Eskom reports first half profit of R12.2 billion

Thursday, 5 December 2013: Eskom today reported a profit of R12.2 billion for the six months that ended on 30 September 2013. The company has indicated, consistent with the seasonality inherent in the sales and maintenance profiles, that this profit will be eroded somewhat in the second half of the financial year.

Revenue in the first half of the 2013/14 financial year increased 6.1% to R77.8 billion as electricity tariffs rose. The benefit was offset by escalating operating expenditures mainly due to an increase in primary energy costs. The volume of sales also declined marginally (0.1%).

"The story during this period is one of co-operation and resilience," Chief Executive Brian Dames said. "Despite a highly constrained system, we've taken significant steps with our partners to avoid rotational load-shedding and we are addressing the tariff constraints in every aspect of our business."

First-half profit declined marginally to R12.24 billion from R12.63 billion in the same period last year due to increased operating costs. The embedded derivatives contracts contributed to profit in the first half mainly because of changes in the dollar-rand exchange rate and changes in interest rates. The second half of Eskom's financial year falls within the summer season, during which Eskom typically records lower sales and maintenance expenditure.

Revenue per kilowatt hour sold increased to 69 cents, compared to 64.9 cents in the same period in the previous year, while operating costs rose to 55.3 cents from 47 cents.

Primary energy costs increased by 25.3% from 22.5 c/kWh (September 2012) to 28.3 c/kWh for the half year to 30 September 2013 mainly due to higher coal costs (up 13.3%) and as a result of the utilisation of open cycle gas turbines (OCGTs) the cost of which increased by R2.3 billion.

Eskom is making steady progress in bringing new capacity online to ease strain on the system. The extensive programme to return to service previously mothballed power stations has concluded with commissioning of the final unit at Komati. The Sere wind farm construction has gained momentum and the first wind turbine has been erected. In addition, Eskom's new build projects at Medupi, Kusile and Ingula hold promise for the future as an example of South Africa's ability to undertake large infrastructure initiatives, with the first power expected from Medupi in the second half of next year. The new build programme which will be completed in 2020, has to date added 6 137MW of capacity, 5 198km of transmission network and 24 065MVA of substation transformers.

As communicated earlier, a tragic accident occurred on 31 October at the Ingula power station that claimed six lives. We remember with sadness each and every life that is lost linked to the provision of our services. Safety continues to remain a strategic focus for Eskom. The Department of Mineral Resources investigation into the cause of the accident is underway and Eskom's investigation will be done in line with the prevalent guidelines. Eskom will consider the outcome of the investigations carefully and implement the necessary actions.

Eskom's employee lost time incident rate continues to improve and strong action is being taken to enforce zero harm and zero tolerance for unsafe practices, including with our contractors. "We will not waiver on our commitment to Zero Harm. We believe that no kilowatt of electricity can be produced at the expense of human life. Last month, we were dealt a huge blow by a horrific accident at one of our new build projects, the Ingula Pumped-storage Scheme, in the Drakensberg. We do not want this kind of tragedy to occur in any of our sites", said the Eskom Chairman Zola Tsotsi.

Eskom is also making significant progress in providing electricity to households without power for the first time. About 53 600 homes were electrified during the first half of the financial year, compared with 32 216 during the same period last year. Since inception of the electrification programme in 1991, a total of approximately 4.4 million homes have been electrified.

Eskom has welcomed the entry of independent power producers and signed power purchase agreements for 1 041MW capacity with IPPs as part of the second bid submission under the Department of Energy's (DoE) renewable energy IPP procurement programme. In June 2013, contracts for 1 005MW of the DoE open-cycle gas turbine ("Peakers") programme were signed and the first project under the renewable energy IPP procurement programme was connected to the grid on 27 September 2013 and commissioning is in progress.

Other highlights for the half-year results include the procurement from B-BBEE compliant entities. Total measured procurement spend for the half year was R65.9 billion of which R57.7 billion or 87.6% was attributable to B-BBEE, exceeding the target of 75%.

The way forward:

The regulatory price determination early this calendar year has forced Eskom to continue to prioritise productivity and sustainability. Eskom is acutely aware of its obligations and need to continue to access financial markets efficiently and prioritises this in its decision making. The gap left by the determination in Eskom's financial plans cannot be closed through efficiency gains alone - certain strategic trade-offs are being made to ensure we continue to keep the lights on.

"We're re-engineering our business to adapt to the limits imposed by the 8% annual average tariff increase that the National Electricity Regulator of South Africa (NERSA) granted us for the next five years," said Mr. Dames.

Eskom continues to actively manage its finances. The utility successfully raised $1 billion through an international bond issuance. "The bulk of funding required for the new-build programme has been identified and secured. Eskom will require robust income far beyond the new-build programme as the debt we incurred to fund these projects will have to be paid off over the next few decades," acting Chief Financial Officer Caroline Henry said.

"We've kept the lights on thanks to the efforts of the private sector, the public, and thousands of dedicated Eskom employees," Mr Tsotsi said. "While we continue to walk a fine line between supply and demand, we are making progress and investing in the future."

Announcements:

Resignation of the Chief Executive

Eskom also regrets to announce the resignation of its Chief Executive Mr Brian Dames, who will leave at the end of Eskom's financial year in March 2014. This time frame allows for a planned succession process.

The Chairman of the Eskom Board Mr Zola Tsotsi thanked Mr Dames, praising him for his dedication and commitment to Eskom over the years: "I want to personally thank Brian for his hard work, for taking the helm of Eskom during arduous times and successfully steering the company through many rough seas. Eskom will still have the benefit of his vast experience and knowledge until 31 March 2014. During this time the Eskom Board and Mr Dames will work together to ensure a smooth transition to a new Chief Executive. The process to find a successor is well underway and we expect it to be concluded timeously."

"My tenure at Eskom has given me an opportunity to become part of the solution that our country needs to succeed. The significant improvement that we make in the lives of ordinary South Africans is one of the best barometers of our success as a company and I am grateful to have played a role in changing people's lives for the better. I have had the pleasure of seeing many young, promising employees grow within the organisation reach their potential, just like I did. I could not have served without the support of Eskom employees, its Board and shareholder and I thank all those who have enriched my journey at Eskom," said Dames.

Brian Dames took his position as Chief Executive at Eskom on 1 July 2010, bringing stability to an Eskom under stress. He now completes a 26 year career at Eskom, having substantially turned around the organisation; under his leadership Eskom kept the lights on in spite of a tight system, sustained the new build programme, invested in renewable energy on a large scale and secured the funding required for its future while also making a significant contribution to development, training and empowerment.

Eskom and its Board are proud of all that was achieved during Brian's tenure. Brian took over as Chief Executive in the run-up to the ultimately successful FIFA Football World Cup, when many doubted that Eskom would be able to keep the lights on for the tournament. Not only did Eskom manage to keep the lights on for the tournament, but under his leadership achieved significant improvements in operational efficiency and thanks to constantly improving operational excellence, Eskom has continued to keep the lights on.

Moreover, Eskom has now secured affordable financing for its build programme and invested in a cleaner future, both by burning coal cleaner and by increasing the contribution of renewable energy to its mix. In this time Brian ensured that Eskom became transparent and proactive with its engagements with stakeholders, customers and the media, of which the regular system status updates and quarterly reports are prime examples.

The most recent news that Eskom is the winner in the Resources Category of the ACCA Reporting Awards for sustainability reporting capped a year during which Eskom won many awards. In 2013 Eskom has won the IAS award for the best presentation to the Investment Analysts Society in the market cap above R30 billion category; the Chartered Secretaries Southern Africa made Eskom the joint winner in the State-owned companies category (first time we won this specific award); Eskom was also the overall winner in the Nkonki SOC integrated reporting awards.

During the period when Brian was Chief Executive, Eskom was voted as Most Desired Company to Work For (Sunday Times), came second in Community Upliftment (Sunday Times), was rated second as the top Company that does most to look after the environment and natural resources (Sunday Times), was given a Star Award for Operation Khanyisa and became the 4th most popular brand in South Africa (Finweek).

This is a track record of real success for which the Board congratulates Brian. We thank him sincerely for his leadership and commitment, because we know that his commitment to excellence in achievement provided the touchstone of success at Eskom. The chapter of his tenure will stand as a testimony to driven leadership and determination that put Eskom successfully on the turnaround track.

Brian Dames thanked the Minister of Public Enterprises for his unwavering support and guidance, and the Board of Eskom, his management colleagues, trade union leaders and the people of Eskom, as well as his family for their support during his tenure as Chief Executive; "at Eskom, we work in our country's interest. Each of our employees, at every level, is crucial to the success of Eskom as a business. What I wanted to achieve depended entirely on the support of all our stakeholders. Together, we made a big difference and we should all be proud of what we achieved under tough conditions. I urge everyone to continue working together to make the country proud of Eskom."

Dames also called on Eskom and all its stakeholders to give their full support to his successor. "As I turn my attention to my family and a new phase in my career, I will continue to support Eskom and its people, including my successor, as best I can. Eskom is a remarkable place to work and the foundation for South Africa's future. Eskom deserves our support and I intend to be a cheerleader for its success."

In addition to his position as Eskom Chief Executive, Brian is a member of the Board of Vereinigung der Großkessel-Besitzer e.V. (VGB), EPRI Board, a member of the Executive Committee and Vice Chairman of the World Business Council for Sustainable Development and a member of the UN Secretary-General's High-level Group on Sustainable Energy for All as well as non-executive Board Member of the IDC.

He has a BSc (Hons) from University of the Western Cape, an MBA and a Graduate Diploma in Utility Management from Samford University in the USA.

He is an experienced leader and manager, but he is also a family man. Dames is married to Stephney and the couple has two children, Christian and Nicole.

Appointment of Finance Director:

Eskom announced the appointment of Ms Tsholofelo Molefe as the new Finance Director of Eskom. Molefe who has been Eskom's Group Executive for Customer Services will take over her role immediately.

Her responsibilities included looking after 4.9 million customers of Eskom, that is, Key Industrial Customers, Municipalities/Redistributors and Residential Customers. She was also accountable for driving Energy Efficiencies and Demand Side Management initiatives, as well as facilitating the Independent Power Producer Grid Access Framework on behalf of Eskom.

The Chairman of Eskom Mr Zola Tsotsi said, "This was a very long and intense process because we were looking for an experienced and knowledgeable scarce skill person who will help us through this transition into becoming a top global power company. Molefe is an experienced Chartered Accountant by profession. She has been with Eskom since 2005 and possesses a deep knowledge of Eskom's business and understanding of the regulatory and policy environment. I would also like to emphasise that she enjoys strong support from both the board and the executive committee."

Statement issued by Eskom, December 5 2013

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