127 March 2013

MYPD3 Briefing Session – Portfolio Committee on Energy

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ESKOM MYPD3 Application in Summary

R'm

Return 2013/14 2014/15 2015/16 2016/17 2017/18

MYPD 3 Total

Eskom primary energy 7 271 14 643 31 187 51 878 81 885 186 864Independent power producers-primary energy 62 328 65 368 69 657 75 330 82 266 354 949Depreciation 5 189 13 302 18 043 20 143 21 042 77 719Integrated demand management 5 189 13 302 18 043 20 143 21 042 77 719Operating costs 44 857 48 952 54 934 59 346 61 478 269 568Eskom revenue requirement 153 378 179 604 212 758 248 332 293 501 1 087 574

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MYPD3 Decision in Summary

R'm 2013/14 2014/15 2015/16 2016/17 2017/18MYPD3

TotalReturn 23 477 26 511 26 436 27 657 33 667 137 748 Primary Energy Costs 51 067 54 966 56 779 62 060 68 620 293 492 Independent Power Producers 2 686 5 108 14 826 19 269 23 018 64 907 Depreciation 25 733 27 481 28 564 28 911 29 197 139 886 Integrated Demand Management 1 455 953 819 712 1 244 5 183 Operating costs 45 519 48 565 52 908 57 769 60 576 265 337 Total Allowed Revenues 149 937 163 584 180 332 196 378 216 322 906 553

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R'm 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18RAB Applied for 911 686 779 203 852 265 919 662 981 853 1 043 100 RAB Adjustments (122 095) (79 594) (145 874) (209 712) (269 073) (325 587) RAB Approved 789 591 699 609 706 391 709 950 712 780 717 513

Approved Regulatory Asset Base

• Adjustments to align with the MYPD2 phasing in of the RAB• Assets commissioning dates adjusted to cater for the delays• Depreciation rate not adjusted (Depreciation amount will change due to changes in asset base costs)

Actual Return Approved

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R'm 2013/14 2014/15 2015/16 2016/17 2017/18MYPD3

TotalWeighted Average Cost of Capital used (%) 3.4% 3.8% 3.7% 3.9% 4.7%Return (R'm) 23 477 26 511 26 436 27 657 33 667 137 748

•The allowed returns were calculated to allow Eskom to meet its debt obligation – see next slide•These returns were also considered to allow for affordable and gradually increasing pricings and to avoid price spikes

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Primary Energy (R’m) including Environmental Levy MYPD 3 Total

Applied for 418 940

Adjustment s (60 441)

Allowed 358 399

Primary Energy

• Coal Prices escalated at 10% over the MYPD3 period• Base price for 2013/14 adjusted to reflect actual history• IPP Commissioning dates and associated costs re-adjusted to reflect delays• Efficiencies on the burn rate and load factors • Renewable IPP adjusted to reflect revised dates• Electricity purchases & SBP procurement costs disallowed

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Depreciation

R'm 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 MYPD3 TotalDepreciation Applied 37 220 30 792 34 848 38 447 40 846 44 271 189 204 Depreciation disallowed (19 340) (5 059) (7 366) (9 883) (11 934) (15 073) (49 316) Depreciation Allowed 17 880 25 733 27 482 28 564 28 912 29 198 139 888

Integrated Demand Management (IDM)

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IDM R'm IDM DMP Buy Back

Applied for 13 090 2 543 8 513

Adjusted (7 906) (688) (8 513)

Approved 5 184 1 855 0

• Operational DMP maintained• Supplemental limited to 800 MW• Power Buy Back allocation not approved• SWH & Heat pumps not approved• Compressed air, process optimisation removed or limited

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OPEX R'M MYPD3 TOTAL

APPLIED 310 595

ADJUSTED (45 258)

APPROVED 265 337

Operating expenditure (excl Primary Energy)

Manpower costs were adjusted in line with inflation plus a salary negotiating margin (1.4%)

• Additional staff compliment for new power plants included (Benchmarked @ 1.24/MW)

Debt arrears reduced from 0.6% from 0.5% “Other costs” limited to increase by inflation Double counted items removed

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Capex (R'm) MYPD3

Capex Applied 336 370

Adjusted (106 357)

Capex Approved 230 012

Capital Expenditure

• Transmission adjustment based on detailed scope assessment and benchmarked costs/km or MVA.• Distribution capex was adjusted from Eskom unit cost of R2.18/km to R1.74/km over the MYPD3 period – projects not altered• Generation adjusted to remove excessive contingency fees and Owners Development Costs,

Weighted Average Cost of Capital

12 Months Average 25 Years Average

CAPM

Real risk free rate 2.29% 4.51%

Real cost of equity 6.75% 8.96%

Real cost of debt 2.86% 5.07%

Pre-tax real WACC 5.14% 7.65%

Post-tax real WACC 3.70% 5.51%

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• The current methodology prescribes the use of 25 years average to calculate the real risk free rate

• The 12 months average reflect the current market conditions

Eskom’s Financial sustainability Goals 2

12Source: NERSA Rfd

-

0.50

1.00

1.50

2.00

2.50

3.00

3.50

Year 2014

Year 2015

Year 2016

Year 2017

Year 2018

EBITDA-To-Interest Cover Ratio (EBITDA/Interest Payments)

EBITDA-To-Interest Cover Ratio (EBITDA/Interest Payments)

Eskom’s Financial Sustainability: Cash Flow

13Source: NERSA Rfd

Year 1 Year 2 Year 3 Year 4 Year 5Allowable revenue (R'million) 142 746 155 477 171 838 189 396 209 025 Allowable return (R'million) 23 477 21 454 20 454 20 562 25 676 Calculated WACC (%) 3.4% 3.0% 2.9% 2.9% 3.6%Allowable prices (c/kWh) 65.51 70.75 76.41 82.53 89.13 Net Cash movement for year (R'million) 21 913 28 552 389 (12 104) (48 126) Cash at end of year 41 623 70 175 70 564 58 460 10 334 EBITDA-To-Interest Cover Ratio (EBITDA/Interest Payments) 2.49 2.92 1.88 1.92 2.08 Price increase (%) 8.0% 8.0% 8.0% 8.0% 8.0%

The Tariffs – issues considered and approved

• Increase to Homelight 20A customers consuming up to 350 kWh/month limited to inflationary increase of 5.6 %. Above this consumption level customers will see an increase of 7.6 %

• All residential customers will see an increase of 8 % p.a.

• Eskom to ensure:– T-O-U off-peak to peak demand adjusted from a ration of 1:9 to 1:8

– Tariff cross-subsidies to be shown transparently

– The use-of-system charges to be based on cost per voltage level for all large power customers

– The reliability and service charge to be unbundled from the energy charge

– The environmental levy to be included in the energy charge and not shown separately

• Eskom to ensure alternate tariff options are made available to municipalities with a predominantly residential load mix

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THANK YOU

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