Integrated report - Eskom

1 Contents IFC About this report 1 Performance highlights for the year 2 Integrated report 3 Our business and strategy Chairman's statement 31 March 2017 4 Our business model 12 Operating environment 15 Strategy and outlook 19 Our leadership 24 Stakeholder engagement and material matters 28 Risks and opportunities, assurance and controls 34 Operating performance 35 Executive overview 37 Revenue and customer sustainability 42 Operational sustainability 53 Sustainable asset creation 59 Environmental and climate change sustainability 63 Safety and security 66 Building sustainable skills 69 Transformation and social sustainability 73 Financial review 74 Chief Financial Officer's report 76 Value added statement 77 Condensed annual financial statements 81 Key accounting policies, significant judgements and estimates 83 Financial sustainability 92 Our governance 93 Governance and ethics 94 Board of Directors and committees 96 Executive Management Committee 98 Executive remuneration and benefits 99 Supplementary information 100 Abbreviations and glossary of terms 103 Eskom 's energy flow diagram 104 Statistical tables 110 Customer information 112 Plant and benchmarking information 119 Environmental implications of using electricity 120 Board and Exco meeting attendance 122 Independent sustainability assurance report 126 GRI G4 indicator table 130 PAIA declaration 131 Contact details 132 Our suite of reports Enabling economic growth Navigation icons About this report Performance highlights for the year The following navigation icons are used to link our sustainability dimensions and strategy to material matters, strategic risks, key performance indicators and performance.

2 Board responsibility and approval The Board is accountable for the integrity and completeness of the Integrated report and any supplementary information, and is assisted by the Audit and Risk Committee and the Social, Ethics and Sustainability Committee. Financial sustainability The Board has applied its collective mind to the preparation and presentation of the Integrated report and has concluded that it is presented in accordance with the International <IR> Framework. In considering the Revenue and customer sustainability completeness of the material items dealt with and the reliability of information presented, based on the combined EAF improved to Connected 207 189. assurance process followed, the Board approved the 2017 Integrated report , annual financial statements and supplementary information on 15 June 2017. Operational sustainability Mr Zethembe Khoza Ms Chwayita Mabude Dr Pathmanathan Naidoo households Sustainable asset creation Interim Chairman Interim Chairman: Audit and Risk Chairman: Social, Ethics and Committee Sustainability Committee Environmental and climate change sustainability Reporting boundary and frameworks to address mainly material matters, both positive and This Integrated report reviews our operational, negative, in this Integrated report .

3 Environmental, social and financial performance for The content is further guided by legal and regulatory Safety and security the year from 1 April 2016 to 31 March 2017, and requirements, such as the Companies Act, 2008 and follows our 2016 Integrated report . Material events up to the date of approval have been included. For a the King Code on Corporate Governance in South Ingula added Synchronised 1 332MW. Africa (King III), as well as global best practice. We Building sustainable skills comprehensive overview of our financial performance, the Integrated report should be read in conjunction are assessing the impact and preparing to apply the Medupi Unit 5 and recently issued King IVTM in the coming year. The with our full set of group annual financial statements. report also contains some GRI G4 disclosures. Kusile Unit 1. Transformation and social sustainability Our group annual financial statements are available online at The GRI G4 indicator table is available as a fact sheet at the back of installed peaking capacity this report The report examines our performance and Building a solid reputation considers the impact of stakeholders on our ability Assurance approach to create value, as well as our impact on them.

4 Unless Our combined assurance model relies on three lines otherwise indicated, the information presented is of defence. The Audit and Risk Committee and Board comparable to that of prior years, with no significant rely on combined assurance in forming their view of restatements. The information in this report refers the adequacy of our risk management and internal Request for feedback controls. to the performance of the group, which includes the We want to ensure that our report continues to provide business of Eskom Holdings SOC Ltd, operating in Export sales Total coal cost relevant information. We welcome your feedback on ways Our strategic risks are discussed on page 29. in which we could improve our report . Please send your South Africa, and its major operating subsidiaries, unless otherwise stated. growth of increase limited to suggestions to The entire report has been internally assured by our Assurance and Forensic Department. The Our business model on pages 8 and 9 provides more detail on our value creation process sustainability KPIs contained in the shareholder compact were subject to external assurance; all but Supplementary Additional information Basis of preparation four have received reasonable assurance.

5 Information in a in this report fact sheet Our Integrated report is based on the principles contained in the International Integrated Reporting The combined assurance of our suite of reports is set out on Information Refers to GRI page 33. available on Framework (the International <IR> Framework). disclosure our website published by the International Integrated Reporting Council (IIRC). The report seeks to provide a balanced The independent sustainability assurance report is included on and transparent assessment of how we create value, pages 122 to 125. A list of abbreviations and glossary of terms are available at the back of this report (pages 100 to 102) considering both qualitative and quantitative matters that are material to our operations and strategic The consolidated annual financial statements EBITDA Borrowing requirement Throughout this Integrated report , performance objectives, which may influence our stakeholders' have been audited by the group's independent auditors, SizweNtsalubaGobodo Inc.

6 Who issued a improved to reduced by approximately R10bn decision-making. against target is indicated as follows: qualified opinion relating to compliance with PFMA. and completeness of irregular expenditure. The The determination of material matters is set out on page 27. Actual performance met or exceeded target consolidated annual financial statements are fairly Actual performance almost met target (within a presented, except for the qualification. Although this is our primary report to stakeholders, 5% threshold). aimed at providers of financial capital, it provides Actual performance did not meet target Refer to the annual financial statements for the audit opinion information of interest to all stakeholders. We aim SC Indicates that a key performance indicator is included in the shareholder compact Eskom Holdings SOC Ltd A. Chairman's statement Our business and strategy Refer to Strategy and outlook on pages 15 to 19 for more 3 Chairman's statement information 4 Our business model Governance Our business and strategy 12 Operating environment To ensure transparency and objectivity, the Board has 15 Strategy and outlook embarked on a comprehensive independent review of 19 Our leadership various reports pertaining to perceived governance issues the State of Capture report issued by the 24 Stakeholder engagement and Office of the Public Protector, draft reports issued by material matters National Treasury following a review of contracts, and 28 Risks and opportunities, assurance the Dentons report , amongst others.

7 Areas of concern and controls Our strategy broadly relate to procurement, contract management Eskom 's key roles remain assisting in lowering the cost and governance. This review follows internal reviews of doing business in South Africa, enabling economic to ensure that all perceived gaps are covered. growth and providing a stable electricity supply in an efficient and sustainable manner. We also contribute The Board is confident that significant progress to job creation, skills development, transformation has been made in addressing findings and and broad-based black economic empowerment recommendations. The Audit and Risk Committee (B-BBEE), in support of the National Development will provide oversight of management's continued Plan (NDP) and other country initiatives. efforts to implement the action plan to improve the control environment in a sustainable manner. Last year, we launched a comprehensive turnaround strategy, which included the Design-to-Cost (DTC) Outlook and conclusion strategy, aimed at leading Eskom and South Africa The execution of our strategy is dependent on into an era of reliable power supply and excess three key enablers, namely governance that drives capacity, while supporting economic growth accountability, successful stakeholder management through moderate tariff increases over the medium and effective risk mitigation strategies, particularly to long term.

8 Despite the challenges over the past to respond to lower than budgeted tariffs. few years, DTC has delivered significant efficiencies, supporting the turnaround of the business. We can We remain committed to connecting independent now move from stabilisation to growth. power producers (IPPs) up to bid window , as long as they are economical at a price of 77c/kWh or We are proud of the major progress the strategy lower, given our surplus capacity. Any further IPPs delivered in its first year of implementation, as will need to be assessed against a holistic framework Eskom achieved the required stability to deliver on a of security of supply, electricity price, environmental number of important objectives for South Africa and benefits and socio-economic factors, to ensure that the SADC region, including: the programme is rolled out at a cost and pace that Ensuring reliable electricity supply through is optimal for both South Africa and Eskom . improved generation asset performance Delivering additional new build capacity We extend our condolences to the friends and Supporting moderate electricity price increases family of those who lost their lives serving Eskom .

9 Through cost efficiencies across the business, particularly in primary energy I thank our current directors, as well as those Increasing universal access to electricity by connecting who stepped down over the past year Ms Nazia more than 200 000 households to the grid Carrim, Ms Viroshini Naidoo, Mr Mark Pamensky, Enabling growth in the region by supplying more Ms Venete Klein and Dr Baldwin Ngubane. Also electricity to our neighbouring countries facing to the Honourable Minister Lynne Brown, our harsh drought conditions shareholder representative, and her team for their Successfully executing our funding plan continued guidance. We have further refined the strategy, to catalyse I congratulate the members of Exco for their economic growth in South Africa and the region supreme efforts in proving that we can deliver against through moderate tariff increases over time, by an ambitious plan, with the notable improvement in creating sustainability in our existing business, while operational and financial performance this past year.

10 Laying the foundation for the Eskom of tomorrow. Our These successes have strengthened the Board's overall objective over the medium term is to achieve confidence that the organisation can deliver on a a standalone investment-grade credit rating to reduce strategy that will see Eskom once again take centre the burden on the fiscus, while ensuring reliable and stage as a catalyst for economic growth in South competitively priced electricity for the country. Africa and the region. The strategy is based on aggressive sales volume growth by stimulating industrial activity, coupled with efficiency improvements across the business, to ensure a tariff path that supports the economy. Zethembe Khoza We aim to achieve our objectives by driving seven Interim Chairman strategic initiatives, by focusing on five critical targets. Our strategy will enable us to manage the impact of the price increase for one year. Eskom Holdings SOC Ltd 3. Our business model Our mandate, vision and mission we produce waste in the form of ash and nuclear Eskom Holdings SOC Ltd is South Africa's primary waste, as well as gaseous and particulate emissions.