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The directors are pleased to present their report for the year ending 31 March 2011.
Principal activities, state of affairs and business review
The principal activities of the Eskom group are described here in the profile section.
State of affairs and business overview
The operating profit for the year for the Eskom group, before fair value gains and losses and net finance costs, was R18 880 million (2010: R10 311 million) and for the company a profit of R17 297 million (2010: R8 351 million).
The net profit for the year for the Eskom group was R8 356 million (2010: R3 620 million). The net profit for the year for the company was R7 951 million (2010: R3 187 million).
Eskom applied for a 35% price increase for the period 2010/11 to 2012/13. NERSA awarded Eskom a price determination of 24.8% (2010/11), 25.8% (2011/12) and 25.9% (2012/13). Further information in this regard is set out in the regulatory and legal framework section.
Special pricing agreements (SPAs) have linked the price of electricity to commodity prices, which has resulted in embedded derivatives in the financial statements. The renegotiation of the Skorpion SPA relating to commodity-linked revenue has been finalised. The negotiation regarding the remaining Hillside and Bayside Potline 1 and 2 SPAs is expected to be concluded in the medium term.
The forward electricity price curve used to value the remaining embedded derivatives at 31 March 2011 was based on an appropriate current tariff with increases determined by NERSA as referred to above. The curve assumes two additional annual increases of 25% and CPI thereafter. A sensitivity analysis for the embedded derivatives appears in note 3.2.
An amount of R55 457 million (2010: R57 003 million) was spent on capital expenditure including borrowing cost capitalised during the year and is disclosed in notes 6 and note 7 to the annual financial statements. The funding of the capital expansion programme is discussed here.
For more detailed information on the performance for the year, refer to the annual financial statements and the business and sustainability performance review.
Change of company name – Eskom Holdings SOC Limited
In terms of the new Companies Act, 71 of 2008, which came into operation on 1 May 2011, Eskom Holdings Limited will change its name to Eskom Holdings SOC1 Limited as of that date.
| 1. | State-owned company. |
Share capital and shareholder
The Government of the Republic of South Africa is the sole shareholder of Eskom Holdings Limited. The shareholder’s representative is the Minister of Public Enterprises.
Dividends
No dividend was declared during the current and prior year, after taking into account the resource impact of the build programme, the current capital structure, and the dividend policy.
Going concern
The board has given particular attention to the assessment of the going concern of the group and is of the view that the group has access to adequate resources to continue in operational existence for the foreseeable future and to complete its current committed capacity expansion programme.
Directors
The board currently consists of 11 non-executive directors, and two executive directors – the chief executive and the finance director.
Mr Mpho Makwana, a non-executive director, was appointed as acting chairman with executive powers, effectively for the period November 2009 to June 2010, to lead Eskom while searching for a new chairman and a new chief executive.
In June 2010, Mpho Makwana was appointed as the chairman of Eskom (without executive powers).
In addition, three new directors were appointed to the board during this period:
Mr Brian Dames, after having served in various senior executive positions in Eskom, was appointed as the chief executive and ex-officio director in June 2010.
Dr Boni Mehlomakulu and Dr Bernie Fanaroff, who had previously served as an external committee member on the sustainability and remuneration committees, were appointed as directors.
The board of directors and their details are discussed here and here in the corporate governance report.
Remuneration of directors and members of Exco
The remuneration of the directors and the executives who were members of Exco during the financial year, is disclosed in note 45.
Company secretary
The details of the company secretary and her declaration in terms of section 268G(d) of the Companies Act are disclosed in her statement found here.
Auditors
The statutory auditors for the forthcoming financial year will be appointed at the annual general meeting scheduled for 27 June 2011.
Eskom’s policy is, where possible, not to use the external auditors for non-audit services. In cases where the external auditors are to be used for non-audit services, the prior approval of the board audit and risk committee must be obtained.
Internal control
An effective internal control framework is the responsibility of the board. The control framework provides cost-effective assurance that the assets of the organisation are safeguarded and that the liabilities and working capital are efficiently managed and that the organisation complies with relevant legislation and regulations.
Information technology
The board is responsible for the governance of information technology (IT), including the implementation of an appropriate IT strategy. The IT control framework provides cost-effective assurance that the IT process is effective and that the IT assets of the organisation are safeguarded.
The internal and IT controls are monitored and evaluated through the audit and risk committee. Refer to the governance section and the statement of responsibilities and approval for further details on internal control and integrated risk management.
Events after the reporting date
There were no significant events after the reporting date.
Subsidiaries, associates and joint venture companies
The investment of Eskom in subsidiaries, associates and joint venture companies is disclosed in notes 8 and note 9 in the annual financial statements. Refer also to the organisational structure.
A decision was made by the board of directors in the prior year not to dispose of Eskom Finance Company (Pty) Limited and it has been accounted for in this manner. This is still subject to government approval.
Interests of directors and officers
Details of directors’ and officers’ interests in the Eskom incentive scheme are disclosed in note 45 to the annual financial statements. Refer to here for Eskom’s ethics policies and their application regarding interests in contracts.
Research and development activities
Research is focused on the needs of the operational divisions within Eskom. The focus is therefore predominantly on applied, not pure research and the outputs are linked to the strategic and operational needs of Eskom. In order to remain relevant, a portion of research resources is allocated to technology innovation and emerging technology options.
The research expenditure of R199 million (2010: R197 million) for the financial year was higher than the budget of R158 million. The increase is indicative of the commitment to research.
Research and development activities are discussed in greater detail under research and demonstration within the Corporate Services division.
Employee information
The Eskom Group had a staff complement of 41 778 men and women at the end of the financial year. Training has always been a major focus area and this past year R998 million (2010: R758 million) was spent on training and developing staff. The staff turnover during the year was again low at 3.6% (2010: 3.5%) but, with the build programme under way, Eskom faces a number of skills-related challenges. The management of human resources is discussed in the Human Resources division section.
Safety
Despite the reduction in employee fatalities from 2008 to 2010 there has been an increase in all fatalities during this financial year. A number of safety improvement initiatives have been and are in the process of being implemented, to reduce the number of safety-related incidents to zero. The implementation of a safety improvement programme has led to enhanced operational discipline among employees and visible, felt leadership in safety. Critical behaviours or actions that, when performed, have a very high probability of causing incidents resulting in severe injuries or fatalities have been identified and led to the implementation of non-negotiable cardinal rules that if not complied with will lead to a disciplinary process. The result of this initiative has been encouraging in that incidents involving these high-risk activities have substantially reduced. Eskom’s safety performance is further discussed here in the Corporate Services division section.
Environmental issues
Environmental controls and oversight mechanisms are in place through our environmental management systems to ensure controls over those activities that have the potential to impact the environment and ensure informed decision making through the obtaining of environmental approvals and permits for proposed projects.
Eskom’s environmental management performance is discussed here in the Corporate Services section and divisional reports.
Corporate social investment
Eskom recognises the need to align its corporate social investment (CSI) activities to that of its business strategies and the communities where Eskom operates. As a corporate citizen Eskom’s corporate social investment initiatives aim to contribute to the wellbeing of communities; but also towards skills development, education and enterprise development and in turn promoting jobs, alleviating poverty and employability. Refer also to here in the Corporate Services division section.
Information required by the Public Finance Management Act
Performance in terms of the shareholder compact
The performance of Eskom against the shareholder compact key performance indicators is shown in the table found here in the profile section.
Reasons for not meeting the targets on the shareholder compact:
- Generation capacity
The installation and commissioning of the 625MW target was not achieved due to ongoing challenges at Grootvlei unit 5 and Komati unit 4. At Grootvlei, a super-heater boiler tube leak occurred. At Komati a turbine failure resulted in an unexpected blow, which caused the front end of the high-pressure (HP) rotor shaft, to shear. This rotor drives the oil pump in the front pedestal. - Transmission lines built
The installation of the 446km transmission lines target was missed by a small margin due to outstanding land and rights issues (outstanding approvals and permits); late access and unsuccessful land acquisition for servitudes due to landowner resistance; the unavailability of required outages and rain.
Performance management of Eskom subsidiaries
The performance of Eskom’s wholly owned subsidiaries is managed and monitored regularly through shareholder compacts with Eskom and annual business plans and budgets that are approved by the respective boards of directors of the subsidiaries.
At the end of the 2011 financial year, shareholder compacts were in place for all South African based subsidiaries that traded throughout the year. The performance of foreign subsidiaries is managed through the monitoring of the respective entities’ board approved business plans taking into account the country-specific legislation.
The performance results of trading subsidiaries are reported monthly to, and reviewed by, Eskom’s Exco. Delays were encountered in the approval of certain subsidiary shareholder compacts during the year because of shortcomings in the approval processes. A centralised pro-active and co-ordinated approach under the accountability of the divisional executive: Regulation and Governance is currently being implemented which will facilitate timeous approval of shareholder compacts and ongoing monitoring thereof.
Losses through criminal conduct and irregular or fruitless and wasteful expenditure
In terms of the materiality framework agreed with the shareholder, any losses due to criminal conduct or irregular or fruitless and wasteful expenditure, that individually (or collectively where items are closely related) exceed R10 million must be reported.
Irregular or fruitless and wasteful expenditure
PN Energy Services (Pty) Limited (PNES)
PNES is a wholly owned subsidiary of Eskom Holdings Limited, whose business comprises the construction, maintenance, operation, administration and development of an electrical and telecommunication distribution network in Khayelitsha in the Western Cape. The operations of this company were closed down during 2010 and it did not trade during the current financial year.
On 21 May 2010, the Board of PNES confirmed that it was investigating potential irregular, fruitless and wasteful expenditure suffered by the company during the 2009 and 2010 financial years. PNES subsequently reported an amount of R58.7 million as irregular expenditure in its 2010 annual financial statements. This amount relates to irregular contracts entered into with a third party. Included in this amount is fruitless and wasteful expenditure of R17 million incurred due to additional costs arising from the irregular contracts. The legality of two agreements was challenged in court. On 11 May 2011 the court found that both agreements were void ab initio. Eskom is considering further action against all the parties involved.
Incidents of fruitless and wasteful expenditure below the materiality threshold
The aggregate of other fruitless and wasteful expenditure which individually (or collectively where items are closely related) were below the materiality threshold was R26.9 million comprising 301 incidents of which three incidents collectively accounted for R13.3 million. Management has instituted preventive and corrective measures as considered appropriate, including disciplinary action.
Management has controls in place within each operating unit to report on and monitor this type of expenditure on a monthly basis. This information is consolidated monthly and presented to the Exco for review and quarterly to the audit and risk committee for review. Management believes, based on the controls in place that the information reported is materially complete.
Criminal conduct
Conductor theft
Losses due to conductor theft (including copper, cable and tower related structures) totalled R38.7 million (2010: R45.5 million), and involved 2 559 incidents (2010: 2 580 incidents). Actions to combat conductor theft are managed by the Eskom Network and Energy Crime Committee in collaboration with other affected state-owned enterprises and the South African Police Service. The combined effort resulted in 412 arrests (2010: 367 arrests). Stolen material worth R4.7 million (2010: R6.3 million) was recovered.
Fraud
During the year Eskom management pro-actively initiated investigations into alleged irregularities and fraud within the procurement and asset management environments. No material findings have been noted to date and investigations are ongoing.
Tabling of the Eskom Holdings Limited annual financial statements in Parliament
The group annual financial statements of Eskom Holdings Limited for the year ended 31 March 2010 were approved by the board of directors on 10 June 2010, and were tabled in Parliament on 4 August 2010.
Promotion of Access to Information Act
Refer to www.eskom.co.za/annreport11/015.html for statistics relating to requests received during the year in terms of the Promotion of Access to Information Act.
Management of energy losses
Energy losses reflect the difference between the quantity of energy sent out from the power stations and the quantity sold to the various customers at the end of the value chain. Losses are categorised as technical or non-technical in nature. Refer to here for more details regarding energy losses.
Total actual losses were:
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