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Consolidated group annual financial statements  
   
   
   
   
 
Directorsí report  
   
 

The directors are pleased to present their report for the year ending 31 March 2008.

Principal activities, state of affairs and business review

Principal activities

The principal activities of the Eskom group are described in the profile section.

State of affairs and business review

The operating profit for the year for the Eskom group, before the impact of embedded derivatives and net finance costs, was R3 215 million (2007: R6 452 million) and for the company R3 132 million (2007: R5 815 million) after taking into account the following:
  • a dividend of R800 million (2007: R202 million) from a subsidiary is included in the net profit for the company (but eliminated for the group)
  • the change in the projected asset lives of coal-fired generation plant from 35 to 50 years impacted the profit by a favourable amount of R484 million
  • the increased amount spent on primary energy. The costs of coal and diesel increased from R13 040 million in 2007 to R18 314 million in 2008

The profit for the year for the Eskom group was R974 million (2007: R6 476 million) after taking into account the fair value loss on embedded derivatives of R143 million (2007: fair value gain of R4 305 million).

The profit for the year for the company was R1 333 million (2007: R6 030 million) after taking into account the fair value loss on embedded derivatives of R149 million (2007: fair value gain of R4 131 million).

The forward electricity price curve used to value the embedded derivatives was 27,5% for the 2008/9 year, 25% for the next three years, 18% for the 2012/13 year and CPI+2% thereafter. A sensitivity analysis for the embedded derivatives appears in note 3 to the annual financial statements.

Property, plant and equipment is disclosed in note 6 of the annual financial statements. An amount of R24 764 million (2007: R17 536 million) (includes interest capitalised) was spent on property, plant and equipment during the year. The funding of the capital expansion programme is discussed here.

The electricity regulator granted a 14,2% increase for the 2008/9 year. During March 2008 we submitted to Nersa an application for a revision of the price increase for 2008/9 from 14,2% to a nominal 60% (53% real) in order for Eskom to recover the full primary energy costs and other operating costs. Nersa allowed an increase of 27,5% against the 60% requested by Eskom.

For more detailed information on the performance for the year, refer to the annual financial statements and to the business and sustainability performance review.

In order to manage the current electricity capacity shortage situation more effectively, the board decided to rationalise the structure of Exco, details of which are to be found here and here in the corporate governance report.

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 year under review after taking into account the resource impact of the future build programme, the current capital structure, and the dividend policy.

Financial instruments

The disclosure of financial instruments has been expanded significantly compared to previous years and is detailed in note 3 and notes 12 to 14 of the annual financial statements.

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. For further information refer in the statement of responsibility of directors.

Directors

Mr TS Gcabashe was a member of the board and chief executive, until 30 April 2007 and Mr PJ Maroga was appointed in his place from 1 May 2007. The board of directors and their details are discussed here and 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 43 of the annual financial statements, on page 198.

Company secretary

The details of the company secretary and his declaration in terms of section 268G(d) of the Companies Act are disclosed in his statement here.

Auditors

The statutory auditors for the forthcoming financial year will be appointed at the annual general meeting scheduled for 17 July 2008.

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 audit committee must be obtained.

Events subsequent to balance sheet date
Nersa announced on 18 June 2008 an additional increase in the electricity tariff of 13,3% for the year ending March 2009 which resulted in an 27,5% average increase year-on-year. Nersa also ruled that the price increase to “poor” residential customers be limited to 14,2%.

The fair value of embedded derivatives was calculated at 31 March 2008 based on the Nersa announcement of 18 June 2008 as well as the principle established in the previous determination of 20 December 2007 relating to the electricity prices reaching full economic levels. The forward electricity price curve used to value the embedded derivatives was 27,5% for the 2008/09 year, 25% for the next three years, 18% for the 2012/13 year and CPI+2% thereafter. A sensitivity analysis for the embedded derivatives appears in note 3 to the annual financial statements.

Subsidiaries, associates and joint venture companies
The investment of Eskom in subsidiaries and equity accounted investees is disclosed in note 8 and 9 in the annual financial statements.

Interests of directors and officers
Details of directors’ and officers’ interests in quasi shares and options are disclosed in note 43 in the annual financial statements. Refer here for Eskom’s ethics policies and their application regarding interests in contracts.

Research and development activities
Research and development activities are discussed in the research blocks within each section of the business and sustainability performance review.

Employee information
The Eskom group has increased its complement of employees from 32 674 to 35 404 during the year in an endeavour to address the skills shortage. The management of human resources is discussed in the business and sustainability performance review here.

Safety
Safety remains a major area of concern for Eskom, as regrettably we have to report the deaths of 17 employees and 12 contract workers in the past year. Much work and effort has been put into safety awareness.

Environmental issues
Eskom’s response to climate change and limiting the impact on the environment is discussed in the business and sustainability performance review.

Political, religious and charitable donations
Eskom is committed to good corporate citizenship through its corporate social investment (CSI) initiatives. Eskom does not make donations and grants to political party activities, trade union activities or religious organisations unless it is a non-profit organisation and has an outreach programme that directly benefits the community, for example, Aids hospice. Refer here in the business and sustainability performance review.

   
 
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