Eskom on its 2014/15 Annual report

Meeting report

Eskom Integrated Results for Year Ended 31 March 2015
Dr Ben Ngubane, Chairperson of the Eskom Board, indicated that the Board was committed to stabilising Eskom, re-energising it and creating growth and value for the shareholder and for the nation.

Mr Brian Molefe, Chief Executive Officer, Eskom introduced his team and noted that all previously “acting” senior management positions had been filled. He indicated that Mr Matshela Koko, the Group Executive for Generation, was no longer suspended.

The Chairperson congratulated the Eskom team that the “acting” positions have been filled.

Mr Molefe said in the period 1 April 2014 to 31 March 2015, Eskom achieved EBITDA of R25.2 billion despite a 19% increase in primary energy costs. The entity also achieved internal cost savings of R9 billion and 96% of the country’s energy needs were met. External funding of R49.5 billion was raised, together with R23 billion allocated by the shareholder subsequent to the year end; this allocation will close the funding gap and ease liquidity pressures. Eskom’s capital expenditure for 2014/15 was R53 billion. The New Build Programme added 6237 Megawatts (MW), 159 8530 homes were electrified and 1.8 Gigawatts (GW) was connected to provide power to the grid.

Mr Anoj Singh, Chief Financial Officer, Eskom said that Eskom’s revenue increased by 6.9% during 2014/15. That Eskom’s financial health was under strain and this was driven by a number of factors such as:
- Inappropriate returns on assets over a sustained period due to above-inflation cost increases
- Declining sales volumes
- Lack of cost-reflective electricity price increases
- Escalating municipal and Soweto arrear debt
- Deteriorating balance sheet in the investment phase, funded through borrowings.

Financial sustainability meant securing sufficient returns to replace existing capacity and to fund future growth. At 31 March 2015, Eskom’s audited revenue was at R147 691 million, a 7% increase from 31 March 2014. Eskom’s revenue stream needed to be protected to ensure that the entity earned an appropriate return. Declining electricity volumes (0.7% below prior year), were largely caused by the impact of industrial action on the platinum sector, contraction in the gold mining sector, closure of the Bayside aluminum smelter and depressed commodity prices. Load shedding led to sales of 548 GW being foregone. Primary energy costs have increased by 19% year-on-year, significantly above both inflation and the 8% tariff increase. Headcount reduced by 1% to 46 490 group employees. Growth in property; plant and equipment were funded by debt raised. The increase in arrear municipal debt to R5 billion and arrear Soweto debt to R4 billion was a serious concern. Large power users (excluding municipalities) owed Eskom R6.1 billion in outstanding debt, large power users (municipalities) owed Eskom R9.8 billion, small power users owed R2.2 billion and other customers owed R848 million. In total, R23.2 billion was owed to Eskom as at 31 March 2015. However despite liquidity constraints, Eskom maintained operations and capital commitments.

Mr Matshela Koko, Group Executive: Generation, Eskom, said that Eskom’s generation fleet performance was volatile over the period under discussion. The average age of the base load fleet was 34 years. Increased unplanned maintenance from breakdowns of ageing plans, limited the opportunity for planned maintenance and impacting plant availability. Plant availability remained stable at around 73% required gradual improvement and partial load shedding was reduced, easing pressure on the constrained power system. Plant performance in the last quarter has improved, with reduced unplanned automatic grid separations and boiler tube failures. On securing Eskom’s resource requirements, a total of 119.2 Mt of coal was burnt during the year under review. A short term solution was in place after the collapse of the main coal silo at Majuba Power Station; an interim solution was due soon. Migration of coal deliveries from road to rail continued to increase. Also energy losses showed a small improvement from 8.9% to 8.8%. More planned maintenance was undertaken which improved network liability.

On supplementary supply, 1 795 MW of renewable energy was received from Independent Power Producers (IPPs): 1185 MW from solar and 600 MW from wind was connected to the grid at an average load factor of about 31%. IPPs have come in handy in keeping the country’s lights on. A total of 5 701 MW was contracted with IPPs, of which 3887 MW was under the Department of Energy’s Renewable Energy IPP. Balancing supply and demand however remained a challenge. Eskom was focused on bringing new capacity online. Since 2005 the New Build Programme had added 6 237 MW in generation capacity. On transmission projects as at 31 March 2015, 5 816 kilometers of transmission lines and 29 655 MVA substation capacity has been added since 2005; the biggest transmission network in the southern hemisphere.

Progress on the New Build Programme was: The 100 MW Sere Wind Farm was put into commercial operation feeding power into the grid since October 2014; Medupi Unit 6 was synchronised to the grid with commercial operation expected during the third quarter; synchronisation of Medupi Unit 5 was expected during the first half of 2017; Kusile Unit 1 was due for first synchronisation in the first half of 2017 and the first synchronisation of Ingula Unit 3 was targeted for the second half of 2016. Environmental compliance was critical to Eskom’s sustainability, however relative particulate emissions performance worsened due to higher plant utilisation to support security of supply. Water consumption also deteriorated in the year under review. There was a decrease in the number of environmental legal contraventions.

The number of employee fatalities has reduced compared to the previous year, but the number still remained high with three fatalities as at 31 March 2015. Public fatalities, mainly from electric contact and motor vehicle accidents remained a focus area. A strategy in response to the 2014 Construction Regulations which imposed additional safety compliance responsibilities, was underway. On internal transformation and skills development,  Eskom had a solid performance on disability equity and racial equity. Eskom had good performance against overall Broad Based Black Economic Empowerment (BBBEE) compliance as well for certain supplier categories.

Mr Molefe talked to the Public Finance Management Act (PFMA) and said that Eskom’s fruitless and wasteful expenditure was R51 million, losses through criminal conduct were R102 million. Total irregular expenditure was R712 million, of that R4 million was condoned leaving the remaining irregular expenditure at R708 million; R418 million of that was waiting to be condoned. Eskom was committed to preventing irregular expenditure by embarking on various initiatives to achieve sustainable results. Some of the initiatives included updating the PFMA procedure, presenting to Operating Division Exco members, migrating all contracts into a single repository, forensic data analysis and fraud resistance assessments and compliance. On maintenance and load shedding, Eskom was committed to conducting maintenance with little or no load shedding. According to the planned maintenance schedule there would be no load shedding until 30 April 2016. So far there has been no load shedding for 50 days.

Dr Ngubane concluded that creating stability was critical to re-energising and growing the company. Eskom was on a path to financial recovery and financial sustainability through driving internal efficiency and cost saving through the business productivity programme (BPP), managing focus on the PFMA compliance and through the successful execution of the R237 billion borrowing plan.

Discussion
Ms N Mazzone (DA) thanked Eskom for the presentation and said it was great that the country had its lights back on. Eskom’s presentation mentioned that the utility was grappling with some energy losses; what were these energy losses? There had also been mention of the low quality of coal being procured by Eskom; why was Eskom procuring sub-standard coal and how was this being addressed? The presentation said that Eskom was on par with meeting its deadlines for Medupi and Kusile; what penalties were in place to deal with the contractors who caused the initial delays? How were IPPs being encouraged to get involved in the renewable energy process, seeing that there was currently no legislation in place to facilitate this? Was Eskom putting enough pressure on the DoE to push the relevant legislation through? What kind of renewable energy was Eskom going to be introducing? Were any of the country’s big companies asked to reduce load to avoid load shedding; if so, how did this impact the country’s economy? The amount brought to light by the Auditor General for fruitless and irregular expenditure was high and unacceptable. Eskom was wasting the millions it had requested from the National Energy Regulator of South Africa (Nersa). Could Eskom explain the noncompliance on the deal between Eskom and The New Age Media? What was the amount for?

Dr Z Luyenge (ANC) congratulated Eskom for the work done in the filling of critical posts. Eskom’s ability to sustain the provision of electricity was dependent on it having the required skills component. What retention strategy was in place to ensure stability within Eskom? How did the transition from road to rail benefit Eskom? The presentation spoke to the transition from road to rail; how would this benefit Eskom and was there a method to ensure that total movement was improved and made the cornerstone of Eskom? Did Eskom have a well capacitated internal audit unit to assist the company to succeed in its financial management?

Mr N Singh (IFP) thanked Eskom for the presentation and said that he was glad that load shedding seemed to be something of the past. He asked if there has not been a reduction in demand from major industries. He raised a concern around the country’s manufacturing production; has this sector not decreased as a result of load shedding? For every 1% of increase Eskom asked from Nersa; how did that impact on Eskom’s revenue stream? How many millions/billions did the increase bring into Eskom’s revenue stream? Was there a need to continue fleecing those people who consumed electricity? Did all tariff increases come from Eskom? The lack of maintenance was indeed the main contributor towards load shedding; he thanked Eskom for the new maintenance plan. He referred to the breakfasts hosted by The New Age Media where Eskom was the main sponsor; how much did this cost and what benefit did Eskom receive from sponsoring such an event? The Annual Report said that an independent inquiry was conducted into the four Eskom executives who were suspended; could an update be provided to the Committee on the outcome of the inquiry?

Dr Ngubane asked that Mr Singh withdraw the statement that Eskom was “fleecing” customers.

Mr Singh said that was the impression that the Committee got.

The Chairperson said “withdrawing a statement” was the language used in the National Assembly House and not to be used in Committees.

Dr Luyenge said he did not agree with the blanket statement that Eskom was robbing people because that has not been his experience with Eskom, especially around the communities he has paid visits to.

The Chairperson said the views expressed by Mr Singh were as a result of his own experiences and there was no issue with him expressing that.

Mr Singh said according to the findings of the Auditor General there has been an increase in irregular expenditure at Eskom, it increased from R354 million to R606 million between 2014 and 2015. What internal controls measures were in place to deal with such incidents? Eskom received a loan from a international credit company; was this a German company? The increasing debt from municipalities was a serious concern; R10 billion was outstanding from local government and R1.3 billion was owed by public entities. What measures were in place to get the defaulting municipalities and public entities to pay Eskom the money?

Mr N Kwankwa (UDM) said a lot of people were still unable to afford electricity, especially in rural areas where most municipalities did not have the resources to provide Free Basic Electricity (FBE). The tariff increases therefore did not leave any room for municipalities to be protected. On the escalating municipal debt, especially in Soweto, during the Committee’s last engagement with Eskom, it had said that measures were in place to address this; however this resulted in residents in Soweto being cut off. That was chaotic. What has Eskom done since then to deal with the challenges in Soweto? According to the presentation, Eskom’s net profit has come down from R7 billion to R3.6 billion. What were some of the risk factors and challenges which contributed to the 49% decrease in net profit? What steps have been taken to purge Eskom of those risks and challenges? What has the Department of Public Enterprises (DPE) done to influence the DoE to include more IPPs from rural areas into the grid?

Mr R Tseli (ANC) said the 50 days without load shedding should have been announced in the media by now; the media had a tendency to only report on the negative and this should not be the normal practice. He raised a concern about the rising municipal debt; how far was Eskom in addressing this? What commitments have been made by municipalities to clear their debt? Ageing infrastructure was also a serious concern; what measures have been put in place to deal with this? He congratulated Eskom on receiving an unqualified audit opinion from the Auditor General during the financial year under discussion. He commended Eskom on the work it has been doing in developing local communities through the Eskom Foundation.

Ms D Rantho (ANC) asked if any interest has been added to the municipal debt, if so, how much was it and was it affordable? What was the reason for the escalating debt - was it because municipalities which had previously made commitments to pay, were now defaulting on payments? Which rural areas were benefitting from Eskom projects mentioned in the presentation, in which provinces were these?

The Chairperson said there seemed to be a slight drop in Eskom’s socio-economic contributions from the previous year. Who were the black women owned suppliers mentioned in the presentation. The country was sitting with a serious challenge of unemployment, especially among young people. Did Eskom have a deliberate plan to build up black-owned companies? Did Eskom have a deliberate plan to create industrialists? What led to the drop in household connections?

Mr Molefe responded to Mr Singh and said in terms of South African law, Eskom did not determine tariffs. Tariffs were determined by the Nersa. In the process of determining tariffs, tariffs were imposed on Eskom after a process of consultation with the public. At the last tariff hearings, Eskom had asked for an additional 12.5% which was declined and Nersa granted Eskom 0% increase. This was in May 2015. Eskom could not fleece on electricity prices because Eskom did not determine tariffs.

Mr Mongezi Ntsokolo, Group Executive: Distribution, Eskom, responded to the question on energy losses and said these were made up of two parts; technical losses (when electricity flows through the conductor there are losses naturally as a result of heat; all system experienced between 4% and 6% of technical load losses), and non-technical losses which make up about 8% of the losses. The main reason for non-technical losses was theft, secondly because meters were mechanical devices, they sometimes broke down.

Mr Molefe responded to the question on coal quality; Eskom checked its coal by sending it to laboratories, these laboratories then gave Eskom reports on the quality of the coal. The coal was checked before it went to the generators. However in certain instances there have been disputes about the testing methodologies of the laboratories and whether the results were correct; in those instances coal was sent to the South Africa Bureau of Standards for checking. Eskom took reasonable steps to ensure that the coal which went into their generators was of good quality. Eskom used to have its own laboratories but they were closed down and privatised. Reviving some of these labs was under discussion, to improve Eskom’s internal capacity to improve coal quality.

Mr Abram Masango, Group Executive: Group Capital, Eskom responded to the question on penalties to companies liable for the delays at Medupi and Kusile. Contract penalties were enforced on all companies which did not meet the deadlines or who did not perform. Eskom enforced delay damages and pulled bonds were necessary. In certain instances Eskom has stepped in to terminate contracts and criminal charges were laid against the individuals involved if misbehaviour was found. Eskom contracts did allow the company to enforce penalties if deadlines were jeopardised for other reasons.

Mr Molefe said Eskom has responded to the question on IPPs; the number of IPPs connected to the grid and the amount of electricity they contributed. On whether Eskom would be participating in renewables the answer was that Eskom would be participating in renewables. Currently Eskom was in discussion with the DoE to try and get a license for operating solar farms in the Northern Cape. Eskom did not think that it was possible to continue with an energy mix which did not include nuclear. Koeberg was serving the country well and it provided the cheapest operating costs at the moment therefore a nuclear programme was feasible. Nuclear plants typically had a life of about 60 years and the payback period was about 20 years; it was therefore feasible to fund and operate several nuclear plants in South Africa, in fact this was urgent.

Eskom had reduced the request for load reductions from the private sector in line with minimal load shedding. Companies have been asked to reduce their load when Eskom foresaw a possibility for load shedding, however this has been kept at a minimum. During the reporting period load reductions as well as load shedding were very high, after July 2015 these have been minimised.

Mr Singh, Eskom CFO, said it was regrettable that there has been an increase in fruitless and irregular expenditure however that was as a direct result of the fact that management has taken a concerted effort to look at improving the controls environment and setting up initiatives against fraud and corruption. Eskom was committed to curbing this trend through various initiatives. A number of incidents which led to criminal misconduct have decreased. On the questions of The New Age Media an amount of R4 million to The New Age Media was listed as irregular expenditure because of the authority who awarded the contract. The amount was subsequently rectified and condoned by the Board.

Mr Molefe said the incident around The New Age Media took place during the 2015 financial year and was rectified during that financial year. Eskom found it odd that the auditors said the amount of R4 million needed to be reported on as irregular, as it was subsequently condoned by the Board. On road to rail the benefits such as reducing traffic on the road were for the whole country. This would also provide Eskom with a cheaper mode of transporting coal to power stations. Transnet has been performing exceptionally well in this area and Eskom hoped to continue having a beneficial relationship with Transnet. Transnet has bought additional locomotives and part of these would make it possible for Eskom to increase transportation of coal on rail. On the four Board members who were suspended, three have subsequently resigned and one has been reinstated. He noted that the irregular expenditure of R712 million was for the period 1 April 2014 to 31 March 2015; to be fair the Chief Financial Officer only came to Eskom in September 2015. He assured the Committee that the Chief Financial Officer was working very hard to ensure that irregular and wasteful expenditure were not repeated in 2015/16.

Mr Singh, Eskom CFO, confirmed that the international credit agency loan was from a German export credit agency.

Mr Molefe said the increase in municipal debt happened between 2014 and 31 March 2015. Post this reporting period, the debt has been declining. Eskom was supposed to have switched off a number of municipalities by June 2015; however this did not take place because agreements were entered into with defaulting municipalities. All municipalities were now honoring their agreements. Eskom’s focus in Soweto at the moment was to install prepaid meters, working with and consulting with municipalities. A petition has been sent to Parliament pertaining to this.

Ms Ayanda Noah, Group Executive: Customer Services, Eskom, said in Soweto Eskom has embarked on the conversion process; looking at installing “green boxes” which were speed meters. Speed metering did not allow for tampering with the meters. Eskom has completed about 5 000 houses in Shawela and Eskom was now looking at installing more in other townships. The Committee was probably aware that there were protests taking place as a result and the communities were being engaged. Some of the residents have written petitions to Eskom asking that “green boxes” be installed for them and these areas were being prioritised. Eskom was also looking at the conversion to prepaid meters in Sandton and Midrand; the procurement process has been concluded. Eskom should be ready to install about 1000 meters in these areas in the next two weeks.

Mr Molefe said the matter of public entities owing R1.3 billion was also being addressed with government and the respective departments. The amount however was coming down post this balance sheet.

On steps to mitigate revenue drop, Mr Singh replied that Eskom had 100% of its revenue regulated. There were very few mitigating measures the company could implement to prevent a deduction in revenue. One of the inherent mechanisms available to Eskom was part of the regulatory mechanism which Nersa has allowed; the Revenue Clearing Account which allowed Eskom to claim certain differences between actual expenditure incurred and revenue projections collected compared to what was allowed in the MPRDA process. That process was currently underway and it should be completed in the next quarter. On municipal debt interest, the matter was a contractual one; interest therefore varied from customer to customer. This was an issue Eskom was looking into together with Nersa and National Treasury.

On ageing infrastructure, Mr Koko replied that the average age was 34 years but Eskom has spent R53 billion in capital enhancing the ageing fleet. Eskom’s first plant would retire in 2022 and Eskom was currently busy with a study to look at what to do with the retired fleet. What was emerging was that extension post retirement was a feasible option and Eskom was exploring that.

Mr Molefe said detailed information on Eskom projects in rural areas would be provided in writing to the Committee, the information would also include how much Eskom has spent and in which provinces. The highest number of electricity connections was in Limpopo, followed by the Eastern Cape. These two provinces were among the country’s poorest provinces and they were the least connected of all the provinces. Northern Cape had a very high connection rate, relative to the population of the province. A number of State Owned Companies spent a lot of money on companies which were BEE compliant and yet the companies were not growing. Eskom has complied with the law and with the Department of Trade and Industry (dti) codes on spending however a number of people within the black business community were not happy with these dti codes; they argued that there were no real benefits that came from the codes. He agreed with the Chairperson that Eskom needed to look at ways to contribute towards the development of black industrialists, especially in the New Build Programme.

On the reasons for the reductions in connections between 2014 and 2015, Ms Noah replied that electrification was generally driven by the Integrated Development Plan (IDP) process where Eskom contracted with municipalities concerning the number of connections that would be done. The bulk of Eskom’s connections now were in deep rural areas where there was no infrastructure. The three provinces with the highest backlogs were Limpopo, Eastern Cape and KwaZulu Natal. However Eskom needed to ensure there was sufficient infrastructure on the ground before rolling out the connections.

The Chairperson said the response to the question on the suspension of the four Eskom officials was not sufficient; what exactly happened? Was there any wrongdoing by the officials and what were the findings of the investigation? Why did the three resign? The country needed to send a strong message that government was not soft on corruption.

Dr Ngubane replied that the original intent of the investigation was to put aside officials who could have an impact on the elicitation of information from their sections. There was no formal charge against any of the suspended officials. The Minister complained about generation, financial sustainability and general planning around load shedding; and those were some of the matters the investigation focused on. The investigation was not geared to prove any wrongdoing on the part of the executives. The report was completed and was with the shareholder. It addressed issues which were being dealt with through load shedding management, the way Eskom was raising debt, borrowing targets among other things. All these weaknesses were being addressed. Even though the officials resigned, this was not as a result of the investigation.

Mr Singh thanked the Chairman for the explanation. The Committee would like access to the investigation report which was with the shareholder because the Committee was under the impression that it was more than just a load shedding issue which warranted the suspensions. On environmental compliance, the Department of Environmental Affairs has given Eskom a life line until 2025 to meet the minimum omissions standards; was provision being made to meet the target? Was Eskom still sponsoring The New Age Media breakfasts, was the contract still in place and for how long? It was great that Nersa acted as a cushion for the public with regard to tariff increases.

Dr Luyenge said it the Chairman’s explanation on the suspensions was enlightening. It was good to know that being suspended was not always as a result of wrongdoing and resigning was not an admission of guilt.

Mr Kwankwa said he was very pleased with Eskom’s response on the drop in electrification numbers and what Eskom has been doing to address the matter.

Ms Makgola Makololo, Deputy Director-General: Energy, DPE, responded to the question on what the Department was doing to encourage IPP connections. The White Paper on Energy was clear on generation between IPPs and Eskom, and there was still a commitment that the DPE would migrate to a 70% generation to renewables. On electrification numbers, one needed to be mindful that as the country moved towards universal access, the numbers would go down. On municipal debt, there were previous socio-economic issues which needed to be dealt with around certain municipalities, together with structural issues and the ability of municipalities to manage funds and reinvest in infrastructure. These were some of the conversations the DPE was having with the Department of Cooperative Governance and Traditional Affairs to ensure that municipalities were able to deliver basic services.

Dr Ngubane thanked Members for the productive interaction.

The Chairperson thanked Eskom for providing leadership. The Committee therefore hoped to see more stability and progress on how procurement was dealt with by the entity. The concerns raised by the Auditor General also needed to be addressed.

The meeting was adjourned.