BRIEFING ON ESKOM Presentation to Nedlac 05 March

BRIEFING ON ESKOM Presentation to Nedlac 05 March 2019

Eskom Power Stations and Mines 2 CONFIDENTIAL

South Africa has installed Capacity of 48 039 MW as at March 2018 Total Installed: 48 039 Eskom Coal fired 37868 Eskom Nuclear 1860 Eskom Diesel 2409 Eskom Pumped Storage 2724 Hydro Eskom RE 600 100 Total Eskom 43 260 DOE IPP 4779 Transmission/Distribution 381 594 KM power lines 285 737 MVA substations 3

Context: Eskom is in severe difficulty • • Eskom faces both financial and operational challenges. Company unable to meet its obligations Over reliance on borrowing to service debt Deterioration plant performance OPERATIONAL CHALLENGES FINANCIAL CHALLENGES STRUCTURAL CHALLENGES • Underinvestment in maintenance and cost plus mines • Declining revenues • Inefficiencies • Deterioration performance from Medupi and Kusile • Outstanding debt • Lack of transparency • Aging fleet • Increasing operational costs - coal - maintenance • Outdated business model • Profit and loss of each division • Increasing capex – new build • Increasing debt on borrowing 4

Context: Eskom is in severe difficulty • Proposed solution: Comprehensive Turnaround/Transformation Plan OPERATIONAL FINANCIAL • Generation recovery: 9 -point plan • STRUCTURAL Cost savings and wastage • • Generation audit: • Review coal procurement and • Appointment of current contracts independent technical audit team • Operational efficiency • Revenue enhancement through tariff increases • Government support (R 23 billion) • Cut non-essential budgets • Debt relief CONFIDENTIAL Establishing three separate entities More transparency 5

How did Eskom get here? 2007 2018 Insights: Total Installed Capacity (MW) 42 618 43 260 Electricity Sales (GWh) 218 120 212 190 39, 4 177, 4 18 85, 06 117, 4 115, 49 Coal Costs (R'bn) 10 53, 8 Employee Costs (R'bn) 9, 5 29, 5 • Capacity grew slightly over the period • Coal Purchases – volumes flat over the 10 year period • Coal costs grew significantly for same volume • Employee costs increased driven by employee benefits Revenue (R'bn) Average selling price (c/k. Wh) Coal Purchases (Mt) Employee Numbers Debt Securities and Borrowings (R'bn) 32 674 48 628 40, 5 388, 7 6 CONFIDENTIAL

Key Issues from President’s SONA • • • Security of energy supply is an absolute imperative. Eskom is in financial crisis and the risks it poses to South Africa are great. It could severely damage our economic and social development ambitions. Eskom need to “minimise any adverse economic cost to the consumer and taxpayer. ” The nine-point Generation turnaround plan which we support and want to see implemented. Eskom will need to take urgent steps to significantly reduce its costs. It will need more revenue through an affordable tariff increase. We need to take steps to reduce municipal non-payment and confront the culture of non-payment that exists in some communities. Eskom will need to develop a new business model. Three separate entities will be established – Generation, Transmission and Distribution – under Eskom Holdings. These will remain the property of the State. As we address the challenges that face Eskom we will ensure that there is meaningful consultation and dialogue with all key stakeholders. We will lead a process with labour, Eskom and other stakeholders to work out the details of a just transition, and proper, credible and sustainable plans that will address the needs of all those who may be affected. 7

2019 SONA Commitments COMMITMENT INTERVENTIONS/PLANS • Where SOEs are not able to raise sufficient financing from • The SOCs are having to put together plans to liquidate some banks, from capital markets, from development finance of their non-core assets or non-strategic assets to raise institutions or from the fiscus, we will need to explore other capital to sustain core assets. mechanisms, such as strategic equity partnerships (SEP) or • Opportunities for business units suitable for SEP are being selling off non-strategic assets. explored by the SOC Boards • We also seek to build a pragmatic and cooperative • The Minister has had numerous engagements with business relationship between government, organized labour and organised labour to address crises as they emerged but private sector stakeholders, where we can jointly determine also to seek consensus on appropriate interventions require a strategic path for SOEs to create jobs, enable inclusive ensure sustainability of the SOCs in the portfolio growth and become operationally and financially • The Presidential Coordinating Council on State Owned sustainable Enterprises had its terms of reference (TOR) approved by Cabinet. The composition of the Council is being finalised to enable its operation. • As we address the challenges that face Eskom we will • The consultations with key stakeholders are being ensure that there is meaningful consultation and dialogue undertaken and will unfold with greater intent in the with all key stakeholders. we will lead a process with labour, aftermath after the SONA 2019 announcements Eskom and other stakeholders to work out the details of a just transition, and proper, credible and sustainable plans that will address the needs of all those who may be affected. • Eskom has come up with a nine-point turnaround plan which we support and want to see implemented. In line with this plan, Eskom will need to take urgent steps to significantly reduce its costs. • The Department is monitoring the implementation of the nine-point plan and appropriate interventions where there is regression are being undertaken through the Minister of PE 8

2019 SONA Commitments COMMITMENT INTERVENTIONS/PLANS • Eskom will need more revenue through an affordable tariff increase. • Eskom has submitted a Multi-Year Pricing Determination (MYPD 4) application to the Energy Regulator NERSA which is currently undergoing consultation. It is envisaged that the process and final determination will be concluded announced 01 March 2019. • To ensure the credibility of the turnaround plan and avoid a similar financial crisis in a few years’ time, Eskom will need to develop a new business model. • Eskom has developed a Turnaround Plan that will address and outlines the new business model • This business model needs to take into account the root causes of its current crisis and the profound international and local changes in the relative costs, and market penetration of energy resources, especially clean technologies. • Eskom has developed a Turnaround Plan that will address and respond with a new and viable business model • It needs to take into account the role that Eskom itself • There are legislative and regulatory hurdles that should be overcome to enable Eskom participation in should play in clean generation technologies. the clean generation technology sector. The DPE and DOE will be spearheading this effort. CONFIDENTIAL 9

Key Interventions • Operational - to urgently address the operational problems at Eskom, of which generation is paramount, the Eskom Chairman and I have decided on the following— • Experienced engineers who have left Eskom during the period of corruption and state capture have indicated they want to return to help – Thuma Mina • The board has been directed to do a full operations audit of all power stations to give us an independent view of where the most serious problems are • These experts will also train, mentor and transfer skills to a younger generation of Eskom engineers so that we build a capable team to run our electricity system into the future. • The board must institute an urgent review to establish when – realistically - Medupi and Kusile will be completed. • Also to determine the extent of design- and other operational faults, what steps can be implemented to minimize escalating costs and what can be done to increase output. • The board will appoint a panel of experts to compile an in-depth, independent audit to ensure that every technical problem is understood. 10

Financial 11

How did Eskom get here? 2007 2018 Insights: Total Installed Capacity (MW) 42 618 43 260 Electricity Sales (GWh) 218 120 212 190 39, 4 177, 4 18 85, 06 117, 4 115, 49 Coal Costs (R'bn) 10 53, 8 Employee Costs (R'bn) 9, 5 29, 5 • Capacity grew slightly over the period • Coal Purchases – volumes flat over the 10 year period • Coal costs grew significantly for same volume • Employee costs increased driven by employee benefits Revenue (R'bn) Average selling price (c/k. Wh) Coal Purchases (Mt) Employee Numbers Debt Securities and Borrowings (R'bn) 32 674 48 628 40, 5 388, 7 12 CONFIDENTIAL

How does ESKOM spend money? R’bn 2007 2018 Revenue generated 40, 6 177 Minus Primary energy cost 13, 0 85, 2 Minus Employee cost 9, 5 29, 5 Minus other expenses -Maintenance 6, 5 18, 8 Equals EBITDA 11, 6 45, 4 Minus interest payment 1, 8 31, 9 Minus Investment requirement 14, 1 55, 5 Surplus (Shortfall) (4, 3) (42) • Since 2007, revenue grew more than 4 times mainly driven by massive tariff increases • However, expenses (primary energy and employees cost) increased faster than revenue growth • EBITDA (proxy for free cash-flow) insufficient to cover interest costs and capex (investment) • Resulting in a shortfall which is covered through borrowing 12 CONFIDENTIAL

Eskom is Facing Liquidity Challenges • The engine is broken: Eskom’s costs are greater than its revenues. • Forecast debt service cover ratio FY 19: 0. 46 Ø Eskom is generating less than half of the cash it needs to service its debt (interest and principal (capital) repayments) 3, 08 2, 00 Mar’ 14 Ø Debt trap: Borrowing to repay its debt! 2, 50 1, 65 Mar’ 16 Debt Equity 2, 52 2, 11 Mar’ 17 Mar’ 18 NOV LE Gearing 15 CONFIDENTIAL

Municipal Revenue Collection is Rapidly Deteriorating Municipal debt increased by R 5. 06 bn in the last 9 months. This excludes Soweto which now amounts to R 17 bn with collections stuck at 5%. All Municipalities Total Due Capital Due* Vat Due* Interest Due* End Nov 18 R 26. 68 Billion R 20. 85 Billion R 3. 04 Billion R 2. 79 Billion 100. 00% 78. 15% 11. 39% 10. 46% Value split is for Total municipal debt and not the overdue amount as reflected in the trend growth above 13

Age Analysis of the Top 10 Defaulting–September 18 TOP 10 DEFAULTING MUNICS PROVINCE Sum of TOTAL Sum of INT (R CAP (R DEBT (R million) Sum of VAT MALUTI A PHOFUNG Free state R 3 264. 94 R 606. 76 R 2 329. 09 R 329. 10 EMALAHLENI Mpumalanga R 2 162. 99 R 216. 80 R 1 702. 65 R 243. 53 MATJHABENG Free state R 1 956. 60 R 279. 47 R 1 469. 23 R 207. 91 EMFULENI Gauteng R 1 326. 80 R 111. 82 R 1 060. 15 R 154. 82 NGWATHE Free state R 1 046. 93 R 142. 57 R 792. 40 R 111. 97 GOVAN MBEKI Mpumalanga R 831. 46 R 93. 75 R 644. 79 R 92. 92 LEKWA Mpumalanga R 645. 62 R 86. 46 R 489. 38 R 69. 78 THABA CHWEU Mpumalanga R 517. 29 R 30. 00 R 426. 87 R 60. 42 DITSOBOTLA North west R 352. 69 R 56. 03 R 259. 82 R 36. 85 MODIMOLLEMOOKGOPHONG Limpopo R 332. 15 R 13. 97 R 277. 52 R 40. 66 Grand Total R 12 437. 48 R 1 637. 62 R 9 451. 90 R 1 347. 96 16 CONFIDENTIAL

Proposed Financial Interventions Government Eskom request a tariff increase of 15% for the financial years 2019/20 to 2021/22. NERSA will be making a determination on the tariff application by 1 March 2019. Government to renegotiate round 1 & 2 of renewables with regard to contractual rights Recover municipal and Soweto debt (R 28 billion). Embark on a process for the legal separation of Eskom. Develop a just transition plan to deal with socio-economic impact. 17

Financial ESKOM TO DRIVE EFFICIENCIES: Reduce costs in the following arears § § § Primary energy optimisation - coal Capital efficiency Operational efficiency Revenue enhancement Reducing headcount GOVERNANCE: Continued focus on ensuring that corruption is eliminated § § § Strengthen Board and Management to enable effective implementation of the Turnaround Strategy Lifestyle audits Review the conflict of interest policy Exit corrupt executives and personnel Ongoing investigations in support of Zondo Commission To support the Turnaround Plan, Government has allocated R 23 billion each for the next three years. The fiscal support is conditional on an independent Chief Reorganisation Officer (CRO) being jointly appointed by the Ministers of Finance and Public Enterprises. 18

Employee Numbers per Business Unit Employee Numbers Generation 12 213 Transmission 2 005 Distribution 14 862 Customer services 2 590 Group capital 2 040 Support functions 7 606 Subsidiaries 7 312 Total 48 628 18 CONFIDENTIAL

Operations 20

Eskom Generation Fleet are Aging • More than half of Eskom’s generation is more that 37 years old. • Major midlife refurbishment is required and have not been implemented due to financial constraints and requisite space. 21 CONFIDENTIAL

Capacity Outlook based on Planned and Unplanned Outages Total installed nominal Capacity ~ 45000 MW Breakdowns (UCLF) ~17000 MW unavailable Planned Maintenance (PCLF) Diesel Electricity demand 22 CONFIDENTIAL

OCGT usage has increased significantly due Poor Plant Performance • Eskom ran OCGTs to manage the system during low levels of energy availability to avoid or minimise load shedding. • Eskom produced 429 GWh by December 2018 with the cost of R 1 373 billion. Projecting that by Fy year end, the figure will be R 2 665 bn • OCGT load factor has gone beyond the 1% approved by NERSA 22 CONFIDENTIAL

New Build Programme Statistics Medupi Kusile Ingula Units in commercial 4, 5, 6 operation 1 1, 2, 3 Total capacity online 2382 MW 800 MW 1333 MW Units still to be commercially operational 1, 2, 3, 4, 5, 6 0 Expenditure to date R 110. 2 bn R 127. 9 bn Project Completed Total cost to completion R 145 b (ex R 38 bn for R 161. 4 bn FGD –environmental compliance) R 28. 68 bn 24 CONFIDENTIAL

Eskom’s 9 point plan for Generation Initiative Objective turnaround 1. Fixing new plant (Medupi, Kusile and Ingula) Addressing known design errors through an expert team to guide the recovery and application of contractual remedies 2. Fixing Full load losses and trips Improve planning, execution and effectiveness of maintenance (including training) and optimise procurement processes to enable swifter purchases when required 3. Fixing units on long-term forced outages to reduce impact of major incidents on breakdowns - UCLF (Unplanned Capability Loss Factor) 4. Partial Losses and boiler tube leaks Reduce partial load losses by addressing major contributors per plant and system and reenergise the tube leak reduction programme 5. Fixing outage duration and slips Planned Maintenance - PCLF (Planned Capability Loss Factor) improvement through improved outage planning and execution 6. Fixing human capital Make appointments in critical positions, train key staff and relink centralised support functions to the stations 7. Prepare for increased OCGT (Open Cycle Gas Turbine) usage To ensure that OCGT plant is able to run when required. Contracts to be put in place with suppliers for diesel, and logistical challenges to be addressed 8. Prepare for Rain Implement measures to reduce the impact of the rainy season by driving compliance with the various power stations Wet Coal Handling Procedures 9. Fixing coal stock piles Recover coal stockpiles to appropriate levels

Structural Interventions 26

Business Case for establishing separate entities • Despite Eskom being regulated and licensed as three (3) separate businesses • • • i. e. Generation, Transmission and Distribution. Eskom reports in an aggregated basis leading to lack of transparency, accountability, consequence management ; and no clear P&L allocation Inefficiencies inherent in monopolistic industries Global trends with alternative energy sources Advantages of three separate entities: • Increase transparency in costs, transfer prices and corporate structure helps protect public interest; • Better control of the different elements of the value chain via regulatory benchmarking; • Easier to introduce competitive pressures in the supply chain; • More agile exploitation of market opportunities by suppliers; and • Easier for non-traditional providers to enter the market • Leveling the playing field for non-Eskom generators • Agility in responding to new models and technologies 27

Business Case for establishing separate entities • • Mitigate the risk arising from an Eskom that is “too big to fail” and limit financial contagion from the underperforming parts of Eskom’s generation business, where most of the problems originate; Position the electricity sector to embrace clean technology, distributed generation and respond to other changes taking place in the electricity sector; Provide open access to the grid and remove conflicts of interest to the procurement of power, both conventional and renewable, from independent generators; Diversify the generation of electricity across a multitude of power producers, thereby reducing the country’s reliance on a single supplier; Generate competition in the electricity market that is expected to drive improvements in efficiency and put downward pressure on prices; . Enable greater management attention to be focused on turning around the different parts of the business, whilst enhancing accountability; Reduce the opportunities for fraud, corruption and rent-seeking; Crowd in private investment into the electricity sector; Allow lenders to separately fund the different components of the business, allowing debt to be priced more tightly, as it more accurately reflects the unique risks of each individual business; 28

New Transmission Entity Establishment of a new wholly-owned subsidiary of Eskom – Transmission entity which will be tasked to: • Own and operate the transmission assets; • Perform the functions of the single buyer office, purchasing power from Eskom and independent power producers; • Operate the transmission system; • Sell electricity to municipalities, industrial users and other customers; • Have a board of directors which is independent of Eskom 29

New Transmission Entity Establishment of a new wholly-owned subsidiary of Eskom – Transmission entity which will be tasked to: • Own and operate the transmission assets; • Perform the functions of the single buyer office, purchasing power from Eskom and independent power producers; • Operate the transmission system; • Sell electricity to municipalities, industrial users and other customers; • Have a board of directors which is independent of Eskom 30

Possible Road Map to the Creation of Transmission Entity 31

New Transmission Entity Establishment of a new wholly-owned subsidiary of Eskom – Transmission entity which will be tasked to: • Own and operate the transmission assets; • Perform the functions of the single buyer office, purchasing power from Eskom and independent power producers; • Operate the transmission system; • Sell electricity to municipalities, industrial users and other customers; • Have a board of directors which is independent of Eskom 32

Reforms required to Support Sustainability Eskom Today Gx SB 1 Functional Separation DPE Eskom Tx Dx Rx 2 Gx SB Tx Dx Rx What is the legal entity? Eskom Where does the P&L reside? Eskom, Gx, Tx, Dx, Rx Who employs the FTEs? Eskom Where does the debt reside? Eskom How long to implement from today? 1. 2. N/A 12 -18 months First Step Single Buyer 2. Retail & beyond the meter services 3. Any combination Hold. Co/Subsidiary possible. One option shown Based on Board Decision having considered the BCG and Lazard input 33

Stakeholder consultations & other LRA processes • Government has already started the process of consulting with key stakeholders - Labour (NUM, NUMSA & Solidarity) - Alliance Secretariat - Political Alliance Council - The Presidency - Mineral Council of South Africa - Engineering Council of South Africa - Cabinet • Eskom has commenced with Sec 189 process - Executives reduced from 21 to 9 34

Conclusion 1. Eskom has a serious financial crisis 2. National Treasury has set R 23 billion/year/10 year, but more has to be done 3. In the interest of the economy and the country – immediate measures must be taken - Financial - Operational - Structural - People skills 4. Government will ensure constructive consultations with all stake holders- particularly labour 5. A more comprehensive business case and structural transformation is being developed and brought to NEDLAC 35