and measured based on the best estimate of the expenditure that would be required All permanent employees of the group are members of the Eskom Pension and Provident Fund (EPPF) in terms of its rules and to settle the present obligation at the end of the reporting period and is charged to profit or loss within primary energy. conditions. Pension benefits are provided to all pensioners of the fund in terms of the rules of the fund. Other The EPPF is registered as a defined benefit fund in terms of the requirements of the Pension Funds Act. The assets of the fund are Other provisions include provisions made for contractual obligations to maintain and restore the infrastructure under service legally separated from the group and are managed by an independent board of trustees who has to act in the best interests of the concession arrangements, onerous contracts, compensation events and guarantees. Other provisions are raised based on contractual plan participants. obligations and are recognised and measured based on the best estimate of the expenditure that would be required to settle the Eskom Holdings SOC Ltd is the majority employer in the EPPF. Other employers include Eskom Rotek Industries SOC Ltd. The fund present obligation at the end of the reporting period and are charged to profit or loss within other expenses. is measured as a whole and there is currently no policy in place for proportionate allocation of net assets to individual entities of 2.19 Revenue from contracts with customers the group. Eskom’s main revenue activity is the sale of electricity which is recognised when electricity is consumed by the user. The subsidiaries Contributions currently comprise 20.8% of pensionable emoluments of which 12.25% is contributed by the employer and 7.3% support this main activity but are not considered to be part of the main revenue activity as their operations include providing home by members. loans, insurance, maintenance and construction services. Pension benefits currently provided by the EPPF is based on a defined formula of 1.085/600 of the final average emoluments and Revenue is recognised when a customer obtains control of the goods or services supplied. The amount of revenue recognised is pensionable service period. The formula does not limit the benefits payable to the assets and contributions made to the fund. measured based on the consideration specified in a contract with a customer and excludes amounts collected on behalf of third However, the rules of the fund state that any deficit on the valuation of the fund will be funded by increases in future contributions parties. Eskom has a statutory obligation to charge value added tax (VAT), payable to the South African Revenue Service (SARS), (if consented to by the employer) or reductions in pensioner benefits (as agreed by the members). when an invoice is created. The VAT is contractually recoverable from the customer and is included in trade and also receivables (refer to note 20). If there is a substantial surplus on the valuation of the fund, future contributions may be decreased or pensioner benefits may be improved as determined and appropriated by the trustees of the fund. Customers that fail the collectability criterion are accounted for on a cash basis and revenue is only recognised when cash is received (refer to note 5.5). An invoice is still raised for sales to these customers which gives rise to a related VAT entry that is allocated to Classification trade and other receivables, even though the transaction price is not recognised in terms of IFRS 15. When cash is received from the Although the promised benefits to the members are not limited to the assets available in the fund as well as the contributions made customer, the transaction price is recognised in profit or loss within revenue, and the related payment for VAT is allocated against as in a normal defined contribution plan in terms of IAS 19, a judgement was made to classify the EPPF as a defined contribution plan the trade and other receivables balance. in terms of IAS 19 because of the following considerations: • the group pays a fixed contribution to the fund and has no legal or constructive obligation to make good a shortfall should it arise • an independent legal opinion during the year confirmed that Eskom has no legal obligation to fund any shortfall that may arise • as the fund has been in a net asset position since its commencement, Eskom has not previously provided any additional contributions to meet the benefits payable as per the benefit formula 38 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 39 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 2. Summary of significant accounting policies (continued) 3. COVID-19 considerations 2.19 Revenue from contracts with customers (continued) The World Health Organisation declared COVID-19 as a pandemic on 11 March 2020. A National State of Disaster was declared in The group’s principal revenue-generating activities are as follows: South Africa and a nationwide lockdown was implemented on 27 March 2020 to reduce the spread of COVID-19. The national lockdown was initially implemented for 21 days and subsequently extended. A five-level risk-adjusted lockdown strategy was implemented Revenue Nature and timing of satisfaction of Revenue recognition thereafter, with level 5 being the highest level. The country gradually moved down to the current level 1 on 21 September 2020 with activity performance obligation, including the state of disaster extended to 15 November 2020. significant payment terms The impact of the lockdown on Eskom’s operations was not that severe as the generation and provision of electricity was declared an Electricity Performance obligation is settled Revenue is recognised over time as electricity is consumed by the customer essential service. It resulted in a significant reduction in electricity demand during the initial lockdown period but this subsequently sales when electricity is supplied to the (ie when control is transferred) and is billed for on a monthly basis. Revenue recovered, albeit not to pre-lockdown levels, mainly as a result of the adverse impact of COVID-19 restrictions on the economy. customer. Most customers pay for is measured based on the consideration specified in a contract with a electricity after consumption and have customer and excludes amounts collected on behalf of third parties Management applied its best estimates based on information available regarding the impact of COVID-19 on the annual financial between 15 and 45 days to pay. Some statements. The actual results may differ from the estimates because of the uncertainty regarding the impact of the lockdown customers prepay for electricity restrictions. Connections Connections arise when customers Connections that were completed before 30 June 2009 were allocated to The following considerations were taken into account in the preparation of the annual financial statements because of the impact of make a contribution to Eskom to deferred income when the customer was connected to the electricity network. COVID-19: construct regular distribution and The deferred income is recognised in profit or loss within revenue on a transmission assets or when the straight-line basis over the expected useful life of the related assets 3.1 Going concern constructed assets are transferred to The cash flow projections for 2021 to 2023 have been updated with the expected impact of COVID-19. The going-concern assessment Connections that were completed after 30 June 2009 were recognised as is discussed in note 4. Eskom to connect customers to the revenue when the customer was connected to the electricity network in terms electricity network of IFRIC 18 Transfers of assets from customers 3.2 Revenue recognition There was no change in the assumptions for the recognition of revenue from contracts with customers as a result of COVID-19 as it Connections arise from contracts Connections that were completed from 1 April 2018 are recognised as follows: was considered highly probable that customers will satisfy their obligations. There were no modifications to the terms and conditions with customers who will also become • connections relating to electricity purchasing customers where there is of the agreements with customers because of COVID-19. electricity purchasing customers once a material right are allocated to deferred income when the customer is they are connected and those who connected to the electricity network. The deferred income is recognised 3.3 Financial instruments and risk management will not purchase electricity in profit or loss within revenue on a straight-line basis over the estimated There were no modifications to financial instrument contracts nor breaches of debt‑related covenants at 31 March 2020 and (eg property developers) customer relationship period of 25 years. Refer to note 28 for the contract subsequently to the date of issue of these financial statements. liabilities of connections recognised on a straight-line basis The group continues to apply its risk management framework. No significant concentration risks have been identified as a result • connections relating to electricity purchasing customers where there is not of COVID-19 and the group continues to have access to its existing lines of credit as disclosed in the financial statements. The a material right are recognised as revenue over the initial contract term sensitivities disclosed remain valid in the current economic environment for all assumptions and estimates applied. • connections relating to non-electricity purchasing customers are recognised as revenue at a point in time when the customer is connected to the Fair value electricity network Fair values reflect the latest data available at the reporting date. The impact of COVID‑19 was considered in the determination of the fair value measurement and disclosure and no material impact was noted. The appropriateness of inputs, fair value hierarchy Other Ad hoc requests for electricity-related Revenue is recognised at a point in time when the service is completed classifications, transfers between fair value hierarchy and unobservable inputs relating to level 3 fair value hierarchy were considered. services that are distinct from the sale of electricity or the connection of Expected credit loss calculations customers to the grid The expected credit loss methodology (except where indicated otherwise) and the definition of default remained consistent from those applied previously. The approach followed to calculate expected credit losses on financial assets are discussed in note 5. The assessment to defer revenue for connection charges from electricity customers required judgement because of divergent international treatments based on contract and operational differences. Changes to the recognition of customer connections is not The group applied judgement in determining whether a significant increase in credit risk had occurred as a result of COVID-19 and expected based on the current information available. no indicators of a significant increase were identified at the reporting date. The assessment of whether or not a connection charge is a material right or not in terms of IFRS 15 requires judgement of what The impact of COVID-19 on the provision at 31 March 2020 has been calculated based on the group’s best estimate using information constitutes a material right from the perspective of the customer and results in different accounting treatments as discussed above. available at the time of preparation of the financial statements and includes forward-looking assumptions. 2.20 Finance income The probability of default for all models (except small power user trade receivables) were increased to reflect the forward-looking Finance income comprises interest receivable on loans, trade receivables, finance lease receivables and income from financial market stress scenario impact of COVID-19 in a manner similar to that observed by Standard & Poor’s during the 2008 financial crisis as this investments. was determined to be the most appropriate stress scenario. Finance income is calculated by applying the effective interest rate method to the gross carrying amount of non-credit impaired financial In addition, the base scenario that was considered the most appropriate for the municipality models (scorecard approach) assumed a assets (ie at the amortised cost of the financial asset before adjusting for any expected credit loss allowance). Finance income on credit- ‘V’ shaped recovery as the expectation was that there will be a significant economic disruption while social distancing measures are impaired financial assets is calculated by applying the effective interest rate to the amortised cost of the credit-impaired financial assets in place followed by an expected sharp recovery when the restrictions are lifted. The probabilities of default and key financial ratios (ie the gross carrying amount less the allowance for expected credit losses). Interest income is recognised in profit or loss. used to assess the municipal trade receivables have also been adjusted to reflect the latest South African sovereign rating downgrade. 2.21 Finance cost The probability of default of the expected credit loss models was adjusted despite the acyclical probability of default behaviour Finance cost comprises interest and fees payable on debt securities and borrowings and lease liabilities, interest resulting from observed historically due to the severity of the COVID-19 impact and the global point-in time probability of default reported by derivatives held for risk management and interest from the unwinding of discount on liabilities. Borrowing costs which are not external rating agencies. capitalised are recognised in profit or loss. Refer to note 2.7. An alternative methodology was applied to small power users given the trend of increased probability of default observed over the 2.22 Assets and liabilities held-for-sale financial year, which were higher than the 2008 financial crisis stress scenario. The increase in the probability of default for small Assets and liabilities (or disposal groups) which meet the definition of held-for-sale under IFRS 5 Non-current assets held-for-sale and power users was based on the largest observed historical quarterly increase. discontinued operations are stated at the lower of their carrying amount and fair value less costs to sell if their carrying amount will be recovered principally through a sale transaction. Hedging The hedged future cash flows remained highly probable at 31 March 2020 based on external information and there was therefore no 2.23 Net debt impact on hedge accounting as a result of COVID-19. Increased counterparty credit risk had a limited impact on the measurement Gross debt is the aggregate of debt securities and borrowings and lease liabilities. of hedge ineffectiveness. Net debt is calculated by adjusting gross debt for related payments made in advance, derivatives held for risk management, financial trading instruments and cash and cash equivalents. 40 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 41 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 3. COVID-19 considerations (continued) Operating cost 3.3 Financial instruments and risk management (continued) The group continues to pursue cost-saving opportunities to assist in ensuring financial sustainability. Embedded derivatives The following income statement measures are monitored by management: The key financial assumptions used in the valuation of embedded derivatives reflect the latest data available at the reporting date and no material impact was noted as a result of COVID-19. Group Company 2020 2019 2020 2019 3.4 Impairment of non-current assets % % % % The methodology, key assumptions and sensitivity analysis of the impairment assessment of the CGU is disclosed in note 10. EBITDA margin 18.55 17.46 17.74 16.21 The assumptions regarding the expected electricity demand for 2021 have been revised to take the impact of COVID-19 into account. Net profit margin (10.28) (11.63) (11.20) (13.00) There was no impact on the discount rates as they relate to parameters associated with longer-term assets. 3.5 Inventory 4.1.3 Net debt There were no adjustments required to the carrying values of inventories due to the impact of COVID-19. Group Company 3.6 Employee benefit obligations 2020 2019 2020 2019 The key financial assumptions applied in the valuations of post-employment medical benefits and leave provisions reflect the latest Rm Rm Rm Rm data available at the reporting date. No revision to the assumptions were deemed necessary as they relate to longer-term obligations Funding spent 97 036 105 644 95 848 105 562 and would therefore not be impacted by COVID-19. Debt repayment and net finance costs 70 025 69 442 70 246 69 547 3.7 Provisions Investment funding requirements 27 011 36 202 25 602 36 015 The key financial assumptions applied in the valuations of power station-related environmental restoration and mine-related closure, and pollution control and rehabilitation provisions reflect the latest data available at the reporting date. No revision to the Funding raised 97 036 105 644 95 848 105 562 assumptions were deemed necessary as they relate to longer-term obligations and would therefore not be impacted by COVID-19. Cash from operations 36 207 32 740 34 714 32 118 No material impact was noted on other provisions as a result of the COVID-19 outbreak. No onerous provisions were identified for Financing activities 81 706 58 509 81 795 58 959 expected losses as a result of COVID-19. Utilisation of cash (20 877) 14 395 (20 661) 14 485 3.8 Leases The following ratios play an important role in the credit ratings given to Eskom, which in turn influences the cost of funding. Eskom’s There were no modifications to lease agreements due to the impact of COVID-19. credit rating is affected by its own financial position as well as the credit rating of the sovereign: 3.9 Taxation Group Company Legislative changes made in response to COVID-19 were assessed and it was concluded that there was no impact on the group. Unit 2020 2019 2020 2019 The impact of COVID-19 is not expected to impact the recognition of the deferred tax assets. The utilisation of the deferred tax Net debt : equity Ratio 2.23 2.87 2.48 3.22 asset that arise out of the unused tax loss position, is dependent on the reversal of taxable temporary differences and not on future Net debt : EBITDA Ratio 11.22 13.71 11.88 14.94 taxable profits. Net debt service cover Ratio 0.52 0.47 0.49 0.46 Free funds from operations : net debt % 9.31 6.74 10.35 8.86 4. Capital management and going concern Eskom’s credit ratings at 31 March were as follows: 4.1 Capital management The objective of capital management is to ensure that the group is sustainable over the long term. The government, as the sole Rating Outlook shareholder, and the board have the responsibility to ensure that the group is adequately capitalised and that the business is attractive 2020 2019 2020 2019 to investors. Standard & Poor’s The group’s funding consists of equity investments by the shareholder, funds generated from operations and funds borrowed on local Foreign currency CCC+ BB- Negative Negative and foreign debt markets with strong government support. There were no changes to the group’s approach to capital management Local currency CCC+ BB- Negative Negative during the financial year. The following capital reserves are managed: Moody’s Foreign currency B2 Ba1 Negative Negative Group Company Local currency B2 Ba1 Negative Negative 2020 2019 2020 2019 Fitch Ratings Note Rm Rm Rm Rm Foreign currency – – Negative Negative Share capital 25 132 000 83 000 132 000 83 000 Local currency BB- BBB Negative Negative Accumulated profit 64 653 78 633 48 208 64 073 Net debt 45 415 190 430 820 420 395 435 771 Net debt is sourced globally to ensure the lowest cost of funding. Where funds are received and have not yet been spent, they are invested to provide the maximum possible return while ensuring minimal capital risk and matching the maturity term requirements of 611 843 592 453 600 603 582 844 the spending of the amount. Additionally, market-making activities are undertaken to reduce the cost of bonds. Facilities available – debt securities and borrowings1 61 373 58 732 61 373 58 732 Net debt is managed via the continuous monitoring of current and potential debt funding arrangements to achieve the most favourable terms possible. These terms and costs are heavily dependent on Eskom’s credit rating. Eskom is focusing on alleviating the rating 4.1.1 Share capital agencies’ concerns regarding the high leveraged financial profile, inadequate electricity price path and funding requirements of Eskom. An additional R49 billion of shares was issued during the year. To facilitate this, the authorised share capital was increased by 200 billion shares. Refer to note 45 for a reconciliation of the movements and analysis of the composition of net debt. 4.1.2 Accumulated profit Revenue Eskom analyses the Integrated Resource Plan (which forecasts the growth in long-term electricity demand) and evaluates the alternative options to meet and manage forecast demand. This information impacts the planning process and informs the revenue applications made to NERSA for tariff increases that will allow Eskom to be financially sustainable. Refer to the turnaround plan section in the directors’ report for more information on electricity tariffs. 1. Facilities in foreign currency are converted to rand at mid-spot rate at reporting date. Refer to note 6.2.1. 42 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 43 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 4. Capital management and going concern (continued) 5. Critical accounting estimates and assumptions 4.2 Going concern The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and The board made an assessment of the ability of the group to continue as a going concern in the foreseeable future. The board: liabilities within the next financial year are discussed below. • recognised that Eskom continues to face various challenges that resulted from mismanagement and corruption. Significant progress The methods and types of assumptions used in preparing the sensitivity analyses did not change compared to the previous period. has been made in cleaning up irregularities and improving processes, but it is taking time to identify all issues and take appropriate Sensitivity analyses are calculated based on a change in a single assumption keeping all other assumptions constant. In practice, this is corrective action and consequence management unlikely to occur and changes in some assumptions may be correlated. • noted that there is a need to secure funding of R30.8 billion in 2021 (64% of the funding for 2021 had been secured by September 2020) • considered the impact of the current economic climate and the sovereign’s credit ratings on Eskom’s ability to raise funds, including 5.1 Embedded derivatives that the rating agencies have expressed a more cautious outlook on Eskom Eskom entered into a number of agreements to supply electricity to electricity-intensive businesses where the revenue from these • reviewed the performance of the group for the period ended 31 March 2020 including the net loss after tax of R20 502 million and contracts is linked to commodity prices and foreign currency rates or foreign producer price indices that give rise to embedded the net current liabilities of R16 515 million derivatives. • noted the further deterioration of some of the group’s financial indicators • considered the impact of the cash flow forecast for the 24 months ending 31 March 2022 and the projected net loss pre-tax for The embedded derivatives consist of the following categories: 2021, estimated at R30 775 million per the latest projections. The cash flow forecast has been revised and updated with the latest • commodity and/or foreign currency expectations, including the expected impact of the COVID-19 pandemic on the operations of the Eskom group • United States producer price and foreign currency • considered that Eskom is in a debt reliant liquidity situation that resulted from low tariffs, stagnant and contracting sales volumes, increased costs and the capital programme to increase and replace generating and transmitting capacity Valuation • considered the impact of reduced generation performance and the continuous increase in overdue electricity receivables (including Valuation techniques are used to determine the fair value as there is no active market for embedded derivatives. The fair value is the impact of non-recoverability of long outstanding electricity receivables) determined by fair valuing the whole agreement and deducting from it the fair value of the host agreement. The valuation methods include the use of swaps (where the electricity tariff is swapped for a commodity in a foreign currency) and options (where the The challenges that the group is facing are being addressed by the following mitigation strategies and actions: electricity tariff or other revenue is based on an embedded derivative floor or cap on foreign consumer or producer price indices or • continuous engagement is taking place with the shareholder and National Treasury to ensure that the challenges that impact the interest rates and a closed form analytic solution is used to produce various cap and floor strike prices). group’s going-concern status are addressed satisfactorily within a reasonable timeframe • government continues to support Eskom to operate as a going concern given the strategic role that Eskom plays in pursuit of A forward electricity price curve is used to value the host agreement and the derivative agreement is valued by using market forecasts government objectives, with support of R56 billion in the 2021 financial year and R33 billion in 2022. The board is managing the of future commodity prices, foreign currency rand exchange rates, interest rate differentials, forecast sales volumes, and production conditions relating to the support that was allocated through the Special Appropriation Act in November 2019 price and liquidity. The forward curves used are based on Eskom’s financial years. • the special paper on Eskom released by the Department of Public Enterprises (DPE) on 20 October 2019 provides a degree of The forecast cash flow is determined and then discounted at the relevant interest rate curve. The net present value of the cash flows clarity on the role that Eskom will play in the unfolding future of South Africa’s electricity supply industry is then converted at the rand/foreign currency spot rate to the reporting currency. The fair value of the embedded derivative is • the board continues with the process of separating the business into the main line divisions (functional unbundling of Eskom) in adjusted, where applicable, to take into account the inherent uncertainty relating to the future cash flows of embedded derivatives accordance with the special paper. Plans are being developed to determine the process, timing and implications of Eskom’s legal such as liquidity, model risk and other economic factors. The important assumptions are obtained either with reference to the unbundling including legislative changes, legal structure and ownership as well as addressing Eskom’s debt challenge including the contractual provisions of the relevant agreements or from independent market sources where appropriate. The only significant impact of loan covenants unobservable input is the United States producer price index (PPI). • Progress on the court proceedings lodged by Eskom against NERSA include: – revenue decision for 2020 to 2022 (MYPD 4): The court ruled that the MYPD 4 determination is reviewed and set aside and that Valuation assumptions Eskom recover the R69 billion in a phased manner over a three-year period from 2022. NERSA has applied for leave to appeal Forecast sales volumes are based on the most likely future sales volumes based on past trends and taking into account future the phasing of the recovery. The appeal was granted on 6 October 2020 production plans in consultation with industry specific experts and key customer executives. – revenue decision for 2019: The court determined that the revenue decision was procedurally unfair, irrational, unreasonable and unlawful. Eskom submitted a supplementary application to NERSA to recover the costs had a lawful decision been made. The following valuation assumptions were used for the valuation of embedded derivatives and are regarded as the best estimates by NERSA has decided to undertake a public consultation process and it is envisaged that a final outcome will be determined by the board: NERSA on 26 February 2021 – RCA decision for 2015 to 2017 (MYPD 3): The judgement sets aside the RCA and accepts that Eskom put forward a case for 2020 Year ended 31 March relief in areas where NERSA did not implement its methodology and past precedent. NERSA is required to urgently reconsider Input Unit 2020 2021 2022 2023 2024 2025 its RCA balance decision. NERSA has decided to undertake a public consultation process and it is envisaged that a final outcome Aluminium price USD per ton 1 499 1 595 n/a1 n/a1 n/a1 n/a1 will be determined by NERSA on 26 February 2021 Volatility Year-on-year (ratio) 0.17 0.17 0.17 0.17 0.17 0.17 – RCA decision for 2018: Eskom submitted its founding affidavit on the review to NERSA on 9 April 2020. NERSA has indicated Rand interest rates Continuous actual/365 days (%) 6.40 6.09 5.20 5.63 6.01 6.80 that it would oppose this review application Dollar interest rates Annual actual/365 days (%) 0.33 0.92 0.48 0.46 0.48 0.51 • the group’s cost structures and capital programme are continuously being reviewed to extract cost savings and improve cash flows • the group’s generation capacity is being managed as a key focus area to ensure appropriate steps are being taken to manage the South African PPI Year-on-year (%) 3.00 5.26 6.15 6.37 4.41 7.31 performance challenges United States PPI Year-on-year (%) (1.97) (0.14) 1.66 2.05 1.85 1.44 • there is continued focus on implementing relevant strategies in an effort to recover overdue trade receivables through the Rand/USD Rand per USD 17.82 18.76 19.58 20.81 22.24 24.41 presidential task team Electricity price increase Year-on-year (%) 5.23 13.87 n/a1 n/a1 n/a1 n/a1 • the group will not embark on any further generation expansion activities in the foreseeable future after the completion of the Kusile power station project 2019 Year ended 31 March • funding options, with the support of National Treasury, are being pursued to implement the group’s borrowing programme Input Unit 2019 2020 2021 2022 2023 2024 • there is continued focus to address the shortcomings relating to the completeness of the irregular as well as fruitless and wasteful expenditure reporting process in terms of the PFMA (resulted in the qualified audit opinion in recent years) and the clean-up of Aluminium price USD per ton 1 886 1 969 2 048 n/a1 n/a1 n/a1 the related challenges in the commercial environment Volatility Year-on-year (ratio) 0.19 0.19 0.19 0.19 0.19 0.19 The board considered the risks relating to the group’s going-concern status and is satisfied that the risks will be satisfactorily Rand interest rates Continuous actual/365 days (%) 6.75 7.93 7.06 7.16 7.24 7.38 addressed with the mitigation strategies in place. The board continues to manage these strategies as a priority as it is important that Dollar interest rates Annual actual/365 days (%) 2.52 2.75 2.39 2.32 2.29 2.30 they materialise as envisaged. Tough and painful decisions will have to be made by Eskom, the shareholder and NERSA for the strategy South African PPI Year-on-year (%) 4.68 5.56 6.33 6.25 6.39 6.59 to succeed. The board therefore concluded that it is satisfied that the group has access to adequate resources and facilities, with United States PPI Year-on-year (%) (1.00) 1.86 1.80 2.28 1.26 1.89 shareholder support, to be able to continue its operations for the foreseeable future as a going concern. Rand/USD Rand per USD 14.48 15.25 15.89 16.74 17.65 18.67 Electricity price increase Year-on-year (%) 5.23 13.87 7.81 n/a1 n/a1 n/a1 1. The embedded derivative that is linked to commodity and/or foreign currency rates expires on 31 July 2020. Inputs beyond this date are therefore not relevant. 44 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 45 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 5. Critical accounting estimates and assumptions (continued) Valuation assumptions 5.1 Embedded derivatives (continued) The principal actuarial assumptions used were: Valuation (continued) Group and company Sensitivity analysis 2020 2019 The effect on profit/loss before tax of an increase or decrease in the assumptions is: % % Group and company Discount rate 13.5 11.0 Input Unit Change in 2020 2019 General price inflation 7.2 6.4 assumption increase decrease increase decrease Salary increases 8.7 7.9 Rm Rm Rm Rm Leave usage 8.0 4.0 Aluminium price USD per ton 1% 8 (8) 32 (32) Assumptions regarding future mortality have been based on published mortality tables and statistics derived from experience. For details Rand interest rates Continuous actual/365 days (%) 100 basis points 123 (141) 154 (171) regarding current longevities underlying the values of the occasional and service leave obligation at the reporting date refer to note 5.2. Dollar interest rates Annual actual/365 days (%) 100 basis points (101) 97 (117) 115 South African PPI Index 1% (50) 47 (129) 116 Sensitivity analysis Based on current experience, 8% (2019: 4%) of the leave is utilised. If the rate at which leave is taken is 16% (2019: 8%), then the United States PPI Index 1% 53 (51) 86 (90) liability will increase by R101 million (2019: R68 million). Rand/USD Rand per USD 1% 19 (17) 53 (48) The carrying amount of the occasional and service leave liability for the group is R1 302 million (2019: R1 348 million) and R1 212 million 5.2 Post-employment medical benefits (2019: R1 266 million) for the company. The group recognises a liability for post-employment medical benefits to qualifying retirees. The post-employment medical benefits 5.4 Power station-related environmental restoration and mine-related closure, pollution control and plan is unfunded. rehabilitation Valuation Valuation The estimated present value of the anticipated expenditure for both in-service and retired members is actuarially valued using the These provisions are determined by discounting the current estimated future decommissioning and rehabilitation costs. projected unit credit method. This method treats the accrued service liability separately from the current cost liability. The accrued service liability (on the valuation assumptions) is based on the completed service to the valuation date and the current cost liability is Valuation assumptions the cost of providing the benefit over the next year. The real discount rate used for these provisions was 4.8% (2019: 3.4%) for the group and company. Valuation assumptions Estimated payment dates The principal actuarial assumptions used were: The estimated payment dates of the costs are: Group Company Group and company Unit 2020 2019 2020 2019 2020 2019 Discount rate % 13.5 11.0 13.5 11.0 Nuclear plant 2026 – 2041 2026 – 2041 Medical aid inflation % 9.2 8.4 9.2 8.4 Coal and pumped storage plants 2024 – 2098 2024 – 2098 Male longevity years 14.42 14.42 14.42 14.42 Spent nuclear fuel 2021 – 2125 2020 – 2125 Female longevity years 20.82 20.82 20.82 20.82 Mine-related closure, pollution control and rehabilitation 2021 – 2077 2020 – 2077 Weighted average duration years 17.70 18.70 17.80 18.80 Sensitivity analysis The carrying amount of the power station-related environmental restoration and mine closure, pollution control and rehabilitation Sensitivity analysis provisions would be an estimated R4 536 million (2019: R6 610 million) lower had the real discount rate used in the calculation of the The effect of an increase or decrease in the assumptions is: provision increased by 1% and R5 845 million (2019: R8 857 million) higher had the real discount rate decreased by 1%. Group Company 5.5 Revenue from contracts with customers Change in 2020 2019 2020 2019 Customer connections assumption increase decrease increase decrease increase decrease increase decrease Connection charges are charged to customers in exchange for connection to Eskom’s electricity network. This connection enables Rm Rm Rm Rm Rm Rm Rm Rm Eskom to sell electricity to these customers over the estimated customer relationship period. The customer relationship period refers to the period the customer remains a purchaser of electricity from Eskom at a given point of supply. A period of 25 years was determined Effect on aggregate current service cost and after considering, inter alia, assumptions about the life-cycle of the distribution network used to supply electricity to customers. finance cost Collectability of amounts receivable Discount rate 1% (154) 189 (187) 235 (153) 187 (186) 233 Revenue may only be recognised if it is believed at the time of sale that the revenue is likely to be recovered from the customer. This Medical aid inflation 1% 356 (286) 426 (333) 350 (282) 420 (328) recoverability requirement is not considered to have been met in contracts with customers who have a poor payments history and Future mortality 1 year 48 (48) 54 (54) 47 (47) 53 (53) for which Eskom does not have the ability to manage the credit risk due to external facts and circumstances (for example socio- Effect on post- economic or political reasons). Eskom accounts for revenue from these contracts on a cash (rather than accrual) basis. employment medical benefits obligation Where the recoverability requirement is met, revenue is recognised on an accrual basis. The risk of non-collection is reflected in the Discount rate 1% (1 593) 1 962 (2 094) 2 646 (1 562) 1 925 (2 054) 2 597 expected credit loss (ECL) as an impairment expense rather than an adjustment to the revenue recognised. Medical aid inflation 1% 1 985 (1 630) 2 641 (2 119) 1 948 (1 598) 2 592 (2 079) 5.6 Expected credit loss on financial assets Future mortality 1 year 313 (317) 407 (409) 306 (310) 398 (400) The expected credit loss on financial assets is calculated using the following formula: Expected credit loss = Exposure x Probability of default x Loss given default 5.3 Occasional and service leave The group recognises a liability for occasional and service leave. The exposure is the amount outstanding less any collateral. The probability of default measures the likelihood that the amount outstanding will become more than 90 days past due. The loss given default measures the expected credit loss in the event that the Valuation outstanding amount becomes more than 90 days past due. Cash flows are discounted at the original effective interest rate over the An actuarial valuation is done on an annual basis for occasional and service leave. The accrued liability is determined by valuing all expected recovery period. Where the last cash flow relates to a recovery from SARS through a write off, the recovery period is future leave expected to be taken and payments to be made in respect of benefits up to the valuation date. The present value of the determined based on current information and past experience limited to a maximum recovery period of five years. benefits is determined by using the yield of long-dated corporate bonds (or government bonds where high quality corporate bonds are not available). The financial assets that are subject to IFRS 9 impairment are stratified using factors such as the balance type, credit risk rating, existence and type of collateral, remaining term to maturity, delinquency status and geographical location. 46 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 47 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 5. Critical accounting estimates and assumptions (continued) The group’s exposure to risk, its objectives, policies and processes for managing the risk and the methods used to measure it have 5.6 Expected credit loss on financial assets (continued) been consistently applied in the years presented. The following details are applicable to the models used for the various financial asset balances: The group has exposure to the following risks as a result of its financial instruments: Financial asset Model details • credit risk – the risk of financial loss to the group if a customer or other counterparty to a financial instrument fails to meet its contractual obligations International Expected credit losses were calculated using a benchmark approach that assigns a probability of default to a client • market risk – the risk that the fair value or future cash flows of financial instruments will fluctuate because of changes in foreign electricity based on the size and country in which the client operates. The benchmark levels are based on a study performed exchange rates, commodity prices, interest rates or equity prices receivables by the Bank of International Settlements and external agency benchmark data. Credit ratings were assigned to • liquidity risk – the risk that the group will not have sufficient financial resources to meet its obligations when they fall due, or will these categories which were then used to determine the probability of default. These probabilities of default are have to do so at excessive cost considered to represent a long-run average over an economic cycle. The through-the-cycle probability of default was used to estimate the expected credit loss due to the lack of data showing a  relationship between the 6.1 Credit risk probability of default and macro-economic factors across the various jurisdictions. It is expected that international The carrying amounts of financial assets represent the maximum credit exposure. The group’s maximum exposure as a result of electricity receivables will behave in an a-cyclical manner similar to local electricity receivables and therefore no financial guarantees issued is disclosed in note 46.1. forward-looking adjustments were made. The loss given default was aligned to the corporate loss given default based on the South African Reserve Bank (SARB) requirements 6.1.1 Trade and other receivables Local large and Expected credit losses were calculated using a provision matrix which utilises a transition approach. The Impairment analysis small power probability of default relevant to balances with similar characteristics was determined by analysing their most 2020 user electricity recent historical loss rates. Default probabilities are not thought to be sensitive to changes in South African Stage 2 Stage 3 Total receivables macro-economic factors such as gross domestic product (GDP) and unemployment rates due to their short- Gross Allowance Carrying Gross Allowance Carrying Gross Allowance Carrying (excluding term nature and therefore no forward-looking adjustment was made. The loss given default was calculated using for impair- value for value for impair- value municipalities) the long-run average recovery rates ment impairment ment Municipality Expected credit losses were calculated using a scorecard approach. Key financial ratios were calculated based on Rm Rm Rm Rm Rm Rm Rm Rm Rm electricity the latest signed municipality annual financial statements. Default probabilities are not believed to be sensitive to Trade receivables receivables changes in South African macro-economic factors such as GDP and unemployment rates due to their short-term nature and therefore no forward-looking adjustment was made. The loss given defaults are based on the long-run Group and average recovery rates company International 1 144 (13) 1 131 456 (205) 251 1 600 (218) 1 382 Intercompany The expected credit losses were calculated using a dual rating approach, which relies on key financial ratios to loans determine a through-the-cycle probability of default. The through-the-cycle probability of default was updated B- to BB+ 1 064 (9) 1 055 456 (205) 251 1 520 (214) 1 306 receivable with economic information to produce a point-in-time probability of default, which is consistent with the current Below B- 80 (4) 76 – – – 80 (4) 76 and future forecasted economic conditions. The loss given default was aligned to the corporate loss given default Local large power based on the South African Reserve Bank (SARB) requirements users – Intercompany The estimates of the probability of default were based on the external rating of Eskom mapped to an internal rating municipalities 8 072 (630) 7 442 4 641 (2 742) 1 899 12 713 (3 372) 9 341 trade and scale. These probabilities of default are considered to represent a long-run average over an economic cycle. BBB- to AAA 5 374 (5) 5 369 – – – 5 374 (5) 5 369 other Probability of default data for listed corporates shows that default rates are sensitive to changes in  South African receivables GDP and therefore a forward-looking adjustment factor was calculated using a macro-economic forecast. The B- to BB+ 1 126 (9) 1 117 2 (1) 1 1 128 (10) 1 118 probability of default was not adjusted as the forward-looking adjustment factor was not material. The loss given Below B- 1 572 (616) 956 4 639 (2 741) 1 898 6 211 (3 357) 2 854 default was aligned to the corporate loss given default based on the SARB requirements Local large power Other Expected credit losses were calculated using a benchmark approach that assigns a probability of default to a client based users – other 7 259 (45) 7 214 387 (310) 77 7 646 (355) 7 291 receivables, on the size and country in which the client operates. The benchmark levels are based on a study performed by the Bank 0 – 30 days 7 097 (20) 7 077 – – – 7 097 (20) 7 077 finance lease of International Settlements and external agency benchmark data. Credit ratings were assigned to these categories 30 – 90 days 162 (25) 137 – – – 162 (25) 137 receivables which were then used to determine the probability of default. These probabilities of default are considered to represent More than 90 days – – – 387 (310) 77 387 (310) 77 and loans a long-run average over an economic cycle. Probability of default data for listed corporates shows that default rates are receivable sensitive to changes in South African GDP and therefore a forward-looking adjustment factor was calculated using a Local small power macro-economic forecast. The probability of default was not adjusted as the forward-looking adjustment factor was users – Soweto 121 (36) 85 2 792 (2 206) 586 2 913 (2 242) 671 not material. The loss given default was aligned to the corporate loss given default based on the SARB requirements 0 – 30 days 32 (10) 22 – – – 32 (10) 22 Investments, The estimates of the probability of default were based on the external credit ratings of the counterparts using an 30 – 90 days 89 (26) 63 – – – 89 (26) 63 financial external rating scale mapped to an internal rating scale. These probabilities of default are considered to represent More than 90 days – – – 2 792 (2 206) 586 2 792 (2 206) 586 trading assets a long-run average over an economic cycle. Probability of default data for listed corporates shows that default and financial rates are sensitive to changes in South African GDP and therefore a forward-looking adjustment factor was Local small power guarantees calculated using a macro-economic forecast. The probability of default was not adjusted as the forward-looking users – other 2 029 (154) 1 875 1 057 (837) 220 3 086 (991) 2 095 adjustment factor was not material. The loss given default was aligned to the corporate loss given default based 0 – 30 days 1 717 (59) 1 658 – – – 1 717 (59) 1 658 on the SARB requirements 30 – 90 days 312 (95) 217 – – – 312 (95) 217 More than 90 days – – – 1 057 (837) 220 1 057 (837) 220 5.7 Pension benefits The facts and circumstances taken into account in determining the accounting treatment of the EPPF are disclosed in note 2.17 and 18 625 (878) 17 747 9 333 (6 300) 3 033 27 958 (7 178) 20 780 note 29.4. Trade and other receivables 6. Financial risk management Group 19 380 (907) 18 473 9 721 (6 605) 3 116 29 101 (7 512) 21 589 The group’s integrated risk and resilience management process enables management to assess and respond to all material risks that may affect the achievement of organisational objectives. Trade receivables 18 625 (878) 17 747 9 333 (6 300) 3 033 27 958 (7 178) 20 780 Other receivables The group maintains an integrated risk and resilience management framework comprising governance structures, management policies (B- to BB+) 755 (29) 726 388 (305) 83 1 143 (334) 809 and guidance standards with a focus on risk and resilience assessments, treatment plans, monitoring and reporting. The management of financial risks, as defined by IFRS 7 Financial instruments: disclosures, falls within these overarching structures, policies and standards. Company 21 141 (981) 20 160 9 690 (6 582) 3 108 30 831 (7 563) 23 268 Trade receivables 18 625 (878) 17 747 9 333 (6 300) 3 033 27 958 (7 178) 20 780 The management of financial risks is delegated by the board to the audit and risk committee. Day-to-day management of financial Other receivables risks is carried out in the area in which the risks arise. Risk assessments, treatment plans and monitoring measures are reported to (B- to BB+) 2 516 (103) 2 413 357 (282) 75 2 873 (385) 2 488 the audit and risk committee on a quarterly basis. 48 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 49 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 6. Financial risk management (continued) ECL percentages used 6.1 Credit risk (continued) 2020 2019 6.1.1 Trade and other receivables(continued) Stage 2 Stage 3 Total Stage 2 Stage 3 Total Impairment analysis (continued) % % % % % % 2019 Trade receivables Stage 2 Stage 3 Total Group and company Gross Allowance Carrying Gross Allowance Carrying Gross Allowance Carrying International 1 45 14 1 87 41 for impair- value for value for impair- value ment impairment ment B- to BB+ 1 45 14 1 72 23 Rm Rm Rm Rm Rm Rm Rm Rm Rm Below B- 5 – 5 2 100 81 Trade receivables Local large power users – municipalities 8 59 27 9 72 32 Group and company B- to BB+ 1 50 1 3 – 3 International 943 (9) 934 810 (702) 108 1 753 (711) 1 042 Below B- 39 59 54 37 72 63 B- to BB+ 843 (7) 836 388 (280) 108 1 231 (287) 944 Local large power users – other 1 80 5 – 79 4 Below B- 100 (2) 98 422 (422) – 522 (424) 98 30 – 90 days 15 – 15 12 – 12 Local large power More than 90 days – 80 80 – 79 79 users – municipalities 7 474 (654) 6 820 4 397 (3 161) 1 236 11 871 (3 815) 8 056 Local small power users – Soweto 30 79 77 33 88 88 BBB- to AAA 2 717 (1) 2 716 – – – 2 717 (1) 2 716 0 – 30 days 31 – 31 33 – 33 B- to BB+ 3 281 (111) 3 170 3 – 3 3 284 (111) 3 173 30 – 90 days 29 – 29 33 – 33 Below B- 1 476 (542) 934 4 394 (3 161) 1 233 5 870 (3 703) 2 167 More than 90 days – 79 79 – 88 88 Local large power Local small power users – other 8 79 32 5 81 28 users – other 7 185 (33) 7 152 294 (231) 63 7 479 (264) 7 215 0 – 30 days 3 – 3 2 – 2 0 – 30 days 6 998 (10) 6 988 – – – 6 998 (10) 6 988 30 – 90 days 30 – 30 22 – 22 30 – 90 days 187 (23) 164 – – – 187 (23) 164 More than 90 days – 79 79 – 81 81 More than 90 days – – – 294 (231) 63 294 (231) 63 Local small power 5 68 26 4 80 33 users – Soweto 12 (4) 8 4 256 (3 734) 522 4 268 (3 738) 530 0 – 30 days 3 (1) 2 – – – 3 (1) 2 Age analysis of trade receivables balances past due 30 – 90 days 9 (3) 6 – – – 9 (3) 6 2020 2019 More than 90 days – – – 4 256 (3 734) 522 4 256 (3 734) 522 Proportion of balance past due Proportion of balance past due Local small power <1 year >1 year >2 years >3 years <1 year >1 year >2 years >3 years users – other 1 877 (86) 1 791 853 (692) 161 2 730 (778) 1 952 % % % % % % % % 0 – 30 days 1 604 (25) 1 579 – – – 1 604 (25) 1 579 International 99 1 – – 71 14 15 – 30 – 90 days 273 (61) 212 – – – 273 (61) 212 Local large power users – More than 90 days – – – 853 (692) 161 853 (692) 161 municipalities 43 30 15 12 52 27 17 4 Local large power users – 17 491 (786) 16 705 10 610 (8 520) 2 090 28 101 (9 306) 18 795 other 78 7 5 10 70 15 7 8 Trade and other Local small power users – receivables Soweto 17 24 18 41 14 14 13 59 Group 18 772 (801) 17 971 10 788 (8 694) 2 094 29 560 (9 495) 20 065 Local small power users – other 43 24 17 16 45 29 14 12 Trade receivables 17 491 (786) 16 705 10 610 (8 520) 2 090 28 101 (9 306) 18 795 Other receivables (B- to BB+) 1 281 (15) 1 266 178 (174) 4 1 459 (189) 1 270 Company 20 015 (829) 19 186 10 764 (8 671) 2 093 30 779 (9 500) 21 279 Trade receivables 17 491 (786) 16 705 10 610 (8 520) 2 090 28 101 (9 306) 18 795 Other receivables (B- to BB+) 2 524 (43) 2 481 154 (151) 3 2 678 (194) 2 484 50 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 51 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 6. Financial risk management (continued) Additional qualitative information includes the following: 6.1 Credit risk (continued) Trade receivables 6.1.1 Trade and other receivables(continued) Credit risk attributable to trade receivables is assessed taking into account the following counterparty characteristics: Reconciliation of movements in allowance for impairment • geographic location of the customer (both internationally and within South Africa) 2020 2019 • size of demand (large or small power user) Stage 2 Stage 3 Total Total • receivable ageing profile Note Rm Rm Rm Rm • security held (deposits and guarantees) • payment history Group Balance at beginning of the year 800 8 695 9 495 9 575 A large number of residential customers are on a prepaid basis thereby eliminating credit risk relating to these customers. Eskom has Raised/(reversed) to the income statement 37 139 (1 082) (943) (138) well-established credit control measures for conventional customers that include: • increased security deposits and guarantees Reversed on payment of opening balance (651) (3 323) (3 974) (2 841) • conversion of customers to prepayment Remeasurement of opening balances held at year end 18 185 203 77 • early identification of and engagement with non-paying customer Raised on new balances 772 2 056 2 828 2 626 • negotiation of mutually acceptable payment arrangements • disconnection of supply Transfer of balances between stage 2 and 3 (32) 32 – – • use of debt collectors Finance income on stage 3 balances – 190 190 153 • taking legal measures such as issuing letters of demand and pursuing adverse listing of defaulting customers Writeoffs – (1 230) (1 230) (95) Progress on the collection process is reviewed on a regular basis and if it is evident that the amount will not be recovered, it is Balance at end of the year 20 907 6 605 7 512 9 495 recommended for writeoff in terms of the group policy. The process of recovery continues unless it is confirmed that there is no Company prospect of recovery or the costs of such action will exceed the benefits to be derived. Amounts written off are determined after Balance at beginning of the year 827 8 673 9 500 9 566 taking into account the value of security held. Raised/(reversed) to the income statement 37 186 (1 084) (898) (124) All billed customers must provide revenue security and this requirement can only be waived or deviated from based on sound business Reversed on payment of opening balance (681) (3 362) (4 043) (2 841) decisions. The granting of exemptions or deviations for a customer must be approved according to the revenue security policy. Remeasurement of opening balances held at year end 15 185 200 77 The main classes of trade receivables are: Raised on new balances 852 2 093 2 945 2 640 International customers Transfer of balances between stage 2 and 3 (32) 32 – – Electricity supply agreements are entered into with key international customers who comprise utility companies, governments of Finance income on stage 3 balances – 190 190 153 neighbouring countries and sundry large power users. Their payment terms are between 10 and 45 days. Impairment is assessed Writeoffs – (1 229) (1 229) (95) based on the country-specific risk. Balance at end of the year 20 981 6 582 7 563 9 500 International customers are not required to provide upfront security however if they default, new payment arrangements are negotiated, or supply is curtailed. Certain international customers may be required to pay upfront when their credit risk profile has changed. Security held for trade receivables (guarantees and deposits) The expected credit loss percentage for balances in stage 3 reduced year-on-year because of higher than previously expected Group and company payment levels from these counterparties during the year. 2020 2019 Local large power users Fair value of security held Security Rene- Fair value of security held Security Rene- Local large power users comprise South African redistributors (metropolitan and municipal) and commercial, industrial and mining Credit Not Total called gotiated Credit Not Total called gotiated customers usually with supplies above 100kVA. Payment terms are individually negotiated and are normally a maximum of 15 days, impaired credit upon balances impaired credit upon balances except for certain bulk redistributing municipalities which are a maximum of 30 days. recei- impaired recei- impaired vables recei- vables recei- Municipalities are required to provide security for all new supplies or where they request an upgrade of existing supply points. Where vables vables a large power user has an acceptable credit rating from an approved rating agency, the provision of security is amended based on the Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm type of risk as defined in the revenue security policy. International – 6 6 – – – 5 5 – – Certain municipalities continued to fall into arrears during the course of the financial year. Monitoring of these municipal payment Local large levels continues to receive ongoing management attention and remains a high priority focus area. power users 182 10 771 10 953 19 2 938 162 10 072 10 234 21 2 738 Interventions include: Municipalities 146 531 677 2 2 924 109 489 598 2 2 724 • entering into special payment arrangements Other 36 10 240 10 276 17 14 53 9 583 9 636 19 14 • following the Promotion of Administrative Justice Act processes to restrict, interrupt or terminate supply • restricting electricity supply if the set maximum demand levels are exceeded Local small power users 126 2 268 2 394 43 52 90 2 154 2 244 38 57 • interrupting electricity supply where no recovery plan can be presented and agreed upon between Eskom and the municipality • terminating supply where no other option is available Soweto 13 – 13 – 1 – 13 13 – 1 • issuing of summonses Other 113 2 268 2 381 43 51 90 2 141 2 231 38 56 • pursuing the attachment of assets 308 13 045 13 353 62 2 990 252 12 231 12 483 59 2 795 Eskom continues to work closely with the Department of Co-operative Governance and Traditional Affairs and other government departments as well as relevant stakeholders to resolve the systemic challenges which have given rise to municipal arrear debt. 52 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 53 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 6. Financial risk management (continued) 6.1.2 Derivatives held for risk management, financial trading assets and cash and cash equivalents 6.1 Credit risk (continued) Impairment analysis 6.1.1 Trade and other receivables(continued) 2020 2019 Trade receivables (continued) Not Subject to Total Not Subject to Total A large portion of the gross carrying amount owed by municipalities that was over 90 days past due at 31 March 2019 has still not subject to impairment subject to impairment been paid at 31 March 2020 due to the ongoing challenges with defaulting municipalities. impairment impairment The proportion of the balance made up of VAT recoverable from municipal customers accounted for on the cash basis (refer to Stage 1 Stage 1 note 2.19) has increased from 2019 to 2020. These balances carry a lower impairment percentage as they are recoverble from SARS Rm Rm Rm Rm Rm Rm through a writeoff. As a result the overall expected credit loss has reduced. Group Local small power users Derivatives held for risk management 57 636 – 57 636 22 662 – 22 662 Local small power users comprise local customers that have a supply of 100kVA or less in size. Payment terms for small power BBB– to AAA 19 125 – 19 125 22 662 – 22 662 customers is 30 days. B– to BB+ 38 511 – 38 511 – – – New customers are required to provide security equivalent to between one and three months’ consumption at the commencement Financial trading assets – 152 152 103 59 162 of the supply agreement. The level of security is reviewed if a customer defaults on their payment obligation or requires additional electricity supply capacity. In these instances, additional security is required to cover between one and three months of recent BBB– to AAA – – – 103 59 162 consumption before supply will commence. All new customers will preferably be on prepayment terms. B– to BB+ – 152 152 – – – Soweto receivables are an identified high credit risk area subject to specific credit risk management. The collection of revenue from Cash and cash equivalents – 22 990 22 990 – 2 031 2 031 customers in Soweto remains a challenge. The enhancement of credit control strategies and monitoring of payment levels in this area BBB– to AAA – 2 516 2 516 – 2 026 2 026 continue to receive management attention. The payment levels expressed as a percentage of billed revenue (excluding interest) for B– to BB+ – 20 472 20 472 – – – the year was 21% (2019: 13%). The residential revenue management strategy, which includes Soweto, continues to be implemented. The strategy entails implementation of split metering technology, conversion of meters to prepayment, and enforcing Eskom’s rights Unrated – 2 2 – 5 5 to restrict, interrupt or terminate supply to improve payment levels. Company A large portion of the gross carrying amount owed by Soweto that was over 90 days past due at 31 March 2019 has still not been Derivatives held for risk management 57 636 – 57 636 22 662 – 22 662 paid at 31 March 2020. The expected credit loss percentage for Soweto receivables reduced because of debt written off in 2020 and BBB– to AAA 19 125 – 19 125 22 662 – 22 662 more receivables related to VAT recoverable from Soweto customers accounted for on the cash basis (refer to note 2.19). As these B– to BB+ 38 511 – 38 511 – – – balances are ultimately recoverable from SARS through a writeoff, the impairment percentages are effectively lower. Financial trading assets – 152 152 103 59 162 The expected credit loss percentage for small power users (other than Soweto) in the stage 3 category reduced year-on-year due to an improvement in the current year in the recovery of balances that were over 90 days past due. BBB– to AAA – – – 103 59 162 B– to BB+ – 152 152 – – – Other receivables Other receivables comprise of various sundry receivables. There are no significant balances with specific repayment terms. No Cash and cash equivalents – 22 314 22 314 – 1 517 1 517 security is held in respect of these balances and no interest has been charged on overdue balances. BBB– to AAA – 2 516 2 516 – 1 512 1 512 There were no material changes to the expected credit loss percentages compared to the prior year, other than the impact of COVID-19. B– to BB+ – 19 796 19 796 – – – Unrated – 2 2 – 5 5 The gross values for financial trading assets and cash and cash equivalents approximate their carrying values as the impairments calculated are immaterial. The asset and liability committee (Alco) manages credit risk arising from the treasury department’s activities in the financial markets with the objective of maximising the rate of return on investments while not exceeding approved levels of credit risk exposure. It is chaired by the CFO and reports on a quarterly basis to Exco and the audit and risk committee. The committee’s terms of reference are maintained and approved by the CFO. They are aligned to the Exco credit risk governance standards and are supplemented by appropriate policies and procedures. Specific activities undertaken by the Alco include the following: • assessing the credit quality of counterparties and approving credit limits based on this assessment • monitoring the adherence to credit limits • approving methodologies for the management of counterparty exposure • ensuring that, where applicable, transactions with counterparties are supported by trading agreements • facilitating and managing the issuing of financial guarantees by the group To assist the Alco to discharge its mandate, the portfolio assessment section within the treasury function provides it with regular feedback on all treasury credit risk-related matters. The management of credit risk is governed by the following policies: • trading in financial instruments is only conducted with selected counterparties after credit limits have been authorised • only financial institutions and/or counterparties with an independent minimum rating of A1 are accepted for investments. If there are no independent ratings, the credit quality of the counterparty is assessed, taking into account its financial position, past experience and other factors • all exposures are based on mark-to-market values. Transaction or close-out netting takes place in accordance with the terms and conditions of the underlying trading agreements • minimum credit-rating requirements for financial institutions are maintained to assess the risk categories by rating class and to ascertain the probability of default inherent in each rating class • approved concentration risk parameters and collateral management procedures are in place. Concentration of credit risk is managed by setting credit risk limits at a counterparty-specific level. Concentration credit risk limits are used as second tier limits in relation to counterparty credit limits. Counterparty-specific exposure is monitored against a set concentration of credit risk limits in relation to the total credit risk exposure to all counterparties 54 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 55 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 6. Financial risk management (continued) Indicators of default in some counterparties in the current year caused the reclassification of outstanding balances to stage 3. 6.1 Credit risk (continued) There were no other material changes to the expected credit loss percentages compared to the prior year, other than the impact 6.1.2 Derivatives held for risk management, financial trading assets and cash and cash equivalents (continued) of COVID-19. Risk is measured by determining a default probability per counterparty using default probabilities assessed by rating agencies for The supply of electricity to customers may be in the form of either a standard or premium power supply. A standard power supply various types of credit ratings. These default probabilities are then applied to the market value of the investment placed to determine is the least life-cycle cost technically acceptable solution as defined in the South African Grid Code and the Distribution Network the capital at risk. Code whereas with a premium supply the customer’s connection requirement exceeds the specifications of a standard supply. This The treasury department’s policies and practices are designed to preserve the independence and integrity of decision-making and is achieved through the installation of premium supply equipment for which the customer is required to pay a connection charge. ensure credit risks are accurately assessed, properly approved, continually monitored and actively managed. Connection charges for premium supply contracts were repayable on a monthly basis over a maximum period of 25 years. This payment option is no longer available for new premium supplies as the connection charges are payable upfront. The following are monitored and reported on: The standard payment terms for trade receivables are also applied to the premium supply equipment connection charge customers. • aggregate credit risk exposure The credit risk exposure resulting from premium supply contracts is managed by monitoring payment levels of the customer’s trade • limits utilisation including any breaches receivable balance. There were no significant overdue or distressed balances relating to finance lease receivables in the current or • hold-limit exceptions prior financial year. Security in the form of bank guarantees is required from customers before the asset is constructed and is in place • risk profile changes for a maximum period of 14 years to cover irrecoverable costs in the event of early termination of the supply contract. In addition, • risk concentrations the premium supply equipment serves as security for the outstanding finance lease receivable balance. Where the credit risk of a particular counterparty has increased, a reassessment of the valuation of the instrument is made. In making this assessment, the counterparty is assessed for the following factors: 6.1.5 Loans receivable Impairment analysis • significance of financial difficulty • probability of bankruptcy 2020 2019 • probability of breach of contract Stage 1 Stage 1 Gross Allowance Carrying Gross Allowance Carrying 6.1.3 Insurance investments for value for value Impairment analysis impairment impairment Rm Rm Rm Rm Rm Rm Group Not Subject to impairment Total Group subject to Stage 1 B– to BB+ 56 (2) 54 67 (1) 66 impairment Gross Gross Allowance Carrying Gross Allowance Carrying Company for value for value B– to BB+ 5 948 (11) 5 937 6 111 (40) 6 071 impairment impairment Rm Rm Rm Rm Rm Rm Rm The allowance for impairment in the company changed in the current year as the approach to determine the internally generated 2020 credit risk rating for the loan to Eskom Finance Company (EFC) was revised. The improved credit score resulted in a reduction in B– to BB+ – 10 694 (12) 10 682 10 694 (12) 10 682 the expected credit loss percentage. There were no other material changes to the expected credit loss percentages compared to the Not subject to credit risk 1 299 – – – 1 299 – 1 299 prior year, other than the impact of COVID-19. 1 299 10 694 (12) 10 682 11 993 (12) 11 981 The Alco manages credit risk arising from loans receivable from subsidiaries with the objective of reducing costs on the group’s consolidated liability. 2019 BBB– to AAA – 7 951 (5) 7 946 7 951 (5) 7 946 The credit risk exposure to EFC is capped based on limits set by Alco. Credit risk exposure to home loans granted to employees by Not subject to credit risk 1 617 – – – 1 617 – 1 617 EFC is mitigated by: • having recourse to the value of the underlying properties through mortgage contracts 1 617 7 951 (5) 7 946 9 568 (5) 9 563 • having access to garnish payroll deductions from employees There were no material changes to the expected credit loss percentages compared to the prior year, other than the impact of 6.2 Market risk COVID-19. A significant part of market risk encountered by the group arises from financial instruments that are managed centrally within the group’s treasury department of the group or from contracts containing embedded derivatives. Escap invests in listed shares and negotiable certificates of deposit (NCD) to satisfy its capital adequacy requirements in line with insurance regulations in South Africa. The listed shares do not expose the group to credit risk. Investments in NCDs are made with The objective of the group’s market risk management framework is to protect and enhance the statement of financial position and banks with an investment-grade credit rating. profit or loss by managing and controlling market risk exposures and to optimise the funding of business operations and facilitate capital expansion. 6.1.4 Finance lease receivables Impairment analysis The basis for calculating risk and sensitivity measures are consistent with the prior year. Sensitivity analyses assume that only the input being analysed changes with all other variables remaining constant. Group and company Stage 1 Stage 3 Total Financial instruments mainly managed by the treasury department Gross Allowance Carrying Gross Allowance Carrying Gross Allowance Carrying The treasury department is responsible for managing market risk within the risk management framework approved by Exco and the for value for value for value board. The overall authority for the management of market risks within the treasury department is vested in the Alco. Measurement impairment impairment impairment and reporting occurs on a daily and/or monthly basis and is performed by an independent section within the treasury department. Rm Rm Rm Rm Rm Rm Rm Rm Rm Financial derivatives are used to manage market risk. 2020 Financial instruments managed by various divisions and subsidiaries B– to BB+ 376 (6) 370 3 (1) 2 379 (7) 372 Market risk arises mainly from changes in foreign exchange rates and, to a limited extent, commodity and equity prices. The divisions and subsidiaries are responsible for identifying the exposure arising from these risks. They liaise with the centralised treasury 2019 department to hedge (economic and cash flow hedges) these exposures appropriately on their behalf. B– to BB+ 408 (3) 405 – – – 408 (3) 405 56 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 57 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 6. Financial risk management (continued) 2019 6.2 Market risk (continued) EUR USD GBP JPY SEK CHF CAD NOK Financial instruments managed by various divisions and subsidiaries (continued) Embedded derivatives Foreign currency exposure Eskom entered into a number of agreements to supply electricity to electricity-intensive industries where the revenue from these (notional amounts in millions per currency) contracts is based on commodity prices and foreign currency rates or foreign production price indices. This gives rise to embedded Group derivatives that require separation as a result of the different characteristics of the embedded derivative and the host contract. Liabilities The remaining contractual periods are between four months and nine years. On 31 July 2020 the Hillside Aluminium contract was Debt securities and borrowings (2 444) (9 669) – (4 972) – – – – extended by six months to 31 January 2021. Trade and other payables (36) (7) (1) – (20) – – (2) The valuation methods and inputs are discussed in the accounting policies (refer to note 2.10.4) and the valuation assumptions and Gross statement of financial position exposure (2 480) (9 676) (1) (4 972) (20) – – (2) sensitivities are disclosed under critical accounting estimates and assumptions (refer to note 5.1). Risks arising from these contracts Estimated forecast purchases1 (522) (104) (16) (285) (118) – (1) (4) are discussed under the relevant risk areas as follows: Gross exposure (3 002) (9 780) (17) (5 257) (138) – (1) (6) • currency risk (refer to note 6.2.1) Derivatives held for risk management 2 3 001 9 778 17 5 257 136 – 1 5 • commodity risk (refer to note 6.2.2) • interest rate risk (refer to note 6.2.3) Net exposure (1) (2) – – (2) – – (1) • other price risk (refer to note 6.2.5) Company Electricity contracts that contain embedded derivatives are considered for economic hedging. Hedging in respect of commodity Liabilities risk and foreign currency exposure resulting from these embedded derivatives takes place on a short-term basis in terms of the Debt securities and borrowings (2 444) (9 669) – (4 972) – – – – SARB regulations. Trade and other payables (36) (7) (1) – (20) – – (2) 6.2.1 Currency risk Gross statement of financial position exposure (2 480) (9 676) (1) (4 972) (20) – – (2) Currency risk arises primarily from purchasing imported goods and services directly from overseas or indirectly via local suppliers, Estimated forecast purchases1 (520) (104) (15) (285) (118) – (1) (4) foreign sales and foreign borrowings. The group is exposed to foreign exchange risk arising from future commercial transactions and recognised assets and liabilities that are denominated in a currency other than the functional currency of the group. All transactions Gross exposure (3 000) (9 780) (16) (5 257) (138) – (1) (6) in excess of R150 000 are hedged (ie economic or cash flow hedges). Currency exposure is identified by the business and hedged and Derivatives held for risk management 2 2 999 9 778 16 5 257 136 – 1 5 managed by the central treasury department. Hedging instruments consist of cross-currency swaps and forward exchange contracts. Net exposure (1) (2) – – (2) – – (1) Most of the forward exchange contracts have a maturity of less than one year from the reporting date but are rolled over at maturity when necessary. Hedging instruments are entered into once the exposure is firm and ascertainable. Mid-spot rate for one unit of the currency to the rand 16.26 14.48 18.93 0.13 1.56 14.55 10.83 1.68 2020 EUR USD GBP JPY SEK CHF CAD NOK Sensitivity analysis Foreign currency exposure (notional amounts in millions per currency) Group and company Group 2020 2019 Assets 1% 1% 1% 1% increase decrease increase decrease Cash and cash equivalents – 200 – – – – – – Rm Rm Rm Rm Liabilities Profit/(loss) before tax Debt securities and borrowings (2 198) (9 877) – (2 483) – – – – Rand/EUR exposure 48 (48) 46 (46) Trade and other payables (36) (4) (1) – (18) – – (1) Rand/USD exposure 32 (30) 47 (42) Gross statement of financial position exposure (2 234) (9 681) (1) (2 483) (18) – – (1) Rand/other currency (4) 4 13 (13) Estimated forecast purchases1 (450) (225) (7) (169) (86) (1) (2) (1) Equity Rand/EUR exposure 67 (67) 66 (66) Gross exposure (2 684) (9 906) (8) (2 652) (104) (1) (2) (2) Rand/USD exposure 302 (302) 166 (166) Derivatives held for risk management 2 2 684 9 904 8 2 652 104 1 2 – Rand/other currency 2 (2) 2 (2) Net exposure – (2) – – – – – (2) Company 6.2.2 Commodity risk Assets The group is exposed to commodity risk where commodities are either used directly (eg coal or liquid fuels) or indirectly as Cash and cash equivalents – 200 – – – – – – a component of plant, equipment or inventory (eg aluminium, copper or steel). The revenue from certain negotiated pricing arrangements is linked to commodity prices. Liabilities Debt securities and borrowings (2 198) (9 877) – (2 483) – – – – The exposures are hedged economically by means of futures and/or options. Economic hedging is applied where it is practical (a Trade and other payables (36) (4) (1) – (18) – – (1) relevant hedging instrument exists) based on the optimal economic solution and in compliance with the SARB requirements. Gross statement of financial position exposure (2 234) (9 681) (1) (2 483) (18) – – (1) The periods of the hedging instrument and that of the hedged item are not the same because of SARB regulations that limit the Estimated forecast purchases1 (450) (225) (7) (169) (86) (1) (2) (1) number of years which can be hedged. Gross exposure (2 684) (9 906) (8) (2 652) (104) (1) (2) (2) The underlying exposure to commodity price risk could result in embedded derivatives. Where the embedded derivatives are closely Derivatives held for risk management 2 2 683 9 904 8 2 652 104 1 2 – related to the host contracts, the embedded derivatives are not accounted for separately. Where the embedded derivatives are not closely related to the host contracts, the contracts have been valued and accounted for separately. Net exposure (1) (2) – – – – – (2) The negotiated pricing arrangements gave rise to commodity-linked (aluminium) embedded derivatives. Refer to note 5.1. Mid-spot rate for one unit of the currency to the rand 19.55 17.82 22.17 0.16 1.78 18.49 12.54 1.70 1. Represents future purchases contracted for. 2. Includes notional value and accrued interest. 58 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 59 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 6. Financial risk management (continued) 6.2.5 Other price risk 6.2 Market risk (continued) Inflation price risk arises from embedded derivatives as discussed under note 5.1. The risk arises from movements in South African 6.2.3 Interest rate risk and United States PPI. Refer to note 27 for the group’s quantitative exposure to other price risk. Interest rate risk is the risk that the group’s financial position may be adversely affected as a result of changes in interest rate levels, Sensitivity analysis yield curves and spreads. Group and company Debt securities and borrowings and derivatives held for risk management at variable rates expose the group to cash flow risk and 2020 2019 those at fixed rates expose the group to fair value risk. The group’s policy is to restrict the maximum effective portion of the external 1% 1% 1% 1% debt (excluding the trading portfolio which is managed within the constraints of the risk management framework) exposed to an increase decrease increase decrease interest rate reset within the next 12-month period to 40%. Rm Rm Rm Rm For the group’s quantitative exposure to interest rate risk refer to note 26. Profit/(loss) before tax South African PPI (50) 47 (129) 116 Sensitivity analysis United States PPI 53 (51) 86 (90) The group analyses its interest rate exposure on a dynamic basis by conducting a sensitivity analysis. This involves determining the impact on profit or loss of defined interest rate shifts. The same interest rate shift is used for each simulation for all currencies. 6.3 Liquidity risk The sensitivity analysis for interest rate risk excludes finance costs capitalised in terms of the group’s accounting policy. Liquidity risk can arise from mismatches in the timing of cash flows from revenue with capital and operational outflows. Funding risk arises when the necessary liquidity to fund illiquid asset positions, such as building new electricity capacity, cannot be obtained at the The simulation is performed on a monthly basis to verify that the maximum loss potential is within the limit set by management. The expected terms and when required. results of the simulation are included in the table below: The objective of the group’s liquidity and funding management is to ensure that all foreseeable operational, capital expansion and loan Group Company commitment expenditure can be met under both normal and stressed conditions. The group has adopted an overall statement of 2020 2019 2020 2019 financial position approach, which consolidates all sources and uses of liquidity, while aiming to maintain a balance between liquidity, +100 basis -100 basis +100 basis -100 basis +100 basis -100 basis +100 basis -100 basis profitability and interest rate considerations. points points points points points points points points The management of group liquidity and funding risk is centralised in the treasury department in accordance with practices and limits Rm Rm Rm Rm Rm Rm Rm Rm set by the Exco and the board. The group’s liquidity and funding management process includes: Profit/(loss) before tax • projecting cash flows and considering the cash required by the group and optimising the short-term liquidity as well as the long- Rand interest rates 283 (311) 295 (334) 262 (290) 275 (313) term funding EUR interest rates (137) 80 (108) 63 (137) 80 (108) 63 • monitoring financial position liquidity ratios USD interest rates (468) 472 (404) 421 (468) 472 (404) 421 • maintaining a diverse range of funding sources with adequate back-up facilities • managing the concentration and profile of debt maturities Other currency interest rates (1) 1 (1) 1 (1) 1 (1) 1 • actively managing the funding risk by evaluating optimal entry points into the various markets per the official borrowing programme Equity • maintaining liquidity and funding contingency plans Rand interest rates 4 622 (4 868) 4 629 (4 302) 4 622 (4 868) 4 629 (4 302) EUR interest rates (1 103) 1 184 (1 138) 1 226 (1 103) 1 184 (1 138) 1 226 Eskom has an established corporate governance structure and process for managing the risks regarding guarantees and contingent USD interest rates (6 475) 6 960 (4 976) 4 715 (6 475) 6 960 (4 976) 4 715 liabilities. All significant guarantees issued by Eskom are approved by the board and are managed on an ongoing basis by the treasury Other currency interest rates (4) 4 (7) 7 (4) 4 (7) 7 department and by the Exco and audit and risk committee of the board. Refer to note 46. The guarantees are administratively managed by the treasury department. Updated guarantee schedules are compiled every month, Fixed and floating rate debt taking cognisance of any changed risk factors and are submitted to each of the committees for consideration and action. Risk factors and assumptions affecting probability calculations are reassessed twice a year and presented to the above committees. Group and company 2020 2019 Eskom’s guarantees are diverse and unlinked, such that a trigger event for any one guarantee is unlikely to precipitate a trigger event fixed floating fixed floating in respect of other guarantees. % % % % Given that there would be forewarning of payments required in terms of the other guarantees, and considering the amounts of the guarantees, it is expected that Eskom will be able to raise the required liquidity to effect any required payments. Proportion of fixed versus floating rate debt at 31 March 72 28 73 27 6.3.1 Key liquidity indicators 6.2.4 Equity price risk Group Company Equity price risk arises from investments listed on the JSE. Changes in the fair value of equity securities held by the group will fluctuate Unit 2020 2019 2020 2019 because of changes in market prices caused by factors specific to the individual equity issuer or factors affecting all similar equity securities traded on the market. Weighted average term to maturity of debt securities and borrowings years 6.64 6.85 6.64 6.85 Working capital ratio 1.09 1.00 1.09 0.99 The investment policy is approved by the Escap board and monitored by the Escap audit and risk committees. Exposure to market Cash interest cover ratio 0.94 0.94 0.90 0.91 risk is limited through diversification and by applying strict investment criteria. Net debt service cover ratio 0.52 0.47 0.49 0.46 Carrying values of investments per sector Liquid assets Rm 22 990 2 031 22 314 1 517 Group Management has set a minimum weighted average term to maturity for debt securities and borrowings of five years. The term limits are 2020 2019 independently monitored and reported to the Alco on a monthly basis and to Exco and the audit and risk committee on a quarterly basis. Rm portfolio Rm portfolio % % The cash interest cover and debt service cover ratios measure the ability to fund debt costs via cash from operations. Management has targeted 3.5 for cash interest cover and 1.5 for net debt service cover. Banks, financial services and insurance 337 26 421 26 Basic materials and resources 198 15 293 18 Liquid assets are investments identified as having the potential to be quickly converted into cash. These consist of cash and Consumer goods and services 645 50 734 45 cash equivalents. Other 119 9 169 11 6.3.2 Primary sources of funding and unused facilities 1 299 100 1 617 100 The primary sources to meet Eskom’s liquidity requirements are cash generated from operations, cash inflows from maturing financial assets purchased, funds committed by government, signed and committed export credit agencies and development funding institution A 1% increase or decrease in share prices would have increased/decreased profit or loss before tax by R13 million (2019: R16 million). facilities, as well as local and foreign debt issued in the market. To supplement these liquidity sources under stress conditions, There will be no impact on equity. undrawn loans, commercial paper facilities and unutilised government guarantees are in place as indicated in the table. All figures are quoted in notional amounts. 60 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 61 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 6. Financial risk management (continued) 6.3.3 Contractual cash flows 6.3 Liquidity risk (continued) The table on the following pages indicate the contractual undiscounted cash flows of the group’s financial assets and liabilities on the 6.3.2 Primary sources of funding and unused facilities (continued) basis of their earliest possible contractual maturity. ZAR EUR USD The cash flows for derivatives held for risk management are presented on a net basis in line with the classification in the statement of 2020 2019 2020 2019 2020 2019 financial position. Contractual cash flows are a function of forward exchange rates and forward interest rates and are a point-in-time m m m m m m calculation that are impacted by market conditions at that time. Group and company The contractual cash flows of financial trading assets and liabilities are disclosed based on their contractual maturities however, as Facilities available some of these instruments are held-for-trading, they may be sold or settled prior to contractual maturity. Export credit agencies – – 338 353 1 9 The tables contain only cash flows relating to financial instruments and financial guarantees and don’t include future cash flows Crédit Agricole Corporate and Investment Bank – Coface – – 44 44 – – expected from the normal course of business and related commodity-linked pricing agreements. Banque Nationale de Paris Paribas – Coface – – 201 201 – – 2020 Kreditanstalt für Wiederaufbau – Hermes – – 93 108 – – Cash flows Export-Import Bank of the United States – – – – 1 9 Nominal 0-3 4-12 1-5 >5 Development financing institutions 4 327 129 76 112 2 746 3 516 inflow/ months months years years outflow World Bank – – – – 667 693 Rm Rm Rm Rm Rm African Development Bank 2 886 129 76 112 25 – Clean technology fund – African Development Bank – – – – 58 58 Group Clean technology fund – World Bank – – – – 215 215 Financial assets New Development Bank – – – – 169 – Loans receivable 56 7 21 28 – Kreditanstalt für Wiederaufbau – – – – 100 100 Derivatives held for risk management 100 716 4 344 19 987 21 582 54 803 Agence Française de Développement 1 441 – – – – – Finance lease receivables 593 20 58 271 244 China Development Bank – – – – 1 512 2 450 Trade and other receivables 63 519 62 050 1 469 – – Insurance investments 11 993 3 928 8 065 – – 4 327 129 414 465 2 747 3 525 Financial trading assets 152 152 – – – Funds received during the year Cash and cash equivalents 22 990 22 990 – – – Export credit agencies – – 15 34 8 8 200 019 93 491 29 600 21 881 55 047 Kreditanstalt für Wiederaufbau – Hermes – – 15 33 – – Financial liabilities Deutsche Bank – Hermes – – – 1 – – Debt securities and borrowings 885 309 8 860 93 491 267 531 515 427 Export-Import Bank of the United States – – – – 8 8 Derivatives held for risk management 3 709 113 4 727 (115) (1 016) Development financing institutions 129 714 36 106 975 670 Lease liabilities 18 639 459 1 375 7 002 9 803 Trade and other payables 38 704 30 249 8 036 419 – World Bank1 – – – – 26 20 Financial trading liabilities 213 213 – – – African Development Bank 2 129 – 36 31 – – European Investment Bank – – – 75 – – 946 574 39 894 107 629 274 837 524 214 New Development Bank – – – – 11 – Agence Française de Développement3 Company – 714 – – – – China Development Bank4 – – – – 938 650 Financial assets Loans receivable 6 067 2 514 3 553 – – 129 714 51 140 983 678 Derivatives held for risk management 100 716 4 344 19 987 21 582 54 803 Finance lease receivables 593 20 58 271 244 Government guarantees available Trade and other receivables 65 023 63 713 1 310 – – Financial trading assets 152 152 – – – 2020 2019 Cash and cash equivalents 22 314 22 314 – – – Domestic General Total Domestic General Total multi-term multi-term 194 865 93 057 24 908 21 853 55 047 note note programme programme Financial liabilities Rm Rm Rm Rm Rm Rm Debt securities and borrowings 889 956 11 067 95 975 267 487 515 427 Group and company Derivatives held for risk management 3 712 114 4 729 (115) (1 016) Opening balance 9 694 31 685 41 379 11 916 77 474 89 390 Lease liabilities 18 635 458 1 375 6 999 9 803 Trade and other payables 40 426 33 610 6 397 419 – Guarantee granted 135 000 215 000 350 000 150 000 200 000 350 000 Financial trading liabilities 213 213 – – – Accumulated amounts used (125 306) (183 315) (308 621) (138 084) (122 526) (260 610) Financial guarantees 4 4 – – – Guarantee swap 10 000 (10 000) – (15 000) 15 000 – 952 946 45 466 108 476 274 790 524 214 Facilities raised (16 758) (7 802) (24 560) (10 754) (62 114) (72 868) Facilities withdrawn – 2 164 2 164 – 1 325 1 325 Facilities repaid – 6 813 6 813 23 532 – 23 532 Closing balance 2 936 22 860 25 796 9 694 31 685 41 379 Guarantee granted 145 000 205 000 350 000 135 000 215 000 350 000 Accumulated amounts used (142 064) (182 140) (324 204) (125 306) (183 315) (308 621) 1. All funds received were reimbursements on payments made by Eskom to various suppliers for goods and services related to the Medupi power station and Majuba rail projects. 2. All funds received were reimbursements on payments made by Eskom to various suppliers for goods and services supplied for the Medupi boilers and turbines. 3. Funds received were for various Distribution projects. 4. Funds received were for the Medupi and Kusile power stations. 62 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 63 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 6. Financial risk management (continued) 7. Accounting classification and fair value 6.3 Liquidity risk (continued) 7.1 Accounting classification 6.3.3 Contractual cash flows (continued) 2020 2019 2019 Fair value Amortised Other Total Fair value Amortised Other Total Cash flows through cost assets through cost assets Nominal 0-3 4-12 1-5 >5 profit or and profit or and inflow/ months months years years loss liabilities loss liabilities outflow Note Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm Group Group Financial assets Financial assets Loans receivable 16 – 54 – 54 – 66 – 66 Loans receivable 67 7 19 41 – Derivatives held for risk Derivatives held for risk management 37 730 598 1 511 13 415 22 206 management 17 8 851 – 48 785 57 636 1 378 – 21 284 22 662 Finance lease receivables 672 20 59 286 307 Foreign exchange contracts 8 508 – 847 9 355 1 281 – 20 1 301 Trade and other receivables 55 777 54 313 1 464 – – Cross-currency swaps 241 – 47 938 48 179 49 – 21 264 21 313 Insurance investments 9 567 4 012 5 555 – – Commodity forwards 2 – – 2 – – – – Financial trading assets 227 63 5 38 121 Credit default swaps 9 – – 9 9 – – 9 Cash and cash equivalents 2 031 2 031 – – – Inflation linked swaps 91 – – 91 39 – – 39 106 071 61 044 8 613 13 780 22 634 Finance lease receivables 18 – – 372 372 – – 405 405 Financial liabilities Trade and other receivables 20 – 21 589 – 21 589 – 20 065 – 20 065 Debt securities and borrowings 811 822 11 149 70 455 244 780 485 438 Insurance investments 15 1 299 10 682 – 11 981 1 617 7 946 – 9 563 Derivatives held for risk management 9 173 590 5 613 6 887 (3 917) Negotiable certificates of Lease liabiilities 20 118 430 1 299 6 876 11 513 deposit – 10 682 – 10 682 – 7 946 – 7 946 Trade and other payables 36 108 27 366 7 687 1 055 – Listed shares 1 299 – – 1 299 1 617 – – 1 617 Financial trading liabilities 272 182 7 83 – Financial trading assets 15 – 152 – 152 103 59 – 162 877 493 39 717 85 061 259 681 493 034 Repurchase agreements – 152 – 152 – 59 – 59 Company Government bonds – – – – 103 – – 103 Financial assets Loans receivable 6 244 2 729 3 515 – – Cash and cash equivalents 22 – 22 990 – 22 990 – 2 031 – 2 031 Derivatives held for risk management 37 730 598 1 511 13 415 22 206 Bank balances – 9 897 – 9 897 – 2 018 – 2 018 Finance lease receivables 672 20 59 286 307 Unsettled deals – 25 – 25 – 13 – 13 Trade and other receivables 56 990 55 769 1 221 – – Fixed deposits – 13 068 – 13 068 – – – – Financial trading assets 227 63 5 38 121 Cash and cash equivalents 1 517 1 517 – – – 10 150 55 467 49 157 114 774 3 098 30 167 21 689 54 954 103 380 60 696 6 311 13 739 22 634 Financial liabilities Debt securities and borrowings 26 – 483 682 – 483 682 – 440 610 – 440 610 Financial liabilities Debt securities and borrowings 816 360 13 972 72 216 244 734 485 438 Eskom bonds – 157 037 – 157 037 – 152 283 – 152 283 Derivatives held for risk management 9 173 590 5 613 6 887 (3 917) Commercial paper – 5 444 – 5 444 – 1 105 – 1 105 Lease liabilities 20 118 430 1 299 6 876 11 513 Eurorand zero coupon bonds – 4 964 – 4 964 – 4 399 – 4 399 Trade and other payables 37 586 30 552 5 979 1 055 – Foreign bonds – 98 563 – 98 563 – 79 963 – 79 963 Financial trading liabilities 272 182 7 83 – Development financing Financial guarantees 3 3 – – – institutions – 154 489 – 154 489 – 135 661 – 135 661 Export credit facilities – 32 746 – 32 746 – 31 782 – 31 782 883 512 45 729 85 114 259 635 493 034 Floating rate notes – 4 046 – 4 046 – 4 047 – 4 047 Other loans – 26 393 – 26 393 – 31 370 – 31 370 Embedded derivatives 27 – – 1 136 1 136 – – 3 434 3 434 Derivatives held for risk management 17 868 – 2 073 2 941 1 139 – 5 901 7 040 Foreign exchange contracts 58 – 29 87 471 – 88 559 Cross-currency swaps 4 – 2 044 2 048 322 – 5 813 6 135 Commodity forwards 6 – – 6 – – – – Credit default swaps 710 – – 710 305 – – 305 Inflation linked swaps 90 – – 90 41 – – 41 Lease liabilities 31 – – 9 350 9 350 – – 9 462 9 462 Trade and other payables 32 – 38 701 – 38 701 – 36 132 – 36 132 Financial trading liabilities 15 214 – – 214 238 – – 238 Short-sold government bonds – – – – 57 – – 57 Repurchase agreements 214 – – 214 181 – – 181 1 082 522 383 12 559 536 024 1 377 476 742 18 797 496 916 64 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 65 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 7. Accounting classification and fair value (continued) 7.2 Fair value 7.1 Accounting classification (continued) Valuation processes The group has a control framework in place for the measurement of fair values. It includes a valuation team that ultimately reports 2020 2019 to the CFO and has overall responsibility for all significant fair value measurements. Fair value Amortised Other Total Fair value Amortised Other Total through cost assets and through cost assets and The valuation team regularly reviews significant unobservable inputs and valuation adjustments. Where third-party information, such profit or liabilities profit or liabilities as broker quotes or pricing services, is used to measure fair value, this information is assessed as to whether it provides adequate loss loss support for the accounting treatment applied including the level of the fair value hierarchy assigned to it. Note Rm Rm Rm Rm Rm Rm Rm Rm Principal markets Company The group is involved in various principal markets because of the unique funding activities undertaken where the fair value is Financial assets determined by each participant in the different principal markets. The principal markets include: Loans receivable 16 – 5 937 – 5 937 – 6 071 – 6 071 • capital and money markets Derivatives held for risk • development financing institutions management 17 8 851 – 48 785 57 636 1 378 – 21 284 22 662 • export credit agencies Foreign exchange contracts 8 508 – 847 9 355 1 281 – 20 1 301 Fair value hierarchy Cross-currency swaps 241 – 47 938 48 179 49 – 21 264 21 313 Fair value measurements are categorised into the different levels in the fair value hierarchy based on the inputs to the valuation Commodity forwards 2 – – 2 – – – – techniques used. There were no changes in the valuation techniques applied. The hierarchy levels are defined as follows: Credit default swaps 9 – – 9 9 – – 9 Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. Inflation linked swaps 91 – – 91 39 – – 39 Inputs other than quoted prices included within level 1 that are observable, either directly (ie as prices) or indirectly Level 2:  Finance lease receivables 18 – – 372 372 – – 405 405 (ie derived from prices). Trade and other receivables 20 – 23 268 – 23 268 – 21 279 – 21 279 Level 3: Unobservable inputs. Financial trading assets 15 – 152 – 152 103 59 – 162 There were no transfers between level 1, 2 or 3 of the fair value hierarchy during the year. The group recognises transfers between Repurchase agreements – 152 – 152 – 59 – 59 levels of the fair value hierarchy at the end of the reporting period during which the transfers have occurred. The group’s policy for Government bonds – – – – 103 – – 103 determining when transfers between levels in the hierarchy have occurred includes monitoring of the following factors: Cash and cash equivalents 22 – 22 314 – 22 314 – 1 517 – 1 517 • changes in market and trading activity (eg significant increases/decreases in activity) • changes in inputs used in valuation techniques (eg inputs becoming/ceasing to be observable in the market) Bank balances – 9 221 – 9 221 – 1 504 – 1 504 Unsettled deals – 25 – 25 – 13 – 13 Valuation techniques Fixed deposits – 13 068 – 13 068 – – – – Financial instrument Valuation technique 8 851 51 671 49 157 109 679 1 481 28 926 21 689 52 096 Level 1: Quoted prices (unadjusted) in active markets Financial trading assets (government bonds) and Quoted bid price in active markets. A market is regarded as active when Financial liabilities insurance investments (listed shares) it is a market in which transactions for the asset or liability take place with Debt securities and borrowings 26 – 488 214 – 488 214 – 445 047 – 445 047 sufficient frequency and volume to provide pricing information on an Eskom bonds – 157 037 – 157 037 – 152 283 – 152 283 ongoing basis Commercial paper – 8 114 – 8 114 – 3 714 – 3 714 Financial trading liabilities (short-sold Quoted bid price in active markets. A market is regarded as active when Eurorand zero coupon bonds – 4 964 – 4 964 – 4 399 – 4 399 government bonds) it is a market in which transactions for the asset or liability take place with Foreign bonds – 98 563 – 98 563 – 79 963 – 79 963 sufficient frequency and volume to provide pricing information on an Development financing ongoing basis institutions – 154 489 – 154 489 – 135 661 – 135 661 Export credit facilities – 32 746 – 32 746 – 31 782 – 31 782 Level 2: Inputs other than quoted prices included within level 1 that are observable Floating rate notes – 4 046 – 4 046 – 4 047 – 4 047 Loans receivable, insurance investments (negotiable A discounted cash flow technique is used which uses expected cash flows Other loans – 28 255 – 28 255 – 33 198 – 33 198 certificates of deposit), debt securities and and a market-related discount rate Embedded derivatives 27 – – 1 136 1 136 – – 3 434 3 434 borrowings and financial trading assets and liabilities Derivatives held for risk (repurchase agreement assets and liabilities) management 17 872 – 2 073 2 945 1 139 – 5 901 7 040 Derivatives held for risk management Valuation determined with reference to broker quotes as well as use of Foreign exchange contracts 62 – 29 91 471 – 88 559 discounted cash flow and option pricing models. Broker quotes are tested Cross-currency swaps 4 – 2 044 2 048 322 – 5 813 6 135 for reasonableness by discounting expected future cash flows using a Commodity forwards 6 – – 6 – – – – market interest rate for a similar instrument at the measurement date Credit default swaps 710 – – 710 305 – – 305 Valuations of cross-currency swaps include the credit risk of Eskom Inflation linked swaps 90 – – 90 41 – – 41 (known as debit value adjustment) and counterparties (known as credit value adjustment) where appropriate. A stochastic modelling approach is Lease liabilities 31 – – 9 347 9 347 – – 9 462 9 462 followed where the expected future exposure to credit risk for Eskom and Trade and other payables 32 – 40 420 – 40 420 – 37 564 – 37 564 its counterparties (considering default probabilities and recovery rates Financial trading liabilities 15 214 – – 214 238 – – 238 derived from market data) is modelled Short-sold government bonds – – – – 57 – – 57 Trade and other receivables and payables and cash Fair values have not been disclosed for financial instruments where the Repurchase agreements 214 – – 214 181 – – 181 and cash equivalents carrying amounts are a reasonable approximation of fair value 1 086 528 634 12 556 542 276 1 377 482 611 18 797 502 785 Level 3: Unobservable inputs Embedded derivative liabilities Fair valued using unobservable inputs. Refer to note 27 for a movement reconciliation and to note 5.1 for information regarding the valuation techniques and assumptions used 66 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 67 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 7. Accounting classification and fair value (continued) 2020 2019 Measured 7.2 Fair value (continued) at fair Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Fair value hierarchy (continued) value Rm Rm Rm Rm Rm Rm The fair value hierarchy of financial instruments is as follows: Company Measured 2020 2019 Financial assets at fair Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Loans receivable No – 5 935 – – 6 113 – value Rm Rm Rm Rm Rm Rm Derivatives held for risk management – 57 636 – – 22 662 – Group Foreign exchange contracts Yes – 9 355 – – 1 301 – Financial assets Cross-currency swaps Yes – 48 179 – – 21 313 – Loans receivable No – 56 – – 67 – Commodity forwards Yes – 2 – – – – Derivatives held for risk management – 57 636 – – 22 662 – Credit default swaps Yes – 9 – – 9 – Foreign exchange contracts Yes – 9 355 – – 1 301 – Inflation linked swaps Yes – 91 – – 39 – Cross-currency swaps Yes – 48 179 – – 21 313 – Financial trading assets – 152 – 103 59 – Commodity forwards Yes – 2 – – – – Credit default swaps Yes – 9 – – 9 – Repurchase agreements No – 152 – – 59 – Inflation linked swaps Yes – 91 – – 39 – Government bonds Yes – – – 103 – – Insurance investments 1 299 11 112 – 1 617 8 266 – Financial liabilities Debt securities and borrowings – 410 205 – – 416 846 – Negotiable certificates of deposit No – 11 112 – – 8 266 – Listed shares Yes 1 299 – – 1 617 – – Eskom bonds No – 134 690 – – 140 909 – Commercial paper No – 8 124 – – 3 726 – Financial trading assets – 152 – 103 59 – Eurorand zero coupon bonds No – 3 256 – – 3 717 – Repurchase agreements No – 152 – – 59 – Foreign bonds No – 79 100 – – 80 023 – Government bonds Yes – – – 103 – – Development financing institutions No – 121 287 – – 118 351 – Export credit facilities No – 32 051 – – 32 373 – Financial liabilities Floating rate notes No – 3 971 – – 4 239 – Debt securities and borrowings – 405 651 – – 412 399 – Other loans No – 27 726 – – 33 508 – Eskom bonds No – 134 690 – – 140 909 – Embedded derivatives Yes – – 1 136 – – 3 434 Commercial paper No – 5 431 – – 1 108 – Derivatives held for risk management – 2 945 – – 7 040 – Eurorand zero coupon bonds No – 3 256 – – 3 717 – Foreign bonds No – 79 100 – – 80 023 – Foreign exchange contracts Yes – 91 – – 559 – Development financing institutions No – 121 287 – – 118 351 – Cross-currency swaps Yes – 2 048 – – 6 135 – Export credit facilities No – 32 051 – – 32 373 – Commodity forwards Yes – 6 – – – – Floating rate notes No – 3 971 – – 4 239 – Credit default swaps Yes – 710 – – 305 – Other loans No – 25 865 – – 31 679 – Inflation linked swaps Yes – 90 – – 41 – Embedded derivatives Yes – – 1 136 – – 3 434 Financial trading liabilities – 214 – 57 181 – Derivatives held for risk management – 2 941 – – 7 040 – Short-sold government bonds Yes – – – 57 – – Foreign exchange contracts Yes – 87 – – 559 – Repurchase agreements Yes – 214 – – 181 – Cross-currency swaps Yes – 2 048 – – 6 135 – Commodity forwards Yes – 6 – – – – Credit default swaps Yes – 710 – – 305 – 8. Segment information Inflation linked swaps Yes – 90 – – 41 – Management has determined the reportable segments based on the reports regularly provided, reviewed and used by Exco to make strategic decisions and assess performance of the segments. Exco assesses the performance of the operating segments based on a Financial trading liabilities – 214 – 57 181 – measure of profit or loss consistent with that of the financial statements. The amounts provided to Exco with respect to total assets Short-sold government bonds Yes – – – 57 – – and liabilities are measured in terms of IFRS. These assets and liabilities are allocated based on the operation of the segment and the Repurchase agreements Yes – 214 – – 181 – physical location of the assets. The operations in each of the group’s reportable segments are as follows: Segment Operations Generation Consists of the primary energy procurement and electricity generation functions Transmission Consists of the following components: • transmission grids and the integrated demand management area. These functions operate and maintain the transmission network for transmitting electricity and also sell bulk electricity to international customers • the southern African energy and energy planning and market development areas. Their activities include systems operations, purchase or sale of electricity from or to southern African countries, purchase of electricity from IPPs and wholesale energy for the purposes of energy trading Distribution Consists of nine provincial operating units who provide, operate and maintain the distribution network for distributing electricity as well as a customer service function that sells electricity to local large and small power users Group capital Responsible for the planning, development and monitoring of all capital projects and the execution of significant capital projects All other Relates to operating segments which are below the quantitative thresholds for determining a reportable segment segments in terms of IFRS 8 Operating segments which includes the group’s subsidiaries as well as all service and strategic functions which do not qualify as a reportable segment in terms of IFRS 8 68 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 69 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 8. Segment information (continued) Gener- Trans- Distri- Group All other Reallo- Group As a consequence of the group’s evolving structure, the balances and activities of the previously reported energy purchases/sales and ation mission bution capital segments cation and group customer services divisions are now managed and reported as part of the transmission and distribution segments respectively. inter The 2019 segment report has been restated in line with the revised reportable segment structure. segment The revenue earned by subsidiaries is presented in the segment note in line with what has been reported in the respective subsidiary trans- financial statements. Inter-segment transfer pricing for the flow of electricity from generator to consumer are allocated between actions the generation, transmission and distribution segments based on cost recovery plus a uniform return on assets informed by the Rm Rm Rm Rm Rm Rm Rm regulatory determination. All direct corporate overhead costs are allocated and, thereafter, a cost driver apportionment is used with 2019 the remainder split on an equal basis. Net finance costs, net fair value and foreign exchange gains/(losses) are allocated to segments External revenue – 8 385 171 507 – 1 377 (1 377) 179 892 based on divisional funding requirements. Inter-segment revenue/recoveries 125 338 25 382 (150 380) (133) 11 252 (11 459) - The segment information provided to Exco for the reportable segments is as follows: Total revenue 125 338 33 767 21 127 (133) 12 629 (12 836) 179 892 Gener- Trans- Distri- Group All other Reallo- Group Other income 747 187 423 496 1 717 (1 420) 2 150 ation mission bution capital segments cation and Primary energy (70 793) (28 681) (11) (3) – – (99 488) inter Employee benefit expense (9 803) (1 865) (10 911) (764) (9 840) – (33 183) segment Impairment of financial assets – (667) 807 (16) (175) 158 107 trans- Impairment of other assets – raised (11) – (4) – – – (15) actions Impairment of other assets – reversed 107 – 39 22 – – 168 Rm Rm Rm Rm Rm Rm Rm Other expenses (21 424) (1 587) (9 066) 222 (1 874) 15 515 (18 214) 2020 Profit/(loss) before depreciation and External revenue – 11 783 187 685 – 1 534 (1 534) 199 468 amortisation expense and net fair value Inter-segment revenue/recoveries 133 593 29 048 (162 243) (159) 11 245 (11 430) – and foreign exchange gain/(loss) (EBITDA) 24 161 1 154 2 404 (176) 2 457 1 417 31 417 Depreciation and amortisation expense (22 046) (2 760) (3 656) (100) (1 395) 219 (29 738) Total revenue 133 593 40 831 25 442 (159) 12 779 (12 964) 199 468 Net fair value and foreign exchange Other income 346 227 672 337 746 (1 090) 1 238 (loss)/gain on financial instruments (5 733) 882 1 906 (797) 339 (6) (3 409) Primary energy (79 342) (32 763) (12) (2) – – (112 119) Employee benefit expense (10 261) (2 029) (11 454) (673) (8 559) – (32 976) (Loss)/profit before net finance Impairment of financial assets (93) 480 542 (19) (67) 93 936 (cost)/income (3 618) (724) 654 (1 073) 1 401 1 630 (1 730) Impairment of other assets – raised (14) – (4) (919) – – (937) Net finance (cost)/income (20 463) (4 679) (2 839) (134) 130 253 (27 732) Impairment of other assets – reversed – – 4 – 58 – 62 Finance income 1 128 280 3 2 212 98 2 722 Other expenses (15 873) (2 316) (9 814) (2 724) (2 659) 14 712 (18 674) Finance cost (20 464) (4 807) (3 119) (137) (2 082) 155 (30 454) Profit/(loss) before depreciation and Share of profit of equity-accounted amortisation expense and net fair value investees – – – – 35 – 35 and foreign exchange (loss)/gain (EBITDA) 28 302 4 430 5 376 (4 159) 2 298 751 36 998 Depreciation and amortisation expense (20 018) (2 843) (3 893) (105) (1 141) 221 (27 779) (Loss)/profit before tax (24 081) (5 403) (2 185) (1 207) 1 566 1 883 (29 427) Net fair value and foreign exchange Income tax – – – – 8 914 (417) 8 497 (loss)/gain on financial instruments (4 003) (800) 2 119 (1 953) 46 (1) (4 592) (Loss)/profit for the year (24 081) (5 403) (2 185) (1 207) 10 480 1 466 (20 930) Profit/(loss) before net finance Other information (cost)/income 4 281 787 3 602 (6 217) 1 203 971 4 627 Segment assets 308 904 63 998 108 182 227 054 59 151 (20 829) 746 460 Net finance (cost)/income (23 096) (4 883) (2 820) (735) 18 264 (31 252) Investment in equity-accounted investees – – – – 373 – 373 Finance income 262 143 406 158 1 570 71 2 610 Assets held-for-sale – – – – 8 871 – 8 871 Finance cost (23 358) (5 026) (3 226) (893) (1 552) 193 (33 862) Total assets 308 904 63 998 108 182 227 054 68 395 (20 829) 755 704 Share of profit of equity-accounted Total liabilities 65 218 16 261 46 072 12 001 487 441 (21 267) 605 726 investees – – – – 63 – 63 Additions to property, plant and equipment (Loss)/profit before tax (18 816) (4 096) 782 (6 952) 1 284 1 235 (26 562) and intangible assets 8 454 1 110 6 901 18 266 496 (529) 34 698 Income tax – – – – 6 420 (360) 6 060 (Loss)/profit for the year (18 816) (4 096) 782 (6 952) 7 704 875 (20 502) Group Other information Revenue Non-current assets Segment assets 345 413 66 358 111 899 195 037 116 922 (21 729) 813 900 2020 2019 2020 2019 Investment in equity-accounted investees – – – – 397 – 397 Geographical information Rm Rm Rm Rm Assets held-for-sale – – – – 8 642 – 8 642 South Africa 187 239 171 651 663 224 662 726 Total assets 345 413 66 358 111 899 195 037 125 961 (21 729) 822 939 Foreign countries 12 229 8 241 271 217 Total liabilities 60 232 15 670 45 009 11 151 528 106 (23 092) 637 076 199 468 179 892 663 495 662 943 Additions to property, plant and equipment The group’s reportable segments operate mainly in South Africa, which is Eskom’s country of domicile. and intangible assets 9 463 887 5 448 8 916 508 (558) 24 664 Revenue is allocated based on the country in which the customer is located after eliminating inter-segment transactions. There is no significant revenue derived from a single external customer by any of the reportable segments. Non-current assets disclosed for geographical information comprise non-current assets other than deferred tax assets and financial instruments. 70 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 71 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 9. Property, plant and equipment Eskom and the SIU have been investigating potential overpayments to a number of contractors involved in the construction of the 2020 2019 Kusile power station. The writeoff was based on the progress of the investigations into these matters out of a potential identified Land, Plant Equip- Work Total Total buildings ment under R4 billion at 31 March 2020. Gene- Trans- Distri- Spares and rating mitting buting and and cons- facilities vehicles truction The normal governance and recovery processes relating to variation orders and compensation event claims are followed when the other investigations are concluded and the overpayments quantified. This includes presentation to a multi-disciplinary compensation event Note Rm Rm Rm Rm Rm Rm Rm Rm Rm claims and variations committee or following an independent adjudication and arbitration process. The investigation and recovery Group processes are part of the normal closure activities as the construction of major projects are nearing completion. Carrying value at beginning Eskom is continuing with the investigating processes and similar overpayments could be identified and confirmed in the future. of the year 8 521 263 914 42 363 74 323 13 929 6 278 241 112 650 440 629 433 The related expense is reflected in note 38. Cost 10 532 367 897 60 599 123 542 15 589 17 897 242 645 838 701 791 852 The total depreciation charge for property, plant and equipment is disclosed in profit or loss in the following categories: Accumulated depreciation and impairment losses (2 011) (103 983) (18 236) (49 219) (1 660) (11 619) (1 533) (188 261) (162 419) Group Company Adoption of IFRS 15 – – – – – – – – 51 2020 2019 2020 2019 Adoption of IFRS 16 52 132 – – – – – – 132 – Note Rm Rm Rm Rm Additions 182 365 92 6 674 428 22 657 24 404 34 255 Depreciation and amortisation expense 39 28 773 30 493 28 741 30 422 Transfers of assets from Primary energy 12 16 12 16 customers – – – 1 421 – – – 1 421 1 454 Commissioning of assets 28 785 30 509 28 753 30 438 constructed 242 56 216 4 210 4 571 52 102 (65 393) – – Basis adjustment – cash flow Average rates of finance cost capitalised to qualifying assets: hedge reserve – – – – – – (132) (132) (281) Finance cost capitalised 42 – – – – – – 14 584 14 584 15 378 Group and company Provisions capitalised 30 – (3 846) – – – – 1 182 (2 664) 1 329 2020 2019 Transfers from assets % % held-for-sale – – – – – – – – 37 General borrowings 9.84 9.43 Disposals and writeoffs (18) (1 100) (47) (20) (44) (39) (3 912) (5 180) (875) Specific borrowings 9.09 9.24 Depreciation (219) (20 329) (2 070) (4 974) (87) (1 106) – (28 785) (30 509) Net impairment 37 – – – – – – (861) (861) 168 Property, plant and equipment includes the following right-of-use asset balances: Carrying value at end of the year 8 840 295 220 44 548 75 327 14 524 5 663 209 237 653 359 650 440 2020 2019 Land, Plant Equipment Total Total Cost 11 070 414 173 64 834 129 487 16 251 17 510 210 156 863 481 838 701 buildings Generating Spares and and Accumulated depreciation and and facilities other vehicles impairment losses (2 230) (118 953) (20 286) (54 160) (1 727) (11 847) (919) (210 122) (188 261) Note Rm Rm Rm Rm Rm Rm Company Group Carrying value at beginning Carrying value at beginning of the year – 7 718 123 – 7 841 8 495 of the year 8 330 264 598 42 493 74 542 13 929 4 842 242 302 651 036 629 944 Cost – 9 768 567 – 10 335 10 335 Cost 10 261 369 499 60 750 123 841 15 589 14 784 243 835 838 559 791 772 Accumulated depreciation and Accumulated depreciation and impairment losses – (2 050) (444) – (2 494) (1 840) impairment losses (1 931) (104 901) (18 257) (49 299) (1 660) (9 942) (1 533) (187 523) (161 828) Adoption of IFRS 16 52 132 – – – 132 – Adoption of IFRS 16 52 132 – – – – – – 132 – Additions 102 – – 70 172 – Additions 179 365 92 7 674 375 23 107 24 799 34 642 Depreciation (92) (638) (13) (6) (749) (654) Transfers of assets from Carrying value at end of the year 142 7 080 110 64 7 396 7 841 customers – – – 1 421 – – – 1 421 1 454 Commissioning of assets Cost 234 9 768 567 70 10 639 10 335 constructed 198 56 544 4 248 4 587 52 40 (65 669) – – Accumulated depreciation and Basis adjustment – cash flow impairment losses (92) (2 688) (457) (6) (3 243) (2 494) hedge reserve – – – – – – (132) (132) (281) Finance cost capitalised 42 – – – – – – 14 584 14 584 15 378 Company Provisions capitalised 30 – (3 846) – – – – 1 182 (2 664) 1 329 Carrying value at beginning of the year – 7 718 123 – 7 841 8 495 Transfers from assets Cost – 9 768 567 – 10 335 10 335 held-for-sale – – – – – – – – 37 Accumulated depreciation and Disposals and writeoffs (2) (1 101) (47) (20) (44) (35) (3 918) (5 167) (1 197) impairment losses – (2 050) (444) – (2 494) (1 840) Depreciation (217) (20 528) (2 076) (4 988) (87) (857) – (28 753) (30 438) Net impairment 37 – – – – – – (861) (861) 168 Adoption of IFRS 16 52 132 – – – 132 – Additions 101 – – 67 168 – Carrying value at end of Depreciation (92) (638) (13) (6) (749) (654) the year 8 620 296 032 44 710 75 549 14 524 4 365 210 595 654 395 651 036 Carrying value at end of the year 141 7 080 110 61 7 392 7 841 Cost 10 769 416 102 65 023 129 803 16 251 14 290 211 514 863 752 838 559 Accumulated depreciation and Cost 233 9 768 567 67 10 635 10 335 impairment losses (2 149) (120 070) (20 313) (54 254) (1 727) (9 925) (919) (209 357) (187 523) Accumulated depreciation and impairment losses (92) (2 688) (457) (6) (3 243) (2 494) Disposals and writeoffs includes R3 473 million that relates to expenditure previously capitalised to plant and work under construction as well as related borrowing costs of R524 million thereon. 72 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 73 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 10. Intangible assets The price increase used for group and company was: 2020 2019 Year ended 31 March Rights Computer Concession Total Total 2021 2022 2023 2024 2025 2026 software assets % % % % % % Note Rm Rm Rm Rm Rm 2020 Group Price increase 10.72 13.28 14.12 10.00 9.98 9.50 Carrying value at beginning of the year 3 001 707 217 3 925 3 945 Cost 3 221 7 286 364 10 871 10 437 Year ended 31 March Accumulated amortisation and impairment losses (220) (6 579) (147) (6 946) (6 492) 2020 2021 2022 2023 2024 2025 % % % % % % Additions and transfers 137 16 107 260 443 Writeoffs – – – – (9) 2019 Amortisation 39 – (302) (53) (355) (454) Price increase 13.87 10.72 13.28 14.12 10.00 9.98 Carrying value at end of the year 3 138 421 271 3 830 3 925 A pre-tax nominal discount rate of 12.46% (2019: 12.30%) or a pre-tax real rate of 7.10% (2019: 6.90%) was used as derived from the Cost 3 358 4 984 465 8 807 10 871 NERSA determination. Accumulated amortisation and impairment losses (220) (4 563) (194) (4 977) (6 946) Company 11. Future fuel supplies Carrying value at beginning of the year 3 001 705 – 3 706 3 803 Group and company Cost 3 221 6 956 – 10 177 9 860 2020 2019 Accumulated amortisation and impairment losses (220) (6 251) – (6 471) (6 057) Coal Nuclear Total Total Note Rm Rm Rm Rm Additions and transfers 137 16 – 153 343 Writeoffs – – – – (9) Carrying value at beginning of the year 5 825 646 6 471 7 157 Amortisation 39 – (301) – (301) (431) Net additions 522 739 1 261 548 Provisions capitalised 30 (1 063) – (1 063) 475 Carrying value at end of the year 3 138 420 – 3 558 3 706 Basis adjustment – cash flow hedge reserve – (234) (234) – Cost 3 358 4 655 – 8 013 10 177 Transfer to inventories 21 (1 119) (1 021) (2 140) (1 709) Accumulated amortisation and impairment losses (220) (4 235) – (4 455) (6 471) Carrying value at end of the year 4 165 130 4 295 6 471 Impairment assessment of indefinite useful life intangible assets Rights are part of the Eskom CGU and were tested for impairment as part of the CGU. The recoverable amount of the CGU was 12. Investment in equity-accounted investees determined based on its value in use and no impairment loss was recognised on the CGU. Group Company The value-in-use calculation is based on the regulatory electricity pricing methodology where the rate of return on Eskom’s assets 2020 2019 2020 2019 should be equal to its weighted average cost of capital (WACC). The return can only be equal to WACC if the price of electricity is Rm Rm Rm Rm cost-reflective. In reality, the electricity price is not cost-reflective and Eskom earns a return on assets that is much lower than its pre-tax, real WACC. The value in use calculation assumed that the electricity price will migrate to cost reflectivity over a period of Balance at beginning of the year 373 372 95 95 time in line with the Electricity Pricing Policy. Share of profit after tax 63 35 – – Dividends received (39) (34) – – Estimates in the value-in-use calculation include long-term growth rates, electricity sales volumes and prices, available generation capacity and discount rates. Estimates are based on past experience and expectations of future changes in the market, including the Balance at end of the year 397 373 95 95 prevailing economic climate. The group’s investments in joint ventures and associates are not individually material. The cash flow projections were based on the revised Eskom Corporate Plan for 2021 to 2025 that was approved in September 2020 and an extrapolation of this information thereafter until the electricity price breaks even (ie when the electricity price is cost The group’s share of the results of its significant joint ventures, all of which are unlisted, is as follows: reflective). The projections after the first five years were extrapolated based on the estimated negative long-term average growth rates and inflation. The extrapolation beyond the first five years was deemed appropriate as generating plant have long useful lives Name Main business Country of Interest 2020 2019 and it is estimated that it could take longer than five years to achieve a cost-reflective price. incorporation held Group Company Group Company Share of Investment Share of Investment The price of electricity is a key input in the value-in-use calculation. The price path is based on the NERSA determination for 2021 profit at cost post-tax at cost and 2022 (adjusted with the impact of the recent court decisions relating to the treatment of the government equity support and the after tax profit/(loss) RCA decisions) and a gradual migration towards cost reflectivity. for the year for the year % Rm Rm Rm Rm Directly held Motraco – Mozambique Electricity Transmission Company SARL1 transmission Mozambique 33 61 95 47 95 Indirectly held Trans Africa Projects (Pty) Ltd Engineering services South Africa 50 2 (12) 63 35 The share capital of the group’s investment in joint ventures comprises ordinary shares. The joint ventures are structured as separate vehicles and the group has a residual interest in the net assets. The relevant activities are jointly controlled in accordance with the agreements under which the entities are established. The joint arrangements have therefore been classified as joint ventures. 1. Year end is 31 December. 74 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 75 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 13. Investment in subsidiaries 15. Investments and financial trading instruments 2020 and 2019 Portfolio Managed by Purpose Name Main business Country of Interest Investment incorporation held at cost Insurance Escap To maintain adequate ring-fenced capital reserves to meet the statutory solvency % Rm requirements of the Insurance Act Financial trading Treasury To reduce the funding cost of the company Directly held Escap SOC Ltd Insurance South Africa 100 380 15.1 Insurance investments Eskom Development Foundation NPC Corporate social investment South Africa 100 – Eskom Enterprises SOC Ltd Non-regulated electricity supply industry Group activities in South Africa and electricity supply 2020 2019 and related services outside South Africa South Africa 100 – 1 Gross Allowance Carrying Total Eskom Finance Company SOC Ltd 2 Finance (employee housing loans) South Africa 100 –1 for value PN Energy Services SOC Ltd Not trading South Africa 100 4 impairment Rm Rm Rm Rm 384 Negotiable certificates of deposit 10 694 (12) 10 682 7 946 Indirectly held Listed shares 1 299 – 1 299 1 617 Eskom Rotek Industries SOC Ltd Construction and abnormal load transportation South Africa 100 Eskom Uganda Ltd3 Operations management Uganda 100 11 993 (12) 11 981 9 563 Golang Coal SOC Ltd Coal exports South Africa 67 Nqaba Finance 1 (RF) Ltd2 Residential backed mortgage securities South Africa 100 15.2 Financial trading instruments Pebble Bed Modular Reactor SOC Ltd Reactor driven generation project South Africa 100 South Dunes Coal Terminal Company Group and company SOC Ltd Coal exports South Africa 69 2020 2019 Assets Liabilities Net asset/ Assets Liabilities Net asset/ All subsidiaries continue to be accounted for as previously assessed as there has not been any change in the outcome of the control (liability) (liability) assessment. The group does not have any subsidiaries with a material non-controlling interest. Rm Rm Rm Rm Rm Rm Repurchase agreements 152 214 (62) 59 181 (122) 14. Deferred tax Eskom bonds – 57 (57) – 91 (91) Group Company Government bonds 152 157 (5) 59 90 (31) 2020 2019 2020 2019 Note Rm Rm Rm Rm Government bonds – – – 103 57 46 14.1 Deferred tax assets 152 214 (62) 162 238 (76) Balance at beginning of the year 17 23 – – Recognised in profit or loss 43 97 (2) – – Financial trading assets – collateral held Assets and liabilities held-for-sale 1 (4) – – Eskom purchased both Eskom and government bonds from approved counterparties and has committed to resell these back to the counterparties in the following financial year. Although Eskom has legal title to the bonds at year end, they have not been recognised Balance at end of the year 115 17 – – in the statement of financial position as a result of the commitment to resell. The total receivable is secured by bonds of an equivalent Comprising 115 17 – – fair value. The difference between the purchase and resale price is treated as interest accrued over the life of the agreement using the effective-yield method. Trade and other receivables 14 14 – – Insurance investments 97 – – – Financial trading liabilities – encumbered assets Derivatives held for risk management (2) – – – Eskom concluded sale and repurchase transactions of both Eskom and government bonds with approved counterparties. The Provisions 5 2 – – group enters into transactions whereby it transfers assets recognised in its statement of financial position, but retains either all or Payments received in advance 1 1 – – substantially all of the risks and rewards of the transferred assets or a portion of them. The transferred assets are not derecognised if all or substantially all risks and rewards are retained. The difference between the sale and repurchase price is treated as interest 14.2 Deferred tax liabilities accrued over the life of the agreement using the effective-yield method. Balance at beginning of the year 7 138 14 641 6 601 14 471 Adoption of IFRS 9 – (74) – – Recognised in profit or loss 43 (6 344) (8 911) (6 740) (9 341) 16. Loans receivable Recognised in other comprehensive income 43 2 884 1 482 2 863 1 471 Group Company Balance at end of the year 3 678 7 138 2 724 6 601 2020 2019 2020 2019 Gross Allowance Carrying Carrying Gross Allowance Carrying Carrying Comprising 3 678 7 138 2 724 6 601 for value value for value value impairment impairment Property, plant and equipment 86 085 82 389 84 987 81 689 Rm Rm Rm Rm Rm Rm Rm Rm Trade and other receivables (11 660) (10 978) (11 693) (10 998) Insurance investments – 31 – – Loans to Derivatives held for risk management 2 702 808 2 701 812 subsidiaries – – – – 5 948 (11) 5 937 6 071 Embedded derivative liabilities (319) (962) (318) (962) Other 56 (2) 54 66 – – – – Provisions (11 668) (10 016) (11 651) (9 988) 56 (2) 54 66 5 948 (11) 5 937 6 071 Employee benefit obligations (4 710) (5 265) (4 550) (5 096) Payments received in advance (3 311) (3 428) (3 311) (3 428) Maturity analysis 56 (2) 54 66 5 948 (11) 5 937 6 071 Tax losses (53 441) (45 441) (53 441) (45 428) Non-current 28 (1) 27 40 – – – – Unused tax losses available for offset against future taxable income 190 861 162 289 190 861 162 243 Current 28 (1) 27 26 5 948 (11) 5 937 6 071 1. Nominal. 2. Eskom Finance Company SOC Ltd and its subsidiary Nqaba Finance 1 (RF) Ltd (a securitisation vehicle) have been classified as held-for-sale. Refer to note 23. 3. Year end is 31 December. 76 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 77 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 17. Derivatives held for risk management 2020 2019 2020 2019 Foreign Cross- Commo- Credit Inflation- Total Total Foreign Cross- Commo- Credit Inflation- Total Total exchange currency dity default linked exchange currency dity default linked contracts swaps forwards swaps swaps contracts swaps forwards swaps swaps Note Rm Rm Rm Rm Rm Rm Rm Note Rm Rm Rm Rm Rm Rm Rm Company Group Net asset/(liability) at beginning Net asset/(liability) at beginning of the year 742 15 178 – (296) (2) 15 622 (5 886) of the year 742 15 178 – (296) (2) 15 622 (5 888) Net fair value gain/(loss) 9 076 32 066 – (405) (48) 40 689 22 498 Net fair value gain/(loss) 9 077 32 066 – (405) (48) 40 690 22 502 Income statement 40 8 086 25 499 – (405) (48) 33 132 19 534 Income statement 40 8 087 25 499 – (405) (48) 33 133 19 538 Statement of comprehensive Statement of comprehensive income 990 6 567 – – – 7 557 2 964 income 990 6 567 – – – 7 557 2 964 Finance cost accrued – (26) – – 51 25 (111) Finance cost accrued – (26) – – 51 25 (111) Cash received (554) (1 087) (4) – – (1 645) (879) Cash received (551) (1 087) (4) – – (1 642) (881) Net asset/(liability) at end of Net asset/(liability) at end of the year 9 264 46 131 (4) (701) 1 54 691 15 622 the year 9 268 46 131 (4) (701) 1 54 695 15 622 Hedge exposure covered 9 264 46 131 (4) (701) 1 54 691 15 622 Hedge exposure covered 9 268 46 131 (4) (701) 1 54 695 15 622 Debt securities and borrowings 7 890 46 131 – (701) 1 53 321 15 689 Debt securities and borrowings 7 890 46 131 – (701) 1 53 321 15 689 Other 1 374 – (4) – – 1 370 (67) Other 1 378 – (4) – – 1 374 (67) Assets Assets Economic hedging 8 508 241 2 9 91 8 851 1 378 Economic hedging 8 508 241 2 9 91 8 851 1 378 Cash flow hedging 847 47 938 – – – 48 785 21 284 Cash flow hedging 847 47 938 – – – 48 785 21 284 9 355 48 179 2 9 91 57 636 22 662 9 355 48 179 2 9 91 57 636 22 662 Maturity analysis 9 355 48 179 2 9 91 57 636 22 662 Maturity analysis 9 355 48 179 2 9 91 57 636 22 662 Non-current – 33 827 – – 91 33 918 20 582 Non-current – 33 827 – – 91 33 918 20 582 Current 9 355 14 352 2 9 – 23 718 2 080 Current 9 355 14 352 2 9 – 23 718 2 080 Liabilities Liabilities Economic hedging 62 4 6 710 90 872 1 139 Economic hedging 58 4 6 710 90 868 1 139 Cash flow hedging 29 2 044 – – – 2 073 5 901 Cash flow hedging 29 2 044 – – – 2 073 5 901 91 2 048 6 710 90 2 945 7 040 87 2 048 6 710 90 2 941 7 040 Maturity analysis 91 2 048 6 710 90 2 945 7 040 Maturity analysis 87 2 048 6 710 90 2 941 7 040 Non-current – 1 003 – 710 89 1 802 5 643 Non-current – 1 003 – 710 89 1 802 5 643 Current 91 1 045 6 – 1 1 143 1 397 Current 87 1 045 6 – 1 1 139 1 397 Notional amount m m m m m m m Notional amount m m m m m m m EUR 1 420 1 256 – – – 2 676 2 989 EUR 1 422 1 256 – – – 2 678 2 991 USD 2 368 7 474 – – – 9 842 9 718 USD 2 368 7 474 – – – 9 842 9 718 GBP 8 – – – – 8 16 GBP 8 – – – – 8 17 JPY 169 2 469 – – – 2 638 5 229 JPY 169 2 469 – – – 2 638 5 229 SEK 104 – – – – 104 136 SEK 104 – – – – 104 136 CHF 1 – – – – 1 – CHF 1 – – – – 1 – CAD 2 – – – – 2 1 CAD 2 – – – – 2 1 NOK – – – – – – 5 NOK – – – – – – 5 ZAR – – 561 3 972 1 000 5 533 5 133 ZAR – – 561 3 972 1 000 5 533 5 133 The hedging practices and accounting treatment are disclosed in note 2.10.3 in the accounting policies. The derivative instruments used to hedge the various financial risks are set out as follows: Derivative instrument Financial risk hedged Exposure Foreign exchange contracts Market (currency) Electricity generation activity purchases and loans denominated in foreign currencies Cross-currency swaps Market (currency and interest rate) Foreign fixed rate bonds and other foreign fixed or floating borrowings Commodity forwards Market (commodity) Electricity sales in terms of agreements where the sales price is influenced by the market price for aluminium Credit default swaps Credit Event of default by Eskom on debt securities and borrowings Inflation-linked swaps Market (interest rate) Finance cost that are dependent on current interest rates 78 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 79 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 17. Derivatives held for risk management (continued) Day-one gain/loss Cash flow hedges The group recognises a day-one gain/loss on initial recognition of cross-currency swaps held as hedging instruments where applicable. Contractual cash flows are a function of foreign exchange and interest rates and are a point-in-time calculation that are impacted Group and company by market conditions at that time. This may result in future contractual cash outflows or inflows even though the fair value of the Cross- Inflation- Total derivative may be reflected as an asset or liability. currency linked swaps swaps Group and company Rm Rm Rm Carrying Un- 0-3 4-12 1-5 >5 amount discounted months months years years Loss at 31 March 2018 (707) – (707) cash flows Day-one loss recognised (580) (27) (607) Rm Rm Rm Rm Rm Rm Amortised to profit or loss 141 2 143 The periods in which the cash flows of derivatives Loss at 31 March 2019 (1 146) (25) (1 171) designated as cash flow hedges are expected to occur are: Day-one loss recognised (358) – (358) 2020 Amortised to profit or loss 184 4 188 Foreign exchange contracts Assets 847 890 200 690 – – Loss at 31 March 2020 (1 320) (21) (1 341) Liabilities (29) (29) (21) (8) – – Cross-currency swaps Assets 47 938 87 984 28 14 442 21 797 51 717 18. Finance lease receivables Liabilities (2 044) (3 166) (24) (4 494) 336 1 016 Group and company 46 712 85 679 183 10 630 22 133 52 733 2020 2019 2019 Gross Unearned Allowance Carrying Gross Unearned Allowance Carrying Foreign exchange contracts receivables finance for value receivables finance for value Assets 20 27 16 11 – – income impairment income impairment Liabilities (88) (73) (10) (63) – – Rm Rm Rm Rm Rm Rm Rm Rm Cross-currency swaps Assets 21 264 35 081 (71) 551 13 404 21 197 Non-current 515 (171) (6) 338 593 (216) (3) 374 Liabilities (5 813) (7 557) (216) (5 228) (6 622) 4 509 Between one and 15 383 27 478 (281) (4 729) 6 782 25 706 five years 271 (126) (2) 143 286 (145) (1) 140 After five years 244 (45) (4) 195 307 (71) (2) 234 The periods in which the cash flows associated with derivatives are expected to impact profit or loss are: Current 2020 Within one year 78 (43) (1) 34 79 (48) – 31 Foreign exchange contracts Assets 847 9 679 200 690 212 8 577 593 (214) (7) 372 672 (264) (3) 405 Liabilities (29) (29) (21) (8) – – Cross-currency swaps Assets 47 938 87 984 28 14 442 21 797 51 717 19. Payments made in advance Liabilities (2 044) (3 166) (24) (4 494) 336 1 016 2020 2019 46 712 94 468 183 10 630 22 345 61 310 Securing Environ- Other Total Total 2019 debt mental Foreign exchange contracts raised rehabili- Assets 20 8 558 16 11 276 8 255 tation Liabilities (88) (73) (10) (63) – – trust fund Cross-currency swaps Rm Rm Rm Rm Rm Assets 21 264 35 081 (71) 551 13 404 21 197 Group Liabilities (5 813) (7 557) (216) (5 228) (6 622) 4 509 Balance at beginning of the year 1 608 882 785 3 275 3 164 15 383 36 009 (281) (4 729) 7 058 33 961 Payments made 642 – 242 884 1 325 Expense recognised – – (149) (149) (330) Ineffective cash flow hedges Transferred to the statement of financial position (657) – (341) (998) (884) The change in the fair value of the hedging instrument of R34 933 million (2019: R20 263 million) and for the hedged item (represented by a hypothetical derivative) of R35 423 million (2019: R21 209 million) were used to calculate hedge effectiveness. The cash flow Balance at end of the year 1 593 882 537 3 012 3 275 hedge reserve is adjusted to the lower in absolute amounts of the cumulative gain or loss of the hedging instrument and hedged item Maturity analysis 1 593 882 537 3 012 3 275 from inception of each hedge. During the year a gain of R119 million (2019: a loss of R950 million) was recognised in profit or loss as ineffectiveness (refer to note 40). Non-current 627 882 105 1 614 1 734 Current 966 – 432 1 398 1 541 Company Balance at beginning of the year 1 608 882 703 3 193 3 057 Payments made 642 – 229 871 1 322 Expense recognised – – (129) (129) (302) Transferred to the statement of financial position (657) – (270) (927) (884) Balance at end of the year 1 593 882 533 3 008 3 193 Maturity analysis 1 593 882 533 3 008 3 193 Non-current 627 882 104 1 613 1 733 Current 966 – 429 1 395 1 460 80 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 81 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 20. Trade and other receivables 2020 2019 Group and company Receivable Amounts Allowance Carrying Receivable Amounts Allowance Carrying 2020 2019 before not for value before not for value Note Rm Rm collect- meeting impairment collect- meeting impairment ability collect- ability collect Reconciliation of movements in amounts not meeting collectability criteria adjust- ability adjust- ability Balance at beginning of the year 25 166 16 284 ments criteria ments criteria Revenue not recognised 33 10 190 8 914 Rm Rm Rm Rm Rm Rm Rm Rm Finance income not recognised 41 3 227 2 593 Cash basis revenue recognised 33 (4 083) (2 472) Group Writeoffs (303) (153) Financial instruments Balance at end of the year 34 197 25 166 Trade receivables International 1 600 – (218) 1 382 1 753 – (711) 1 042 Refer to note 6.1.1 for a reconciliation of the movements in allowance for impairment. Local large power users 44 695 (24 336) (3 727) 16 632 35 223 (15 873) (4 079) 15 271 21. Inventories Municipalities 37 049 (24 336) (3 372) 9 341 27 744 (15 873) (3 815) 8 056 2020 2019 Other 7 646 – (355) 7 291 7 479 – (264) 7 215 Coal and Nuclear Maintenance Total Total Local small power liquid fuel fuel spares and users 15 860 (9 861) (3 233) 2 766 16 291 (9 293) (4 516) 2 482 consumables Note Rm Rm Rm Rm Rm Soweto 12 774 (9 861) (2 242) 671 13 561 (9 293) (3 738) 530 Other 3 086 – (991) 2 095 2 730 – (778) 1 952 Group Carrying value at beginning of the year 12 337 1 936 12 209 26 482 24 348 62 155 (34 197) (7 178) 20 780 53 267 (25 166) (9 306) 18 795 Adoption of IFRS 15 – – – – (315) Other receivables 1 143 – (334) 809 1 459 – (189) 1 270 Changes in working capital 4 136 (842) 1 624 4 918 572 Transfer from future fuel supplies 11 1 119 1 021 – 2 140 1 709 63 298 (34 197) (7 512) 21 589 54 726 (25 166) (9 495) 20 065 Provisions capitalised 30 (23) 70 – 47 183 Non-financial Net impairment loss 37 – – (14) (14) (15) instruments 802 – – 802 794 – – 794 17 569 2 185 13 819 33 573 26 482 VAT 3 – – 3 53 – – 53 Diesel rebate 799 – – 799 741 – – 741 Company Carrying value at beginning of the year 12 337 1 936 11 978 26 251 24 122 64 100 (34 197) (7 512) 22 391 55 520 (25 166) (9 495) 20 859 Changes in working capital 4 136 (842) 1 612 4 906 252 Company Transfer from future fuel supplies 11 1 119 1 021 – 2 140 1 709 Financial Provisions capitalised 30 (23) 70 – 47 183 instruments Net impairment loss 37 – – (14) (14) (15) Trade receivables 17 569 2 185 13 576 33 330 26 251 International 1 600 – (218) 1 382 1 753 – (711) 1 042 Local large power users 44 695 (24 336) (3 727) 16 632 35 223 (15 873) (4 079) 15 271 22. Cash and cash equivalents Municipalities 37 049 (24 336) (3 372) 9 341 27 744 (15 873) (3 815) 8 056 Group Company Other 7 646 – (355) 7 291 7 479 – (264) 7 215 2020 2019 2020 2019 Local small power Rm Rm Rm Rm users 15 860 (9 861) (3 233) 2 766 16 291 (9 293) (4 516) 2 482 Bank balances 9 897 2 018 9 221 1 504 Soweto 12 774 (9 861) (2 242) 671 13 561 (9 293) (3 738) 530 Unsettled deals 25 13 25 13 Other 3 086 – (991) 2 095 2 730 – (778) 1 952 Fixed deposits 13 068 – 13 068 – 62 155 (34 197) (7 178) 20 780 53 267 (25 166) (9 306) 18 795 22 990 2 031 22 314 1 517 Other receivables 2 873 – (385) 2 488 2 678 – (194) 2 484 65 028 (34 197) (7 563) 23 268 55 945 (25 166) (9 500) 21 279 23. Assets and liabilities held-for-sale Non-financial The EFC disposal process followed during the 2019 financial year did not solicit interest from buyers that either had the necessary instruments expertise to originate loans and manage a loan book or could acquire and manage the loan book in terms of Eskom’s requirements or Diesel rebate 799 – – 799 741 – – 741 had sufficient financial reserves to purchase the company. 65 827 (34 197) (7 563) 24 067 56 686 (25 166) (9 500) 22 020 In response, Eskom materially altered the disposal strategy to improve the chances that the current process will be successful. This change of strategy required updated governance approvals which delayed the conclusion of the disposal process. Approvals for the disposal were obtained in January 2020 and a request for proposal for the disposal of the assets and liabilities of EFC was issued in February 2020 to all banks and other parties who indicated interest in participating in the process. The closing date for the submission of proposals was extended to 10 July 2020 to accommodate the impact of the national lockdown because of the COVID-19 pandemic on the ability of bidders to submit proposals. The process of evaluating the submitted proposals is currently underway. Eskom remains committed to the disposal of EFC as one of the means of addressing its liquidity challenges. The revised disposal strategy is expected to result in a successful disposal process and is estimated to be completed by 31 March 2021. EFC is included under all other segments in the segment report. 82 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 83 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 23. Assets and liabilities held-for-sale (continued) 25. Share capital Group Group and company 2020 2019 2020 2019 Eskom Inter- Total Total Shares Shares Finance company Company transactions Authorised ordinary shares Rm Rm Rm Rm Balance at beginning of the year 100 000 000 000 100 000 000 000 Additional ordinary shares authorised 200 000 000 000 – Summarised statements of financial position Assets Balance at end of the year 300 000 000 000 100 000 000 000 Loans receivable 8 531 – 8 531 8 752 Issued Trade and other receivables 12 – 12 6 Balance at beginning of the year 83 000 000 001 83 000 000 001 Deferred tax 15 – 15 17 Share capital issued 49 000 000 000 – Taxation 4 – 4 1 Cash and cash equivalents 131 (51) 80 95 Balance at end of the year 132 000 000 001 83 000 000 001 8 693 (51) 8 642 8 871 Unissued 167 999 999 999 16 999 999 999 Liabilities The unissued share capital is under the control of the Government of the Republic of South Africa, represented by the DPE, as the Debt securities and borrowings 7 411 (5 949) 1 462 1 675 sole shareholder. Trade and other payables 16 (5) 11 4 7 427 (5 954) 1 473 1 679 26. Debt securities and borrowings Group Company 24. Service concession arrangements 2020 2019 2020 2019 The group operates a service concession for the generation and transmission of electricity through its operations in Uganda. Rm Rm Rm Rm Eskom Uganda Ltd (Eskom Uganda) entered into an operation and maintenance agreement with Uganda Electricity Generation Company Eskom bonds 157 037 152 283 157 037 152 283 Ltd (UEGCL) in 2002, which is linked to a power purchase agreement concluded with Uganda Electricity Transmission Company Ltd Commercial paper 5 444 1 105 8 114 3 714 (UETCL). In terms of the agreements, Eskom Uganda operates and maintains two hydro-electric power stations in Uganda, from which it Eurorand zero coupon bonds 4 964 4 399 4 964 4 399 supplies electricity to UETCL. The dams, powerhouses, related switchyard facilities, high voltage substations, land and movable property Foreign bonds 98 563 79 963 98 563 79 963 together constitute the ‘energy assets’ in terms of the agreement. The concession period is 20 years (ending in March 2023). Development financing institutions 154 489 135 661 154 489 135 661 Eskom Uganda is entitled to receive revenue from UETCL, based on electricity supplied at tariffs regulated by the Electricity Export credit facilities 32 746 31 782 32 746 31 782 Regulatory Authority of Uganda. It also receives a fee to cover it for investment in additional energy assets where required. This has Floating rate notes 4 046 4 047 4 046 4 047 been recognised as an intangible asset. Other loans 26 393 31 370 28 255 33 198 The plant remains the property of and will revert to UEGCL at the end of the concession period. At that point Eskom Uganda will 483 682 440 610 488 214 445 047 have no further obligation in respect of the plant. Maturity analysis 483 682 440 610 488 214 445 047 2020 2019 Non-current 408 151 387 208 408 107 387 161 Rm Rm Current 75 531 53 402 80 107 57 886 Summarised statements of financial position Assets Intangible assets 271 217 Taxation 17 10 Inventories 28 28 Payments made in advance 1 1 Trade and other receivables 36 56 Cash and cash equivalents 51 111 404 423 Liabilities Debt securities and borrowings 10 14 Deferred tax 30 13 Provisions 22 12 Employee benefit obligations 5 4 Trade and other payables 36 94 103 137 Summarised income statements Revenue 268 205 Profit for the year before tax 64 50 Taxation (28) (21) Profit for the year after tax 36 29 The balances and transactions above are included in the respective line items in the statements of financial position and income statements. 84 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 85 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 26. Debt securities and borrowings (continued) Group Company Group Company Currency Security Interest rate Nominal Maturity Carrying value Carrying value Currency Security Interest rate Nominal Maturity Carrying value Carrying value number date number date 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 % % m m Rm Rm Rm Rm % % m m Rm Rm Rm Rm Eskom bonds 157 037 152 283 157 037 152 283 Balances carried forward from the ZAR ECN20 – 10.01 – 5 000 Mar 20 – 5 009 – 5 009 previous page 266 008 237 750 268 678 240 359 ZAR E1741 10.13 – 2 928 – Aug 20 3 020 – 3 020 – ZAR E1751 9.97 – 2 928 – Aug 21 3 115 – 3 115 – Development ZAR E1702 – 10.13 – 8 792 Aug 21 – 9 324 – 9 324 financing ZAR ECN22 10.17 10.17 5 000 5 000 Mar 22 4 988 4 972 4 988 4 972 institutions5 154 489 135 661 154 489 135 661 ZAR ES233 9.31 9.39 19 784 17 927 Jan 23 20 483 18 598 20 483 18 598 USD n/a3 – 4.67 – 500 Dec 19 – 7 242 – 7 242 ZAR ECN24 10.37 10.37 5 000 5 000 Mar 24 4 958 4 945 4 958 4 945 USD n/a3 4.68 5.71 965 965 Jul 21 17 235 13 937 17 235 13 937 ZAR ES263 9.29 9.27 32 898 28 851 Apr 26 32 052 27 917 32 052 27 917 ZAR n/a3 7.91 8.50 1 133 1 267 Aug 28 1 148 1 284 1 148 1 284 ZAR EL283 2.55 2.55 5 278 7 563 May 28 7 996 7 692 7 996 7 692 USD n/a3 2.93 3.96 165 184 Aug 28 2 946 2 679 2 946 2 679 ZAR EL293 1.90 1.90 3 709 5 167 Nov 29 5 457 5 250 5 457 5 250 EUR n/a3 – – 579 603 Aug 29 11 328 9 811 11 328 9 811 ZAR EL303 2.30 2.30 3 665 4 861 Jul 30 5 083 4 887 5 083 4 887 ZAR n/a3 7.23 7.77 6 784 7 369 Aug 29 6 862 7 462 6 862 7 462 ZAR EL313 2.10 2.10 4 076 5 180 Jun 31 5 395 5 184 5 395 5 184 ZAR n/a3 10.10 10.10 3 738 3 935 Sep 29 3 732 3 929 3 732 3 929 ZAR ECN32 2.95 2.95 5 000 5 951 Mar 32 6 204 5 964 6 204 5 964 ZAR n/a 10.37 10.37 15 000 15 000 Jan 31 15 263 15 259 15 263 15 259 ZAR ES333 9.21 9.18 34 530 33 904 Sep 33 30 205 29 569 30 205 29 569 EUR n/a3 1.50 1.50 470 470 Mar 31 8 733 7 268 8 733 7 268 ZAR EL363 2.25 2.25 3 753 4 613 Jan 36 4 832 4 646 4 832 4 646 USD n/a3 2.37 2.69 7 8 Aug 31 125 110 125 110 ZAR EL373 2.25 2.25 3 838 4 684 Jan 37 4 846 4 631 4 846 4 631 ZAR n/a 6.78 7.55 1 099 1 193 Mar 32 1 103 1 197 1 103 1 197 ZAR ES423 10.34 10.03 20 909 15 201 Apr 42 18 403 13 695 18 403 13 695 USD n/a3 3.28 4.84 2 488 1 550 Sep 33 43 914 22 278 43 914 22 278 Commercial paper 5 444 1 105 8 114 3 714 USD n/a3 4.68 5.71 9 9 Aug 36 149 127 149 127 ZAR n/a3 10.56 11.15 4 704 4 998 Aug 36 4 695 4 995 4 695 4 995 ZAR ESNOICP3 7.39 8.07 5 625 1 130 Sep 20 5 444 1 105 5 444 1 105 USD n/a3 2.41 3.29 25 184 May 38 445 2 700 445 2 700 ZAR n/a4 7.52 8.09 2 786 2 709 Jan 215 – – 2 670 2 609 ZAR n/a3 9.17 9.16 31 007 30 011 May 38 32 193 31 151 32 193 31 151 Eurorand zero USD n/a3 2.16 – 11 – Mar 39 191 – 191 – coupon bonds1 4 964 4 399 4 964 4 399 ZAR n/a3 10.21 10.18 2 978 3 039 Nov 40 3 052 3 114 3 052 3 114 USD n/a3 0.25 0.25 35 35 May 51 622 506 622 506 ZAR n/a 13.33 13.33 8 000 8 000 Aug 27 3 175 2 800 3 175 2 800 USD n/a3 0.25 0.25 42 42 Aug 51 753 612 753 612 ZAR n/a 11.89 11.89 7 500 7 500 Dec 32 1 789 1 599 1 789 1 599 Export credit Foreign bonds 98 563 79 963 98 563 79 963 facilities5 32 746 31 782 32 746 31 782 USD n/a 5.87 5.75 1 750 1 750 Jan 21 31 479 25 541 31 479 25 541 JPY n/a 1.49 1.58 2 469 4 944 May 22 406 644 406 644 USD n/a 6.90 6.75 1 000 1 000 Aug 23 17 922 14 541 17 922 14 541 EUR n/a 1.25 0.89 35 50 Sep 23 658 775 658 775 USD n/a 7.39 7.13 1 250 1 250 Feb 25 22 241 18 030 22 241 18 030 EUR n/a 0.57 0.66 7 9 Jul 24 140 142 140 142 USD n/a 8.47 8.45 500 500 Aug 28 8 991 7 298 8 991 7 298 EUR n/a 4.74 4.73 604 723 Jan 27 11 330 11 153 11 330 11 153 USD n/a3 6.37 6.35 1 000 1 000 Aug 28 17 930 14 553 17 930 14 553 EUR n/a 2.48 2.49 491 575 Jul 27 9 100 8 771 9 100 8 771 Balances carried ZAR n/a 9.06 9.35 1 528 1 765 Jul 27 1 419 1 640 1 419 1 640 forward to the USD n/a 2.32 2.32 583 641 Mar 31 9 693 8 657 9 693 8 657 next page 266 008 237 750 268 678 240 359 Floating rate notes5 ZAR n/a3 6.22 7.16 4 000 4 000 Apr 21 4 046 4 047 4 046 4 047 Other loans 26 393 31 370 28 255 33 198 ZAR n/a – 13.25 – 3 000 Apr 19 – 3 003 – 3 003 ZAR n/a3 8.76 9.35 15 000 15 000 Feb 21 15 120 15 096 15 120 15 096 ZAR n/a 9.31 9.90 1 000 1 000 Aug 23 1 014 1 015 1 014 1 015 ZAR n/a 8.84 10.39 2 955 3 650 Mar 24 2 985 3 658 2 985 3 658 ZAR n/a 12.80 12.80 1 500 1 500 Oct 24 1 589 1 588 1 589 1 588 ZAR n/a 11.18 11.27 5 550 6 850 Feb 25 5 640 6 963 5 640 6 963 On ZAR n/a4 6.58 6.76 1 822 1 875 demand – – 1 907 1 875 On ZAR n/a – – 44 47 demand 45 47 – – 483 682 440 610 488 214 445 047 1. Holders have a right to first charge against revenue and assets of Eskom in terms of section 7 of the Eskom Conversion Act. 2. This instrument would have matured in three equal tranches. Each tranche was converted into separate instruments (E173, E174 and E175) during the 2020 financial year to align them to the separate maturity dates. No gain or loss resulted. 3. Government guaranteed. 4. Includes, inter alia, instruments issued to subsidiaries. 5. Latest in a range of maturity dates is indicated for these instruments. 86 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 87 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 27. Embedded derivatives 29. Employee benefit obligations 2020 2019 2020 2019 Commodity United Total Total Post- Leave Bonus Total Total and/or States employment foreign PPI and medical currency foreign benefits currency Note Rm Rm Rm Rm Rm Rm Rm Rm Rm Group Group and company Balance at beginning of the year 16 148 2 187 469 18 804 19 112 Liability at beginning of the year 3 008 426 3 434 5 291 Raised to income statement 409 901 578 1 888 1 820 Net fair value gain (1 878) (420) (2 298) (1 857) Raised 409 901 608 1 918 1 820 Liability at end of the year 1 130 6 1 136 3 434 Reversed – – (30) (30) – Maturity analysis 1 130 6 1 136 3 434 Reversed to other comprehensive income (3 546) – – (3 546) (1 992) Non-current – 5 5 1 365 Finance cost 42 1 787 – – 1 787 1 748 Current 1 130 1 1 131 2 069 Cash paid (598) (912) (600) (2 110) (1 884) Balance at end of the year 14 200 2 176 447 16 823 18 804 28. Payments received in advance and contract liabilities and deferred income Maturity analysis 14 200 2 176 447 16 823 18 804 2020 2019 Non-current 13 530 – – 13 530 15 560 Customer Government Other Total Total Current 670 2 176 447 3 293 3 244 connections grant Note Rm Rm Rm Rm Rm Company Balance at beginning of the year 15 792 2 000 408 18 200 18 501 28.1 Payments received in advance Raised to income statement 407 831 417 1 655 1 712 Group Reversed to other comprehensive income (3 478) – – (3 478) (1 949) Balance at beginning of the year 3 668 1 095 634 5 397 4 769 Payments received 1 005 2 716 286 4 007 4 709 Finance cost 42 1 749 – – 1 749 1 710 Transfers to the statement of financial position (346) (2 394) (59) (2 799) (2 983) Cash paid (585) (852) (439) (1 876) (1 774) Transfers to contract liabilities and Balance at end of the year 13 885 1 979 386 16 250 18 200 deferred income 28.2 (322) (2 394) – (2 716) (2 983) Maturity analysis 13 885 1 979 386 16 250 18 200 Other (24) – (59) (83) – Non-current 13 232 – – 13 232 15 224 Income recognised (390) (190) (240) (820) (1 098) Current 653 1 979 386 3 018 2 976 Balance at end of the year 3 937 1 227 621 5 785 5 397 Maturity analysis 3 937 1 227 621 5 785 5 397 29.1 Post-employment medical benefits Non-current 2 172 – 183 2 355 2 038 Group Company Current 1 765 1 227 438 3 430 3 359 2020 2019 2020 2019 Rm Rm Rm Rm Company Balance at beginning of the year 3 668 1 095 642 5 405 4 762 The group has anticipated expenditure in terms of continued contributions Payments received 1 005 2 716 278 3 999 4 724 to medical aid subscriptions in respect of qualifying employees who retire. Transfers to the statement of financial position (346) (2 394) (59) (2 799) (2 983) Amounts recognised in profit or loss: Transfers to contract liabilities and Employee benefit expense 409 528 407 525 deferred income 28.2 (322) (2 394) – (2 716) (2 983) Finance cost 1 787 1 748 1 749 1 710 Other (24) – (59) (83) – Amounts recognised in other comprehensive income: Income recognised (390) (190) (233) (813) (1 098) Re-measurements of post-employment medical benefits (actuarial gain) (3 546) (1 992) (3 478) (1 949) Balance at end of the year 3 937 1 227 628 5 792 5 405 Financial assumptions (3 604) (1 784) (3 537) (1 751) Experience adjustments 58 (208) 59 (198) Maturity analysis 3 937 1 227 628 5 792 5 405 Non-current 2 172 – 183 2 355 2 038 Measurement of post-employment medical benefits and key actuarial assumptions Current 1 765 1 227 445 3 437 3 367 The estimated present value of the anticipated expenditure for both in- 28.2 Contract liabilities and deferred income service and retired members was calculated by independent actuaries. Group and company The group expects to pay R670 million and the company R653 million in Balance at beginning of the year 2 624 20 170 – 22 794 21 005 contributions to this plan in the 2021 financial year. Transfers of property, plant and equipment from customers 128 – – 128 187 Expected maturity analysis of undiscounted post-employment medical Transfers from payments received in advance 28.1 322 2 394 – 2 716 2 983 benefits: Income recognised 39 (172) (1 349) – (1 521) (1 381) Within one year 670 588 653 568 Balance at end of the year 2 902 21 215 – 24 117 22 794 Between one and two years 734 637 715 621 Between two and five years 2 897 2 499 2 825 2 436 Maturity analysis 2 902 21 215 – 24 117 22 794 After five years 362 897 249 731 359 094 246 721 Non-current 2 711 19 866 – 22 577 21 295 367 198 253 455 363 287 250 346 Current 191 1 349 – 1 540 1 499 88 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 89 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 29. Employee benefit obligations (continued) Actuarial gains/losses on fund obligations 29.1 Post-employment medical benefits (continued) Group and Risks company The medical aid benefits are administered by funds that are legally separated from the group. The boards of the funds are required 2020 2019 by law to act in the best interest of the plan participants and are responsible for setting policies including investment, contribution Rm Rm and indexation of the funds. Financial assumptions (16 869) (6 949) These funds expose the group to a number of risks, the most significant of which are: Experience adjustments (4 136) (1 758) • changes in bonds’ yields: a decrease in corporate bond yields will increase plan liabilities • inflation risk: the post-employment obligations are linked to inflation and higher inflation will lead to higher liabilities (although, in (21 005) (8 707) most cases, caps on the level of inflationary increases are in place to protect the plan against extreme inflation) • life expectancy: the majority of the plans’ obligations are to provide benefits for the life of the member and therefore increases in The amount recognised as an expense has been disclosed in the financial statements in note 36. Eskom’s expected contributions to life expectancy will result in an increase in the plans’ liabilities the plan over the course of the following year is R2 457 million. The expected current service cost for the 2021 financial year is estimated at R279 million for the group and R277 million for the Measurement of fund obligations and key actuarial assumptions company. Refer to note 5.2 for the sensitivity analysis and principal actuarial assumptions used. Group and company 29.2 Leave Unit 2020 2019 The group recognises a liability for annual, occasional and service leave. Refer to note 5.3. Long-term investment return before tax % 13.5 11.0 29.3 Bonus Future general salary increases % 8.7 7.9 The bonus consists of the annual bonus that equals one month’s salary for employees on Tuned Assessment of Skills and Knowledge Future pension increases (inflation) % 7.2 6.4 grading levels 1 to 13. Employees on grading levels 14 to 26 can choose to spread their bonus amount over the year or take it as a Weighted average duration years 14.9 16.4 thirteenth cheque. Expected maturity analysis of undiscounted fund obligations: 29.4 Pension benefits Within one year Rm 5 423 5 229 The EPPF was actuarially valued based on the projected unit credit method basis at 31 March 2020 (previous valuation at Between one and two years Rm 5 932 5 647 31 March 2019). Relevant information relating to the status of the fund include: Between two and five years Rm 20 605 19 210 After five years Rm 1 525 270 1 097 049 Movements in net asset/liability 1 557 230 1 127 135 2020 2019 Fund Fund Asset Net asset/ Fund Fund Asset Net asset/ Assumptions regarding future mortality have been based on published mortality tables and statistics derived from experience. assets obligations ceiling (liability) assets obligations ceiling (liability) Refer to note 5.2 for details regarding current longevities underlying the values of the pension benefit obligation at the reporting date. adjust- adjust- Refer to note 36 for the expense recognised. ments ments Rm Rm Rm Rm Rm Rm Rm Rm Fund assets composition Net asset/(liability) at Group and company beginning of the year 141 905 103 517 (38 388) – 134 582 102 563 (32 019) – 2020 2019 Current service cost – 2 631 – (2 631) – 3 090 – (3 090) Domestic Inter- Total Domestic Inter- Total Interest, returns and actuarial national national gains/losses (12 339) (9 592) 2 929 182 9 200 2 162 (6 369) 669 Rm Rm Rm Rm Rm Rm Net interest 15 481 11 413 (4 223) (155) 14 033 10 869 (3 362) (198) Equities 47 300 39 676 86 976 53 062 44 006 97 068 Actuarial gain/(loss) on asset/ Bonds 24 528 6 611 31 139 26 012 – 26 012 liability (27 820) (21 005) 7 152 337 (4 833) (8 707) (3 007) 867 Issued by Eskom 2 901 – 2 901 2 851 – 2 851 Payments received by the fund 3 803 1 354 – 2 449 3 775 1 354 – 2 421 Other 21 627 6 611 28 238 23 161 – 23 161 Employer funded 2 449 – – 2 449 2 421 – – 2 421 Property 118 – 118 9 187 – 9 187 Member funded 1 354 1 354 – – 1 354 1 354 – – Cash 4 818 338 5 156 719 342 1 061 Payments made by the fund (6 133) (6 133) – – (5 652) (5 652) – – Hedge funds 1 158 – 1 158 930 – 930 Balanced funds – – – 7 647 – 7 647 Benefit and pension payments (5 538) (5 538) – – (4 868) (4 868) – – Other 1 2 688 2 689 – – – Fund management costs (283) (283) – – (241) (241) – – Transfers to/from the fund (312) (312) – – (543) (543) – – 77 923 49 313 127 236 97 557 44 348 141 905 Net asset/(liability) at end of Sensitivity analysis the year 127 236 91 777 (35 459) – 141 905 103 517 (38 388) – The effect on fund obligations of an increase or decrease in the assumptions is: Group and company 2020 2019 increase decrease increase decrease Rm Rm Rm Rm 1% change in discount rate (5 276) 6 670 (6 787) 10 169 1% change in inflation rate 6 923 (5 612) 10 226 (7 118) One year change in post-employment mortality (1 166) 1 134 (2 125) 1 510 90 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 91 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 30. Provisions 31. Lease liabilities 2020 2019 2020 2019 Power station-related Mine- Coal- Other Total Total Gross Future Carrying Gross Future Carrying environmental related related payables finance value payables finance value restoration1 closure, obligations pollution charges charges Nuclear Other plant generating control Rm Rm Rm Rm Rm Rm plant and rehabi- Group litation1 Non-current 16 805 (7 930) 8 875 18 389 (9 259) 9 130 Note Rm Rm Rm Rm Rm Rm Rm Between one and five years 7 002 (4 676) 2 326 6 876 (4 969) 1 907 Group After five years 9 803 (3 254) 6 549 11 513 (4 290) 7 223 Balance at beginning of the year 17 797 14 460 13 906 324 4 763 51 250 49 679 Charged to income statement (1 798) (1 334) 672 378 (404) (2 486) (1 499) Current Within one year 1 834 (1 359) 475 1 729 (1 397) 332 Raised 879 246 1 295 701 967 4 088 1 602 Reversed – (248) (11) (323) (1 371) (1 953) (2 877) 18 639 (9 289) 9 350 20 118 (10 656) 9 462 Change in discount rate (2 677) (1 332) (612) – – (4 621) (224) Company Capitalised to property, plant and Non-current 16 802 (7 929) 8 873 18 389 (9 259) 9 130 equipment 9 (1 399) (2 447) – – 1 182 (2 664) 1 329 Between one and five years 6 999 (4 675) 2 324 6 876 (4 969) 1 907 Raised – 106 – – 2 969 3 075 6 865 After five years 9 803 (3 254) 6 549 11 513 (4 290) 7 223 Reversed – (590) – – (1 787) (2 377) (5 352) Change in discount rate (1 399) (1 963) – – – (3 362) (184) Current Capitalised to future fuel supplies 11 – – (1 063) – – (1 063) 475 Within one year 1 833 (1 359) 474 1 729 (1 397) 332 Raised – – 51 – – 51 1 318 18 635 (9 288) 9 347 20 118 (10 656) 9 462 Reversed – – (77) – – (77) (782) Change in discount rate – – (1 037) – – (1 037) (61) Group Company Capitalised to inventories 21 70 – (23) – – 47 183 2020 2019 2020 2019 Raised 70 – 182 – – 252 240 Movement reconciliation Note Rm Rm Rm Rm Reversed – – (205) – – (205) (57) Balance at beginning of the year 9 462 9 819 9 462 9 819 Finance cost 42 1 585 1 253 1 075 – 32 3 945 3 940 Adoption of IFRS 16 52 139 – 139 – Cash paid (52) – (276) (702) (708) (1 738) (2 857) Additions 172 – 168 – Balance at end of the year 16 203 11 932 14 291 – 4 865 47 291 51 250 Finance costs 1 415 1 444 1 415 1 444 Cash paid (1 838) (1 801) (1 837) (1 801) Maturity analysis 16 203 11 932 14 291 – 4 865 47 291 51 250 Capital (423) (357) (422) (357) Non-current 15 406 11 932 13 686 – 276 41 300 45 588 Finance costs (1 415) (1 444) (1 415) (1 444) Current 797 – 605 – 4 589 5 991 5 662 Company Balance at end of the year 9 350 9 462 9 347 9 462 Balance at beginning of the year 17 797 14 460 13 906 324 4 627 51 114 49 553 Charged to income statement (1 798) (1 334) 672 378 (357) (2 439) (1 509) Refer to note 38 for short-term and low-value lease expenses. Raised 879 246 1 295 701 1 014 4 135 1 535 Reversed – (248) (11) (323) (1 371) (1 953) (2 820) 32. Trade and other payables Change in discount rate (2 677) (1 332) (612) – – (4 621) (224) Group Company Capitalised to property, plant and equipment 9 (1 399) (2 447) – – 1 182 (2 664) 1 329 2020 2019 2020 2019 Rm Rm Rm Rm Raised – 106 – – 2 969 3 075 6 865 Reversed – (590) – – (1 787) (2 377) (5 352) Financial instruments 38 700 36 132 40 420 37 564 Change in discount rate (1 399) (1 963) – – – (3 362) (184) Trade and other payables 28 043 22 968 28 605 23 441 Capitalised to future fuel supplies 11 – – (1 063) – – (1 063) 475 Accruals 5 605 8 507 6 763 9 466 Raised – – 51 – – 51 1 318 Deposits 5 052 4 657 5 052 4 657 Reversed – – (77) – – (77) (782) Non-financial instruments 1 886 1 748 1 752 1 675 Change in discount rate – – (1 037) – – (1 037) (61) VAT 1 248 1 095 1 114 1 022 Capitalised to inventories 21 70 – (23) – – 47 183 Environmental levy 638 653 638 653 Raised 70 – 182 – – 252 240 Reversed – – (205) – – (205) (57) 40 586 37 880 42 172 39 239 Finance cost 42 1 585 1 253 1 075 – 30 3 943 3 940 Maturity analysis 40 586 37 880 42 172 39 239 Cash paid (52) – (276) (702) (697) (1 727) (2 857) Non-current 411 1 031 411 1 031 Balance at end of the year 16 203 11 932 14 291 – 4 785 47 211 51 114 Current 40 175 36 849 41 761 38 208 Maturity analysis 16 203 11 932 14 291 – 4 785 47 211 51 114 Non-current 15 406 11 932 13 686 – 254 41 278 45 558 Current 797 – 605 – 4 531 5 933 5 556 1. Refer to note 5.4 for critical accounting estimates and assumptions. 92 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 93 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 Group Company Group Company 2020 2019 2020 2019 2020 2019 2020 2019 Note Rm Rm Rm Rm Note Rm Rm Rm Rm 33. Revenue 36. Employee benefit expense Redistributors (metropolitan and municipal customers) 79 918 71 265 79 918 71 265 Salaries 25 158 24 850 22 655 22 415 Overtime 2 282 2 237 1 824 1 815 Invoiced to customers 85 656 77 231 85 656 77 231 Annual bonus 1 352 1 370 1 191 1 199 Amounts not meeting collectability criteria 20 (9 821) (8 438) (9 821) (8 438) Post-employment medical benefits 409 528 407 525 Recognised on a cash received basis 20 4 083 2 472 4 083 2 472 Leave 901 859 831 809 Residential 5 993 5 490 5 993 5 490 Pension benefits 2 450 2 421 2 216 2 192 Invoiced to customers 6 362 5 966 6 362 5 966 Direct costs of employment 32 552 32 265 29 124 28 955 Amounts not meeting collectability criteria 20 (369) (476) (369) (476) Direct training and development 81 116 65 91 Temporary and contract staff costs 2 140 2 831 292 695 Industrial 37 946 36 168 37 946 36 168 Other staff costs 845 1 357 751 1 177 Mining 29 968 26 550 29 968 26 550 Commercial 14 067 12 385 14 067 12 385 Gross employee benefit expense 35 618 36 569 30 232 30 918 Agricultural 9 839 8 682 9 839 8 682 Capitalised to property, plant and equipment (2 642) (3 386) (2 642) (3 386) International 12 229 8 241 12 229 8 241 32 976 33 183 27 590 27 532 Rail 3 323 3 119 3 323 3 119 Public lighting 218 160 218 160 37. Impairment of assets Post-paid electricity sales 193 501 172 060 193 501 172 060 37.1 Financial assets Prepaid electricity sales 9 489 8 645 9 489 8 645 Loans receivable 2 31 (29) 40 Total electricity sales 202 990 180 705 202 990 180 705 Finance lease receivables 5 3 5 3 Connections 1 855 2 300 1 855 2 300 Trade and other receivables 20 (943) (138) (898) (124) Other 306 280 306 280 Insurance investments 7 5 – – Gross revenue 205 151 183 285 205 151 183 285 (929) (99) (922) (81) Capitalised to property, plant and equipment (5 683) (3 393) (5 683) (3 393) Bad debts recovered – trade and other receivables (7) (8) (7) (8) 199 468 179 892 199 468 179 892 (936) (107) (929) (89) Sales of electricity to local customers are included in the distribution 37.2 Other assets operating segment. International sales are included in the transmission Raised 937 15 937 15 segment. Other revenue consists of reconnection fees and ad hoc sundry revenue. Connections occur mainly within the transmission and Property, plant and equipment 9 919 – 919 – distribution operating segments. Inventories 21 18 15 18 15 Reversed (62) (168) (62) (168) 34. Other income Insurance proceeds 14 24 858 1 189 Property, plant and equipment 9 (58) (168) (58) (168) Services income 359 284 – – Inventories 21 (4) – (4) – Management fee income – – 132 131 Operating lease income 274 360 225 257 875 (153) 875 (153) Dividend income 66 49 46 35 Other 525 1 433 558 1 461 38. Other expenses Managerial, technical and other fees 318 743 288 709 1 238 2 150 1 819 3 073 Lease expense 819 1 277 207 680 35. Primary energy Operating – 1 277 – 680 Own generation costs 79 343 70 796 79 343 70 796 Short term 781 – 169 – Low value 38 – 38 – Generation costs 71 730 62 991 71 730 62 991 Environmental levy 48 7 613 7 805 7 613 7 805 Auditors’ remuneration1 169 156 156 144 Net loss on disposals and writeoffs of property, plant and equipment and International electricity purchases 4 716 3 740 4 716 3 740 intangible assets2 4 646 318 4 643 640 Independent power producers 28 060 24 952 28 060 24 952 Repairs and maintenance, transport and other expenses 12 722 15 720 20 957 24 846 112 119 99 488 112 119 99 488 18 674 18 214 26 251 27 019 Generation costs relate to the cost of coal (including logistics), uranium, water and liquid fuels that are used in the generation of electricity. Eskom uses a combination of short-, medium- and long-term agreements with suppliers for coal purchases and long-term 39. Depreciation and amortisation expense agreements with the Department of Water Affairs to reimburse the department for the cost incurred in supplying water to Eskom. Depreciation of property, plant and equipment 9 28 773 30 493 28 741 30 422 Amortisation of intangible assets 10 355 454 301 431 Contract liabilities and deferred income recognised (government grant) 28.2 (1 349) (1 209) (1 349) (1 209) 27 779 29 738 27 693 29 644 1. There were no non-audit services rendered by the group’s statutory auditors. 2. Includes R3 473 million as well as related borrowing costs of R524 million thereon relating to a writeoff of property, plant and equipment. Refer to note 9. 94 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 95 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 Group Company 43. Income tax 2020 2019 2020 2019 Group Company Note Rm Rm Rm Rm 2020 2019 2020 2019 Note Rm Rm Rm Rm 40. Net fair value and foreign exchange loss on financial instruments Recognised in profit or loss Gain/(loss) on instruments carried at fair value 35 053 21 335 35 420 21 377 Current tax 381 412 – – Deferred tax 14 (6 441) (8 909) (6 740) (9 341) Financial trading assets (1) 4 (1) 4 Financial trading liabilities (9) (18) (9) (18) Reversal of temporary differences 1 559 5 974 1 273 5 529 Insurance investments (368) (46) – – Tax losses (8 000) (14 883) (8 013) (14 870) Derivatives held for risk management 17 33 133 19 538 33 132 19 534 (6 060) (8 497) (6 740) (9 341) Embedded derivatives 2 298 1 857 2 298 1 857 Reconciliation between standard and effective Gain/(loss) on foreign currency translation of instruments tax rate: carried at amortised cost (40 089) (24 118) (40 091) (24 119) R million Trade and other receivables 8 3 6 – Taxation income at standard rate (7 437) (8 239) (8 142) (9 165) Cash and cash equivalents 136 620 136 620 Non-taxable income1 (332) (484) (281) (458) Trade and other payables (158) (119) (158) (117) Expenses not deductible for tax purposes2 1 709 226 1 683 282 Debt securities and borrowings (40 075) (24 622) (40 075) (24 622) Taxation income per the income statement (6 060) (8 497) (6 740) (9 341) Amounts recycled from cash flow hedge reserve 444 (626) 444 (626) % Amortisation of effective portion of terminated cash flow hedges 325 324 325 324 Taxation income at standard rate 28.00 28.00 28.00 28.00 Ineffective portion of cash flow hedges 119 (950) 119 (950) Non-taxable income 1.25 1.64 0.97 1.40 Expenses not deductible for tax purposes (6.44) (0.77) (5.79) (0.86) (4 592) (3 409) (4 227) (3 368) Taxation income per the income statement 22.81 28.87 23.18 28.54 41. Finance income Financial trading assets 4 3 4 3 2020 2019 Insurance investments 699 601 – – Before tax Tax Net of tax Before tax Tax Net of tax Loans receivable 855 865 451 461 Rm Rm Rm Rm Rm Rm Finance lease receivables 47 51 47 51 Recognised in other comprehensive Trade and other receivables 412 347 412 347 income Invoiced to customers 3 639 2 940 3 639 2 940 Group Amounts not meeting collectability criteria 20 (3 227) (2 593) (3 227) (2 593) Cash flow hedges 6 747 (1 889) 4 858 3 309 (926) 2 383 Cash and cash equivalents 593 855 554 817 Net change in fair value 7 557 (2 115) 5 442 2 964 (830) 2 134 Net amount transferred to profit or loss (444) 124 (320) 626 (175) 451 2 610 2 722 1 468 1 679 Net amount transferred to initial carrying amount of hedged items (366) 102 (264) (281) 79 (202) 42. Finance cost Foreign currency translation differences (22) – (22) 50 – 50 Debt securities and borrowings 34 012 31 845 34 201 31 997 Re-measurement of post-employment Eskom bonds 13 468 12 895 13 468 12 895 medical benefits 3 546 (995) 2 551 1 992 (556) 1 436 Commercial paper 234 263 304 299 10 271 (2 884) 7 387 5 351 (1 482) 3 869 Eurorand zero coupon bonds 565 689 565 689 Foreign bonds 5 536 4 538 5 536 4 538 Company Development financing institutions 9 359 8 825 9 359 8 825 Cash flow hedges 6 747 (1 889) 4 858 3 309 (926) 2 383 Export credit facilities 1 552 1 647 1 552 1 647 Net change in fair value 7 557 (2 115) 5 442 2 964 (830) 2 134 Floating rate notes 381 373 381 373 Net amount transferred to profit or loss (444) 124 (320) 626 (175) 451 Other loans 2 917 2 615 3 036 2 731 Net amount transferred to initial carrying Derivatives held for risk management 6 878 6 218 6 878 6 218 amount of hedged items (366) 102 (264) (281) 79 (202) Employee benefit obligations 29 1 787 1 748 1 749 1 710 Re-measurement of post-employment Provisions 30 3 945 3 940 3 943 3 940 medical benefits 3 478 (974) 2 504 1 949 (545) 1 404 Lease liabilities 1 415 1 444 1 415 1 444 10 225 (2 863) 7 362 5 258 (1 471) 3 787 Trade and other payables 409 637 407 636 Gross finance cost 48 446 45 832 48 593 45 945 Capitalised to property, plant and equipment 9 (14 584) (15 378) (14 584) (15 378) 33 862 30 454 34 009 30 567 1. Eskom receives various non-taxable income including government grants and learnership allowances. In 2019 there was also a recovery from a supplier with a tax impact of R253 million. 2. In 2020 there were writeoffs of property, plant and equipment of R3 473 million which were not tax deductible. 96 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 97 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 44. Cash generated from operations 45. Net debt reconciliation Group Company Debt Lease Financial Financial Derivatives Payments Cash and Net debt 2020 2019 2020 2019 securities liabilities2 trading trading held for risk made in cash Rm Rm Rm Rm and assets3 liabilities management 3 4 advance equivalents6 5 borrowings1 Loss before tax (26 562) (29 427) (29 080) (32 732) Rm Rm Rm Rm Rm Rm Rm Rm Adjustments for: 65 364 58 991 66 090 60 255 Group Depreciation and amortisation expense 27 779 29 738 27 693 29 644 Balance at 1 April 2018 388 684 9 819 (168) 249 5 060 (1 150) (15 823) 386 671 Depreciation expense – primary energy 12 16 12 16 Net cash increase/(decrease) 24 459 (357) 10 (29) 1 219 (1 179) 14 395 38 518 Impairment of financial and other assets (excluding bad debts recovered) (54) (252) (47) (234) Net fair value and foreign Net fair value loss on financial instruments 4 592 3 409 4 227 3 368 exchange losses/(gains) 24 622 – (4) 18 (22 121) – (620) 1 895 Net loss on disposals and writeoffs of property, plant and equipment 4 646 318 4 643 640 Foreign currency translation – – – – – – (50) (50) Transfer of assets from non-electricity purchasing customers (1 293) (1 267) (1 293) (1 267) Assets and liabilities held-for-sale – – – – – – 67 67 Dividend income (66) (49) (46) (35) Other movements 2 845 – – – 153 721 – 3 719 Increase in employee benefit obligations 1 888 1 820 1 655 1 712 Decrease in provisions (2 486) (1 499) (2 439) (1 509) Balance at 31 March 2019 440 610 9 462 (162) 238 (15 689) (1 608) (2 031) 430 820 Decrease in contract liabilities and deferred income (172) (172) (172) (172) Net cash increase/(decrease) 525 (423) 9 (33) 1 843 (642) (20 877) (19 598) Payments made in advance recognised in profit or loss 149 330 129 302 Net fair value and foreign Payments received in advance recognised in profit or loss (820) (1 098) (813) (1 098) exchange losses/(gains) 40 075 – 1 9 (39 449) – (136) 500 Finance income (2 610) (2 722) (1 468) (1 679) Foreign currency translation – – – – – – 22 22 Finance cost 33 862 30 454 34 009 30 567 Assets and liabilities held-for-sale – – – – – – 32 32 Share of profit of equity-accounted investees (63) (35) – – Other movements 2 472 311 – – (26) 657 – 3 414 Balance at 31 March 2020 483 682 9 350 (152) 214 (53 321) (1 593) (22 990) 415 190 38 802 29 564 37 010 27 523 Changes in working capital: (2 464) 3 693 (2 536) 4 800 Company Balance at 1 April 2018 392 585 9 819 (168) 249 5 060 (1 150) (15 379) 391 016 Payments made in advance (240) (137) (227) (134) Net cash increase/(decrease) 25 032 (357) 10 (29) 1 219 (1 179) 14 485 39 181 Increase in inventories (4 853) (496) (4 841) (176) Net fair value and foreign Increase in trade and other receivables (576) (1 437) (1 138) (1 311) exchange losses/(gains) 24 622 – (4) 18 (22 121) – (620) 1 895 Increase in trade and other payables 2 200 4 088 2 428 4 621 Other movements 2 808 – – – 153 721 (3) 3 679 Expenditure incurred on employee benefit obligations (2 110) (1 884) (1 876) (1 774) Expenditure incurred on provisions (892) (1 150) (881) (1 150) Balance at 31 March 2019 445 047 9 462 (162) 238 (15 689) (1 608) (1 517) 435 771 Payments received in advance 4 007 4 709 3 999 4 724 Net cash increase/(decrease) 525 (422) 9 (33) 1 843 (642) (20 661) (19 381) Net fair value and foreign 36 338 33 257 34 474 32 323 exchange losses/(gains) 40 075 – 1 9 (39 449) – (136) 500 Other movements 2 567 307 – – (26) 657 – 3 505 Balance at 31 March 2020 488 214 9 347 (152) 214 (53 321) (1 593) (22 314) 420 395 1. Refer to note 26. 2. Refer to note 31. 3. Refer to note 15.2. 4. Refer to note 17 (hedge exposure covering debt securities and borrowings). 5. Refer to note 19 (securing debt raised). 6. Refer to note 22. 98 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 99 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 46. Guarantees and contingent liabilities 47. Commitments Group Company Group Company Unit 2020 2019 2020 2019 2020 2019 2020 2019 Rm Rm Rm Rm 46.1 Financial guarantees Long-term debt raised by Motraco 47.1 Capital expenditure Eskom guaranteed a portion of the debt that Motraco raised as part of Contracted capital expenditure 31 508 35 535 31 424 35 515 its operations. The debt matured on 30 April 2019 and therefore there Within one year 11 735 15 691 11 651 15 671 is no guarantee at 31 March 2020. One and five years 19 645 19 773 19 645 19 773 Guarantee issued USDm – 2 – 2 After five years 128 71 128 71 Default probability % – 1.05 – 1.05 Capital expenditure excludes finance costs capitalised and foreign currency Guaranteed contract value Rm – 22 – 22 fluctuations. EFC loans to group employees The capital expenditure will be financed through debt with government support EFC has granted loans (secured by mortgage bonds on the properties) and internally generated funds. to qualifying employees of the group. Eskom has issued guarantees to EFC to the extent to which the loan values of employees exceed the The capital programme will be reviewed and reprioritised by management in line current value of the mortgage security. with the funds available. Historically, EFC has absorbed any losses incurred and has not called up 47.2 Leases any guarantee payments. Eskom’s guarantee exposure is therefore As lessee governed by the default probability of EFC, which is influenced by the The future minimum lease payments payable under non-cancellable leases are: risk of significant fluctuations in interest rates that might cause Within one year 244 91 65 91 employees to default on their repayments. The risk-adjusted credit exposure of EFC is calculated by applying a rating agency’s annual default Operating leases – 91 – 91 probabilities. Short-term leases 201 – 23 – Guarantee issued/contract value Rm – – 983 1 032 Low-value leases 43 – 42 – Default probability % – – 0.38 0.29 One to five years 142 85 137 85 Financial guarantee Rm – – 4 3 Operating leases – 85 – 85 Changes in variables will not have a significant impact on profit or loss. Low-value leases 142 – 137 – Summary of financial guarantees Total 386 176 202 176 Total guaranteed contract value Rm – 22 983 1 054 Total financial guarantee Rm – – 4 3 Operating leases – 176 – 176 Short-term leases 201 – 23 – 46.2 Other guarantees Low-value leases 185 – 179 – Guarantees to South African Revenue Service for customs duty The lease payments payable under non-cancellable leases are of a similar nature Customs duty and import VAT are normally due upon declaration of to the right-of-use, short-term and low-value leases recognised in the statement imported goods at the port of entry (harbour or airport). SARS allows of financial position and income statement. Eskom up to a maximum of 37 days after declaration date before the customs duty and import VAT must be settled on the deferment As lessor account. SARS requires Eskom to provide a bank guarantee to secure The future minimum lease payments receivable under non-cancellable operating the debt when it becomes due. leases are: 67 6 54 6 All conditions of the deferral of the customs duty and import VAT have Within one year 46 3 40 3 been met. The total amount disclosed as a contingent liability One to five years 21 3 14 3 amounted to Rm 156 156 156 156 Eskom Pension and Provident Fund The lease payments receivable under non-cancellable leases are of a similar nature to the right-of-use, short-term and low-value Eskom has indemnified the EPPF against any loss resulting from leases recognised in the statement of financial position and income statement. negligence, dishonesty or fraud by the fund’s officers or trustees. 46.3 Other contingent liabilities Legal claims Legal claims are in process against Eskom as a result of disputes with various parties. On the basis of the evidence available it appears that no obligation is present. The claims are disclosed as a contingent liability and amounted to Rm 329 106 318 106 100 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 101 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 48. Related-party transactions and balances The group is wholly owned by the government represented by the DPE. Eskom (and its subsidiaries) are classified as schedule 2 public entities in terms of the PFMA. Eskom is part of the national sphere of government and its related parties in that sphere include Group Company national departments (including the shareholder), constitutional institutions and public entities (schedule 1, 2 and 3). A list of related 2020 2019 2020 2019 parties is provided by National Treasury on its website www.treasury.gov.za. Note Rm Rm Rm Rm Related parties also include subsidiaries, associates and joint ventures of the group and post-retirement benefit plans for the benefit Outstanding balances (due by related parties) of employees. It also includes key management personnel of Eskom or its shareholder and close family members of these related Receivables and amounts owed by related parties 2 125 2 236 3 918 3 530 parties. Key management personnel for Eskom include the group’s board of directors and the Exco. Disclosure of related-party National departments 119 100 119 100 transactions with key management personnel is included in note 51. Disclosure on the government guarantees to Eskom are included Public entities 1 667 1 808 1 546 1 650 in note 6.3.2. Subsidiaries, associates and joint ventures 339 328 2 253 1 780 Group Company Payments made in advance 2020 2019 2020 2019 Public entities – 8 – 8 Note Rm Rm Rm Rm Loans receivable Transactions Subsidiaries, associates and joint ventures1 – – 5 948 6 111 Sales of goods and services1 12 552 11 797 13 384 13 112 Indirect transactions – assets at nominal value National departments – 103 – 103 National departments 1 256 1 148 1 256 1 148 Public entities 7 420 6 937 7 202 6 868 Total due by related parties 2 125 2 347 9 866 9 752 Subsidiaries, associates and joint ventures 3 876 3 712 4 926 5 096 Cash and cash equivalents Government grant funding received for electrification Public entities 1 073 – 1 073 – National departments 2 717 2 841 2 717 2 841 Outstanding balances (due to related parties) Purchases of goods and services1 9 985 8 608 20 634 19 524 Debt securities and borrowings 115 106 122 657 119 682 127 141 Constitutional institutions 2 8 2 8 National departments 16 17 16 17 National departments 1 811 1 671 1 811 1 671 Public entities 112 189 119 789 112 189 119 789 Public entities 5 610 4 337 4 913 3 818 Subsidiaries, associates and joint ventures2 – – 4 576 4 484 Eskom Pension and Provident Fund 2 901 2 851 2 901 2 851 Subsidiaries, associates and joint ventures 112 171 11 692 11 835 Eskom Pension and Provident Fund 2 450 2 421 2 216 2 192 Payables3 and amounts owed to related parties 3 462 3 537 5 823 5 861 Net fair value loss on derivatives held for risk management Constitutional institutions – 6 – 6 Subsidiaries, associates and joint ventures – – (1) (4) National departments 404 405 404 405 Public entities 3 031 2 939 2 679 2 804 Finance income 138 142 589 603 Subsidiaries, associates and joint ventures 18 8 2 731 2 467 National departments 11 9 11 9 Eskom Pension and Provident Fund 9 179 9 179 Public entities 127 133 127 133 Payments received in advance 1 197 1 041 1 213 1 057 Subsidiaries, associates and joint ventures – – 451 461 National departments 1 197 1 041 1 197 1 041 Finance cost 2 7 772 7 856 8 101 8 159 Subsidiaries, associates and joint ventures – – 16 16 National departments 10 8 10 8 Derivative liabilities held for risk management Public entities 7 601 7 682 7 601 7 682 Subsidiaries, associates and joint ventures – – 4 – Subsidiaries, associates and joint ventures – – 329 303 Indirect transactions – liabilities at nominal value Eskom Pension and Provident Fund 161 166 161 166 National departments – 57 – 57 Dividend income Total due to related parties 119 765 127 292 126 722 134 116 Subsidiaries, associates and joint ventures 39 34 39 34 Guarantees Lease income 26 62 30 66 Guarantees issued contract value 156 178 1 139 1 210 National departments 3 – 3 – Subsidiaries, associates and joint ventures 46.1 – 22 983 1 054 Public entities 23 62 23 62 National departments 46.2 156 156 156 156 Subsidiaries, associates and joint ventures – – 4 4 Commitments Lease expenses 7 7 10 10 Eskom does not have any material commitments with its related parties. Public entities 7 7 7 7 Subsidiaries, associates and joint ventures – – 3 3 Environmental levy Public entities 35 7 613 7 805 7 613 7 805 1. Goods and services are bought and sold to related parties on an arm’s length basis at market-related prices. 1. The effective interest rate on the loans to subsidiaries is 7.12% (2019: 7.74%). 2. Bonds are bearer instruments and it is therefore unknown if the initial counterparty still holds the bonds. Transactions in the secondary market where Eskom is not the 2. Refer to note 26 for effective interest rate and maturity date relating to intercompany instruments. counterparty are therefore excluded. 3. Purchase transactions with related parties are on an arm’s length basis with payment terms of 30 days from invoice date. 102 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 103 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 49. Events after the reporting date The 2018 and 2019 statements of financial position as well and as the 2019 income statement and statement of comprehensive income Changes in board and Exco have been restated as a result of the above errors as follows: Mr S Dabengwa resigned from the Eskom board effective from 21 July 2020. Group Company Equity support Previously Adjust- Restated Previously Adjust- Restated Eskom received R1 billion on 29 May 2020 and R5 billion on 11 August 2020 as part of the support from government. reported ments reported ments Rm Rm Rm Rm Rm Rm Eskom restructuring Statement of financial position at 31 March 2018 The board approved an implementation plan on 15 September 2020 to give effect to the legal separation of the transmission division Assets into a wholly owned subsidiary and a PFMA application had been made to this effect. Various other approvals, including various Non-current regulatory and legal aspects would be required before this could be finalised. Property, plant and equipment 630 648 (1 215) 629 433 631 159 (1 215) 629 944 Other Current Mr M Manjingolo was appointed as company secretary on 1 July 2020. Trade and other receivables 20 125 (946) 19 179 21 429 (946) 20 483 Equity Capital and reserves 170 336 (3 099) 167 237 158 075 (3 072) 155 003 50. Restatement of comparatives Liabilities Post-retirement medical aid Non-current Eskom previously attributed the benefits relating to the post-employment medical aid up to the normal retirement age of 65 years. Employee benefit obligations 13 725 2 143 15 868 13 404 2 105 15 509 Eskom should have attributed the benefits in terms of the requirements of IAS 19 up to the date when further service by the employee Deferred tax 15 846 (1 205) 14 641 15 665 (1 194) 14 471 will lead to no material amount of further benefits. This has been reassessed to be at age 55 years when employees are allowed to go Statement of financial position at 31 March 2019 on early retirement and qualify for the full post-employment benefit. Assets Impairment of VAT portion of trade receivables Non-current Eskom did not previously impair the VAT portion of trade receivables balances, on the basis that it is recoverable from SARS if the trade Property, plant and equipment 651 637 (1 197) 650 440 652 233 (1 197) 651 036 receivable is written off. However, because the recovery would take at least 12 months to be received, the impact of the time value of money Current should have been incorporated into the allowance for impairment. This expected loss was calculated by discounting the recoverable cash Trade and other receivables 21 976 (1 117) 20 859 23 137 (1 117) 22 020 flows using the receivable balance’s original effective interest rate over the expected recovery period, limited to a maximum of five years. Equity Capital and reserves 153 094 (3 116) 149 978 138 492 (3 093) 135 399 Capitalisation of cost incurred in the construction of plant Liabilities Eskom re-assessed some of the costs that were previously capitalised during the construction of the Ingula pump storage power Non-current station. It was concluded that some of the costs incurred, mainly as a consequence of addressing the impact and shortcomings of the Employee benefit obligations 13 546 2 014 15 560 13 242 1 982 15 224 safety incident that occurred in the incline high pressure shaft on 31 October 2013, were not directly attributable to bringing the asset Deferred tax 8 350 (1 212) 7 138 7 804 (1 203) 6 601 to the condition necessary for it to be capable of operating in the manner intended. Income statements for the year ended 31 March 2019 Employee benefit expense (33 272) 89 (33 183) (27 616) 84 (27 532) Impairment of financial assets 278 (171) 107 260 (171) 89 Depreciation and amortisation expense (29 756) 18 (29 738) (29 662) 18 (29 644) Finance cost (30 239) (215) (30 454) (30 355) (212) (30 567) Loss before tax (29 148) (279) (29 427) (32 451) (281) (32 732) Income tax 8 419 78 8 497 9 262 79 9 341 Loss for the year (20 729) (201) (20 930) (23 189) (202) (23 391) Statements of comprehensive income for the year ended 31 March 2019 Loss for the year (20 729) (201) (20 930) (23 189) (202) (23 391) Items that may be reclassified subsequently to profit or loss 2 433 – 2 433 2 383 – 2 383 Items that may not be reclassified subsequently to profit or loss 1 252 184 1 436 1 223 181 1 404 Re-measurement of post-employment medical benefits 1 737 255 1 992 1 698 251 1 949 Income tax thereon (485) (71) (556) (475) (70) (545) Total comprehensive loss for the year (17 044) (17) (17 061) (19 583) (21) (19 604) 104 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 105 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 51. Directors’ remuneration Salaries The background to directors’ remuneration and an overview of the main provisions of the remuneration policy is included in the Salaries consist of a guaranteed package that includes Eskom’s medical and pension fund contributions. No fees were paid to remuneration and benefits section in the integrated report. The details of the board (governing body) and executive management executives who serve on the boards of Eskom subsidiaries. remuneration are included in this note. The details regarding the appointments, resignations and other changes in roles of directors during the year are included in the directors’ report. Short-term bonus If applicable, a short-term incentive bonus is paid after year end. No short-term bonuses were awarded in the current or prior 51.1 Executive directors and group executives financial years. The remuneration of the group chief executive and the chief financial officer (executive directors) and Exco members (group executives) are disclosed below. Eskom’s prescribed officers are the group executives. The group chief executive and the chief Long-term bonus financial officer have fixed-term contracts. The group executives have permanent contracts based on Eskom’s standard conditions of If applicable, a long-term incentive bonus is paid after year end in cash and consists of the vested amount in a reporting period. The service. NB Hewu and SJ Mthembu were appointed on standard fixed-term contracts. long-term bonus is based on units that are awarded in terms of the long-term incentive scheme to reward performance in line with performance conditions and targets over a three-year performance period. The number of units that vest may differ from the number The emoluments for the executives of the group were as follows: awarded depending on the achievement of performance conditions. The scheme requires that the employee remains in Eskom’s employment throughout the vesting period. These units are not in the scope of IFRS 2 Share-based payment as the performance award Name Salaries Notice Other Total is not linked to a share or a share price. payment payments remuneration earned and Name Vested on 31 March 2020 Vested on 31 March 2019 cash paid Awarded Payable Awarded Paid R’000 R’000 R’000 R’000 units R’000 units R’000 2020 A Noah – – 2 684 480 – Executive directors 9 394 – 499 9 893 MM Ntsokolo – – 3 076 945 – EM Pule – – 2 646 000 – AM de Ruyter 1 654 – 10 1 664 – – 8 407 425 – PS Hadebe 2 840 – 353 3 193 C Cassim 4 900 – 136 5 036 Bonus units awarded on 1 April 2016 vested on 31 March 2019 with a vesting rate over the three-year period of 38.07% payable at Group executives 27 493 850 1 173 29 516 R1.27 per unit. The board applied its discretion and resolved that the awards vested at 0% due to Eskom’s financial constraints. No new bonus units have been awarded since 1 April 2017 due to Eskom’s current financial constraints. JA Oberholzer 5 496 – 303 5 799 ML Bala 2 800 – 115 2 915 2020 2019 A Etzinger 599 – 19 618 R’000 R’000 ND Harris 1 874 – 17 1 891 Long-term bonus provision movement reconciliation NB Hewu 3 400 – – 3 400 Balance at beginning of the year – 5 451 SJ Mthembu 2 550 850 131 3 531 Service cost accrued – 1 744 BJ Nxumalo 2 100 – 163 2 263 Effect of changes in rates of vesting including board’s discretionary adjustments – (4 868) EM Pule 3 339 – 130 3 469 Forfeited – (2 327) SM Scheppers 2 800 – 134 2 934 Balance at end of the year – – MS Tshitangano 2 353 – 110 2 463 N Zibi 182 – 51 233 Notice payment Payments in terms of contractual agreements 850 18 743 36 887 850 1 672 39 409 Other payments 2019 Other payments consist of accumulated leave paid out on resignation and fees related to telephone costs, security services and operating vehicle expenditure. 1 672 973 Executive directors 11 651 – 210 11 861 Housing loans PS Hadebe 8 521 – 94 8 615 C Cassim 3 304 3 094 C Cassim 3 130 – 116 3 246 ML Bala 2 736 – Group executives 24 490 18 743 763 43 996 A Etzinger 985 74 JA Oberholzer 3 900 – 53 3 953 7 025 3 168 A Etzinger 399 – 12 411 Home loan balances are disclosed when an individual is in the role of an executive director or group T Govender 3 297 939 94 4 330 executive (even if they were only in that capacity for a portion of the year). The interest rate on the NB Hewu 850 – – 850 loans from EFC at 31 March 2020 was 8.00% (2019: 8.50%). The loans are repayable over a maximum WF Majola 1 882 3 849 117 5 848 period of 30 years. The terms and conditions applicable to ex-employees are applied on resignation. AA Masango 2 271 1 223 54 3 548 51.2 Non-executive directors SJ Mthembu 850 – – 850 Non-executive directors receive a fixed fee and are reimbursed for out-of-pocket expenses A Noah 2 541 6 372 120 9 033 incurred in fulfilling their duties. Their emoluments were as follows: MM Ntsokolo 2 912 6 360 139 9 411 JA Mabuza (Chairman) 4 261 1 599 EM Pule 3 339 – 133 3 472 RDB Crompton 540 524 HJ Steyn 290 – 13 303 RSN Dabengwa 557 489 MS Tshitangano 580 – 10 590 SN Mabaso-Koyana 506 607 N Zibi 1 379 – 18 1 397 NVB Magubane 498 489 MW Makgoba 952 717 36 141 18 743 973 55 857 BCE Makhubela 497 489 B Mavuso 593 593 PE Molokwane 618 578 TH Mongalo 543 593 J Sebulela – 289 9 565 6 967 106 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 107 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 52. New standards and interpretations 52.2 Standards, interpretations and amendments to published standards that are effective and applicable 52.1 Standards, interpretations and amendments to published standards that are not yet effective to the group The following new standards, interpretations and amendments to existing standards have been published that are applicable for future accounting periods that have not been adopted early by the group. These standards and interpretations will be applied in the first Topic Summary of requirements Impact year that they are applicable to Eskom. IFRIC 23 IFRIC 23 clarifies that where it is unclear how tax law applies Impact not material. The group is already Uncertainty over to a particular transaction or circumstance, an entity will have accounting for uncertainty over income tax Topic Summary of requirements Impact income tax to assess whether it is probable that the tax authority will treatments in accordance with the guidance Amendments to The main changes to the principles in the framework have The adoption of the amendments to the treatments accept the entity’s chosen tax treatment. Where it is references to implications for how and when assets and liabilities are conceptual framework is not expected to (1 January 2019) probable that the tax authority may not accept the chosen Conceptual recognised and derecognised in the financial statements. It is result in any significant changes. Any changes tax treatment, disclosure about judgements made, Framework in IFRS expected that inconsistencies between accounting policies to standards as a result of the amendments assumptions and other estimates used; and the potential standards effective and the new guidance will be rare will be addressed accordingly impact of uncertainties that are not reflected may be (1 January 2020) required. The interpretation also requires the entity to reassess the judgements and estimates applied if the facts and Definition of a The amendments provide more guidance on the definition of Impact not material. There are currently no circumstances change business a business. The effect of these changes is that the new business combinations – amendments definition of a business is narrower. This could result in fewer Annual The annual improvements deal with additional guidance for Impact not material. There were no business to IFRS 3 business combinations being recognised improvements 2015 applying the acquisition method to particular types of combinations, joint operations or dividends (1 January 2020) – 2017 cycle – business combinations (IFRS 3 Business combinations), payable Amendments to accounting for acquisitions of interests in joint operations Definition of The definition of ‘material’ has been refined and practical The adoption of the updated definition and IFRS 3, IFRS 11, (IFRS 11 Joint arrangements), income tax consequences of The additional guidance on borrowing costs material guidance on applying the concept of materiality has been issued practical guidance is not expected to result in IAS 12 and IAS 23 payments on financial instruments classified as equity eligible for capitalisation has been prospectively – amendments to any significant changes based on how (1 January 2019) (IAS 12 Income taxes) and borrowing costs eligible for applied from 1 April 2019. The impact was not IAS 1 and IAS 8 The revised definition of material is: “Information is material materiality has been applied in the current significant if omitting, misstating or obscuring it could reasonably be annual financial statements capitalisation (IAS 23 Borrowing costs) (1 January 2020) expected to influence decisions that the primary users of Plan amendments, Amendment to IAS 19 clarifies current service and net Impact not material. There was no general purpose financial statements make on the basis of curtailment or interest accounting in the accounting for defined benefit plans amendment, curtailment or settlement of a those financial statements, which provide financial information settlement defined benefit plan about a specific reporting entity” – amendments Interest Rate The first phase of amendments to IFRS 9 Financial Instruments, The group is currently in the process of to IAS 19 Benchmark Reform IAS 39 Financial Instruments: Recognition and Measurement and evaluating the detailed requirements of the (1 January 2019) Phase 1 IFRS 7 Financial Instruments: Disclosures focused on hedge standard to assess the impact on the financial IFRS 16 Leases Eskom has applied IFRS 16 (replacing IAS 17 Leases, (amendments to accounting issues. Specific hedge accounting requirements statements. The impact is not expected to be (1 January 2019) IFRIC  4  Determining whether an arrangement contains a lease, IFRS 9, IAS 39 have been amended to provide relief from the potential material as the amendments provide targeted SIC-15 Operating leases – incentives and SIC-27 Evaluating the and IFRS 7) effects of the uncertainty caused by the interbank offered relief for financial instruments qualifying for substance of transactions involving the legal form of a lease) from (1 January 2020) rates (IBOR) reform hedge accounting in the lead up to IBOR reform 1 April 2019 IFRS 17 Insurance IFRS 17 introduces one accounting model for all insurance The adoption of IFRS 17 is not expected to Lessee accounting contracts contracts in all jurisdictions that apply IFRS have a material impact on the group IFRS 16 introduces a single, on-balance sheet lease accounting The group: (1 January 2023) model for lessees. A lessee is required to recognise a right-of- • It requires an entity to measure insurance contracts using The group is currently in the process of applied a single recognition and updated estimates and assumptions that reflect the timing of evaluating the detailed requirements of the use asset representing its right to use the underlying leased measurement approach for all leases cash flows and take into account any uncertainty relating to standard to assess the impact on the financial asset and a lease liability representing its obligation to make except for short-term leases and leases insurance contracts. The financial statements of an entity will statements. It is expected that the standard lease payments. There are recognition exemptions for short- of low-value assets, where the recognition have to reflect the time value of money of estimated payments will only impact the financial statements of the term leases and leases of low-value items exemption was applied required to settle incurred claims. Insurance contracts will be group subsidiary, Escap • adopted IFRS 16 using the modified A lessee measures right-of-use assets similarly to other non- measured only on the obligations created by the contracts. retrospective approach where the financial assets (such as property, plant and equipment) and An entity will also be required to recognise profits as an retrospective cumulative effect of initially lease liabilities similarly to other financial liabilities. As a insurance service is delivered, rather than on receipt of applying the standard was recognised at the consequence, a lessee recognises depreciation on the right- premium date of initial application on 1 April 2019 of-use asset and interest on the lease liability and also • elected to use the practical expedient on Sale or These amendments address the conflict between the guidance Impact not material. The group is currently classifies cash repayments of the lease liability into principal transition that allows the group not to contribution of on consolidation and equity accounting when a parent loses not disposing any of its investments in and interest portions and presents them in the statement of reassess whether a contract contains a assets between an control of a subsidiary in a transaction with an associate or associates or joint ventures cash flows applying IAS 7 Statement of cash flows lease on initial application for contracts investor and its joint venture. The parent recognises the full gain on the loss Assets and liabilities arising from a lease are initially measured that existed at transition date. The group associate or joint of control under the consolidation standard, but under the on a present value basis. The measurement includes non- therefore applied the standard to contracts venture – standard on associates and joint ventures, the parent cancellable lease payments (including inflation-linked that were previously identified as leases amendments to recognises the gain only to the extent of unrelated investors’ payments), and also includes payments to be made in optional applying IAS 17 and IFRIC 4 on 1 April 2019 IFRS 10 and IAS 28 interests in the associate or joint venture. The amendments periods if the lessee is reasonably certain to exercise an (optional adoption, require the full gain to be recognised when the assets option to extend the lease, or not to exercise an option to effective date transferred meet the definition of a business under IFRS 3 terminate the lease deferred Business Combinations indefinitely) 108 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 109 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 52. New standards and interpretations (continued) 52.3 Impact of adoption of IFRS 16 52.2 Standards, interpretations and amendments to published standards that are effective and applicable Lease commitments reconciliation to the group (continued) Group and Topic Summary of requirements Impact company Note Rm IFRS 16 Leases Lessee accounting (continued) The following specific requirements and (1 January 2019) Lessees will need to apply judgement in deciding on the practical expedients have been applied by the Operating lease commitments at 31 March 2019 47.2 176 (continued) information to disclose to meet the objective of providing a group on transition: Effect of discounting (9) basis for users of financial statements to assess the effect that 167 leases have on the financial position, financial performance Lessee accounting of leases previously classified as and cash flows of the lessee finance leases Short-term leases 28 The group did not change the initial carrying Right-of-use lease liabilities 31 139 IFRS 16 can be applied using either a retrospective approach or a modified retrospective approach with optional practical amounts of recognised assets and liabilities expedients for lessees. The lessee will have to apply any at the date of initial application for leases Impact on statement of financial position at initial adoption (1 April 2019) elections consistently to all of its leases previously classified as finance leases (ie the right-of-use assets and lease liabilities equal Group Company When applying the modified retrospective approach to leases the lease assets and liabilities recognised Before After Before After previously classified as operating leases under IAS 17, the under IAS 17). The requirements of IFRS 16 implemen- IFRS 16 implemen- implemen- IFRS 16 implemen- lessee can elect, on a lease-by-lease basis, whether to apply were applied to these leases from 1 April tation adoption tation tation adoption tation a number of practical expedients on transition 2019 Note Rm Rm Rm Rm Rm Rm Lessee accounting of leases previously classified as Assets operating leases Property, plant and equipment 9 650 440 132 650 572 651 036 132 651 168 The group recognised right-of-use assets and lease liabilities for those leases previously Liabilities classified as operating leases, except for Lease liabilities 31 9 462 139 9 601 9 462 139 9 601 short-term leases and leases of low-value Trade and other payables 37 880 (7) 37 873 39 239 (7) 39 232 assets. The right-of-use asset for leases were recognised on transition based on the amount The R7 million impact on trade and other payables relates to operating lease smoothing balances that had been recognised in terms equal to the lease liabilities, adjusted for any of IAS 17. related prepaid and accrued lease payments previously recognised 53. Information required by the Public Finance Management Act Lease liabilities were recognised based on the Section 55(2)(b)(i) of the PFMA requires that the particulars of any irregular expenditure, fruitless and wasteful expenditure as present value of the remaining lease payments, well as material losses due to criminal conduct be disclosed in the annual financial statements. Any losses due to criminal conduct discounted using the average incremental that individually or collectively (where items are closely related) exceed R25 million in terms of the significance and materiality borrowing rate of 9.06% at the date of initial framework, as agreed with the shareholder, have to be reported. application 53.1 Irregular expenditure The group also applied the available practical Irregular expenditure is defined as expenditure, other than unauthorised expenditure, incurred in contravention of or that is not in expedients on transition wherein it: accordance with a requirement of any applicable legislation. The scope includes transgressions of any laws and regulations regardless • used a single discount rate to a portfolio of whether or not the expenditure was justified from a business perspective, value was received, the breaches were deliberate or of leases with reasonably similar accidental, or the breaches happened unknowingly or in good faith. characteristics • applied the short-term leases exemption Non-compliance to internal policies and procedures was included as irregular expenditure in terms of a National Treasury instruction to leases with lease terms that were ending that was valid from 1 December 2018 to 16 May 2019. This instruction was subsequently superseded by an updated instruction within 12 months of initial application. from National Treasury where internal non-compliances are only reported as irregular expenditure if the policy or procedure is The group accounted for those leases in underpinned by legislation. the same way as for short-term leases as Irregular expenditure is incurred when the related transaction is recognised in terms of IFRS. The irregular expenditure is removed described earlier from the note through a process of condonation by the relevant authority, recovery or removal. Lessor accounting IFRS 16 substantially carries forward the lessor accounting Lessor accounting remains substantially requirements in IAS 17. Accordingly, a lessor continues to unchanged in terms of IFRS 16. Leases continue classify its leases as operating or finance leases and to account to be classified as operating or finance leases for those two types of leases differently using similar principles as in IAS  17. IFRS 16 therefore did not have any impact on leases IFRS 16 also requires enhanced disclosures to be provided where the group is the lessor about a lessor’s risk exposure, particularly to residual value risk 110 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 111 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 53. Information required by the Public Finance Management Act (continued) 53.1 Irregular expenditure (continued) Balance at Expenditure Condoned Recovered Balance Balance at Expenditure Condoned Recovered Balance beginning at end of beginning at end of of the year the year of the year the year Note Rm Rm Rm Rm Rm Note Rm Rm Rm Rm Rm 2020 2019 Group Group PFMA 16 301 10 540 (45) (150) 26 646 PFMA 12 454 4 798 (951) – 16 301 Use of sole source (a) 7 103 2 734 – – 9 837 Use of sole source (a) 4 9291 2 174 – – 7 103 Incorrect classification as emergency procurement (b) 340 36 – – 376 Incorrect classification as emergency procurement (b) 2701 701 – – 340 Tender processes not adhered to and insufficient Tender processes not adhered to and insufficient delegation of authority (c) 3 397 5 546 (45) (150) 8 748 delegation of authority (c) 2 9831 1 3651 (951) – 3 397 Modifications exceeding allowed amounts (d) 5 461 2 224 – – 7 685 Modifications exceeding allowed amounts (d) 4 2721 1 1891 – – 5 461 PPPFA 3 868 451 (27) – 4 292 PPPFA 3 767 245 (144) – 3 868 Incorrect tender process applied (e) 794 85 (27) – 852 Incorrect tender process applied (e) 916 1 22 (144) – 794 Tax clearance certificates (f) 3 074 350 – – 3 424 Tax clearance certificates (f) 2 8511 2231 – – 3 074 Designated sectors (g) – 16 – – 16 CIDB regulations CIDB regulations Contracts awarded without following CIDB Contracts awarded without following CIDB requirements (h) 5801 797 – – 1 377 requirements (h) 1 377 156 – – 1 533 National Treasury instructions National Treasury instructions Contracts not in accordance with National Contracts not in accordance with National Treasury instructions (i) 1 398 – – (902) 496 Treasury instructions (i) 496 1 – – 497 Various commercial requirements Various commercial requirements Breach of more than one commercial requirement (j) 461 23 – – 69 Breach of more than one commercial requirement (j) 69 – – – 69 Other 8 2 (10) – – Other – 18 – – 18 18 253 5 865 (1 105) (902) 22 111 22 111 11 166 (72) (150) 33 055 Company Company PFMA 7 086 2 734 (662) – 9 158 PFMA 9 158 8 340 (29) (150) 17 319 Use of sole source (a) 247 253 – – 500 Use of sole source (a) 500 709 – – 1 209 Incorrect classification as emergency procurement (b) 203 511 – – 254 Incorrect classification as emergency procurement (b) 254 – – – 254 Tender processes not adhered to and insufficient Tender processes not adhered to and insufficient delegation of authority (c) 2 4151 1 2411 (662) – 2 994 delegation of authority (c) 2 994 5 438 (29) (150) 8 253 Modifications exceeding allowed amounts (d) 4 2211 1 1891 – – 5 410 Modifications exceeding allowed amounts (d) 5 410 2 193 – – 7 603 PPPFA 3 376 215 – – 3 591 PPPFA 3 591 411 – – 4 002 Incorrect tender process applied (e) 609 2 – – 611 Incorrect tender process applied (e) 611 62 – – 673 Tax clearance certificates (f) 2 767 2131 – – 2 980 Tax clearance certificates (f) 2 980 333 – – 3 313 CIDB regulations Designated sectors (g) – 16 – – 16 Contracts awarded without following CIDB CIDB regulations requirements (h) 5771 797 – – 1 374 Contracts awarded without following CIDB National Treasury instructions requirements (h) 1 374 153 – – 1 527 Contracts not in accordance with National National Treasury instructions Treasury instructions (i) 1 398 – – (902) 496 Contracts not in accordance with National Various commercial requirements Treasury instructions (i) 496 – – – 496 Breach of more than one commercial requirement (j) 461 23 – – 69 Various commercial requirements Other 8 2 (10) – – Breach of more than one commercial requirement (j) 69 – – – 69 12 491 3 771 (672) (902) 14 688 Other – 16 – – 16 14 688 8 920 (29) (150) 23 429 1. Prior period corrected with updated numbers identified during the group’s clean-up exercise. 112 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 113 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 53. Information required by the Public Finance Management Act (continued) (b) Incorrect classification as emergency procurement 53.1 Irregular expenditure (continued) Irregular expenditure was incurred where emergency purchases did not meet the National Treasury requirements for emergency procurement. In cases where an emergency purchase is required for a period longer than 30 days with more than one payment, Expenditure analysis a contract is established to limit abuse and minimise any potential risk in execution. This resulted in a significant reduction in 2020 2019 the number of emergency procurement transactions since October 2017. Appropriate action has been taken against implicated Current Prior Total Total individuals where the related investigations were completed. year years The 2019 balances have been restated as follows as a result of the clean-up exercise: Note Rm Rm Rm Rm • opening balance increased by R16 million for the group Group • expenditure increased by R1 million for the group and company PFMA 4 304 6 236 10 540 4 798 (c) Tender processes not adhered to and insufficient delegation of authority Use of sole source (a) 2 572 162 2 734 2 174 The following categories have been combined because of the similarity of issues reported previously: Incorrect classification as emergency procurement (b) 36 – 36 701 • internal processes not adhered to Tender processes not adhered to and insufficient delegation of • tender process not followed and insufficient delegation of authority authority (c) 278 5 268 5 546 1 3651 • tender process not adhered to Modifications exceeding allowed amounts (d) 1 418 806 2 224 1 1891 Transgressions where tender processes were not followed reduced significantly. Internal controls on the management of panel PPPFA 211 240 451 245 contracts have been enhanced to align with the Preferential Procurement Policy Framework Act’s (PPPFA) award criteria and a terms Incorrect tender process applied (e) 24 61 85 22 of reference have been introduced for the panel control committee. Civil and criminal action are being taken where contracts were Tax clearance certificates (f) 171 179 350 2231 placed without proper delegation of authority in prior years. Two contracts were deemed irregular in 2020 after the investigation Designated sectors (g) 16 – 16 – into the matters were completed, a recovery process is underway for one matter and an amount of R150 million was recovered in another matter. Eskom submitted requests for condonation to National Treasury for the majority of this expenditure. CIDB regulations Contracts awarded without following CIDB requirements (h) 155 1 156 797 The 2019 balances have been restated as follows as a result of the clean-up exercise: National Treasury instructions • opening balance decreased by R138 million for the group and R77 million for the company Contracts not in accordance with National Treasury instructions (i) – 1 1 – • expenditure increased by R8 million for the group and company Various commercial requirements (d) Modifications exceeding allowed amounts Breach of more than one commercial requirement (j) – – – 23 Any modification to an original contract where the value of the modification is more than 20% or R20 million for construction-related goods, works or services and 15% or R15 million for all other goods or services has to be approved by National Treasury effective Other 10 8 18 2 from 1 May 2016. The group did not initially comply with the National Treasury instruction and an estimated amount of irregular 4 680 6 486 11 166 5 865 expenditure was reported in 2018, predominately due to the interpretation of the instruction note. Company The full population of contract with value changes from 1 May 2016 to 31 March 2018 was reviewed and the irregular expenditure PFMA 2 129 6 211 8 340 2 734 recalculated based on the contract value excluding cost price adjustment and contingency. Management confirmed the regularity of all contracts with modifications during the period. The methodology applied to calculate the irregular expenditure was properly Use of sole source (a) 553 156 709 253 documented. The calculation was based on management estimates due to the impracticality of reviewing the large volume of individual Incorrect classification as emergency procurement (b) – – – 511 line items and was calculated based on the committed values during this period. The contracts that were found to be non-compliant Tender processes not adhered to and insufficient delegation of authority (c) 189 5 249 5 438 1 2411 will be taken through the relevant internal processes and then submitted to National Treasury for condonation. The procurement Modifications exceeding allowed amounts (d) 1 387 806 2 193 1 1891 procedure has been aligned to the National Treasury instruction to ensure compliance going forward. The procurement practitioners were appraised on the interpretation of the threshold and systems were enhanced. Modifications of task orders on panel contracts PPPFA 171 240 411 215 are monitored to ensure compliance. Incorrect tender process applied (e) 1 61 62 2 Tax clearance certificates (f) 154 179 333 2131 The 2019 balances have been restated as follows as a result of the clean-up exercise: Designated sectors (g) 16 – 16 – • opening balance decreased by R2 276 million for the group and R2 282 million for the company • expenditure decreased by R783 million for the group and company CIDB regulations Contracts awarded without following CIDB requirements (h) 152 1 153 797 (e) Incorrect tender process applied The PPPFA, effective 7 December 2012, requires that the preferential points calculation is determined inclusive of VAT. Certain Various commercial requirements procurement was incorrectly done where the preferential points calculation, which is based on the applicable quotation or contract Breach of more than one commercial requirement (j) – – – 23 value, was determined exclusive of VAT. The procurement procedure has been amended in line with the PPPFA requirements. Other 10 6 16 2 Training has been rolled out on the revised procedure. There were six new occurrence of irregular expenditure of this nature relating to historic transactions, indicating that the controls implemented are effective. 2 462 6 458 8 920 3 771 The 2019 opening balance has increased by R4 million for the group as a result of the clean-up exercise. (a) Use of sole source (f) Tax clearance certificates State-owned entities are required to procure goods and services in a manner that is fair, equitable, transparent, competitive and The PPPFA regulations require that tenders may only be awarded to a person whose tax matters have been declared to be in order cost-effective. Expenditure was incurred on awards which did not follow proper tender processes where awards were incorrectly by SARS. SARS has since created a mechanism whereby a supplier’s tax status can be confirmed. Internal processes were enhanced allocated to predetermined suppliers. These incidents and all similar transactions incurred during the year have been investigated. and procurement practitioners trained to ensure that the tax status of all successful tenderers is confirmed to be compliant prior to Internal procedures have been enhanced and system controls have been implemented to flag the transactions when they occur. concluding a contract. The additional irregular expenditure that was reported during the year was primarily incurred on existing contracts from prior years. There were 11 new instances amounting to R179 million reported in 2020. Most of the expenditure incurred in the current year The irregular expenditure will fall away once those contracts are condoned. Eskom is engaging with National Treasury to expedite relates to past transgressions which will no longer be irregular once condoned. The historical non-compliances have been submitted the condonation process. A standing committee has been established between Eskom, National Treasury and DPE to monitor the to National Treasury for condonation. processing of submitted applications, including condonation of all irregular expenditure. The 2019 balances have been restated as follows as a result of the clean-up exercise: The system controls that were implemented from January 2019 seem to be effective as there were minimal, if any, re-occurrences • opening balance decreased by R344 million for the group of irregular expenditure in this category. Sole source requests are scrutinised to determine if the request is applicable to one or • expenditure increased by R21 million for the group and company multiple sites. National contracts or contracts per specific site are established for multiple site request to ensure economies of scale. The 2019 opening balance has decreased by R68 million for the group as a result of the clean-up exercise. 1. Prior period corrected with updated numbers identified during the group’s clean-up exercise. 114 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 115 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 53. Information required by the Public Finance Management Act (continued) Balance at Expenditure Recovered Removed Balance at 53.1 Irregular expenditure (continued) beginning end of (g) Designated sectors of the year the year Where local production and content is of critical importance in the award of tenders in designated sectors, such tenders must be Rm Rm Rm Rm Rm advertised with a specific tendering condition that only locally produced goods, services or works or locally manufactured goods that meet the stipulated minimum threshold for local production and content will be considered. 2019 Group Contracts were awarded to suppliers despite having declared a local content threshold that was below the required stipulated Project management – 53 – (46) 7 threshold as per the Department of Trade and Industry list of designated materials. Training was provided to the relevant staff during Procurement and contract management 11 21 – (19) 3 the year on the requirements of designated sectors to ensure compliance. Revenue management – 4 – (4) – (h) Contracts awarded without following CIDB requirements Interest and penalties – 221 – (18) 4 The group did not comply with the Construction Industry Development Board (CIDB) regulation regarding the advertising of tenders, Other 1 5331 – (10) 524 grading of contractors and publishing of awards. Eskom engaged with CIDB and National Treasury to address the non-compliance. 2 633 – (97) 538 Controls have been enhanced to prevent future non-compliance as there is now a mechanism in place to prove and sign-off on the adherence of the CIDB regulation. There has been minimal non-compliance to this requirement in the current year. Company Project management – 48 – (41) 7 The 2019 opening balance has increased by R6 million for the group and company as a result of the clean-up exercise. Procurement and contract management 11 3 – (2) 2 (i) Contracts not in accordance with National Treasury instructions Revenue management – 4 – (4) – Eskom entered into a consulting contract on a risk-based remuneration model without prior approval from National Treasury. The Interest and penalties – 81 – (5) 3 matter is being investigated by the Directorate for Priority Crime Investigation (Hawks). Eskom pursued recovery from the supplier Other 1 5301 – (7) 524 and its subcontractor and an amount of R496 million is still outstanding from the subcontractor. Eskom instituted civil procedures and 2 593 – (59) 536 the Pretoria High Court ruled in Eskom’s favour on 18 June 2019 and ordered the subcontractor to repay the amount due with costs. Eskom issued a notice of motion for the winding-up of the sub-contractor on 17 January 2020 to recover the outstanding amounts. Criminal charges have been laid against the implicated individuals. Expenditure analysis 2020 2019 (j) Breach of more than one commercial requirement Investigations identified transgressions of more than one legislative requirement as well as Eskom procurement policy and procedures. Current Prior Total Total All identified breaches have been logged in a central condonation register and investigated for condonation by internal Delegated year years Approval Authorities. Condonation will be requested from National Treasury, where applicable, and improvements have been made Rm Rm Rm Rm to processes to address each of the breaches. In addition, various Instruction Notes and guidelines have been implemented to clarify Group any ambiguity in the legislative prescripts and internal procedures. Project management 2 2 112 2 114 53 The 2019 opening balance has increased by R5 million for the group and company as a result of the clean-up exercise. Procurement and contract management – 6 6 21 Revenue management – 1 1 4 53.2 Fruitless and wasteful expenditure Interest and penalties – – – 221 Fruitless and wasteful expenditure is expenditure made in vain that could have been avoided had reasonable care been exercised. Other 208 4 212 5331 Fruitless and wasteful expenditure is reported in the annual financial statements when it is confirmed. 210 2 123 2 333 633 Balance at Expenditure Recovered Removed Balance at Company beginning end of of the year the year Project management – 2 112 2 112 48 Rm Rm Rm Rm Rm Procurement and contract management – 6 6 3 Revenue management – 1 1 4 2020 Interest and penalties – – – 81 Group Other 208 4 212 5301 Project management 7 2 114 – – 2 121 Procurement and contract management 3 6 (2) – 7 208 2 123 2 331 593 Revenue management – 1 – – 1 Interest and penalties 4 – – (1) 3 The group experienced 83 (2019: 214) and the company 77 (2019: 180) incidents of fruitless and wasteful expenditure during the Other 524 212 – – 736 reporting period. 538 2 333 (2) (1) 2 868 Construction commenced in 2012 on residential flats to accommodate artisans during the construction of the Kusile power station. The project was not completed while expenditure of R840 million was incurred. The property has been made available for sale. The Company necessary consequence management, including disciplinary action, civil recovery and possible criminal sanction has been instituted Project management 7 2 112 – – 2 119 and one employee was subsequently dismissed. Procurement and contract management 2 6 (2) – 6 Revenue management – 1 – – 1 Expenditure of R1 247 million incurred on the construction of the Ingula pump storage power station was assessed to be fruitless and wasteful due to shortcomings in project management. Interest and penalties 3 – – – 3 Other 524 212 – – 736 536 2 331 (2) – 2 865 1. Prior period corrected with updated numbers identified during the group’s clean-up exercise. 116 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 117 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 53. Information required by the Public Finance Management Act (continued) (b) Estimated non-technical revenue losses 53.3 Criminal conduct Non-technical losses arise mainly from meter tampering and bypasses, illegal connections to the electricity network and illegal Material losses caused by criminal conduct and any disciplinary, civil or criminal action taken in respect of such losses are reported vending of electricity. The management of non-technical losses focuses on ensuring that all energy supplied is accounted for, energy in terms of the materiality framework. supplied and not invoiced is identified, lost revenue calculated and any lost revenue stemming from energy losses recovered. Group Company Eskom invoiced R318 million (2019: R449 million) of revenue relating to these losses during the year, of which R213 million Note 2020 2019 2020 2019 (2019: R117 million) has been received during the year. Payments received reflected are for the current financial year only. Once the recovery is invoiced, the debtors process is followed for collection. Losses incurred (Rm) Theft of conductors, cabling and related equipment (a) 115 105 113 104 Interventions to reduce non-technical energy losses include: • reconciliation of the energy delivered and energy sold (ie energy accounting) at various levels of the network to prioritise high loss Estimated non-technical revenue losses (b) 1 977 1 741 1 977 1 741 feeders for normalisation Fraud 38 51 38 29 • revenue risk analysis through exception report analysis to identify metering installations with a high revenue risk • auditing and repairing of faulty customer meter installations Material incidents (greater than R25 million) – 28 – 28 • disconnection of illegal connections, meter tampers and imposition of penalties (remedial fees) Immaterial incidents (less than R25 million) (c) 38 23 38 1 • correction of process non-adherence and data anomalies • estimation and recovery of revenue for historical unaccounted energy where tampered, faulty or missing metering installations Other crimes 117 80 110 79 were encountered in the conventional customer base Material incidents (greater than R25 million) (d) 58 1 58 – • automisation of various elements of the loss management process to improve efficiencies (ie implementation of advanced Immaterial incidents (less than R25 million) 59 79 52 79 analytics in identifying revenue risk, automation of revenue risk case management, energy balancing and rollout of tools for lost revenue estimation) 2 247 1 977 2 238 1 953 • implementation of audit, advisory, training, standardisation, automation and benchmarking support • Free Basic Electricity campaign launch to make people aware of their constitutional rights Losses recovered (Rm) • launch of the revenue management centre Theft of conductors, cabling and related equipment (a) 4 2 4 2 Estimated non-technical revenue losses (b) 213 117 213 117 (c) Fraud Fraud Immaterial incidents (less than R25 million) Material incidents (greater than R25 million) (c) – 3 – 3 Eskom concluded 25 (2019: 19) investigations into fraud during the year. The internal control measures in the affected areas have been reviewed and enhancements recommended to the accountable line managers for implementation. This includes controls, disciplinary, Other crimes criminal and civil proceedings against those involved. Immaterial incidents (less than R25 million) 2 – 2 – (d) Other crimes 219 122 219 122 Material incidents (greater than R25 million) Number of incidents There were two incidents that took place at the Majuba power station. A 4 000 ton coal silo (with an approximate value of R30 million) Theft of conductors, cabling and related equipment (a) 4 798 5 150 4 790 5 150 was burned in a case of arson. There was also a sabotage of a weighbridge valued at R28 million. Fraud 29 20 25 2 53.4 Matters under assessment and determination Matters under assessment and determination include the following: Material incidents (greater than R25 million) – 1 – 1 • various non-compliances to PFMA section 51(1)(a)(iii) regarding the principles of fair, equitable, transparent, competitive and cost- Immaterial incidents (less than R25 million) (c) 29 19 25 1 effective procurement including inappropriate: Other crimes 1 998 1 838 1 900 1 838 – use of sole sources and emergencies – modifications to contracts Material incidents (greater than R25 million) (d) 2 – 2 – – emergency procurement of fuel oil Immaterial incidents (less than R25 million) 1 996 1 838 1 898 1 838 – significant matters on six modifications related to construction contracts – various non-adherence to tender processes including breaches of delegation of authority 6 825 7 008 6 715 6 990 • application of Preferential Procurement Regulations Number of arrests – designated sectors (minimum thresholds not stated in the tender advert and tenderer submissions) Theft of conductors, cabling and related equipment (a) 120 119 120 119 – tax non-compliance – period of tender advertisements Other crimes – application of evaluation criteria for measuring functionality Immaterial incidents (less than R25 million) 46 62 46 62 • limitation where documents were not provided for audit purposes which may result in a non-compliance 166 181 166 181 • incorrect application of CIDB Act • possible undue influence due to a conflict of interest (supplier declaration of interest not completed) • potential losses due to a lack of reasonable care in project and contract management (a) Theft of conductors, cabling and related equipment • interest and penalties being levied against Eskom due to instances of late payment of suppliers Actions to combat these losses are managed in collaboration with other affected state-owned companies, industry role players, the • losses due to under-utilised information technology systems and licences National Prosecuting Authority and the South African Police Service. • potential overpayments of R3.5 billion to a number of contractors involved in the construction of the Kusile power station. Although the amounts have been written off in terms of IFRS, assessments are ongoing to determine whether the payments constitute fruitless and wasteful expenditure. These types of contracts are remeasured on conclusion of the final deliverables. The reviews and assessments are conducted by independent external parties. Appropriate reporting of fruitless and wasteful expenditure will be made once the reviews and assessments are finalised Relevant disclosure will be made in a subsequent financial year should any losses or expenditure incurred prove to be irregular, fruitless and wasteful or due to criminal conduct. 118 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 119 NOTES TO THE FINANCIAL STATEMENTS continued for the year ended 31 March 2020 54. Reportable irregularities and matters under investigation 54.1 Reportable irregularities The external auditors raised certain reportable irregularities in terms of section 45 of the Auditing Profession Act in prior periods. Progress was made in clearing these reportable irregularities, but some will stay open until finalisation of court cases or conclusion of investigations by external parties. The table below reflects the status of the reportable irregularities at 31 March 2020. The discussion focused on items that were open at the previous year end. Description Action Status Description Action Status Reportable irregularities – 31 March 2017 • the former CFO (A Singh) approved a • the former CFO resigned • open, pending guarantee on behalf of Eskom to Tegeta • the guarantee was not called on and expired on recovery of • there were allegations that an early • the Democratic Alliance and Solidarity Trade Union • open, pending Exploration and Resources (Pty) Ltd in 31 March 2017 guarantee fees retirement agreement between Eskom and successfully brought an application in the Gauteng repayment of the December 2015 in contravention of the • guarantee fees were incurred and reported as the former GCE (B Molefe) was irregular Division of the High Court to set aside the early early retirement PFMA without proper delegation of authority fruitless and wasteful expenditure in terms of the retirement agreement between Eskom and the settlement PFMA former GCE • the cost incurred will be recovered from the • the former GCE appealed the High Court decision to former CFO the Supreme Court of Appeal • legal processes are being followed to recover the cost • the Supreme Court of Appeal dismissed the appeal incurred from the former CFO in April 2019 • the former GCE subsequently appealed the matter to Reportable irregularities – 31 March 2018 the Constitutional Court, which also dismissed the • there were allegations that the former • the former CFO and interim GCE resigned • open, awaiting case CFO (A Singh) and former interim GCE • the agreement was not binding as the required formal conclusion • the EPPF issued a letter of demand to the former GCE (S Maritz) breached their fiduciary duties by approval from the DPE and National Treasury was of the Zondo in April 2019 for payment of the amounts ordered by contractually and financially binding Eskom not obtained Commission the High Court, to date payment is outstanding to a facilitation fee with Huarong Asset • there was no financial loss to Eskom • the EPPF advised Eskom that it approached the Financing (Huarong) • it was communicated to Huarong that Eskom would court for an order empowering it to repay the early not honour any agreement as it is considered not retirement to Eskom as the current court orders did binding not empower it to do so • the matter was discussed at the Zondo Commission • the Hawks are currently investigating the matter • the EPPF launched new proceedings against the • there were allegations that Eskom incorrectly • the GE: security resigned • open, pending former GCE procured services from Bizz Tracers (Pty) Ltd • the investigation into the matter was finalised and addressing of through the sole source supplier process the findings from the investigation are being actioned. findings and Reportable irregularities – 30 September 2017 • subsequent to 31 March 2018, further The findings of the reports are currently being re- finalisation of • a parliamentary inquiry was held into • Eskom investigated and action was taken, including • open, pending suppliers were identified where services confirmed recovery process perceived maladministration, governance relevant reporting where appropriate, against those finalisation, were incorrectly procured through the sole • letters of demand were issued to relevant suppliers and procurement issues at Eskom. Certain implicated in the parliamentary inquiry conclusion and source supplier process for recovery of monies paid representations made by previous and • some of the implicated employees resigned or their receipt of the Reportable irregularities – 30 September 2018 current directors and officials indicated that employment was terminated final report there could have been a breach of fiduciary • criminal charges were lodged against relevant of the Zondo • legal fees were paid on behalf of certain • the former board members resigned • open, pending duties in terms of the requirements of the employees Commission former board members that were not directly • it was confirmed that legal fees had been paid on finalisation of Companies Act • the final report on the inquiry was adopted by the related to their roles as directors of Eskom behalf of BS Ngubane, MV Pamensky and DV Naidoo recovery process Portfolio Committee on Public Enterprises on • letters of demand and summons were issued to 28 November 2018 former board members for recovery of fees paid • the findings of the report, which were not conclusive, • BS Ngubane is challenging Eskom, MV Pamensky has have been analysed. The report recommended a repayment arrangement that he is servicing and that the findings and evidence be submitted to the DV Naidoo has settled in full Judicial Commission of Inquiry into Allegations of State Capture (Zondo Commission) for further Reportable irregularities – 31 March 2019 investigation • there was non-compliance in terms of the • the relevant submissions were made as required • closed • the Zondo Commission is ongoing and Eskom is B-BBEE Act as Eskom’s compliance report • procedures have been put in place to ensure that the participating in this process and annual financial statements were not relevant submissions are submitted timeously • the subcontracting of Trillian Management • executives and senior management resigned • open, pending submitted timeously as required • the court set aside the tender award made to Consultancy (Trillian) by McKinsey did not • criminal charges were lodged against relevant completion of • Eskom did not apply the relevant code of Dongfang follow the correct procurement process employees the recovery good practice in terms of the B-BBEE Act • a further issue relating to this matter • the business relationships with McKinsey and Trillian process when evaluating a request for proposal and was raised on 31 March 2018 where the were terminated in the award made to Dongfang Electrical former chief procurement officer (CPO) • information was provided to the Hawks for Corporation Limited (Dongfang) (E  Mabelane), former group executive (GE): investigation group capital (A Masango), former acting • the High Court ruled against Trillian on 18 June 2019 GE: group capital (P Govender) and former and ordered it to repay R595 million to Eskom company secretary (CS) (S Daniels) approved • Trillian applied for leave to appeal to the Supreme payments to Trillian without the existence of Court of Appeal a contract thereby breaching their fiduciary • liquidation proceedings have been launched against duties Trillian by Eskom and SARS 120 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 121 NOTES TO THE FINANCIAL STATEMENTS continued APPENDIX – ABBREVIATIONS, ACRONYMS AND DEFINITIONS for the year ended 31 March 2020 54. Reportable irregularities (continued) Accounting, audit and other financial terms 54.1 Reportable irregularities (continued) CGU Cash Generating Unit Description Action Status EBITDA Earnings Before Interest, Tax, Depreciation and Amortisation Reportable irregularities – 31 March 2020 GDP Gross Domestic Product IAS International Accounting Standard/(s) • the former interim executive chairman and • adequate policies and procedures are in place and • closed IFRIC International Financial Reporting Interpretations Committee acting GCE (JA Mabuza) had an interest in the former interim executive chairman and acting IFRS International Financial Reporting Standard/(s) supplier IDS Industry Service, through his GCE declared all other interests in line with Eskom’s IRBA Independent Regulatory Board for Auditors alleged niece (NZ Mabuza), which was not policies and procedures declared • all members are requested at every meeting to ISA International Standards on Auditing declare any interest JSE Johannesburg Stock Exchange • this tender adjudication process was performed at a LIFO Last-In-First-Out lower level tender committee of which the former PPI Producer Price Index interim executive chairman and acting GCE was not R Rand a member Rm Rand millions • the niece of the former interim executive chairman SIC Standing Interpretations Committee of the International Accounting Standards Committee and acting GCE declared her interest as per normal VAT Value Added Tax tender processes WACC Weighted Average Cost of Capital • certain minutes of the board and its sub- • improvements will be made to ensure minutes are • open, pending Currencies committees were not signed as evidence signed timeously signing of of approval • a process is in place to ensure that extracts of minutes the relevant AUD Australian Dollar • certain resolutions purported to have been are a true reflection of the approved minutes. Where minutes and CAD Canadian Dollar made at previous meetings could not be found there are changes to draft minutes, an extract of the implementation CHF Swiss Franc in the minutes of meetings final minutes will be communicated to the business of improvements EUR Euro • a permanent company secretary has been appointed GBP Pound Sterling (United Kingdom) on 1 July 2020 which will bring stability to this JPY Japanese Yen function NOK Norwegian Krone • the underlying irregular expenditure register • Eskom is focussing on ongoing improvements to • open, pending SEK Swedish Krona used to disclose irregular expenditure as part the reporting process and clean-up of the reported implementation USD United States Dollar of the annual financial statements, per the information of improvements ZAR South African Rand requirements of the PFMA section 55(2)(b)(i), • training on the revised PFMA reporting procedures and finalisation Entities was not complete and accurate and guidelines was rolled out of clean-up • a loss control department is being established to exercise Company Eskom Holdings SOC Ltd assess and investigate all occurrences of irregular EFC Eskom Finance Company SOC Ltd expenditure and oversee consequence management EPPF Eskom Pension and Provident Fund including disciplinary actions, condonations and Escap Escap SOC Ltd recovery of losses Eskom Eskom Holdings SOC Ltd Eskom Uganda Eskom Uganda Ltd 54.2 Matters under investigation group Eskom Holdings SOC Ltd and its subsidiaries There are currently various internal and external investigations being conducted into alleged fraud and malfeasance by current and Motraco Mozambique Transmission Company SARL former Eskom employees as well as external parties. Eskom is working with relevant authorities regarding these matters. Nqaba Nqaba Finance 1 (RF) Ltd UEGCL Uganda Electricity Generation Company Ltd UETCL Uganda Electricity Transmission Company Ltd Legislation Companies Act Companies Act, No. 71 of 2008 Insurance Act Insurance Act, No. 18 of 2017 PAA Public Audit Act, No. 25 of 2004 PFMA Public Finance Management Act, No. 1 of 1999 PPPFA Preferential Procurement Policy Framework Act, No. 5 of 2000 Measures GWh Gigawatt hour kg Kilogram km Kilometre kWh Kilowatt hour kWhSO Kilowatt hour Sent Out ℓ Litre Mt Million tons MVA Mega volt ampere MW Megawatt MWh Megawatt hour MWhSO Megawatt hour Sent Out 122 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020 ESKOM HOLDINGS SOC LTD | 123 APPENDIX – ABBREVIATIONS, ACRONYMS AND DEFINITIONS continued CONTACT DETAILS Other Telephone numbers Websites and email addresses Alco Asset and Liability Committee www.eskom.co.za Eskom head office +27 11 800 8111 Eskom website Board Board of Directors Contact@eskom.co.za B-BBEE Broad-Based Black Economic Empowerment +27 11 800 3343 CA(SA) Chartered Accountant of South Africa Eskom Media Desk +27 11 800 3378 Eskom Media Desk MediaDesk@eskom.co.za CFO Chief Financial Officer +27 11 800 6103 CIDB Construction Industry Development Board CSDP Competitive Supplier Development Programme InvestorRelations@eskom. Investor Relations +27 11 800 2775 Investor Relations co.za DMRE Department of Mineral Resources and Energy DPE Department of Public Enterprises Whistle-blowing hotline 0800 112 722 Forensic investigations Investigate@eskom.co.za EAF Energy Availability Factor Eskom Development www.eskom.co.za/csi EUF Energy Utilisation Factor Eskom Development Foundation +27 11 800 8111 Foundation CSI@eskom.co.za Exco Executive Committee GCE Group Chief Executive 08600 ESKOM or Promotion of Access to National call centre PAIA@eskom.co.za GE Group Executive 08600 37566 Information Act requests IPP Independent Power Producer Customer SMS line 35328 Customer Service CSOnline@eskom.co.za MYPD Multi-Year Price Determination NCD Negotiable Certificates of Deposit Facebook EskomSouthAfrica Feedback on our report IRfeedback@eskom.co.za NERSA National Energy Regulator of South Africa OCGT Open Cycle Gas Turbine Twitter Eskom_SA MyEskom app RCA Regulatory Clearing Account SADC Southern African Development Community SARB South African Reserve Bank Physical address Postal address SARS South African Revenue Services Eskom Megawatt Park SCOPA Special Committee on Public Accounts 2 Maxwell Drive PO Box 1091 SIU Special Investigations Unit Sunninghill Johannesburg TMPS Total Measured Procurement Spend Sandton 2000 Definitions 2157 Group Company Secretary Company registration number Cash interest cover ratio Net cash flows from operating activities divided by the aggregate of interest paid and received from financing activities Office of the Company Secretary PO Box 1091 Eskom Holdings SOC Ltd EBITDA Revenue plus other income minus primary energy, employee benefit expense, impairment of financial Johannesburg 2002/015527/30 assets, impairment of other assets and other expenses 2000 EBITDA margin EBITDA divided by revenue Free funds from operations Net cash flows from operating activities minus cash flows from changes in working capital Our suite of reports covering our integrated results for 2020 is available at www.eskom.co.za/IR2020 Liquid assets Treasury investments plus cash and cash equivalents Net debt Debt securities and borrowings plus lease liabilities minus treasury investments minus financial trading assets plus financial trading liabilities plus derivative liabilities held for risk management (used to hedge other items of net debt) minus derivative assets held for risk management (used to hedge other items of net debt) minus payments made in advance (used to secure borrowings raised) minus cash and cash equivalents Net debt service cover Net cash flows from operating activities divided by the aggregate of debt repaid and interest paid and received from financing activities Net profit margin Net profit divided by revenue Working capital current assets Inventories plus payments made in advance (current portion) plus trade and other receivables (current portion) plus taxation asset Working capital current liabilities Trade and other payables (current portion) plus payments received in advance (current portion) plus provisions (current portion) plus employee benefit obligations (current portion) plus taxation liability Working capital ratio Working capital current assets divided by working capital current liabilities Refer to the integrated report for definitions relating to the shareholder compact key performance indicators on page 131. JOINT VENTURE [0005] 124 | ANNUAL FINANCIAL STATEMENTS | 31 MARCH 2020